International Financial Markets Final Test Solutions - 1265 Verified Questions
International Financial Markets
Final Test Solutions
Course Introduction
International Financial Markets explores the structure, function, and dynamics of financial markets operating across national boundaries. The course examines major global financial institutions, the roles of currencies, exchange rate mechanisms, and financial instruments such as bonds, equities, and derivatives. Key topics include the impact of globalization on capital flows, regulatory frameworks, financial crises, risk management, and the interplay between developed and emerging markets. Students will gain an understanding of how international financial markets influence investment, corporate finance decisions, and economic policy in a rapidly changing global environment.
Recommended Textbook
Financial Markets and Institutions 6th Edition by Anthony Saunders
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Money markets trade securities that
I. mature in one year or less.
II. have little chance of loss of principal.
III. must be guaranteed by the federal government.
A)I only
B)II only
C)I and II only
D)I and III only
E)I,II,and III
Answer: C
Q2) Which of the following are capital market instruments?
A)10-year corporate bonds
B)30-year mortgages
C)20-year Treasury bonds
D)15-year U.S. government agency bonds
E)All of the options
Answer: E
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Page 3
Chapter 2: Determinants of Interest Rates
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Q1) For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows,and the future value of the same annuity will be greater than the sum of the cash flows.
A)True
B)False
Answer: True
Q2) An annuity and an annuity due with the same number of payments have the same future value if r = 10%. Which one has the higher payment?
A)An annuity and an annuity due cannot have the same future value.
B)There is no way to tell which has the higher payment.
C)The annuity due has the higher payment.
D)They both must have the same payment since the future values are the same.
E)The annuity has the higher payment.
Answer: E
Q3) Simple interest calculations assume that interest earned is never reinvested.
A)True
B)False
Answer: True
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4
Chapter 3: Interest Rates and Security Valuation
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Q1) A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?
A)$1,261.32
B)$1,253.12
C)$1,250.94
D)$1,263.45
E)$1,264.79
Answer: A
Q2) A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?
A)The bond was purchased at a premium to par.
B)The coupon rate was 8 percent.
C)The required return was greater than 6 percent.
D)The coupons were reinvested at a higher rate than expected.
E)The bond must have been a zero coupon bond.
Answer: D
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5
Chapter 4: The Federal Reserve System, Monetary Policy, and Interest
Rates
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Q1) The major monetary policy-making arm of the Federal Reserve is the A)Board of Governors.
B)Council of Federal Reserve Bank presidents.
C)Office of the Comptroller of the Currency.
D)Federal Reserve Bank of New York.
E)none of the options
Q2) Four seats on the Federal Open Market Committee (FOMC)are allocated to Federal Reserve Bank presidents on an annual rotating basis.
A)True
B)False
Q3) A bank has $770 million in checkable deposits. The bank has $85 million in reserves. The bank's required reserves are _____________ and its excess reserves are
A)$85 million; $0
B)$770 million; $85 million
C)$89 million; $21 million
D)$685 million; $8.5 million
E)$77 million; $8 million
Q4) What are the four major functions of the Federal Reserve System?
Q5) Explain how the deposit multiplier works.
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Chapter 5: Money Markets
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Q1) Euro commercial paper is a short-term obligation of the European Central Bank.
A)True
B)False
Q2) The majority of money market securities are low-denomination,low-risk investments designed to appeal to individual investors with excess cash.
A)True
B)False
Q3) If your firm enters into an overnight reverse repurchase agreement,your firm is
A)borrowing Fed funds temporarily.
B)selling a security now while agreeing to buy it back tomorrow.
C)giving an unsecured loan to the counterparty.
D)procuring a banker's acceptance.
E)none of the options
Q4) In a Treasury auction,preferential bidding status is granted to A)competitive bidders.
B)noncompetitive bidders.
C)short sale committed bidders.
D)commercial bank bidders.
E)no group of bidders.
Q5) How does a banker's acceptance (BA)help create more international trade?
Page 7
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Chapter 6: Bond Markets
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Sample Questions
Q1) You find the following quote for a corporate bond ($1,000 par,paying interest semiannually):
Q2) Which of the following statements about Eurobonds is/are true?
I. The issuer chooses the currency of denomination.
II. Spreads on firm commitment offers are lower for Eurobonds than for U.S. bonds.
III. Eurobonds typically have denomination of $5,000 and $10,000.
IV. Eurobonds are bearer bonds.
A)I and II only
B)I,III,and IV only
C)II,III,and IV only
D)II and III only
E)I,II,III,and IV are true
Q3) Which one of the following bonds is likely to have the highest required rate of return,ceteris paribus?
