Financial Markets and Institutions
Final Exam Questions
Course Introduction
This course provides a comprehensive overview of financial markets and institutions, exploring their roles, functions, and impact on the global economy. Students will examine the structure and operations of various financial markets including money, capital, and derivatives markets as well as the key institutions such as banks, insurance companies, investment firms, and regulatory bodies. The course delves into the mechanisms of financial intermediation, the process of risk management, and the dynamics of interest rates and monetary policy. Emphasis is placed on understanding recent financial innovations, globalization trends, and the regulatory environment, equipping students with analytical tools to evaluate the performance and stability of financial systems.
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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Q1) In recent years,financial markets have become more risky. However,only a limited number of tools (such as derivatives)are available to assist in managing this risk.
A)True
B)False
Answer: False
Q2) In a bull market stock prices are rising,on average.
A)True
B)False
Answer: True
Q3) The Dow fell below 7,000 in 2009,only to start a bull market run,reaching new highs above ________ in 2013.
A) 12,000
B) 10,000
C) 15,000
D) 19,000
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 are primary markets?
A) The New York Stock Exchange
B) The U.S. government bond market
C) The over-the-counter stock market
D) The options markets
E) None of the above
Answer: E
Q2) A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.
Answer: B
Q3) Through risk-sharing activities,a financial intermediary ________ its own risk and ________ the risks of its customers.
A) reduces; increases
B) increases; reduces
C) reduces; reduces
D) increases; increases
Answer: B
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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) The current yield is the yearly coupon payment divided by the current market price.
A)True
B)False
Answer: True
Q2) The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is
A) -10 percent.
B) -5 percent.
C) 0 percent.
D) 5 percent.
Answer: C
Q3) 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
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Chapter 4: Why Do Interest Rates Change?
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Q1) What is the expected return on a bond if the return is 9% two-thirds of the time and 3% one-third of the time? What is the standard deviation of the returns on this bond? Would you prefer this bond or one with an identical expected return and a standard deviation of 4.5? Why?
Q2) An increase in the federal government budget deficit will raise the interest rate on bonds.
A)True
B)False
Q3) Use the bond demand and supply framework to explain the Fisher effect and why it occurs.
Q4) If the Fed wants to permanently lower interest rates,then it should lower the rate of money growth if
A) there is fast adjustment of expected inflation.
B) there is slow adjustment of expected inflation.
C) the liquidity effect is smaller than the expected inflation effect.
D) the liquidity effect is larger than the other effects.
Q5) How will a decrease in the federal government's budget deficit affect the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework.
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Q1) (I)If a corporate bond becomes less liquid,the interest rate on the bond will fall. (II)If a corporate bond becomes less liquid,the interest rate on Treasury bonds will fall.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q2) A positive liquidity premium indicates that investors prefer long-term bonds over short-term bonds.
A)True
B)False
Q3) Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another?
A) Market segmentation theory
B) Expectations theory
C) Liquidity premium theory
D) Separable markets theory
Q4) Why would an increase in the income tax rate reduce borrowing costs to municipalities?
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Chapter 6: Are Financial Markets Efficient?
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Q1) Which of the following is an insight from behavioral finance?
A) The price of securities fully reflects all available information.
B) Investor overconfidence leads to high trading volumes.
C) The optimal forecast of a security's return equals the security's equilibrium return.
D) Investment advisers cannot consistently beat the market.
Q2) 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.
Q3) Rules used to predict movements in stock prices based on past patterns are,according to the efficient markets theory, A) a waste of time.
B) profitably employed by all financial analysts.
C) the most efficient rules to employ.
D) consistent with the random walk hypothesis.
Q4) What is a rational bubble?
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Chapter 7: Why Do Financial Institutions Exist?
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Q1) A bank
A) has the ability to profit from the information it produces.
B) avoids the free-rider problem by primarily making private loans rather than by purchasing securities that are traded in the open market.
C) becomes an expert in determining good firms from bad firms.
D) all of the above.
Q2) The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.
A)True
B)False
Q3) The concept of adverse selection helps explain why collateral is an important feature of many debt contracts.
A)True
B)False
Q4) The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance.
A)True
B)False
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Chapter 8: Why Do Financial Crises Occur and
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Q1) Describe how the European debt crisis evolved.
Q2) Describe the sequence of events in a financial crisis in an advanced economy and explain why they can cause economic activity to decline.
Q3) Which of the following factors led up to the Greece debt crisis in 2009-2010?
A) Speculative attacks on the euro and a rise in actual and expected inflation
B) A decline in tax revenues resulting from a contraction in economic activity
C) A double-digit budget deficit
D) All of the above
E) only B and C of the above
Q4) Factors that lead to worsening conditions in financial markets include
A) increases in interest rates.
