International Finance Exam Bank
Course Introduction
International Finance explores the monetary interactions that occur between two or more countries, focusing on topics such as foreign exchange markets, international monetary systems, balance of payments, international financial institutions, and global financial crises. The course examines how multinational corporations manage exposure to currency risk, the instruments used for hedging and speculation in international markets, and the regulatory frameworks governing cross-border financial flows. Students will gain practical insights into exchange rate determination, international capital budgeting, and the effects of globalization on financial strategies.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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Page 2
Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) In general,from 2001 through 2013,the dollar ________ in value relative to major foreign currencies.
A) appreciated
B) depreciated
C) remained about the same
Answer: B
Q2) The stock market is important because
A) it is where interest rates are determined.
B) it is the most widely followed financial market in the United States.
C) it is where foreign exchange rates are determined.
D) all of the above.
Answer: B
Q3) Monetary policy is chiefly concerned with
A) how much money businesses earn.
B) the level of interest rates and the nation's money supply.
C) how much money people pay in taxes.
D) whether people have saved enough money for retirement.
Answer: B
Q4) What is money?
Answer: NOT Answerd
Page 3
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) The SEC restricts trading by the largest stockholders (known as ________)in corporations issuing securities.
A) insiders
B) members of the board
C) hedge funds
D) intermediaries
Answer: A
Q2) The country whose banks are the most restricted in the range of assets they may hold is
A) Japan.
B) Canada.
C) Germany.
D) the United States.
Answer: D
Q3) Which of the following are not investment intermediaries?
A) A life insurance company
B) A pension fund
C) A mutual fund
D) Only A and B of the above
Answer: D
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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 interest rate that is adjusted for actual changes in the price level is called the
A) ex post real interest rate.
B) expected interest rate.
C) ex ante real interest rate.
D) none of the above.
Answer: A
Q2) A consol bond is a bond that
A) pays interest annually and its face value at maturity.
B) pays interest in perpetuity and never matures.
C) pays no interest but pays its face value at maturity.
D) rises in value as its yield to maturity rises.
Answer: B
Q3) Which of the following $1,000 face value securities has the highest yield to maturity?
A) A 5 percent coupon bond selling for $1,000
B) A 10 percent coupon bond selling for $1,000
C) A 15 percent coupon bond selling for $1,000
D) A 15 percent coupon bond selling for $900
Answer: D
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Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) When the growth rate of the money supply increases,interest rates end up being permanently lower if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.
Q2) What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called?
A) Econometric model
B) Liquidity preference framework
C) Market equilibrium
D) Fisher effect
Q3) _______ is the total resources owned by an individual,including all assets.
A) Expected return
B) Wealth
C) Liquidity
D) Risk
Q4) Explain how the loanable funds framework and the supply and demand for bonds are related.
Q5) What is the difference between systematic and nonsystematic risk?
Page 6
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Q1) (I)The risk premium widens as the default risk on corporate bonds increases. (II)The risk premium widens as corporate bonds become less liquid.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q2) The term structure of interest rates describes how interest rates move over time.
A)True
B)False
Q3) Moody's and Standard and Poor's are agencies that
A) help investors collect when corporations default on their bonds.
B) advise municipal bond issuers on the tax exempt status of their bonds.
C) produce information about the probability of default on corporate bonds.
D) maintain liquid markets for corporate bonds.
Q4) What is meant by the risk structure of interest rates?
Q5) Explain why a flight to quality occurred following the subprime collapse and how this affected the interest rates on lower-quality corporate bonds and Treasury bonds.
Page 7
Q6) Explain why the liquidity premium theory is so widely accepted.
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) What is the optimal investment strategy according to the efficient market hypothesis? Why?
Q2) The advantage of a "buy and hold strategy" is that
A) net profits will tend to be higher because there will be fewer brokerage commissions.
B) losses will eventually be eliminated.
C) the longer a stock is held, the higher its price will be.
D) only B and C of the above are true.
Q3) What is a rational bubble?
Q4) According to the strong view of the efficient markets hypothesis,security prices reflect ________ and so financial markets are efficient.
A) market fundamentals
B) rational expectations
C) momentum effects
D) current market trends
Q5) In an efficient market,abnormal returns are not possible,even using inside information.
A)True
B)False
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) The potential conflict of interest when a single accounting firm provides both auditing and consulting services is that the firm can
A) charge higher fees to its audit clients and lower fees for its consulting services so it can expand its consulting business.
B) charge higher fees to its consulting clients and lower fees for its audit services so it can expand its auditing business.
