Capital Markets
Exam Questions
Course Introduction
This course provides an in-depth exploration of capital markets, focusing on their structure, function, and significance within the global financial system. Students will examine the key financial instruments traded in capital markets, including stocks, bonds, and derivatives, while also learning about the roles of various market participants such as investment banks, institutional investors, and regulatory bodies. Topics include primary and secondary markets, market efficiency, risk-return relationships, and the impact of economic policies on capital market operations. Through case studies and real-world examples, students will gain practical insights into investment strategies, market analysis, and current trends shaping capital markets today.
Recommended Textbook
Financial Markets and Institutions 7th Edition by Frederic S. Mishkin
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Chapter 1: Why Study Financial Markets and Institutions
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Sample Questions
Q1) 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
Q2) 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
Q3) Interest rates can be accurately described as the rental price of money.
A)True
B)False
Answer: True
Q4) Why should consumers be concerned with movements in foreign exchange rates?
Answer: not answered
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.
A)asymmetric information
B)adverse selection
C)moral hazard
D)fraud
Answer: B
Q2) A financial intermediary's risk-sharing activities are also referred to as asset transformation.
A)True
B)False
Answer: True
Q3) A mutual fund is not a depository institution.
A)True
B)False
Answer: True
Q4) Describe how over-the-counter markets work.
Answer: not answered
Q5) Distinguish between primary markets and secondary 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) All else being equal, the greater the interest rate the greater the duration is. A)True
B)False
Answer: False
Q2) Why may a bond's rate of return differ from its yield to maturity?
Answer: not answered
Q3) Bonds whose term to maturity is shorter than the holding period are also subject to A)default.
B)reinvestment risk.
C)both of the above.
D)none of the above.
Answer: B
Q4) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is A)5 percent.
B)10 percent.
C)14 percent.
D)15 percent.
Answer: D
Page 5
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Chapter 4: Why Do Interest Rates Change
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Sample Questions
Q1) When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right.
A)True
B)False
Q2) When bond prices become more volatile, the demand for bonds ________ and the interest rate ________.
A)increases; rises
B)increases; falls
C)decreases; falls
D)decreases; rises
Q3) When the federal government's budget deficit decreases, the demand curve for bonds shifts to the right.
A)True
B)False
Q4) In Figure 4.3, the factor responsible for the decline in the interest rate is
A)a decline in the price level.
B)a decline in income.
C)an increase in the money supply.
D)a decline in the expected inflation rate.
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates
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Sample Questions
Q1) According to the market segmentation theory of the term structure,
A)the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity.
B)bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time.
C)investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope upward.
D)all of the above.
E)none of the above.
Q2) (I)If a corporate bond becomes less liquid, the demand for the bond will fall, causing the interest rate to rise. (II)If a corporate bond becomes less liquid, the demand for Treasury bonds does not change.
A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.
Q3) How would a severe recession affect the risk premium on corporate bonds?
Q4) What do credit-rating agencies do and why is this work important?
Page 7
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Chapter 6: Are Financial Markets Efficient
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Sample Questions
Q1) What is the optimal investment strategy according to the efficient market hypothesis? Why?
Q2) If the optimal forecast of the return on a security exceeds the equilibrium return, then
A)the market is inefficient.
B)an unexploited profit opportunity exists.
C)the market is in equilibrium.
D)only A and B of the above are true.
E)only B and C of the above are true.
Q3) According to the efficient market hypothesis
A)one cannot expect to earn an abnormally high return by purchasing a security.
B)information in newspapers and in the published reports of financial analysts is already reflected in market prices.
C)unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities.
D)all of the above are true.
E)only A and B of the above are true.
Q4) What is a rational bubble?
Q5) Give evidence both for and against market efficiency.
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Chapter 7: Why Do Financial Institutions Exist
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Sample Questions
Q1) Liquidity services are services that
A)make it easier for customers to conduct transactions.
B)conducts transactions for the customer.
C)increase transaction costs.
D)all of the above.
Q2) Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets?
A)Covenants reduce moral hazard by restricting borrowers' undesirable behavior.
B)Covenants require that borrowers keep collateral in good condition.
C)Covenants require periodic accounting statements and income reports.
D)All of the above.
