International Financial Markets
Textbook Exam Questions
Course Introduction
International Financial Markets explores the structure, operation, and regulatory environment of global financial markets. The course examines the key instruments, institutions, and participants in these markets, including foreign exchange, international bonds, equities, and derivatives. Students learn about cross-border capital flows, risk management techniques, and the factors influencing exchange rates and interest rates. Emphasis is placed on the integration of markets, the impact of international events on financial systems, and the challenges faced by multinational corporations in managing financial risks in a rapidly globalizing economy.
Recommended Textbook
Financial Markets and Institutions 12th Edition by Jeff Madura
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Q1) Which of the following statements is incorrect?
A) Financial markets attract funds from investors and channel the funds to corporations.
B) Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
C) Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
D) Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.
Answer: C
Q2) There is a ____ relationship between the risk of a security and the expected return from investing in the security.
A) positive
B) negative
C) indeterminable
D) none of the above
Answer: A
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Chapter 2: Determination of Interest Rates
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Q1) The equilibrium interest rate should
A) fall when the aggregate supply of funds exceeds the aggregate demand for funds.
B) rise when the aggregate supply of funds exceeds the aggregate demand for funds.
C) fall when the aggregate demand for funds exceeds the aggregate supply of funds.
D) rise when the aggregate demand for funds equals the aggregate supply of funds.
E) B and C
Answer: A
Q2) At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.
A) greater; higher
B) greater; lower
C) smaller; lower
D) none of the above
Answer: B
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Chapter 3: Structure of Interest Rates
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Q1) The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years aheadis ____ percent.
A) 1.8
B) 9
C) 15
D) none of the above
Answer: C
Q2) Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to
A) become inverted.
B) become flat.
C) become upward sloping.
D) be unaffected.
Answer: C
Q3) The higher a bond rating, the lower the perceived credit risk.
A)True
B)False
Answer: True
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Chapter 4: Functions of the Fed
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Q1) Most of the Fed's income is transferred to the U.S. Department of Justice.
A)True
B)False
Q2) ____ includes currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items.
A) M1
B) M2
C) M3
D) None of the above
Q3) The Board of Governors is composed of
A) seven members appointed by the President of the United States.
B) the 12 presidents of Fed district banks.
C) the Federal Open Market Committee, plus the Federal Advisory Council.
D) the Federal Open Market Committee, plus the President of the United States.
Q4) The purchase of government securities by someone other than the Fed results in
A) an overall increase in funds among commercial banks.
B) an overall decrease in funds among commercial banks.
C) offsetting changes in funds at commercial banks.
D) an increase in securities maintained by the Fed.
Page 6
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Chapter 5: Monetary Policy
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Q1) The intent of the Fed's operation twist strategy in 2011 and 2012 was to:
A) increase long-term interest rates.
B) require corporations to issue more commercial paper.
C) require bond rating agencies to impose higher standards on their ratings.
D) reduce long-term interest rates.
Q2) An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a limited effect if long-term interest rates remain unaffected.
A)True
B)False
Q3) There is some evidence that high money supply growth may lead to _______ U.S. inflation over time, which in turn places ____ pressure on U.S. interest rates.
A) higher; upward
B) higher; downward
C) lower; downward
D) lower; upward
Q4) The Fed is more likely to use a stimulative policy during a strong-dollar period.
A)True
B)False
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Chapter 6: Money Markets
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Q1) When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.
A) 5.93
B) 6.12
C) 6.2
D) 6.02
E) none of the above
Q2) Treasury bills are sold through ____ when initially issued.
A) insurance companies
B) commercial paper dealers
C) auction
D) finance companies
Q3) A major drawback to investing in Treasury bills is that they cannot easily be liquidated.
A)True
B)False
Q4) Junk commercial paper is commercial paper that is not rated or is rated low.
A)True
B)False
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Chapter 7: Bond Markets
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Q1) Devin, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a returnof ____ percent.
A) 12
B) 9
C) 10.5
D) more information is needed to answer this question
Q2) If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called.
A)True
B)False
Q3) Jim purchases $10,000 par value bonds with a 10 percent coupon rate and a 7 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
A) 8
B) 7
C) 10
D) More information is needed to answer this question.
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds.
A) higher; lower
B) higher; higher
C) lower; higher
D) lower; lower
Q2) As interest rates increase, prices of short-term bonds will decline by a greater degree than prices of long-term bonds.
A)True
B)False
Q3) A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bondsare 6 percent. What should be the current price?
A) $1,069.31
B) $1,000.00
C) $9712
D) $927.66
E) none of the above
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10
Chapter 9: Mortgage Markets
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Q1) An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.
A) stable; decreasing
B) increasing; stable
C) increasing; decreasing
D) decreasing; increasing
Q2) Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long#NAME?erm mortgage loans.