A)AAA-rated non-callable corporate bond with a sinking fund
B)AA-rated callable corporate bond with a sinking fund
C)AAA-rated callable corporate bond with a sinking fund
D)High-quality municipal bond
E)AA-rated callable corporate bond without a sinking fund
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Page 8
Chapter 7: Mortgage Markets
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Sample Questions
Q1) How does GNMA improve mortgage marketability?
Q2) Explain each term of the following pass-through quote:
Q3) If a borrower makes a 20 percent down payment on a conventional mortgage,she will be required to obtain
A)FHA insurance.
B)VA insurance.
C)private mortgage insurance.
D)GNMA payment guarantees.
E)none of the options.
Q4) Construct an amortization schedule for the first three months and the final three months of payments for a 30-year,7 percent mortgage in the amount of $90,000. What percentage of the third payment is principal? What percentage of the final payment is principal?
What do these differences imply?
(Hint: The balance after the 357<sup>th</sup> payment is $1,775.56.)
Q5) Why do mortgage lenders prefer ARMs while many borrowers prefer fixed-rate mortgages,ceteris paribus.
Q6) Why were CMOs created?
Page 9
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Chapter 8: Stock Markets
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Q1) In the event of bankruptcy,a firm's janitor must be paid all of the salary owed to him before stockholders receive anything.
A)True
B)False
Q2) In terms of volume of trading and market value of firms traded,the _____________ is the largest U.S. stock market. In terms of number of firms traded,the ___________ is the largest in the United States.
A)NYSE; NYSE
B)NASDAQ; NYSE
C)NYSE; AMEX
D)NYSE; NASDAQ
E)NASDAQ; AMEX
Q3) In 2007 the NYSE merged with _________________.
A)Nasdaq
B)Euronext
C)American Exchange
D)Chicago Mercantile Exchange
E)London Stock Exchange
Q4) Answer the following questions concerning the given partial stock quote:
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Chapter 9: Foreign Exchange Markets
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Q1) If you can convert 150 Swiss francs to $90,the exchange rate is 1.67 francs per dollar.
A)True
B)False
Q2) Which of the following conditions may lead to a decline in the value of a country's currency?
I. Low interest rates
II. High inflation
III. Large current account deficit
A)I only
B)I and II only
C)II and III only
D)II only
E)III only
Q3) Explain how a drop in the value of the dollar could affect the U.S. import and export sectors.
Q4) If the euro per yen ratio falls,the value of the yen has risen.
A)True
B)False
Q5) What are the major purposes of the foreign exchange markets?
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Chapter 10: Derivative Securities Markets
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Sample Questions
Q1) The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases.
A)True
B)False
Q2) By convention,a swap buyer on an interest rate swap agrees to
A)periodically pay a fixed rate of interest and receive a floating rate of interest.
B)periodically pay a floating rate of interest and receive a fixed rate of interest.
C)swap both principal and interest at contract maturity.
D)back both sides of the swap agreement.
E)act as the dealer in the swap agreement.
Q3) When would a forward contract be better for hedging than a futures contract?
Q4) Forward contracts are marked to market daily. A)True B)False
Q5) When would an option hedge be better than a futures or forward hedge?
Q6) European-style options are options that may only be exercised at maturity. A)True B)False
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Chapter 11: Commercial Banks: Industry Overview
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Q1) Advantages of going global for U.S. banks include all but which one of the following?
A)Diversification of earnings
B)Greater opportunities to exploit economies of scale
C)Greater sources of funds
D)Conducting business in less regulated environments
E)Low fixed costs involved in international expansion
Q2) Banks differ from other types of depository institutions in that
I. banks have more diversified asset portfolios.
II. banks obtain funds from more different types of sources.
III. the average size bank is larger than other depository institutions.
A)I only
B)I and II only
C)I and III only
D)II and III only
E)I,II,and III
Q3) Business loans have dropped in importance since 1987 as measured by the proportion of these loans on the bank balance sheet.
A)True
B)False
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Page 13
Chapter 12: Commercial Banks Financial Statements and Analysis
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Q1) If a bank has more purchased funds than the average bank,you would not be surprised to see a higher than average ____________________ ratio.
A)provision for loan loss
B)tax
C)noninterest expense
D)interest expense
E)none of the options
Q2) C&I loans are loans to businesses used to finance capital needs,equipment purchases,and plant expansions.
A)True
B)False
Q3) a(n.__________________ is a contra asset account.
A)loan commitment
B)provision for loan and lease losses
C)allowance for loan and lease losses
D)net charge-off
Q4) Rate-sensitive funding sources at a bank are termed core deposits.
