Banking and Financial Services
Exam Preparation Guide
Course Introduction
This course provides a comprehensive introduction to the structure, functions, and operations of banking and financial services in both domestic and international contexts. Students will explore the roles of commercial banks, non-banking financial institutions, and regulatory agencies, examining key products such as deposits, loans, credit cards, payment systems, insurance, and investment services. The course also delves into risk management, financial technologies (fintech), customer relationship management, and the evolving landscape of financial regulation, equipping students with foundational knowledge essential for careers in the banking and finance industries.
Recommended Textbook
Money Banking and the Financial System 3rd Edition by R. Glenn Hubbard
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18 Chapters
1993 Verified Questions
1993 Flashcards
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Page 2
Chapter 1: Introducing Money and the Financial System
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70 Verified Questions
70 Flashcards
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Sample Questions
Q1) Which of the following is NOT a financial asset?
A) a bond issued by Google
B) Wells Fargo Bank
C) a home mortgage loan
D) a certificate of deposit
Answer: B
Q2) Funds flow from lenders to borrowers
A) indirectly through financial markets.
B) directly through financial intermediaries.
C) indirectly through financial intermediaries.
D) primarily through government agencies.
Answer: C
Q3) How did securitization and the bursting of the housing bubble contribute to the Financial Crisis of 2007-2009?
Answer: Many investment banks and other investors purchased mortgage-backed securities because they paid higher interest rates than securities of comparable default risk.When the housing bubble burst,the value of the mortgage-backed securities declined significantly,resulting in massive losses for those who owned them,including many investment banks.
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Page 3
Chapter 2: Money and the Payments System
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121 Verified Questions
121 Flashcards
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Sample Questions
Q1) Which of the following is NOT included in M2?
A) currency
B) savings bonds
C) money market deposit accounts
D) overnight repurchase agreements
Answer: B
Q2) Andy can't make a deal with Danny.Andy has an Alex Rodriguez baseball card and would like to trade it to Danny for Danny's Albert Pujols card,but Danny doesn't want an Alex Rodriguez card.Andy's problem illustrates the drawback to a barter system known as
A) the specialization problem.
B) the double coincidence of wants problem.
C) the many prices problem.
D) the transactions problem.
Answer: B
Q3) In what way are other assets less liquid than money?
Answer: You incur transactions costs when you exchange other assets for money.
Q4) Why does the payments system continue to change over time?
Answer: New forms of payments are introduced that increase the efficiency of the payments system by reducing transactions costs.
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Chapter 3: Interest Rates and Rates of Return
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) A bond's price and its yield to maturity are inversely related because
A) discounting future payments at a higher rate reduces the present value of the payments.
B) discounting future payments at a higher rate increases the present value of the payments.
C) an increase in the yield to maturity will lower a bond's coupon rate and hence its price.
D) a fall in a bond's price will lower its par value and hence its yield to maturity.
Answer: A
Q2) Which of the following is a consequence of extending the payback period of a student loan from 10 to 30 years?
A) higher monthly payments
B) more interest paid over the life of the loan
C) faster payoff of principal
D) lower monthly payments initially, but higher monthly payments in the future
Answer: B
Q3) What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?
Answer: The yield to maturity equals $40 / $800 = 5%.
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Page 5
Chapter 4: Determining Interest Rates
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Sample Questions
Q1) Which best describes the relationship between the cost of acquiring information and return?
A) A high return must compensate for a high cost of acquiring information.
B) A higher cost of information corresponds with a low return.
C) A low cost of acquiring information corresponds with a high return.
D) A higher return results in a lower cost of acquiring information.
Q2) An open economy is one that
A) has a large government sector.
B) lends and borrows in the international capital market.
C) produces mainly agricultural goods.
D) produces mainly manufactured goods.
Q3) What impact do savings rates in Belgium have on the real interest rate that businesses in Belgium must pay to obtain the funds to finance their spending on plant and equipment?
Q4) What is a black swan event?
