Potential NRB mcqs
A deficit unit is one for whom: 1. saving exceeds investment. 2. consumption exceeds income. 3. (consumption + investment) exceeds income. 4. saving equals investment.
(consumption + investment) exceeds income.
Which of the following functions of a central bank may potentially conflict with its monetary policy role? 1. Supervisor of the banking system. 2. Banker to the banking system. 3. Manager of the national debt. 4. Banker to the government. 5. Issuer of currency. a. 1 and 3 b. 1 and 4 c. 1, 2 and 3 d. 2 and 4
1 and 3 supervisor of banking system and manager of national debt
Which of the following are functions of a financial system? 1. The operation of a payments system. 2. Providing the means of portfolio adjustment. 3. Helping to reduce unemployment. 4. Channeling funds between lenders and borrowers. 5. Helping speculators to bet on price movements. a. 2, 3 and 5 b. 2 to 5 c. 1, 2 and 4 d. 1 and 5 e. All the above
1, 2 and 4 payment system, portfolio adjustment and channeling funds
Which of the following are normally regarded as banks' 'reserves'? 1. Notes and coin in circulation with the public. 2. Operational deposits at the central bank. 3. Treasury bills held by the banking system. 4. The wide monetary base. 5. Notes and coin held by banks. a. 2 and 5 b. 1 and 4 c. 2 and 4 d. 2, 4 and 5 e. 1, 3 and 5
2 and 5 operational deposits of central bank and notes and coin held by the banks
3-month CDs are trading at a discount rate of 5 3/8, while 1-month CDs are trading at a rate of 5 5/8. The difference in rates is: 1. 0.025 percent. 2. 0.5 basis points. 3. 0.25 basis points. 4. 25 basis points. 5. 0.5 percent.
25 basis points.
Which of the following are characteristic of a financial intermediary? 1. .It introduces borrowers to lenders. 2. It has assets which exceed liabilities. 3. It increases liquidity for lenders. 4. It reduces transaction costs for borrowers and lenders. 5. It makes excess profit.
3 and 4 liquidity and reduces transaction cost
On which of the following instruments is the rate of return calculated on a 'discount basis'? 1. Certificates of deposit. 2. Interbank deposits. 3. Commercial paper. 4. Repurchase agreements. 5. Commercial bills. a. 1, 3 and 4 b. 2, 3 and 5 c. 3 and 5 d. 1 and 3 e. 2 and 4
3 and 5 commercial paper and commercial bills
Which of the following are money markets instruments? 1. Treasury 8% 2011. 2. National Savings Certificates. 3. A 3-month certificate of deposit. 4. A treasury bill with 7 days to maturity. 5. A 14-day repurchase agreement of Treasury 8% 2007.
3, 4 and 5 3 months CD, 7 days TB and 14 day repo
A 'structural' budget deficit is one that: 1. arises because of accounting practice but has no economic significance. 2. occurs when countries are in recession. 3. occurs regularly irrespective of the state of the economy. 4. arises because of high capital expenditure such as the building of new schools and hospitals.
3. occurs regularly irrespective of the state of the economy.
The central bank accepts the quantity theory of money. It expects GDP growth to be 4% this year while monetary growth will be 12%. If it also expects velocity to fall by 5%, what does it expect to happen to inflation? 7% 8% 3% 5% 17%
: 3%
Eurocurrency
Any currency banked outside its country of origin.
