Money and Banking Exam Questions
Course Introduction
This course explores the fundamental principles and operations of money and banking within the economy. It examines the evolution and role of money, the structure and function of financial institutions, and the regulatory frameworks that govern them. Key topics include the creation of money, the operation of central banks, monetary policy, interest rates, and the impact of banking activities on national and global economies. Through real-world examples and case studies, students gain a comprehensive understanding of how money and banking systems influence economic growth, stability, and policy decisions.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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27 Chapters
2334 Verified Questions
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Page 2
Chapter 1: Why Study Financial Markets and Institutions?
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67 Verified Questions
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Sample Questions
Q1) A security
A) is a claim or price of property that is subject to ownership.
B) promises that payments will be made periodically for a specified period of time.
C) is the price paid for the usage of funds.
D) is a claim on the issuers future income.
Answer: D
Q2) Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases
Answer: B
Q3) Financial markets are what makes financial institutions work.
A)True
B)False
Answer: False
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) An investor who puts all her funds into one asset ________ her portfolio's
A) increases; diversification
B) decreases; diversification
C) increases; average return
D) decreases; average return
Answer: B
Q2) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as
A) foreign bonds.
B) Eurobonds.
C) Eurocurrencies.
D) Eurodollars.
Answer: B
Q3) Which of the following can be described as involving indirect finance?
A) A bank buys a U.S. Treasury bill from one of its depositors.
B) A corporation buys commercial paper issued by another corporation.
C) A pension fund manager buys commercial paper in the primary market.
D) Both A and C of the above.
Answer: D
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Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation?
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Sample Questions
Q1) Discounting the future is the procedure used to find the future value of a dollar received today.
A)True
B)False
Answer: False
Q2) A bonds with a 5% coupon as has a yield to maturity of 5%.
A)True
B)False
Answer: False
Q3) The interest rate that is adjusted for actual changes in the price level is called the
A) ex post real interest rate.
B) expected interest rate.
C) ex ante real interest rate.
D) none of the above.
Answer: A
Q4) The current yield goes up as the price of a bond falls.
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) When the economy slips into a recession,normally the demand for bonds ________,the supply of bonds ________,and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
Q2) Identify and describe three factors that cause the supply curve for bonds to shift.
Q3) When the quantity of bonds demanded equals the quantity of bonds supplied,there is
A) excess supply.
B) excess demand.
C) a market equilibrium.
D) an asset market approach.
Q4) The higher the standard deviation of returns on an asset,the ________ the asset's
A) greater; risk
B) smaller; risk
C) greater; expected return
D) smaller; expected return
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) In actual practice,short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of the
A) market segmentation theory.
B) expectations theory.
C) liquidity premium theory.
D) separable markets theory.
Q2) Corporate bonds are not as liquid as government bonds because A) fewer bonds for any one corporation are traded, making them more costly to sell.
B) the corporate bond rating must be calculated each time they are traded.
C) corporate bonds are not callable.
D) all of the above.
E) only A and B of the above.
Q3) ________ bonds are exempt from federal income taxes.
A) Corporate Aaa
B) U.S. Treasury
C) Corporate Baa
D) Municipal
Q4) What effect did the Bush Tax Cut have on bond interest rates?
Q5) What do credit-rating agencies do and why is this work important?
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) According to the strong view of the efficient markets hypothesis,security prices reflect ________ and so financial markets are efficient.
A) market fundamentals
B) rational expectations
C) momentum effects
D) current market trends
Q2) "Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it.
A)True
B)False
Q3) Tests used to rate the performance of rules developed in technical analysis conclude that
A) technical analysis outperforms the overall market.
B) technical analysis far outperforms the overall market, suggesting that stockbrokers provide valuable services.
C) technical analysis does not outperform the overall market.
D) technical analysis does not outperform the overall market, suggesting that stockbrokers do not provide services of any value.
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8
Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) The concept of adverse selection helps explain why collateral is an important feature of many debt contracts.
A)True
B)False
Q2) Which of the following is not one of the eight basic facts about financial structure?
A) The financial system is among the most heavily regulated sectors of the economy.
B) Issuing marketable securities is the primary way businesses finance their operations.
C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets.
D) Financial intermediaries is the most important source of external funds to finance businesses.
Q3) Distinguish between adverse selection and moral hazard.
Q4) Collateralized debt is also called secured debt.