Q5) Suppose Ireland is a small open economy that is neither a net international borrower or international lender.Many countries increase their savings resulting in a lower world real interest rate.Make use of a graph of the loanable funds market for a small open economy to show the impact this has on Ireland's international financial position.
Page 6
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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112 Verified Questions
112 Flashcards
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Sample Questions
Q1) The segmented markets theory
A) has difficulty explaining why yield curves usually slope up.
B) has difficulty explaining why yield curves usually slope down.
C) has difficulty explaining why yields on instruments of different maturities tend to move together.
D) provides a good explanation of why yields on instruments of different maturities tend to move together.
Q2) A one-year bond has an interest rate of 3% and is expected to fall to 2.5% next year and 2% in two years.The term premium for a two-year bond is 0.3% and for a three-year bond is 0.5%.What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?
Q3) According to the liquidity premium theory,a steep yield curve may be an indicator of A) expectations of a significant increase in inflation.
B) an upcoming recession.
C) an economic slowdown.
D) lower future short-term interest rates.
Q4) Why does the segmented markets theory suggest that bonds of different maturities are NOT perfect substitutes for each other?
Page 7
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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118 Verified Questions
118 Flashcards
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Sample Questions
Q1) The difference between a firm's assets and its liabilities is known as
A) limited liability.
B) stock.
C) equity.
D) profit.
Q2) The required return on equity for an individual stock includes which of the following?
A) systemic risk
B) idiosyncratic risk
C) risk-free interest rate
D) all of the above
Q3) According to the Gordon growth model,what is the value of a stock with a dividend of $1,required return on equity of 10% and expected growth rate of dividends of 5%?
A) $2
B) $10
C) $20
D) $21
Q4) What are the effects of the double taxation of dividends?
Q5) How can stock prices affect spending by businesses and households?
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Chapter 7: Derivatives and Derivative Markets
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123 Verified Questions
123 Flashcards
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Sample Questions
Q1) In comparing futures contracts with options contracts,we can say that
A) in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights.
B) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract, the buyer and seller have symmetric rights.
C) in both futures and options contracts, the buyer and seller have symmetric rights.
D) in both futures and options contracts, the buyer and seller have asymmetric rights.
Q2) Southwest Airlines relies on jet fuel to operate its planes.If it chooses to hedge against future changes in fuel prices,what positions (long or short)will it take in the spot and futures markets?
Q3) Futures trading practices in the United States are regulated by
A) the Chicago Board of Trade.
B) the Chicago Mercantile Exchange.
C) the Commodities Futures Trading Commission.
D) the Board of Futures Trading.
Q4) What are the information costs associated with forward contracts?
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Page 9
Chapter 8: The Market for Foreign Exchange
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Since the 1960s,the percentage of U.S.output exported to foreigners
A) remained about the same.
B) more than doubled.
C) increased by more than ten times.
D) declined by about half.
Q2) Today,the short-run demand and supply of foreign currency originating from financial transactions is
A) much more important than is the demand and supply of foreign currency originating from trade in goods.
B) much less important than is the demand and supply of foreign currency originating from trade in goods.
C) of equal importance as is the demand and supply of foreign currency originating from trade in goods.
D) the only important factor in determining short-run exchange rates.
Q3) In 2010,fears were growing that the dollar would experience a significant decline in value.What are the likely implications for the euro-dollar exchange rate?
Q4) What is an advantage of using options instead of forward contracts when speculating on exchange rates?
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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118 Verified Questions
118 Flashcards
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Sample Questions
Q1) Information costs
A) are the costs of buying and selling financial claims.
B) include the costs that savers incur to determine the credit worthiness of borrowers.
C) include the costs borrowers incur to discover the best investments to make with the money they have borrowed.
D) are zero in financial markets, but high for transactions carried out through financial intermediaries.
Q2) Generally,when there is asymmetric information
A) a lender will only lend to the government.
B) a lender will only lend to well-known borrowers.