B) declining stock prices.
C) increasing uncertainty in financial markets.
D) all of the above.
E) only A and B of the above.
Q5) The process of deleveraging refers to
A) cutbacks in lending by financial institutions.
B) a reduction in debt owed by banks.
C) both A and B.
D) none of the above.
Page 10
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Chapter 9: Central Banks and the Federal Reserve System
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Q1) Rapid money supply growth and uncontrollable inflation were among the factors which motivated the creation of the Federal Reserve System.
A)True
B)False
Q2) The FOMC issues directives to the trading desk at the New York Fed.
A)True
B)False
Q3) 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.
Q4) Describe the structure and responsibility for policy tools in The Federal Reserve System.
Q5) Each member of the seven-member Board is appointed by the president and confirmed by the Senate to serve 14-year terms.
A)True
B)False
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Q1) A discount loan by the Fed to a bank causes a(n)________ in reserves in the banking system and a(n)________ in the monetary base.
A) increase; decrease
B) decrease; decrease
C) decrease; increase
D) increase; increase
Q2) The discount rate is
A) the interest rate on loans from the Fed to a bank.
B) the price the Fed pays for government securities.
C) the interest rate on loans of reserves from one bank to another.
D) the price banks pay the Fed for government securities.
E) the interest rate on loans from a bank to the federal government.
Q3) An open market purchase of securities by the Fed will
A) increase assets of the nonbank public and increase assets of the banking system.
B) decrease assets of the nonbank public and increase assets of the Fed.
C) decrease assets of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase assets of the Fed.
E) increase assets of the banking system and decrease assets of the Fed.
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Chapter 11: The Money Markets
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Q1) Eurodollars
A) are time deposits with fixed maturities and are, therefore, somewhat illiquid.
B) may offer the borrower a lower interest rate than can be received in the domestic market.
C) are limited to London banks.
D) are all of the above.
E) are only A and B of the above.
Q2) Money market securities include Treasury bills,commercial paper,federal funds,repurchase agreements,negotiable certificates of deposit,banker's acceptances,and Eurodollars.
A)True
B)False
Q3) The U.S.Treasury Department is the single most influential participant in the U.S.money market.
A)True
B)False
Q4) What are the major types of securities and who are the major participants in the money markets?
Q5) Explain how and why repurchase agreements would be used.
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Chapter 12: The Bond Market
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Q1) In its simplest form,a credit default swap provides
A) insurance against default in the principle and interest payments of a credit instrument.
B) an alternative method for bond issuers to pay principle and interest payments via a swap.
C) bond investors with a method to swap interest payments for principle payments during a "credit event."
D) the government with a guarantee that certain bond issues will not run into credit problems.
Q2) In a leveraged buy-out,a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock.
A)True
B)False
Q3) The primary issuers of capital market securities are local governments and corporations.
A)True
B)False
Q4) What is the difference between a general obligation bond and a revenue bond?
Q5) Why don't federal,state,and local governments issue equity claims?
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Chapter 13: The Stock Market
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Q1) Common stock is the riskiest corporate security,followed by preferred stock and then bonds.
A)True
B)False
Q2) Which of the following statements about trading operations in an organized exchange is correct?
A) Floor traders all deal in a wide variety of stocks.
B) In most trades, specialists match buy and sell orders.
C) In most trades, specialists buy for or sell from their own inventories.
D) The SuperDOT system is used to expedite large trades of over 100,000 shares.
Q3) In the generalized dividend valuation model,a stock's value depends only on
A) its future dividend payments and its future price.
B) its future dividend payments and the required return on equity.
C) its future price and the required return on investments on equity.
D) its future dividend payments.
Q4) What is the role of specialists on a stock exchange?
Q5) Why would a crisis in the subprime mortgage market lead to declining prices in the U.S.equity markets?
Q6) How do common stocks differ from preferred stocks?
Q7) What are American Depository Receipts (ADRs)?
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Chapter 14: The Mortgage Markets
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Q1) How has the modern mortgage market changed over recent years?
Q2) An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger loan than if they requested a conventional mortgage.
A)True
B)False
Q3) Which of the following is a disadvantage of a second mortgage compared to credit card debt?
A) The loans are secured by the borrower's home.
B) The borrower gives up the tax deduction on the primary mortgage.
C) The borrower must pay points to get a second mortgage loan.
D) The borrower will find it more difficult to qualify for a second mortgage loan.
Q4) One important advantage to a borrower who qualifies for an FHA or VA loan is the very low interest rate on the mortgage.