Agency capture is only likely when there are a small number of consumers. True False
False
High compliance costs are desirable because they indicate that regulation is working. False True
False
Indicate whether the following statement is true or false. Eurobanks are referred to as 'offshore' because they operate from international waters in order to avoid national regulations. True False
False
Indicate whether the following statement is true or false. The eurocurrency market is principally concerned with long-term lending. True False
False
Indicate whether the following statement is true or false. The eurocurrency market is small, relative to national markets. False True
False
It is possible to combine a zero coupon bond with an interest rate swap to produce a diff swap. False True
False
Moral hazard is an example of market failure. False True
False
Safes are less safe for banks than are most other derivatives. True False
False
State whether the following is true or false. Almost all direct quotations of exchange rates involve the US dollar. True False
False
State whether the following is true or false. Given the following indirect quotation of the dollar, $1 = €0.9598-9.620, the direct quotation is $1 = €0.9609, the mid-point between the two numbers. True False
False
State whether the following is true or false. £1 = US$1.8879 is a direct quotation of the exchange rate of sterling. True False
False
The default risk on futures is greater than on swaps. False True
False
A firm exports goods to the United States and has recently entered into a large contract to supply goods that will be settled in US dollars within three months of the final delivery of goods. The British firm is thus long in US dollars. Assume that it wishes to hedge the exchange risk involved but believes that the dollar is more likely to rise than fall in value. Which instrument is it more likely to use to hedge the risk? 1. Forward rate agreement. 2. Foreign exchange futures. 3. Foreign exchange option.
Foreign exchange option.
Which of the following is not a eurocurrency? 1. US$ held in Tokyo. 2. French francs held in New York. 3. Deutschemarks held in Paris. 4. Japanese ¥ held in New York. 5. French francs held in Paris.
French francs held in Paris.
Which of the following best explains the fact that interest rates on the euro are lower than those on the pound? 1. Bond prices are lower in the UK than in the eurozone. 2. Inflationary expectations are higher in the UK than in the eurozone. 3. The euro is a weaker currency than sterling. 4. British markets are offshore from mainland Europe. 5. Unemployment is higher in the eurozone than in the UK.
Inflationary expectations are higher in the UK than in the eurozone.
Using a supply and demand framework, what is likely to happen to share prices in general if the central bank raises interest rates in response to a fall in the exchange rate? 1. Both curves shift inward. 2. No changes. 3. The supply curve shifts to the right. 4. The supply curve shifts to the left. 5. The demand curve shifts to the left.
No changes.
Which of the following actions might you expect lenders to take during periods of variable and unpredictable inflation? 1. Reduce the amount of lending they are prepared to do. 2. Increase the average length of loans they are willing to make. 3. Reduce the spread between the bid and offer rates of interest. 4. Reduce the average length of loans they are willing to make. 5. Increase the amount of lending they are prepared to do.
Reduce the average length of loans they are willing to make.
Using a supply and demand framework, what is likely to happen to share prices in general if the central bank unexpectedly raises interest rates? 1. The demand curve shifts to the left. 2. The supply curve shifts to the left. 3. Both curves shift outward. 4. No changes. 5. The supply curve shifts to the right.
The demand curve shifts to the left.
A widening of the difference between the return on corporate bonds and on government bonds might suggest which of the following? 1. Investors should avoid government bonds. 2. Government bonds are becoming more risky compared to corporate bonds. 3. Interest rates are going to rise in future. 4. The economy is on the brink of recession.
The economy is on the brink of recession.
Given the following interest rates on different currencies, which of the following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25 percent. Yen 0.5 percent. 1. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro. 2. The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall in value. 3. The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried out in dollars. 4. The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a low rate of interest.
The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
A currency coupon swap is a combination of an interest rate swap and a fixed rate currency swap. True False
True
A diff swap is also known as a quanto swap. False True
True
Indicate whether the following statement is true or false. A major part of the eurocurrency market is interbank activity. True False
True
Indicate whether the following statement is true or false. Eurobanks are largely unregulated. False True
True
Regulations introduced to offset market failure can themselves cause market failure. True False
True
State whether the following is true or false. In the exchange rate £1 = US$1.8865-1.8893, $1.8893 is the offer rate of sterling. True False
True
A eurobond is: 1. a bond issued in Europe. 2. a US dollar bond issued in Europe. 3. a bond issued outside of the country in the currency of which it is denominated. 4. a bond denominated in euros. a bond issued by the European Union or a member country of the European union.
a bond issued outside of the country in the currency of which it is denominated.
The euro is: 1. the currency of EU member countries. 2. a currency, the value of which is determined by demand and supply. 3. a currency that is only traded offshore. 4. a weighted average of the currencies of EU member countries.
a currency, the value of which is determined by demand and supply.
