International Financial Markets
Exam Practice Tests
Course Introduction
International Financial Markets explores the structure, operation, and dynamics of global financial systems, examining key markets such as foreign exchange, international bond and equity markets, and derivative instruments. The course delves into the roles of major market participants including governments, financial institutions, and multinational corporations and analyzes how global economic events, monetary policies, and regulatory frameworks impact market behavior. Students gain an understanding of risk management strategies, international capital flows, market integration, and the challenges and opportunities presented by globalization for investors and policymakers.
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) From 1980 to early 1985 the dollar ________ in value,thereby benefiting American
A) appreciated; businesses
B) appreciated; consumers
C) depreciated; businesses
D) depreciated; consumers
Answer: B
Q2) A rising stock market index due to higher share prices
A) increases people's wealth and as a result may increase their willingness to spend.
B) increases the amount of funds that business firms can raise by selling newly issued stock.
C) decreases the amount of funds that business firms can raise by selling newly issued stock.
D) both A and B of the above.
Answer: D
Q3) In a bull market stock prices are rising,on average.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Overview of the Financial System
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Sample Questions
Q1) The New York Stock Exchange is an example of a primary market.
A)True
B)False
Answer: False
Q2) Unlike regulations in other countries,there are very few federal regulations governing who is allowed to set up a financial intermediary.
A)True
B)False
Answer: False
Q3) Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of A) poorly informed consumers.
B) standardization.
C) economies of scale.
D) their market power.
Answer: C
Q4) Distinguish between primary markets and secondary markets.
Answer: 11ec663f_db52_ebd0_bd63_d36f7881685f_TB2777_00
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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) Bonds whose term to maturity is shorter than the holding period are also subject to A) default.
B) reinvestment risk.
C) both of the above.
D) none of the above.
Answer: B
Q2) Increasing duration implies that interest-rate risk has increased.
A)True
B)False
Answer: True
Q3) The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) present value
B) future value
C) interest
D) deflation
Answer: A
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Page 5
Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) When comparing the loanable funds and liquidity preference frameworks of interest rate determination,which of the following is true?
A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation.
B) The loanable funds framework provides a simpler analysis of the effects of changes in income, the price level, and the supply of money.
C) In most instances, the two approaches to interest rate determination yield the same predictions.
D) All of the above are true.
E) Only A and B of the above are true.
Q2) When the demand for bonds ________ or the supply of bonds ________,interest rates rise.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
Q3) Use the bond demand and supply framework to explain the Fisher effect and why it occurs.
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) (I)An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the left.
(II)An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q2) The risk premium on corporate bonds becomes smaller if A) the riskiness of corporate bonds increases.
B) the liquidity of corporate bonds increases.
C) the liquidity of corporate bonds decreases.
D) the riskiness of corporate bonds decreases.
E) either B or D of the above occur.
Q3) With the Obama tax increase that repealed the Bush tax cuts for high-income tax payers in 2013,the after-tax expected return on tax-free municipal bonds relative to Treasury bonds decreases.
A)True
B)False
Page 7
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) Evidence in favor of market efficiency does not include A) random-walk behavior.
B) technical analysis.
C) performance of investment analysts and mutual funds.
D) the January effect.
Q2) If the security markets are truly efficient,there is no need to pay for help selecting securities.
A)True
B)False
Q3) The efficient market hypothesis suggests that
A) investors should not try to outguess the market by constantly buying and selling securities.
B) investors do better on average if they adopt a "buy and hold" strategy.
C) buying into a mutual fund is a sensible strategy for a small investor.
D) all of the above are sensible strategies.
E) only A and B of the above are sensible strategies.
Q4) The efficient market hypothesis does not have to imply that financial markets are efficient.
A)True
B)False
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) A financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders.This is an example of economies of A) scope.
B) scale.
C) complexity.
D) information.
Q2) The ________ problem occurs when people who do not pay for information take advantage of the information that other people have paid for.
A) free-rider
B) moral hazard
C) adverse selection
D) lemons
Q3) What conflicts of interest can arise in credit-rating agencies?
Q4) The principal-agent problem is an example of the adverse selection problem that can result from asymmetric information.
A)True
B)False
Q5) What factors usually cause an increase in adverse selection?
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) In addition to having a direct effect on increasing adverse selection problems,increases in interest rates also promote financial crises by ________ firms' and households' interest payments,thereby ________ their cash flow.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Q2) Most financial crises in the United States have begun with A) a steep stock market decline.
