multiple choice questions

| June 10, 2016

Question
)

eliminates search and transactions costs.

is a mere theoretical possibility.

promotes economic growth and social progress.

depends on high volumes of "direct" transactions.

Question 2.2. (TCO 1) Financial intermediaries are able to be profitable due to (Points : 4)

economies of scale.

the ability to manage credit risk.

good control of transactions costs.

All of the above

Question 3.3. (TCO 1) An example of a notforprofit financial institution are (Points : 4)

thrift institutions.

credit unions.

pension funds.

commercial banks.

Question 4.4. (TCO 1) Money market instruments and capital market instruments differ
appreciably in (Points : 4)

size.

liquidity.

issuers.

All of the above

Question 5.5. (TCO 1) Financial markets give financial institutions (Points : 4)

a place to securitize assets.

a source of generating fee income from trading.

a source of funding.

All of the above

Question 6.6. (TCO 2) One of the more important goals of the Federal Open Market Committee
(FOMC) is to (Points : 4)

set monetary policy.

supervise and examine member banks.

guarantee excess reserves to National Banks.

enforce margin requirements.

Question 7.7. (TCO 2) If the Fed buys government securities, this action will (Points : 4)

not change the money supply.

increase security prices.

increase interest rates.

decrease credit availability.

Question 8.8. (TCO 2) The modern objectives of the Fed include which goals? (Points : 4)

To coordinate an efficient payments mechanism

To provide an elastic money supply

To regulate the financial system

All of the above

Question 9.9. (TCO 2) Using the data below, what is the level of excess reserves?

Total Reserves $100,000,000
Reserve Requirement 6%
Total Deposits $750,000,000 (Points : 4)

$ 55,000,000

$ 45,000,000

$ 100,000,000

Not ascertainable

Question 10.10. (TCO 3) Business investment and consumption spending should increase
if (Points : 4)

financial wealth decreases.

reserve requirements decrease.

interest rates increase.

credit availability decreases.

Question 11.11. (TCO 4) What factors influence the real rate of interest? (Points : 4)

Investor’s positive time preference

The gold supply

Return on capital investments

Both investor’s positive time preference and return on capital investments

Question 12.12. (TCO 4) What affects the supply of loanable funds? (Points : 4)

The level of income

The savings rate

Federal Reserve monetary policy actions

All of the above

Question 13.13. (TCO 4) We can associate the flow of funds approach to interest rate forecasting
with (Points : 4)

the Flow of Funds Accounts.

the loanable funds theory of interest rate determination.

the Federal Reserve System.

All of the above

Question 14.14. (TCO 4) The ______ equation indicates that nominal interest rates are influenced
by changes in price levels and the real rate of interest. (Points : 4)

Fisher

Loanable funds

Nominal rate

Rate

Question 15.15. (TCO 4) An investor received a 5% coupon rate last year on a $1,000 bond

purchased at par. The inflation rate during the year was 4% and is expected to be 5% next year.
The realized real rate earned by the investor last year was (Points : 4)

5%

1%

4%

1%

Question 16.16. (TCO 5) Which of the following statements is true? (Points : 4)

Bond prices and interest rates move together.

Coupon rates are fixed at the time of issue.

Short­term securities have large price swings relative to long­term securities.

The higher the coupon, the lower the price of a bond.

Question 17.17. (TCO 5) When a bond’s coupon rate is equal to the market rate of interest, the
bond will sell for (Points : 4)

a discount.

a premium.

par.

a variable rate.

Question 18.18. (TCO 5) Interest rate risk is (Points : 4)

duration.

the extent that coupon rates vary with time.

the potential variability in the realized rate of return caused by changes in market rates.

the potential variability in the bond maturity caused by changing discount rates.

Question 19.19. (TCO 5) Bond A has a duration of 5.6 while bond B has a duration of 6.0. Bond
B (Points : 4)

will have greater price variability, given a change in interest rates, relative to bond A.

will have a longer maturity than bond A.

will have a higher coupon rate than bond A.

will have less price variability, given a change in interest rates, relative to bond A.

Question 20.20. (TCO 5) The yield to maturity measure assumes that coupon interest is reinvested
at (Points : 4)

the yield to maturity.

the changing market rates.

the coupon rate.

the treasury bond rate.

1. (TCO 5) The source of data for a yield curve might be (Points : 4)

bond yield by issuers over time.

historical Treasury security yields.

realized Treasury security yields by time.

outstanding Treasury security yields by maturity.

