Money and Capital Markets
Chapter Exam Questions
Course Introduction
This course explores the structure, function, and significance of money and capital markets within the financial system. Students will examine how these markets facilitate the allocation of funds between savers and borrowers, the role of financial intermediaries, and the instruments frequently traded, such as bonds, stocks, and other securities. Key topics include the determination of interest rates, risk management, regulatory frameworks, and the impact of monetary policy on market behavior. By analyzing real-world case studies and current events, students gain an understanding of the forces that shape financial market dynamics and their broader implications for the economy.
Recommended Textbook
Introduction to Finance Markets Investments and Financial Management 15th Edition by Ronald
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Chapter 1: The Financial Environment
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Sample Questions
Q1) Because the relative values of currencies may change, firms cannot use the currency exchange markets to reduce the risk of holding too much of certain currencies.
A)True
B)False
Answer: False
Q2) A sub-prime mortgage is a home loan made to a borrower with a relatively low credit score indicating the likelihood that loan payments might be missed when due.
A)True
B)False
Answer: True
Q3) Finance has its origins in:
A)economics and statistics
B)accounting and mathematics
C)management and operations
D)economics and accounting
Answer: D
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Chapter 2: Money and the Monetary System
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Sample Questions
Q1) The bimetallic standard was difficult to maintain because the market ratio between silver and gold changed constantly.
A)True
B)False
Answer: True
Q2) M1 includes currency and demand deposits but excludes travelers' checks.
A)True
B)False
Answer: False
Q3) Which of the following statements is false?
A)The Bretton Wood System of fixed exchange rates was maintained until 1975.
B)Under the Bretton Wood System, one ounce of gold was set equal to $35.
C)Under the Bretton Wood System, each participating country had it currency pegged to either gold or the U.S.dollar.
D)All of the above statements are correct.
Answer: A
Q4) Fiat money is a form of credit money.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Banks and Other Financial Institutions
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Sample Questions
Q1) The U.S.banking system as it exists today is relatively unchanged since just before the Civil War.
A)True
B)False
Answer: False
Q2) __________________ is the process by which individual savings are accumulated in depository institutions and, in turn, lent or invested.
A)Investing
B)Financial intermediation
C)The multiplier effect
D)Lending
E)none of the above
Answer: B
Q3) Insurance companies sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities.
A)True
B)False
Answer: False
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Chapter 4: Federal Reserve System
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Sample Questions
Q1) The basic policy instruments that the Fed uses to execute monetary policy include all of the following EXCEPT
A)changing reserve requirements
B)changing the discount rate
C)conducting open market operations
D)all of the above are monetary policy instruments
Q2) The Board of Governors of the Federal Reserve System:
A)consists of 7 appointed members
B)sets reserve requirements
C)approves discount rates as part of monetary policy
D)all the above
E)none of the above
Q3) The Federal Reserve is empowered to encourage depository institutions to help meet the needs of communities for housing and other purposes:
A)through the Community Reinvestment Act
B)through the Truth in Lending Act
C)by a provision of the Fair Housing Act
D)by strictly enforcing usury laws setting maximum interest rates
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Chapter 5: Policy Makers and the Money Supply
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Sample Questions
Q1) Traditionally, the federal government provides services that cannot be provided as efficiently by the private sector.
A)True
B)False
Q2) The government body primarily responsible for monetary policy is Congress.
A)True
B)False
Q3) U.S.debt management is generally designed to:
A)lower interest rates
B)stimulate economic activity
C)encourage orderly economic growth and stability
D)complement Federal Reserve monetary policy
Q4) A budget deficit stimulates economic activity.
Keynesian; questionable in reality
A)True
B)False
Q5) The larger the budget deficit, the more total spending there will be.
A)True
B)False
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Chapter 6: International Finance and Trade
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Sample Questions
Q1) In recent years, the principal market for bankers' acceptances has been:
A)domestic banks
B)domestic business corporations
C)foreign business corporations
D)all of the above
E)none of the above
Q2) A flexible exchange rate system in which currency exchange rates are determined by supply and demand has been in place since 1973. Too similar to above.
