Money and Banking Final Exam
Course Introduction
Money and Banking explores the fundamental role of money and financial institutions in the economy. This course delves into the nature and functions of money, the structure and operation of financial systems, and the conduct of monetary policy by central banks. Students will examine how banks and non-bank financial intermediaries facilitate savings, investment, and the allocation of resources, as well as their interactions with financial markets and the broader economy. Topics include the creation of money, interest rate determination, the regulation and supervision of banking systems, and the impact of monetary policy on inflation, employment, and economic stability.
Recommended Textbook
Financial Markets and Institutions 12th Edition by Jeff Madura
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Chapter 1: Role of Financial Markets and Institutions
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Q1) Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
A)True
B)False
Answer: True
Q2) If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
A) perfect
B) active
C) inefficient
D) in equilibrium
Answer: C
Q3) ____ are long-term debt obligations issued by corporations and government agencies to support their operations.
A) Common stock
B) Derivative securities
C) Bonds
D) None of the above
Answer: C
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Chapter 2: Determination of Interest Rates
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Q1) According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.
A) higher nominal interest rate
B) higher real interest rate
C) lower nominal interest rate
D) lower real interest rate
Answer: A
Q2) The federal government demand for funds is said to be interest-inelastic, or ____ to interest rates.
A) sensitive
B) insensitive
C) relatively sensitive as compared to other sectors
D) none of the above
Answer: B
Q3) According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.
A)True
B)False
Answer: False
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Chapter 3: Structure of Interest Rates
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Q1) You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxablesecurities that pay
A) 31.1 percent.
B) 19 percent.
C) 12.5 percent.
D) 14 percent.
Answer: D
Q2) Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressureon the yield of T-bills.
A) decrease; downward
B) decrease; upward
C) increase; upward
D) increase; downward
Answer: C
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Chapter 4: Functions of the Fed
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Q1) To increase the money supply, the Fed may increase the reserve requirement ratio.
A)True
B)False
Q2) The ____ is made up of seven individual members, and each member is appointed by the president of the United States.
A) Board of Governors
B) Federal Reserve district bank
C) Federal Open Market Committee (FOMC)
D) Securities and Exchange Commission
Q3) To increase the money supply growth, the Fed could
A) sell government securities in the secondary market
B) increase the primary credit lending rate.
C) increase the reserve requirement ratio.
D) all of the above
E) none of the above
Q4) Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.
A)True
B)False
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Chapter 5: Monetary Policy
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Q1) The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth.
A)True
B)False
Q2) When the Fed uses open market operations to sell some of its Treasury securities, there will be
A) an outward shift in the supply schedule of loanable funds.
B) an inward shift in the supply schedule of loanable funds.
C) no shift in the supply schedule of loanable funds.
D) an outward shift in the demand schedule for loanable funds.
Q3) A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.
A) tight; loose
B) loose; tight
C) tight; tight
D) loose; loose
Q4) The Fed needs the approval of the presidential administration to make decisions.
A)True
B)False
Page 7
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Chapter 6: Money Markets
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Q1) The rate at which depository institutions effectively lend or borrow funds from each other is the ____.
A) federal funds rate
B) discount rate
C) prime rate
D) repo rate
Q2) The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be
A) eliminated.
B) reduced.
C) increased.
D) unchanged (there is no effect).
Q3) Junk commercial paper is commercial paper that is not rated or is rated low.
A)True
B)False
Q4) Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.
A)True
B)False
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Chapter 7: Bond Markets
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Q1) Which of the following eurozone countries has not recently experienced debt repayment problems?
A) Finland
B) Greece
C) Portugal
D) Spain
Q2) The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
A)True
B)False
Q3) A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.
A) first mortgage bond; second mortgage bond
B) first mortgage bond; debenture
C) first mortgage bond; subordinated debenture
D) chattel mortgage bond; subordinated debenture
E) none of the above
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Chapter 8: Bond Valuation and Risk
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Q1) The appropriate price of a bond is simply the sum of the cash flows to be received.
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) The bonds that are most sensitive to interest rate movements have
A) no coupon and a short-term maturity.
B) high coupons and a short-term maturity.
C) high coupons and a long-term maturity.
D) no coupon and a long-term maturity.
Q4) The actual relationship reflecting the response of a bond's price to a change in bond yields is
A) concave.
B) convex.
C) linear.
D) quadratic.
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Chapter 9: Mortgage Markets
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Q1) Lehman Brothers commonly used _________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral.
A) commercial paper
B) Treasury securities
C) its stock
D) mortgages
Q2) Which of the following is not a guarantor of federally insured mortgages?
