International Financial Markets
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Course Introduction
International Financial Markets explores the structure, functions, and operations of financial markets on a global scale. The course examines the key institutions, instruments, and participants that shape cross-border financial flows, including banks, multinational corporations, markets for foreign exchange, equities, bonds, and derivatives. Students will analyze the impact of globalization, regulatory environments, and economic policies on international capital movements and exchange rates. Real-world case studies and current events are used to critically assess risk management strategies and the influence of macroeconomic factors on global financial stability and investment decisions.
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Financial Markets and Institutions 9th Edition by Jeff
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Page 2
Madura
Chapter 1: Role of Financial Markets and Institutions
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Q1) ____ maintain a larger amount of assets in aggregate than the other types of depository institutions.
A)Credit unions
B)Commercial banks
C)Life insurance companies
D)Savings institutions
Answer: B
Q2) Debt securities are certificates that represent debt (borrowed funds) by the issuer.
A)True
B)False Answer: True
Q3) Treasury bonds have a maturity of one to three years.
A)True
B)False
Answer: False
Q4) The credit crisis in the 2008-2009 period was caused by weak economies in Asia.
A)True
B)False Answer: False
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Chapter 2: Determination of Interest Rates
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Q1) The Fisher effect states that the
A)nominal interest rate equals the expected inflation rate plus the real rate of interest.
B)nominal interest rate equals the real rate of interest minus the expected inflation rate.
C)real rate of interest equals the nominal interest rate plus the expected inflation rate.
D)expected inflation rate equals the nominal interest rate plus the real rate of interest.
Answer: A
Q2) Assume that foreign investors who have invested in U.S.securities decide to increase their holdings of U.S.securities.This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S.interest rates.
A)decrease; upward
B)decrease; downward
C)increase; downward
D)increase; upward
Answer: C
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4
Chapter 3: Structure of Interest Rates
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Q1) The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.
A)negatively; negatively
B)positively; positively
C)negatively; positively
D)positively; negatively
Answer: B
Q2) According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.
A)upward; upward
B)downward; downward
C)upward; downward
D)downward; upward
Answer: C
Q3) Treasury securities are exempt from federal and state income taxes.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Functions of the Fed
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Q1) Assume that the reserve requirements ratio is 15%.An initial injection of $150 million could result in a maximum change in the money supply of
A)$150 million.
B)$1 billion.
C)$1 million.
D)$22.5 million.
Q2) Which of the following is an action that the Fed uses to increase or decrease the money supply?
A)buying or selling Treasury securities in the secondary market
B)adjusting the tax rate imposed on income earned on Treasury securities
C)adjusting the coupon rate on Treasury bonds
D)selling Treasury securities in the primary market
Q3) The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply.
A)lower; less
B)lower; greater
C)greater; less
D)B and C
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Chapter 5: Monetary Policy
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Q1) A passive monetary policy adjusts money supply automatically in response to economic conditions.
A)True
B)False
Q2) The time between when the Fed adjusts the money supply and when interest rates change reflects the
A)recognition lag.
B)implementation lag.
C)impact lag.
D)open-market lag.
Q3) According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase.
A)higher; reduce
B)higher; increase
C)lower; reduce
D)lower; increase
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Chapter 6: Money Markets
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Q1) Bullock Corp.purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period.The repo rate is ____ percent.
A)7.08
B)6.95
C)6.99
D)7.04
E)none of the above
Q2) Which of the following is not a money market instrument?
A)banker's acceptance
B)commercial paper
C)negotiable CDs
D)repurchase agreements
E)all of the above are money market instruments
Q3) ____ are the most active participants in the federal funds market.
A)Savings and loan associations
B)Securities firms
C)Credit unions
D)Commercial banks
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Page 8
Chapter 7: Bond Markets
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Q1) ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.
A)Competitive
B)Noncompetitive
C)Negotiable
D)Non-negotiable
Q2) When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions.The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.
A)auction-rate securities
B)structured notes
C)leveraged notes
D)stripped securities
Q3) Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time.
A)True
B)False
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Chapter 8: Bond Valuation and Risk
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Q1) A zero-coupon bond makes no coupon payments.
A)True
B)False
Q2) An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.
A)True
B)False
Q3) International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.
A)True
B)False
Q4) Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?
A)short-term, high-coupon
B)short-term, low-coupon
C)long-term, high-coupon
D)long-term, zero-coupon
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) The credit crisis is mostly attributed to the use of:
A)excessively strict criteria applied by mortgage originators.
B)excessively liberal criteria applied by mortgage originators.
C)very tough credit ratings applied to mortgages.
D)fixed-rate mortgages with excessively long terms to maturity.
Q2) A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.
A)True
B)False
Q3) The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____.
