Economics of Money, Banking and Financial Markets, Business School Edition plus NEW MyEconLab with Pearson eText -- Access Card Package Access Card (1-semester access) Package, 3/E , solutions manual and test bank Mishkin
Part Three
Answers
to End-of-Chapter
Problems
Chapter 1
ANSWERS TO QUESTIONS
1. The
interest rate on three-month Treasury bills fluctuates more than the other
interest rates and is lower on average. The interest rate on Baa
corporate bonds is higher on average than the other interest rates.
2. The lower price for a
firm’s shares means that it can raise a smaller amount of funds, so investment
in facilities and equipment will fall.
3. Higher stock prices mean
that consumers’ wealth is higher, and they will be more likely to increase
their spending.
4. They channel funds from
people who do not have a productive use for them to people who do, thereby
resulting in higher economic efficiency.
5. The United States economy
was hit by the worst financial crisis since the Great Depression. Defaults in
subprime residential mortgages led to major losses in financial institutions,
producing not only numerous bank failures, but also the demise of two of the
largest investment banks in the United
States
6. The basic activity of
banks is to accept deposits and make loans.
7. Savings and loan associations, mutual savings banks, credit unions,
insurance companies, mutual funds, pension funds, and finance companies.
8. Answers will vary.
9. In the period from 2007
to 2011, both inflation and interest rates have generally trended downward
compared to before that period.
10. The data in Figures 3, 5,
and 6 suggest that real output, the inflation rate, and interest rates would
all fall.
all fall.
11. Businesses would increase
investment spending because the cost of financing this spending is now lower,
and consumers would be more likely to purchase a house or a car because the
cost of financing their purchase is lower.
12. No. It is true that
people who borrow to purchase a house or a car are worse off because it costs
them more to finance their purchase; however, savers benefit because they can
earn higher interest rates on their savings.
13. Because the Federal
Reserve affects interest rates, inflation, and business cycles, all of which
have an important impact on the profitability of financial institutions.
14. The deficit as a
percentage of GDP has expanded dramatically since 2007; in 2010 the deficit to
GDP ratio was 10%, well above the historical average of around 2% since 1950.
GDP ratio was 10%, well above the historical average of around 2% since 1950.
15. It makes foreign goods
more expensive, so British consumers will buy fewer foreign goods and more domestic
goods.
16. It makes British goods
more expensive relative to American goods. Thus American businesses will find
it easier to sell their goods in the United States
17. Changes in foreign exchange rates change the
value of assets held by financial institutions and thus lead to gains and
losses on these assets. Also changes in foreign exchange rates affect the
profits made by traders in foreign exchange who work for financial
institutions.
18. In the
mid- to late 1970s and in the late 1980s and early 1990s, the value of the
dollar was low, making travel abroad relatively more expensive; thus it
was a good time to vacation in the United States and see the Grand Canyon. With
the rise in the dollar’s value in the early 1980s, travel abroad became
relatively cheaper, making it a good time to visit the Tower of London
19. When the dollar increases in value, foreign
goods become less expensive relative to American goods; thus you are more
likely to buy French-made jeans than American-made jeans. The resulting drop in
demand for American-made jeans because of the strong dollar hurts American
jeans manufacturers. On the other hand, the American company that imports jeans
into the United States now finds that
the demand for its product has risen, so it is better off when the dollar is strong.
the demand for its product has risen, so it is better off when the dollar is strong.
20. As the dollar becomes stronger (worth more)
relative to a foreign currency, one dollar is equivalent to (can be exchanged for) more foreign currency. Thus
for a given face value of bond holdings, a stronger dollar will yield more home currency to
foreigners, so the asset will be worth more to foreign investors.
Likewise, a weak dollar will lead to foreign bond holdings worth less to
foreigners.
ANSWERS TO APPLIED
PROBLEMS
21. The
best day is 4/25. At a rate of $1.6674/pound, you would have £119.95. The worst
day is 4/7. At $1.961/pound, you would have £101.99, or a difference of £17.96.
Chapter 2
ANSWERS TO QUESTIONS
1. Yes, I
should take out the loan, because I will be better off as a result of doing so.
My interest payment will be $4500 (90% of $5000), but as a result, I
will earn an additional $10,000, so I will be ahead of the game by $5500. Since
Larry’s loan-sharking business can make some people better off, as in this
example, loan sharking may have social benefits. (One argument against
legalizing loan sharking, however, is that it is frequently a violent
activity.)
2. Yes, because the absence
of financial markets means that funds cannot be channeled to people who have
the most productive use for them. Entrepreneurs then cannot acquire funds to
set up businesses that would help the economy grow rapidly.
3. The share of Microsoft
stock is an asset for its owner, because it entitles the owner to a share of
the earnings and assets of Microsoft. The share is a liability for Microsoft,
because it is a claim on its earnings and assets by the owner of the share.
4. You would rather hold
bonds, because bondholders are paid off before equity holders, who are the
residual claimants.
5. This statement is false.
Prices in secondary markets determine the prices that firms issuing securities receive in primary markets. In addition, secondary
markets make securities more liquid and thus easier to sell in the
primary markets. Therefore, secondary markets are, if anything, more important
than primary markets.
6. Treasury bills are
short-term debt instruments issued by the United States government to cover immediate
spending obligations, i.e., finance deficit spending. Certificates of deposit
(CDs) are
issued by banks and sold to depositors. Commercial paper is issued by corporations and large banks as a method of short-term funding in debt markets. Repos are issued primarily by banks, and funded by corporations and other banks through loans in which treasury bills serve as collateral, with an explicit agreement to pay off the debt (repurchase the treasuries) in the near future. Fed funds are overnight loans from one bank to another.
issued by banks and sold to depositors. Commercial paper is issued by corporations and large banks as a method of short-term funding in debt markets. Repos are issued primarily by banks, and funded by corporations and other banks through loans in which treasury bills serve as collateral, with an explicit agreement to pay off the debt (repurchase the treasuries) in the near future. Fed funds are overnight loans from one bank to another.