A)True
B)False
Q3) Loans by an exporter's bank based on the security of a documentary draft:
A)are supported entirely by the strength of the importer
B)are subject to the approval of the importer's bank
C)are available only to exporters with strong credit ratings
D)have not only the financial strength of the exporter to support them, but also that of the importer
Q4) International financial markets strongly influence domestic interest rates.
A)True
B)False
Page 8
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Chapter 7: Savings and Investment Process
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Sample Questions
Q1) When current savings of an economic unit exceed its direct investment in real assets,
A)more funds are needed by the economic unit
B)funds can be made available to a savings deficit unit
C)interest rates will rise
The firm has undistributed profits
Q2) Direct financing involves the use of securities that represent specific contracts between savers and borrowers.
A)True
B)False
Q3) Capital market securities are debt securities with maturities less than one year and corporate stocks.
A)True
B)False
Q4) A saver who chooses securities as a savings medium and desires maximum growth of principal buys:
A)public utility stocks
B)corporate stocks
C)high-grade corporate bonds
D)government bonds
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Chapter 8: Interest Rates
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Sample Questions
Q1) Which of the following statements is most correct?
A)Extended refunding is one of the new debt-management techniques used to extend the average maturity of the marketable debt without disturbing the financial markets and occurs when the Treasury offers the owners of a given issue the opportunity to exchange their holdings well in advance of the holdings' regular maturity for new securities of longer maturity.
B)Investment grade bonds have ratings of Aaa or higher and meet financial institution (banks, pension funds, insurance companies, etc.) investment standards.
C)In reaction to the then developing 2007-2009 financial crisis, short-term interest rates declined sharply and were less than 100 percent by October, 2008.
D)Laddered refunding is one of the new debt-management techniques used to extend the average maturity of the marketable debt without disturbing the financial markets and occurs when the Treasury offers the owners of a given issue the opportunity to exchange their holdings well in advance of the holdings' regular maturity for new securities of longer maturity.
E)none of the above
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Chapter 9: Time Value of Money
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Sample Questions
Q1) Discounting is an arithmetic process whereby a future value sum decreases at a compounding interest rate over time to reach a present value.
A)True
B)False
Q2) Anders owns stock in a company which has consistently paid a growing dividend over the last 10 years.The first year Alexis owned the stock, he received $4.50 per share and in the 10th year, he received $4.92 per share.What is the growth rate of the dividends over the last 10 yearsduring this time?
A)8%
B)4%
C)2%
D)1%
Q3) The interest rate determined by multiplying the interest rate charged per period by the number of periods in a year is called the:
A)annual percentage rate
B)compound rate of interest
C)stated rate of interest
D)effective annual rate
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Chapter 10: Bonds and Stocks: Characteristics and Valuation
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Sample Questions
Q1) Bondholders have priority claims over equity holders to a firm's assets and cash flows.
A)True
B)False
Q2) Global bonds are generally denominated in euros and are marketed globally.
A)True
B)False
Q3) The value of a share of stock currently selling for $50 after a 1 for 5 split is:
A)$10
B)$200
C)$500250
D)$1000500
E)none of the above
Q4) A trustee represents the company to ensure that the covenants of the bond indenture are met.
A)True
B)False
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Chapter 11: Securities Markets
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Sample Questions
Q1) In reality, an option's value will equal its intrinsic value only at expiration.At all other times, the option's premium or price will exceed its intrinsic value.A major reason for this is/are _____________.
A)marketability
B)price
C)trade restrictions
D)brand
E)none of the above
Q2) The Dow-Jones Industrial Average is made up of 30 large blue-chip stocks.
A)True
B)False
Q3) Insider trading regulation is provided for under the Securities Exchange Act of 1934.
A)True
B)False
Q4) Over-the-counter (OTC) trades must take place:
A)on the floor of the New York Stock Exchange
B)on the floor of the American Stock Exchange
C)on the floor of the NASDAQ Stock Exchange
D)none of the above
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Chapter 12: Financial Return and Risk Concepts
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Sample Questions
Q1) If the expected returns for Stock A are 3% and this year's returns are 3%, next year's returns would be
A)3%
B)6%
C)cannot say for certain
Q2) The risk cause by changes in inflation that affect revenues, expenses and profitability is called:
A) interest rate risk
B) business risk
C) purchasing power risk
D) financial risk
E) none of the above
Q3) In comparing the deviations of returns, which one of the following assets has historically had the largest standard deviation of annual returns?
