Introduction to Finance Exam Practice Tests
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and concepts that guide financial decision-making in organizations and personal settings. The course explores essential topics such as time value of money, risk and return, valuation of stocks and bonds, and the basics of financial markets and institutions. Students will also be introduced to budgeting, capital investment decisions, and the analysis of financial statements. Through real-world examples and practical applications, this course equips learners with the skills necessary to make informed financial decisions and lays the groundwork for more advanced studies in finance and related fields.
Recommended Textbook
Money Banking and the Financial System 2nd Edition by Glenn P. Hubbard
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18 Chapters
1827 Verified Questions
1827 Flashcards
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Chapter 1: Introducing Money and the Financial System
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64 Verified Questions
64 Flashcards
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Sample Questions
Q1) What made the recession of 2007-2009 different than any other recession since the Great Depression?
A)the government did not implement a fiscal stimulus
B)the Fed failed to reduce interest rates
C)it was accompanied by a financial crisis
D)the impact was primarily limited to the financial sector
Answer: A
Q2) Borrowers who stated but did not document their incomes are referred to as:
A)subprime
B)alt A
C)adjustable
D)securitized
Answer: B
Q3) Securitization is the process of
A)issuing stocks to finance capital spending.
B)issuing bonds to finance purchases of equipment and structures.
C)reducing risk by decreasing corporate debt loads.
D)converting loans into securities.
Answer: D
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Page 3
Chapter 2: Money and the Payments System
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113 Verified Questions
113 Flashcards
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Sample Questions
Q1) Money market deposit accounts are included in
A)only M1.
B)only M2.
C)M1 and M2.
D)neither M1 nor M2.
Answer: B
Q2) Money that has no value other apart from its use as money:
A)is known as commodity money
B)is known as fiat money
C)will result in a return to a barter system
D)will result in rapid inflation
Answer: B
Q3) According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by how much should the Fed increase the money supply if it wants inflation to be 2%?
A)0)5%
B)1)25%
C)4)5%
D)5%
Answer: C
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Chapter 3: Interest Rates and Rates of Return
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) When the price of a coupon bond increases,
A)the coupon rate declines
B)the coupon rate increases
C)the current yield declines
D)the current yield increases
Answer: C
Q2) Suppose a firm receives $975 for a discount bond with a face value of $1000 to be repaid in one year. What is the amount of interest on the bond? What is the interest rate on the bond? Report a percentage with two decimal places.
Answer: The amount of interest is $1000 - $975 or $25. the interest rate is $25/$975 which equals 2.56%.
Q3) A corporation issues a three year bond with a coupon of $50 and a face value of $1000. Immediately after being issued, market interest rates decline to 4%. What is the price of the bond? Report your answer to the nearest dollar.
Answer: Since the price of the bond equals its present value, the price is $50/1.04 + $50/(1.04)<sup>2</sup> + $1050/(1.04)<sup>3 </sup>= $1029.
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Chapter 4: Determining Interest Rates
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124 Flashcards
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Sample Questions
Q1) Suppose that Congress passes an investment tax credit. The likely result will be
A)the supply curve for bonds will shift to the right.
B)the demand curve for bonds will shift to the left.
C)the demand curve for bonds will shift to the right.
D)the equilibrium interest rate will fall.
Q2) Loanable funds refers to
A)only those funds loaned from one bank to another.
B)only those funds loaned to banks by the Federal Reserve.
C)only those funds loaned by banks to private individuals.
D)all those funds changing hands between lenders and borrowers in the bond market.
Q3) In recent decades, the United States
A)was essentially a closed economy.
B)was generally a net borrower of foreign funds.
C)was generally a net lender abroad.
D)experienced a net outflow of savings.
Q4) How should a financial plan of an older saver differ from that of a younger saver?
Q5) Assess the impact on the bond market of the rise in Internet trading of stocks.
Q6) What is a black swan event?
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) Which bond would someone in a 35% tax bracket choose to buy: a municipal bond with an interest rate of 7% or a corporate bond with an interest rate of 10%?
Q2) The default risk premium is
A)relevant only for securities issued by very small companies.
B)the additional yield a saver requires for holding a bond with some default risk.
C)zero for corporate bonds, but quite substantial for corporate stock.
D)constant across the business cycle.
Q3) The yield on a thirty-year Treasury bond is 8% at the same time as the yield on two-year Treasury note is 5%. This occurrence
A)indicates that the yield curve is downward sloping.
B)is well explained by the segmented markets theory.
C)is largely explained by the favorable tax treatment of Treasury notes.
D)indicates that the bond market is anticipating that inflation will fall.
Q4) How do ratings agencies earn income?
Q5) How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?
Q6) What are the economic implications of an inverted yield curve?
Page 7
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Chapter 6: The Stock Market, Information, and Financial
Market Efficiency
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) Rational expectations involve the assumption that
A)market participants make use only of information on the past performance of an asset in determining what they believe its price should be.
B)market participants rarely change their minds about the correct price of an asset.
C)financial markets are good at increasing liquidity, but poor at transmitting information.
