Finance
Chapter Exam Questions
Course Introduction
This course provides an introduction to the fundamental principles of finance, focusing on the concepts of time value of money, risk and return, valuation of financial assets, capital budgeting, and the functioning of financial markets. Students will explore topics such as personal and corporate financial planning, investment analysis, and the role of financial institutions in the economy. The course combines theoretical frameworks with practical applications to equip students with the analytical skills needed for sound financial decision-making in both personal and professional contexts.
Recommended Textbook Money Banking and the Financial System 1st Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Introducing Money and the Financial System
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Q1) Financial intermediaries
A) include banks and other depository institutions.
B) include the New York and American Stock exchanges.
C) directly issue claims on individual borrowers to savers.
D) are owned and operated by the federal government.
Answer: A
Q2) Why did some economists and policymakers criticize the Fed and Treasury for arranging the sale of Bear Stearns to JP Morgan Chase in 2008?
Answer: The main concern was with the moral hazard problem,which is the possibility that managers of financial firms such as Bear Stearns might make riskier investments if they believe that the federal government will save them from bankruptcy.
Q3) If you purchase a Treasury bond,the Treasury bond is
A) an asset to you as well as an asset to the U.S. government.
B) an asset to you, but a liability to the U.S. government.
C) a liability to you, but an asset to the U.S. government.
D) a liability to you as well as a liability to the U.S. government.
Answer: B
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Page 3
Chapter 2: Money and the Payments System
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Sample Questions
Q1) Andy can't make a deal with Danny.Andy has a Alex Rodriguez baseball card and would like to trade it to Danny for Danny's Albert Pujols card,but Danny doesn't want a Alex Rodriquez 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
Q2) The purchasing power of money
A) rises when prices fall.
B) rises when prices rise.
C) is set by the Fed in January of each year.
D) is constant.
Answer: A
Q3) 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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Sample Questions
Q1) Suppose you have two clients who need your services for two years.One agreed to pay you $50,000 one year from now and another $50,000 in two years while the other paid $35,000 after one year,but $65,000 after two years.Assuming an interest rate of 10%,which one has a higher present value? Round off to the nearest dollar.
Answer: The present value of the first contract is $86,777 and the second one is $85,537.
Q2) The most common type of simple loan is a(an)
A) automobile loan from a bank.
B) mortgage loan from a bank.
C) commercial loan from a bank.
D) corporate bond.
Answer: C
Q3) A corporation issues a three year bond with a coupon of $50 and a face value of $1000.Immediately after being issued,market interest rates decline to 4%.What is the price of the bond? Report your answer to the nearest dollar.
Answer: Since the price of the bond equals its present value,the price is $50/1.04 + $50/(1.04)<sup>2</sup> + $1050/(1.04)<sup>3 </sup>= $1029.
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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) A portfolio is a
A) brokerage house specializing in the trading of common stock.
B) brokerage house specializing in the trading of corporate bonds.
C) measure of the risk involved with a holding a particular asset.
D) collection of assets.
Q3) If the government were to simultaneously cut the personal income tax and the corporate profits tax,the equilibrium interest rate
A) would fall.
B) would rise.
C) would be unaffected.
D) might either rise or fall.
Q4) If a government's income tax receipts exceed its expenditures,the government is running a
A) surplus and is a net borrower of funds.
B) surplus and is a net saver of funds.
C) deficit and is a net borrower of funds.
D) deficit and is a net saver of funds.
Q5) How should a financial plan of an older saver differ from that of a younger saver?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Q1) The default risk premium is
A) relevant only for securities issued by very small companies.
B) the additional yield a saver requires for holding a bond with some default risk.
C) zero for corporate bonds, but quite substantial for corporate stock.
D) constant across the business cycle.
Q2) Suppose that your marginal federal income tax rate is 30%,the sum of your marginal state and local tax rates is 5%,and the yield on a thirty-year corporate bond is 10%.You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity,risk,and costs of information)if the municipal bond has a yield of
A) 6.5%.
B) 7.0%.
C) 9.5%.
D) 10.0%.
Q3) The term structure is usually defined with yields on which securities?
A) Corporate bonds
B) Commercial paper
C) U.S. Treasury securities
D) Municipal bonds
Page 7
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Q1) Suppose 3M pays a dividend of $2 per share which the investor is expected to receive immediately.The dividend is expected to grow by 5% per year and the investor has a required rate of return of 8%.What should be the current price of the stock according to the Gordon-Growth model?
Q2) Given the financial market bubbles since the late 1990s,most economists think A) asset prices always equal their fundamental value.
B) investors can consistently outperform the market.
C) it is unlikely that investors can earn above normal profits in the long run by following trading strategies.
D) there is no such thing as a fundamental value of an asset.
Q3) An implication of the efficient markets hypothesis is that
A) only sophisticated investors will be able to earn above-normal profits from financial investments.
B) above-normal profits are available only to major traders.
C) above-normal profits will be eliminated in the trading process.
D) unless he or she acts recklessly, the average investor should be able to make above-normal profits.