A) Federal Housing Administration (FHA)
B) Veterans Administration (VA)
C) Federal Deposit Insurance Corporation (FDIC)
D) All of the above are guarantors of federally insured mortgages.
Q3) 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
Q4) Non-U.S. financial institutions never hold mortgages on U.S. property.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Q1) The transaction costs to the issuing firm in an IPO are usually ____ percent of the funds raised.
A) 1
B) 3
C) 7
D) 25
Q2) If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price.
A) upward pressure
B) downward pressure
C) no additional pressure
D) none of the above
Q3) Most individual investors attend road shows of firms that are about to go public before they purchase shares at the time of an IPO.
A)True
B)False
Q4) The legal protection of shareholders varies substantially among countries.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Q1) According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms couldbe____ affected by a weak dollar.
A) adversely; favorably
B) favorably; adversely
C) favorably; favorably
D) adversely; adversely
Q2) The main source of uncertainty in computing the return of a stock is the dividend to be received next year.
A)True
B)False
Q3) The credit crisis caused major problems in the mortgage market but had no impact on the stock market.
A)True
B)False
Q4) The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Q1) Under the present margin requirements, at least ____ percent of an investor's invested funds must be paid in cash.
A) 20
B) 30
C) 40
D) 50
E) none of the above
Q2) The Division of ____ of the SEC requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities.
A) Corporate Finance
B) Enforcement
C) Administration
D) Market Regulation
Q3) A criticism of dark pools is that they:
A) reduce transparency.
B) are more expensive than the public stock exchanges.
C) are not accessible to institutional investors.
D) cannot be used to trade large blocks of stock.
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Chapter 13: Financial Futures Markets
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Q1) The use of financial leverage
A) magnifies the positive returns of futures contracts.
B) magnifies losses of futures contracts.
C) both A and B
D) none of the above
Q2) Trading restrictions imposed on specific stocks or stock indexes are referred to as
A) index busters.
B) index options.
C) circuit breakers.
D) protective covenants.
Q3) Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures.
A)True
B)False
Q4) Interest rate futures are not available on A) Treasury bonds.
B) Treasury notes.
C) Eurodollar CDs.
D) the S&P 500 index.
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Chapter 14: Options Markets
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Q1) Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____.
A) available; in numerous non-U.S. countries
B) not available; in numerous non-U.S. countries
C) available; only in the United States
D) not available; only in the United States
Q2) The premium on an existing call option should ____ when the underlying stock price decreases.
A) be negative
B) decline
C) increase
D) be unaffected
E) A and B
Q3) European-style stock options
A) are long-term options (at least one year until expiration at the time they are created).
B) can be exercised after the expiration date.
C) can be exercised any time until the expiration date.
D) none of the above
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Chapter 15: Swap Markets
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Q1) Interest rate swaps are rarely used by companies that issue bonds.
A)True
B)False
Q2) If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments.
A)True
B)False
Q3) Which of the following is not a typical provision of an interest rate swap?
A) the notional principal value to which the interest rates are applied to determine the interest payments involved
B) the fixed interest rate
C) the formula and type of index used to determine the floating interest rate
D) the underwriter of the bond
E) All of the above are provisions of an interest rate swap.
Q4) A rate-capped swap may limit the fixed-rate payer's ability to effectively hedge against interest rate risk.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Q1) ____ in the supply of euros for sale will cause the euro to ____.
A) increase; appreciate
B) increase; depreciate
C) decrease; depreciate
D) none of the above
Q2) The devaluation of a country's currency:
A) makes foreign products more expensive for consumers in that country.
B) increases foreign demand for that country's exports.
C) can lead to deflation in that country.
D) A and B
Q3) The Bretton Woods era was the era
A) of free-floating exchange rates.
B) of floating rates without boundaries, but subject to government intervention.
C) in which governments maintained exchange rates within 1 percent of a specified rate.
D) in which exchange rates were maintained within 10 percent of a specified rate.
Q4) The forward rate is the exchange rate for immediate delivery.
A)True
B)False
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Chapter 17: Commercial Bank Operations
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Q1) Money market deposit accounts differ from conventional time deposits in that they
A) specify a maturity.
B) offer limited check-writing privileges.
C) are less liquid.
D) none of the above
Q2) The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company's own stock, and acquire other firms.
A)True
B)False
Q3) When a bank obtains funds through ____, households are not a common provider of the funds.
A) NOW accounts
B) retail CDs
C) passbook savings accounts
D) NCDs
Q4) A bank's sources of funds represent liabilities or equity of the bank.