D)market participants makes use of all available information.
Q2) Excess volatility refers to
A)the unwillingness of financial analysts to consistently recommend the same stocks.
B)the greater volatility of futures prices compared to the volatility of prices of the underlying assets.
C)the tendency for stocks with high rates of returns also to have quite variable returns.
D)the larger movements in market prices of stock than in their fundamental values.
Q3) What should affect the fundamental value of a stock according to the efficient markets hypothesis?
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8
Chapter 7: Derivatives and Derivative Markets
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) One benefit of a swap compared to futures and options is that they
A)promote liquidity.
B)reduce the risk for both the buyer and seller.
C)can be better tailored to meet the needs of market participants.
D)can involve financial instruments and not just commodities.
Q2) The buyer of a futures contract
A)assumes the short position.
B)assumes the long position.
C)may not sell the contract without the permission of the original seller.
D)has the obligation to deliver the underlying financial instrument at the specified future date.
Q3) Which of the following accurately describes possible positions taken by hedgers?
A)may take a short position in the futures market to offset a long position in the spot market
B)may take a short position in the spot market to offset a long position in the futures market
C)may take a long position in the spot market to offset a short position in the futures market
D)may take a long position in the futures market to offset a long position in the spot market
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Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) According to the theory of purchasing power parity, if the inflation rate in England is greater than the inflation rate in Japan,
A)the law of one price has been violated.
B)the nominal value of the pound will appreciate against the yen.
C)the nominal value of the yen will appreciate against the pound.
D)the nominal value of the pound will appreciate against the yen, but only if the two countries are on the gold standard.
Q2) Which of the following would cause the nominal exchange rate to appreciate?
A)The real exchange rate depreciates.
B)The domestic inflation rate decreases.
C)The domestic inflation rate increases.
D)The government budget deficit decreases.
Q3) A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price of the television?
A)$1000
B)$99,900
C)$10,000,000
D)$100,100
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Chapter 9: Transactions Costs, Asymmetric Information, and
the Structure of the Financial System
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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) A firm's agents are its
A)shareholders.
B)management.
C)marketing department.
D)customers.
Q2) In the late 2000s, which of the following was the primary source of external financing for small to medium-size firms?
A)mortgages
B)bank loans other than mortgages
C)trade credit
D)other loans
Q3) How does adverse selection in financial markets affect the method by which firms raise funds?
Q4) Since crowd funding sites do not themselves invest in business start ups that raise funds on their sites, they don't reduce:
A)the principal-agent problem
B)information costs
C)transaction costs
D)asymmetric information
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Chapter 10: The Economics of Banking
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139 Flashcards
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Sample Questions
Q1) What are the different forms of bank borrowings?
Q2) Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks because
A)of fear of adverse selection problems.
B)of interest rate ceilings in many states.
C)of fear of offending the loan applicants.
D)use of credit rationing is encouraged by the Federal Reserve.
Q3) Bank borrowing from the Fed is referred to as:
A)federal funds
B)discount loans
C)repurchase agreements
D)reverse repurchase agreements
Q4) If a bank has a leverage ratio of 0.1 and a return on capital of 2%, what is its return on equity?
A)0)2%
B)2)1%
C)5%
D)20%
Q5) What steps can a bank take to deal with a significant outflow of deposits?
Q6) How can banks measure interest-rate risk?
Page 12
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Chapter 11: Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System
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85 Flashcards
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Sample Questions
Q1) An insurance premium is a
A)payment made by an insurance company to a policyholder after the occurrence of an insurable event.
B)payment made by an insurance company to a policyholder following a period in which the policyholder has filed no claims against the company.
C)fee paid by policyholders to insurance companies as payment for coverage.
D)fee paid by policyholders to insurance companies in exchange for special considerations, such as a particularly large policy.
Q2) Finance companies
A)issue stock and use the proceeds to purchase bonds.
B)raise funds in financial markets to lend to households and firms.
C)raise funds from banks to lend to households and firms.
D)issue bonds and use the proceeds to purchase stock.
Q3) Which of the following is a term for the total value of a firm's outstanding shares?
A)market value
B)intrinsic value
C)fair value
D)fairness value
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Chapter 12: Financial Crises and Financial Regulation
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) One of the most important enforcement tools of the Consumer Finance Protection Bureau is:
A)the threat of civil charges against those who violate the laws involving money transfers, foreclosure and many other financial services
B)the ability to audit financial firms and institutions
C)the ability to initiate new regulations
D)the authority to impose criminal penalties
Q2) What was the purpose of the stress test administered by the Treasury in 2009?
A)Evaluate potential losses of Fannie Mae and Freddie Mac.
B)Assess the viability of AIG.
C)Gauge how well the largest financial firms would fare if the recession deepened.
D)Evaluate the solvency of the major investment banks.
Q3) The original intention of the Fed's role as lender of last resort was to make loans to banks that were
A)not illiquid nor insolvent.
B)illiquid, but not insolvent.
C)insolvent, but not illiquid.
D)both illiquid and insolvent.
