Money and Banking Final
Suppose you buy a 60-day T-bill with a face value of $1,000 at a price of $990. Your discount rate yield (DRY) would be
6.0%
Gwen considering buying either a corporate bond or a municipal bond that are exactly the same except for their yield. Gwen is in the 33% tax rate. She is considering a bond that pays a 6% interest rate. To make Gwen indifferent between the two bonds, the corporate bond must pay
8.96%
What concept does the following graph illustrate? (Value of currency in FX market = y-axis, quantity = x-axis, slope is negate with line representing currency)
As the currency depreciates, the quantity of the currency demanded increases
You are a manager of a hedge fund that has a trading strategy based on picking which currencies you believe will change in value in a significant way in a short period of time. If you believe that value of the British pound will appreciate in the near future against the euro, you will
Buy British Pounds
An "unsterilized intervention" is when a country's _________ buy(s) the country's own currency in the foreign exchange market to ________ the currency's market price
Central Bank, increase
A type of stock that entitles the owner to a claim on the corporation's assets at liquidation
Common Stock
The banking legislation that requires that banks that want to merge or expand their branches must demonstrate that they are lending and providing financial services to people across their geographical area is called the __________ Act.
Community Reinvestment
When Lauren purchased shares in a mutual fund, she was charged a 5% fee at the time of purchase. This is what kind of fee?
Front-end load
Warren Buffet has said: "If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be"
Jack Bogle
_________ brought private equities into the limelight during the 1980s
Leveraged buyouts
XYZ corporation is trying to decide whether it should buy money market instruments or leave its funds on deposit at a commercial bank buying money market instruments over leaving funds on deposit at a commercial bank that XYZ should be aware of
Money market instruments offer a higher yield than leaving funds on deposit at a commerical bank
______________ funds allow investors to write checks to access their funds at any time
Money market mutual
An inspiration for setting up Vanguard's index funds was a paper by Nobel Prize winning economist
Paul Samuelson
The secondary market is where _________ is/are sold
Previously owned stocks
A money market has a __________ market, where a given IOU is issued for the first time, and a much larger _________ market
Primary; secondary
Is considered the most risky, non-liquid investment vehicle
Private equity
Randolph & Chase electronics has just declared an initial public offering (IPO). This means that
Randolph & Chase will be selling its shares in the primary market to the public for the first time
A sterilized foreign exchange intervention taken by the European Central Bank to meet the objective of depreciating the euro might include __________ to sterilize the transaction
Selling euros and buying US dollars, and then selling a similar amount of government securities
Which of the following is NOT a service offered by investment banks?
Taking deposits
Foreign exchange rate system where the central bank or government sets official upper and lower bounds for the market value of the country's currency and the central bank or government pledges to undertake an intervention if the market-determined exchange rate approaches either the upper or lower bound is a
Target Zone Regime
___________ life insurance does not hold any cash value
Term
Assume that the US currency is weakening due to a variety of domestic and global economic and social factors. Which of the following courses of action could be taken by the United States central bank, the Federal Reserve, if it wants to help boost the dollar so it begins to appreciate
The Federal Reserve could buy US dollars in the foreign exchange market and sell other currency it holds
If the US Treasury engages in a foreign exchange intervention to lower the value of the dollar relative to the euro by having the Federal Reserve sell dollars and buy euros in the foreign market, how will this affect the monetary base?
The monetary base will increase.
Damon goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base?
The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.
A typical setup is for an asset management firm offering active management of assets to get paid a percentage of
The value of assets under management
Harper just got a big raise at work, which pushed her from the 15% federal marginal tax bracket to the 25% tax bracket. Which one of these affect her decision to buy municipal bonds
This will maker her more likely to buy municipal bonds because it will increase the difference between the nominal interest rate paid to what she will receive relative to corporate bonds
According to Hans Sennholz, the ultimate cause of the stock market crash was five years of reckless credit expansion by the Federal Reserve.
True
After President Roosevelt took office in 1933, he instituted a minimum wage; worked to raise prices (e.g. by paying farmers to plant less); and strengthened labor unions.
True
Vanguard is set up as a cooperative. That is, it's owned by the fund's shareholders
True
An individual who begins to participate in extreme sports after taking out a $1,000,000 life insurance policy is an example of the issue of moral hazard.
True
Between yesterday and today, the US dollar has appreciate against the yen. One of the impacts of this will be
US made goods that sell in Japan will be more expensive
_____________ life insurance generally offers policyholders a choice of mutual funds in which to invest the cash value
Variable
With whole life insurance, the insured can borrow against the
cash value
Trading in salmon or other wild-caught fish would be included in
commodities trading
Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a
compensating balance as a way to mitigate the problem of moral hazard.
