Financial Markets and Institutions
Mock Exam
Course Introduction
Financial Markets and Institutions explores the structure, functions, and roles of financial markets and the various institutions that operate within them. The course examines how these markets facilitate the flow of funds between savers and borrowers, and how they contribute to economic efficiency and growth. Key topics include the operation of money and capital markets, the roles of central banks, commercial banks, investment firms, insurance companies, and regulatory agencies. Students will also learn about financial instruments, risk management, interest rate determination, and the impact of monetary policy on financial systems. Through theoretical frameworks and case studies, the course provides an understanding of the challenges and dynamics that shape global financial systems.
Recommended Textbook
Introduction to Finance Markets Investments and Financial Management 14th Edition by Ronald
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Page 2
Chapter 1: The Financial Environment
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Sample Questions
Q1) Business finance is concerned with:
A)financial planning
B)asset management
C)fund raising
D)all the above
E)none of the above
Answer: D
Q2) An area of finance that involves the sale or marketing of securities,the analysis of securities,and the management of investment risk through portfolio diversification is referred to as:
A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above
Answer: B
Q3) A credit score measures the number of times a debtor has paid on time.
A)True
B)False
Answer: False
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Chapter 2: Money and the Monetary System
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Sample Questions
Q1) The faster velocity of money,the greater an economy's GDP.
A)True
B)False
Answer: True
Q2) Which of the following statements is false?
A)M1,M2,and M3 include demand deposits and other checkable deposits.
B)Term repurchase agreements are included in M3,but not in M1 and M2.
C)U.S.savings bonds are included in M3,but not in M1 and M2.
D)Travelers' checks are included in M1,M2,and M3.
Answer: C
Q3) Fiat money is legal tender proclaimed to be money by law.
A)True
B)False
Answer: True
Q4) All of the following are normally categorized as financial institutions EXCEPT: A)S&Ls
B)brokerage firms
C)commercial banks
D)credit unions
Answer: B
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Chapter 3: Banks and Other Financial Institutions
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Sample Questions
Q1) The bank holding company may not engage in direct banking activities.
A)True
B)False
Answer: False
Q2) The Garn-St.Germain Depository Institutions Act,among other things:
A)extended the Fed's control to thrift institutions and to commercial banks that are not members of the Fed
B)enabled depository institutions to issue money market accounts with no regulated interest rate ceiling
C)was designed to assist the investment banking industry
D)all the above
Answer: B
Q3) An organization that sells or markets new securities issued by businesses to individuals and institutional investors is called a (n)
A)mutual fund
B)investment bank
C)insurance company
D)brokerage firm
Answer: B
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Page 5
Chapter 4: Federal Reserve System
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Sample Questions
Q1) The Federal Open Market Committee:
A)is comprised of members of the Federal Reserve board and representatives of all Federal Reserve Banks
B)came into being at the time the Federal Reserve System was created
C)is made up of the presidents of the 12 Federal Reserve Banks
D)was created under a provision of the Banking Act of 1935
Q2) The National Banking Acts of 1863 and 1864 were:
A)totally eliminated under the Federal Reserve Act of 1913
B)were modified to permit greater flexibility of operations under the Federal Reserve Act of 1913
C)were unaffected by the Federal Reserve Act of 1913
D)none of the above
Q3) The discount rate is:
A)the rate charged a bank's best customers
B)the rate paid by large business with good credit
C)the rate a bank must pay to borrow from the Fed
D)none of the above
Q4) In addition to the 12 Reserve Banks,25 branch banks have been established.
A)True
B)False
Page 6
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Chapter 5: Policy Makers and the Money Supply
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Sample Questions
Q1) In fall 2008,the U.S.Congress and President George W.Bush responded to the financial crisis with the passage of the _____________ in early October of that year.
A)Economic Stimulus Act
B)Economic Recovery Act
C)Economic Expansion Act
D)Economic Booster Act
E)none of the above
Q2) Federal Reserve open market operations,setting reserve requirement,and lending to depositories are:
A)usually conducted simultaneously
B)designed to improve the federal deficit
C)of equal importance in their effort
D)functions shared with the U.S.Treasury
E)none of the above
Q3) Open market operations differ from discounting operations in that they are:
A)initiated by member depository institutions
B)designed to be of significance only to large city banks
C)initiated by the Federal Reserve
D)initiated by the U.S.Treasury
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Chapter 6: International Finance and Trade
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Sample Questions
Q1) Which of the following statements is most correct?
