Financial Markets and Institutions
Exam Questions
Course Introduction
This course provides a comprehensive overview of the structure, functions, and operations of financial markets and institutions. Students will explore the roles of various financial intermediaries, such as banks, insurance companies, investment firms, and regulatory bodies, examining how they channel funds from savers to borrowers and facilitate economic activity. Key topics include the functioning of money and capital markets, interest rate determination, risk management, financial instruments, and the impact of central banking and monetary policy. Through real-world examples and case studies, students gain insights into the complexities of global financial systems and their influence on economic stability and growth.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) 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
Q2) Money is anything accepted by anyone as payment for services or goods.
A)True
B)False
Answer: True
Q3) From the peak of the high-tech bubble in 2000,the stock market ________ by over ________ by late 2002.
A) collapsed; 75%
B) rose; 35%
C) collapsed; 30%
D) rose; 50%
Answer: C
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) 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
Q2) Many common stocks are traded over the counter,although a majority of the largest corporations have their shares traded at organized stock exchanges.
A)True
B)False
Answer: True
Q3) When the least desirable credit risks are the ones most likely to seek loans,lenders are subject to the A) moral hazard problem.
B) adverse selection problem.
C) shirking problem.
D) free-rider problem.
E) principal-agent problem.
Answer: B
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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) In which of the following situations would you prefer to be borrowing?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer: D
Q2) The yield to maturity for a one-year discount bond equals
A) the increase in price over the year, divided by the initial price.
B) the increase in price over the year, divided by the face value.
C) the increase in price over the year, divided by the interest rate.
D) none of the above.
Answer: A
Q3) A long-term bond's price is less affected by interest rate movements than a short-term bond's price.
A)True
B)False
Answer: False
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Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) Use the bond demand and supply framework to explain the Fisher effect and why it occurs.
Q2) As the price of a bond ________ and the expected return ________,bonds become more attractive to investors and the quantity demanded rises.
A) falls; rises
B) falls; falls
C) rises; rises D) rises; falls
Q3) In a recession when income and wealth are falling,the demand for bonds ________ and the demand curve shifts to the ________.
A) falls; right
B) falls; left C) rises; right D) rises; left
Q4) The more liquid an asset is relative to alternative assets,holding everything else unchanged,the more desirable it is,and the greater the quantity demanded. A)True
B)False
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Q1) When yield curves are steeply upward-sloping,
A) long-term interest rates are above short-term interest rates.
B) short-term interest rates are above long-term interest rates.
C) short-term interest rates are about the same as long-term interest rates.
D) medium-term interest rates are above both short-term and long-term interest rates.
E) medium-term interest rates are below both short-term and long-term interest rates.
Q2) Bonds with the lowest risk of default are often referred to as junk bonds.
A)True
B)False
Q3) As a result of the subprime collapse,the demand for low -quality corporate bonds ________,the demand for high-quality Treasury bonds ________,and the risk spread
A) increased; decreased; was unchanged
B) decreased; increased; increased
C) increased; decreased; decreased
D) decreased; increased; was unchanged
Q4) What is meant by the risk structure of interest rates?
Q5) What do credit-rating agencies do and why is this work important?
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) The efficient market hypothesis applies to
A) both the stock market and the foreign exchange market.
B) the stock market but not the foreign exchange market.
C) the foreign exchange market but not the stock market.
D) neither the stock market nor the foreign exchange market.
Q2) Another way to state the efficient market condition is that in an efficient market,
A) unexploited profit opportunities will be quickly eliminated.
B) unexploited profit opportunities will never exist.
C) arbitrageurs guarantee that unexploited profit opportunities never exist.
D) both A and C of the above occur.
Q3) The efficient market hypothesis suggests that
A) investors should not try to outguess the market by constantly buying and selling securities.
B) investors do better on average if they adopt a "buy and hold" strategy.
C) buying into a mutual fund is a sensible strategy for a small investor.
D) all of the above are sensible strategies.
E) only A and B of the above are sensible strategies.
Q4) Does the efficient market hypothesis imply that financial markets are efficient? Explain.
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) The concept of adverse selection helps to explain
A) why collateral is not a common feature of many debt contracts.
B) why large, well-established corporations find it so difficult to borrow funds in securities markets.
C) why financial markets are among the most heavily regulated sectors of the economy.
D) all of the above.
Q2) What is the free-rider problem? Describe some situations that this problem creates.
Q3) A debt contract is said to be incentive compatible if
A) the borrower's net worth reduces the probability of moral hazard.