7. Mortgages are
loans to households or firms to purchase housing, land, or other real
structures, where the structure or land itself serves as collateral for the
loans. Mortgage-backed securities are
bond-like debt instruments which are backed by a bundle of individual
mortgages, whose interest and principal payments are collectively paid to the
holders of the security. In other words, when an individual takes out a
mortgage, that loan is bundled with other individual mortgages to create a
composite debt instrument, which is then sold to investors.
8. The British gained
because they were able to earn higher interest rates as a result of lending to
Americans, while the Americans gained because they now had access to capital to
start up profitable businesses such as railroads.
9. The international trade of mortgage-backed securities is generally
beneficial in that the European banks that held the mortgages could earn
a return on those holdings, while providing needed capital to
U.S. financial markets to support borrowing for new home construction and other productive uses.
In this sense, both European banks and U.S. borrowers should have benefitted. However, with the sharp decline in the U.S. housing market, default rates on mortgages rose sharply, and the value of
the mortgage-backed securities held by European banks fell sharply. Even though the financial crisis began primarily in the United States as a housing downturn, it significantly affected European markets; Europe would have been much less affected without such internationalization of financial markets.
U.S. financial markets to support borrowing for new home construction and other productive uses.
In this sense, both European banks and U.S. borrowers should have benefitted. However, with the sharp decline in the U.S. housing market, default rates on mortgages rose sharply, and the value of
the mortgage-backed securities held by European banks fell sharply. Even though the financial crisis began primarily in the United States as a housing downturn, it significantly affected European markets; Europe would have been much less affected without such internationalization of financial markets.
10. Financial intermediaries
benefit by carrying risk at relatively low transaction costs. Since higher
risk assets on average earn a higher return, financial intermediaries can earn a profit on a diversified portfolio of risky assets. Individual investors benefit by earning returns on a pooled collection of assets issued by financial intermediaries at lower risk. Risk to individual investors is lowered through the pooling of assets by the financial intermediary.
risk assets on average earn a higher return, financial intermediaries can earn a profit on a diversified portfolio of risky assets. Individual investors benefit by earning returns on a pooled collection of assets issued by financial intermediaries at lower risk. Risk to individual investors is lowered through the pooling of assets by the financial intermediary.
11. Because you know your family
member better than a stranger, you know more about the borrower’s honesty,
propensity for risk taking, and other traits. There is less asymmetric
information than with a stranger and less likelihood of an adverse selection
problem, with the result that you are more likely to lend to the family member.
12. The issuance of subprime
mortgages represents lenders loaning money to the pool of potential homeowners
who are the highest credit risk and have the lowest net wealth and other
financial resources. In other words, this group of borrowers most in need of
mortgage credit was also the highest risk to lenders, a perfect example of
adverse selection.
13. Loan sharks can threaten
their borrowers with bodily harm if borrowers take actions that might jeopardize
their paying off the loan. Hence borrowers from a loan shark are less likely to
increase moral hazard.
14. They might not work hard
enough while you are not looking or may steal or commit fraud.
15. Yes, because even if you
know that a borrower is taking actions that might jeopardize paying off the
loan, you must still stop the borrower from doing so. Because that may be
costly, you may not spend the time and effort to reduce moral hazard, and so
the problem of moral hazard still exists.
16. True. If there are no informational or transactions costs, people
could make loans to each other at no cost and would thus have no need for
financial intermediaries.
17. Because the costs of making the loan to your
neighbor are high (legal fees, fees for a credit check, and so on), you will
probably not be able earn 5% on the loan after your expenses even though it
has a 10% interest rate. You are better off depositing your savings with a financial intermediary and earning 5% interest. In addition, you are likely to bear less risk by depositing your savings at the bank rather than lending them to your neighbor.
has a 10% interest rate. You are better off depositing your savings with a financial intermediary and earning 5% interest. In addition, you are likely to bear less risk by depositing your savings at the bank rather than lending them to your neighbor.
18. Potentially competing
interests may lead an individual or firm to conceal information or disseminate
misleading information. A substantial reduction in the quality of information
in financial markets increases asymmetric information problems and prevents
financial markets from channeling funds into the most productive investment
opportunities. Consequently, the financial markets and the economy become less
efficient. That is, false information as a result of a conflict of interest can
lead to a more inefficient allocation of capital than just asymmetric information alone.
lead to a more inefficient allocation of capital than just asymmetric information alone.
19. Financial firms that
provide multiple types of financial services can be more efficient through
economies of scope; that is, by lowering the cost of information production.
However, this can be problematic since it can also lead to conflicts of interest,
in which the financial firm provides false or misleading information to protect
its own interests. This can lead to a worsening of the asymmetric information
problem, making financial markets less efficient.
20. You would likely use a
credit union if you are a member, since their primary business is consumer
loans. In some cases it is possible to borrow directly from pension funds, but
it can come with high borrowing costs and tax implications. Investment banks do
not provide loans to the general public.
21. Most life insurance companies hold large
amounts of corporate bonds and mortgage assets, thus poor corporate profits or
a downturn in the housing market can significantly adversely impact the value
of asset holdings of insurance companies.
22. During the financial panic, regulators were
concerned that depositors worried their banks would fail, and that depositors
(especially with accounts over $100,000) would pull money from banks, leaving
cash-starved banks with even less cash to satisfy customer demands and day-to-day
operations. This could create a contagious
bank panic in which otherwise healthy banks would fail. Raising the insurance
limit would reassure depositors that their money was safe in banks and prevent
a bank panic, helping to stabilize the financial system.
ANSWERS TO APPLIED
PROBLEMS
23. (a) With Option 1, since deposits are insured it
can be assumed a riskless investment. Thus, the expected total payoff would be
$10,000 ´ 1.02 = $10,200. With Option 2, a
bond return of 5% implies a potential payoff
of $10,000 ´ 1.05 = $10,500, and there is a 90% chance that this outcome will occur, thus the expected
payoff is $10,500 ´ 0.9 = $9450. Under Option 3, the expected payoff is $10,000 ´ 1.08 ´ 0.93 = $10,044. Option 4 is riskless, so the expected total payoff is
$10,000. Given these choices and the assumption that you don’t care about risk,
Option 1 is the best investment.