E)Only A and B of the above.
Q3) A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called
A)moral hazard.
B)asymmetric information.
C)noncollateralized risk.
D)adverse selection.
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Chapter 8: Why Do Financial Crises Occur and Why Are They so Damaging to
the Economy
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Sample Questions
Q1) Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy.
Q2) Stage Two of a financial crisis in an emerging market economy usually involves a ________ crisis.
A)currency
B)stock market
C)banking
D)commodities
Q3) Most financial crises in the United States have begun with
A)a steep stock market decline.
B)an increase in uncertainty resulting from the failure of a major firm.
C)a steep decline in interest rates.
D)all of the above.
E)only A and B of the above.
Q4) Discuss some of the financial innovations in mortgage markets that led to the U.S. financial crisis in 2007.
Q5) Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.
Q6) 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) In November 2007, the Fed announced major enhancements to its communication strategy. Which of the following was a part of the changes?
A)The forecast horizon for the FOMC's projections was extended from two calendar years to three.
B)The committee publishes FOMC projections four times a year instead of twice a year.
C)The release would include a narrative of the forces shaping the outlook and risks to that outlook.
D)All of the above were proposed changes.
Q2) Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would
A)impart an inflationary bias to monetary policy.
B)force monetary authorities to sacrifice the long-run objective of price stability.
C)make the so-called political business cycle even more pronounced.
D)do all of the above.
E)do only A and B of the above.
Q3) What factors limit the independence of the Federal Reserve?
Q4) What are the factors that promote the independence of the Federal Reserve?
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Q1) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the
A)frictional rate of unemployment.
B)structural rate of unemployment.
C)natural rate of unemployment.
D)ideal rate of unemployment.
Q2) Compare the advantages and disadvantages of monetary targeting and inflation targeting.
Q3) If the Fed uses the federal funds rate as an interest rate target, fluctuations in the reserves demand curve will cause ________ to fluctuate.
A)nonborrowed reserves
B)the federal funds interest rate
C)Treasury bill interest rates
D)the inflation rate
Q4) When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment.
A)True
B)False
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Chapter 11: The Money Markets
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Sample Questions
Q1) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.
A)True
B)False
Q2) Explain how and why repurchase agreements would be used.
Q3) If your noncompetitive bid for a Treasury bill is successful, then you will
A)certainly pay less than if you had submitted a competitive bid.
B)certainly pay more than if you had submitted a competitive bid.
C)pay the average of prices offered in other noncompetitive bids.
D)pay the same as other successful noncompetitive bidders.
Q4) The advantage of mutual funds is that they
A)require no cash up front.
B)give investors with relatively small amounts of cash to invest access to large-denomination securities.
C)always yield the highest returns.
D)both A and B of the above.
Q5) Explain why banks, which would seem to have a comparative advantage in gathering information, have not eliminated the need for the money markets.
Q6) Explain why the money markets are referred to as wholesale markets.
Page 13
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Chapter 12: The Bond Market
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Sample Questions
Q1) Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because
A)higher; corporate earnings will be limited by the restrictions
B)higher; the bonds will be considered safer by bondholders
C)lower; the bonds will be considered safer by buyers
D)lower; corporate earnings will be higher with more restrictions in place
Q2) (I)Restrictive covenants often limit the amount of dividends that firms can pay the stockholders. (II)Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back.
A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.
Q3) To sell an old bond when rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate.
A)True
B)False
Q4) Explain the different types of corporate bonds.
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Chapter 13: The Stock Market
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Sample Questions
Q1) What are the advantages and disadvantages of Electronic Communications Networks (ECNs)for trading stocks?
Q2) A ________ PE may indicate that the market feels the firm's earnings are very ________ risk and is therefore willing to pay a ________ for them.
A)high; low; premium
B)high; high; discount
C)low; low; discount
D)high; high; premium
Q3) What are the objectives of the Securities and Exchange Commission?
Q4) To list on the NYSE, a firm must
A)have earnings of at least $10 million per year.
B)have at least $500 million in outstanding debt.
C)have a total of $100 million in market value.
D)meet all of the above requirements.
E)meet A and C of the above requirements.
Q5) Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy.
A)True
B)False
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) Which of the following are useful for home buyers who expect their income to fall in the future?
