Banking and Financial Services
Final Exam
Course Introduction
This course provides a comprehensive introduction to the structure, functions, and operations of banking and financial services. Students will explore the roles of commercial and investment banks, non-banking financial institutions, and regulatory bodies in the financial system. Key topics include the process of credit creation, risk management techniques, digital banking innovations, asset and liability management, and the role of financial services in economic development. The course also examines contemporary issues such as fintech, cybersecurity, and the impact of global financial regulations, preparing students for careers in the evolving banking and financial sectors.
Recommended Textbook Financial Markets and Institutions Global 7th Edition by Frederic S Mishkin
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Chapter 1: Why Study Financial Markets and Institutions
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Q1) A security
A)is a claim or price of property that is subject to ownership.
B)promises that payments will be made periodically for a specified period of time.
C)is the price paid for the usage of funds.
D)is a claim on the issuer's future income.
Answer: D
Q2) The price of one country's currency in terms of another's is called
A)the foreign exchange rate.
B)the interest rate.
C)the Dow Jones industrial average.
D)none of the above.
Answer: A
Q3) Money is anything accepted by anyone as payment for services or goods.
A)True
B)False
Answer: True
Q4) What is the central bank and what does it do?
Answer: not answered
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Chapter 2: Overview of the Financial System
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Q1) U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as
A)Eurodollars.
B)Eurocurrencies.
C)Eurobonds.
D)foreign bonds.
Answer: A
Q2) American investors pay attention to only the Dow Jones Industrial Average.
A)True
B)False
Answer: False
Q3) Which of the following are not investment intermediaries?
A)A life insurance company
B)A pension fund
C)A mutual fund
D)Only A and B of the above
Answer: D
Q4) Distinguish between money markets and capital markets. Answer: not answered
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Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation
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Sample Questions
Q1) The current yield on a coupon bond is the bond's ________ divided by its
A)annual coupon payment; price
B)annual coupon payment; face value
C)annual return; price
D)annual return; face value
Answer: A
Q2) Why may a bond's rate of return differ from its yield to maturity?
Answer: not answered
Q3) What is interest-rate risk and how is it measured?
Answer: not answered
Q4) Which of the following are true of coupon bonds?
A)The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid.
B)U)S. Treasury bonds and notes are examples of coupon bonds.
C)Corporate bonds are examples of coupon bonds.
D)All of the above.
E)Only A and B of the above.
Answer: D
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Chapter 4: Why Do Interest Rates Change
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Q1) Factors that cause the demand curve for bonds to shift to the left include
A)an increase in the inflation rate.
B)an increase in the liquidity of stocks.
C)a decrease in the volatility of stock prices.
D)all of the above.
E)none of the above.
Q2) Factors that can cause the supply curve for bonds to shift to the right include
A)an expansion in overall economic activity.
B)a decrease in expected inflation.
C)a decrease in government deficits.
D)all of the above.
E)only A and B of the above.
Q3) Milton Friedman contends that it is entirely possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation.
A)fall; liquidity
B)fall; risk
C)rise; liquidity
D)rise; risk
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates
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Q1) The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression.
A)was reversed
B)narrowed significantly
C)widened significantly
D)did not change
Q2) A moderately upward-sloping yield curve indicates that short-term interest rates are expected to
A)neither rise nor fall in the near future.
B)remain relatively unchanged, but that long-term rates are expected to fall.
C)neither rise nor fall, but that long-term rates are expected to rise moderately.
D)rise moderately in the near future.
Q3) When a municipal bond is given tax-free status, the demand for municipal bonds shifts ________, causing the interest rate on the bond to ________.
A)leftward; rise
B)leftward; fall
C)rightward; rise
D)rightward; fall
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Chapter 6: Are Financial Markets Efficient
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Q1) How do loss aversion, overconfidence of investors, and social contagion affect market efficiency?
Q2) Which of the following types of information will most likely enable the exploitation of a profit opportunity?
A)Financial analysts' published recommendations
B)Technical analysis
C)Hot tips from a stockbroker
D)None of the above
Q3) Ivan Boesky, the most successful of the so-called arbs in the 1980s, was able to outperform the market on a consistent basis, indicating that A)securities markets are not efficient.
B)unexploited profit opportunities were abundant.
C)investors can outperform the market with inside information.
D)only B and C of the above.
Q4) Evidence in favor of market efficiency includes
A)performance of investment analysts and mutual funds.
B)whether stock prices reflect publicly available information.
C)the random-walk behavior of stock prices.
D)all of the above.