A) exchange rate
B) prepayment
C) reinvestment rate
D) interest rate
E) exchange rate.
Q3) Financial institutions may purchase credit default swaps on mortgages if they expect defaults on many mortgages.
A)True
B)False
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Page 11
Chapter 10: Stock Offerings and Investor Monitoring
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Q1) Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.
A)True
B)False
Q2) A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share.
The firm's dividend yield is
A) .74 percent.
B) 1.34 percent.
C) 7.44 percent.
D) 1.14 percent.
Q3) ____ are acquisitions that require substantial amounts of borrowed funds.
A) Stock repurchases
B) Corporate controls
C) Leveraged buyouts
D) Stock splits
Q4) In addition to extended sessions offered by the stock exchanges, some electronic communications networks (ECNs) allow for trading at any time.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) The limitations of the dividend discount model are most pronounced for a firm that A) has a high beta.
B) has high expected future earnings.
C) distributes most of its earnings as dividends.
D) retains all of its earnings.
E) none of the above
Q2) According to the capital asset pricing model, the required return by investors on a security is
A) inversely related to the risk-free rate.
B) inversely related to the firm's beta.
C) inversely related to the market return.
D) none of the above
Q3) If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.
A)True
B)False
Q4) Stock price volatility increased during the credit crisis.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Q1) The Division of ____ of the SEC assesses possible violations of SEC regulations and can take action against individuals or firms.
A) Corporate Finance
B) Enforcement
C) Administration
D) Market Regulation
Q2) The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price.
A)True
B)False
Q3) Traders that engage in high frequency trading commonly close out their positions in:
A) one day.
B) one month
C) three months
D) one year
Q4) When investors place a limit order, they can place it for the day only.
A)True
B)False
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Page 14
Chapter 13: Financial Futures Markets
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Q1) If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.
A) increase; selling
B) increase; buying
C) decrease, selling
D) decrease; purchasing a call option on
Q2) Laura sells an S&P 500 futures contract with a September settlement date when the index is 1750. By the settlement date, the S&P 500 index falls to 1400. The return on Laura's position in theS&P500 futures contract is ____ percent.
A) -20
B) -10
C) 25
D) 20
E) 0
Q3) Stock index futures cannot be closed out before the settlement date
A)True
B)False
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Page 15
Chapter 14: Options Markets
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Q1) The ____ is not a factor affecting the call option premium.
A) market price of the underlying instrument (relative to the option's exercise price)
B) volatility of the underlying instrument
C) current price of futures contracts on the underlying instrument
D) time to maturity of the call option
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) Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.
A) put; strengthen
B) put; weaken
C) call; strengthen
D) call; weaken
E) A and D
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Chapter 15: Swap Markets
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Q1) An arrangement that enables firms to exchange currencies at periodic intervals is called a(n)
A) currency swap.
B) interest rate swap.
C) swap exchange.
D) Eurobond swap.
Q2) Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ____ than ____ and therefore were adversely affected by ____ interestrates.
A) assets; liabilities; increasing
B) liabilities; assets; decreasing
C) liabilities; assets; increasing
D) none of the above
Q3) A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped.
A) rate-capped
B) zero-coupon-for-floating
C) callable
D) putable
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Page 17
Chapter 16: Foreign Exchange Derivative Markets
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Q1) Which of the following is not a method of forecasting exchange rate volatility?
A) using the volatility of historical exchange rate movements
B) using a time series of volatility patterns in previous periods
C) using the volatility of future exchange rate movements
D) using the exchange rate's implied standard deviation
Q2) Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity.
A) appreciate; 2
B) depreciate; 2
C) appreciate; 4
D) depreciate; 4
E) none of the above
Q3) The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.
A)True
B)False
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18
Chapter 17: Commercial Bank Operations
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Q1) From a bank manager's perspective, the differential in interest between a bank's loans and its deposits;
A) must not exceed the federal funds rate.
B) is called the primary credit lending rate.
C) must be sufficient to cover the bank's other expenses and generate a reasonable profit for the bank's owners.
D) must be sufficient to cover the bank's deposit insurance premiums and its reserve requirements at the Federal Reserve.
Q2) When banks need funding for just a few days, they would most likely
A) issue bonds and then call them.
B) issue stock and then repurchase it.
C) borrow in the federal funds market.
D) issue NCDs.
Q3) Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.
A)True
B)False
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Chapter 18: Bank Regulation
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Q1) The Financial Reform Act (Wall Street Reform and Consumer Protection Act or Dodd-Frank Act) of 2010:
A) ended the system of risk-based insurance premiums.
B) set requirements for the Deposit Insurance Fund's reserves.
C) raised the limit for insured deposits to $750,000 per depositor.
D) allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.
Q2) Federal deposit insurance
A) has existed since the 1800s.