A)GPMs
B)RAMs
C)GEMs
D)Only A and B are useful.
E)Only A and C are useful.
Q2) (I)ARMs offer lower initial rates and the rate may fall during the life of the loan. (II)Conventional mortgages do not allow a borrower to take advantage of falling interest rates.
A)(I)is true, (II)is false.
B)(I)is false, (II)is true.
C)Both are true.
D)Both are false.
Q3) A loan-servicing agent will
A)package the loan for an investor.
B)hold the loan in their investment portfolio.
C)collect payments from the borrower.
D)do both A and C of the above.
E)do both B and C of the above.
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) In the short run, the quantity of dollars supplied (deposits, bonds, equities)is
A)fixed with respect to the exchange rate.
B)quite volatile and difficult to model in a supply-demand framework.
C)typically following the business cycle (procyclical).
D)is best represented with a horizontal supply curve.
Q2) If the dollar depreciates relative to the British pound, British sweaters will become more expensive in the United States.
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) A fall in the expected future exchange rate shifts the expected return schedule for domestic deposits to the right and causes the domestic currency to depreciate.
A)True
B)False
Q5) What are some of the long-run determinants of the exchange rate?
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Chapter 16: The International Financial System
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Q1) The Bretton Woods system was a fixed exchange rate regime in which central banks bought and sold their own currencies to keep their exchange rates fixed.
A)True
B)False
Q2) The current account balance plus the capital account balance equals the net change in government international reserves.
A)True
B)False
Q3) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base.
A)sale; purchase; increase
B)sale; sale; decline
C)purchase; sale; increase
D)purchase; purchase; decline
Q4) An anchor currency provides the base for a floating exchange rate system.
A)True
B)False
Q5) Describe the pros and cons for controls on capital inflows and outflows.
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) What are a bank's major sources and uses of funds?
Q2) In general, banks would prefer to meet deposit outflows by ________ rather than
A)selling loans; selling securities.
B)selling loans; borrowing from the Fed.
C)borrowing from the Fed; selling loans.
D)"calling in" loans; selling securities.
Q3) Which of the following are reported as assets on a bank's balance sheet?
A)discount loans from the Fed
B)loans
C)borrowings
D)only A and B of the above
Q4) Which is the least costly way for a bank to handle deposit outflows?
A)Hold excess reserves.
B)Borrow from other banks.
C)Sell securities.
D)Call in loans.
Q5) Discuss the recent trends in bank performance measures.
Page 19
Q6) Distinguish between a bank's reserves, required reserves, excess reserves, and secondary reserves.
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Chapter 18: Financial Regulation
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Sample Questions
Q1) When bad drivers line up to purchase collision insurance, automobile insurers are subject to the
A)moral hazard problem.
B)adverse selection problem.
C)assigned risk problem.
D)ill queue problem.
Q2) Discuss the role of mark-to-market accounting during the 2007-2009 financial crisis. Did it help or hurt credit markets and bank lending?
Q3) Discuss some of the problems of Basel 2 that the 2007-2009 financial crisis revealed.
Q4) According to some economists, Congress made a mistake when it passed the FDICIA of not requiring the FDIC to assess risk-based insurance premiums.
A)True
B)False
Q5) Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details.
A)True
B)False
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Chapter 19: Banking Industry: Structure and Competition
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Q1) The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system.
A)state; national
B)state; municipal
C)national; state
D)national; municipal
Q2) The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the A)central bank.
B)commercial bank.
C)bank of settlement.
D)Treasury Department.
Q3) A form of electronic money used on the Internet to pay for goods and services is A)e-money.
B)e-cash.
C)a smart card.
D)a virtual bank.
Q4) Explain the innovations that have been created to lower interest-rate risk.
Q5) What financial innovations are best explained as attempts to avoid regulations?
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) All ________ are open-end investment funds that invest only in money market securities.
A)Stock funds
B)Bond funds
C)Money market mutual funds
D)all of the above
Q2) Which of the following is most likely to be a no-load fund?
A)value funds
B)hedge funds
C)growth funds
D)index funds
Q3) Equity funds can be placed in which class according to the Investment Company Institute?