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Chapter 7: Why Do Financial Institutions Exist
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Q1) The authors' analysis of adverse selection indicates that financial intermediaries in general, and banks in particular (because they hold a large fraction of nontraded loans),
A)have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than direct finance.
B)play a greater role in moving funds to corporations than do securities markets as a result of their ability to overcome the free-rider problem.
C)provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations, which rely to a greater extent on the new issues market for funds.
D)all of the above.
E)only A and B of the above.
Q2) Investment banks are guilty of conflict of interest when they
A)pressure their analysts to produce research favorable to their client firms.
B)permit executives of client firms to alter analysts' research on their firms.
C)prohibit analysts from making negative or controversial comments about client firms.
D)all of the above.
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Chapter 8: Why Do Financial Crises Occur and Why Are
They so Damaging to the Economy
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Q1) In the second stage of a financial crisis in an emerging economy, foreign exchange markets start placing huge bets that there will be an appreciation of the emerging market country's currency.
A)True
B)False
Q2) Stock market declines preceded a full-blown financial crisis
A)in the United States in 1987.
B)in the United States in 2000.
C)in Indonesia in 1997.
D)in all of the above.
E)in none of the above.
Q3) In an advanced economy, a financial crisis can begin in several ways, including:
A)mismanagement of financial liberalization or innovation.
B)asset pricing booms and busts.
C)an increase in uncertainty caused by failure of financial institutions.
D)all of the above.
Q4) What is the problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis?
Q5) What does the "twin crises" in an emerging economy financial crisis refer to?
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Chapter 9: Central Banks and the Federal Reserve System
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Q1) Americans' fear of centralized power and their distrust of moneyed interests explain why the U.S. did not have a central bank until the A)17th century.
B)18th century.
C)19th century.
D)20th century.
Q2) The FOMC issues directives to the trading desk at the New York Fed. A)True
B)False
Q3) Former Board of Governors chairman Paul Volcker reportedly once said that the Federal Reserve is free to pursue any policy it desires, as long as it convinces Congress that such a policy is reasonable. What does Volcker's comment suggest about the independence of the Fed? Explain.
Q4) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A)is supportive of congressional attempts to limit the central bank's autonomy.
B)is secretive about the conduct of future monetary policy.
C)sought less control over banks in the 1980s.
D)is willing to take on powerful groups that may threaten its autonomy.
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Q1) The federal funds rate is an operating target.
A)True
B)False
Q2) Describe and discuss Chairman Bernanke's views on inflation targeting and transparency in central banking.
Q3) The Federal Reserve desires interest rate stability because
A)it allows for less uncertainty about future planning.
B)interest rate volatility often leads to demands to curtail the Fed's power.
C)it guarantees full employment.
D)both A and B of the above.
Q4) Flexibility is a requirement in selecting an intermediate target.
A)True
B)False
Q5) An open market transaction intended to change the level of bank reserves is a A)repurchase agreement.
B)reverse repo.
C)dynamic operation.
D)defensive operation.
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Q6) Discuss how the monetary policy of the European Central Bank is similar to the U.S. How are they different?
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Chapter 11: The Money Markets
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Q1) Explain why banks, which would seem to have a comparative advantage in gathering information, have not eliminated the need for the money markets.
Q2) Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms
A)were not subject to deposit reserve requirements.
B)were not subject to the deposit interest rate ceilings.
C)were not limited in how much they could borrow from depositors.
D)had the advantage of all the above.
E)had the advantage of only A and B of the above.
Q3) Asset-backed commercial paper differs from conventional commercial paper in that
A)it is backed (secured)by some bundle of assets.
B)its maturity usually extends well beyond 1 year.
C)both A and B of the above.
D)neither A nor B of the above.
Q4) The market for U.S. Treasury bills is a shallow market because so few individual investors buy T-bills.
A)True
B)False
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Chapter 12: The Bond Market
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Sample Questions
Q1) The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is A)5%.
B)10%.
C)12%.
D)15%.
Q2) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.
A)True
B)False
Q3) The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.
A)True
B)False
Q4) The largest purchasers of capital market securities are A)households.
B)corporations.
C)governments.
D)central banks.
Q5) What is the difference between a general obligation bond and a revenue bond?
Page 15
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Chapter 13: The Stock Market
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Q1) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments?
A)$30.24
B)$26.30
C)$26.09
D)$27.74
Q2) A high price earnings ratio (PE)gives what interpretation?
A)The market expects earnings to fall in the future.
B)The market feels the firm's earnings are very high risk and are willing to pay a premium for them.
C)The market expects the earnings to rise in the future.