(b) This option implies the very real possibility of either
receiving nothing (if he actually leaves town),
or $10,800 (if he indeed pays as promised). If you don’t pay Mike, you have an
expected return of $10,044 as shown above. If you paid your friend the $100 and
learned that Mike would leave without paying, then obviously you wouldn’t loan
Mike the money, and you would be left with $9900. However, if you paid the
friend $100 and learned that Mike would pay, you would have $10,700 (= $10,000 ´
1.08 -
$100). After paying your friend Mike, but before knowing the true outcome, your
expected return would be $10,644 ($9900 ´
0.07 +
$10,700 ´ 0.93). Paying
your friend the $100 is definitely worth it because it increases your expected
return and in addition dramatically reduces the downside risk that you make a
bad loan, and increases the certainty of the payoff amount. That is, with
asymmetric information (not paying your roommate), you have a range of payoffs of
$0 to $10,800 versus $9900 to $10,700 without asymmetric information. Thus paying a small amount to improve risk assessment can
be very beneficial, a task for which financial
intermediaries are well suited.
Chapter 3
ANSWERS TO QUESTIONS
1. Since a lot of other assets have liquidity
properties that are similar to currency but can be used as money to purchase
goods and services, not counting them would understate an economy’s access
to liquidity for transactions purposes. For this reason, counting assets such as checking deposits or savings accounts more accurately reflects the stock of assets that can be considered money.
to liquidity for transactions purposes. For this reason, counting assets such as checking deposits or savings accounts more accurately reflects the stock of assets that can be considered money.
2. Even if he or she is a
non-smoker, since the prisoner knows that others in the prison will accept
cigarettes as a form of payment, they themselves would be willing to accept
cigarettes as a form
of payment. So, rather than prisoners having to barter and trade favors, cigarettes satisfy the double coincidence of wants in that both parties to a trade stand ready to use them to “purchase” goods or services.
of payment. So, rather than prisoners having to barter and trade favors, cigarettes satisfy the double coincidence of wants in that both parties to a trade stand ready to use them to “purchase” goods or services.
3. Because the orchard owner
likes only bananas but the banana grower doesn’t like apples, the
banana grower will not want apples in exchange for his bananas, and they will not trade. Similarly, the chocolatier will not be willing to trade with the banana grower because she does not like bananas. The orchard owner will not trade with the chocolatier because he doesn’t like chocolate. Hence, in a barter economy, trade among these three people may well not take place, because in no case is there
a double coincidence of wants. However, if money is introduced into the economy, the orchard owner can sell his apples to the chocolatier and then use the money to buy bananas from the banana grower. Similarly, the banana grower can use the money he receives from the orchard owner to buy chocolate from the chocolatier, and the chocolatier can use the money to buy apples from the orchard owner. The result is that the need for a double coincidence of wants is eliminated, and everyone is better off because all three producers are now able to eat what they like best.
banana grower will not want apples in exchange for his bananas, and they will not trade. Similarly, the chocolatier will not be willing to trade with the banana grower because she does not like bananas. The orchard owner will not trade with the chocolatier because he doesn’t like chocolate. Hence, in a barter economy, trade among these three people may well not take place, because in no case is there
a double coincidence of wants. However, if money is introduced into the economy, the orchard owner can sell his apples to the chocolatier and then use the money to buy bananas from the banana grower. Similarly, the banana grower can use the money he receives from the orchard owner to buy chocolate from the chocolatier, and the chocolatier can use the money to buy apples from the orchard owner. The result is that the need for a double coincidence of wants is eliminated, and everyone is better off because all three producers are now able to eat what they like best.
4. Cavemen did not need
money. In their primitive economy, they did not specialize in producing one
type of good and they had little need to trade with other cavemen.
5. (a) This situation illustrates the medium-of-exchange function of money.
We usually do not think about why we accept money in exchange for hours
spent working, as we are so accustomed to using money. The medium-of-exchange
function of money refers to its ability to facilitate trades (hours worked for
money and then money for groceries) in a society. (b) In this case we observe
money performing its unit-of-account function. If modern societies did not use
money as a unit of account, then the price
of apples would have to be quoted in terms of all the other items in the market. This quickly becomes an impossible task. Suppose that a pound of apples sells for 0.80 pounds of oranges, half a gallon of milk, one third of a pound of meat, 2 razor blades, 1.5 pound of potatoes, etc., etc., etc! (c) Maria is contemplating the store-of-value function of money. As a medium of exchange and unit of account, measures of money known as M1 or M2 have no important rivals. With respect to the store-of-value function, however, there are many assets that can preserve value better than a checking account. Maria’s choice to preserve the purchasing power of her income by increasing her savings account balance is fine for a small period of time. For a period of 20 years, however, you might choose to
buy a U.S. treasury bond that matures in 20 years (as many grandparents have done as a way to
pay for their grandchildren’s educations).
of apples would have to be quoted in terms of all the other items in the market. This quickly becomes an impossible task. Suppose that a pound of apples sells for 0.80 pounds of oranges, half a gallon of milk, one third of a pound of meat, 2 razor blades, 1.5 pound of potatoes, etc., etc., etc! (c) Maria is contemplating the store-of-value function of money. As a medium of exchange and unit of account, measures of money known as M1 or M2 have no important rivals. With respect to the store-of-value function, however, there are many assets that can preserve value better than a checking account. Maria’s choice to preserve the purchasing power of her income by increasing her savings account balance is fine for a small period of time. For a period of 20 years, however, you might choose to
buy a U.S. treasury bond that matures in 20 years (as many grandparents have done as a way to
pay for their grandchildren’s educations).
6. Because of the rapid
inflation in Brazil, the domestic currency, the real, was a poor store of
value. Thus many people preferred to hold dollars, which were a better store of
value, and used them in their daily shopping.