When an economy sees higher real, risk-adjusted interest rates, it will most likely experience a(n) _________ in demand for its currency in the foreign exchange market, and the value of its currency will ________.
increase; appreciate
A decrease in aggregate demand would be caused by a(n) __________ in __________.
increase; imports
Those who argue against the pursuit of the dual objectives of stable prices and high employment point to the __________ as evidence that the pursuit of dual objectives is misguided.
inflation of the 1970s
Monetization of public debt can lead to a rapid increase in the money supply and hence to
inflation.
An investment bank is selling shares for a small private firm that is just going public. This sale is a(n)
initial public offering
Regulation Q, part of the Banking Act of 1933, prohibited banks from paying
interest on checking accounts.
Interest rates and stock prices tend to be
inversely related
Commercial Paper
is essentially unsecured IOUs
When the Federal Reserve buys US Treasury securities on the open market, it is attempting to
lower interest rates.
A potentially important difference between NOW accounts and demand deposits is that NOW accounts
may reserve the right to require seven days' notice prior to making a withdrawal.
When the federal government runs a budget deficit, or spends more than they take in, they
must borrow the difference
Following the 2007 financial crisis, the Federal Reserve created the term auction facility (TAF) in order to
overcome the stigma banks experienced from borrowing from the Fed at the discount window in order to add liquidity to financial markets.
The Dow Jones Industrial Average is a(n) __________ stock market index
price-weighted
Overnight bank borrowing from the Federal Reserve is known as
primary credit.
Selling shares of stock is a way for corporations to
raise capital
Molly's time preference is the
rate at which Molly prefers to consume today as opposed to consuming in the future.
The focus of the Securities and Exchange Commission (SEC) is on
reducing the asymmetric information problem may exist in the US equity market
The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute a
repurchase agreement to provide a short-term boost to the money supply.
Imagine that Roland goes to his bank and deposits $10,000 in cash into his savings account. The bank, wanting to use those funds to generate revenue for itself, will look to make a loan with this cash. An important determinant of how much of that $10,000 the bank can lend is the
required reserve ratio.
During the LBO craze craze, when several troubled firms were merged into one firm to reduce overhead, this was referred to as
rollups
Shareen buys a 30-year, $10,000 US Treasury bond with a coupon rate of 5%. After two years she needs some cash so she decides to sell her bond. Shareen will sell her bond in the __________ market.
secondary bond
A money market is a segment of a financial market where _________ debt instruments with ___________ are traded
short-term, high levels of liquidity
On payday you get paid in cash, so each week you put $10 into a shoebox in your closet so that you can buy a big-screen TV at the end of the year. In this situation, money is serving as a
store of value.
Eugene Fama's proposition that prices reflect all available information, which (in extreme) implies that there's no may to beat the market, is know as
the Efficient Market Hypothesis
The anchor currency in the Bretton Woods System was
the US dollar
The concept of purchasing power parity refers to
the exchange rate between currencies that equalizes the purchasing power of each currency by eliminating the differences in price levels in each economy
If Claire were to sell a US Treasury security to the Federal Reserve in the secondary market, receiving a check from the Fed as payment, and then cash the check at her bank and hold onto the cash, then
the monetary base will increase but bank reserves will stay the same.
In Figure 9-1, the loanable funds market is in equilibrium at A with the interest rate IR1. In conducting monetary policy, the Federal Reserve engages in the buying of US Treasury securities on the open market, which causes
the supply of loanable funds to increase to S', causing the equilibrium interest rate to fall to IR3.
Money market instruments have a "low level of default risk" because
they are issued by only the biggest and safest borrowers
According to the pure expectations theory, a flat yield curve means the market
thinks that future interest rates will be exactly the same as current interest rates.
John Maynard Keynes argued that there were three reasons that people demand money. They are the
transactions motive, precautionary motive, and speculative motive.
According the episode, "the Copernican Revolution about the proper way to invest" is low-cost index funds
true
The market for bonds is a subset of the market for loanable funds.
true
When the currency ratio increases, the impact of changes in the monetary base on the money supply is
weakened.
A crawling peg exchange rate system is an exchange rate system
where the stated official exchange rate remains unchanged day to day but is changed by the government or central bank when economic conditions warrant a change
If the interest rate is 5%, the value of $1,000 at the end of 10 years is
$1,628.89.
If the required reserve ratio is 5%, an initial demand deposit made in a bank of $100,000 can result in an expansion in the money supply of
$2,000,000.
The FDIC insures deposits up to
$250,000.
