Financial Systems Exam Bank
Course Introduction
This course provides an in-depth exploration of the core components and functioning of financial systems, including financial markets, institutions, instruments, and regulatory frameworks. Students will examine the roles these elements play in facilitating the flow of funds between savers and borrowers, supporting economic development, and managing financial risk. The course covers topics such as the structure and operation of banking systems, capital markets, payment systems, and the impact of government policies and international financial architecture. By analyzing real-world examples and current trends, students will gain a comprehensive understanding of how financial systems operate and evolve in both domestic and global contexts.
Recommended Textbook Financial Markets and Institutions 12th Edition by Jeff Madura
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Chapter 1: Role of Financial Markets and Institutions
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Q1) When a depository institution offers a loan, it is acting as a creditor.
A)True
B)False
Answer: True
Q2) Which of the following are not major investors in stocks?
A) commercial banks
B) insurance companies
C) mutual funds
D) pension funds
Answer: A
Q3) If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.
A) rise; lower
B) fall; higher
C) fall; lower
D) rise; higher
Answer: D
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Chapter 2: Determination of Interest Rates
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Q1) A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.
A) higher; inward
B) higher; outward
C) lower; outward
D) none of the above
Answer: B
Q2) Which of the following is not true regarding foreign interest rates?
A) The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.
B) The expectations of a strong dollar should cause a flow of funds to the United States.
C) An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries.
D) All of the above are true regarding foreign interest rates.
Answer: C
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Chapter 3: Structure of Interest Rates
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Q1) The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years aheadis ____ percent.
A) 1.8
B) 9
C) 15
D) none of the above
Answer: C
Q2) According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities. A) equal B) be less than C) be greater than D) B and C are possible, depending on the size of the liquidity premium Answer: C
Q3) The higher a bond rating, the lower the perceived credit risk. A)True
B)False
Answer: True
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Page 5
Chapter 4: Functions of the Fed
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Q1) The purchase of government securities by someone other than the Fed results in
A) an overall increase in funds among commercial banks.
B) an overall decrease in funds among commercial banks.
C) offsetting changes in funds at commercial banks.
D) an increase in securities maintained by the Fed.
Q2) Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations to buy $200 million worth of Treasury securities. Assuming that banks use all funds exceptrequired reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____.
A) increase; $200 million
B) increase; $1.67 billion
C) decrease; $200 million
D) decrease; $1.67 billion
Q3) Which of the following is an action that the Fed uses to increase or decrease the money supply?
A) buying or selling Treasury securities in the secondary market
B) adjusting the tax rate imposed on income earned on Treasury securities
C) adjusting the coupon rate on Treasury bonds
D) selling Treasury securities in the primary market
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Chapter 5: Monetary Policy
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Q1) Which of the following is true about an increase in the U.S. government's budget deficit?
A) It will lead to global crowding out if U.S. interest rates fall below the level of interest rates in other countries.
B) It will cause outflows of foreign funds from the United States as foreign investors move their funds to other countries.
C) It will cause an inward shift in the aggregate demand for funds curve.
D) None of the above
Q2) Which of the following is not an effect of a stimulative monetary policy?
A) The risk-free rate and the credit risk premium increase.
B) A firm's cost of debt decreases.
C) A firm's cost of equity decreases.
D) Depository institutions experience an increase in their supply of funds.
Q3) In 2012, the Fed stated that it would continue to purchase Treasury bonds in the financial markets until GDP growth increased to a target level.
A)True
B)False
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Chapter 6: Money Markets
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Sample Questions
Q1) Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.
A)True
B)False
Q2) An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent.
A) 6.02
B) 1.54
C) 1.5
D) 6.2
E) none of the above
Q3) A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?
A) 10.26 percent
B) 0.26 percent
C) $2,500
D) 10.00 percent
E) 11.00 percent
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8
Chapter 7: Bond Markets
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Q1) Devin, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a returnof ____ percent.
A) 12
B) 9
C) 10.5
D) more information is needed to answer this question
Q2) Which of the following statements is not true regarding STRIPS?
A) They are not issued by the Treasury.
B) They are created and sold by various financial institutions.
C) They are backed by the U.S. government.
D) They have to be held until maturity.
E) All of the above are true regarding STRIPS.
Q3) The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
A)True
B)False
Q4) Savings bonds are bonds issued by the Federal Reserve.
A)True
B)False
Page 9
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.
A) slightly; rises
B) very; rises
C) very; declines
D) slightly; declines
Q2) If the coupon rate equals the required rate of return, the price of the bond
A) should be above its par value.
B) should be below its par value.
C) should be equal to its par value.
D) is negligible.
Q3) Zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years and a required rate of return of 9 percent. What is the current price?
A) $363,212
B) $385,500
C) $422,400
D) $424,100
E) none of the above
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to
A) interest rate risk.
B) reinvestment rate risk.
C) credit risk.
D) insurance risk.
