Banking and Financial Intermediation Exam
Bank
Course Introduction
This course explores the fundamental roles that banks and other financial intermediaries play in the global economy. Students will examine the structure and functioning of financial institutions, the process of financial intermediation, and the management of various types of risks faced by banks. The course also covers topics such as interest rate determination, the regulation and supervision of banks, innovations in banking, and the impact of technology on financial services. By understanding the theories and practical operations of banks and intermediaries, students gain insights into their importance in supporting economic growth and stability.
Recommended Textbook Money Banking and the Financial System 1st Edition by R. Glenn Hubbard
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18 Chapters
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) The leading federal regulatory body for financial markets in the United States is the A) Federal Bureau of Investigation.
B) Securities and Exchange Commission.
C) Federal Financial Market Bureau.
D) Investors Protection Agency.
Answer: B
Q2) All of the following were significant changes in the mortgage market in the 2000s EXCEPT
A) investment banks became significant participants in the secondary mortgage market.
B) lenders loosened lending standards.
C) mortgage-backed securities became more popular with investors.
D) borrowers tended to increase the amount of their down payments.
Answer: D
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Chapter 2: Money and the Payments System
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Sample Questions
Q1) Which of the following is an example of a commodity money?
A) gold coins
B) dollar bills
C) British pound notes
D) Japanese yen notes
Answer: A
Q2) What is the difference between money,income,and wealth?
Answer: Income is equal to a person's earnings over a period of time.Wealth is the sum of a person's assets minus the sum of a person's liabilities.Money is a medium of exchange and one component of a person's wealth.
Q3) When economists refer to the role of money as a store of value,they mean that
A) money never loses its value, unlike other assets.
B) money allows value to be stored easily.
C) the value of money falls only when the quantity of money in circulation falls.
D) the value of money falls only when the quantity of money in circulation rises.
Answer: B
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4
Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) Which of the following is the correct expression for the approximate expected real interest rate?
A) r = i +p<sup>e</sup>
B) r = i - p<sup>e</sup>
C) r = i/p<sup>e</sup>
D) r = ip<sup>e</sup>
Answer: B
Q2) The current yield is equal to
A) the coupon divided by the market price of the bond.
B) the yield to maturity, if the bond is a coupon bond.
C) the coupon divided by the par value of the bond.
D) the market price of the bond divided by its par value.
Answer: A
Q3) Suppose you purchase a bond with a coupon of $50 for $1010.You sell it one year later for $900.What rate of return did you earn? Report a percentage with two decimal places.
Answer: The rate of return is $50/$1010 + ($900 - $1010)/$1010 = -5.94%.
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Page 5
Chapter 4: Determining Interest Rates
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Sample Questions
Q1) Assess the impact on the bond market of the rise in Internet trading of stocks.
Q2) Suppose there's an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%.What is the expected rate of return on the stock?
A) -40%
B) -20%
C) 8%
D) 16%
Q3) If there is an excess demand for bonds at a given price of bonds,then
A) the interest rate will fall.
B) the interest rate will rise.
C) the price of bonds will fall.
D) the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.
Q4) As wealth increases in the economy,savers are willing to
A) hold more cash relative to their holdings of bonds.
B) buy fewer bonds at any given price.
C) buy more bonds at any given price.
D) lend less at any given interest rate.
Q5) What is a black swan event?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Sample Questions
Q1) The key assumption of the liquidity premium theory is that investors
A) view bonds of different maturities as perfect substitutes.
B) view bonds of different maturities as completely unsubstitutable.
C) always choose the bond with the highest expected return, regardless of maturity.
D) care about both expected returns and time to maturity.
Q2) Unlike the segmented markets theory,the expectations theory attributes the slope of the yield curve to
A) tax considerations.
B) the fact that short-term bonds are not perfect substitutes for long-term bonds.
C) the market's view of future short-term interest rates.
D) the variance in the inflation rates over the business cycle.
Q3) The expectations theory
A) has difficulty explaining why U.S. Treasury securities have lower yields than corporate bonds.
B) has difficulty explaining why yields on bonds of different maturities move together.
C) has difficulty explaining why yield curves usually slope upward.
D) accounts well for the fact that yield curves usually slope upward.
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Page 7
Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Sample Questions
Q1) Suppose Apple announces that its earnings for the fourth quarter of 2011 rose to $2 billion.As a result of this announcement the price of Apple's stock does not change.The best explanation of this is
A) market participants were expecting Apple's earnings to be greater than $2 billion.
B) market participants expected Apple's earnings to be $2 billion.
C) market participants expected Apple's earnings to be less than $2 billion.
D) market participants have adaptive expectations.
Q2) According to the Efficient Markets Hypothesis,prices of securities
A) change infrequently.
B) change frequently to reflect news about changes in the fundamental values of the securities.
C) change frequently as evaluations of existing information about the securities change. D) are not allowed, under federal securities laws, to change more frequently than once a month.
Q3) Why do some economists think that taxing capital gains results in a locked-in effect?
Q4) Explain how a bubble can develop in the market for an asset.