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the level of required reserves for this economy?
$75 billion
You own a 10-year, $10,000 US Treasury bond with a coupon rate of 3%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond? [FOR SIMPLICITY, ASSUME AN ANNUAL COUPON PAYMENT.]
$9,628
Shonda says that she would need to earn 3% interest in order to lend you money which you will pay back in two years. This implies that for Shonda the present value of $100 to be received two years from today is
$94.26.
Sherry says that she requires a 3% rate of interest in order to lend you some money. This implies that for Sherry the present value of $100 to be received one year from today is
$97.09.
It is found that when the disposable income of Elvania increases by $100 billion, the demand for household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is
0.7.
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the currency ratio in this economy?
1.33
Suppose the current real federal funds rate in the economy is 2.0%, the current inflation rate is 1.0%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is -2.0%. According to the Taylor Rule, the Federal Reserve's target federal funds rate should be
1.5%.
Emmel is the CFO for ABC Corporation. Ten years ago, under Emmel's instructions, the company invested in 10-year US Treasury bonds that paid 3% interest. At the time, Emmel's projection was that inflation over the 10-year period would be 0.5% per year. As it turns out, the annual rate of inflation over the 10-year period was 1.5%. As a result, the ex-post rate of return on ABC Corporation's investment was _____, instead of the _____ return that Emmel expected ex-ante.
1.5%; 2.5%
Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the money multiplier for this economy?
1.63
At its inception, the power of the Federal Reserve rested in the
12 independent regional Federal Reserve banks.
Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is
2%.
If the before-tax rate of return on a corporate bond is 7%, an individual in the 25% marginal tax bracket would earn a _____ rate of return on the bond.
5.25%
Which of the following qualifies as a liability to a bank?
A consumer loan
Consider Figure 6-1. Which of the following will cause a shift in the aggregate demand curve from AD1 to AD2?
A reduction in personal income taxes
Consider Figure 6-2. A decrease in the cost of productive inputs would lead to a movement from
A to C.
Consider Figure 6-1. Which of the following will cause a shift in aggregate demand from AD2 to AD1?
An increase in interest rates
The __________ attempt to set international standards for bank capital.
Basel Accords
Aggregate demand is equal to
C + I + G + (X - M).
Following World War II, inflation became so bad that Germans stopped using Reichsmarks for transactions, and instead used cigarettes for small transactions and cognac (a type of brandy) for large transactions. Which of the following best describes this situation?
Cigarettes and cognac functioned as money in Germany in this period following World War II.
Today, in the United States, several assets function as money. Which of the following would NOT be considered money?
Credit cards
Which of the following is included in the M1 definition of the money supply?
Demand deposits and other checkable deposits
__________ is the removal of funds from a financial intermediary (e.g., bank) to invest them directly, as through a mutual fund.
Disintermediation
In 2010, the passage of the __________ Act removed the restriction on the paying of interest on demand deposits that had been established with Regulation Q.
Dodd-Frank Wall Street Reform and Consumer Protection
Under which of the following banking acts were banks forbidden from underwriting almost all stocks and bonds and were banned from selling insurance?
Glass-Steagall Act
In the late 1960s and early 1970s, when inflation was driving up interest rates, the prohibition against banks paying interest on checking accounts became a real problem. In response to this prohibition, Ronald Haselton created
NOW accounts that were similar to checking accounts but paid interest.
The president of which district bank is a permanent member of the Federal Open Market Committee?
New York
The Federal Reserve was created largely in response to the
Panic of 1907.
For much of US history, banks have been limited in how much they could pay in interest on deposits by
Regulation Q.
Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. On what market would she do this?
Secondary market
Consider the graph in Figure 3-1. Which of the following best represents an increase in supply?
The movement from A to D
What concept does the following diagram illustrate? (FRED m2 money vs consumer price index)
The price level tends to move in the same direction as the money supply.
Consider the bond market illustrated in the graph in Figure 3-3. If the current market price is higher than P1, which of the following statements is true?
There is a surplus of bonds in the market, and the market price will fall toward P1.
The securities that the Federal Reserve holds on its balance sheet include
US Treasury securities, federal agency debt, and privately issued mortgage-backed securities.
The principal characteristic of a dual banking system is that
a bank charter may be obtained from either the national or the state/provincial government.
Dollarization occurs when
a country officially adopts another country's currency as their legal tender.
In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using
a deductible to try to mitigate the problem of moral hazard.
Stagflation is an economic condition where an economy is experiencing
a high and rising price level and little economic growth with high unemployment.
Mandy goes to the grocery store to buy groceries, and at the checkout counter she pays cash. This is an example of money being used as
a medium of exchange.
