Money and Banking Study Guide Questions
Course Introduction
Money and Banking explores the fundamental principles of how money functions within modern economies and the pivotal role played by banking institutions. The course examines the structure and operations of financial systems, including central and commercial banks, and analyzes the processes of money creation, monetary policy, and regulation. Students learn about the impact of interest rates, inflation, and financial markets on economic stability and growth, as well as the interaction between monetary authorities and economic policy. Emphasis is placed on understanding current events and trends in the financial sector with real-world examples.
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Financial Markets and Institutions 9th Edition by Jeff Madura
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Q1) The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.
A)corporate finance
B)investment management
C)financial markets and institutions
D)none of the above
Answer: A
Q2) Which of the following is a nondepository financial institution?
A)savings banks
B)commercial banks
C)savings and loan associations
D)mutual funds
Answer: D
Q3) Which of the following is not a typical money market security?
A)Treasury bills
B)Treasury bonds
C)Commercial paper
D)Negotiable certificates of deposit
Answer: B
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Page 3
Chapter 2: Determination of Interest Rates
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Q1) Which of the following is likely to cause a decrease in the equilibrium U.S.interest rate, other things being equal?
A)a decrease in savings by foreign savers
B)an increase in inflation
C)pessimistic economic projections that cause businesses to reduce expansion plans
D)a decrease in savings by U.S.households
Answer: C
Q2) At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest.
A)True
B)False
Answer: True
Q3) Other things being equal, a smaller quantity of U.S.funds would be demanded by foreign governments and corporations if their domestic interest rates were high relative to U.S.rates.
A)True
B)False
Answer: False
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4
Chapter 3: Structure of Interest Rates
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Q1) When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.
A)True
B)False
Answer: False
Q2) The higher a bond rating, the lower the perceived default risk.
A)True
B)False
Answer: True
Q3) If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the A)liquidity premium theory.
B)expectations theory.
C)segmented markets theory.
D)A and B
Answer: B
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Chapter 4: Functions of the Fed
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Q1) Assume that the reserve requirements ratio is 15%.An initial injection of $150 million could result in a maximum change in the money supply of
A)$150 million.
B)$1 billion.
C)$1 million.
D)$22.5 million.
Q2) Repurchase agreements are purchased by the Fed to
A)temporarily decrease the aggregate level of bank funds.
B)permanently increase the aggregate level of bank funds.
C)permanently decrease the aggregate level of bank funds.
D)temporarily increase the aggregate level of bank funds.
Q3) Which of the following is not an activity of Fed district banks?
A)clearing checks
B)replacing old currency
C)providing loans to depository institutions
D)acting as an intermediary to match up lenders and borrowers in the stock market
Q4) Most of the Fed's income is transferred to the U.S.Department of Justice.
A)True
B)False
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Chapter 5: Monetary Policy
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Q1) The ____ indicators tend to occur after a business cycle. A)leading B)lagging C)coincident
D)none of the above
Q2) The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply. A)increase; decreasing B)decrease; increasing C)decrease; decreasing D)increase; increasing
Q3) If the Fed attempts to reduce inflation, it would likely increase money supply growth. A)True B)False
Q4) To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary market.
A)True B)False
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Chapter 6: Money Markets
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Sample Questions
Q1) ____ are the most active participants in the federal funds market.
A)Savings and loan associations
B)Securities firms
C)Credit unions
D)Commercial banks
Q2) An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period.The repo rate is ____ percent.
A)3.10
B)0.77
C)1.00
D)none of the above
Q3) T-bills do not offer coupon payments but are sold at a discount from par value. A)True
B)False
Q4) Junk commercial paper is commercial paper that is not rated or rated low. A)True
B)False
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Chapter 7: Bond Markets
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Sample Questions
Q1) The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.
A)True
B)False
Q2) Some bonds are "stripped," which means that A)they have defaulted.
B)the call provision has been eliminated.
C)they are transferred into principal-only and interest-only securities.
D)their maturities have been reduced.
Q3) Bonds are issued in the primary market through a telecommunications network. A)True
B)False
Q4) Leveraged buyouts are commonly financed by the issuance of:
A)AAA-rated bonds.
B)Treasury bonds.
C)junk bonds.
D)municipal bonds.
Q5) Corporate bonds are more standardized than stocks. A)True
B)False
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Chapter 8: Bond Valuation and Risk
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Q1) A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.
A)increase; upward
B)increase; downward
C)decrease; downward
D)none of the above
Q2) If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.
A)underestimate; underestimate
B)overestimate; overestimate
C)underestimate; overestimate
D)overestimate; underestimate
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.
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to
A)interest rate risk.
