International Financial Markets
Question Bank
Course Introduction
International Financial Markets explores the structure, function, and dynamics of global financial systems, focusing on the roles of major institutions, instruments, and regulatory frameworks. The course examines international capital flows, foreign exchange markets, and the integration of financial markets worldwide. Topics include global stock and bond markets, international banking, derivatives, risk management, and the impact of economic policies and geopolitical events on cross-border investments. Students gain analytical tools to assess market trends and understand the mechanisms that drive globalization in finance, equipping them for careers in multinational corporations, investment firms, and regulatory bodies.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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2334 Verified Questions
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Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) Interest rates can be accurately described as the rental price of money.
A)True
B)False
Answer: True
Q2) Typically,increasing interest rates
A) discourages individuals from saving.
B) discourages corporate investments.
C) encourages corporate expansion.
D) encourages corporate borrowing.
E) none of the above.
Answer: B
Q3) (I)Banks are financial intermediaries that accept deposits and make loans.
(II)The term "banks" includes firms such as commercial banks,savings and loan associations,mutual savings banks,credit unions,insurance companies,and pension funds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: A
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Foreign currencies that are deposited in banks outside the home country are known as
A) foreign bonds.
B) Eurobond.
C) Eurocurrencies.
D) Eurodollars.
Answer: C
Q2) When the least desirable credit risks are the ones most likely to seek loans,lenders are subject to the
A) moral hazard problem.
B) adverse selection problem.
C) shirking problem.
D) free-rider problem.
E) principal-agent problem.
Answer: B
Q3) A mutual fund is not a depository institution.
A)True
B)False
Answer: True
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Page 4
Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation?
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Sample Questions
Q1) What is the purpose of discounting cash flows?
Answer: The purpose of discounting cash flows is to convert the cash flows into a common time period (i.e. discounting the cash flows into Present Worth, Future Worth or Annual Worth), so that comparison can be done among different mutually exclusive alternative investment options.
Q2) An ex post real interest rate is adjusted for ________ changes in the price level.
A) actual
B) expected
C) nominal
D) real
Answer: A
Q3) Unless a bond defaults,an investor cannot lose money investing in bonds.
A)True
B)False
Answer: False
Q4) The real interest rate is equal to the nominal rate minus inflation. A)True
B)False
Answer: True
Page 5
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Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
Q2) As expected inflation increases for the coming year,we expected the price of gold to ________ due to a rightward shift the in ________ curve.
A) increase; demand
B) increase; supply
C) decrease; demand
D) decrease; supply
Q3) In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is
A) an increase in the price of bonds.
B) a business cycle boom.
C) an increase in the expected inflation rate.
D) a decrease in the expected inflation rate.
Q4) What is the difference between systematic and nonsystematic risk?
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) The relationship among interest rates on bonds with identical default risk but different maturities is called the
A) time-risk structure of interest rates.
B) liquidity structure of interest rates.
C) yield curve.
D) bond demand curve.
Q2) According to the expectations theory of the term structure,
A) the interest rate on long-term bonds will exceed the average of expected future short-term interest rates.
B) interest rates on bonds of different maturities move together over time.
C) buyers of bonds prefer short-term to long-term bonds.
D) all of the above.
E) only A and B of the above.
Q3) During the budget negotiations in Congress in 1995-1996,and then again in 2011-2013,the Republicans threatened to let Treasury bonds default,and this had an impact on the bond market.
A)True
B)False
Q4) Discuss what is shown by a yield curve.
Page 7
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) If the markets are efficient,the optimal investment strategy will be to buy and hold so as to minimize transaction costs.
A)True
B)False
Q2) The efficient market hypothesis
A) is based on the assumption that prices of securities fully reflect all available information.
B) holds that the expected return on a security equals the equilibrium return.
C) both A and B.
D) neither A nor B.
Q3) The efficient markets hypothesis is weakened by evidence that A) stock prices tend to follow a random walk.
B) stock prices are more volatile than fluctuations in their fundamental values can explain.
C) technical analysis does not outperform the overall market.
D) an investment adviser's past success or failure at picking stocks does not predict his or her future performance.
Q4) How do loss aversion,overconfidence of investors,and social contagion affect market efficiency?
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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 by engaging in multiple activities.These are called economies of
A) scope.
B) scale.
C) complexity.
D) information.