If the public's confidence in the banking system is shaken, it may cause
a run on banks.
One of the main reasons that banks exist is to deal with the issues of __________ and __________.
adverse selection; moral hazard
Liquidity is important to banks because it
allows them to meet the cash needs of their depositers.
A one-time deposit in a bank will result in
an expansion in the money supply that is larger than the size of the one-time deposit.
The Federal Reserve operates as
an independent entity.
The chair of the Federal Reserve becomes the chair by being
appointed by the president of the United States and confirmed by the US Senate.
When the parties to a transaction have different levels of knowledge about each other and/or the nature and implications of the transaction, it is said that there exists __________ information.
asymmetric
An example of asymmetric information in financial markets is that, in banking,
borrowers know more about their capacity to repay loans than lenders.
Financial markets bring together __________ and __________.
borrowers; lenders
The best way to measure the default risk premium that a borrower is paying is to
compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities.
Among the assets on a bank's balance sheet are
consumer loans.
Monetary policy has the best chance of influencing the level of __________ unemployment.
cyclical
The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk.
default
In the market for used cars, asymmetric information will tend to
drive the better used cars out of the market.
A limitation on US banks is the prohibition from holding __________ in their asset portfolios.
equities
Money that has no intrinsic value is known as
fiat money.
Because a bank's depositors also suffer from asymmetric information in that it is difficult for them to know if a bank is being run well, the US government created
government-sponsored deposit insurance.
Banks will often use derivative contracts to
hedge exchange rate risk.
If the market for loanable funds is currently in equilibrium, a(n) __________ will cause an increase in the interest rate.
increase in business confidence
Term auction lending was introduced by the Fed in the early stages of the 2007 financial crisis in order to
increase the amount of liquidity in the financial system.
When the Federal Reserve makes a loan at the discount window to a bank, it will __________ the monetary base by __________ bank reserves.
increase; increasing
As the federal marginal tax rate rises, the advantage of municipal bonds over corporate bonds
increases.
One of the biggest challenges the Federal Reserve faces in conducting monetary policy is the existence of __________ lags.
information and impact
For bank executives, the level of bank capital and the level of executive compensation are
inversely related.
Bond prices and interest rates are
inversely related.
An advantage of inflation rate targeting is
it reduces inflationary expectations.
The FDIC prefers to use the purchase and assume strategy to deal with a failed bank rather than the pay off and liquidate approach because it is typically
less expensive.
The purpose behind Regulation Q was to
limit competition between banks.
When there is a high degree of trust in a country's banking system, the currency ratio will be
low
Within an economy, money gets created when banks
make loans.
Bonds are issued by
many kinds of borrowers.
Regulation Q, passed following the Great Depression, set a
maximum on the interest rate that banks can pay on deposits.
Harmon opens a new restaurant, which he insures for twice its worth. Knowing his business is insured, Harmon becomes careless in his management of the restaurant, with the result being that he suffers a bad fire which burns down his restaurant. This is an example of
moral hazard.
Mortgages that are pooled together and sold to investors are known as
mortgage-backed securities.
One of the concerns about the Federal Reserve targeting high employment is that it might
neglect the goal of stable prices.
Banks want to hold as little cash as possible because holding cash
offers a minimal rate of return.
A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to
pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years.
Consider the figure above. The initial equilibrium in the loanable funds market in Etopia is at A when the banks in Etopia begin to see an upsurge in deposits. This upsurge in bank deposits will result in a new equilibrium at
point D with a decrease in the interest rate and an increase in the amount of loanable funds borrowed and lent.
The main responsibility of the Bank of Japan is to use monetary policy to
pursue price stability.
In the too big to fail policy, there is an inherent tension between __________ and __________.
reducing systemic risk; increasing moral hazard
Having multiple entities responsible for issuing bank charters in the United States has given rise to the problem of
regulator shopping.
When bankers are in control of the regulatory agencies to the point that regulations are enforced in ways favorable to the banks, it is known as
regulatory capture.
By far, the largest asset on the Federal Reserve's balance sheet is
securities.