B) restrictive covenants limit the type of activities that can be undertaken by the borrower.
C) both A and B of the above occur.
D) neither A nor B of the above occur.
Q4) The majority of household debt in the United States consists of
A) credit card debt.
B) consumer installment debt.
C) collateralized loans.
D) unsecured loans, such as student loans.
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) Discuss why some view the Fed as a culprit in the U.S.housing bubble during the 2000s.
Q2) Stage Three of a financial crisis in an advanced economy features
A) a general increase in inflation.
B) debt deflation.
C) an increase in general price levels.
D) a full-fledged financial crisis.
Q3) Stock market declines preceded a full-blown financial crisis
A) in the United States in 1987.
B) in the United States in 2000.
C) in the United States in 1929.
D) in all of the above.
E) in none of the above.
Q4) What is the problem with government safety nets,such as deposit insurance,during the formative stages of a financial crisis?
Q5) Approximately how large was the U.S.subprime mortgage market in 2007?
A) $100 million
B) $100 billion
C) $500 billion
D) $1 trillion
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) 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
Q2) Factors that provide the Federal Reserve with a high degree of independence include
A) 14-year terms for members of the Board of Governors.
B) a four-year term for the chairman of the Board of Governors that is not coincident with the president's term of office.
C) constitutional independence from Congress and the president.
D) all of the above.
E) only A and B of the above.
Q3) The Washington,D.C.Fed bank,with over 30 percent of the system's assets,is the most important Federal Reserve Bank.
A)True
B)False
Q4) In recent years,has Fed policymaking become more or less transparent? Why?
Q5) What are the arguments for and against an independent Fed?
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) If the desired intermediate target is an interest rate,then the preferred operating target will be a(n)________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed base
Q2) If the Fed wants to temporarily drain reserves from the banking system,it will engage in
A) a repurchase agreement.
B) a matched sale-purchase transaction.
C) a "pump" agreement.
D) none of the above.
Q3) An open market sale leads to an expansion of reserves and deposits in the banking system and hence to a decline in the monetary base and the money supply.
A)True
B)False
Q4) What are the arguments for and against central bank intervention during asset-price bubbles?
Q5) Discuss the differences between quantitative easing and credit easing.
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Chapter 11: The Money Markets
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Sample Questions
Q1) Which of the following statements about the money markets are true?
A) Most money market securities do not pay interest. Instead, the investor pays less for the security than it will be worth when it matures.
B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations.
C) Unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier.
D) All of the above are true.
E) Only A and B of the above are true.
Q2) A negotiable certificate of deposit
A) is a term security because it has a specified maturity date.
B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest.
C) can be bought and sold until maturity.
D) all of the above.
E) only A and B of the above.
Q3) Explain why the money markets are referred to as wholesale markets.
Q4) Why would we expect rates on money market securities to move together?
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Chapter 12: The Bond Market
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Sample Questions
Q1) Corporations may enter the capital markets because
A) they do not have sufficient capital to fund their investment opportunities.
B) they want to preserve their capital to protect against expected needs.
C) it is required by the Securities and Exchange Commission (SEC).
D) none of the above.
Q2) Compared to money market securities,capital market securities have
A) more liquidity.
B) longer maturities.
C) lower yields.
D) less risk.
Q3) Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called
A) junk bonds.
B) callable bonds.
C) convertible bonds.
D) debentures.
Q4) A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year.
A)True
B)False
Page 14
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Chapter 13: The Stock Market
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Sample Questions
Q1) In the one-period valuation model,a stock's value will be higher
A) the higher its expected future price is.
B) the lower its dividend is.
C) the higher the required return on investments in equity is.
D) all of the above.
Q2) Which of the following is not an advantage of Electronic Communications Networks (ECNs)?
A) All unfilled orders are available for review by ECN traders.
B) Transactions costs are lower for ECN trades.
C) Trades are made and confirmed faster.
D) ECNs work well for thinly traded stocks.
Q3) Exchange traded funds (ETFs)have which of the following features?
A) They are listed and traded as individual stocks on a stock exchange.
B) They are indexed rather than actively managed.
C) Their value is based on the underlying net asset value of the stocks held in the index basket.
D) All of the above.
Q4) What are the advantages and disadvantages of Electronic Communications Networks (ECNs)for trading stocks?
Q5) How do corporate stocks differ from bonds?
Page 15
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) Explain the features of mortgage loans that are designed to reduce the likelihood of default.
Q2) During the early years of a balloon 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.
