Financial Markets and Institutions
Midterm Exam
Course Introduction
This course provides an in-depth introduction to the structure and functioning of financial markets and institutions. Students will explore the roles of key financial intermediaries such as commercial banks, investment firms, insurance companies, and pension funds, as well as the various financial instruments traded in money and capital markets. Topics include interest rate determination, the risk and regulation of financial institutions, the impact of monetary policy, the global integration of financial markets, and recent financial innovations. Through real-world examples and case studies, students will gain a comprehensive understanding of how financial markets and institutions contribute to economic stability and growth.
Recommended Textbook Money Banking and Financial Markets 4th Edition by Stephen G. Cecchetti
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2615 Verified Questions
2615 Flashcards
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Chapter 1: An Introduction to Money and the Financial System
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Sample Questions
Q1) The New York Stock Exchange is an example of a:
A)financial instrument.
B)financial institution.
C)financial market.
D)bank.
Answer: C
Q2) Investing in financial instruments in today's economy:
A)is an activity practiced only by the wealthy.
B)involves costly transactions.
C)requires a relatively large sum of money to invest (more than $100,000).
D)is made easier by the use of mutual funds.
Answer: D
Q3) Which of the following statements best describes financial instruments?
A)All financial instruments are a means of payment.
B)Financial instruments can transfer resources between people but not risk.
C)Financial instruments can transfer resources and risk between people.
D)Financial instruments can transfer risk but not resources between people.
Answer: C
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Chapter 2: Money and the Payments System
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Sample Questions
Q1) How many prices would a trader of a particular good need to know in a barter economy with 5 goods?
A)5
B)10
C)20
D)50
Answer: B
Q2) How many prices would a trader of a particular good need to know in a barter economy with 20 goods?
A)190
B)100
C)20
D)40
Answer: A
Q3) The purchasing power of money:
A)rises when inflation rises.
B)decreases as the price level decreases.
C)decreases with inflation.
D)is not impacted by inflation, only by monetary policy.
Answer: C
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Chapter 3: Financial Instruments, Financial Markets, and Financial Institutions
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Sample Questions
Q1) Financial instruments used primarily to transfer risk would include all of the following, except:
A)an insurance contract.
B)a futures contract.
C)options.
D)a bank loan.
Answer: D
Q2) What evidence is there that the transaction costs involved with the buying and selling of stocks is low?
Answer: Probably the best evidence is the volume of trading that occurs on an average day.As an example, on an average day billions of shares of stock may trade in the U.S.alone, and while most of these trades are undertaken using brokers, the fee the broker requires is usually a very small percentage of the overall value of the instruments traded.The volume of trades and the low fees for these trades would not result if transaction costs were high.
Q3) What are some of the advantages of trading in decentralized electronic exchanges?
Answer: Customers can see the orders, the orders are executed quickly, trading occurs 24 hours a day, and costs are low.
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Chapter 4: Future Value, Present Value, and Interest Rates
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Sample Questions
Q1) Higher savings usually requires higher interest rates because: A)everyone prefers to save more instead of consuming.
B)saving requires sacrifice and people must be compensated for this sacrifice. C)higher savings means we expect interest rates to decrease.
D)of the rule of 72.
Q2) The higher the future value of the payment the:
A)lower the present value.
B)higher the present value.
C)future value doesn't impact the present value, only the interest rate really matters. D)lower the present value because the interest rate must fall.
Q3) What matters more: having a credit card with a low rate or paying off your balance as quickly as possible? Explain.
Q4) What is the monthly interest rate if you are asked to convert a 12 percent annual rate to a monthly rate (calculate to 4 decimal places)?
Q5) Compute the future value of $1,000 at a 6 percent interest rate after three different lengths of time.Use 6, 10 and 20 years into the future.
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Chapter 5: Understanding Risk
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Sample Questions
Q1) You study horse racing avidly and discover for this year's Kentucky Derby you think you have the field pretty well figured out.In fact, you calculate the expected return and it is the same as the expected return you are getting from the stock market.Is this investment in the race valuable to you?
Q2) What is the difference between standard deviation and value at risk? Consider the difference between purchasing a one-year bank CD compared with purchasing a homeowner's insurance policy.Which scenario do you believe is more likely to consider value at risk over standard deviation? Explain.
