Financial Economics
Exam Bank
Course Introduction
Financial Economics explores the application of economic principles to financial markets and instruments. The course examines how individuals and firms make investment decisions under uncertainty, the functioning of capital markets, the valuation of assets such as stocks and bonds, and the role of financial institutions. Key topics include risk and return, portfolio theory, the pricing of derivatives, market efficiency, and the impact of government policies on financial markets. Through theoretical models and real-world case studies, students gain a comprehensive understanding of how economic forces drive financial decision-making and influence the broader economy.
Recommended Textbook
Financial Markets and Institutions Global 7th Edition by Frederic S Mishkin
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26 Chapters
2183 Verified Questions
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Page 2
Chapter 1: Why Study Financial Markets and Institutions
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Sample Questions
Q1) Banks, savings and loan associations, mutual savings banks, and credit unions
A)are no longer important players in financial intermediation.
B)have been providing services only to small depositors since deregulation.
C)have been adept at innovating in response to changes in the regulatory environment.
D)all of the above.
E)only A and C of the above.
Answer: C
Q2) Why is the stock market so important to individuals, firms, and the economy?
Answer: not answered
Q3) Interest rates can be accurately described as the rental price of money.
A)True
B)False
Answer: True
Q4) Have interest rates been more or less volatile in recent years? Why?
Answer: not answered
Q5) In recent years, financial markets have become more stable and less risky.
A)True
B)False
Answer: False
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Which of the following markets is sometimes organized as an over-the-counter market?
A)The stock market
B)The bond market
C)The foreign exchange market
D)The federal funds market
E)all of the above
Answer: E
Q2) Distinguish between money markets and capital markets.
Answer: not answered
Q3) American investors pay attention to only the Dow Jones Industrial Average.
A)True
B)False
Answer: False
Q4) Which of the following can be described as involving indirect finance?
A)A bank buys a U.S. Treasury bill from one of its depositors.
B)A corporation buys commercial paper issued by another corporation.
C)A pension fund manager buys commercial paper in the primary market.
D)Both A and C of the above.
Answer: D
Page 4
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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) Financial economists consider the ________ to be the most accurate measure of interest rates.
A)simple interest rate
B)discount rate
C)yield to maturity
D)real interest rate
Answer: C
Q2) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?
A)5 percent
B)10 percent
C)-5 percent
D)25 percent
E)None of the above
Answer: D
Q3) All else being equal, the greater the interest rate the greater the duration is.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Why Do Interest Rates Change
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Sample Questions
Q1) When the demand for bonds ________ or the supply of bonds ________, bond prices rise.
A)increases; decreases
B)decreases; increases
C)decreases; decreases
D)increases; increases
Q2) An increase in an asset's expected return relative to that of an alternative asset, holding everything else unchanged, raises the quantity demanded of the asset.
A)True
B)False
Q3) A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________
A)decrease; right.
B)decrease; left.
C)increase; right.
D)increase; left.
Q4) Identify and describe three factors that cause the supply curve for bonds to shift.
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6
Chapter 5: How Do Risk and Term Structure Affect Interest
Rates
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Q1) The risk premium on corporate bonds becomes smaller if
A)the riskiness of corporate bonds increases.
B)the liquidity of corporate bonds increases.
C)the liquidity of corporate bonds decreases.
D)the riskiness of corporate bonds decreases.
E)either B or D of the above occur.
Q2) (I)The risk premium widens as the default risk on corporate bonds increases. (II)The risk premium widens as corporate bonds become less liquid.
A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.
Q3) If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on the four-year bond is
A)1 percent.
B)2 percent.
C)4 percent.
D)none of the above.
Page 7
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Chapter 6: Are Financial Markets Efficient
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Sample Questions
Q1) Give evidence both for and against market efficiency.
Q2) How expectations are formed is important because expectations influence A)the demand for assets.
B)bond prices.
C)the risk structure of interest rates.
D)the term structure of interest rates.
E)all of the above.
Q3) If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs.
A)True
B)False
Q4) The efficient markets hypothesis is weakened by evidence that A)stock prices tend to follow a random walk.
B)stock prices are more volatile than fluctuations in their fundamental values can explain.
C)technical analysis does not outperform the overall market.
D)an investment adviser's past success or failure at picking stocks does not predict his or her future performance.