A)True
B)False
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) Adverse selection and moral hazard problems increased in magnitude during the early years of the Great Depression as
A) stock prices declined to 10 percent of their levels in 1929.
B) banks failed.
C) the aggregate price level declined.
D) a result of all of the above.
E) a result of A and B of the above.
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) Factors that lead to worsening conditions in financial markets include A) declining interest rates.
B) anticipated increases in the price level.
C) bank panics.
D) only A and C of the above.
E) only B and C of the above.
Q4) Explain the relationship between agency theory and a financial crisis.
Page 10
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The unusual structure of the Federal Reserve System is best explained by Americans' fear of centralized power.
A)True
B)False
Q2) The Board of Governors sets reserve requirements.
A)True
B)False
Q3) Critics of the current system of Fed independence contend that the president has too much control over monetary policy on a day-to-day basis.
A)True
B)False
Q4) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize
A) the public's welfare.
B) its own welfare.
C) profits.
D) conflict between the executive and legislative branches of government.
Q5) What are the factors that promote the independence of the Federal Reserve?
Q6) What are the arguments for and against an independent Fed?
Page 11
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) The Bank of England,as well as the ECB,put price stability first among all goals. This is known as a ________.
A) hierarchical mandate
B) dual mandate
C) singular mandate
D) ubiquitous mandate
Q2) 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.
Q3) If the desired intermediate target is an interest rate,then the preferred operating target will be a(n)________ variable like the ________.
A) interest rate; three-month Treasury bill rate
B) interest rate; federal funds rate
C) reserve aggregate; monetary base
D) reserve aggregate; nonborrowed base
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Chapter 11: The Money Markets
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Sample Questions
Q1) The usual maturity range for fed funds is ________.
A) 1 to 270 days
B) 1 to 15 days
C) 4, 13, and 26 weeks
D) 1 to 7 days
Q2) Two important characteristics of any financial market are flexibility and A) risk.
B) innovation.
C) tolerance.
D) capital.
Q3) The U.S.Treasury Department is the single largest borrower in the U.S.money market.
A)True
B)False
Q4) Activity in money markets increased significantly in the late 1970s and early 1980s because of
A) rising short-term interest rates.
B) regulations that limited what banks could pay for deposits.
C) both A and B of the above.
D) neither A nor B of the above.
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Chapter 12: The Bond Market
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Sample Questions
Q1) The ________ value of a bond is the amount that the issuer must pay at maturity.
A) market
B) present
C) discounted
D) face
Q2) Governments never issue stock because
A) they cannot sell ownership claims.
B) the Constitution expressly forbids it.
C) both A and B of the above.
D) neither A nor B of the above.
Q3) To sell an old bond when rates have risen,the holder will have to discount the bond until the yield to the buyer is the same as the market rate.
A)True
B)False
Q4) 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.
Q5) What role do restrictive covenants play in bond markets?
Page 14
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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) About 75% of orders to buy or sell on the NYSE are executed using SuperDOT.
A)True
B)False
Q3) A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to A) vote.
B) receive dividends.
C) receive interest payments.
D) only A and B of the above.
Q4) What is the role of the required return on equity investments in stock valuation models?
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) The most common type of mortgage-backed security is
A) the mortgage pass-through, a security that has the borrower's mortgage payments pass through the trustee before being disbursed to the investors.
B) collateralized mortgage obligations, a security which reduces prepayment risk.
C) the participation certificate, a security which passes the borrower's mortgage payments equally among all the owners of the certificates.
D) the securitized mortgage, a security which increases the liquidity of otherwise illiquid mortgages.
Q2) Private mortgage insurance is a policy that guarantees to make up any discrepancy between the value of the property and the loan amount,should a default occur.
A)True
B)False
Q3) A FICO score below 660 is considered good while a score above 720 is likely to cause problems in obtaining a loan.
A)True
B)False
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) The interest parity condition states that ________.
A) the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency
B) the domestic interest rate equals the foreign interest rate plus the expected appreciation of the foreign currency
C) Neither A nor B is correct.
D) Both A and B are correct.
Q2) According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected ________ of the foreign currency must be ________ percent.
A) appreciation; 4
B) appreciation; 2
C) depreciation; 2
D) depreciation; 4
Q3) When the exchange rate for the euro changes from $0.90 to $0.85,then holding everything else constant,the euro has depreciated and American wheat sold in Germany becomes more expensive.