Q3) Which of the following are true of mortgage interest rates?
A) Interest rates on mortgage loans are determined by three factors: current long-term market rates, the term of the mortgage, and the number of discount points paid.
B) Mortgage interest rates tend to track along with Treasury bond rates.
C) The interest rate on 15-year mortgages is lower than the rate on 30-year mortgages, all else the same.
D) All of the above are true.
E) Only A and B of the above are true.
Q4) What are points? What is their purpose?
Q5) How does an amortizing mortgage loan differ from a balloon mortgage loan?
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Chapter 15: The Foreign Exchange Market
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Q1) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign deposits is
A) the level of trade and capital flows.
B) the expected return on these assets relative to one another.
C) the liquidity of these assets relative to one another.
D) the riskiness of these assets relative to one another.
Q2) If the interest rate on dollar deposits is 10 percent,and the dollar is expected to appreciate by 7 percent over the coming year,the expected return on dollar deposits in terms of the foreign currency is
A) 3 percent.
B) 10 percent.
C) 13.5 percent.
D) 17 percent.
E) 24 percent.
Q3) As the relative expected return on dollar deposits increases,Americans will want to hold fewer dollar deposits and more foreign deposits.
A)True
B)False
Q4) 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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Sample Questions
Q1) Which of the following policies is not part of the "policy trilemma"?
A) Dollarization
B) Free capital mobility
C) Fixed exchange rate
D) Independent monetary policy
Q2) Depreciation of a currency occurs when
A) a floating exchange rate adjusts upward.
B) a floating exchange rate adjusts downward.
C) a fixed exchange rate is adjusted upward.
D) a fixed exchange rate is adjusted downward.
Q3) A central bank's international reserves are its holdings of assets denominated in foreign currencies.
A)True
B)False
Q4) Explain graphically how a country must intervene in the foreign exchange market under a fixed exchange rate regime if its currency is undervalued.
Q5) Explain graphically the speculative attacks that occurred against the British pound in 1992,the Mexican peso in 1994,the Thai baht in 1997,the Brazilian real in 1999,and the Argentine peso in 2002.
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Chapter 17: Banking and the Management of Financial Institutions
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Q1) Holding all else constant,when a bank receives the funds for a deposited check,
A) cash items in process of collection fall by the amount of the check.
B) bank assets remain unchanged.
C) bank liabilities decrease by the amount of the check.
D) all of the above occur.
E) only A and B of the above occur.
Q2) Examples of off-balance-sheet activities include
A) loan sales.
B) foreign exchange market transactions.
C) trading in financial futures.
D) all of the above.
E) only A and B of the above.
Q3) Which of the following are reported as liabilities on a bank's balance sheet?
A) Reserves
B) Checkable deposits
C) Loans
D) Deposits with other banks
Q4) Distinguish between a bank's reserves,required reserves,excess reserves,and secondary reserves.
Q5) What costs do banks hope to avoid by holding excess reserves?
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Chapter 18: Financial Regulation
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Sample Questions
Q1) 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
Q2) Discuss some of the problems of Basel 2 that the global financial crisis revealed.
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) If the FDIC uses the purchase and assumption method to handle a failed bank, A) all deposits will suffer losses.
B) small deposits will be paid in full but deposits over the insurance limit will not.
C) all deposits will be paid in full.
D) none of the above will occur.
Q5) What is the asymmetric information problem and how does it contribute to our understanding of the structure of bank regulation in the United States and other countries?
Q6) Describe the difference between macroprudential and microprudential regulation.
Q7) Why did the United States experience a banking crisis in the 1980s?
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Chapter 19: Banking Industry: Structure and Competition
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Q1) Thrift institutions' importance as a source of funds for borrowers
A) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent today.
B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 10 percent today.
C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent today.
D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent today.
Q2) Which of the following is an advantage of forming a bank holding company?
A) It allows ownership of several banks where branching is prohibited.
B) It allows owners to engage in activities related to banking that are prohibited to banks.
C) Both A and B of the above.
D) None of the above.
Q3) Describe Edge Act corporations,international banking facilities,and the structure of foreign banks in the United States.
Q4) What financial innovations are best explained as attempts to avoid regulations?
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Page 21
Chapter 20: The Mutual Fund Industry
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Q1) Discuss the proposals that have been made to reduce the conflict of interest abuses in the mutual funds industry.
Q2) Which of the following is an advantage to investors of an open-end mutual fund?
A) Once all the shares have been sold, the investor does not have to put in more money.