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) How do individual become members of the Board of Governors?
Q2) The Banking Acts of 1933 and 1935
A)established the Federal Reserve System.
B)increased central control of the Federal Reserve System.
C)eliminated the authority of the Board of Governors to set reserve requirements.
D)made the Secretary of the Treasury a member of the Board of Governors.
Q3) Which of the following is NOT considered one of the four groups in the Federal Reserve System?
A)Federal Reserve banks
B)Federal Deposit Insurance Corporation
C)Board of Governors
D)Federal Open Market Committee
Q4) Which of the following is NOT a way in which power was divided up in the Federal Reserve System?
A)between bankers and business interests
B)among states and regions
C)between importers and exporters
D)between government and the private sector
Q5) What are the limitations to the Fed's independence?
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) Although open market operations and discount loans both change the monetary base, the Fed has
A)greater control over open market operations than over discount loans.
B)greater control over discount loans than over open market operations.
C)very little control over either discount loans or open market operations.
D)complete control over both discount loans and open market operations.
Q2) Which of the following is an asset of the Fed?
A)reserves of banks
B)currency in circulation
C)discount loans to banks
D)checkable deposits in commercial banks
Q3) The primary assets of the Fed are
A)discount loans and reserves.
B)discount loans and government securities.
C)government securities and reserves.
D)discount loans and open market operations.
Q4) Suppose the required reserve ratio is 8% and banks do not hold excess reserves. Illustrate on a bank's balance sheet what happens if the Fed buys $250,000 worth of securities from a bank.
Page 16
Q5) Briefly explain the process of multiple deposit creation.
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Chapter 15: Monetary Policy
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Sample Questions
Q1) Which of the following accurately describes the Fed's inflation target?
A)It is implicit rather than explicit.
B)It seeks to maintain an average inflation rate of 2% per year.
C)It seeks to keep inflation at 2% all the time.
D)Its goal is to achieve zero inflation.
Q2) Reserve requirements are changed
A)more frequently than the discount rate is changed, but less frequently than open market operations are conducted.
B)more frequently than the discount rate is changed and more frequently than open market operations are conducted.
C)more frequently than open market operations are conducted, but less frequently than the discount rate is changed.
D)less frequently than open market operations are conducted and less frequently than the discount rate is changed.
Q3) Which of the following is NOT considered to be a goal of monetary policy?
A)fair wages
B)high employment
C)economic growth
D)price stability
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Page 17
Chapter 16: The International Financial System and Monetary Policy
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Sample Questions
Q1) When a central bank buys foreign assets,
A)its holdings of foreign assets rise by the amount of the purchase, but the monetary base is unaffected.
B)its holdings of foreign assets and the monetary base rise by the amount of the purchase.
C)its holdings of foreign assets rise by the amount of the purchase, and the monetary base rises by the amount of the purchase times the money multiplier.
D)the monetary base falls by the amount of the purchase.
Q2) The euro is
A)the currency of all nations in Europe.
B)the rate at which the French central bank makes discount loans.
C)a common currency of many European countries.
D)the name of the European central bank.
Q3) Make use of a graph of the foreign exchange market to show how the Brazilian Central Bank can use an unsterilized intervention to reduce the value of its currency, the real, in terms of the dollar.
Q4) Why do restrictions on capital inflows receive more support from some economists than restrictions of capital outflows?
Page 18
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Chapter 17: Monetary Theory I: The Aggregate Demand and Aggregate Supply Model
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Sample Questions
Q1) An argument in support of hysteresis is
A)companies may be reluctant to hire workers until AD increases.
B)prices are sticky in the short run.
C)the skills of unemployed workers may deteriorate making it more difficult to find a job.
D)overlapping wage contracts.
Q2) According to the new classical view, aggregate output will differ from full-employment output
A)whenever saving does not equal investment.
B)only if the actual price level does not equal the expected price level.
C)only if the federal government's expenditures are greater than its tax receipts.
D)whenever imports exceed exports.
Q3) The aggregate supply curve represents levels of output that producers are willing to sell at
A)each level of the real interest rate.
B)each level of real GDP.
C)each price level.
D)each inflation rate.
Q4) What are the principal sources of change in productivity growth?
Page 19
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Chapter 18: Monetary Theory II: The IS-MP Model
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Sample Questions
Q1) Changes in net worth and liquidity may significantly affect the volume of lending and economic activity according to the
A)interest rate channel.
B)balance sheet channel.
C)money channel.
D)bank lending channel.
Q2) In a move up the IS curve,
A)investment rises.
B)output falls.
C)the real interest rate falls.
D)saving rises.
Q3) Which of the following is NOT true of the interest rate channel?
A)Bank loans play no special role.
B)The Fed changes the real interest rate which affects the components of aggregate expenditures.
C)Borrowers are indifferent as to how and from whom they raise funds.
D)Alternative sources of funds are not substitutes for each other.
Q4) How do expectations of higher inflation become embedded in the economy and affect actual inflation?
Q5) What is the inflation gap? What is the output gap?
Page 20
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