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) Financial futures contracts are regulated by
A) the Commodity Futures Trading Commission.
B) the Federal Trade Commission.
C) the Interstate Commerce Commission.
D) the Options and Futures Commission.
Q2) The futures price
A) reflects traders' expectations of the spot price on the day of delivery.
B) is always above the spot price on the day of delivery.
C) is always below the spot price on the day of delivery.
D) is always equal to the spot price at every point in time.
Q3) The intrinsic value of an option
A) is equal to the option premium.
B) is the amount the option actually is worth if it is immediately exercised.
C) is the amount the option is expected to be worth on its expiration date.
D) is impossible to determine in the absence of information on the future prices of the underlying asset.
Q4) Why do futures have lower information costs and higher liquidity than forward contracts?
Q5) Describe two useful purposes served by speculators in derivatives markets.
Q6) How do exchanges seek to reduce default risk in the futures market?
Page 9
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Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?
Q2) If the German interest rate is 4% and the U.S.interest rate is 5%,what is the expected change in the value of the dollar in terms of the euro?
A) 1%
B) -1%
C) 9%
D) -9%
Q3) If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico,the law of one price indicates that you should be able to exchange $1 for A) 0.025 peso.
B) 4 pesos.
C) 40 pesos.
D) 400 pesos.
Q4) What real-world complications keep purchasing power parity from being a complete explanation of exchange rates ?
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) When interest rates in the bond market rise,
A) adverse selection problems increase.
B) adverse selection problems are mitigated.
C) moral hazard problems increase.
D) moral hazard problems are mitigated.
Q2) Which economist is credited with having been the first to discuss the "lemons problem"?
A) George Akerlof
B) Milton Friedman
C) Robert Shiller
D) James Tobin
Q3) Requirements for information disclosure for firms that desire to sell securities in financial markets
A) are very common in industrialized countries, including the United States.
B) are common in other industrialized countries, but have not yet been adopted in the United States.
C) have been adopted in the United States, but have not yet been adopted in other industrialized countries.
D) have yet to be adopted in the United States or other industrialized countries.
Page 11
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) Which of the following is NOT a nontransaction deposit?
A) a money market deposit account
B) a certificate of deposit
C) a savings account
D) a NOW account
Q2) In banking,the spread refers to the difference between the
A) interest rate on long-term bonds and the interest rate on short-term bonds.
B) interest rate on car loans and the interest rate on home mortgages.
C) average interest rate earned on assets and the average interest rate paid on liabilities.
D) bid and asked prices on a bond.
Q3) Standby letters of credit
A) are a form of swaps.
B) are a promise by a bank to lend the borrower funds to pay off its maturing commercial paper.
C) are a promise by a large depositor to provide additional funds to a bank should the bank face an unexpectedly large deposit outflow.
D) represent the unused balance on a bank credit card.
Q4) Why do banks make use of loan loss reserves?
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Chapter 11: Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System
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Sample Questions
Q1) Suppose an investment bank buys $100 million worth of mortgage-backed securities.It finances the purchase by borrowing $90 million and using $10 million from its equity.If the value of holdings of mortgage-backed securities declines by 5%,what is its return on equity investment?
Q2) How does proprietary trading expose investment banks to interest-rate and credit risk?
Q3) What are some reasons that hedge funds have become controversial?
Q4) Underwriting involves
A) insuring the life or health of individuals.
B) guaranteeing a price for new capital to the issuing firm.
C) selling stock more cheaply than conventional stockbrokers.
D) issuing stock and using the proceeds to buy bonds.
Q5) Which of the following statements is NOT true of consumer finance companies?
A) Their borrowers have higher default risk than bank customers.
B) They charge higher interest rates than banks do on similar loans.
C) They lend primarily to consumers.
D) They are strictly regulated by state governments.
Q6) What type of economic research do analysts at investment banks conduct?
Q7) what were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage? Page 13
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Page 14
Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) Why do governments want to maintain the health of the banking system?
Q2) The creation of a lender of last resort in the United States
A) occurred in response to banking panics.
B) was mandated in the U.S. Constitution.
C) occurred in response to the S&L crisis of the 1980s.
D) has been recommended by the Treasury in its report of late 1992.
Q3) What are two ways that governments can prevent banking panics?
Q4) Sovereign debt refers to
A) debt owned by the government.
B) bonds issued by the government.
C) debt owed to the government.
D) debt only issued by nations with kings or queens.
Q5) The recession that became the Great Depression began
A) two months prior to the stock market crash of 1929.
B) with the stock market crash of 1929.
C) one year after the stock market crash of 1929.
D) with the banking panics of the early 1930s.
Q6) How does the relationship between housing prices and rental rates provide evidence for or against the existence of a housing bubble?
Q7) Describe the debt-deflation process.
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Chapter 13: The Federal Reserve and Central Banking
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Q1) Which country was least supportive of expansionary policy by the European Central Bank during the Financial Crisis of 2007-2009?