A)Exporters may use sight or time drafts in billing foreign customers when they have confidence in the purchaser's ability and willingness to pay.
B)A time draft becomes a banker's acceptance when the customer receives,signs,and returns the draft to the exporter.
C)The currency rate is the rate at which a given unit of a foreign currency is quoted in terms of gold.
D)All of the above statements are correct.
Q2) A draft requiring immediate payment is called a (n)
A)bill of exchange
B)sight draft
C)time draft
D)documentary draft
Q3) To protect against loss as a result of adverse currency fluctuations,an export firm may:
A)demand cash settlement
B)purchase a futures contract as a hedge
C)require the customer to make payment in the exporter's currency
D)require a government guarantee against currency loss of value
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Page 8
Chapter 7: Savings and Investment Process
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Sample Questions
Q1) Which of the following statements is most correct?
A)As levels of income decrease,an individual may dissave,that is,reduce further consumption expenditures rather than liquidate accumulated savings.
B)The ability to provide adequate funds to meet our investment needs is dependent primarily on the savings of corporations and the government.
C)In terms of the amount of funds raised annually in the credit markets,borrowing by the state and local government sector is smaller than borrowing by the U.S.government.
D)All of the above statements are correct.
Q2) Direct payments to individuals from the Federal government do not include:
A)Social Security payments.
B)Medicare payments
C)health expenditures
D)all the above are included
Q3) The largest proportion of government revenue comes from corporate income taxes.
A)True
B)False
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Chapter 8: Interest Rates
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Sample Questions
Q1) Economists who believe that long-run inflationary bias will continue base their belief on the following factors:
A)Prices and wages tend to fall during periods of boom in a competitive economy;this tendency is reinforced by wage contracts that provide escalator clauses to keep wages in line with prices and by wage increases that are sometimes greater than increases in productivity.
B)During expansions,prices tend to remain stable rather than decrease because major unions have long-run contracts calling for annual wage increases no matter what economic conditions are at the time.
C)The tendency of small corporations to rely on non-price competition (advertising,and style and color changes)and to increase output rather than cut prices also keeps prices stable.
D)If prices rise drastically in a field,the government is likely to step in with programs to make up the shortage of supplies in the market.
E)none of the above are correct
Q2) Interest rates in the United States are only influenced by domestic factors.
A)True
B)False
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Page 10
Chapter 9: Time Value of Money
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Sample Questions
Q1) When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called
A)discount interest.
B)compound interest.
C)primary interest.
D)future value.
Q2) The method of calculating the annual percentage rate (APR)is set by law.
A)True
B)False
Q3) The annual rate of return is often referred to as the A)discount rate.
B)opportunity cost.
C)cost of capital.
D)all of the above.
Q4) An amortized loan is repaid in equal payments over a specified time period. A)True B)False
Q5) An annuity due may also be referred to as a deferred annuity. A)True
B)False
11
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Chapter 10: Bonds and Stocks: Characteristics and Valuation
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Q1) Which of the following is not a component of the Gordon (or constant dividend growth rate)model for valuing stocks?
A)next year's expected dividend
B)a discount rate that reflects the riskiness of the stock
C)a constant divided growth rate
D)next year's expected earnings
Q2) An unrated bond:
A)is perceived as having lower than average risk
B)are termed as "debentures"
C)generally has a lower than rated bonds
D)none of the above
Q3) Several factors will be considered by the board of directors and management as they consider the level of dividend payout.Some of these factors include:
A)the ability of the firm to generate cash to sustain the level of dividends.
B)legal and contractual considerations
C)growth opportunities
D)cost of other financing sources
E)all of the above
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Chapter 11: Securities Markets
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Sample Questions
Q1) The regulation of new security sales by individual states is referred to as:
A)the registration process
B)a truth-in-securities requirement
C)the rating of security quality
D)Blue-sky laws
Q2) Under a best-effort agreement,investment bankers try to sell the securities of the issuing corporation,but they assume no risk for a possible failure of the flotation.
A)True
B)False
Q3) Under a ______________,if any additional shares of common stock,or any security that may be converted into common stock,are to be issued,the securities must be offered for sale first to the existing common stockholders.
A)red herring
B)rights offering
C)shelf registration
Q4) Commissions on stock trades are set by the stock exchanges.
A)True
B)False
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Chapter 12: Financial Return and Risk Concepts
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Sample Questions
Q1) The ____________ the coefficient of variation,the ____________ the risk.