A)originator's; borrower
B)borrower's; originator
C)government's; originator
D)none of the above
Q4) A financial institution may service a mortgage even after selling it.
A)True
B)False
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11
Chapter 10: Stock Offerings and Investor Monitoring
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Q1) Which of the following is not true with respect to preferred stock?
A)Preferred stock usually does not allow for significant voting rights.
B)If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy.
C)Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend.
D)Payment of preferred dividends is not a tax-deductible expense.
E)All of the above are true.
Q2) The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.
A)True
B)False
Q3) Analysts periodically communicate with high-level managers of the firms whose stock they rate.
A)True
B)False
Q4) If the secondary market is inactive, then the shares would be illiquid.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Q1) Which of the following is not commonly used as the estimate of a stock's volatility?
A)the estimate of its standard deviation of returns over a recent period
B)the trend of historical standard deviations of returns over recent periods
C)the implied volatility derived from an option pricing model
D)the estimate of its option premium derived from an option pricing model
Q2) Kudrow stock just paid a dividend of $4.76 per share and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently.The required rate of return is 15 percent.The value of Kudrow stock, according to the dividend discount model, is $____.
A)39.67
B)41.67
C)33.33
D)31.73
E)none of the above
Q3) The Sharpe Index measures the
A)average return on a stock.
B)variability of stock returns per unit of return
C)stock's beta adjusted for risk.
D)excess return above the risk-free rate per unit of risk.
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Page 13
Chapter 12: Market Microstructure and Strategies
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Q1) Refer to Exhibit 12-1.If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock?
A)30.00 percent
B)F1F1F1S1 F1F1F1042.86 percent
C)F1F1F1S1 F1F1F1030.00 percent
D)42.86 percent
E)none of the above
Q2) A short seller
A)anticipates that the price of the stock sold short will increase.
B)earns the difference between what they initially paid for the stock versus what they later sell the stock for.
C)makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made.
D)is essentially lending the stock to another investor and will ultimately receive that stock back from that investor.
E)none of the above
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14
Chapter 13: Financial Futures Markets
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Q1) Assume that a bank obtains most of its funds from large CDs with a one-year maturity.Its assets are in the form of loans with rates that adjust every six months.The bank would be ____ affected if interest rates increase.To partially hedge its position, it could ____ futures contracts.
A)adversely; purchase B)favorably; sell C)favorably; purchase D)adversely; sell
Q2) Financial leverage, when used in association with a futures contract, ____ the positive returns and ____ losses.
A)magnifies; reduces B)reduces; magnifies C)magnifies; magnifies D)reduces; reduces
Q3) The prices of stock index futures
A)are always the same as the prices of the stocks representing the index. B)are always a little above the prices of the stocks representing the index.
C)are always a little below the prices of the stocks representing the index.
D)none of the above
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Page 15
Chapter 14: Options Markets
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Q1) Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.
A)True
B)False
Q2) A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.
A)call option
B)put option
C)sale of a futures contract
D)purchase of a futures contract
Q3) The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States.
A)True
B)False
Q4) The sale of a call option on a stock the seller already owns is referred to as A)a covered call.
B)a naked call.
C)call on futures.
D)futures on options.
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Chapter 15: Swap Markets
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Q1) An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.
A)True
B)False
Q2) A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time.
A)plain vanilla
B)zero-coupon-for-floating
C)forward
D)seasoned vanilla
E)putable
Q3) A rate-capped swap may limit the fixed-rate payer's ability to effectively hedge against interest rate risk.
A)True
B)False
Q4) An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Q1) Currency futures contracts differ from forward contracts in that they
A)are an obligation.
B)are not an obligation.
C)are standardized.
D)can specify any amount and maturity date.
Q2) Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory.
A)True
B)False
Q3) The indirect exchange rate specifies the value of the currency in U.S.dollars.
A)True
B)False
Q4) The speculative risk of purchasing a ____ is that the foreign currency value ____ over time.
A)put option; increases
B)put option; decreases
C)call option; increases
D)futures contract; increases
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Chapter 17: Commercial Bank Operations
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Q1) Which of the following is not an off-balance sheet activity?
A)highly leveraged transactions (HLTs)
B)standby letters of credit
C)forward contracts
D)swap contracts
Q2) ____ is (are) not a major source of funds for commercial banks.
A)Deposit accounts
B)Borrowed funds
C)Commercial loans
D)Bank capital
E)All of the above are commercial banks sources of funds.
Q3) Which of the following statements is incorrect?
A)Banks have expanded their business across services over time.
B)Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.
C)The banking industry has become less concentrated in recent years.
D)All of the statements above are correct.
Q4) A bank's uses of funds represent liabilities of a bank.
A)True
B)False
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Chapter 18: Bank Regulation
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Q1) The key reason for regulatory examinations (such as CAMELS ratings) is to A)rate past performance.