Q4) Shouldn't better informed investors be able to profit from the deviations from pricing efficiency caused by noise traders?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Q1) Standardization of derivative contracts
A) increases their liquidity.
B) is the rule with respect to contracts whose underlying asset is a financial security, but not for contracts whose underlying asset is a commodity.
C) is the rule with respect to contracts whose underlying asset is a commodity, but not for contracts whose underlying asset is a financial asset.
D) has been proposed many times by financial analysts, but has not yet been carried out by the SEC.
Q2) All of the following are steps involved in basic currency swaps EXCEPT
A) counterparties exchange the net interest at the end of the swap.
B) the parties exchange principals in two currencies.
C) the parties exchange periodic interest payments over the life of the agreement.
D) the parties exchange the principal amount at the end of the agreement.
Q3) What does it mean to "cover a short"?
Q4) Compare the rights and obligations of buyers and sellers of futures contracts with the rights of buyers and sellers of options contracts.
Q5) How do exchanges seek to reduce default risk in the futures market?
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Page 9
Chapter 8: The Market for Foreign Exchange
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Q1) In forward transactions,
A) the exchange takes place at the same exchange rate as in the spot market.
B) currencies are exchanged at a set date in the future.
C) currencies may only be exchanged at rates set by governments well in advance.
D) currency is bought and sold for delivery later that same day.
Q2) Nominal exchange rates differ from real exchange rates in that nominal exchange rates
A) do not correct for differing interest rates across countries.
B) do not measure the purchasing power of the currency.
C) are fixed, while real exchange rates are flexible.
D) are flexible, while real exchange rates are fixed.
Q3) A Japanese television sells for ¥100,000 and a dollar is equal to ¥100.What is the dollar price of the television?
A) $1000
B) $99,900
C) $10,000,000
D) $100,100
Q4) What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?
Q5) What is a dollar liquidity swap line?
Page 10
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) Credit rationing refers to
A) the increase in the interest rate that occurs when the demand for credit increases.
B) the increase in the interest rate that occurs when the supply of credit increases.
C) the increase in the interest rate that occurs when the supply of credit decreases.
D) a restriction in the availability of credit.
Q2) How does adverse selection in financial markets affect the method by which firms raise funds?
Q3) Transactions costs are
A) zero in financial markets.
B) zero in financial intermediaries.
C) the costs of direct financial transactions.
D) equal to the taxes imposed on financial transactions.
Q4) Transaction and information costs
A) benefit borrowers at the expense of savers.
B) benefit savers at the expense of borrowers.
C) transaction costs hurt savers while information costs hurt borrowers.
D) create profit opportunities for those who can reduce these costs.
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) Credit risk is the risk that
A) an insufficient number of borrowers will apply for loans or credit.
B) interest rates will rise after a loan has been granted.
C) interest rates will fall after a loan has been granted.
D) borrowers might default on their loans.
Q2) Short-term loans between banks are called
A) federal funds.
B) repurchase agreements.
C) repos.
D) discount loans.
Q3) Suppose First National Bank has $200 million of assets and $20 million of equity capital.If First National has a 2% return on assets (ROA),what is its return on equity (ROE)? Suppose First National's equity capital declines to $10 million,while its assets and ROA are unchanged.What is First National's ROE now?
Q4) Which of the following is NOT a bank liability?
A) checkable deposits
B) CDs
C) mortgage loans
D) borrowings from the Federal Reserve
Q5) Why do households hold less in checking accounts then they once did?
Page 12
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Chapter 11: Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System
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Q1) Why did Goldman Sachs and Morgan Stanley seek to become financial holding companies in October 2008?
Q2) The development of new financial securities or investment strategies using sophisticated models is known as
A) underwriting.
B) factoring.
C) financial engineering.
D) hedging.
Q3) Finance companies
A) issue stock and use the proceeds to purchase bonds.
B) raise funds in financial markets to lend to households and firms.
C) raise funds from banks to lend to households and firms.
D) issue bonds and use the proceeds to purchase stock.
Q4) What makes advising on mergers and acquisitions particularly profitable for investment banks relative to other services that they provide?
Q5) How did the financial crisis of 2007-2009 reveal that market participants underestimated two sources of risk from using commercial paper?
Page 13
Q6) How do defined-contribution plans differ from defined-benefit plans?
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Chapter 12: Financial Crises and Financial Regulation
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Q1) Who was the effectively in charge of the Fed during the early 1930s?
A) Secretary of Treasury
B) Head of the Federal Reserve bank of New York
C) Comptroller of the Currency
D) no one
Q2) Banks have a maturity mismatch since
A) they borrow long term, but lend short term.
B) they borrow short term, but lend long term.
C) some of their loans are short term while others are long term.
D) some of their borrowings are short term while others are long term.
Q3) What happened to real interest rates during the early 1930s?
A) They declined as nominal interest rates declined.
B) They rose as nominal interest rates rise.
C) They declined due to deflation.
D) They rose due to deflation.