Q3) If an investment offered an expected payoff of $100 with $0 variance, you would know that:
A)half of the time the payoff is $100 and the other half it is $0.
B)the payoff is always $100.
C)half of the time the payoff is $200 and the other half it is $0.
D)half of the time the payoff is $200 and the other half it is $50.
Q4) The greater the standard deviation of an investment the:
A)lower the return.
B)greater the risk.
C)lower the risk.
D)lower the risk and return.
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Chapter 6: Bonds, Bond Prices, and the Determination of Interest Rates
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Sample Questions
Q1) If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:
A)would rise and yields would fall.
B)would fall and yields would increase.
C)will rise and yields will remain constant.
D)will rise and yields would increase.
Q2) As general business conditions improve, we would witness the following in the bond market:
A)the bond demand curve shifting left.
B)the bond supply curve shifting left.
C)bond prices decreasing.
D)bond prices increasing.
Q3) A $1000 face value bond, with one year to maturity that sells for $950 and has a $40 annual coupon has a:
A)current yield and yield to maturity of 4.00%.
B)yield to maturity that equals the current yield.
C)coupon rate of 4.00% and a current yield that is below this.
D)current yield of 4.21%.
Q4) Could the holding period return ever be less than the yield to maturity? Explain.
Page 8
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Chapter 7: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) The risk spread is:
A)the difference between a bond's purchase price and selling price.
B)the difference between the bond's yield and the yield on a U.S.Treasury bond of the same maturity.
C)less than 0 (zero) for a U.S.Treasury bond.
D)assigned by a bond-rating agency.
Q2) Suppose that the Federal Reserve is concerned about rising inflation, so they increase short-term interest rates.How will this affect long-term rates and the yield curve? What does the slope of the yield curve reveal about the effectiveness of the Fed's policy? Explain in the context of the Liquidity Premium Theory.
Q3) The economy enters a period of robust economic growth that is expected to last for several years.How would this be reflected in the risk structure of interest rates?
A)An inverted yield curve
B)A decrease in the term spread
C)A decrease in the interest rate spread
D)An increase in yields on tax-exempt bonds
Q4) Briefly describe the two different types of junk bonds (high-yield bonds).
Q5) Why do economists pay particular attention to inverted yield curves?
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Chapter
8:
Stocks, Stock Markets, and Market Efficiency
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Sample Questions
Q1) Identify the ways in which a bondholder's rights differ from those of a stockholder.In what ways do they differ when a firm is bankrupt?
Q2) Next year, the price of a stock is expected to be $2200 and the stock will pay a $55 dividend.The interest rate is 10%.Based on equation 7 in the chapter, what is the current price of this stock?
A)$1,980
B)$2,000
C)$2,050
D)$2,035
Q3) Which of the following stock price indexes is a price-weighted index?
A)Dow Jones Industrial Average
B)Standard & Poor's 500 Index
C)Nasdaq
D)Wilshire 5000
Q4) Do the voting rights possessed by common stockholders ensure that managers and directors have the same objectives as stockholders? Explain.
Q5) Considering the return an investor requires from a stock, what are the two components that make up that return? Briefly explain each of these components.
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Chapter 9: Derivatives: Futures, Options, and Swaps
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Sample Questions
Q1) Explain the difference between American and European options.
Q2) Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.
Q3) For a given call option price, which of the following statements is correct?
A)The closer the strike price is to the current price of the underlying asset, the smaller the time value of the option.
B)The closer the strike price is to the current price of the underlying asset, the larger the time value of the option.
C)As the strike price approaches the price of the underlying asset, the time value of the option approaches zero.
D)As the strike price approaches the price of the underlying asset, the intrinsic value of the option increases and the time value of the option decreases.
Q4) Which of the following statements is true?
A)Call options can be sold prior to expiration but put options cannot.
B)Put options can be sold prior to expiration but call options cannot.
C)No option can be sold prior to expiration.
D)Both American and European options can be sold prior to expiration.
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11
Chapter 10: Foreign Exchange
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Sample Questions
Q1) A country that has a capital account deficit:
A)is a net seller of assets.
B)is importing more goods and services than it exports.
C)also has a current account deficit.
D)is a net buyer of assets.
Q2) Explain why the law of one price may best be applied to financial assets.