C) provide unjustifiably favorable audit reviews for firms that are large clients for its consulting services.
D) pressure its clients into paying high fees for both auditing and consulting services.
Q2) One reason why indirect financing is used is to minimize adverse selection problems. A)True B)False
Q3) What facts about financial structure can be explained by adverse selection?
Q4) What is the free-rider problem? Describe some situations that this problem creates.
Q5) What is the principal-agent problem?
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) 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.
Q2) Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.
A) currency
B) stock market
C) banking
D) commodities
Q3) Why was the shadow banking system important during the 2007-2009 U.S.financial crisis?
Q4) Explain the relationship between agency theory and a financial crisis.
Q5) When asset prices fall following a boom,
A) moral hazard may increase in companies that have lost net worth in the bust.
B) financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging.
C) both A and B are correct.
D) none of the above are correct.
10
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Chapter 9: Central Banks and the Federal Reserve System
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Q1) Monetary policy is set by the Board of Governors.
A)True
B)False
Q2) The 12 Federal Reserve banks are involved in monetary policy in which of the following ways?
A) Their directors establish the discount rate.
B) They decide which banks can obtain discount loans from the Federal Reserve Bank.
C) Their directors select one commercial banker from each bank's district to serve on the Federal Advisory Council.
D) all of the above.
Q3) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize
A) the public's welfare.
B) its own welfare.
C) profits.
D) conflict between the executive and legislative branches of government.
Q4) The Fed has goal independence but not instrument independence.
A)True
B)False
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) Discount loans to healthy banks,who may borrow as much as they wish from the Fed,are called
A) primary credit.
B) secondary credit.
C) seasonal credit.
D) lender-of-last-resort credit.
Q2) What is the argument for the Fed paying interest to banks on required reserves? Are there good arguments for not doing this?
Q3) If the Federal Reserve wants to drain reserves from the banking system,it will
A) purchase government securities.
B) lower the discount rate.
C) sell government securities.
D) raise reserve requirements.
Q4) An open market sale of securities by the Fed will
A) decrease liabilities of the Fed and not affect assets of the banking system.
B) decrease assets of the nonbank public and decrease assets of the Fed.
C) increase liabilities of the banking system and increase assets of the Fed.
D) have no effect on assets of the nonbank public but increase liabilities of the Fed.
E) decrease assets of the banking system and increase assets of the Fed.
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Chapter 11: The Money Markets
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Sample Questions
Q1) The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short.
A)True
B)False
Q2) The most influential participant(s)in the U.S.money market
A) is the Federal Reserve.
B) is the U.S. Treasury Department.
C) are the large money center banks.
D) are the investment banks that underwrite securities.
Q3) Federal funds
A) are short-term funds transferred between financial institutions, usually for a period of one day.
B) actually have nothing to do with the federal government.
C) provide banks with an immediate infusion of reserves.
D) are all of the above.
E) are only A and B of the above.
Q4) Interest rates on banker's acceptances are low because the risk of default is very low.
A)True
B)False
Page 13
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Chapter 12: The Bond Market
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Sample Questions
Q1) (I)Securities that have an original maturity greater than one year are traded in capital markets.
(II)The best known capital market securities are stocks and bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q2) The secondary market is where new issues of stocks and bonds are introduced. A)True
B)False
Q3) The first step in finding the value of a bond is to
A) discount back the cash flows using an interest rate that represents the yield available on other bonds of like risk and maturity.
B) identify the cash flows the holder of the bond will receive.
C) contact the holder of the bond.
D) none of the above.
Q4) Governments never issue stock because they cannot sell ownership claims.
A)True B)False
Q5) Explain the different types of corporate bonds.
Page 14
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Chapter 13: The Stock Market
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Sample Questions
Q1) Holding other things constant,a stock's value will be highest if the investor's required return on investments in equity is
A) 20%.
B) 15%.
C) 10%.
D) 5%.
Q2) Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy.
A)True
B)False
Q3) The main cause of fluctuations in stock prices is changes in A) tax laws.
B) errors in technical stock analysis.
C) daily trading volume in stock markets.
D) information available to investors.
E) total household wealth in the economy.
Q4) How do common stocks differ from preferred stocks?
Q5) How do over-the-counter markets differ from organized exchanges?
Q6) What is the role of the required return on equity investments in stock valuation models?
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) Why has the online lending market developed in recent years and what are the advantages and disadvantages of this development?
Q2) (I)Conventional mortgages are originated by private lending institutions,and FHA or VA loans are originated by the government.