7. Because
money was losing value at a slower rate (the inflation rate was lower) in the
1950s than in the 1970s, it was a better store of value then, and you would
have been willing
Economics of Money, Banking, and Financial Markets,
3e, Bus. School Ed., (Mishkin)
Chapter 2 An
Overview of the Financial System
2.1 Function of Financial Markets
1) Every
financial market has the following characteristic:
A) It determines
the level of interest rates.
B) It allows
common stock to be traded.
C) It allows
loans to be made.
D) It channels
funds from lenders-savers to borrowers-spenders.
Answer: D
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2) Financial
markets have the basic function of
A) getting
people with funds to lend together with people who want to borrow funds.
B) assuring that
the swings in the business cycle are less pronounced.
C) assuring that
governments need never resort to printing money.
D) providing a
risk-free repository of spending power.
Answer: A
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3) Financial
markets improve economic welfare because
A) they channel
funds from investors to savers.
B) they allow
consumers to time their purchase better.
C) they weed out
inefficient firms.
D) eliminate the
need for indirect finance.
Answer: B
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4)
Well-functioning financial markets
A) cause
inflation.
B) eliminate the
need for indirect finance.
C) cause
financial crises.
D) produce an
efficient allocation of capital.
Answer: D
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5) A breakdown
of financial markets can result in
A) financial
stability.
B) rapid
economic growth.
C) political
instability.
D) stable
prices.
Answer: C
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6)
The principal lender-savers are
A)
governments.
B)
businesses.
C)
households.
D)
foreigners.
Answer: C
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7) Which of the
following can be described as direct finance?
A) You take out
a mortgage from your local bank.
B) You borrow
$2500 from a friend.
C) You buy
shares of common stock in the secondary market.
D) You buy
shares in a mutual fund.
Answer: B
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8) Assume that
you borrow $2000 at 10% annual interest to finance a new business project. For
this loan to be profitable, the minimum amount this project must generate in
annual earnings is
A) $400.
B) $201.
C) $200.
D) $199.
Answer: B
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9) You can
borrow $5000 to finance a new business venture. This new venture will generate
annual earnings of $251. The maximum interest rate that you would pay on the
borrowed funds and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
Answer: D
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10) Which of the
following can be described as involving direct finance?
A) A corporation
issues new shares of stock.
B) People buy
shares in a mutual fund.
C) A pension
fund manager buys a short-term corporate security in the secondary market.
D) An insurance
company buys shares of common stock in the over-the-counter markets.
Answer: A
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11) Which of the
following can be described as involving direct finance?
A) A corporation
takes out loans from a bank.
B) People buy
shares in a mutual fund.
C) A corporation
buys a short-term corporate security in a secondary market.
D) People buy
shares of common stock in the primary markets.
Answer: D
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12) Which of the
following can be described as involving indirect finance?
A) You make a
loan to your neighbor.
B) A corporation
buys a share of common stock issued by another corporation in the primary
market.
C) You buy a
U.S. Treasury bill from the U.S. Treasury.
D) You make a
deposit at a bank.
Answer: D
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13) Which of the
following can be described as involving indirect finance?
A) You make a
loan to your neighbor.
B) You buy
shares in a mutual fund.
C) You buy a
U.S. Treasury bill from the U.S. Treasury.
D) A corporation
buys a short-term security issued by another corporation in the primary market.
Answer: B
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14) Securities
are ________ for the person who buys them, but are ________ for the individual
or firm that issues them.
A) assets;
liabilities
B) liabilities;
assets
C) negotiable;
nonnegotiable
D)
nonnegotiable; negotiable
Answer: A
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15)
With ________ finance, borrowers obtain funds from lenders by selling them
securities in the financial markets.
A)
active
B)
determined
C)
indirect
D)
direct
Answer: D
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16)
With direct finance, funds are channeled through the financial market from the
________ directly to the ________.
A)
savers, spenders
B)
spenders, investors
C)
borrowers, savers
D)
investors, savers
Answer: A
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17)
Distinguish between direct finance and indirect finance. Which of these is the most important source
of funds for corporations in the United States?
Answer: With direct finance, funds flow directly from
the lender/saver to the borrower. With
indirect finance, funds flow from the lender/saver to a financial intermediary
who then channels the funds to the borrower/investor. Financial intermediaries (indirect finance)
are the major source of funds for corporations in the U.S.
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2.2 Structure of Financial Markets
1) Which of the
following statements about the characteristics of debt and equity is false?
A) They can both
be long-term financial instruments.
B) They can both
be short-term financial instruments.
C) They both
involve a claim on the issuer's income.
D) They both
enable a corporation to raise funds.
Answer: B
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2) Which of the
following statements about the characteristics of debt and equities is true?
A) They can both
be long-term financial instruments.
B) Bond holders
are residual claimants.
C) The income
from bonds is typically more variable than that from equities.
D) Bonds pay
dividends.
Answer: A
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3) Which of the
following statements about financial markets and securities is true?
A) A bond is a
long-term security that promises to make periodic payments called dividends to
the firm's residual claimants.
B) A debt
instrument is intermediate term if its maturity is less than one year.
C) A debt instrument
is intermediate term if its maturity is ten years or longer.
D) The maturity
of a debt instrument is the number of years (term) to that instrument's
expiration date.
Answer: D
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4)
Which of the following is an example of an intermediate-term debt?
A)
A thirty-year mortgage.
B)
A sixty-month car loan.
C)
A six month loan from a finance company.
D)
A Treasury bond.
Answer: B
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5)
If the maturity of a debt instrument is less than one year, the debt is called
A)
short-term.
B)
intermediate-term.
C)
long-term.
D)
prima-term.
Answer: A
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6)
Long-term debt has a maturity that is
A)
between one and ten years.
B)
less than a year.
C)
between five and ten years.
D)
ten years or longer.
Answer: D
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7)
When I purchase ________, I own a portion of a firm and have the right to vote
on issues important to the firm and to elect its directors.