Q3) During the latter 1990s and into the early 2000s, the U.S.stock market boomed reflecting rapid growth in the U.S.economy.In terms of demand for and supply of dollars, explain what possible impacts this rapid increase in stock market values could have on the exchange rate.
Q4) If in late 2016 100 U.S.dollars exchanged for 118 euros and in mid-2017 100 U.S.dollars exchanged for 127 euros, then:
A)the euro appreciated relative to the dollar.
B)the dollar appreciated relative to the euro.
C)European goods became more expensive to Americans.
D)American goods became more expensive to Americans.
Q5) The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens.Who would be likely to be bringing pressure and why?
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Chapter 11: The Economics of Financial Intermediation
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Sample Questions
Q1) Economies of scale associated with financial intermediaries means:
A)the total cost of handling transactions falls as more transactions of different kinds are handled.
B)the cost per transaction falls as a larger volume of similar transactions are handled.
C)the cost per transaction increases as more transactions are handled.
D)the cost per transaction decreases regardless of the number of transactions.
Q2) Often times we see companies offering money back guarantees to customers if they are not satisfied.These guarantees are a way to treat the problem of:
A)buyers having more information about the product than the seller.
B)the seller having more information about the product than the buyer.
C)symmetric information.
D)adverse selection.
Q3) The usual situation in banking regarding asymmetric information is:
A)borrowers know more than lenders.
B)lenders know more than borrowers.
C)borrowers and lenders have the same information.
D)lenders and borrowers have perfect information.
Q4) What are the five functions performed by financial intermediaries?
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Page 13
Chapter 12: Depository Institutions: Banks and Bank Management
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Sample Questions
Q1) Capital is the cushion banks have against:
A)sudden drops in the value of their assets.
B)an unexpected decrease in liabilities.
C)liquidity risk.
D)moral hazard.
Q2) For every $100 in assets, a bank has $40 in interest-rate sensitive assets, and the other $60 in non-interest-rate sensitive assets.The same bank has $50 for every $100 in liabilities in interest-rate sensitive liabilities, the other $50 are in liabilities that are not interest-rate sensitive.If the interest rate on assets increases from 5 to 6 percent, and the interest rate on liabilities increases from 3 to 4 percent, the impact on the bank's profits per $100 of assets will be:
A)an increase of $0.10.
B)a decrease of $0.10.
C)a reduction of $1.00.
D)zero since the interest rates on assets and liabilities increased by the same amount.
Q3) Identify the four broad categories that make up the asset side of the balance sheet for banks and which category is usually the largest.
Q4) What is the equation that reflects a bank's balance sheet?
Page 14
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Chapter 13: Financial Industry Structure
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Sample Questions
Q1) A business needs a loan to help keep its shelves stocked.This is an example of:
A)an inventory loan.
B)sales finance.
C)equipment leasing.
D)consumer finance.
Q2) Citigroup is an example of:
A)an Edge Act corporation.
B)a foreign bank.
C)a financial holding company.
D)a unit bank.
Q3) Unit banks are:
A)banks with no branches.
B)more numerous in the United States than they were in previous decades.
C)no longer permitted to exist in the United States.
D)commercial banks that have combined into one unit with an investment bank.
Q4) Finance companies perform all of the following functions, except:
A)issue commercial paper and securities.
B)take deposits.
C)make loans.
D)lease equipment to firms.
Page 15
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Chapter 14: Regulating the Financial System
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Sample Questions
Q1) Which of the following is not a positive effect of the Basel Accord?
A)It forced regulators to change the way they thought about bank capital.
B)It promoted a more uniform international system.
C)It provided a framework that less developed countries could use to improve the regulation of their banks.
D)It provided a system to differentiate between bonds based on their systemic risk.
Q2) If the government did not offer the too-big-to-fail safety net:
A)large banks would be more disciplined by the potential loss of large corporate accounts.
B)the moral hazard problem of insuring large banks would increase.
C)the moral hazard problem of insuring large banks would not be affected.
D)the FDIC deposit insurance limits would have to be raised.
Q3) What was the primary motivation behind the creation of the 1988 Basel Accord?
Q4) Why are banks restricted in the assets that they can own? For example, why do you think banks are prohibited from owning common stock?
Q5) The FDIC used to charge all banks the same rate for insurance on deposits.From what you have learned, what problems did this create for not only the FDIC but for well-run banks?