D)The firm is not paying a dividend.
Q3) About half of new equity issues are preferred stock.
A)True
B)False
Q4) What are the advantages and disadvantages of Electronic Communications Networks (ECNs)for trading stocks?
Q5) How do common stocks differ from preferred stocks?
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Chapter 14: The Mortgage Markets
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Q1) What are points? What is their purpose?
Q2) The Federal Housing Administration (FHA)
A)was set up to buy mortgages from thrifts so that these institutions could make more loans.
B)funds purchases of mortgages by selling bonds to the public.
C)provides insurance for certain mortgage contracts.
D)does all of the above.
E)does only A and B of the above.
Q3) Retired people can live on the equity they have in their homes by using a A)GEM.
B)GPM.
C)SAM.
D)RAM.
Q4) The share of the mortgage market held by savings and loans is A)over 50 percent.
B)approximately 40 percent.
C)approximately 20 percent.
D)less than 10 percent.
Q5) What are mortgage-backed securities, why were they developed, what types of mortgage-backed securities are there, and how do they work?
Page 17
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Chapter 15: The Foreign Exchange Market
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Q1) The theory of purchasing power parity is a theory of how exchange rates are determined in
A)the long run.
B)the short run.
C)both A and B of the above.
D)none of the above.
Q2) There are two kinds of exchange rate transactions.
A)True
B)False
Q3) In the long run, ________ affect the exchange rate.
A)relative price levels
B)tariffs and quotas
C)productivity
D)all of the above.
Q4) With the start of the subprime financial crisis in August 2007, the dollar began an accelerated decline in value, falling by 9% against the euro. At that point, the financial crisis appeared to be a U.S. problem. However, by mid-2008, the crisis spread to Europe.
Discuss the reaction of the dollar to actions taken by European central banks in late 2008 to deal with the widening financial crisis.
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Chapter 16: The International Financial System
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Q1) A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.
A)sale; decrease
B)purchase; decrease C)sale; increase
D)purchase; increase
Q2) A balance of payments ________ is associated with a ________ of international reserves.
A)surplus; loss
B)surplus; gain
C)deficit; gain
D)balance; loss
Q3) A sterilized intervention leaves the money supply changed and has a direct way of affecting interest rates or the expected future exchange rate.
A)True
B)False
Q4) What was the European Monetary System? How did its exchange rate mechanism work?
Q5) Describe the pros and cons for controls on capital inflows and outflows.
Page 19
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Chapter 17: Banking and the Management of Financial
Institutions
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Q1) To keep enough cash on hand to meet depositors' demand for withdrawals, banks must engage in liquidity management.
A)True
B)False
Q2) Banks can protect themselves from the disruption caused by deposit outflows by
A)holding excess reserves.
B)selling securities.
C)"calling in" loans.
D)doing all of the above.
E)doing only A and B of the above.
Q3) Checkable deposits and money market deposit accounts are A)payable on demand.
B)liabilities of the banks.
C)assets of the banks.
D)only A and B of the above.
E)only A and C of the above.
Q4) Discuss the recent trends in bank performance measures.
Q5) Loan loss reserves are an asset on a bank's balance sheet. A)True
B)False
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Chapter 18: Financial Regulation
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Q1) The too-big-to-fail policy
A)exacerbates moral hazard problems.
B)puts large banks at a competitive disadvantage in attracting large deposits.
C)treats large depositors of small banks inequitably when compared to depositors of large banks.
D)does only A and C of the above.
Q2) The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC
A)guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method.
B)guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method.
C)is less likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures.
D)does both A and B of the above.
E)does both B and C of the above.
Q3) How has bank regulation in the United States changed since the late 1980s? What accounts for these changes?
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Chapter 19: Banking Industry: Structure and Competition
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Q1) Describe Edge Act corporations, international banking facilities, and the structure of foreign banks in the United States.
Q2) Examples of financial services that became practical realities as the result of new computer technology include
A)credit cards.
B)electronic banking facilities.
C)checking accounts.
D)all of the above.
E)only A and B of the above.
Q3) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.
A)federal government; municipalities
B)state governments; municipalities
C)federal government; states
D)municipalities; states
Q4) Explain the innovations that have been created to lower interest-rate risk.
Q5) What are Treasury strips? What roles have reinvestment risk and information technology played in the development of this financial product?
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Chapter 20: The Mutual Fund Industry
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Q1) Government bonds are essentially default risk-free, ________ returns.