An agreement to exchange fixed interest rate payments on a loan for floating interest rate payments is: 1. an interest rate swap. 2. a currency swap. 3. a floating rate eurobond. 4. a flip flop option. 5. a basis rate swap.
an interest rate swap.
According to the American economist Minsky, financial crises that occur in capitalist economies: 1. are caused by swindlers such as Charles Ponzi. 2. occur because market participants are fearful because of their clear memory of past disasters. 3. are the result of excessive government regulation. are caused by the over-expansion of the money supply. 4. do not occur because market participants behave rationally. 5. are systemic events rather than accidents.
are systemic events rather than accidents.
A eurocurrency is: 1. a bank deposit in a non-European currency held in Europe. 2. a bank deposit in a European currency held outside of Europe. 3. the currency of the European Union. 4. a bank deposit held in a country that does not issue that currency in which the deposit is denominated. 5. the currency of European Economic and Monetary Union - called the 'euro' for short.
bank deposit held in a country that does not issue that currency in which the deposit is denominated.
The regulation of the banking industry is of particular importance in modern economies because: 1. banks provide the principal means of payment for the economy. 2. banks are large and very profitable. 3. banks employ many people. 4. everyone in the economy has a bank account.
banks provide the principal means of payment for the economy.
Which of the following are deposit-taking institutions (DTIs)? 1. Building societies. 2. Insurance companies. 3. Investment trust companies. 4. Retail banks. 5. Pension funds.
building societies and retail banks
The sale of government bonds overseas: 1. causes a smaller increase in interest rates than the sale of bonds to the domestic banking sector. 2. causes a smaller increase in interest rates than the sale of bonds to the domestic private sector. 3. causes a deficit in the balance of payments. 4. causes a fall in the domestic money supply.
causes a smaller increase in interest rates than the sale of bonds to the domestic private sector.
All risk-averse savers are particularly worried by: 1. foreign exchange risk. 2. upside risk. 3. capital risk. 4. default risk. 5. income risk. 6. downside risk.
downside risk.
Economics teaches that: 1. exchange rates move rapidly to return to equilibrium positions. 2. foreign exchange markets are always efficient. exchange rates 3. should be determined by transactions that are included in the current account of the balance of payments. 4. exchange rates should be determined by the market fundamentals.
exchange rates should be determined by the market fundamentals.
An insurance company can protect itself from moral hazard by: 1. imposing an 'excess'. 2. diversification. 3. monitoring. 4. holding liquid assets. 4. maturity transformation.
imposing an 'excess'.
A surplus unit is one for whom: 1. income exceeds consumption. 2. income exceeds (consumption + investment). 3. investment exceeds saving. 4. investment equals saving.
income exceeds (consumption + investment).
Covered interest rate parity occurs as the result of: 1. purchasing power parity 2. stabilising speculation. 3. interest rate arbitrage. 4. the actions of market-makers.
interest rate arbitrage.
unit's net acquisition of financial assets ('NAFA') will be negative if: 1. income exceeds (consumption + saving). 2. investment exceeds saving. 3. consumption exceeds income. 4. investment equals saving.
investment exceeds saving.
In a situation where share prices are generally depressed because long-term interest rates are expected to rise in future, a large firm looking for long-term finance would normally consider: 1. making a new share issue. borrowing in the interbank market. 2. issuing 6-month bills. 3. issuing long-dated bonds. 4. borrowing from its bank on overdraft.
issuing long-dated bonds.
The public debt of a country is not necessarily a burden on the economy to the extent that: 1. people are happy to hold government bonds. 2. it can be financed without adding to inflation. 3. people receive good public services. 4. it grows less rapidly than GDP. 5. it is paid for by borrowing abroad.
it grows less rapidly than GDP.
It is very difficult to interpret news in foreign exchange markets because: 1. it is difficult to know which news is relevant to future exchange rates. 2. very little information is publicly available. 3. it is difficult to know whether the news has been obtained legally. 4. most of the news is foreign.
it is difficult to know which news is relevant to future exchange rates.