Question 2.2. (TCO 5) According to the expectations theory of the term structure of

interest rates, if the yield curve slopes _______, the markets expect short­term
interest rates to _______ in the future. (Points : 4)

upward; increase

downward; decrease

upward; decrease

Both upward; increase and downward; decrease

Question 3.3. (TCO 5) According to the expectations theory, what is the one­year

forward rate three years from now if three­ and four­year spot rates are 5.50%
and 5.80%, respectively? (Points : 4)

The rate cannot be calculated from the information above

6.2%

6.7%

5.6%

Question 4.4. (TCO 5) The major determinant of the bond ratings assigned by

Moody’s, Standard and Poor’s, or Fitch is (Points : 4)

marketability.

tax treatment.

term to maturity.

default risk.

Question 5.5. (TCO 5) Borrowers that seek long­term funds to finance capital

projects must pay lenders a _____ premium. (Points : 4)

liquidity

default

interest

market

Question 6.6. (TCO 6) Money market securities have very little (Points : 4)

global risk.

size risk.

marketability risk.

None of the above

Question 7.7. (TCO 6) An example of a liability of a non­financial business

corporation is (Points : 4)

commercial paper.

Federal Funds.

Treasury securities.

agency securities.

Question 8.8. (TCO 6) The use of commercial paper as a backup line of credit (Points
: 4)

increases the credit risk for investors.

decreases the credit risk for investors.

has no impact on investors.

decreases the marketability of commercial paper.

Question 9.9. (TCO 6) Which money market security is backed by specified

collateral? (Points : 4)

Negotiable CDs

Banker’s acceptances

Repurchase agreements

Commercial paper

Question 10.10. (TCO 6) If a firm is to sell securities with the agreement to buy them

back later at a higher price, this is a _____. (Points : 4)

repurchase agreement

purchase agreement

reverse purchase agreement

reverse repurchase agreement

Question 11.11. (TCO 7) Which of the following is an example of capital market

securities? (Points : 4)

Common stocks

Convertible bonds

Mortgages

All of the above

Question 12.12. (TCO 7) Corporations will typically use capital market financing

for (Points : 4)

new plant and equipment.

seasonal inventory needs.

a quarterly dividend payment.

the sale of common stock.

Question 13.13. (TCO 7) United States Treasury STRIP investments help to

eliminate (Points : 4)

default risk.

price risk.

reinvestment risk.

foreign exchange risk.

Question 14.14. (TCO 7) _____ would be least likely to purchase a tax­exempt

municipal Bond. (Points : 4)

Variables commercial bank

Casualty insurance company

Mutual funds

Individuals in low tax brackets

Question 15.15. (TCO 7) Bonds are classified as a junk bonds if (Points : 4)

issued in large volumes.

originate within small businesses.

its with high default risk.

None of the above

Question 16.16. (TCO 7) Multinational firms look at Eurocurrency markets as a

source of attractively priced working capital loans because (Points : 4)

lower regulatory costs allow lenders to offer lower cost loans.

with transactions starting at $500,000, economies of scale provide better

pricing.

higher credit checking costs and other processing costs lowers lending

rates.

lower regulatory costs allow lenders to offer lower cost loans and With

transactions starting at $500,000, economies of scale provide better pricing.
Question 17.17. (TCO 8) All of the following can be used to adjust ARM rates

except (Points : 4)

Treasury security rates

Dow Jones Mortgage Rate Index

S & L cost of funds index

LIBOR

Question 18.18. (TCO 8) If a savings and loan (S & L) has a very low net worth

position, most likely the S & L would (Points : 4)

invest in conventional fixed­rate loans.

invest in variable­rate loans.

make and sell eligible loans to the FHLMC.

make equity­participation mortgages.

Question 19.19. (TCO 8) Mortgage rates, relative to other capital market rates (Points :
4)

tend to vary with other rates.

tend to be lower than Treasury bond rates.

reflect an element of credit risk.

tend to vary with other rates and reflect an element of credit risk.

Question 20.20. (TCO 8) The Federal Home Loan Mortgage Corporation (Freddie

Mac) had an original purpose to (Points : 4)

make home loans to low income individuals.

purchase the conventional mortgages from thrift institutions.

purchase the insured conventional mortgages from financial institutions.

purchase the government insured mortgages from thrift institutions.

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