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Chapter 15: Central Banks in the World Today
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Sample Questions
Q1) What do you think is meant by the statement that "successful monetary policy requires competent people and the right institutional environment"?
Q2) The Federal Reserve didn't always communicate its actions to the public like it does today.As recently as the mid 1990s, secrecy ruled.Why do you think the Fed and most central banks now are more public about their actions and the reasons for them?
Q3) Which of the following statements is not true?
A)The potential growth rate in the U.S.economy may have fallen following the financial crisis of 2007-2009.
B)Periods of growth below the potential level are periods of low unemployment.
C)Periods of growth above the potential level are periods of low employment.
D)Periods of growth below the potential level are periods of high unemployment.
Q4) The chairman of the Fed gives a speech and hints that, at the next meeting of the Open Market Committee, the issues of a rapidly growing economy and preliminary indications of rising prices will have to be addressed.You are in the market for a new house and your mortgage broker calls to tell you that the interest rate on the $100,000, 30-year mortgage you applied for has just increased by a quarter of a percent.Why did the rate increase even though the Fed has not announced any rate change?
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Chapter 16: The Structure of Central Banks: The Federal Reserve
and the European Central Bank
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Sample Questions
Q1) Current law regarding the Fed's Board of Governors stipulates that:
A)no more than three governors can come from the same district.
B)no more than two governors can come from the same district.
C)every district must have at least one governor on the board.
D)no more than one governor can come from the same district.
Q2) A typical FOMC meeting would best be described as:
A)an informal meeting with significant give and take among participants.
B)an informal meeting with the Chairman as a passive observer.
C)a fairly formal session with not much give and take.
D)a press conference, where the financial press can ask questions regarding the Fed's view of the economy.
Q3) Buying and selling U.S.Treasury Securities for the Fed's own portfolio is called:
A)managing the float.
B)discount buying.
C)open market operations.
D)reserve adjustment.
Q4) Why did it take almost 150 years before the U.S.had a permanent central bank?
Q5) In what ways do the regional Federal Reserve Banks influence monetary policy?
Page 18
Q6) Who makes up the voting members of the Federal Reserve's Open Market Committee?
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Chapter 17: The Central Bank Balance Sheet and the Money Supply Process
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Sample Questions
Q1) Given the prevalence of electronic payment mechanisms like credit cards and debit cards and the safety of checks, why is the amount of currency in the hands of the public increasing?
Q2) Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by:
A)2.5 times.
B)3 times.
C)4.5 times.
D)6 times.
Q3) Which of the following statements is most correct?
A)Discount loans are initiated by the Federal Reserve.
B)Discount loans are made when banks need relatively small amounts of cash for the long term.
C)Discount loans are made when banks need relatively large amounts of cash for the long term.
D)Discount loans are made when banks need relatively small amounts of cash for the short term.
Q4) Considering changes to the monetary base, are discount loans and federal funds borrowing equivalent? Explain.
Page 20
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Chapter 18: Monetary Policy: Stabilizing the Domestic Economy
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Q1) The European Central Bank's Marginal Lending Facility is used to provide:
A)short-term loans to banks at rates below the target refinancing rate.
B)long-term loans to banks at rates above the target refinancing rate.
C)short-term loans at rates above the target refinancing rate.
D)long-term loans to banks at rates below the target refinancing rate.
Q2) When the Fed forecasts a sustained increase in the demand for the monetary base, the staff of the Fed is likely to meet this demand through:
A)discount loans.
B)repurchase agreements.
C)an outright purchase of U.S.Treasury Securities.
D)an outright sale of U.S.Treasury Securities.
Q3) Which of the following statements is most correct?
A)The market federal funds rate equals the target federal funds rate.
B)Since 2008, the market federal funds rate has remained solidly within the target range announced by the Fed.
C)Since 2008, the market federal funds rate has varied wildly, sometimes moving outside the target range announced by the Fed.
D)There doesn't appear to be any relationship at all between the target and market federal fund rates.
Page 21
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Chapter 19: Exchange-Rate Policy and the Central Bank
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Sample Questions
Q1) A country that suffers from bouts of high inflation and wants to fix its exchange rate should tie its currency to the currency of a:
A)country with a strong reputation for low inflation.