The Heavily Indebted Poor Countries Initiative has been criticised by campaigners for developing countries because: 1. it spreads the benefits over too many countries. 2. it provides too little help to too few countries. 3. it increases the debts of poor countries. 4. it encourages profligate behaviour in poor countries. 5. it rewards dictators but not democratic governments.
it provides too little help to too few countries.
The government prefers to sell longer-dated than shorter-dated stock because: 1. the bond market is strongly segmented. 2. it allows the authorities to construct a time profile of the public debt. 3. it reduces the rate at which the existing public debt must be refinanced. 4. it allows them to influence the relationship between long and short interest rates. 5. investors prefer to hold longer-dated stock.
it reduces the rate at which the existing public debt must be refinanced.
A bond whose coupon rate is below the current market rate of interest will have a price: 1. of £100. 2. less than its maturity value. 3. equal to its maturity value. 4. more than its maturity value.
less than its maturity value.
Problems arose in the 1990s in the newly emerging markets because: 1. the Asian 'tiger' economies collapsed. 2. losses in one market frequently cause investors to become temporarily risk averse. 3. financial markets reflect accurately problems in real economies. 4. individual investors are always risk averse. 5. Asian currencies appreciated, causing sharp falls in the exports of the Asian economies.
losses in one market frequently cause investors to become temporarily risk averse.
Which of the following are commonly functions of the central bank? 1. Conduct of monetary policy. 2. Lending to the general public. 3. Supervising the stockmarket. 4. Lending to the commercial banking system.
monetary policy and lending to commercial bank
A situation where people who have taken out insurance behave more recklessly as a result is known as: 1. moral hazard. 2. asymmetric information. 3. fraud. 4. bad luck. 5. adverse selection.
moral hazard.
The 'golden rule' of the public finances is that: 1. any budget deficit must be financed by the sale of government assets. 2. the budget should always be kept in balance. 3. over the medium term, the government should only borrow as much as the private sector borrows. 4. budget deficits should be allowed when the country is in recession but should be balanced by surpluses when there is no recession. 5. over the medium term, the government should only borrow to finance investment.
over the medium term, the government should only borrow to finance investment.
Moral hazard caused by regulation can only be removed from financial transactions if: 1. all regulation is self-regulation. participants in the finance industry 2. do not feel protected by the regulations. regulations are regularly 3. revised to keep pace with the changing circumstances of the market. regulation involves heavy compliance costs. 4. the regulations prevent agency capture.
participants in the finance industry do not feel protected by the regulations.
Options have an advantage over futures in that they: 1. preserve profit opportunities while providing a hedge. 2. require only a small initial payment. are likely to be cheaper. 3. have a lower default risk. 4. are margined on a marked to market basis
preserve profit opportunities while providing a hedge.
A central bank wishing to reduce the rate of credit expansion would typically: 1. lower the price of repurchase agreements with the banking system. 2. refuse reserves to the banking system. buy treasury bills from the banking system at their current price. 3. sell treasury bills to the general public. 4. raise the price of repurchase agreements with the banking system.
raise the price of repurchase agreements with the banking system.
The rate of return on a bond held to maturity is known as its: 1. running yield. 2. redemption yield. 3. present value. 4. duration. 5. interest yield.
redemption yield.
A saver who is capital-risk averse is worried that interest rates in the economy might: 1. fall. 2. fall and later rise. 3. remain unchanged. 4. rise and then fall. rise.
rise.
Statutory regulation is likely to create larger compliance costs than self-regulation because: 1. statutory regulators are often over-cautious. self-regulation is never 2. effective. statutory regulation is controlled by consumers. 3. consumers are better able to assess risk under self-regulation. 4. self-regulation does not involve lawyers and the courts.
statutory regulators are often over-cautious.
If the public debt can be financed without adding to inflation or causing interest rates to rise, it is said to be: 1. sustainable. 2. in primary balance. 3. only a burden on future generations. 4. following the golden rule of the public finances.
sustainable.