Q5) What is a rational bubble?
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Chapter 7: Why Do Financial Institutions Exist
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Sample Questions
Q1) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A)moral hazard.
B)adverse selection.
C)free-riding.
D)costly state verification.
Q2) What conflicts of interest can arise in accounting firms?
Q3) Because of the adverse selection problem,
A)good credit risks are more likely to seek loans, causing lenders to make a disproportionate amount of loans to good credit risks.
B)lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town."
C)lenders are reluctant to make loans that are not secured by collateral.
D)all of the above.
Q4) The financial system is one of the most heavily regulated sectors of the economy.
A)True
B)False
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9
Chapter 8: Why Do Financial Crises Occur and Why Are They so Damaging to
the Economy
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Sample Questions
Q1) What is a credit default swap?
A)a swap agreement where two parties swap credit payments
B)an agreement to swap interest payments when one party defaults
C)a type of insurance against bond defaults
D)a swap between credit rating agencies
Q2) Bank failures have been a feature of all U.S. financial crises from 1800 to 1944.
A)True
B)False
Q3) What is a credit boom?
A)an explosion in a credit cycle, which can increase or decrease lending in the short-run
B)essentially a lending spree on the part of banks and other financial institutions
C)when credit card receivables rise due to low initial interest rates
D)the signal of the end of a credit spree, with credit contracting rapidly
Q4) Describe the sequence of events in a financial crisis in an advanced economy and explain why they can cause economic activity to decline.
Q5) Discuss why some view the Fed as a culprit in the U.S. housing bubble during the 2000s.
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Chapter 9: Central Banks and the Federal Reserve System
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Q1) The case for Federal Reserve independence includes the idea that
A)a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
B)a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
C)the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day.
D)only A and B of the above.
Q2) Banks subject to reserve requirements set by the Federal Reserve System include
A)only state-chartered banks.
B)only nationally chartered banks.
C)only banks with less than $100 million in assets.
D)only banks with less than $500 million in assets.
E)all banks whether or not they are members of the Federal Reserve System.
Q3) In recent years, has Fed policymaking become more or less transparent? Why?
Q4) The Fed has goal independence but not instrument independence.
A)True
B)False
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Page 11
Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Q1) The monetary base consists of
A)currency in circulation and reserves.
B)government securities held by the Fed and discount loans.
C)government securities held by the Fed and currency in circulation.
D)discount loans and reserves.
Q2) The first country to mandate that its central bank adopt inflation targeting was A)the United States.
B)the United Kingdom.
C)Canada.
D)New Zealand.
Q3) The actual execution of open market operations is done at
A)the Board of Governors in Washington, D.C.
B)the Federal Reserve Bank of New York.
C)the Federal Reserve Bank of Philadelphia.
D)the Federal Reserve Bank of Boston.
Q4) If the Federal Reserve wants to drain reserves from the banking system, it will
A)purchase government securities.
B)lower the discount rate.
C)sell government securities.
D)raise reserve requirements.
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Chapter 11: The Money Markets
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Sample Questions
Q1) Two important characteristics of any financial market are flexibility and A)risk.
B)innovation.
C)tolerance.
D)capital.
Q2) Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days.
A)True
B)False
Q3) Banker's acceptances
A)can be bought and sold until they mature.
B)are issued only by large money center banks.
C)carry low interest rates because of the very low default risk.
D)are all of the above.
E)are only A and B of the above.
Q4) In a direct placement
A)the issuer bypasses the dealer and sells indirectly to the end investor.
B)the dealer sells directly to the end investor.
C)the issuer bypasses the dealer and sells directly to the end investor.
D)none of the above.
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Chapter 12: The Bond Market
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Sample Questions
Q1) Explain the different types of corporate bonds.
Q2) Most municipal bonds are revenue bonds rather than general obligation bonds.
A)True
B)False
Q3) Distinguish between general obligation and revenue municipal bonds.
Q4) Financial guarantees
A)are insurance policies to back bond issues.
B)are purchased by financially weaker security issuers.
C)lower the risk of the bonds covered by the guarantee.
D)do all of the above.
E)do only A and B of the above.
Q5) (I)Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II)General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.
A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.
Q6) What are Treasury STRIPS?
Page 14
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Chapter 13: The Stock Market
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Sample Questions
Q1) Which of the following is not an element of the Gordon growth model of stock valuation?