A)True
B)False
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Chapter 18: Bank Regulation
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Q1) Which banking act allowed for the creation of NOW accounts?
A) McFadden Act
B) Glass-Steagall Act
C) DIDMCA
D) Garn-St Germain Act
Q2) The Volcker Rule prohibits banks from sponsoring or holding an ownership interest in a hedge fund or a private equity fund.
A)True
B)False
Q3) Commercial banks are allowed to invest in junk bonds.
A)True
B)False
Q4) Which of the following is an "off-balance-sheet commitment"?
A) long-term debt
B) additional paid-in capital
C) notes payable
D) letters of credit backing commercial paper issued by firms
Q5) Deposit insurance now covers all bank deposits without any limit.
A)True
B)False
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Chapter 19: Bank Management
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Q1) Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____.
A) Treasury bonds; corporate bonds
B) Treasury bonds; municipal bonds
C) Treasury bonds; commercial loans
D) none of the above
Q2) Banks would reduce their liquidity by restructuring their asset portfolio to contain fewer ____ and more ____.
A) Treasury securities; excess reserves
B) loans; Treasury securities
C) corporate bonds; Treasury securities
D) none of the above
Q3) Which of the following is not a function of a bank's board of directors?
A) overseeing acquisitions
B) determining a compensation system for the bank's executives
C) overseeing policies for changing the bank's capital structure
D) pursuing a proxy contest to change the bank's dividend policy
Q4) Floating-rate loans completely eliminate interest rate risk.
A)True
B)False
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Chapter 20: Bank Performance
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Q1) Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A's return on assets is ____ than Bank B's. Bank A's return on equity is ____ than BankB's.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Q2) Gross interest expense is affected by
A) market interest rates.
B) the composition of assets held by the bank.
C) fee services provided by the bank.
D) A and B
Q3) A bank with ____ management may account for ____ loan losses, which _____ reported earnings now.
A) conservative; smaller; reduces
B) conservative; larger; reduces
C) aggressive; larger; increases
D) aggressive; smaller; has no effect on
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Chapter 21: Thrift Operations
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Q1) All federally chartered credit unions are required to obtain insurance from the National Credit Union Share Insurance Fund (NCUSIF).
A)True
B)False
Q2) Deposits at credit unions are called
A) NOW accounts.
B) money market deposit accounts.
C) shares.
D) credit union deposit accounts.
Q3) A savings institution owned by its depositors is a ____ savings institution.
A) mutual
B) stock
C) credit
D) closed-end
Q4) ____ savings institutions hold the most assets in aggregate.
A) Stock-owned
B) Mutual
C) Closely held
D) Privatized
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Chapter 22: Finance Company Operations
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Q1) The value of a finance company can be modeled as the present value of its future cash flows.
A)True
B)False
Q2) Finance companies are not subject to state regulations on intrastate business.
A)True
B)False
Q3) 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
Q4) Finance companies would prefer to increase their long-term debt when interest rates
A) are relatively low and are expected to increase.
B) have increased.
C) have been stable for several years.
D) are projected to decrease.
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Chapter 23: Mutual Fund Operations
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Q1) 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.
Q2) 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
Q3) Many businesses that go public are partially backed by venture capital before the IPO.
A)True
B)False
Q4) Exchange-traded funds can be purchased on margin.
A)True
B)False
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Chapter 24: Securities Operations
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Q1) Securities firms avoided exposure to mortgages during the credit crisis because they sold their mortgage holdings before the crisis began.
A)True
B)False
Q2) When a stock offering is based on a firm commitment, this means that the securities firm does not guarantee a price to the issuing corporation.
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) Which of the following is not a service that is commonly performed by a securities firm?
A) setting regulatory rules for stock exchanges
B) origination
C) underwriting
D) distribution
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Chapter 25: Insurance Operations
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Q1) Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?
A) whole life
B) term
C) decreasing term
D) universal life
Q2) Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy.
A) whole life insurance
B) term insurance
C) variable life insurance
D) universal life insurance
Q3) Bond insurance is available only for corporate bonds and not for municipal securities.
A)True
B)False
Q4) Group insurance policies are very popular for employers and employees.
A)True
B)False
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Chapter 26: Pension Fund Operations
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Q1) A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.
A)True
B)False
Q2) Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans.
A) defined-benefit
B) defined-contribution
C) beneficiary
D) guarantor-insured
Q3) If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matchedfunding and projective funding, ____ is more flexible for portfolio managers.
A) matched funding; matched funding
B) projective funding; matched funding
C) projective funding; projective funding
D) matched funding; projective funding
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