(II)Conventional mortgages are insured by private companies,and FHA or VA loans are insured by the government.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q3) Mortgage-backed securities have declined in popularity in recent years as institutional investors have sought higher returns in other markets.
A)True
B)False
Q4) How does an amortizing mortgage loan differ from a balloon mortgage loan?
Q5) Evaluate the advantages and disadvantages,from both the lender's and borrower's perspectives,of fixed-rate and adjustable-rate mortgages.
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Page 16
Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) According to the interest parity condition,the domestic interest rate is equal to the foreign interest rate
A) plus the expected appreciation of the domestic currency.
B) less the expected appreciation of the domestic currency.
C) less the expected depreciation of the domestic currency.
D) less the expected depreciation of the domestic currency weighted by the domestic interest rate.
Q2) The theory of purchasing power parity cannot fully explain exchange rate movements because fiscal policy differs across countries.
A)True
B)False
Q3) The more modern asset market approach to exchange rate determination
A) emphasizes the role of import and export demand.
B) emphasizes stocks of assets.
C) emphasizes both of the above.
D) emphasizes neither of the above.
Q4) Increased demand for a country's exports causes its currency to depreciate.
A)True
B)False
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Chapter 16: The International Financial System
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Sample Questions
Q1) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base.
A) sale; purchase; increase
B) sale; sale; decline
C) purchase; sale; increase
D) purchase; purchase; decline
Q2) A balance of payments ________ is associated with a ________ of international reserves.
A) deficit; loss
B) deficit; gain
C) surplus; loss
D) balance; gain
Q3) In contrast to other countries' currencies,the Japanese yen and yen-denominated assets are the major component of international reserves held by countries.
A)True
B)False
Q4) What is the policy trilemma as it relates to capital mobility,fixed/floating exchange rates,and monetary policy?
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Chapter 17: Banking and the Management of Financial
Institutions
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Sample Questions
Q1) Net profit after taxes per dollar of assets is a basic measure of bank profitability called
A) return on assets.
B) return on capital.
C) return on equity.
D) return after taxes.
Q2) Banks can protect themselves from the disruption caused by deposit outflows by
A) holding excess reserves.
B) selling securities.
C) "calling in" loans.
D) doing all of the above.
E) doing only A and B of the above.
Q3) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank,then
A) the liabilities of the First National Bank decrease by $10.
B) the liabilities of the Second National Bank increase by $10.
C) the reserves of the First National Bank increase by $10.
D) all of the above occur.
E) only A and B of the above occur.
Q4) Discuss the recent trends in bank performance measures.
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Chapter 18: Financial Regulation
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Sample Questions
Q1) Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.
A)True
B)False
Q2) How has bank regulation in the United States changed since the late 1980s? What accounts for these changes?
Q3) Prior to the global financial crisis,inaccurate ratings provided by credit rating agencies helped promote risk taking throughout the financial system.
A)True
B)False
Q4) Regulators attempt to reduce the riskiness of banks' asset portfolios by
A) limiting the amount of loans in particular categories or to individual borrowers.
B) prohibiting banks from holding risky assets such as common stocks.
C) establishing a minimum interest rate floor that banks can earn on certain assets.
D) doing all of the above.
E) doing only A and B of the above.
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20
Chapter 19: Banking Industry: Structure and Competition
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Q1) Securitization is the process of transforming illiquid financial assets such as residential mortgages into marketable securities.
A)True
B)False
Q2) A bank with a large credit-card customer base can market other financial products to these customers at a low cost.This is an example of
A) economies of scale.
B) economies of scope.
C) becoming a superregional bank.
D) none of the above.
Q3) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.
A) federal government; municipalities
B) state governments; municipalities
C) federal government; states
D) municipalities; states
Q4) What are Treasury strips? What roles have reinvestment risk and information technology played in the development of this financial product?
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) Equity funds can be placed in which class according to the Investment Company Institute?
A) Capital appreciation funds
B) World funds
C) Total return funds
D) All of the above
Q2) Which of the following is an advantage to investors of an open-end mutual fund?
A) Once all the shares have been sold, the investor does not have to put in more money.
B) The investors can sell their shares in the over-the-counter market with low transaction fees.
C) The fund agrees to redeem shares at any time.
D) The market value of the fund's shares may be higher than the value of the assets held by the fund.
Q3) At the end of 2012 there were over ________ separate mutual funds with total assets over ________.
A) 800; $10 trillion
B) 7,500; $13 trillion
C) 10,000; $10 trillion
D) 1,000; $7 trillion
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Page 22
Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) The federal regulatory agency responsible for regulating the activities of life insurance companies is
A) the Federal Deposit Insurance Corporation.