A)the stock's most recent dividend paid
B)the expected constant growth rate of dividends
C)the required return on investments in equity
D)the stock's expected future price
Q2) The riskiest capital market security is
A)preferred stock.
B)common stock.
C)corporate bonds.
D)Treasury bonds.
Q3) Which of the following is not an objective of the Securities and Exchange Commission?
A)maintain integrity of the securities markets
B)advise investors about which particular stocks are good buys
C)require firms to provide specific information to investors
D)regulate major participants in securities markets
Q4) What are the objectives of the Securities and Exchange Commission?
Q5) What are the advantages and disadvantages of exchange traded funds (ETFs)fro trading stocks?
15
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) During the early years of an amortizing mortgage loan, the lender applies
A)most of the monthly payment to the outstanding principal balance.
B)all of the monthly payment to the outstanding principal balance.
C)most of the monthly payment to interest on the loan.
D)all of the monthly payment to interest on the loan.
E)the monthly payment equally to interest on the loan and the outstanding principal balance.
Q2) A problem that initially hindered the marketability of mortgages in a secondary market was that they were not standardized.
A)True
B)False
Q3) What are the benefits and side effects of securitized mortgages?
Q4) Ginnie Mae
A)insures qualifying mortgages.
B)insures pass-through certificates.
C)insures collateralized mortgage obligations.
D)does only A and B. of the above
E)does only B and C of the above.
Q5) Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?
Page 16
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) American firms became less competitive compared to foreign firms during the 1980s because
A)the quality and productivity of American workers declined.
B)foreign firms were younger than American firms and as a result had more modern facilities that made use of the latest technology.
C)the U.S. dollar became worth more in terms of foreign currencies.
D)the U.S. dollar became worth less in terms of foreign currencies.
Q2) When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has
A)appreciated and German cars sold in the United States become more expensive.
B)appreciated and German cars sold in the United States become less expensive.
C)depreciated and American wheat sold in Germany becomes more expensive.
D)depreciated and American wheat sold in Germany becomes less expensive.
Q3) The foreign exchange market is organized as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.
A)True
B)False
Q4) Explain the theory of purchasing power parity.
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Page 17
Chapter 16: The International Financial System
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Q1) A current account ________ indicates that the United States is ________ its claims on foreign wealth.
A)surplus; increasing B)surplus; decreasing C)deficit; increasing D)balance; decreasing
Q2) How does a sterilized foreign exchange intervention differ from an unsterilized one in terms of its effects on the exchange rate, international reserves, and the monetary base?
Q3) The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.
A)IMF
B)World Bank
C)Central Settlements Bank
D)Bank of International Settlements
E)European Exchange Rate Mechanism (ERM)
Q4) Describe the pros and cons for controls on capital inflows and outflows.
Q5) What was the European Monetary System? How did its exchange rate mechanism work?
Page 18
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) A bank failure is more likely to occur when
A)a bank holds less in U.S. government securities.
B)a bank suffers large deposit outflows.
C)a bank holds less equity capital.
D)all of the above occur.
E)only A and B of the above occur.
Q2) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet,
A)the assets at the bank increase by $800,000.
B)the liabilities of the bank increase by $1,000,000.
C)the liabilities of the bank increase by $800,000.
D)reserves increase by $160,000.
Q3) Discount loans are also known as ________.
A)interest-free loans
B)advances
C)credits
D)market loans
Q4) What costs do banks hope to avoid by holding excess reserves?
Page 19
Q5) Explain how a capital crunch can lead to a credit crunch in our economy.
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Chapter 18: Financial Regulation
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Sample Questions
Q1) Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include
A)a chartering process designed to prevent crooks from getting control of a bank.
B)restrictions that prevent banks from acquiring certain risky assets, such as common stocks.
C)high bank capital requirements to increase the cost of bank failure to the owners.
D)all of the above.
E)only A and B of the above.
Q2) 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
Q3) The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac.
A)True B)False
Q4) Describe the CAMELS rating system used by bank examiners.
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Chapter 19: Banking Industry: Structure and Competition
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Q1) The presence of so many commercial banks in the United States is most likely the result of
A)consumers' strong preference for dealing with only local banks.
B)adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks.
C)regulations that restrict the ability of banks to open branches.