A)
bonds
B)
bills
C)
notes
D)
stock
Answer: D
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8)
Equity holders are a corporation's ________.
That means the corporation must pay all of its debt holders before it
pays its equity holders.
A)
debtors
B)
brokers
C)
residual claimants
D)
underwriters
Answer: C
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9)
Which of the following benefit directly from any increase in the corporation's
profitability?
A)
a bond holder
B)
a commercial paper holder
C)
a shareholder
D)
a T-bill holder
Answer: C
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10)
A financial market in which previously issued securities can be resold is
called a ________ market.
A)
primary
B)
secondary
C)
tertiary
D)
used securities
Answer: B
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11) An important
financial institution that assists in the initial sale of securities in the
primary market is the
A) investment
bank.
B) commercial bank.
C) stock
exchange.
D) brokerage
house.
Answer: A
Ques
Status: Previous Edition
12)
When an investment bank ________ securities, it guarantees a price for a
corporation's securities and then sells them to the public.
A)
underwrites
B)
undertakes
C)
overwrites
D)
overtakes
Answer: A
Ques
Status: Previous Edition
13)
Which of the following is not a secondary market?
A)
foreign exchange market
B)
futures market
C)
options market
D)
IPO market
Answer: D
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
14)
________ work in the secondary markets matching buyers with sellers of
securities.
A)
Dealers
B)
Underwriters
C)
Brokers
D)
Claimants
Answer: C
Ques
Status: Previous Edition
15) A
corporation acquires new funds only when its securities are sold in the
A) primary
market by an investment bank.
B) primary
market by a stock exchange broker.
C) secondary
market by a securities dealer.
D) secondary
market by a commercial bank.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
16) A
corporation acquires new funds only when its securities are sold in the
A) secondary
market by an investment bank.
B) primary
market by an investment bank.
C) secondary
market by a stock exchange broker.
D) secondary
market by a commercial bank.
Answer: B
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
17) An important
function of secondary markets is to
A) make it
easier to sell financial instruments to raise funds.
B) raise funds
for corporations through the sale of securities.
C) make it
easier for governments to raise taxes.
D) create a
market for newly constructed houses.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
18) Secondary
markets make financial instruments more
A) solid.
B) vapid.
C) liquid.
D) risky.
Answer: C
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
19)
A liquid asset is
A)
an asset that can easily and quickly be sold to raise cash.
B)
a share of an ocean resort.
C)
difficult to resell.
D)
always sold in an over-the-counter market.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
20) The higher a
security's price in the secondary market the ________ funds a firm can raise by
selling securities in the ________ market.
A) more; primary
B) more;
secondary
C) less; primary
D) less;
secondary
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
21)
When secondary market buyers and sellers of securities meet in one central
location to conduct trades the market is called a(n)
A)
exchange.
B)
over-the-counter market.
C)
common market.
D)
barter market.
Answer: A
Ques
Status: Previous Edition
22)
In a(n) ________ market, dealers in different locations buy and sell securities
to anyone who comes to them and is willing to accept their prices.
A)
exchange
B)
over-the-counter
C)
common
D)
barter
Answer: B
Ques
Status: New
23) Forty or so
dealers establish a "market" in these securities by standing ready to
buy and sell them.
A) Secondary
stocks
B) Surplus
stocks
C) U.S.
government bonds
D) Common stocks
Answer: C
Ques
Status: Previous Edition
24) Which of the
following statements about financial markets and securities is true?
A) Many common
stocks are traded over-the-counter, although the largest corporations usually
have their shares traded at organized stock exchanges such as the New York
Stock Exchange.
B) As a
corporation gets a share of the broker's commission, a corporation acquires new
funds whenever its securities are sold.
C) Capital market
securities are usually more widely traded than shorter-term securities and so
tend to be more liquid.
D) Because of
their short-terms to maturity, the prices of money market instruments tend to
fluctuate wildly.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
25)
A financial market in which only short-term debt instruments are traded is
called the ________ market.
A)
bond
B)
money
C)
capital
D)
stock
Answer: B
Ques
Status: Previous Edition
26)
Equity instruments are traded in the ________ market.
A)
money
B)
bond
C)
capital
D)
commodities
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
27)
Because these securities are more liquid and generally have smaller price
fluctuations, corporations and banks use the ________ securities to earn
interest on temporary surplus funds.
A)
money market
B)
capital market
C)
bond market
D)
stock market
Answer: A
Ques
Status: New
AACSB: Reflective thinking skills
28)
Corporations receive funds when their stock is sold in the primary market. Why
do corporations pay attention to what is happening to their stock in the
secondary market?
Answer: The existence of the secondary market makes
their stock more liquid and the price in the secondary market sets the price
that the corporation would receive if they choose to sell more stock in the
primary market.
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
29)
Describe the two methods of organizing a secondary market.
Answer: A secondary market can be organized as an
exchange where buyers and sellers meet in one central location to conduct
trades. An example of an exchange is the
New York Stock Exchange. A secondary
market can also be organized as an over-the-counter market. In this type of market, dealers in different
locations buy and sell securities to anyone who comes to them and is willing to
accept their prices. An example of an
over-the-counter market is the federal funds market.
Ques
Status: Previous Edition
2.3 Financial Market Instruments
1)
Prices of money market instruments undergo the least price fluctuations because
of
A)
the short terms to maturity for the securities.
B)
the heavy regulations in the industry.
C)
the price ceiling imposed by government regulators.
D)
the lack of competition in the market.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
2)
U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price
than the amount you receive at maturity.
A)
premium
B)
collateral
C)
default
D)
discount
Answer: D
Ques
Status: Previous Edition
AACSB: Analytic skills
3)
U.S. Treasury bills are considered the safest of all money market instruments
because there is almost no risk of
A)
defeat.
B)
default.
C)
desertion.
D)
demarcation.