B)reinvestment rate risk.
C)credit risk.
D)insurance risk.
Q2) A ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.
A)primary
B)secondary
C)money
D)none of the above
Q3) Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.
A)True
B)False
Q4) A financial institution may service a mortgage even after selling it.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Q1) Which of the following is not true with respect to venture capital (VC) funds?
A)When a VC fund decides to invest in a business, it will negotiate the terms of its investment, including the amount of funds it is willing to invest.
B)One common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering.
C)VC funds receive money from wealthy investors and from pension funds that are willing to maintain the investment for a long-term period.
D)All of the above are true with respect to VC funds.
Q2) If investors become dissatisfied with a firm's performance, they can compete with management in soliciting proxy votes in what is known as a proxy fight.
A)True
B)False
Q3) In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) Sorvino Co.is expected to offer a dividend of $3.2 per share per year forever.The required rate of return on Sorvino stock is 13 percent.Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.
A)4.06
B)4.16
C)24.62
D)40.63
E)none of the above
Q2) The standard deviation of a stock's returns is used to measure a stock's A)volatility.
B)beta.
C)Treynor Index.
D)risk-free rate.
Q3) Stock price volatility increased during the credit crisis.
A)True
B)False
Q4) The credit crisis only affected the stock performance of stocks in the U.S.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) Assume that a stock is priced at $50 and pays an annual dividend of $2 per share.An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest.If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is
A)60 percent.
B)44 percent.
C)30 percent.
D)69 percent.
Q2) A ____ order to buy or sell a stock means to execute the transaction at the best possible price.
A)market
B)limit
C)stop-loss
D)stop-buy
Q3) The short interest ratio is commonly measured as the number of shares shorted divided by the number of shares that the firm has repurchased in the last quarter.
A)True
B)False
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Chapter 13: Financial Futures Markets
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Sample Questions
Q1) Financial futures contracts on U.S.securities are ____ by non-U.S.financial institutions.
A)not allowed to be traded
B)are rarely desired
C)are commonly traded
D)A and B
Q2) The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments.
A)True
B)False
Q3) Assume that a futures contract on Treasury bonds with a face value of $100,000 is purchased at 93-00.If the same contract is later sold at 94-18, what is the gain, ignoring transactions costs?
A)$1,180,000
B)$118
C)$11,800
D)$15,625
E)$1,562.50
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15
Chapter 14: Options Markets
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Sample Questions
Q1) The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option.
A)True
B)False
Q2) Market makers can execute stock option transactions for customers and do not trade stock options for their own account.
A)True B)False
Q3) An option with a higher exercise price has a higher call option premium and a lower put option premium.
A)True
B)False
Q4) A call option is "in the money" when the
A)market price of the underlying security exceeds the exercise price.
B)market price of the underlying security equals the exercise price.
C)market price of the underlying security is less than the exercise price.
D)premium on the option is less than the exercise price.
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Chapter 15: Swap Markets
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Sample Questions
Q1) 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
Q2) There is risk that a firm involved in an interest rate swap may not meet its payment obligations; this risk is called systemic risk.
A)True
B)False
Q3) Refer to Exhibit 15-1.The dollar amount to be received (or paid) by the seller of the interest rate cap based on the forecast of LIBOR assumed above over the three-year period is $____.
A)F1F1F1S1 F1F1F10500,000
B)500,000
C)F1F1F1S1 F1F1F101,500,000
D)1,500,000
E)none of the above
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Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.
A)short; short
B)long; short
C)short; long
D)long; long
Q2) A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a A)pegged system.
B)free float.
C)dirty float.
D)managed float.
Q3) In July 2005, China implemented a new system in which the yuan could float within narrow boundaries based on a set of major currencies.
A)True
B)False
Q4) Direct intervention is always extremely effective.
A)True
B)False
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Chapter 17: Commercial Bank Operations
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Q1) Which of the following is not an off-balance sheet activity for commercial banks?
A)consumer loans
B)loan commitments
C)standby letters of credit
D)swap contracts
E)All of the above are off-balance sheet activities.
Q2) ____ are the largest bank source of funds (as a percentage of total liabilities).
A)Small-denomination time deposits
B)Federal funds borrowed
C)Transaction deposits
D)Bonds
E)Savings deposits (including MMDAs)
Q3) Which type of savings account transfers funds to a checking account when checks are written?
A)ATS
B)passbook savings
C)CDs
D)MMDAs
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19
Chapter 18: Bank Regulation
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Sample Questions
Q1) The McFadden Act was applicable to banks
A)in states where no branching was allowed.
B)only in limited branching states.
C)only in statewide branching states.
D)in all states, regardless of their intrastate branching status.