D)all of the above.
Q2) The legislation that separated investment banking from commercial banking was the
A)National Bank Act.
B)Federal Reserve Act.
C)Glass-Steagall Act.
D)McFadden Act.
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
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Page 21
Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) ________ means the investors can convert their investment into cash quickly at a low cost.
A)Liquidity intermediation
B)Denomination intermediation
C)Diversification
D)Managerial expertise
Q2) The net asset value of a mutual fund is
A)determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding.
B)determined by calculating the net price of the assets owned by the fund.
C)calculated every 15 minutes and used for transactions occurring during the next 15-minute interval.
D)calculated as the difference between the fund's assets and its liabilities.
Q3) 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
Q4) How is a mutual fund's net asset value calculated?
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Chapter 21: Insurance Companies and Pension Funds
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Q1) Fraudulent practices and other abuses of private pension funds led Congress to enact the ________.
A)Federal Deposit Insurance Corporation Act
B)Employee Retirement Income Security Act
C)Federal Reserve Act
D)Social Security Act
Q2) Which life insurance policy usually requires the insured to pay a level premium for the duration of the policy, and the overpayment accumulates as a cash value that can be borrowed by the insured at reasonable rates?
A)whole life
B)term
C)universal life
D)none of the above
Q3) The problem of ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.
A)asymmetric information
B)moral hazard
C)adverse selection
D)fraudulent behavior
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Page 23
Chapter 22: Investment Banks, Security Brokers and
Dealers, and Venture Capital Firms
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Q1) The Securities Acts Amendment of 1975 abolished fixed commissions.
A)True
B)False
Q2) The buyers of private placement issues are most likely to be ________.
A)insurance companies
B)pension funds
C)investment banks
D)all of the above
E)only A and B of the above
Q3) An additional perk of a private equity firm is that the profits for both CEOs and the partners are taxed at the 15% capital gains rate rather than the 35% rate they would suffer if the income was received as income.
A)True
B)False
Q4) A ________ is a specialized firm that finances young, start-up companies.
A)venture capital firm
B)finance company
C)small-business finance company
D)capital-creation company
Q5) What is underwriting?
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Chapter 23: Risk Management in Financial Institutions
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Q1) The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.
A)True
B)False
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) A bank's commitment (for a specified future period of time)to provide a firm with loans up to a given amount at an interest rate that is tied to a market interest rate is called
A)credit rationing.
B)a line of credit.
C)continuous dealings.
D)none of the above.
Q4) Explain how banks benefit from specialization in lending.
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Chapter 24: Hedging With Financial Derivatives
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Q1) The most widely traded stock index future is on the
A)Dow Jones 1000 index.
B)S&P 500 index.
C)NASDAQ index.
D)Dow Jones 30 index.
Q2) Using options to control interest-rate risk reduces the chance of a loss but increases the chance of a gain.
A)True
B)False
Q3) An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a(n)________.
A)call option
B)put option
C)American option
D)European option
Q4) Discuss the challenges regulators face in controlling the use of derivatives by financial institutions.
Q5) How would a firm use exchange rate futures to lock in current exchange rates?
Q6) Why have the futures markets grown so rapidly in recent years?
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Chapter 25: Savings Associations and Credit Unions
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Q1) The main source of funds at savings and loan associations is
A)borrowing in the money market.
B)borrowing in the capital market.
C)deposits.
D)equity capital.
Q2) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 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)only A and B of the above.
Q3) Explain the advantages and disadvantages between mutual savings banks and savings and loans.
Q4) Explain why thrift regulators engaged in regulatory forbearance in the 1980s.
Q5) How has the thrift industry been transformed since FIRREA?
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Chapter 26: Finance Companies
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Q1) Sales finance companies make loans to consumers to purchase items
A)on the Internet.
B)from any retailer.
C)from a particular retailer.
D)for a specific use.
Q2) What are the various types of finance companies?
Q3) Usury statutes limit the level of interest rates that finance companies can charge their customers.
A)True
B)False
Q4) Consumer finance companies make loans to borrowers who would not qualify for bank loans due to low income or poor credit.
A)True
B)False
Q5) Much like banking institutions, interest-rate risk is a big concern for finance companies.
A)True
B)False
Q6) Describe the process of factoring? When and why is it used?
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