You hear a report on the news by a well-respected financial analyst who says that the currently inverted yield curve is irrelevant to borrowing and lending decisions because yield curves are not an accurate reflection of the situation in bond markets. This analyst most likely is a proponent of the __________ theory of interest rates.
segmented market
Institutions that compete with commercial banks because they perform some but not all of the functions of commercial banks are said to be part of the __________ banking industry.
shadow
The idea that the failure of one megabank could result in the collapse of the entire financial system is known as __________ risk.
systemic
In a very basic sense, banks perform two functions in society: they __________ and __________.
take deposits; make loans
You are having a conversation with your friend Belinda about the upward-sloping yield curve that currently exists in the bond market. She explains this to you by saying that the upward slope to the yield curve is because longer-term bonds are less desirable than shorter-term bonds so that the issuers of longer term bonds must offer a higher interest rate as an incentive to attract buyers. Her observation means that she is a proponent of the __________ theory of interest rates.
term premium
In the absence of banks and other lending institutions, when Sally is looking to borrow some money to buy a house, one of the biggest problems she faces is
the cost associated with searching for a suitable lender.
A major advantage that municipal bonds have over corporate bonds for investors is that
the income earned on municipal bonds is not subject to federal income tax.
Currency in circulation plus bank reserves plus US Treasury currency in circulation is referred to as
the monetary base.
The board of governors of the Federal Reserve has three primary responsibilities, which are
the operations of the Fed, commercial bank regulation, and monetary policy.
The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase
the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds.
By far, the largest liability on the banking system's balance sheet is
trading.
Unemployment is not only terribly costly to people who are unemployed but also to society as a whole because
unemployment represents an underutilization of society's available resources.
When the price level falls, indebted persons will be __________ off because the real value of their debt will have __________.
worse; increased
Government deficits can complicate monetary policy because government borrowing can lead to
"crowding out," which leads to higher interest rates.
Miserly Bank finds itself short of reserves at the end of the day. One solution to this dilemma would be for Miserly to
borrow in the federal funds market
The stock market is sometimes referred to as the
equity market
In 2008, the Federal Reserve began paying interest on the bank deposits it holds. By doing this, its goal is to
establish a price floor on the interest rate in the federal funds market
When central banks were first created, their primary function was to
finance government spending.
An example of asymmetric information in financial markets is that, in equity markets, directors __________ than shareholders.
have a better sense of future profitability
Consider a share of stock in a company that will pay a dividend of $20 one year from today. Time value of money is such that you consider $1.05 a year from today is equivalent to $1.00 today. What is the company willing to pay?
$23.81
You own a 10-year US Treasury bond with a coupon rate of 3%. There are two years left to maturity, and you are planning to sell the bond. The rate is 5%, how much can you expect to get for the bond
$9,628
Suppose you buy a 120 T-bill with a face value of $10,000 at a price of $9,900. Your discount rate yield (DRY) would be
3.0%
In a barter economy with 100 goods, there would be _____ prices.
4,950
Consider the graph below. Which of the following would lead to a shift in the demand for bonds from Demand1 to Demand 2 (Price = y, quantity = x, both lines are negative)
A decrease in societal wealth
Consider the graph below. Which of the following occurrences will shift the supply of bonds from Supply0 to Supply1? (price = y, quantity = x, both lines are positive)
A more optimistic outlook by business about the future
An example of the currency board regime might be if the United States were to pledge to
A: Convert or exchange US dollars for the euro at any time at a stated fixed price because the euro is the anchor currency of the US dollar
If the market interest rate is lower than the coupon rate on a newly issued bond, the the bond will sell
Above par
The _______ act requires hedge funds with more that $100 million to register with the SEC
Dodd-Frank
Increasing premiums after a claim is a way insurance companies reduce
Either pure risk or moral hazard (not adverse selection or speculative risk)
_________ are traded daily on stock exchanges at market-determined prices
Exchange traded funds
An increase in the supply of loanable funds could be caused by
Expansionary monetary policy being followed by the Federal Reserve
An increase in the price of bonds will cause a decrease in the demand for bonds
False
During the post-crash recession of 1929-33, President Hoover cut government spending, lowered taxes, and urged businesses to cut prices.
False
The Federal Reserve is part of the US Treasury.
False
The government doesn't actually pay interest on T-bills, instead, they are sold at
a discount
The business of banking solves the problem of
a liquidity mismatch with savers desiring liquidity and borrowers desiring illiquid loans.
Part ownership of a corporation, such as General Electric, is represented by ownership of
a share of General Electrick stick
If the market interest rate is higher than the coupon rate on a newly issued bond, then the bond will sell
below par.
When the Federal Reserve increases the reserve ratio, the impact will be to
decrease the size of the money multiplier.
The rate at which a lender needs to be compensated for taking on a greater risk is known as a(n) ____________ premium
default risk
Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the
discount rate plus a penalty.
The US dollar-to-euro exchange rate was $1 = 0.921384 euros yesterday. Today, the US dollar-to-euro exchange rate is $1 = 0.891560. This means that between yesterday and today, the
dollar has depreciated against the euro