Financial Economics
Textbook Exam Questions
Course Introduction
Financial Economics explores the principles and theories underlying financial markets, instruments, and institutions. It examines how individuals and firms make investment and financing decisions in the presence of risk and uncertainty, and how these decisions influence the allocation of resources in the economy. The course covers topics such as the time value of money, asset pricing models, portfolio theory, market efficiency, financial derivatives, and the role of financial intermediaries. By applying economic analysis to financial markets, students gain insight into the functioning of modern financial systems and develop the analytical tools needed for careers in finance, banking, investment, and financial policy making.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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2334 Verified Questions
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Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) Holding everything else constant,as the dollar strengthens foreigners will buy more U.S.exports.
A)True
B)False
Answer: False
Q2) The largest one-day drop in the history of the American stock markets occurred in A) 1929.
B) 1987.
C) 2000.
D) 2001.
Answer: B
Q3) The stock market is important because
A) it is where interest rates are determined.
B) it is the most widely followed financial market in the United States.
C) it is where foreign exchange rates are determined.
D) all of the above.
Answer: B
Q4) What is money?
Answer: NOT Answerd
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as
A) foreign bonds.
B) Eurobonds.
C) Eurocurrencies.
D) Eurodollars.
Answer: B
Q2) The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically,in the past,the U.S.was the only industrialized country to subject banks to restrictions on ________.
A) branching
B) lending
C) assets they may hold
D) the size they could grow to
Answer: A
Q3) The process of financial intermediation is also known as direct finance.
A)True
B)False
Answer: False
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Page 4
Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation?
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Sample Questions
Q1) A $10,000,8 percent coupon bond that sells for $10,000 has a yield to maturity of
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.
Answer: A
Q2) Unless a bond defaults,an investor cannot lose money investing in bonds.
A)True
B)False
Answer: False
Q3) If a $5,000 coupon bond has a coupon rate of 13 percent,then the coupon payment every year is
A) $650.
B) $1,300.
C) $130.
D) $13.
E) None of the above.
Answer: A
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Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) Diversification benefits an investor by
A) increasing wealth.
B) increasing expected return.
C) reducing risk.
D) increasing liquidity.
Q2) What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called?
A) Econometric model
B) Liquidity preference framework
C) Market equilibrium
D) Fisher effect
Q3) When bond prices become less volatile,the demand for bonds ________ and the interest rate ________.
A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
Q4) When interest rates decrease,the demand curve for bonds shifts to the left.
A)True
B)False
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) When a municipal bond is given tax-free status,the demand for Treasury bonds shifts ________,and the interest rate on Treasury bonds ________.
A) leftward; rises
B) leftward; falls
C) rightward; rises
D) rightward; falls
Q2) With the Obama tax increase that repealed the Bush tax cuts for high-income tax payers in 2013,the after-tax expected return on tax-free municipal bonds relative to Treasury bonds decreases.
A)True
B)False
Q3) Corporate bonds are not as liquid as government bonds because
A) fewer bonds for any one corporation are traded, making them more costly to sell.
B) the corporate bond rating must be calculated each time they are traded.
C) corporate bonds are not callable.
D) all of the above.
E) only A and B of the above.
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) The advantage of a "buy and hold strategy" is that
A) net profits will tend to be higher because there will be fewer brokerage commissions.
B) losses will eventually be eliminated.
C) the longer a stock is held, the higher its price will be.
D) only B and C of the above are true.
Q2) An investor gains from short selling by ________ and then later ________.
A) buying a stock; selling it at a higher price
B) selling a stock; buying it back at a lower price
C) buying a stock; selling it at a lower price
D) selling a stock; buying it back at a higher price
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 elimination of a riskless profit opportunity in a market is called
A) the efficient market hypothesis.
B) random walk.
C) arbitrage.
D) market fundamentals.
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) Adverse selection
A) is a problem created by asymmetrical information after the transaction.
B) can be solved by eliminating asymmetrical information.
C) occurs when people who do not pay for information take advantage of the information other people have to pay for.
D) all of the above.
Q2) The potential conflict of interest when a single accounting firm provides both auditing and consulting services is that the firm can
A) charge higher fees to its audit clients and lower fees for its consulting services so it can expand its consulting business.
B) charge higher fees to its consulting clients and lower fees for its audit services so it can expand its auditing business.
C) provide unjustifiably favorable audit reviews for firms that are large clients for its consulting services.