A) Spain
B) Portugal
C) Greece
D) Germany
Q2) How did the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affect the Fed's
Q3) The movement to set up a central bank in the United States was spurred by the financial panic that occurred in
A) 1816.
B) 1907.
C) 1929.
D) 1987.
Q4) To conduct open market operations,the FOMC issues a directive to A) the trading desk at the Federal Reserve Bank of New York.
B) the Board of Governors in Washington, D.C.
C) the presidents of the district banks.
D) the chairman of the New York Stock Exchange.
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) The monetary base is equal to
A) all currency in circulation plus all deposits in financial institutions.
B) all currency in circulation plus checkable deposits in financial institutions.
C) all currency in circulation plus reserves held by banks.
D) checkable deposits in depository institutions plus reserves held by banks.
Q2) Which of the following statements is correct?
A) The volume of open market operations is determined jointly by the actions of the Fed, the banking system, and the nonbank public.
B) The Fed's control over discount lending is more complete than its control over open market operations.
C) The Fed completely controls the volume of open market operations.
D) The Fed has complete control over the volume of both discount loans and open market operations.
Q3) Which of the following is an asset of the Fed?
A) reserves of banks
B) currency in circulation
C) discount loans to banks
D) checkable deposits in commercial banks
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Chapter 15: Monetary Policy
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Sample Questions
Q1) Increases in interest rates are often blamed on
A) Congress.
B) the President.
C) the Fed.
D) the U.S. Treasury.
Q2) The discount window is
A) another name for the discount rate.
B) the means by which the Fed makes discount loans to banks.
C) the spread between the discount rate and the T-bill rate.
D) the period each month during which banks are allowed to apply for discount loans.
Q3) How did the federal funds rate compare to that suggested by Taylor's rule following the 2001 recession and during the Financial Crisis of 2007-2009? How would proponents of Taylor's rule evaluate monetary policy in each period.
Q4) An open market purchase
A) increases the monetary base.
B) decreases the monetary base.
C) increases the federal funds rate.
D) is another name for a discount loan.
Q5) What has been the approach of the European Central Bank to monetary targeting?
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Chapter 16: The International Financial System and Monetary Policy
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Q1) The main reason central banks engage in foreign-exchange interventions is to
A) stabilize the domestic money supply.
B) stabilize domestic interest rates.
C) stabilize foreign interest rates.
D) stabilize the exchange rate.
Q2) Capital inflow restrictions
A) receive less support from economists than full capital controls.
B) may lessen domestic lending booms and risk-taking by domestic banks.
C) were imposed in the United States during the late 1990s.
D) were imposed in Europe in May 2000.
Q3) An unsterilized foreign-exchange intervention occurs
A) whenever a central bank purchases or sells domestic currency.
B) whenever a central bank purchases or sells foreign currency.
C) whenever a central bank allows the monetary base to respond to the sale or purchase of domestic currency.
D) whenever a central bank fails to reduce its holdings of gold by the amount of a foreign-exchange purchase.
Q4) How did maintaining the gold standard deepen the severity of the Great Depression?
Page 19
Q5) Discuss the problems associated with the imposition of capital controls.
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Chapter 17: Monetary Theory I: the Aggregate Demand and Aggregate Supply Model
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Sample Questions
Q1) The new classical explanation of aggregate supply is also known as
A) Monetarism.
B) Keynesianism.
C) the misperception theory.
D) the adaptive expectations theory.
Q2) Why are many economists skeptical of the Fed's ability to fine tune the economy?
A) monetary policy only affects output in the long run
B) lags in policy make it difficult to properly time policy
C) fiscal policy can be implemented more quickly than monetary policy
D) monetary policy does not have any effect on output
Q3) Which of the following is NOT a reason for the weak recovery following the 2007-2009 recession?
A) recessions started by financial crises are almost always severe
B) the decline in the automobile industry appeared to be structural
C) the collapse of the housing market was long lived
D) the recession was caused by a decline in short-run aggregate supply
Q4) According to the New Classical theory,why may output differ from its full-employment level in the short run?
Page 20
Q5) How does an increase in interest rates affect net exports?
Q6) How does an increase in the price level lead to a higher interest rate?
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Page 21
Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) What unusual measures did the Fed take in trying to reduce the risk premium during the Financial Crisis of 2007-2009?
A) buying mortgage-backed securities issued by Fannie Mae and Freddie Mac
B) reducing the federal funds rate multiple times
C) issuing its own securities
D) eliminating the discount rate on loans to member banks
Q2) How is the economy likely to respond when AE (sales)exceed production?
Q3) The MP curve represents
A) the Fed's monetary policy actions in setting a target for the federal funds rate.
B) the relationship between the money supply and the price level.
C) a relationship between the real interest rate and manufacturing production.
D) the relationship between real interest rates and potential GDP.
Q4) A closed economy is one in which
A) investment spending is zero.
B) government spending is zero.
C) there are no imports or exports.
D) demand equals supply in every market.
Q5) What is the inflation gap? What is the output gap?
Q6) What three parts of the economy are represented in the IS-MP model?
Page 22
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