B) an increase in uncertainty resulting from the failure of a major firm.
C) a steep decline in interest rates.
D) all of the above.
E) only A and B of the above.
Q3) An unusual feature of the "Great Recession" in the U.S.from 2007-2009 was that the crisis did not spread to European nations.
A)True
B)False
Q4) Discuss why some view the Fed as a culprit in the U.S.housing bubble during the 2000s.
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The many regional Federal Reserve banks resulted from a compromise between parties favoring
A) the establishment of a central bank and those opposed to its establishment.
B) a private central bank and those favoring a government institution.
C) the establishment of the Board of Governors in Washington, D.C., and those preferring its establishment in New York City.
D) none of the above.
Q2) The power within the Federal Reserve was effectively transferred to the Board of Governors by
A) the banking legislation of the Great Depression.
B) Supreme Court decisions in the 1950s.
C) the Depository Institutions Deregulation and Monetary Control Act of 1980.
D) the Treasury-Federal Reserve Accord of 1951.
Q3) Of all commercial banks,about ________ percent belong to the Federal Reserve System.
A) 10
B) 25
C) 33
D) 50
Q4) What are the factors that promote the independence of the Federal Reserve?
Page 11
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) The Bank of England,as well as the ECB,put price stability first among all goals. This is known as a ________.
A) hierarchical mandate
B) dual mandate
C) singular mandate
D) ubiquitous mandate
Q2) Assets on the Fed's balance sheet include
A) government securities and currency in circulation.
B) discount loans and reserves.
C) government securities and discount loans.
D) currency in circulation and reserves.
Q3) If the Fed uses the federal funds rate as an interest rate target,an increase in the demand for reserves will result in a(n)________ in ________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
Q4) Why does the Fed use open market operations to a greater extent than reserve requirements in its conduct of monetary policy?
Page 12
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Chapter 11: The Money Markets
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Sample Questions
Q1) How are Treasury bills sold? How do competitive and noncompetitive bids differ?
Q2) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds.
A)True
B)False
Q3) Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures.The security's annualized yield if held to maturity is about
A) 1.5%.
B) 2%.
C) 3%.
D) 6%.
Q4) Banker's acceptances
A) can be bought and sold until they mature.
B) are issued only by large money center banks.
C) carry low interest rates because of the very low default risk.
D) are all of the above.
E) are only A and B of the above.
Q5) What are the main characteristics of money market securities?
Q6) Explain how and why repurchase agreements would be used.
Page 13
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Chapter 12: The Bond Market
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Sample Questions
Q1) The current yield is a less accurate approximation of the yield to maturity the ________ the time to maturity of the bond and the ________ the price is from/to the par value.
A) shorter; closer
B) shorter; farther C) longer; closer D) longer; farther
Q2) A financial guarantee ensures that the lender (bond purchaser)will be paid both principal and interest in the event the issuer defaults.
A)True
B)False
Q3) Registered bonds have now been largely replaced by bearer bonds,which do not have coupons.
A)True
B)False
Q4) Capital market securities are less liquid and have longer maturities than money market securities.
A)True B)False
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Chapter 13: The Stock Market
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Sample Questions
Q1) How do corporate stocks differ from bonds?
Q2) A weakness of the PE approach to valuing stock is that it is A) difficult to estimate the constant growth rate of a firm's dividends. B) difficult to estimate the required return on equity.
C) difficult to predict how much a firm will pay in dividends. D) based on industry averages rather than firm-specific factors.
Q3) 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%.
Q4) Common stock is the riskiest corporate security,followed by preferred stock and then bonds.
A)True B)False
Q5) Why would a crisis in the subprime mortgage market lead to declining prices in the U.S.equity markets?
Q6) What are American Depository Receipts (ADRs)?
Q7) What are the objectives of the Securities and Exchange Commission?
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) The Federal Housing Administration (FHA)
A) was set up to buy mortgages from thrifts so that these institutions could make more loans.
B) funds purchases of mortgages by selling bonds to the public.
C) provides insurance for certain mortgage contracts.
D) does all of the above.
E) does only A and B of the above.
Q2) Which of the following are useful for home buyers who expect their income to fall in the future?
A) GPMs
B) RAMs
C) GEMs
D) Only A and B are useful.
E) Only A and C are useful.
Q3) Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?
Q4) Down payments are designed to reduce the likelihood of default on mortgage loans.