D) pressure its clients into paying high fees for both auditing and consulting services.
Q3) What factors usually cause an increase in adverse selection?
Q4) Explain how the "lemons" problem could cause financial markets to fail.
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) Financial crises
A) cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers.
B) are a recent phenomenon that occur only in developing countries.
C) invariably lead to debt deflation.
D) all of the above.
E) none of the above.
Q2) Adverse selection and moral hazard problems increased in magnitude during the early years of the Great Depression as
A) stock prices declined to 10 percent of their levels in 1929.
B) banks failed.
C) the aggregate price level declined.
D) a result of all of the above.
E) a result of A and B of the above.
Q3) Explain the relationship between agency theory and a financial crisis.
Q4) Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms.
A)True
B)False
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A) resists so vigorously 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) all of the above.
E) only A and B of the above.
Q2) Which of the following central banks has the greatest degree of independence?
A) Bank of England
B) European Central Bank
C) Bank of Japan
D) Federal Reserve System
Q3) Describe the structure and responsibility for policy tools in The Federal Reserve System.
Q4) What are the arguments for and against an independent Fed?
Q5) The FOMC issues directives to the trading desk at the New York Fed.
A)True
B)False
Q6) 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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Sample Questions
Q1) If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom,what is the primary tool for accomplishing this?
A) Raising interest rates
B) Lowering interest rates
C) Increasing reserve requirements
D) Taking a short position in the overpriced asset
Q2) The natural rate of unemployment is not lowered by high inflation,so higher inflation cannot produce lower unemployment or more employment in the long run.
A)True
B)False
Q3) Which of the following statements is correct,concerning price stability as a monetary goal?
A) In the long run, inconsistencies exists between the price stability goal and the other goals, such as high unemployment.
B) In the short run price stability does not conflict with the goals of high employment and interest-rate stability.
C) Neither A nor B is true.
D) Both A and B are correct.
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Chapter 11: The Money Markets
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Sample Questions
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) Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures.The security's annualized yield if held to maturity is about
A) 1.5%.
B) 2%.
C) 3%.
D) 6%.
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) Interest rates on banker's acceptances are low because the risk of default is very low.
A)True
B)False
Q5) Why would we expect rates on money market securities to move together?
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) The nearer a bond's price is to its par value and the longer the maturity of the bond,the more closely the ________ approximates the ________.
A) current yield; yield to maturity
B) current yield; coupon rate
C) yield to maturity; current yield
D) yield to maturity; coupon rate
Q2) Most of the time,the interest rate on Treasury notes is below that on money market securities because of their low default risk.
A)True
B)False
Q3) Registered bonds have now been largely replaced by bearer bonds,which do not have coupons.
A)True
B)False
Q4) Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer.
A)True
B)False
Q5) What is the difference between a general obligation bond and a revenue bond?
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Chapter 13: The Stock Market
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Sample Questions
Q1) The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend growth to ________,investors' required return on equity to ________,and stock prices to ________.
A) decrease; increase; decrease
B) decrease; increase; increase
C) increase; decrease; decrease
D) increase; decrease; increase
Q2) Securities not listed on one of the exchanges trade in the over-the-counter market.In this exchange,dealers "make a market" by
A) buying stocks for inventory when investors want to sell.
B) selling stocks from inventory when investors want to buy.
C) doing both of the above.
D) doing neither of the above.
Q3) What are the advantages and disadvantages of exchange traded funds (ETFs)fro trading stocks?
Q4) How do over-the-counter markets differ from organized exchanges?
Q5) What is the role of specialists on a stock exchange?
Q6) What are the advantages and disadvantages of Electronic Communications Networks (ECNs)for trading stocks?
Page 15
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) Borrowers tend to prefer ________ to ________,whereas lenders prefer
A) fixed-rate loans; ARMs; fixed-rate loans
B) ARMs; fixed-rate loans; fixed-rate loans
C) fixed-rate loans; ARMs; ARMs
D) ARMs; fixed-rate loans; ARMs
Q2) What are points? What is their purpose?
Q3) Nearly half the funds for mortgage lending comes from mortgage pools and trusts.
A)True
B)False
Q4) How does an amortizing mortgage loan differ from a balloon mortgage loan?
Q5) During the early years of a mortgage loan,the lender applies most of the payment to the principal on the loan.
A)True
B)False
Q6) How has the modern mortgage market changed over recent years?