Answer: B
Ques
Status: Revised
AACSB: Analytic skills
4)
A debt instrument sold by a bank to its depositors that pays annual interest of
a given amount and at maturity pays back the original purchase price is called
A)
commercial paper.
B)
a negotiable certificate of deposit.
C)
a municipal bond.
D)
federal funds.
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
5)
A short-term debt instrument issued by well-known corporations is called
A)
commercial paper.
B)
corporate bonds.
C)
municipal bonds.
D)
commercial mortgages.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
6)
________ are short-term loans in which Treasury bills serve as collateral.
A)
Repurchase agreements
B)
Negotiable certificates of deposit
C)
Federal funds
D)
U.S. government agency securities
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
7)
Collateral is ________ the lender receives if the borrower does not pay back
the loan.
A)
a liability
B)
an asset
C)
a present
D)
an offering
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
8)
Federal funds are
A)
funds raised by the federal government in the bond market.
B)
loans made by the Federal Reserve System to banks.
C)
loans made by banks to the Federal Reserve System.
D)
loans made by banks to each other.
Answer: D
Ques
Status: Previous Edition
AACSB: Analytic skills
9)
The British Banker's Association average of interbank rates for dollar deposits
in the London market is called the
A)
Libor rate.
B)
federal funds rate.
C)
prime rate.
D)
Treasury Bill rate.
Answer: A
Ques
Status: Previous Edition
10)
Which of the following are short-term financial instruments?
A)
A repurchase agreement.
B)
A share of Walt Disney Corporation stock.
C)
A Treasury note with a maturity of four years.
D)
A residential mortgage.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
11)
Which of the following instruments are traded in a money market?
A)
State and local government bonds.
B)
U.S. Treasury bills.
C)
Corporate bonds.
D)
U.S. government agency securities.
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
12)
Which of the following instruments are traded in a money market?
A)
Bank commercial loans.
B)
Commercial paper.
C)
State and local government bonds.
D)
Residential mortgages.
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
13)
Which of the following instruments is not traded in a money market?
A)
Residential mortgages.
B)
U.S. Treasury Bills.
C)
Negotiable bank certificates of deposit.
D)
Commercial paper.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
14)
Bonds issued by state and local governments are called ________ bonds.
A)
corporate
B)
Treasury
C)
municipal
D)
commercial
Answer: C
Ques
Status: Previous Edition
15)
Equity and debt instruments with maturities greater than one year are called
________ market instruments.
A)
capital
B)
money
C)
federal
D)
benchmark
Answer: A
Ques
Status: Previous Edition
16)
Which of the following is a long-term financial instrument?
A)
A negotiable certificate of deposit.
B)
A repurchase agreement.
C)
A U.S. Treasury bond.
D)
A U.S. Treasury bill.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
17)
Which of the following instruments are traded in a capital market?
A)
U.S. Government agency securities.
B)
Negotiable bank CDs.
C)
Repurchase agreements.
D)
U.S. Treasury bills.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
18)
Which of the following instruments are traded in a capital market?
A)
Corporate bonds.
B)
U.S. Treasury bills.
C)
Negotiable bank CDs.
D)
Repurchase agreements.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
19)
Which of the following are not traded in a capital market?
A)
U.S. government agency securities.
B)
State and local government bonds.
C)
Repurchase agreements.
D)
Corporate bonds.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
20)
The most liquid securities traded in the capital market are
A)
corporate bonds.
B)
municipal bonds.
C)
U.S. Treasury bonds.
D)
mortgage-backed securities.
Answer: C
Ques
Status: New
AACSB: Reflective thinking skills
2.4 Internationalization of Financial Markets
1)
Equity of U.S. companies can be purchased by
A)
U.S. citizens only.
B)
foreign citizens only.
C)
U.S. citizens and foreign citizens.
D)
U.S. mutual funds only.
Answer: C
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
2)
One reason for the extraordinary growth of foreign financial markets is
A)
decreased trade.
B)
increases in the pool of savings in foreign countries.
C)
the recent introduction of the foreign bond.
D)
slower technological innovation in foreign markets.
Answer: B
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
3) Bonds that
are sold in a foreign country and are denominated in the country's currency in
which they are sold are known as
A) foreign
bonds.
B) Eurobonds.
C) equity bonds.
D) country
bonds.
Answer: A
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
4) Bonds that
are sold in a foreign country and are denominated in a currency other than that
of the country in which it is sold are known as
A) foreign
bonds.
B) Eurobonds.
C) equity bonds.
D) country
bonds.
Answer: B
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
5)
If Microsoft sells a bond in London and it is denominated in dollars, the bond
is a
A)
Eurobond.
B)
foreign bond.
C)
British bond.
D)
currency bond.
Answer: A
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
6)
U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches
of U.S. banks are called
A)
Atlantic dollars.
B)
Eurodollars.
C)
foreign dollars.
D)
outside dollars.
Answer: B
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
7)
Distinguish between a foreign bond and a Eurobond.
Answer: A foreign bond is sold in a foreign country
and priced in that country's currency. A
Eurobond is sold in a foreign country and priced in a currency that is not that
country's currency.
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
2.5 Function of Financial Intermediaries: Indirect Finance
1) The process
of indirect finance using financial intermediaries is called
A) direct
lending.
B) financial
intermediation.
C) resource
allocation.
D) financial
liquidation.
Answer: B
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
2) In the United
States, loans from ________ are far ________ important for corporate finance
than are securities markets.
A) government
agencies; more
B) government
agencies; less
C) financial
intermediaries; more
D) financial
intermediaries; less
Answer: C
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
3)
The time and money spent in carrying out financial transactions are called
A)
economies of scale.
B)
financial intermediation.
C)
liquidity services.
D)
transaction costs.
Answer: D
Ques
Status: Previous Edition
4) Economies of
scale enable financial institutions to
A) reduce
transactions costs.
B) avoid the
asymmetric information problem.
C) avoid adverse
selection problems.
D) reduce moral
hazard.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
5) An example of
economies of scale in the provision of financial services is
A) investing in
a diversified collection of assets.