Q2) Equity contracts account for a small fraction of external funds raised by American businesses because
A) costly state verification makes the equity contract less desirable than the debt contract.
B) there is greater scope for moral hazard problems under equity contracts, as compared to debt contracts.
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt.
D) all of the above.
E) both A and B of the above.
Q3) What factors usually cause an increase in moral hazard?
Q4) Why should we be concerned about conflicts of interest in the financial services industry?
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) Discuss why some view the Fed as a culprit in the U.S.housing bubble during the 2000s.
Q2) Factors that lead to worsening conditions in financial markets include
A) increases in interest rates.
B) declining stock prices.
C) increasing uncertainty in financial markets.
D) all of the above.
E) only A and B of the above.
Q3) Describe the sequence of events in a financial crisis in an advanced economy and explain why they can cause economic activity to decline.
Q4) In Europe,Greece was the first nation to face a debt crisis.
A)True
B)False
Q5) The Internet stock market bubble of the late 1990s led to one of the worst financial crises in U.S.history.Banks lost billions of dollars as Internet companies went bankrupt. A)True
B)False
Q6) Explain the relationship between agency theory and a financial crisis.
Q7) Describe how the European debt crisis evolved.
Page 10
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The directors of a district bank are classified into three categories: A,B,and C.The three B directors are
A) professional bankers.
B) prominent leaders from industry, labor, agriculture, or the consumer sector.
C) elected by the board of governors to represent the public interest.
D) all of the above.
Q2) Politicians in a democratic society may be shortsighted because of their desire to win reelection; thus,the political process can
A) impart an inflationary bias to monetary policy.
B) impart a deflationary bias to monetary policy.
C) generate a political business cycle in which, just before an election, expansionary policies are pursued to lower unemployment and interest rates.
D) cause both A and C of the above to occur.
Q3) 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.
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate.
A)True
B)False
Q2) Inflation targeting makes the central bank less accountable.
A)True
B)False
Q3) 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.
Q4) List and describe the various assets and liabilities making up the consolidated balance sheet of the Federal Reserve System.
Q5) The federal funds rate is an operating target.
A)True
B)False
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Chapter 11: The Money Markets
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Sample Questions
Q1) The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount.
A)True
B)False
Q2) Commercial paper securities
A) are issued only by the largest and most creditworthy corporations, as they are unsecured.
B) carry an interest rate that varies according to the firm's level of risk.
C) never have a term to maturity that exceeds 270 days.
D) all of the above.
E) only A and B of the above.
Q3) The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system.
A)True
B)False
Q4) Explain why banks,which would seem to have a comparative advantage in gathering information,have not eliminated the need for the money markets.
Q5) What are the major types of securities and who are the major participants in the money markets?
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Chapter 12: The Bond Market
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Sample Questions
Q1) A change in the current yield ________ signals a change in the same direction of the yield to maturity.
A) never
B) rarely
C) always
D) often
Q2) The Commodity Futures Modernization Act (2000)removed derivative securities,such as CDSs,from regulatory oversight.This change opened the door for speculators to bet on the health of a company or pool of assets,and was certainly a culprit in the 2007-2009 financial crisis.Why did Congress pass such legislation?
Q3) Corporations may enter the capital markets because
A) they do not have sufficient capital to fund their investment opportunities.
B) they want to preserve their capital to protect against expected needs.
C) it is required by the Securities and Exchange Commission (SEC).
D) none of the above.
Q4) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation.
A)True
B)False
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Chapter 13: The Stock Market
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Sample Questions
Q1) According to the Gordon growth model,what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 11 percent?
A) $110
B) $100
C) $11
D) $10
E) $5.24
Q2) Preferred stockholders hold a claim on assets that has priority over the claims of
A) both common stockholders and bondholders.
B) neither common stockholders nor bondholders.
C) common stockholders, but after that of bondholders.
D) bondholders, but after that of common stockholders.
Q3) A stock's market value will be higher the higher the investor's required rate of return is,all else being equal.
A)True
B)False
Q4) 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) An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger loan than if they requested a conventional mortgage.
A)True
B)False
Q2) What are points? What is their purpose?
Q3) A loan for borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income is
A) a subprime mortgage.
B) a securitized mortgage.
C) an insured mortgage.
D) a graduated-payment mortgage.