Q2) Mortgage-backed securities are assigned ratings by:
A) rating agencies.
B) the Treasury.
C) the Fed.
D) the mortgage originator.
Q3) Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount representspayment of interest.
A) 1,014; 264
B) 1,241; 750
C) 1,014; 750
D) none of the above
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Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) Which of the following statements is incorrect?
A) A stock represents partial ownership in a corporation.
B) Like debt securities, common stock is issued by firms to obtain funds.
C) Stocks are issued by corporations to raise short-term funds.
D) The secondary stock market enables investors to sell stocks that they had previously purchased.
Q2) Which of the following is not true with respect to preferred stock?
A) Preferred stock usually does not allow for significant voting rights.
B) If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy.
C) Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend.
D) Payment of preferred dividends is not a tax-deductible expense.
E) All of the above are true.
Q3) Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option-pricing model, it is possible to derive the anticipatedvolatility level.
A)True
B)False
Q2) The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derivethe PE ratio.
A)True
B)False
Q3) Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta.
A)True
B)False
Q4) The market risk premium is stable over time and is not affected by stock market conditions.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Q1) The SEC's ____ reviews the registration statement filedwhen a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board membersorother corporate issues.
A) Division of Corporate Finance
B) Division of Market Regulation
C) Division of Enforcement
D) none of the above
Q2) ____ may facilitate transactions on a stock exchange by executing stock transactions for their clients.
A) Board members
B) Capstone members
C) Floor brokers
D) None of the above
Q3) The ____ the trading volume of a stock, the ____ the spread.
A) higher; wider
B) higher; narrower
C) lower; narrower
D) none of the above
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Chapter 13: Financial Futures Markets
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Sample Questions
Q1) ____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.
A) Market
B) Liquidity
C) Credit
D) Basis
E) None of the above
Q2) If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.
A) increase; selling
B) increase; buying
C) decrease, selling
D) decrease; purchasing a call option on
Q3) The use of financial leverage
A) magnifies the positive returns of futures contracts.
B) magnifies losses of futures contracts.
C) both A and B
D) none of the above
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Chapter 14: Options Markets
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Sample Questions
Q1) An option with a higher exercise price has a higher call option premium and a lower put option premium.
A)True
B)False
Q2) Sellers (writers) of call options can offset their position at any point in time by
A) selling a put option on the same stock.
B) buying identical call options.
C) selling additional call options on the same stock.
D) all of the above
E) A and B
Q3) The sale of a call option on a stock the seller already owns is referred to as A) a covered call.
B) a naked call.
C) call on futures.
D) futures on options.
Q4) Several call options are available for a given stock, and the risk-return potential will vary among them
A)True
B)False
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Chapter 15: Swap Markets
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Q1) Which of the following is not a reason why financial institutions engage in interest rate swaps?
A) to reduce interest rate risk
B) to act as an intermediary
C) to act as a dealer in swaps
D) All of the above are reasons why financial institutions engage in swaps.
Q2) Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself.
A)True
B)False
Q3) If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments.
A) fixed-rate; floating-rate
B) fixed-rate euro; fixed-rate dollar
C) stock dividend; fixed-rate
D) stock dividend; floating-rate
Q4) Interest rate floors are commonly used to hedge against lower interest rates.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) A system whereby exchange rates are market determined without boundaries but subject to government intervention is called
A) a dirty float.
B) a free float.
C) the gold standard.
D) the Bretton Woods era.
Q2) The indirect exchange rate specifies the value of the currency in U.S. dollars.
A)True
B)False
Q3) The indirect exchange rate is always the reciprocal of the direct exchange rate.
A)True
B)False
Q4) If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.
A) short; short
B) long; short
C) short; long
D) long; long
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Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) When banks obtain funds in the federal funds market, the providers of the funds are
A) other depository institutions.
B) nonfinancial corporations.
C) consumers.
D) the Federal Reserve.
Q2) Before establishing foreign branches, a U.S. bank must obtain the approval of the:
A) U.S. Treasury
B) U.S. Commerce Department.
C) Federal Deposit Insurance Corporation.
D) Federal Reserve
Q3) The interest rate charged on loans between depository institutions is commonly referred to as the
A) federal funds rate.
B) discount rate.
C) primary credit lending rate.
D) none of the above
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Page 19
Chapter 18: Bank Regulation
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Q1) Bank regulations typically:
A) involve a trade-off between the safety of the banking system and the efficiency of bank operations.
B) impose restrictions on the types of assets in which banks can invest.
C) set requirements for the minimum amount of capital that banks must hold.
D) all of the above
Q2) The liquidity component of the CAMELS rating refers to
A) how a bank's earnings would change if economic conditions change.
B) how readily a bank's management would detect its financial problems.
C) a bank's sensitivity to financial market conditions.
D) the type of loans that a bank provides, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases.
E) whether a bank frequently needs to borrow from outside sources, such as the discount window.
Q3) National banks are regulated by ____, and state banks are regulated by ____.