Q7) Mortgage-backed securities have declined in popularity in recent years as institutional investors have sought higher returns in other markets.
A)True
B)False
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar,the euro has ________ and the dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
Q2) Which of the following causes a depreciation of the domestic currency?
A) A lower domestic interest rate due to a lower expected inflation rate.
B) A decline in the domestic real interest rate.
C) A decrease in the domestic money supply.
D) All of the above.
Q3) If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5 francs per dollar,the franc depreciates and the dollar appreciates.
A)True
B)False
Q4) What are some of the long-run determinants of the exchange rate?
Q5) Explain graphically how a change in the domestic price level will affect exchange rates,holding everything else constant.
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Chapter 16: The International Financial System
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Sample Questions
Q1) An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a rise in international reserves,a decrease in the money supply,and an appreciation of the domestic currency.
A)True
B)False
Q2) In September 1992,the Bundesbank attempted to keep the mark from appreciating relative to the British pound,but it failed because participants in the foreign exchange market came to expect the
A) appreciation of the mark.
B) depreciation of the mark.
C) revaluation of the dollar.
D) the end of the Exchange Rate Mechanism.
Q3) A balance of payments ________ is associated with a ________ of international reserves.
A) surplus; loss
B) surplus; gain
C) deficit; gain
D) balance; loss
Q4) 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) In general,banks make profits by selling ________ liabilities and buying ________ assets.
A) long-term; shorter-term
B) short-term; longer-term
C) illiquid; liquid
D) risky; risk-free
Q2) Explain how a capital crunch can lead to a credit crunch in our economy.
Q3) A bank can reduce its total amount of loans outstanding by
A) "calling in" loans; that is, by not renewing some loans when they come due.
B) selling loans to other banks.
C) selling loans to the Federal Reserve.
D) doing all of the above.
E) doing only A and B of the above.
Q4) Large-denomination CDs are ________,so that like a bond they can be resold in a ________ market before they mature.
A) nonnegotiable; secondary
B) nonnegotiable; primary
C) negotiable; secondary
D) negotiable; primary
Page 19
Q5) Discuss the recent trends in bank performance measures.
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Chapter 18: Financial Regulation
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Sample Questions
Q1) The failure of one bank can hasten the failure of others in what is referred to as a contagion effect.
A)True
B)False
Q2) An SIV,or structured investment vehicle,is an off-balance-sheet entity that shields a sponsoring institution from risk.What happened to some of these SIVs when they ran into financial problems?
A) The SIV sued the sponsoring institution to pay, in full, all liabilities of the SIV.
B) The SIV still remained off-balance-sheet, but investors did sue sponsoring institutions.
C) Nothing! The SIV status as off-balance-sheet remained, a nice example of a financial structure that worked during the financial crisis.
D) Troubled SIVs became an asset of the sponsoring institution - the off-balance-sheet status was meaningless.
Q3) What do we learn about the causes of banking crises by comparing crises throughout the world to those that have occurred in the United States?
Q4) Discuss the role of NINJA loans in the global financial crisis.
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Page 20
Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) In 1977,________ pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.
A) Michael Milken
B) Roger Milliken
C) Ivan Boskey
D) Carl Ichan
Q2) The prohibition against banks underwriting corporate securities and engaging in brokerage,real estate,and insurance activities was repealed by the
A) Gramm-Leach-Bliley Financial Services Modernization Act.
B) Competitive Equality in Banking Act.
C) Depositary Institution Deregulation and Monetary Control Act.
D) Glass-Steagall Act.
Q3) The process in which people seeking higher interest rates take their money out of financial institutions is called ________.
A) capital mobility
B) loophole mining
C) disintermediation
D) deposit jumping
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21
Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) Open-end mutual funds are more common than closed-end funds.
A)True
B)False
Q2) Describe the practices of late trading and market timing and explain how these practices harm a mutual fund's shareholders.
Q3) Discuss the proposals that have been made to reduce the conflict of interest abuses in the mutual funds industry.
Q4) 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
Q5) Measured by assets,the most popular type of bond fund is the ________ bond fund.
A) state municipal
B) strategic income
C) government
D) high-yield
Q6) What is the difference between an open-end and a closed-end mutual fund?
Page 22
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) ________ companies get a tax advantage; most new insurance companies organize as ________ companies.