B) the Federal Reserve.
C) the Federal Life Insurance Board.
D) none of the above; there is no such federal regulatory agency.
Q2) In the case of an insurance policy,________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff.
A) moral hazard
B) opportunism
C) adverse selection
D) shirking
Q3) Most private pension plans are insured by the Penny Benny,which pays benefits when a plan's sponsor goes bankrupt.
A)True
B)False
Q4) What are the major differences between life insurance and property and casualty 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 buy or sell the security at the current market price is called a ________.
A) limit order
B) market order
C) stop loss order
D) margin order
Q2) In a typical private equity buyout,a partnership is formed and private equity investors are contacted to pledge participation.
A)True
B)False
Q3) There are ________ risk and ________ returns to investors in private equity buyouts.
A) high; low
B) low; high
C) high; high
D) low; low
Q4) Discuss the life cycle of a equity buyout.
Q5) What niche in the financial system do venture capital firms fill?
Q6) Discuss the difference between full-service and discount brokers.
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Chapter 23: Risk Management in Financial Institutions
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Sample Questions
Q1) If borrowers with the most risky investment projects are more likely to seek bank loans than borrowers with the safest investment projects,banks face the problem of
A) adverse credit risk
B) adverse selection
C) moral hazard
D) conflict of interest
Q2) If a bank has more rate-sensitive assets than rate-sensitive liabilities,then a(n)________ in interest rates will ________ bank profits.
A) increase; increase
B) increase; reduce C) decline; increase
D) decline; not affect
Q3) Because borrowers,once they have a loan,are more likely to invest in high-risk investment projects,banks face the
A) adverse selection problem.
B) lemon problem.
C) adverse credit risk problem.
D) moral hazard problem.
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Chapter 24: Hedging with Financial Derivatives
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Q1) If you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500,you will ________.
A) lose $12,500
B) gain $12,500
C) lose $50
D) gain $50
Q2) The global financial crisis illustrates that derivatives cannot be used to hedgefinancial institutions should be barred from using them in any form.
A)True
B)False
Q3) Financial futures are regularly traded on all of the following except the A) Chicago Board of Trade.
B) Chicago Mercantile Exchange.
C) New York Futures Exchange.
D) Chicago Commodity Markets Board.
Q4) Why have the futures markets grown so rapidly in recent years?
Q5) Explain how a swap could be used to reduce interest-rate risk for a bank with more rate-sensitive assets than rate-sensitive liabilities.
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) In an emerging market economy,a financial crisis generally begins with A) mismanagement of financial liberalization or innovation.
B) asset pricing booms and busts.
C) an increase in uncertainty caused by failure of financial institutions.
D) all of the above.
Q2) Describe the differences in the evolution of the financial crises in South Korea (1997-1998)and Argentina (2001-2002).
Q3) Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy.
Q4) What is the problem with government safety nets,such as deposit insurance,during the formative stages of a financial crisis?
Q5) In contrast to most advanced economies that typically denominate debt in domestic currency,emerging market economies denominate many debt contracts in foreign currency.
A)True
B)False
Q6) Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.
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Chapter 26: Savings Associations and Credit Unions
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Q1) Since the early 1990s,the number of savings and loan associations has ________ and the average size (in assets)has ________.
A) risen; declined
B) declined; risen
C) risen; risen
D) declined; declined
Q2) Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take fewer risks than healthy S&Ls that can take risks and still remain solvent.
A)True
B)False
Q3) In the early 1990s,to replenish the reserves of the Savings Association Insurance Fund,insurance premiums for S&Ls were increased from ________ cents per $100 of deposits to ________ cents and can rise as high as 32.5 cents.
A) 12.5; 17.5
B) 17.5; 20.5
C) 20.8; 23.0
D) 23.0; 27.8
Q4) How has the thrift industry been transformed since FIRREA?
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Page 28
Chapter 27: Finance Companies
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Q1) Finance companies are ________ market intermediaries.
A) stock
B) bond
C) FX
D) money
Q2) Finance companies essentially sell commercial paper and use the proceeds to make loans.
A)True
B)False
Q3) Many retailers established finance companies to provide financing for their customers.Although these finance subsidiaries did increase sales,the subsidiary was typically unprofitable.
A)True
B)False
Q4) What factors explain the existence of finance companies,given that banks already provide loans,credit,and so forth?
Q5) Describe how floor plans work in the automobile industry.Why can finance companies offer these arrangements at a lower cost than banks?
Q6) Describe the process of factoring? When and why is it used?
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