A)True
B)False
Q5) Explain the features of mortgage loans that are designed to reduce the likelihood of default.
Q6) 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) If the dollar appreciates relative to the Swiss franc,
A) Swiss chocolate will become more expensive in the United States.
B) American computers will become less expensive in Switzerland.
C) Swiss chocolate will become cheaper in the United States.
D) both A and B of the above will happen.
Q2) As the relative expected return on dollar deposits increases,
A) foreigners will want to hold fewer dollar deposits and more foreign deposits.
B) Americans will want to hold more dollar deposits and less foreign deposits.
C) Americans will want to hold fewer dollar deposits and more foreign deposits.
D) Americans and foreigners will be indifferent toward holding dollar deposits or foreign deposits.
Q3) An increase in tariffs and quotas on imports causes a country's currency to appreciate.
A)True
B)False
Q4) In the short run,the quantity of dollars supplied is relatively fixed,and is best represented with a vertical supply curve.
A)True
B)False
Q5) Explain the theory of purchasing power parity.
Page 17
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Chapter 16: The International Financial System
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Q1) The difference between merchandise exports and imports is called the current account balance.
A)True
B)False
Q2) Under the Bretton Woods system,when a nonreserve-currency country was running a balance of payments deficit,
A) it gained international reserves.
B) it lost international reserves.
C) it was necessary for the policymakers to implement a contractionary monetary policy.
D) both A and C of the above occurred.
E) both B and C of the above occurred.
Q3) Revaluation of a currency's value 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.
Q4) By the end of 2012,China had accumulated more than $3 trillion of international reserves.How did China accomplish this? Is the policy sustainable?
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Chapter 17: Banking and the Management of Financial
Institutions
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Sample Questions
Q1) Which of the following bank assets are the least liquid?
A) Reserves
B) Mortgage loans
C) Cash items in process of collection
D) Deposits with other banks
Q2) Given a bank's return on assets,the higher the bank capital,the higher the return for the owners of the bank.
A)True
B)False
Q3) What are a bank's major sources and uses of funds?
Q4) Which of the following statements is true?
A) A bank's assets are its uses of funds.
B) A bank's assets are its sources of funds.
C) A bank's liabilities are its uses of funds.
D) Only B and C of the above are true.
Q5) When you deposit $50 in the First National Bank,
A) its liabilities decrease by $50.
B) its assets increase by $50.
C) its reserves increase by $50.
D) only B and C of the above occur.
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Chapter 18: Financial Regulation
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Q1) How has bank regulation in the United States changed since the late 1980s? What accounts for these changes?
Q2) The Federal Deposit Insurance Corporation Improvement Act of 1991
A) reduced the scope of deposit insurance in several ways.
B) eliminated restrictions on nationwide banking.
C) allowed well-capitalized banks to do some securities underwriting.
D) did only A and B of the above.
E) did only A and C of the above.
Q3) To understand banking regulation in the United States,it is helpful to understand the concepts of asymmetric information,adverse selection,and moral hazard.
A)True
B)False
Q4) As a way of stemming the decline in the number of savings and loans and mutual savings banks,the Garn-St.Germain Act of 1982 allowed
A) money market certificates.
B) money market mutual funds.
C) money market deposit accounts.
D) negotiable order of withdrawal accounts.
Q5) 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) In September of 2008,the money market mutual fund Reserve Primary Fund had a price of less than $1.00 for a dollar invested.How did this happen?
A) The fund invested in debt of Lehman Brothers, which was worthless when Lehman went broke.
B) The fund invested in high-yield junk bonds, which defaulted.
C) The fund invested in Treasuries, which yielded less than 0% returns.
D) This actually didn't happen. It cannot happen since the fund only invested in low-risk debt.
Q2) The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains,in part,the passage of
A) the National Bank Charter Amendments of 1918.
B) the Glass-St. Germain Act of 1982.
C) the National Bank Act of 1863.
D) none of the above.
Q3) The Second Bank of the United States was denied a new charter by
A) President Andrew Jackson.
B) Vice President John Calhoun.
C) President Benjamin Harrison.
D) President John Q. Adams.
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Chapter 20: The Mutual Fund Industry
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Q1) A deferred-load mutual fund charges a commission
A) when shares are purchased.
B) when shares are sold.
C) both when shares are purchased and when they are sold.
D) when shares are redeemed.
Q2) Mutual funds are regulated under four federal laws designed to protect investors.
A)True
B)False
Q3) 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
Q4) What benefits do mutual funds offer investors?
Q5) SEC research suggests that about three-fourths of mutual funds let privileged shareholders engage in market timing.
A)True
B)False
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Chapter 21: Insurance Companies and Pension Funds
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Q1) Insurance management tools that give policyholders incentives to avoid accidents insured against include ________.