B) providing
depositors with a variety of savings certificates.
C) spreading the
cost of borrowed funds over many customers.
D) spreading the
cost of writing a standardized contract over many borrowers.
Answer: D
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
6)
Financial intermediaries provide customers with liquidity services. Liquidity services
A)
make it easier for customers to conduct transactions.
B)
allow customers to have a cup of coffee while waiting in the lobby.
C)
are a result of the asymmetric information problem.
D)
are another term for asset transformation.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
7) The process
where financial intermediaries create and sell low-risk assets and use the
proceeds to purchase riskier assets is known as
A) risk sharing.
B) risk
aversion.
C) risk
neutrality.
D) risk selling.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
8) The process
of asset transformation refers to the conversion of
A) safer assets
into risky assets.
B) safer assets
into safer liabilities.
C) risky assets
into safer assets.
D) risky assets
into risky liabilities.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
9) Reducing risk
through the purchase of assets whose returns do not always move together is
A)
diversification.
B)
intermediation.
C) intervention.
D) discounting.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
10) The concept
of diversification is captured by the statement
A) don't look a
gift horse in the mouth.
B) don't put all
your eggs in one basket.
C) it never
rains, but it pours.
D) make hay
while the sun shines.
Answer: B
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
11) Risk sharing
is profitable for financial institutions due to
A) low
transactions costs.
B) asymmetric
information.
C) adverse
selection.
D) moral hazard.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
12) Typically,
borrowers have superior information relative to lenders about the potential
returns and risks associated with an investment project. The difference in
information is called
A) moral selection.
B) risk sharing.
C) asymmetric
information.
D) adverse
hazard
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
13) If bad
credit risks are the ones who most actively seek loans and, therefore, receive
them from financial intermediaries, then financial intermediaries face the
problem of
A) moral hazard.
B) adverse
selection.
C) free-riding.
D) costly state
verification.
Answer: B
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
14) The problem
created by asymmetric information before the transaction occurs is called
________, while the problem created after the transaction occurs is called
________.
A) adverse
selection; moral hazard
B) moral hazard;
adverse selection
C) costly state
verification; free-riding
D) free-riding;
costly state verification
Answer: A
Ques
Status: Previous Edition
15) Adverse
selection is a problem associated with equity and debt contracts arising from
A) the lender's
relative lack of information about the borrower's potential returns and risks
of his investment activities.
B) the lender's
inability to legally require sufficient collateral to cover a 100% loss if the
borrower defaults.
C) the
borrower's lack of incentive to seek a loan for highly risky investments.
D) the
borrower's lack of good options for obtaining funds.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
16) An example
of the problem of ________ is when a corporation uses the funds raised from
selling bonds to fund corporate expansion to pay for Caribbean cruises for all
of its employees and their families.
A) adverse
selection
B) moral hazard
C) risk sharing
D) credit risk
Answer: B
Ques
Status: Previous Edition
AACSB: Ethical understanding and reasoning abilities
17)
Banks can lower the cost of information production by applying one information
resource to many different services.
This process is called
A)
economies of scale.
B)
asset transformation.
C)
economies of scope.
D)
asymmetric information.
Answer: C
Ques
Status: New
18)
Conflicts of interest are a type of ________ problem that can happen when an
institution provides multiple services.
A)
adverse selection
B)
free-riding
C)
discounting
D)
moral hazard
Answer: D
Ques
Status: New
AACSB: Ethical understanding and reasoning abilities
19) Studies of
the major developed countries show that when businesses go looking for funds to
finance their activities they usually obtain these funds from
A) government
agencies.
B) equities
markets.
C) financial
intermediaries.
D) bond markets.
Answer: C
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
20) The
countries that have made the least use of securities markets are ________ and
________; in these two countries finance from financial intermediaries has been
almost ten times greater than that from securities markets.
A) Germany;
Japan
B) Germany;
Great Britain
C) Great
Britain; Canada
D) Canada; Japan
Answer: A
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
21) Although the
dominance of ________ over ________ is clear in all countries, the relative
importance of bond versus stock markets differs widely.
A) financial
intermediaries; securities markets
B) financial
intermediaries; government agencies
C) government
agencies; financial intermediaries
D) government
agencies; securities markets
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
22)
Because there is an imbalance of information in a lending situation, we must
deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial
intermediaries can reduce these problems.
Answer: Adverse selection is the asymmetric
information problem that exists before the transaction occurs. For lenders, it is the difficulty in judging
a good credit risk from a bad credit risk.
Moral hazard is the asymmetric information problem that exists after the
transaction occurs. For lenders, it is
the difficulty in making sure the borrower uses the funds appropriately. Financial intermediaries can reduce adverse
selection through intensive screening and can reduce moral hazard by monitoring
the borrower.
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
2.6 Types of Financial Intermediaries
1)
Financial institutions that accept deposits and make loans are called ________
institutions.
A)
investment
B)
contractual savings
C)
depository
D)
underwriting
Answer: C
Ques
Status: Previous Edition
2) Thrift
institutions include
A) banks, mutual
funds, and insurance companies.
B) savings and
loan associations, mutual savings banks, and credit unions.
C) finance
companies, mutual funds, and money market funds.
D) pension
funds, mutual funds, and banks.
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
3) Which of the
following is a depository institution?
A) A life
insurance company
B) A credit
union
C) A pension
fund
D) A mutual fund
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
4) Which of the
following is a depository institution?
A) A life
insurance company
B) A mutual
savings bank
C) A pension
fund
D) A finance
company
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
5) Which of the
following financial intermediaries is not a depository institution?
A) A savings and
loan association
B) A commercial
bank
C) A credit
union
D) A finance
company
Answer: D
Ques
Status: Previous Edition
AACSB: Analytic skills
6) The primary
assets of credit unions are
A) municipal
bonds.
B) business
loans.
C) consumer
loans.
D) mortgages.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
7) The primary
liabilities of a commercial bank are
A) bonds.
B) mortgages.
C) deposits.