B) was created in 1933
C) was created after World War II.
D) was created in 1960.
Q3) Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affectedby rising interest rates.
A)True
B)False
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Page 20
Chapter 19: Bank Management
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Q1) During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.
A) increase; more rate sensitive than B) decrease; more rate sensitive than C) increase; equally rate sensitive as D) decrease; equally rate sensitive as
Q2) Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Leskar's gap ratio is ____.
A) 1.5
B) 0.67
C) $1 million
D) none of the above
Q3) Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer ____ and more ____.
A) excess reserves; Treasury bills
B) Treasury bonds; corporate bonds
C) loans; Treasury bills
D) none of the above
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21
Chapter 20: Bank Performance
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Q1) Banks with relatively ____ ROAs often incur ____ noninterest expenses.
A) low; very low
B) low; very high
C) high; very high
D) none of the above
Q2) A bank's net interest margin includes
A) noninterest expenses.
B) noninterest income.
C) loan losses
D) none of the above
Q3) When only equity counts as capital, the higher the capital ratio, the A) lower the leverage measure.
B) lower the degree of financial leverage.
C) higher the leverage measure.
D) A and B
E) B and C
Q4) Access to a bank's ROA without any other information reveals when its performance is not up to par and the reasons for its poor performance.
A)True
B)False
Page 22
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Chapter 21: Thrift Operations
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Sample Questions
Q1) ____ are the primary asset of savings institutions.
A) Mortgages
B) Cash balances
C) Investment securities
D) Business loans
Q2) The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements.
A) long; insensitive
B) short or medium; sensitive
C) long; sensitive
D) short or medium; insensitive
Q3) A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n)
A) interest rate futures contract.
B) interest rate swap contract.
C) interest cap contract.
D) security swap contract.
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Chapter 22: Finance Company Operations
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Q1) Finance companies differ from commercial banks, savings institutions, and credit unions in that they
A) do not rely heavily on deposits as a source of funds.
B) focus on financing acquisitions by companies.
C) focus on providing residential mortgages.
D) use most of their funds to purchase stocks
Q2) Finance companies are subject to
A) disclosure requirements and truth in lending rules.
B) ceiling interest rates on loans provided.
C) a maximum length on loan maturity.
D) regulations on intrastate business.
E) all of the above
Q3) Finance companies participate in the ____ market to reduce interest rate risk.
A) money
B) bond
C) options
D) swap
Q4) Business finance companies focus on loans to very large businesses.
A)True
B)False
Page 24
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Chapter 23: Mutual Fund Operations
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Q1) Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates.
A)True
B)False
Q2) Most studies that assess mutual fund performance find that mutual funds almost always outperform a benchmark market index.
A)True
B)False
Q3) Which of the following statements is incorrect?
A) Mutual funds serve as a key financial intermediary.
B) Managers of mutual funds do not analyze economic and industry trends.
C) Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.
D) Some mutual funds offer check-writing privileges.
Q4) Which of the following are most likely to invest in mortgages?
A) stock mutual funds
B) real estate investment trusts
C) load funds
D) money market funds
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Chapter 24: Securities Operations
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Q1) Securities firms engage in proprietary trading, which means that they serve as an intermediary by trading shares of stock requested by proprietorships.
A)True B)False
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) The Securities and Exchange Commission's approval of a registration statement guarantees the quality and safety of the securities to be issued.
A)True
B)False
Q4) When facilitating a secondary stock offering, a securities firm commonly performs all of the following functions except _____
A) origination.
B) underwriting the stock.
C) distribution of the stock.
D) its own purchase of at least 20 percent of the offering.
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Chapter 25: Insurance Operations
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Q1) Bond insurance is available only for corporate bonds and not for municipal securities.
A)True B)False
Q2) Life insurance companies can attempt to reduce their exposure to interest rate risk by
A) increasing their proportion of long-term assets.
B) diversifying the age distribution of their customer base.
C) increasing their proportion of short-term assets.
D) concentrating on an older age distribution of their customer base.
Q3) The adverse selection problem as related to the insurance industry means that people who have insurance are less likely to suffer losses than people who do not have insurance.
A)True B)False
Q4) Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
A)True B)False
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Chapter 26: Pension Fund Operations
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Q1) Pension funds managed by life insurance companies concentrate on
A) common stock.
B) bonds and mortgages.
C) preferred stock.
D) money market instruments.
Q2) The government agency that guarantees that participants in defined-benefit plans will receive their benefits upon retirement is the:
A) Federal Pension Insurance Corporation.
B) Pension Benefit Guaranty Corporation.
C) Office of Pension Insurance.
D) Employee Pension Protection Bureau.
Q3) Public pension funds can be classified by the manner in which contributions are received and benefits are paid.
A)True
B)False
Q4) In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans.
A)True
B)False
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