A) deductibles
B) risk-based premiums
C) coinsurance
D) all of the above
Q2) What insurance protects against liability for harm the insured may cause to others as a result of product failure or accidents?
A) Property insurance
B) Health insurance
C) Life insurance
D) Casualty insurance
Q3) Keogh plans and IRAs are
A) individual pension plans.
B) government pension plans.
C) corporate pension plans.
D) public pension plans.
Q4) Why must insurance companies screen applicants so carefully?
Q5) Distinguish between different types of life insurance.
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Q1) An instruction to a securities agent to sell a stock when it reaches a specific price is a
A) short sell
B) market order
C) limit order
D) stop loss order
Q2) Discuss the advantages of a private equity buyout.
Q3) Which of the following is not a step in the process by which an investment bank assists in the sale of a company or corporate division?
A) Preparation of a confidential memorandum
B) Negotiation of a letter of intent
C) Preparation of a definitive agreement
D) Forming a syndicate of purchasers
Q4) Under best efforts underwriting,the underwriter
A) pays for the entire security issue.
B) sells the security on a commission basis.
C) spreads the risk among different brokerage houses.
D) makes a special appeal to the Securities and Exchange Commission to delay the issue.
Chapter 23: Risk Management in Financial Institutions
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Q1) In one sense,________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.
A) specialization in lending; diversifying
B) specialization in lending; rationing
C) credit rationing; diversifying
D) screening; rationing
Q2) Banks face the problem of adverse selection in loan markets because bad credit risks are the ones most likely to seek bank loans.
A)True
B)False
Q3) Compensating balances
A) are a particular form of collateral commonly required on commercial loans.
B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank.
C) allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions.
D) are all of the above.
Q4) What is duration gap analysis and why is it important to a bank?
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Chapter 24: Hedging with Financial Derivatives
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Q1) If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise,he could ________ options on financial futures.
A) buy put
B) buy call
C) sell put
D) sell call
Q2) A contract that calls for the investor to (possibly)sell securities on a future date is called a ________.
A) short contract
B) long contract
C) hedge
D) micro hedge
Q3) The advantage of forward contracts over futures contracts is that forward contracts A) are standardized.
B) have lower default risk.
C) are more flexible.
D) both A and B are true.
Q4) How would a firm use exchange rate futures to lock in current exchange rates?
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) Why did the financial crisis in Iceland (2008)resemble a crisis in an emerging market economy as opposed to an advanced market economy?
Q2) In Argentina,the primary force leading to their financial crisis in 2001 was ________.
A) fiscal mismanagement on the part of the government
B) financial liberalization
C) fraud in financial markets
D) all of the above
E) only B and C of the above
Q3) The experience with financial crises in emerging market economies suggests a number of government policies that can help make financial crises in emerging market countries less likely,including
A) beefing up prudential regulation and supervision of banks.
B) better bank risk disclosure.
C) limiting the currency mismatch.
D) all of the above.
E) only B and C of the above.
Q4) What are some of the steps that emerging market economies can take to avoid a financial crisis?
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Chapter 26: Savings Associations and Credit Unions
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Q1) An analysis of the political economy of the savings and loan crisis helps one to understand
A) why politicians hampered the efforts of thrift regulators, cutting regulatory appropriations and encouraging regulatory forbearance.
B) why thrift regulators were reluctant to admit that any problem even existed in the thrift industry.
C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress.
D) all of the above.
E) only A and B of the above.
Q2) The largest asset held by S&Ls is ________.
A) consumer loans
B) securities
C) mortgage loans
D) consumer savings
Q3) Federal legislation allows credit unions representing groups with different common bonds to merge into a single credit union.
A)True
B)False
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Chapter 27: Finance Companies
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Q1) Installment credit is a loan that requires the borrower to make a series of equal payments over some fixed length of time.
A)True
B)False
Q2) Two growth areas for consumer finance companies are
A) first mortgages and vacation financing.
B) marine vessel loans and auto loans.
C) home equity loans and educational loans.
D) home equity loans and "private label" retail credit cards.
Q3) A balloon loan requires
A) multiple payments at odd, random intervals.
B) periodic payments of principle and interest.
C) a single large payment at the loan's maturity to retire the debt.
D) a steadily increasing payment (floating balloon) to retire the debt.
Q4) Consumer finance companies typically make loans to consumers who
A) prefer to avoid the regulatory environment at a bank.
B) cannot obtain credit otherwise due to low income or poor credit.
C) Both A and B of the above are correct.
D) Neither A nor B of the above are correct.
Q5) What are the various types of finance companies?
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