B)detect problems of a bank in time to correct them.
C)check for embezzlement.
D)monitor reserve requirements.
Q2) Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999?
A)It complemented the Glass-Steagall Act.
B)It enabled commercial banks to more easily pursue securities and insurance activities.
C)It gave securities firms and insurance companies the right to acquire banks.
D)The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities.
E)All of the above are true.
Q3) The fee banks pay to the FDIC for deposit insurance is now
A)a fixed dollar amount for all banks.
B)a fixed percentage of the bank's deposit level for all banks.
C)a fixed percentage of the bank's loan volume for all banks.
D)based on the risk of the bank.
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Page 20
Chapter 19: Bank Management
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Q1) Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed-rate loans in British pounds.Which of the following would reduce the bank's profit margin?
A)the A$ appreciates against the pound
B)the A$ is stable against the pound
C)the A$ depreciates against the pound
D)the British interest rates increase
E)C and D
Q2) Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affected by interest rate fluctuations.
A)True
B)False
Q3) The risk of a loss due to closing out a transaction is referred to as ____ risk.
A)settlement
B)credit
C)interest rate
D)exchange rate
E)none of the above
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Page 21
Chapter 20: Bank Performance
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Q1) Bank T generally obtains a high percentage of its funds from wholesale CDs.Bank V which obtains most of its funds from retail CDs.Bank Z obtains its funds from checking accounts.The bank that will incur the highest interest expenses is ____.
A)Bank T
B)Bank V
C)Bank Z
D)all banks are the same
Q2) During periods of ____ economic growth, loan demand tends to be ____, allowing banks to provide ____ loans.
A)strong; higher; more B)weak; higher; more C)weak; lower; more D)strong; lower; fewer E)none of the above
Q3) The value of a commercial bank can be modeled as the present vale of its future cash flows.
A)True
B)False
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Chapter 21: Thrift Operations
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Q1) High economic growth results in more risk for a savings institution, since its consumer loans, mortgage loans, and investments in debt securities are more likely to default.
A)True
B)False
Q2) Which of the following was not a major reason for the savings institution crisis?
A)a large proportion of loan losses on real estate loans
B)a large proportion of loan losses on loans by SIs to less-developed countries
C)fraud
D)illiquidity
E)increased interest expenses
Q3) Credit unions are technically owned by the A)shareholders.
B)bondholders.
C)government.
D)depositors.
E)none of the above
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Chapter 22: Finance Operations
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Q1) Finance companies are subject to
A)a maximum limit on loan size.
B)ceiling interest rates on loans provided.
C)a maximum length on loan maturity.
D)regulations on intra-state banking.
E)all of the above
Q2) When a finance company's assets are ____ interest rate sensitive than its liabilities and when interest rates are expected to ____, bonds can provide long-term financing at a rate that is completely insulated from rising market rates.
A)less; increase
B)less; decrease
C)more; increase
D)more; decrease
Q3) Many consumer finance companies also provide personal loans, directly to individuals to finance purchases of large household items.
A)True
B)False
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Chapter 23: Mutual Fund Operations
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Q1) Equity real estate investment trusts invest
A)in mortgage and construction loans.
B)directly in properties.
C)in common stocks issued by construction companies.
D)in common stocks issued by real estate brokerage firms.
Q2) Hedge funds are more heavily regulated than mutual funds.
A)True
B)False
Q3) Mutual funds that are willing to repurchase their shares from investors at any time are referred to as
A)closed-end mutual funds.
B)load mutual funds.
C)no-load mutual funds.
D)open-end mutual funds.
Q4) The ____ of a mutual fund indicates the value per share.
A)gross asset value
B)net asset value
C)net stock value
D)net bond value
E)none of the above
Page 25
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Chapter 24: Securities Operations
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Q1) The return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors who purchase the shares after the IPO are generally ____.
A)high; high
B)high; low
C)low; high
D)low; low
Q2) Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of future financing.
A)True
B)False
Q3) Funds received from a bridge loan are commonly used to A)purchase junk bonds.
B)purchase high-grade corporate bonds.
C)provide temporary financing for an acquisition.
D)provide financing for individual investors that wish to purchase Treasury bonds.
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26
Chapter 25: Insurance and Pension Fund Operations
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Q1) Pension funds commonly engage in interest rate swaps to hedge the exposure of their bond and mortgage portfolios to ____ risk.
A)exchange rate
B)reinvestment rate
C)interest rate
D)credit
E)none of the above
Q2) Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.
A)less; less
B)more; more
C)less; more
D)none of the above
Q3) The most common use of funds for property and casualty insurance companies is A)municipal securities
B)Treasury securities.
C)corporate stock.
D)corporate bonds.
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