A)U.S.Treasury bills
B)long-term corporate bonds
C)long-term government bonds
D)large company stocks
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14
Chapter 13: Business Organization and Financial Data
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Sample Questions
Q1) All of the following accounts are considered to be current liabilities on the balance sheet except:
A)taxes payabledepreciation
B)accounts payable
C)accruals
D)notes payable
E)all of the above are current liabilities
Q2) Which of the following statements is false?
A)working capital represents assets needed to carry out the normal operations of the business.
B)current liabilities that reflect amounts owed but not yet due on the date of the balance sheet are called accruals.Wages payable are part of a firm's accounts payable,
C)because of accrual accounting, a firm's net income over some period is not necessarily the same as its cash flows.
D)all the above statements are correct.
Q3) Profits from a proprietorship are taxed at the corporate income tax rates.
A)True
B)False
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15
Chapter 14: Financial Analysis and Long-Term Financial Planning
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Q1) Ratio analysis is a financial technique that involves dividing various financial statements numbers into one another.
A)True
B)False
Q2) ________ evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.
A)Inconclusive
B)General
C)Incomplete
D)Initial
E)all of the above
Q3) The _______________ ratio is computed as earnings before interest and taxes divided by interest expense:
A)net profit margin
B)fixed charge coverage
C)total asset turnover
D)interest coverage
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Page 16
Chapter 15: Managing Working Capital
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Sample Questions
Q1) If a firm's inventories on hand are $200,000 and its cost of goods sold is $600,000, what is the inventory turnover?
A)2.0 times
B)3.0 times
C)4.0 times
D)5 0.33 times
Q2) Working capital is essentially a firm's current assets and consists of cash, accounts receivable, inventories, plant and equipment.
A)True
B)False
Q3) A firm can reduce its cash conversion cycle by
A)increasing its average age of inventory
B)increasing its average collection period
C)decreasing its average payment period
D)none of the above
Q4) The transaction motive for holding cash is the demand for cash needed to take advantage of unusual cash discounts for needed materials.
A)True
B)False
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Chapter 16: Short-Term Business Financing
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Sample Questions
Q1) The aggressive financing approach is a strategy that attempts to match the maturities of assets with the maturities of the liabilities with which they are financed.
A)True
B)False
Q2) Short-term financing may come in the form of trade credit extended between businesses.
A)True
B)False
Q3) When accounts receivable are factored: the borrower sells the receivable; accounts receivable balances are removed from the balance sheet; the customer payment is made to the factor; and interest is charged on the funds advanced.
A)True
B)False
Q4) A compensating balance requirement means that a lending institution will require a borrowing company to keep a certain percentage of the loaned amount on deposit with that institution.
A)True
B)False
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Page 18
Chapter 17: Capital Budgeting Analysis
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Q1) All of the following statements are correct EXCEPT:
A)Capital budgeting analysis is a framework for evaluating all business decisions; it is not only a tool for the "financial" types.
B)Proper analysis will identify relevant cash flows and an appropriate discount rate to reflect the risk of the strategy and will compare the benefits and costs of the project by considering the time value of money.
C)Whether the investment is one in a business strategy, building a new warehouse, seeking fuel efficient methods of doing business, upgrading information technology systems, or investing in human resources, we should not try to quantify the benefits and cost of these choices in order to evaluate them properly.
D)To achieve success over time, a firm's managers must identify and invest in projects that provide positive net present values to maximize shareholder wealth.
E)all of the above statements are correct
Q2) Information generation develops three types of data: internal financial data, external economic and political data, and non-financial data.
A)True
B)False
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Chapter 18: Capital Structure and the Cost of Capital
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Q1) Leverage does not affect EPS for most firms.
A)True
B)False
Q2) A firm with a DOL of 2, and no preferred stock, and no long-term debt will have a DCL of:
A)0
B)2
C)1
D)cannot tell from this information
Q3) Financial risk affects the bottom half of the income statement.
A)True
B)False
Q4) The cost of capital may should be estimated from the historical cost of raising debt and equity capital.
A)True
B)False
Q5) The degree of financial leverage measures the sensitivity of earnings per share to changes in EBIT.
A)True
B)False
Page 20
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