A)capital appreciation funds
B)world funds
C)total return funds
D)all of the above
Q4) Discuss the proposals that have been made to reduce the conflict of interest abuses in the mutual funds industry.
Q5) Discuss the four primary classes of mutual funds available to investors.
Page 23
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Chapter 21: Insurance Companies and Pension Funds
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Q1) A whole life insurance policy pays a death benefit if the policyholder dies.
A)True
B)False
Q2) Health maintenance organizations (HMOs)shift the risk from the provider to the insurance company.
A)True
B)False
Q3) All insurance is subject to several basic principles, including all of the following except that
A)the insured must provide full and accurate information to the insurance company.
B)the insured is to profit as a result of insurance coverage.
C)the loss must be quantifiable.
D)there must be a relationship between the insured and the beneficiary.
Q4) Distinguish between different types of life insurance.
Q5) The higher the insurance coverage, the more the policyholder can gain from risky activities that make an insurance payoff less likely.
A)True
B)False
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Chapter 22: Investment Banks, Security Brokers and
Dealers, and Venture Capital Firms
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Q1) Which of the following provides funds to companies not yet ready to sell securities to the public?
A)investment banks
B)securities brokers and dealers
C)venture capital firms
D)none of the above
Q2) How do venture capital firms overcome the problem of information asymmetries that accompany start-up firms?
Q3) Within the broad universe of private equity sectors, the two most common are venture funds and capital buyouts.
A)True
B)False
Q4) In a ________ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive, but agrees to sell the securities on a commission basis.
A)best efforts
B)brokered
C)private-placement
D)jump-start
25
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Chapter 23: Risk Management in Financial Institutions
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Q1) Credit rationing reduces adverse selection problems.
A)True
B)False
Q2) One problem with duration gap analysis is that it
A)is calculated assuming that the yield curve is flat.
B)is calculated assuming that the yield curve does not change.
C)does not measure the sensitivity of net worth to interest rate changes.
D)does not measure the sensitivity of income to interest rate changes.
E)applies only to financial institutions.
Q3) Referring to Table 23.1, First National Bank has a gap of ________.
A)-30
B)+30
C)60
D)0
Q4) What is gap analysis and why is it important to a bank?
Q5) Explain how banks benefit from long-term customer relationships.
Q6) If interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will increase regardless of the income gap.
A)True
B)False
Page 26
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Chapter 24: Hedging With Financial Derivatives
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Q1) A long contract obligates the holder to sell securities in the future.
A)True
B)False
Q2) A forward contract is more flexible than a futures contract.
A)True
B)False
Q3) An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium.
A)increase
B)decrease
C)not affect
D)Not enough information is given.
Q4) Intermediaries are active in the swap markets because A)they increase liquidity.
B)they reduce default risk.
C)they reduce search cost.
D)all of the above are true.
Q5) Futures trading is regulated by the Commodity Futures Trading Commission. A)True
B)False
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Chapter 25: Savings Associations and Credit Unions
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Q1) Savings and loan associations
A)were established by Congress to encourage home ownership.
B)initially were not permitted to accept demand deposits.
C)held about 85 percent of their assets in the form of mortgages prior to the Great Depression.
D)are all of the above.
E)are only A and B of the above.
Q2) The major provisions of the Competitive Equality in Banking Act of 1987 included
A)abolishing the Federal Home Loan Bank Board and the FSLIC.
B)transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department.
C)establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership.
D)all of the above.
E)none of the above.
Q3) Explain why thrift regulators engaged in regulatory forbearance in the 1980s.
Q4) Mutual savings banks are the only financial institutions that are tax-exempt.
A)True
B)False
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Chapter 26: Finance Companies
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Q1) As presented in the Consolidated Finance Company Balance Sheet, the largest asset of finance companies is consumer loans, representing ________ of assets.
A)10%
B)22%
C)25%
D)33%
Q2) Lease financing is an example of a business financing need not served by most banks.
A)True
B)False
Q3) A sales finance company differs from a captive finance company primarily in regulations and other restrictions.
A)True
B)False
Q4) Describe the process of factoring? When and why is it used?
Q5) Describe how floor plans work in the automobile industry. Why can finance companies offer these arrangements at a lower cost than banks?
Q6) What are the various types of finance companies?
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