A) Mutual insurance; mutual insurance
B) Mutual insurance; stock
C) Stock; stock
D) Stock; mutual insurance
Q2) 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
Q3) Casualty insurance can be provided in either named-peril policies or open-peril policies.
A)True
B)False
Q4) Social Security is a "pay-as-you-go" system.
A)True
B)False
Q5) Distinguish between different types of life insurance.
Page 23
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Q1) The best known investment banker involved in mergers and acquisitions,credited with inventing the junk bond market,is ________.
A) Ivan Boesky
B) Michael Milken
C) James Garner
D) Michael Douglas
Q2) Which of the following is not a characteristic feature of venture capital firms?
A) Funding just one or a small number of firms
B) Holding equity in the firms that are funded
C) Having a long-term investment horizon
D) Providing advice and assistance to the firms that are funded
Q3) Investment bankers have been active in the mergers and acquisitions market since the 1960s.Their contributions have included
A) helping firms that want to acquire another firm locate a firm to pursue.
B) helping would-be acquirers solicit shareholders through a tender offer.
C) helping target firms ward off undesired takeover attempts.
D) all of the above.
E) only A and B of the above.
Q4) Discuss the difference between full-service and discount brokers.
Page 24
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Chapter 23: Risk Management in Financial Institutions
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Sample Questions
Q1) Credit rationing reduces adverse selection problems.
A)True
B)False
Q2) To be profitable,financial institutions must overcome the adverse selection and moral hazard problems that make loan defaults ________.
A) more likely
B) certain C) unlikely
D) impossible
Q3) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called
A) basic gap analysis.
B) the segmented maturity approach to gap analysis.
C) the maturity bucket approach to gap analysis.
D) the segmented maturity approach to interest-exposure analysis.
E) none of the above.
Q4) How is credit risk related to the concepts of adverse selection and moral hazard?
Q5) What is the difference between income gap analysis and duration gap analysis?
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Chapter 24: Hedging with Financial Derivatives
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Sample Questions
Q1) A long contract obligates the holder to sell securities in the future.
A)True
B)False
Q2) The main reason to buy an option on a futures contract rather than the futures contract itself is
A) to reduce transaction cost.
B) to preserve the possibility for gains.
C) to limit losses.
D) to remove the possibility for gains.
Q3) The purpose of the Commodity Futures Trading Commission is to do all of the following except
A) oversee futures trading.
B) see that prices are not manipulated.
C) approve proposed futures contracts.
D) establish minimum prices for futures contracts.
Q4) All other things held constant,premiums on put options will increase when the A) exercise price increases.
B) volatility of the underlying asset falls.
C) term to maturity increases.
D) A and C are both true.
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) Describe the differences in the evolution of the financial crises in South Korea (1997-1998)and Argentina (2001-2002).
Q2) Financial crises
A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.
B) occur when adverse selection and moral hazard problems in financial markets become more significant.
C) frequently lead to sharp contractions in economic activity.
D) are all of the above.
E) are only A and B of the above.
Q3) Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.
Q4) Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy.
Q5) Contrast the stages of a financial crisis between an advanced economy and an emerging market economy.
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Chapter 26: Savings Associations and Credit Unions
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Sample Questions
Q1) The common bond membership requirement makes it difficult for ________ to diversify their loans.
A) savings and loan associations
B) credit unions
C) banks
D) mutual savings banks
Q2) 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.
Q3) How has the thrift industry been transformed since FIRREA?
Q4) Most credit unions today have federal charters.
A)True
B)False
Q5) Explain the advantages and disadvantages between mutual savings banks and savings and loans.
Q6) Discuss the background of mutual savings banks and how this lead to the creation of S&Ls.
Q7) Explain why thrift regulators engaged in regulatory forbearance in the 1980s.
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Chapter 27: Finance Companies
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Sample Questions
Q1) Finance companies are ________ market intermediaries.
A) stock
B) bond
C) FX
D) money
Q2) In the early 1900s,banks did not offer loans to purchase automobiles.This is because
A) banks could not make a profit on car loans.
B) only finance companies were permitted to offer car loans.
C) banks could not repossess a car if the loan defaulted.
D) banks did not view a car as a productive asset.
Q3) Commercial paper is an important source of funding for finance companies.As presented in the Consolidated Finance Company Balance Sheet,commercial paper represents about ________ of their liabilities.
A) 3.9%
B) 5.8%
C) 12.5%
D) 20.0%
Q4) Discuss the types of risk faced by finance companies.Are these risks similar to banks?
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