A)True
B)False
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits,and if the dollar is expected to appreciate at a 4 percent rate,
A) euro deposits have a higher expected return than dollar deposits.
B) the expected return on euro deposits in terms of dollars is 11 percent.
C) the expected return on dollar deposits in terms of euros is 1 percent.
D) the expected return on euro deposits in terms of dollars is 3 percent.
E) the expected return on dollar deposits equals the expected return on euro deposits.
Q2) When François the Foreigner considers the expected return on dollar deposits in terms of foreign currency,the expected return must be adjusted for
A) any expected appreciation or depreciation of the dollar.
B) the interest rates on foreign deposits.
C) both A and B of the above.
D) neither A nor B of the above.
Q3) In the short run,the quantity of dollars supplied (deposits,bonds,equities)is
A) fixed with respect to the exchange rate.
B) quite volatile and difficult to model in a supply-demand framework.
C) typically following the business cycle (procyclical).
D) is best represented with a horizontal supply curve.
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Chapter 16: The International Financial System
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Sample Questions
Q1) A dirty float is
A) when the value of a currency is pegged relative to the value of one other currency.
B) when the value of a currency is allowed to fluctuate against all other currencies.
C) when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets.
D) when the value of a currency is pegged relative to an anchor currency.
Q2) How does a sterilized foreign exchange intervention differ from an unsterilized one in terms of its effects on the exchange rate,international reserves,and the monetary base?
Q3) A managed float regime is when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets.
A)True
B)False
Q4) Describe the pros and cons for controls on capital inflows and outflows.
Q5) 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) The largest source of bank income is
A) interest on loans.
B) interest on securities.
C) service charges on deposit accounts.
D) noninterest income.
Q2) When you deposit $50 in the First National Bank,
A) its liabilities decrease by $50.
B) its assets increase by $50.
C) its reserves increase by $50.
D) only B and C of the above occur.
Q3) A loan commitment is an agreement to provide a loan up to a certain dollar amount if a customer requests the loan during a specific time period.
A)True
B)False
Q4) The amount of assets per dollar of equity capital is called the
A) asset ratio.
B) equity ratio.
C) equity multiplier.
D) asset multiplier.
E) return on equity.
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Chapter 18: Financial Regulation
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Sample Questions
Q1) As a way of stemming the decline in the number of savings and loans and mutual savings banks,the Garn-St.Germain Act of 1982 allowed
A) money market certificates.
B) money market mutual funds.
C) money market deposit accounts.
D) negotiable order of withdrawal accounts.
Q2) What accounts for the problems facing China's four largest banks?
A) Large loans to inefficient, state-owned enterprises
B) Closing of unprofitable branches and laying off unproductive employees
C) Selling shares in the bank overseas to raise capital
D) All of the above
Q3) Discuss the role of NINJA loans in the global financial crisis.
Q4) Of the following assets,the one which has the highest capital requirement under the Basel Accord is
A) municipal bonds.
B) residential mortgages.
C) commercial paper.
D) securities issued by industrialized countries' governments.
Q5) Describe the CAMELS rating system used by bank examiners.
Q6) Describe the difference between macroprudential and microprudential regulation.
Page 20
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) In a ________ banking system,commercial banks engage in securities underwriting,but separate subsidiaries conduct the different activities.Also,banking and insurance are not typically undertaken together in this system.
A) universal
B) British-style universal
C) divided
D) compartmentalized
E) severable
Q2) An electronic machine that allows customers to make deposits,get cash,transfer funds from one account to another,and check balances is
A) an automated banking machine.
B) the virtual bank.
C) an automated teller machine.
D) a smart card.
Q3) Financial innovation has widened the cost advantages that banks have in acquiring funds,helping to explain why bank profitability has soared in recent years.
A)True
B)False
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21
Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) ________ intermediation means that small investors can pool their funds with other investors to purchase high face value securities.
A) Liquidity
B) Financial
C) Denomination
D) Share
Q2) The increase in the number of defined contribution pension funds has slowed the growth of mutual funds.
A)True
B)False
Q3) Which of the following is most likely to be a no-load fund?
A) Value funds
B) Hedge funds
C) Growth funds
D) Index funds
Q4) Hedge funds have a minimum investment requirement of between $100,000 and $20 million,with the typical minimum investment being $1 million.
A)True
B)False
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) Which of the following statements regarding the funding of Social Security is false?
A) In 2010, workers contributed 6.2% of their wages up to a maximum of $106,800.