A)lower,lower
B)higher,lower
C)lower,higher
D)more stable,higher
E)none of the above
Q2) If prices in a particular market fully reflect all public and private knowledge,the market is efficient in the:
A)weak form
B)semi-strong form
C)strong form
D)both a and b
Q3) A (n)________ portfolio maximizes return for a given level of risk,or minimizes risk for a given level of return.
A)technical
B)profit maximizing
C)idiosyncratic
D)diverse
E)none of the above
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Page 14
Chapter 13: Business Organization and Financial Data
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Sample Questions
Q1) The 2002 Sarbanes-Oxley Act was designed to:
A)limit the compensation that could be paid to CEOs.
B)exacerbate the many disclosure and conflict of interest problems of corporations
C)provide uniform international accounting standards
D)two of the above
E)none of the above
Q2) The market value added measures the value created by the firm's managers.
A)True
B)False
Q3) Which of the following is not considered to be one of the three major forms of business ownership in the United States?
A)proprietorship
B)partnership
C)public limited company
D)corporation
Q4) A weakness for a proprietorship is that owner's liability for debts of the firm is unlimited.
A)True
B)False
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Chapter 14: Financial Analysis and Long-Term Financial Planning
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Sample Questions
Q1) The method of calculating return on assets which highlights the importance of sales,profit margin,and asset turnover is known as:
A)the Gordon model
B)cost-volume profit analysis
C)DuPont analysis
D)break-even analysis
Q2) Which of the following is not a variable cost?
A)direct materials
B)direct labor
C)delivery costs
D)rent
E)all of the above are variable costs
Q3) A firm's sales forecast is usually based on
A)forecasts of external economic activity
B)the firm's sales force estimates of demand
C)both internal and external factor estimates
D)accounts receivable experience
Q4) Net working capital is current assets plus current liabilities.
A)True
B)False
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Chapter 15: Managing Working Capital
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Sample Questions
Q1) Both the operating cycle and the cash conversion cycle can be reduced by shortening the inventory period.
A)True
B)False
Q2) Reasons to invest in marketable securities would not include:
A)transactions motives
B)precautionary motives
C)speculative motives
D)all the above are reasons to invest in marketable securities
E)none of the above
Q3) One way a firm can reduce the amount of cash it needs in any one month is to A)slow down the payment of receivables
B)delay the payment of wages
C)speed up the payment of taxes
D)speed up the payment of wages
E)none of the above
Q4) Increases in the cash conversion cycle will lower the firm's short-term financing needs.
A)True
B)False
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Chapter 16: Short-Term Business Financing
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Sample Questions
Q1) A short-term promissory note sold by high-credit-quality corporations and is backed solely by the credit quality of the issuer is called:
A)commercial paper
B)a line of credit
C)a revolving credit agreement
D)a factoring arrangement
Q2) Inventory loans are less expensive than unsecured loans to business borrowers.
A)True
B)False
Q3) In general,a firm that secures a bank line of credit pays interest on:
A)the full line of credit.
B)only half of the amount actually borrowed.
C)on the unused portion of the line of credit.
D)on the amount borrowed as well as on the unused portion of the line of credit.
E)none of the above
Q4) The need for current funds increases when there is an upswing in the business cycle or the sales cycle of an industry.
A)True
B)False
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Chapter 17: Capital Budgeting Analysis
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Q1) The internal rate of return concept is best explained by which of the following?
A)rate where NPV is equal to zero
B)point where initial investment has been returned
C)marginal cost of capital
D)average book value
Q2) When a project's net present value exceeds zero,then:
A)the project should be accepted
B)the project will be acceptable using the payback period method
C)the IRR should be calculated to ensure that the project's IRR exceeds the cost of capital
D)both a and c are true
Q3) Projects with negative net present values will lead to a decrease in the value of the firm.
A)True
B)False
Q4) A positive NPV suggests that a project produces sufficient cash flows to cover not only its initial cost,but also all financing costs.
A)True
B)False
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Chapter 18: Capital Structure and the Cost of Capital
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Q1) The firm's unadjusted cost of debt financing equals the yield to maturity on new debt issues.
A)True
B)False
Q2) All of the following statements are correct except:
A)The pecking order hypothesis is a theory that states managers prefer to use new debt to finance the firm,then retained earnings,and (as a final resort)new equity.
B)The market timing hypothesis states that firms try to time the equity market by issuing stock when their stock prices are low and repurchasing shares when stock values are high.
C)The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of interest)with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs).
D)Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero.
E)None of the above statements are correct.
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Page 20