A)True
B)False
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Page 17
Chapter 16: The International Financial System
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Sample Questions
Q1) Under dollarization,a country
A) backs its currency 100 percent with foreign reserves.
B) earns seigniorage because it no longer bears the cost of issuing its own currency.
C) abandons its own currency and adopts the money of another country.
D) must worry about a speculative attack on its currency.
Q2) Which of the following appears in the capital account part of the balance of payments?
A) A gift to an American from his English aunt
B) A purchase by the Honda corporation of a U.S. Treasury bill
C) A purchase by the Bank of England of a U.S. Treasury bill
D) Income earned by the Honda corporation on its automobile plant in Ohio
Q3) Policymakers may not want to see their country's currency appreciate because
A) this would hurt consumers in their country by making foreign goods more expensive.
B) this would hurt domestic businesses by making foreign goods cheaper in their country.
C) this would increase inflation in their country.
D) this would decrease the wealth of the country.
Q4) What was the European Monetary System? How did its exchange rate mechanism work?
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) The value-at-risk method for estimating a bank's risk exposure measures the losses a bank could incur under a worst-case scenario.
A)True
B)False
Q2) In general,banks would prefer to meet deposit outflows by ________ rather than ________.
A) selling loans; selling securities
B) selling loans; borrowing from the Fed
C) borrowing from the Fed; selling loans
D) "calling in" loans; selling securities
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) Borrowings
C) U.S. Treasury securities
D) Reserves
Q4) Explain how a capital crunch can lead to a credit crunch in our economy.
Q5) What costs do banks hope to avoid by holding excess reserves?
Q7) Discuss the recent trends in bank performance measures. Page 19
Q6) Distinguish between a bank's reserves,required reserves,excess reserves,and secondary reserves.
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Page 20
Chapter 18: Financial Regulation
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Sample Questions
Q1) How have bank capital requirements changed since the banking crisis of the 1980s? Explain.
Q2) Describe the difference between macroprudential and microprudential regulation.
Q3) Because asymmetric information problems in the banking industry are a fact of life throughout the world,bank regulation in other countries is similar to that in the United States.
A)True
B)False
Q4) The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to
A) standardize bank capital requirements internationally.
B) reduce, across the board, bank capital requirements in all countries.
C) sever the link between risk and capital requirements.
D) do all of the above.
Q5) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) approved NOW accounts nationwide.
B) restricted the use of ATS accounts.
C) imposed interest rate ceilings on bank loans.
D) did all of the above.
Page 21
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) Even when an ATM is owned by a bank,states typically have special provisions that allow wider establishment of ATMs than is permissible for traditional "brick and mortar" branches.
A)True
B)False
Q2) Since the passage of the International Banking Act of 1978,the competitive advantage enjoyed by foreign banks has been ________.
A) reduced
B) mildly expanded
C) completely eliminated
D) greatly expanded
Q3) A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable.
A)True
B)False
Q4) Explain the innovations that have been created to lower interest-rate risk.
Q5) Unlike commercial banks,S&Ls can only be chartered by the federal government. A)True
B)False
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) Whether a fund is organized as a closed- or an open-end fund,is will have the same basic organizational structure.
A)True
B)False
Q2) Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds.
A) large, established companies that pay dividends regularly; more B) large, established companies that pay dividends regularly; less C) companies expected to grow rapidly; more D) companies expected to grow rapidly; less
Q3) Describe the practices of late trading and market timing and explain how these practices harm a mutual fund's shareholders.
Q4) The larger the number of shares traded in a stock transaction,the lower the transaction costs per share.
A)True B)False
Q5) What are two key differences between a traditional mutual fund and a hedge fund?
Q6) What are the five benefits of mutual funds?
Q7) What benefits do mutual funds offer 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) Risk-assessment screening
B) Risk-based premiums
C) Restrictive provisions
D) All of the above
E) Only A and B of the above
Q2) When those most likely to produce the outcome insured against are the ones who purchase insurance,insurance companies are said to face the problem of ________.
A) fraudulent claims
B) moral hazard
C) adverse selection
D) pecuniary purchases
Q3) Social Security is a
A) fully funded pension plan.
B) federally insured private pension plan.
C) government sponsored private pension plan.