B) Employers contribute an amount equal to the workers' contributions.
C) Interest, dividend, rent, and royalty income are also taxed to provide supplemental funds for Social Security.
D) Contributions exceeding the amounts paid to current Social Security recipients are invested in Treasury bonds to build up a Social Security trust fund.
Q2) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?
A) Requiring collateral for policies
B) Risk-based premiums
C) Compensating balances
D) All of the above
E) Only A and B of the above
Q3) Why do life insurance companies and pension plans invest heavily in long-term assets?
Q4) Distinguish between different types of life insurance.
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Sample Questions
Q1) From an investment banker's perspective,the best outcome occurs when a new issue is ________.
A) undersubscribed
B) fully subscribed
C) oversubscribed
D) syndicated
Q2) By making a market in thinly traded stocks,securities dealers solve the ________ trading problem,which is of particular benefit to ________ businesses.
A) synchronous; large
B) synchronous; small
C) nonsynchronous; large
D) nonsynchronous; small
Q3) What services do investment bankers provide for firms that are issuing new securities?
Q4) The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities on behalf of its customers.
A)True
B)False
Q5) What is the difference between a venture fund and a capital buyout?
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Chapter 23: Risk Management in Financial Institutions
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Q1) Referring to Table 23.1,if interest rates rise by 5 percentage points,then bank profits (measured using gap analysis)will
A) decline by $0.5 million.
B) decline by $1.5 million.
C) decline by $2.5 million.
D) increase by $1.5 million.
Q2) Referring to Table 23.2,if interest rates rise by 5 percentage points,then bank profits (measured using gap analysis)will
A) decline by $0.5 million.
B) decline by $1.5 million.
C) decline by $2.5 million.
D) increase by $2.0 million.
Q3) Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called ________.
A) proscription bonds
B) collateral clauses
C) restrictive covenants
D) liens
Q4) Explain how banks benefit from specialization in lending.
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Chapter 24: Hedging with Financial Derivatives
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Q1) The elimination of riskless profit opportunities in the futures market is referred to as
A) speculation
B) hedging
C) arbitrage
D) open interest
E) mark to market
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) Explain how a short hedge could be used to hedge a Treasury portfolio against interest-rate risk.
Q4) Currency swaps involve the exchange of a set of payments on one currency for a set of payments in another.
A)True
B)False
Q5) Explain the difference between a macro hedge and a micro hedge for a financial institution.
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) In South Korea,the primary force leading to their financial crisis in 1997 was
A) financial liberalization
B) fiscal mismanagement on the part of the government
C) fraud in financial markets
D) all of the above
E) only B and C of the above
Q2) Describe the differences in the evolution of the financial crises in South Korea (1997-1998)and Argentina (2001-2002).
Q3) 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
Q4) In an emerging market economy,a currency crisis can be triggered by two things: a deterioration of bank balance sheets and severe fiscal imbalances.
A)True
B)False
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Chapter 26: Savings Associations and Credit Unions
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Q1) Why did the Competitive Equality in Banking Act of 1987 fail to solve the problems in the thrift industry?
Q2) The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.
A) regulatory forbearance; moral hazard
B) regulatory forbearance; adverse selection
C) regulatory stringency; moral hazard
D) regulatory stringency; adverse selection
Q3) Credit unions' main source of funds is ________.
A) regular share accounts
B) share certificates
C) share draft accounts
D) money market accounts
Q4) Credit unions are characterized by
A) mutual ownership.
B) common bond membership.
C) nonprofit, tax-exempt status.
D) all of the above.
E) none of the above.
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Chapter 27: Finance Companies
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Sample Questions
Q1) Two growth areas for consumer finance companies are
A) first mortgages and vacation financing.
B) marine vessel loans and auto loans.
C) home equity loans and educational loans.
D) home equity loans and "private label" retail credit cards.
Q2) Although finance companies are largely unregulated,they do face some regulations aimed primarily at
A) protecting unsophisticated customers.
B) the government deposit insurance.
C) large corporate customers.
D) protecting the finance companies from failure.
Q3) Finance companies face much stricter regulations than commercial banks.
A)True
B)False
Q4) In the early 1900s,banks did not offer loans to purchase automobiles.This is because A) banks could not make a profit on car loans.
B) only finance companies were permitted to offer car loans.
C) banks could not repossess a car if the loan defaulted.
D) banks did not view a car as a productive asset.
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