Arbitrageurs in foreign exchange markets: 1. make their profits through the spread between bid and offer rates of exchange. 2. take advantage of the small inconsistencies that develop between markets. 3. attempt to make profits by outguessing the market. 4. need foreign exchange in order to buy foreign goods.
take advantage of the small inconsistencies that develop between markets.
Interest rate expectations have been thought to be an important influence on bond sales because: 1. government bond-holders are, by and large, are income risk averse. 2. until recently, government debt was the responsibility of the Bank of England, which was not independent. 3. the bond market is dominated by people interested mainly in capital gains. 4. government bond-holders hold extrapolative expectations. interest rates have always been very unstable.
the bond market is dominated by people interested mainly in capital gains.
Supporters of the portfolio approach to the eurocurrency argument argue that the growth of the eurocurrency market has not been inflationary because: 1. the re-deposit rate in eurobanks is low. 2. the eurobanks cannot create credit. 3. the eurobank multiplier is only small. 4. the eurobanks have lowered rates of interest on loans.
the eurobanks cannot create credit.
The eurocurrency market did not develop until the late 1950s because: 1. the countries of the Soviet bloc did not earn dollars in foreign trade until 1958. 2. US central bank regulations prevented it from doing so. European currencies were only convertible for non-residents before 1958. 3. US banks were not permitted to open branches outside the USA until 1958. 4. the major European economies had not recovered sufficiently from the effects of World War II.
the major European economies had not recovered sufficiently from the effects of World War II.
The term 'commercial hot money' is used to describe: 1. speculation based on expected future changes in exchange rates. 2. the movement of funds to profit from changes in short-term interest rates. 3. the movement of funds to avoid government restrictions on convertibility. 4. the international movement of funds by companies in order to reduce their tax payments. 5. the repatriation of profits by transnational corporations.
the movement of funds to profit from changes in short-term interest rates.
In a deep market: 1. there is no scope for arbitrage. 2. there are many sudden large movements of the exchange rate. 3. speculators are almost certain to lose. 4. there are few sudden large movements of the exchange rate.
there are few sudden large movements of the exchange rate.
The poorer developing countries are only marginal participants in the international capital market because: 1. they are not regarded as credit worthy by private lenders. 2. their currencies are not used in world trade. 3. they have no money to lend. 4. their leaders are invariably corrupt. 5. international bankers do not wish to live in poor countries.
they are not regarded as credit worthy by private lenders.
Currency swaps have expanded less rapidly than interest rate swaps because: 1. the euro has been particularly weak since its introduction. 2. they require higher capital backing under the Basle rules. 3. interest rates are set by central banks. 4. they involve both default risk and exchange rate risk. 5. exchange rates have been very volatile in recent years.
they require higher capital backing under the Basle rules.
In the 'walking stick' hypothesis, the yield curve slopes: 1. in an unpredictable manner. 2. down and then up. 3. down. 4. up and then down. 5. up.
up and then down.
Floating rate eurobonds become popular: 1. when investors are particularly concerned about income risk. 2. when interest rates are very volatile. 3. during crises in the newly emerging markets. 4. when exchange rates are very volatile.
when interest rates are very volatile.
Overshooting models of the exchange rate are an attempt to explain: 1. why purchasing power parity plays no role in determining the value of a currency. 2. why the foreign exchange market is never in equilibrium. 3. why forward rates of exchange are not good predictors of future spot rates of exchange. 5. why exchange rates are so volatile.
why exchange rates are so volatile.
A 10% bond with six years to maturity has just paid this year's coupon (assume annual coupon payments). Long-term interest rates are currently 6%. The price of the bond will be:
£105.62
The risk free rate of interest is 5%, while the market risk premium is 8%. A firm has shown a steady growth in earnings of 12% p.a. in recent years. If its last dividend payment was 9p per share and the share's ß-coefficient is 1.2, the price of its shares will be: 1. £1.22 2. £2.50 3. £1.05 4. £3.46 5. £3.00
£3.46