A)and will yield high B)and will yield the highest C)but will have relatively low D)none of the above
Q2) Money market mutual funds originated when the brokerage firm Merrill Lynch offered its customers an account from which funds could be taken to purchase securities and into which funds could be deposited when securities were sold.
A)True
B)False
Q3) At the end of 2009 there were over ________ separate mutual funds with total assets over ________.
A)800; $10 trillion
B)7,000; $11 trillion
C)10,000; $10 trillion
D)1,000; $7 trillion
Q4) Open-end mutual funds are more common than closed-end funds.
A)True
B)False
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Chapter 21: Insurance Companies and Pension Funds
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Q1) If automobile insurance companies were prevented from charging risk-based premiums, but could selectively screen potential policyholders, the likely effect would be to
A)increase the number of young men obtaining insurance coverage relative to young women.
B)decrease the number of young women obtaining insurance coverage relative to young men.
C)decrease the number of young men obtaining insurance coverage relative to young women.
D)do both A and B of the above.
Q2) Which of the following statements regarding the funding of Social Security is false?
A)In 2004, workers contributed 6.2% of their wages up to a maximum of $87,900.
B)Employers contribute an amount equal to the workers' contributions.
C)Interest, dividend, rent, and royalty income are also taxed to provide supplemental funds for Social Security.
D)Contributions exceeding the amounts paid to current Social Security recipients are invested in Treasury bonds to build up a Social Security trust fund.
Q3) Why must insurance companies screen applicants so carefully?
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Q1) The most active investment banking firm in the private placement market is
A)Merrill Lynch
B)Lehman Brothers
C)Goldman Sachs
D)Morgan Stanley
Q2) With private investing,
A)capital is raised by selling securities to the public.
B)capital is raised by issuing new shares of stock.
C)a limited partnership is formed that raises money from a small number of high-wealth investors.
D)all of the above occur
Q3) By law, investors must be given a portion of the registration statement before they can invest in a new security. This document is called a ________.
A)prospectus
B)proxy statement
C)fiduciary warrant
D)debenture
Q4) What niche in the financial system do venture capital firms fill?
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Chapter 23: Risk Management in Financial Institutions
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Q1) Which of the following are not generally rate-sensitive assets?
A)securities with a maturity of less than one year
B)variable-rate mortgages
C)fixed-rate mortgages
D)all of the above are rate-sensitive assets
E)none of the above are rate-sensitive assets
Q2) A bank manager concerned about interest income who expects interest rates to fall and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.
A)increase; increase
B)decrease; increase
C)decrease; decrease
D)increase; decrease
Q3) From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.
A)moral hazard; diversification
B)diversification; moral hazard
C)adverse selection; diversification
D)diversification; adverse selection
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Chapter 24: Hedging With Financial Derivatives
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Q1) If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could ________ options on financial futures.
A)buy put
B)buy call
C)sell put
D)sell call
Q2) If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk by
A)selling foreign exchange futures short.
B)buying foreign exchange futures long.
C)staying out of the exchange futures market.
D)doing none of the above.
Q3) If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will ________.
A)lose $12,500
B)gain $12,500
C)lose $50
D)gain $50
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Chapter 25: Savings Associations and Credit Unions
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Q1) Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take fewer risks than healthy S&Ls that can take risks and still remain solvent.
A)True
B)False
Q2) In the early 1990s, to replenish the reserves of the Savings Association Insurance Fund, insurance premiums for S&Ls were increased from ________ cents per $100 of deposits to ________ cents and can rise as high as 32.5 cents.
A)12.5; 17.5
B)17.5; 20.5
C)20.8; 23.0
D)23.0; 27.8
Q3) Savings banks
A)were first established in Scotland and England.
B)were established to encourage saving by the poor.
C)were very conservative with their funds, placing most of them in commercial banks.
D)are all of the above.
E)are only A and B of the above.
Q4) What factors contributed to creating the thrift crisis?
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Chapter 26: Finance Companies
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Q1) By the beginning of 2010, banks held $1,177 billion in consumer loans. Finance companies held about ________ of that figure.
A)40%
B)60%
C)90%
D)110%
Q2) Which of the following is not an advantage of a lease financing arrangement?
A)Companies with losses can still depreciate equipment if leased from a finance company.
B)Repossession is easier in a lease-finance arrangement because the finance company already owns the equipment.
C)Finance companies are in a good position to sell a repossessed asset, especially if they are a subsidiary of the equipment manufacturer.
D)The lessee often does not have to make as large of an upfront payment, relative to a straight loan.
Q3) Describe the process of factoring? When and why is it used?
Q4) What factors explain the existence of finance companies, given that banks already provide loans, credit, and so forth?
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