A) the Comptroller of the Currency; their state agency
B) the Comptroller of the Currency; the Comptroller of the Currency
C) their state agency; their state agency
D) their state agency; the Comptroller of the Currency
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Page 20
Chapter 19: Bank Management
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Q1) Banks would reduce their liquidity by restructuring their asset portfolio to contain fewer ____ and more ____.
A) Treasury securities; excess reserves
B) loans; Treasury securities
C) corporate bonds; Treasury securities
D) none of the above
Q2) In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.
A) more; fixed; variable
B) more; variable; fixed
C) less; fixed; variable
D) less; fixed; fixed
E) none of the above
Q3) The say on pay rules require all decisions about executive compensation to be made only by outside directors.
A)True
B)False
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Chapter 20: Bank Performance
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Q1) Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than the rates that larger banks charge on the loans they provide to large businesses.
A)True
B)False
Q2) Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.
A) economic growth
B) the risk-free interest rate
C) industry conditions
D) management abilities
E) none of the above
Q3) Which of the following factors affecting a bank's gross interest income is not influenced by the bank's policy decisions?
A) maturity and rate sensitivity of the bank's assets
B) market interest rate movements
C) the bank's loan rate
D) composition of the bank's assets
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22
Chapter 21: Thrift Operations
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Sample Questions
Q1) Credit unions obtain most of their funds by borrowing from the U.S. government.
A)True
B)False
Q2) Comparing credit unions with commercial banks and savings institutions
A) credit unions are less able to quickly generate additional deposits.
B) savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions cannot.
C) savings institutions and commercial banks are less able to quickly generate additional deposits.
D) credit unions have less exposure to liquidity risk.
Q3) Which of the following is not a deposit source of funds for savings institutions?
A) passbook savings
B) retail CDs
C) money market deposit accounts
D) negotiable order of withdrawal (NOW) accounts
E) All of the above are deposit sources of funds for savings institutions.
Q4) Credit unions use the majority of their funds to invest in the stock market.
A)True
B)False
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies.
A)True
B)False
Q2) A finance company's cash flows are _____ related to changes in economic growth and may be ____ related to changes in the risk-free rate.
A) positively; inversely
B) inversely; positively
C) inversely; inversely
D) positively; positively
Q3) Finance companies are exempt from state regulations.
A)True
B)False
Q4) Unlike loans made by commercial banks, loans made by finance companies cannot be securitized (bundled together and sold as securities to investors).
A)True
B)False
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24
Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) The Securities and Exchange Commission's Regulation FD allows a firm to provide advance information about its earnings exclusively to hedge funds.
A)True
B)False
Q2) ____ funds focus on a group of companies sharing a particular characteristic.
A) Specialty
B) Growth and income
C) Closed-end
D) Capital appreciation
E) None of the above
Q3) ____ fund contains a sales charge.
A) Load
B) no-load
C) closed-end
D) open-end
E) none of the above
Q4) Many businesses that go public are partially backed by venture capital before the IPO.
A)True
B)False
Page 25
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Chapter 24: Securities Operations
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Q1) The ____ determines margin requirements on securities purchased.
A) Securities and Exchange Commission
B) Financial Industry Regulatory Authority
C) Federal Reserve Board
D) Securities Investor Protection Corporation
Q2) The compensation paid to securities firms for helping a firm raise funds is typically in the form of interest income.
A)True
B)False
Q3) Which of the following is not an example of a securities firm that experienced financial problems as a result of taking on excessive risk when engaging in proprietary trading?
A) Washington Mutual
B) Société Générale
C) Bear Stearns
D) Barings Bank
Q4) One of the main functions of securities firms is helping corporations and governments raise funds.
A)True
B)False
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Chapter 25: Insurance Operations
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Q1) ____ insurance provides insurance for a policyholder only over a specified period.
A) Term
B) Whole life
C) Universal
D) A and C
Q2) The most common use of funds for property and casualty insurance companies is for
A) corporate bonds and municipal securities.
B) Treasury bills.
C) corporate stock.
D) commercial paper.
Q3) Individuals who are insured under a managed health care plan can usually choose any provider of health care services.
A)True
B)False
Q4) Bond insurance is available only for corporate bonds and not for municipal securities.
A)True
B)False
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Chapter 26: Pension Fund Operations
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Q1) Projective funding limits the manager's discretion, allowing only investments that match future payouts.
A)True
B)False
Q2) Pension funds managed by life insurance companies concentrate on
A) common stock.
B) bonds and mortgages.
C) preferred stock.
D) money market instruments.
Q3) The government agency that guarantees that participants in defined-benefit plans will receive their benefits upon retirement is the:
A) Federal Pension Insurance Corporation.
B) Pension Benefit Guaranty Corporation.
C) Office of Pension Insurance.
D) Employee Pension Protection Bureau.
Q4) Underfunded pensions are primarily a problem with defined-contribution pension plans.
A)True
B)False
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