Q2) When the Continental Illinois Bank problem became widely publicized, regulators guaranteed all deposits of all banks.
A)True
B)False
Q3) Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999?
A)It complemented the Glass-Steagall Act.
B)It enabled commercial banks to more easily pursue securities and insurance activities.
C)It gave securities firms and insurance companies the right to acquire banks.
D)The Act requires that commercial banks must have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities.
E)All of the above are true.
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20
Chapter 19: Bank Management
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Sample Questions
Q1) Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.
A)True
B)False
Q2) Most loan sales enable the bank originating the loan to continue servicing the loan.
A)True
B)False
Q3) For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.
A)True
B)False
Q4) For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____.
A)exceeds; zero
B)exceeds; negative
C)exceeds; positive
D)is less than; negative
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21
Chapter 20: Bank Performance
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Sample Questions
Q1) Net interest income is the difference between gross interest income and interest expenses and is measured as a percentage of A)liabilities.
B)shareholder's equity.
C)assets.
D)revenues.
Q2) The risk premium on a commercial bank is ____ related to economic growth and ____ related to management skills.
A)positively; negatively
B)positively; positively
C)negatively; negatively
D)negatively; positively
Q3) Noninterest income as a percentage of assets has been consistently lowest for banks that
A)focus on providing loans.
B)offer substantial insurance services.
C)offer substantial securities-related services.
D)offer substantial advisory services.
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Chapter 21: Thrift Operations
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Sample Questions
Q1) Adjustable-rate mortgages ____ of rising interest rates on a typical savings institution's spread.They ____ of declining interest rates on the spread.
A)reduce the adverse impact; reduce the favorable impact
B)reduce the adverse impact; increase the favorable impact
C)increase the adverse impact; increase the favorable impact
D)increase the adverse impact; reduce the favorable impact
Q2) Checkable accounts offered by credit unions are called
A)NOW accounts.
B)money market deposit accounts.
C)share certificates.
D)share drafts.
Q3) The primary source of funds for credit unions is
A)share certificates.
B)share deposits.
C)share drafts.
D)borrowed funds from the Central Liquidity Facility (CLF).
E)none of the above
Q4) In general, savings institutions are larger than commercial banks.
A)True
B)False
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Chapter 22: Finance Operations
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Sample Questions
Q1) Finance companies are most likely to compete with which of the following institutions for consumer loans?
A)commercial banks
B)securities firms
C)pension funds
D)insurance companies
E)none of the above
Q2) Some finance companies offer credit card loans through a particular retailer.
A)True
B)False
Q3) Overall, the liquidity risk of finance companies is higher than that of other financial institutions.
A)True
B)False
Q4) Which of the following is not a use of finance company funds?
A)consumer loans
B)business loans
C)commercial paper
D)real estate loans
E)All of the above are uses of finance company funds.
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Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) Mutual funds that do not repurchase their shares from investors are
A)closed-end mutual funds.
B)load mutual funds.
C)no-load mutual funds.
D)open-end mutual funds.
Q2) Money market fund assets are dominated by
A)commercial paper.
B)repurchase agreements.
C)Treasury bills.
D)CDs.
Q3) Exchange traded funds can be
A)traded throughout the day.
B)purchased on margin.
C)sold short.
D)all of the above
Q4) Exchange-traded funds can be shorted.
A)True
B)False
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Page 25
Chapter 24: Securities Operations
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Sample Questions
Q1) Securities firms
A)tend to overprice IPOs.
B)tend to underprice IPOs.
C)tend to price IPOs correctly.
D)are typically not involved in IPOs.
Q2) One of the main functions of securities firms is raising capital for corporations.
A)True
B)False
Q3) When securities firms raise capital for corporations, their primary role is as a(n)
A)intermediary.
B)lender (creditor).
C)investor.
D)B and C
Q4) Securities and Exchange Commission (SEC) approval of a registration statement guarantees the quality and safety of the securities to be issued.
A)True
B)False
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26
Chapter 25: Insurance and Pension Fund Operations
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Q1) Property and casualty (PC) insurance differs from life insurance in all of the following ways, except
A)PC policies often last one year or less, as opposed to the long-term or even permanent life insurance policies.
B)PC insurance is more focused than life insurance.
C)the amount of future compensation to be paid on PC insurance is more difficult to forecast than that paid on life insurance.
D)All of the above are differences between PC and life insurance.
Q2) To reduce interest rate risk, pension fund managers can
A)shift from variable-rate to fixed-rate bonds.
B)increase the average maturity on fixed-rate bonds.
C)decrease the average maturity on fixed-rate bonds.
D)reduce the investment in money market securities.
Q3) 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.
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