D) "pay-as-you-go" system.
Q4) Distinguish between different types of life insurance.
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Sample Questions
Q1) The Securities Acts Amendment of 1975 abolished fixed commissions.
A)True
B)False
Q2) Discuss the difference between full-service and discount brokers.
Q3) What ultimately happened to Webvan,the Internet grocer that received more than $1 billion in venture financing.
Q4) The sources of venture capital funding have
A) shifted from wealthy individuals to pension funds and corporations.
B) shifted from pension funds and corporations to wealthy individuals.
C) decreased since 1990.
D) done none of the above.
Q5) An instruction to a securities agent to purchase a stock as long as its price does not exceed a specified level is a ________.
A) short sell
B) market order
C) limit order
D) stop loss order
Q6) Discuss the advantages of a private equity buyout.
25
Q7) What niche in the financial system do venture capital firms fill?
Q8) Discuss the life cycle of a equity buyout.
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Chapter 23: Risk Management in Financial Institutions
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Sample Questions
Q1) If interest rates rise by 5 percentage points,then bank profits (measured using gap analysis)will increase regardless of the income gap.
A)True
B)False
Q2) Credit rationing occurs when a bank
A) refuses to make a loan of any amount to a borrower, even when she is willing to pay a higher interest rate.
B) restricts the amount of a loan to less than the borrower would like.
C) does either A or B of the above.
D) does neither A nor B of the above.
Q3) Referring to Table 23.2,First National Bank has a gap of ________.
A) -10
B) 10
C) 20
D) 0
Q4) Effective screening and information collection together form an important principle of credit risk management.
A)True
B)False
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Chapter 24: Hedging with Financial Derivatives
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Q1) One advantage of using options to hedge is that the accounting transaction will never require the firm to show large unrecognized losses.
A)True
B)False
Q2) If you buy an option to buy Treasury futures at 115,and at expiration the market price is 110,
A) the call will be exercised.
B) the put will be exercised.
C) the call will not be exercised.
D) the put will not be exercised.
Q3) The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.
A) premium
B) call
C) strike price
D) put
Q4) Futures trading is regulated by the Commodity Futures Trading Commission.
A)True B)False
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) In Argentina,the primary force leading to their financial crisis in 2001 was ________.
A) fiscal mismanagement on the part of the government
B) financial liberalization
C) fraud in financial markets
D) all of the above
E) only B and C of the above
Q2) In an emerging market economy,a financial crisis generally begins with A) mismanagement of financial liberalization or innovation.
B) asset pricing booms and busts.
C) an increase in uncertainty caused by failure of financial institutions.
D) all of the above.
Q3) In South Korea,the primary force leading to their financial crisis in 1997 was ________.
A) financial liberalization
B) fiscal mismanagement on the part of the government
C) fraud in financial markets
D) all of the above
E) only B and C of the above
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Chapter 26: Savings Associations and Credit Unions
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Q1) The congressionally imposed cap on the interest rate that S&Ls could pay on savings accounts became a serious problem for them in the 1970s when inflation rose.
A)True
B)False
Q2) An analysis of the political economy of the savings and loan crisis helps one to understand
A) why politicians hampered the efforts of thrift regulators, cutting regulatory appropriations and encouraging regulatory forbearance.
B) why thrift regulators were reluctant to admit that any problem even existed in the thrift industry.
C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress.
D) all of the above.
E) only A and B of the above.
Q3) Listing large amounts of goodwill as an asset is another way that savings and loans are able to hide the fact that they are insolvent.
A)True
B)False
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Chapter 27: Finance Companies
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Sample Questions
Q1) Consumer finance companies typically make loans to consumers who
A) prefer to avoid the regulatory environment at a bank.
B) cannot obtain credit otherwise due to low income or poor credit.
C) Both A and B of the above are correct.
D) Neither A nor B of the above are correct.
Q2) Factoring refers to purchasing a firm's accounts receivables at a premium.
A)True
B)False
Q3) Much like banking institutions,interest-rate risk is a big concern for finance companies.
A)True
B)False
Q4) In which industry is factoring a common practice?
A) Automobile
B) Tech services
C) Entertainment
D) Apparel
Q5) Describe how floor plans work in the automobile industry.Why can finance companies offer these arrangements at a lower cost than banks?
Page 31
Q6) Describe the process of factoring? When and why is it used?
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