B)larger country.
C)country with similar inflation performance.
D)country that is still on the gold standard.
Q2) Only two exchange rate regimes can be considered hard pegs.These are:
A)currency boards and dollarization.
B)dollarization and managed floating.
C)flexible exchange rates and currency boards.
D)the gold standard and inflation targeting.
Q3) Fixed exchange rate regimes include each of the following, except:
A)the Bretton Woods exchange rate system.
B)exchange rate pegs.
C)dollarization.
D)currency boards.
Q4) Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.
Q5) What are the cost and benefits to a country instituting capital controls?
Page 22
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Chapter 20: Money Growth, Money Demand, and Modern Monetary Policy
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Q1) The higher the nominal interest rate:
A)the less money individuals will hold for any given level of transactions and the higher the velocity of money.
B)the more money individuals will hold for any given level of transactions and the higher the velocity of money.
C)the more money individuals will hold for any given level of transactions and the lower the velocity of money.
D)the less money individuals will hold for any given level of transactions and the lower the velocity of money.
Q2) Which of the following would be classified as precautionary demand for money?
A)You keep a $1000 in a money market account because the return is better than a savings account at your bank
B)You apply for and receive a credit card with a $1000 limit
C)You put $1000 in a savings account at your bank for emergencies
D)You put $1000 in your checking account each month to cover your regular expenses
Q3) Is keeping money growth low when the central bank can accurately forecast real growth a guarantee that short-run inflation will not occur? Explain
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Page 23
Chapter 21: Output, Inflation, and Monetary Policy
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Q1) Which of the following statements is most correct?
A)When the real interest rate increases the reward for saving decreases.
B)When the real interest rate decreases current consumption becomes less expensive and the reward for saving decreases.
C)When the real interest rate decreases the cost of current consumption increases.
D)When the real interest rate increases the level of saving always decreases.
Q2) Discuss what happens to the monetary policy reaction curve if the Fed were to lower their inflation target and why?
Q3) Evidence points out that since the mid-1950's just about every recession was preceded by rising interest rates.This suggests that the recessions were:
A)caused in part by the actions of the Federal Reserve.
B)the result of changes in consumer confidence.
C)due to increases in oil prices and other production costs.
D)caused by simultaneous shifts in aggregate demand and aggregate supply.
Q4) In the face of constant velocity, explain what happens to aggregate demand if the growth rate of money is less than the rate of inflation.
Q5) What are the conditions for long-run equilibrium?
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Page 24
Chapter 22: Understanding Business Cycle Fluctuations
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Q1) A "shock" is something that creates a shift in:
A)the demand curve only.
B)the supply curve only.
C)either the demand curve or the supply curve.
D)both the demand curve and the supply curve at the same time.
Q2) Which of the following is true?
A)A flat dynamic aggregate demand curve corresponds to a steep monetary policy reaction curve and means that supply shocks will create large changes in current output.
B)A flat dynamic aggregate demand curve corresponds to a flat monetary policy reaction curve and means that supply shocks will create large changes in current output.
C)A flat dynamic aggregate demand curve corresponds to a steep monetary policy reaction curve and means that supply shocks will create small changes in current output.
D)A flat dynamic aggregate demand curve corresponds to a flat monetary policy reaction curve and means that supply shocks will create small changes in current output.
Q3) What explanations have been offered to account for the Great Moderation?
Q4) Explain the view called real business cycle theory.
Page 25
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Chapter 23: Modern Monetary Policy and the Challenges
Facing Central Bankers
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Q1) What are the arguments for and against monetary policymakers intervening to address equity and property price bubbles?
Q2) The fact that investors can always hold cash creates:
A)a problem for monetary policymakers when the short-term interest rates approach zero.
B)an opportunity for the U.S.treasury to issue bonds that actually have negative nominal interest rates.
C)an upward bound on nominal interest rates.
D)negative nominal interest rates.
Q3) The high rates of inflation that were experienced in the 1970s could partly be blamed on all of the following except:
A)the assumption the economy would continue to grow at the rates that the economy experienced in the 1960s.
B)the Vietnam war.
C)high oil prices.
D)rapid growth rates of potential GDP during the 1970s.
Q4) If greater stock prices can lead to greater investment spending, should central bankers ever worry about stock prices becoming too high?
Page 26
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