C) practical solutions are devised to allow lending to take place.
D) a lender will cease all lending activities.
Q3) All of the following are benefits of securitization EXCEPT
A) risk sharing.
B) reduced interest rates that borrowers pay on loans.
C) increased liquidity.
D) fewer adverse selection problems.
Q4) How is the lemons problem in the used car market an example of asymmetric information?
Page 11
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Chapter 10: The Economics of Banking
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146 Flashcards
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Sample Questions
Q1) 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.
Q2) In order to reduce the likelihood of excessive leverage in the banking system,governments have traditionally
A) imposed capital requirements on commercial banks.
B) imposed capital requirement on investment banks.
C) imposed capital requirements on both commercial and investment banks.
D) imposed asset requirements on all banks.
Q3) Limits on the value of the assets that commercial banks can acquire relative to their capital is known as
A) equity requirements.
B) capital requirements.
C) required reserves.
D) asset requirements.
Q4) In what ways does a certificate of deposit (CD)differ from a savings deposit?
Q5) Why do households hold less in checking accounts than they once did?
Page 12
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Chapter 11: Beyond Commercial Banks: Shadow Banks and
Nonbank Financial Institutions
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) What regulatory change did Congress approve in 2010 to reduce counterparty risk in the shadow banking system?
A) push more trading of derivatives onto exchanges
B) required investment banks to follow the same rules on leverage as commercial banks
C) required increased collateral for those trading derivatives
D) banned trading of mortgage-backed securities
Q2) 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.
Q3) When investment banks buy or sell securities on their own account,it's called
A) financial engineering.
B) proprietary trading.
C) underwriting.
D) factoring.
Q4) What information is typically included in a prospectus?
Q5) What are some reasons that hedge funds have become controversial?
Q6) How does an investment bank use the results of its research?
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Chapter 12: Financial Crises and Financial Regulation
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79 Verified Questions
79 Flashcards
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Sample Questions
Q1) All of the following were actions taken by the government or the Fed in response to the financial crisis of 2007-2009 EXCEPT
A) purchasing of most toxic assets such as mortgage-backed securities.
B) reducing the federal funds rate to near zero.
C) insuring deposits in money market mutual funds.
D) effective nationalization of Fannie Mae and Freddie Mac.
Q2) The primary motive for financial innovation during the regulatory process is A) profit.
B) adherence to the new regulations.
C) return to the way business was conducted prior to the new regulations.
D) increase coordination with other financial institutions.
Q3) According to research by Reinhart and Rogoff,recessions that involve financial crises have typically been ________ than recessions that do not involve financial crises.
A) longer and deeper
B) longer but milder
C) shorter but deeper
D) shorter and milder
Q4) Why do governments want to maintain the health of the banking system?
Q5) Why do bank panics normally lead to recessions?
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) Which of the following is NOT considered one of the four groups in the Federal Reserve System?
A) Federal Reserve banks
B) Federal Deposit Insurance Corporation
C) Board of Governors
D) Federal Open Market Committee
Q2) The issue of Fed independence is most often raised by
A) disagreement over the role the Fed should play in managing monetary policy.
B) the Fed's refusal to carry out the wishes of the president.
C) the Fed's refusal to carry out the wishes of Congress.
D) the public's negative reaction to Fed policy.
Q3) Which of the following statements is correct?
A) The Fed is fully insulated from external pressures due to the long terms that members of the Board of Governors serve.
B) The Fed is fully insulated from external pressures because it does not need to go through the normal congressional appropriations process.
C) The Fed is fully insulated from external pressures because it has a constitutional mandate.
D) The Fed is only partially insulated from external pressures.
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Page 15
Chapter 14: The Federal Reserves Balance Sheet and the Money
Supply Process
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Sample Questions
Q1) Suppose the required reserve ratio is 8%,the excess reserve-to-deposit ratio is 2%,and the currency-to-deposit ratio is 10%.What is the value of the money multiplier?