Q4) Closing for a mortgage loan refers to the moment the loan is paid off.
A)True
B)False
Q5) What are mortgage-backed securities,why were they developed,what types of mortgage-backed securities are there,and how do they work?
Q6) Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system?
Page 16
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) When the value of the dollar changes from 0.50 pounds to 0.75 pounds,the pound has appreciated and the dollar has depreciated.
A)True
B)False
Q2) If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar,the euro depreciates from ________ dollars to ________ dollars per euro.
A) 1.25; 0.83
B) 0.83; 1.25
C) 0.67; 1.50
D) 1.50; 0.67
Q3) A rise in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.
A) domestic; right
B) domestic; left
C) foreign; right
D) foreign; left
Q4) Explain graphically how a change in the foreign interest rate will affect exchange rates.
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Chapter 16: The International Financial System
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Sample Questions
Q1) Under a fixed exchange rate system,
A) an anchor country loses control over its monetary policy.
B) a country that ties its currency to that of another country gains control of the other country's monetary policy.
C) a country that ties its currency to that of another country loses control over its monetary policy.
D) a country that ties its currency to that of another country acquires greater control over its monetary policy.
Q2) Holding other factors constant,which of the following would increase the size of the U.S.current account deficit?
A) Sales of U.S. farm products in Europe
B) Visits by European tourists to the United States
C) Increasing travel by American college students in Europe
D) Both A and B of the above
Q3) How does a fixed exchange rate regime differ from a system of floating exchange rates?
Q4) Briefly explain what it means to be a "reserve-currency" country.What are the advantages? Can you think of any disadvantages?
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) The share of bank operating income earned from off-balance-sheet activities has increased over the past two decades.
A)True
B)False
Q2) ________ were once the most common type of nontransaction deposit.
A) Checking accounts
B) Time deposits
C) Savings accounts
D) none of the above
Q3) Which of the following are not reported as assets on a bank's balance sheet?
A) Cash items in the process of collection
B) Deposits with other banks
C) U.S. Treasury securities
D) Checkable deposits
Q4) Given a bank's return on assets,the higher the bank capital,the higher the return for the owners of the bank.
A)True
B)False
Page 19
Q5) How did liability management change during the 1960s?
Q6) What costs do banks hope to avoid by holding excess reserves?
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Chapter 18: Financial Regulation
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Sample Questions
Q1) Banks do not want to hold too much capital because
A) they do not bear fully the costs of bank failures.
B) higher returns on equity are earned when bank capital is smaller, all else equal.
C) higher capital levels attract the scrutiny of regulators.
D) all of the above.
E) only A and B of the above.
Q2) The legislation that separated commercial banking from the securities industry is known as the ________.
A) National Bank Act
B) Federal Reserve Act
C) Glass-Steagall Act
D) McFadden Act
Q3) According to some economists,Congress made a mistake when it passed the FDICIA of not requiring the FDIC to assess risk-based insurance premiums.
A)True
B)False
Q4) Describe the CAMELS rating system used by bank examiners.
Q5) Discuss some of the recent banking crises throughout the world.
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) The future structure of the U.S.banking industry is likely to be characterized by many more smaller banks,as customers demand neighborhood banks operated by people they know personally.
A)True
B)False
Q2) Which of the following is a reason for the rapid expansion of international banking?
A) The rapid growth in international trade
B) The growth of multinational corporations
C) The desire of U.S. banks to expand
D) All of the above
Q3) Adjustable-rate mortgages
A) benefit homeowners when interest rates are falling.
B) reduce financial institutions' interest-rate risk.
C) reduce households' risk of having to pay higher mortgage payments when interest rates rise.
D) do only A and B of the above.
Q4) When and why was the Glass-Steagall Act passed? When and why was it repealed?
Q5) Are bank consolidations and nationwide banking good things? Why?
Q6) What financial innovations are best explained as attempts to avoid regulations?
Page 22
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) The origins of mutual funds can be traced back to the mid to late 1800s in
A) England and Scotland
B) New York City
C) Boston
D) Germany
Q2) How is an index fund different from the other four primary investment objective classes for mutual funds?
Q3) Mutual fund companies frequently offer a number of separate mutual funds called ________.
A) indexes
B) complexes
C) components
D) actuaries
Q4) A deferred-load mutual fund charges a commission
A) when shares are purchased.