A)True
B)False
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Chapter 13: Regulation of Commercial Banks
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Sample Questions
Q1) Areas of commercial bank regulation designed to encourage banks to lend to socially important sectors such as housing and farming are termed ______________________ regulations.
A)safety and soundness
B)consumer protection
C)investor protection
D)credit allocation
E)monetary policy
Q2) The FDIC may require an undercapitalized bank to
I. provide the FDIC with a capital restoration plan.
II. cease acquiring brokered deposits.
III. obtain FDIC approval for all acquisitions.
IV. suspend dividends and management fees.
V. suspend payments on subordinated debt.
A)I and II only
B)III only
C)I,II,III,and IV only
D)I,II,III,IV,and V
E)I,II,III,and V only
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Page 15
Chapter 14: Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies
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Q1) The U.S. Central Credit Union and the corporate credit union
A)are the primary regulators of the credit union industry.
B)pool funds and provide investment services to local credit unions.
C)serve as the trade organization for the industry.
D)charter credit unions.
E)provide deposit insurance for credit unions.
Q2) Rank the following from greatest to smallest in terms of industry asset size in 2010.
I. Banks
II. Savings institutions
III. Credit unions
IV. Finance companies
A)IV,I,II,III
B)I,IV,II,III
C)I,II,IV,III
D)I,II,III,IV
E)II,IV,III,I
Q3) In a mutual organization,the depositors are owners of the institution.
A)True
B)False
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Chapter 15: Insurance Companies
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Sample
Questions
Q1) What additional flexibilities are provided by variable and universal life as compared to a standard whole life or endowment policy?
Q2) A 65-year-old person has saved $1,250,000 and wishes to receive 10 annual annuity payments,beginning in one year. If the annuity rate is 5.75 percent,he can expect to receive $167,829 per year.
A)True
B)False
Q3) The McFadden Act grants states the primary right to regulate insurance companies. A)True
B)False
Q4) How do insurance guarantee funds differ from bank deposit insurance funds?
Q5) Property loss risk is generally easier to estimate than liability loss risk. A)True
B)False
Q6) Most states maintain a permanent reserve fund to resolve insurance company failures.
A)True B)False
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Chapter 16: Securities Firms and Investment Banks
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Q1) What did the Sarbanes-Oxley Act do to try and prevent additional scandals at corporations?
What more needs to be done to prevent additional scandals among investment bankers?
Q2) Diversified full-line investment banks act as both broker dealers and securities underwriters.
A)True
B)False
Q3) Although an investor can write checks on a cash management account held with a broker,regulations prevent the use of ATMs or debit cards on these accounts.
A)True
B)False
Q4) In a best efforts offering,the investment banker acts as an agent for the issuer rather than as a principal.
A)True
B)False
Q5) What are the major types of firms in the investment banking industry? Briefly describe each.
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Page 18
Chapter 17: Investment Companies
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Q1) If you invest $10,000 in a mutual fund with a NAV of $50 per share and a 5.5 percent back-end load,you will receive less than 200 shares in the fund. A back-end load is not paid until fund shares are sold.
A)True
B)False
Q2) A hedge fund that goes long in a convertible bond and short in the equity of the same firm is employing a market neutral arbitrage strategy.
A)True
B)False
Q3) You are considering purchasing shares in a typical mutual fund that has three classes of shares outstanding: Class A,Class B,and Class C. If you purchase Class A shares,you will pay
A)a back-end load and no 12b-1 fees.
B)a front-end load and a small 12b-1 fee.
C)no front-end load but a back-end load.
D)a back-end load and full 12b-1 fees.
Q4) How are hedge fund expenses different from mutual fund expenses?
What are hurdle rates and high water marks at a hedge fund? Why are these used?
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Chapter 18: Pension Funds
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Questions
Q1) An employee who has worked for his firm for 30 years can retire right now and receive a constant annual benefit of $45,000. He has a final pay plan that pays his average salary over his final five years times 2 percent times years of service. He has decided he will keep working five more years but only if by doing so his retirement benefits will grow at 6 percent per year. How much would his expected average salary (to the nearest dollar)have to be over the next five years to keep him working?
A)$54,198
B)$86,029
C)$51,617
D)$66,911
E)$53,147
Q2) Social Security began running a deficit for the first time in what year?
A)1990
B)1995
C)2000
D)2005
E)2010
Q3) Why do employees increasingly prefer defined contribution plans to defined benefit plans?
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Page 20
Chapter 19: Types of Risks Incurred by Financial Institutions
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Q1) Assets in a bank's trading book tend to be held for a longer time than assets held in the banking book.