B) The investors can sell their shares in the over-the-counter market with low transaction fees.
C) The fund agrees to redeem shares at any time.
D) The market value of the fund's shares may be higher than the value of the assets held by the fund.
Q3) 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
Q4) Whether a fund is organized as a closed- or an open-end fund,is will have the same basic organizational structure.
A)True
B)False
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Chapter 21: Insurance Companies and Pension Funds
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Q1) Why must insurance companies screen applicants so carefully?
Q2) 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.
Q3) Which of the following is not what can we expect in the future regarding pension funds?
A) Pension funds will help create more stable financial markets.
B) Pension funds will continue their growth and popularity.
C) Pension fund variety will continue to expand.
D) Pension funds will gain increased control over corporations as they invest in the equity of these companies.
Q4) Describe how insurance companies try to reduce adverse selection and moral hazards.
Q5) The Social Security system is an example of a pension plan that is fully funded. 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) Resisted takeovers are called hostile.
A)True
B)False
Q2) Investment banks may lose ________ if new securities issues are ________.
A) large amounts of money; oversubscribed
B) large amounts of money; fully subscribed
C) future business; oversubscribed
D) future business; undersubscribed
Q3) Securities dealers
A) hold inventories of securities, which they sell to customers who want to buy.
B) hold securities that they have purchased from customers who wanted to sell.
C) are called market takers, as they have significantly cut into the market that brokers used to dominate.
D) do all of the above.
E) do only A and B of the above.
Q4) Discuss the life cycle of a equity buyout.
Q5) Venture capital firms reduce risk by investing in only a few companies which can be carefully monitored and nurtured.
A)True
B)False
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Chapter 23: Risk Management in Financial Institutions
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Q1) Because borrowers,once they have a loan,are more likely to invest in high-risk investment projects,banks face the
A) adverse selection problem.
B) lemon problem.
C) adverse credit risk problem.
D) moral hazard problem.
Q2) If a decline in interest rates causes the market value of a bank's net worth to rise,then the bank must have a ________.
A) negative duration gap
B) positive duration gap
C) negative gap
D) positive gap
Q3) If First State Bank has a gap equal to a positive $20 million,then a 5 percentage point drop in interest rates will cause profits to
A) increase by $10 million.
B) increase by $1.0 million.
C) decline by $10 million.
D) decline by $1.0 million.
Q4) What steps do banks take to reduce their exposure to credit risk?
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Chapter 24: Hedging with Financial Derivatives
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Q1) A call option gives the owner the ________ to ________ the underlying security.
A) right; sell
B) obligation; sell
C) right; buy
D) obligation; buy
Q2) If you buy an option to buy Treasury futures at 110,and at expiration the market price is 115,
A) the call will be exercised.
B) the put will be exercised.
C) the call will not be exercised.
D) the put will not be exercised.
Q3) Explain how a long hedge could be used to protect a bank from the risk that interest rates could rise before a loan is funded.
Q4) The seller of an option has the
A) right to buy or sell the underlying asset.
B) the obligation to buy or sell the underlying asset.
C) ability to reduce transaction risk.
D) right to exchange one payment stream for another.
Q5) Explain how a short hedge could be used to hedge a Treasury portfolio against interest-rate risk.
26
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) In an emerging market economy,a currency crisis can be triggered by two things: a deterioration of bank balance sheets and severe fiscal imbalances.
A)True
B)False
Q2) During a bank panic,many banks fail in a very short time period.
A)True
B)False
Q3) In Stage Three of a financial crisis in an emerging market economy,the currency mismatch refers to ________.
A) the mismatch between size of the actual notes and the high price levels need to buy basic goods
B) the difference in the currency FX markets over time
C) the mismatch between the currency of the stock and bond markets
D) the fact that most debt in emerging market economies is denominated in U.S. dollars
Q4) What are some of the steps that emerging market economies can take to avoid a financial crisis?
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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Q1) 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.
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.
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Chapter 27: Finance Companies
Available Study Resources on Quizplus for this Chatper
41 Verified Questions
41 Flashcards
Source URL: https://quizplus.com/quiz/5935
Sample Questions
Q1) 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%
Q2) By the beginning of 2013,banks held $1,191 billion in consumer loans.Finance companies held about ________ of that figure.
A) 42%
B) 68%
C) 90%
D) 117%
Q3) Finance companies are ________ market intermediaries.
A) stock
B) bond
C) FX
D) money
Q4) What are the various types of finance companies?
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