B) when shares are sold.
C) both when shares are purchased and when they are sold.
D) when shares are redeemed.
Q5) Discuss the four primary classes of mutual funds available to investors.
Page 23
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?
A) Collection of information and screening of potential policyholders
B) Risk-based premiums
C) Deductibles and coinsurance
D) All of the above
E) Only A and B of the above
Q2) Privatization of Social Security
A) would transform the program from an unfunded pay-as-you-go system to a fully funded pension plan.
B) would mean that workers' current contributions to Social Security would no longer be available to pay benefits to current retirees.
C) receives less public support when the stock market declines.
D) all of the above
E) none of the above
Q3) A defined-contribution plan promises employees a specific amount of retirement income.
A)True
B)False
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Page 24
Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Q1) The largest full-service broker is ________ with about 17,000 financial advisors and $2.2 trillion in client assets.
A) Bank of America Merrill Lynch
B) Charles Schwab Corp.
C) Ameritrade
D) Smith Barney
Q2) Which of the following is not a characteristic feature of venture capital firms?
A) Funding just one or a small number of firms
B) Holding equity in the firms that are funded
C) Having a long-term investment horizon
D) Providing advice and assistance to the firms that are funded
Q3) When a firm issues stock for the first time in an initial public offering,it is difficult for an investment bank to determine what the correct price should be.
A)True
B)False
Q4) How do venture capital firms overcome the problem of information asymmetries that accompany start-up firms?
Q5) Discuss the life cycle of a equity buyout.
Q6) Describe the differences between securities brokers and securities dealers.
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Chapter 23: Risk Management in Financial Institutions
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Q1) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called
A) basic gap analysis.
B) the segmented maturity approach to gap analysis.
C) the maturity bucket approach to gap analysis.
D) the segmented maturity approach to interest-exposure analysis.
E) none of the above.
Q2) Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans,banks
A) ration credit, granting borrowers smaller loans than they have requested.
B) ration credit, charging higher interest rates to borrowers who want large loans than to those who want small loans.
C) ration credit, charging higher fees as a percentage of the loan to borrowers who want large loans than to those who want small loans.
D) do none of the above.
Q3) How is credit risk related to the concepts of adverse selection and moral hazard?
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Chapter 24: Hedging with Financial Derivatives
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Q1) Explain how option contracts could be used to protect against losses in portfolio value that may occur as interest rates increase.
Q2) If a firm must pay for goods it has ordered with foreign currency,it can hedge its foreign exchange rate risk by
A) selling foreign exchange futures short.
B) buying foreign exchange futures long.
C) staying out of the exchange futures market.
D) doing none of the above.
Q3) The agency responsible for regulation of the futures exchanges and trading in financial futures is the
A) Commodity Futures Trading Commission. B) Securities and Exchange Commission.
C) Federal Trade Commission.
D) Futures Exchange Commission.
Q4) Explain the advantages of protecting against interest-rate risk using options rather than futures contracts.
Q5) Option premiums fall as the volatility of the underlying asset falls. A)True B)False
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) 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
Q2) The experience with financial crises in emerging market economies suggests a number of government policies that can help make financial crises in emerging market countries less likely,including
A) rapid financial liberalization.
B) better bank risk disclosure.
C) limiting the currency mismatch.
D) all of the above.
E) only B and C of the above.
Q3) 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.
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Chapter 26: Savings Associations and Credit Unions
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Q1) Discuss the background of mutual savings banks and how this lead to the creation of S&Ls.
Q2) The mutual form of ownership accentuates the principal-agent problem that exists in corporations.
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) 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
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Chapter 27: Finance Companies
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Q1) By the beginning of 2013,banks held $1,191 billion in consumer loans.Finance companies held about ________ of that figure.
A) 42%
B) 68%
C) 90%
D) 117%
Q2) In 2013,the largest portion of loans made by finance companies was ________,representing 60% of the loans.
A) consumer loans
B) factoring loans
C) business loans
D) real estate
Q3) In factoring,a finance company makes a loan and
A) purchases the firm's accounts receivables at a premium.
B) purchases the firm's accounts payables at a premium.
C) purchases the firm's accounts receivables at a discount.
D) purchases the firm's accounts payables at a discount.
Q4) Describe the process of factoring? When and why is it used?
Q5) What are the various types of finance companies?
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