A)True
B)False
Q2) Rank order the net charge-off rates from high to low for the following loan types:
I. C&I loans.
II. Credit card loans.
III. Real estate loans.
A)I,II,III
B)I,III,II
C)II,I,III
D)II,III,I
E)III,I,II
Q3) CHIPS and ACH are
A)potato products of Frito Lay.
B)check clearing systems run by the Federal Reserve.
C)retail payment systems used in Europe.
D)international bank regulators.
E)wholesale electronic payment systems.
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Page 21
Chapter 20: Managing Credit Risk on the Balance Sheet
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Q1) Describe the credit analysis process for a mid-market corporate loan applicant.
Q2) A corporate loan applicant has cash of $40,receivables of $50,and inventory of $20. The applicant also has current debts of $65. If the bank's policy requires a current ratio of 1.75 or better and an acid test ratio of 1.25 or better would the applicant receive the loan?
A)Yes,because the applicant's current ratio and acid test ratios are acceptable.
B)No,because the applicant's current ratio and acid test ratios are both unacceptable.
C)No,because although the applicant's current ratio is acceptable,its acid test ratio is not.
D)No,because although the applicant's acid test ratio is acceptable,its current ratio is not.
Q3) A firm's cash account grew by $300 over the year when the firm had cash flow from financing of -$150 and cash flow from investing of $100. The firm's operating cash flow must have been +$250.
A)True
B)False
Q4) For most business loans,growing earnings are not a sufficient reason to grant a loan. Why?
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22
Chapter 21: Managing Liquidity Risk on the Balance Sheet
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Q1) How does reliance on purchased liquidity rather than core deposits affect a bank?
I. Increases the risk of a liquidity crisis
II. Allows the bank to adjust to deposit drains without affecting bank size
III. Increases overall interest sensitivity of the bank's profits to interest rates
A)I only
B)II only
C)I and II only
D)II and III only
E)I,II,and III
Q2) When calculating the liquidity index,the larger the discount from fair value,the ______________ the liquidity index; and the _________________ the liquidity risk the FI faces.
A)larger; greater
B)smaller; greater
C)larger; lower
D)smaller; lower
Q3) Explain how liquidity risk can lead to insolvency risk.
Q4) You have the following data for a bank (Million $):
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Chapter 22: Managing Interest Rate Risk and Insolvency
Risk on the Balance Sheet
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Q1) For a nine-month maturity bucket,the bank has _________________ in fixed-rate assets and _________________ in fixed-rate liabilities.
A)$425; $285
B)$285; $425
C)$285; $359
D)$359; $285
E)$250; $66
Q2) A bank has a positive repricing gap. This implies that A)some RSAs are financed by fixed-rate liabilities. B)some RSLs are financing fixed-rate assets.
C)some RSAs are financing equity.
D)the bank has no fixed-rate assets.
Q3) What are three major weaknesses of the repricing model?
Q4) An FI's balance sheet is characterized by long-term fixed-rate assets funded by short-term variable-rate securities. Most likely the bank has a A)positive repricing gap and a positive duration gap. B)positive repricing gap and a negative duration gap. C)negative repricing gap and a positive duration gap. D)negative repricing gap and a negative duration gap.
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Chapter 23: Managing Risk Off the Balance Sheet With
Derivative Securities
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Q1) Which of the following requires daily cash flow settlements between the parties?
A)Forward contract
B)Futures contract
C)Purchased options contract
D)Swap contract
E)Collars
Q2) The safest way to hedge a bond liability with options is to
A)purchase a call option on the bond.
B)write a call option on the bond.
C)purchase a put option on the bond.
D)write a put option on the bond.
Q3) A bank with a negative repricing gap could enter into a swap to pay a fixed rate of interest and receive a variable rate of interest to effectively reduce its repricing gap.
A)True
B)False
Q4) What are the advantages and disadvantages of forwards versus futures contracts?
Q5) A spot contract is an immediate delivery versus payment contract.
A)True
B)False
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Chapter 24: Managing Risk Off the Balance Sheet With Loan
Sales and Securitization
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Q1) If mortgage interest rates fall and prepayments occur,the holder of a GNMA pass-through selling at a _____ will have a _____. I. discount; capital gain
II. premium; capital loss
III. discount; capital loss
IV. premium; capital gain
A)I only
B)I and III only
C)I and II only
D)II and IV only
E)III and IV only
Q2) Why are MBBs the least used form of mortgage securitization?
Q3) A loan that finances a merger or acquisition that results in a high-leverage ratio for the borrower is called a
A)correspondent loan.
B)CMO.
C)HLT loan.
D)low-recourse loan.
E)distressed loan.
Q4) What loans,other than mortgages,are currently being securitized?
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