Q4) Disintermediation refers to the
A) failure of financial intermediaries due to moral hazard problems.
B) failure of financial intermediaries due to adverse selection problems.
C) movement of savers and borrowers from banks to financial markets.
D) removal of government regulations of financial intermediaries.
Page 14
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Chapter 13: The Federal Reserve and Central Banking
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Q1) Which of the following appears to be evidence against the public interest view of the Fed's motivation?
A) The conflict with the Treasury over interest rate fixing during World War II.
B) The failure of the Fed to emphasize the goal of price stability.
C) The unwillingness of the Fed to turn over its excess profits to the Treasury.
D) The independence of Fed chairmen from the authority of the President.
Q2) 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.
Q3) The public interest view of Fed motivation holds that the Fed acts in the interest of A) the general public. B) banks.
C) Congress.
D) itself.
Q4) What was the original intent of the Federal Reserve Act of 1913?
Q5) What constitutes meaningful independence of a central bank?
Q6) How do individual become members of the Board of Governors?
Page 15
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Chapter 14: The Federal Reserves Balance Sheet and the Money
Supply Process
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Questions
Q1) Required reserves are equal to
A) the required reserve ratio divided by checkable deposits.
B) checkable deposits divided by the required reserve ratio.
C) excess reserves divided by total reserves.
D) the required reserve ratio times checkable deposits.
Q2) During the Financial Crisis of 2007-2009,banks significantly increased their holdings of excess reserves.What impact did this have on the money multiplier? How would the Fed change the monetary base if it wanted to maintain a stable money supply?
Q3) The percentage of deposits that banks must hold as reserves is called the A) percentage rate.
B) required reserve ratio.
C) Fed rate.
D) discount rate.
Q4) Suppose the required reserve ratio is 8% and banks do not hold excess reserves.Illustrate on a bank's balance sheet what happens if the Fed buys $250,000 worth of securities from a bank.
Q5) What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009 that affected its balance sheet?
Q6) Briefly explain the process of multiple deposit creation.
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Chapter 15: Monetary Policy
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Q1) Reserve requirements are set by
A) the Secretary of Treasury.
B) the President.
C) Congress.
D) the Fed.
Q2) Which of the following describes the relationship between the actual federal funds rate and that suggested by Taylor's rule following the recovery from the 2001 recession?
A) The federal funds rate was above that suggested by Taylor's rule.
B) The federal funds rate was below that suggested by Taylor's rule.
C) The federal funds rate was about equal to that suggested by Taylor's rule.
D) There was not a clear relationship between the federal funds rate and that suggested by Taylor's rule.
Q3) Describe the temporary lending facilities that the Fed set up during the Financial Crisis of 2007-2009.
Q4) A falling dollar makes U.S.goods
A) more expensive abroad and increases the volume of U.S. exports.
B) less expensive abroad and increases the volume of U.S. exports.
C) less expensive abroad and decreases the volume of U.S. exports.
D) more expensive abroad and decreases the volume of U.S. exports.
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Chapter 16: The International Financial System and Monetary Policy
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Q1) If the central bank buys foreign assets,
A) the domestic monetary base will decline.
B) domestic short-term interest rates will decline.
C) the foreign-exchange value of the domestic currency will rise.
D) its holdings of international reserves will rise.
Q2) How did the global savings glut in the 2000s affect the U.S.current account balance?
A) it caused it to decline by increasing the value of the dollar
B) it caused it to decline by reducing the value of the dollar
C) it caused it to increase by increasing the value of the dollar
D) it caused it to increase by reducing the value of the dollar
Q3) 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.
Q4) Discuss the problems associated with the imposition of capital controls.
Q5) How did maintaining the gold standard deepen the severity of the Great Depression?
Page 18
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Chapter 17: Monetary Theory I: the Aggregate Demand and Aggregate Supply Model
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Q1) Which of the following best describes a price setter?
A) firms in perfect competition
B) pricing of products that are not standardized
C) firms setting prices equal to the market price
D) firms setting price equal to the aggregate price level
Q2) In the new Keynesian view,the larger the proportion of firms in the economy with sticky prices,
A) the steeper the SRAS curve will be.
B) the flatter the SRAS curve will be.
C) the greater the increase in the price level for a given shift in the AD curve.
D) the less effective is fiscal policy in increasing 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 19
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) If a $10 billion increase in investment leads to a $20 billion increase in GDP,the multiplier is
A) 0.5
B) 2
C) 10
D) 30
Q2) In a closed economy,the goods market is in equilibrium when
A) Y = S + I + G.
B) C + S = I + G.
C) C + I = S + G.
D) Y = C + I + G.
Q3) What is the multiplier? If MPC =0.75,what is the value of the multiplier in the simple model of the economy?
Q4) If AE < Y,which of the following will NOT occur?
A) inventories will decline
B) actual investment will be more than planned investment
C) employment will decline
D) GDP will decline
Q5) How is the economy likely to respond when AE (sales)exceed production?
Q6) How does the goods market return to equilibrium if AE is less than production?
Page 20
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