Q2) If the nonbank public wants to move funds from checkable deposits to savings accounts
A) M1 and M2 would both rise.
B) M1 and M2 would both remain unchanged.
C) M1 would fall and M2 would remain unchanged.
D) M1 would fall and M2 would rise.
Q3) Suppose the required reserve ratio is 8% and that banks hold no excess reserves and the public does not change its currency holdings.If the Fed sells $5 million worth of securities,what happens to the amount of deposits in the banking system?
Q4) Included in both M1 and M2 are
A) savings accounts and money market mutual funds.
B) savings accounts and checkable deposits.
C) money market mutual funds and currency.
D) currency and checkable deposits.
Q5) Suppose the Fed makes a $5 million discount loan to a bank.Illustrate how this affects the balance sheets of the Fed and the banking system.
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Chapter 15: Monetary Policy
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Sample Questions
Q1) In a matched sale-purchase transaction,the Fed
A) buys securities from a dealer and the dealer agrees to buy them back.
B) sells securities to a dealer and the dealer agrees to sell them back.
C) buys securities from one dealer and sells the same dollar amount of securities to another dealer.
D) sells securities to one dealer and buys the same dollar amount of securities from another dealer.
Q2) An important problem facing the Fed is that
A) the goals for economic growth and price stability may conflict in the short run.
B) it lost effective control over the monetary base.
C) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with Congress.
D) it has been given responsibility for meeting policy goals, but true control over monetary policy remains with the president.
Q3) What is quantitative easing? What was the Fed's objective in implementing quantitative easing?
Q4) Describe the three types of unemployment?
Q5) On which type of unemployment can monetary policy have the most effect? Why?
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Chapter 16: The International Financial System and Monetary Policy
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Sample Questions
Q1) Make use of a T-account to show the effect of the Fed's sale of $500 million worth of foreign government securities on the Fed's balance sheet.(assume the Fed receives a check from the sale of securities).
Q2) The "troika" that helped Greece avoid defaulting on its debt included all of the following EXCEPT the
A) IMF.
B) European Central Bank.
C) World Bank.
D) European Commission.
Q3) Which of the following is NOT considered a payment in the balance of payments?
A) capital outflows
B) U.S. foreign aid to other countries
C) imports of goods
D) exports of services
Q4) A central bank may be reluctant to see its currency appreciate because
A) rising prices of imports will contribute to inflation.
B) falling prices of exports will contribute to inflation.
C) the country's goods may become uncompetitive in world markets.
D) the country's monetary base will increase.
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) How does an increase in the price level result in higher interest rates?
A) It increases the real money supply.
B) It decreases the real money supply.
C) It increases the real money demand.
D) It decreases the real money demand.
Q2) If labor costs rise at the same time that the federal government decreases its purchases,in the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) aggregate output will fall, but the price level may either increase or decrease.
Q3) Which of the following is NOT an example of a supply shock?
A) a drought in the Midwest
B) a decline in natural gas prices following discovery of new fields
C) the introduction of a new line of computer-controlled machine tools in manufacturing
D) a substantial increase in federal government spending on Medicare
Q4) What are the seven key factors that cause the aggregate demand curve to shift?
Q5) How does an increase in the price level lead to a higher interest rate?
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Sample Questions
Q1) An autonomous expenditure is one that does NOT depend on
A) government policy.
B) the automobile sector.
C) interest rates.
D) GDP.
Q2) How can the difference between the current unemployment rate and the natural rate of unemployment help explain changes in inflation?
Q3) Which interest rate is most relevant in determining aggregate expenditures?
A) federal funds rate
B) short-term real interest rate
C) long-term nominal interest rate
D) long-term real interest rate
Q4) Which of the following prevented the Fed from reducing long-term real interest rates during the financial crisis of 2007-2009?
A) an increase in expected inflation
B) an increase in the risk premium
C) the collapse in the housing market
D) the failure of the federal funds rate to respond to monetary policy
Q5) How does the goods market return to equilibrium if AE is less than production?
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