D) commercial
paper.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
8) The primary
liabilities of depository institutions are
A) premiums from
policies.
B) shares.
C) deposits.
D) bonds.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
9)
________ institutions are financial intermediaries that acquire funds at
periodic intervals on a contractual basis.
A)
Investment
B)
Contractual savings
C)
Thrift
D)
Depository
Answer: B
Ques
Status: Previous Edition
10) Which of the
following is a contractual savings institution?
A) A life
insurance company
B) A credit
union
C) A savings and
loan association
D) A mutual fund
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
11) Contractual
savings institutions include
A) mutual
savings banks.
B) money market
mutual funds.
C) commercial
banks.
D) life
insurance companies.
Answer: D
Ques
Status: Previous Edition
AACSB: Analytic skills
12) Which of the
following are not contractual savings institutions?
A) Life
insurance companies
B) Credit unions
C) Pension funds
D) State and
local government retirement funds
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
13) Which of the
following is not a contractual savings institution?
A) A life
insurance company
B) A pension
fund
C) A savings and
loan association
D) A fire and
casualty insurance company
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
14) The primary
assets of a pension fund are
A) money market
instruments.
B) corporate
bonds and stock.
C) consumer and
business loans.
D) mortgages.
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
15) Which of the
following are investment intermediaries?
A) Life
insurance companies
B) Mutual funds
C) Pension funds
D) State and
local government retirement funds
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
16)
An investment intermediary that lends funds to consumers is
A)
a finance company.
B)
an investment bank.
C)
a finance fund.
D)
a consumer company.
Answer: A
Ques
Status: Previous Edition
17) The primary
assets of a finance company are
A) municipal
bonds.
B) corporate
stocks and bonds.
C) consumer and
business loans.
D) mortgages.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
18)
________ are financial intermediaries that acquire funds by selling shares to
many individuals and using the proceeds to purchase diversified portfolios of
stocks and bonds.
A)
Mutual funds
B)
Investment banks
C)
Finance companies
D)
Credit unions
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
19) Money market
mutual fund shares function like
A) checking
accounts that pay interest.
B) bonds.
C) stocks.
D) currency.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
20) An important
feature of money market mutual fund shares is
A) deposit
insurance.
B) the ability
to write checks against shareholdings.
C) the ability
to borrow against shareholdings.
D) claims on
shares of corporate stock.
Answer: B
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
21) The primary
assets of money market mutual funds are
A) stocks.
B) bonds.
C) money market
instruments.
D) deposits.
Answer: C
Ques
Status: Previous Edition
AACSB: Analytic skills
22)
An investment bank helps ________ issue securities.
A)
a corporation
B)
the United States government
C)
the SEC
D)
foreign governments
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
23)
An investment bank purchases securities from a corporation at a predetermined
price and then resells them in the market.
This process is called
A)
underwriting.
B)
underhanded.
C)
understanding.
D)
undertaking.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
2.7 Regulation of the Financial System
1) Which of the
following is not a goal of financial regulation?
A) Ensuring the
soundness of the financial system
B) Reducing
moral hazard
C) Reducing
adverse selection
D) Ensuring that
investors never suffer losses
Answer: D
Ques
Status: Previous Edition
AACSB: Analytic skills
2)
Increasing the amount of information available to investors helps to reduce the
problems of ________ and ________ in the financial markets.
A)
adverse selection; moral hazard
B)
adverse selection; risk sharing
C)
moral hazard; transactions costs
D)
adverse selection; economies of scale
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
3)
A goal of the Securities and Exchange Commission is to reduce problems arising
from
A)
competition.
B)
banking panics.
C)
risk.
D)
asymmetric information.
Answer: D
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
4)
The purpose of the disclosure requirements of the Securities and Exchange
Commission is to
A)
increase the information available to investors.
B)
prevent bank panics.
C)
improve monetary control.
D)
protect investors against financial losses.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
5)
Government regulations to reduce the possibility of financial panic include all
of the following except
A)
transactions costs.
B)
restrictions on assets and activities.
C)
disclosure.
D)
deposit insurance.
Answer: A
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
6) Which of the
following do not provide charters?
A) The Office of
the Comptroller of the Currency
B) The Federal
Reserve System
C) The National
Credit Union Administration
D) State banking
and insurance commissions
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
7)
A restriction on bank activities that was repealed in 1999 was
A)
the prohibition of the payment of interest on checking deposits.
B)
restrictions on credit terms.
C)
minimum down payments on loans to purchase securities.
D)
separation of commercial banking from the securities industries.
Answer: D
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
8)
In order to reduce risk and increase the safety of financial institutions,
commercial banks and other depository institutions are prohibited from
A)
owning municipal bonds.
B)
making real estate loans.
C)
making personal loans.
D)
owning common stock.
Answer: D
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
9)
The primary purpose of deposit insurance is to
A)
improve the flow of information to investors.
B)
prevent banking panics.
C)
protect bank shareholders against losses.
D)
protect bank employees from unemployment.
Answer: B
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
10)
The agency that was created to protect depositors after the banking failures of
1930-1933 is the
A)
Federal Reserve System.
B)
Federal Deposit Insurance Corporation.
C)
Treasury Department.
D)
Office of the Comptroller of the Currency.
Answer: B
Ques
Status: Previous Edition
AACSB: Analytic skills
11) Savings and
loan associations are regulated by the
A) Federal
Reserve System.
B) Securities
and Exchange Commission.
C) Office of the
Comptroller of the Currency.
D) Office of
Thrift Supervision.
Answer: D
Ques
Status: Previous Edition
AACSB: Analytic skills
12)
The regulatory agency that sets reserve requirements for all banks is
A)
the Federal Reserve System.
B)
the Federal Deposit Insurance Corporation.
C)
the Office of Thrift Supervision.
D)
the Securities and Exchange Commission.
Answer: A
Ques
Status: Previous Edition
AACSB: Analytic skills
13)
Asymmetric information is a universal problem. This would suggest that
financial regulations
A)
in industrial countries are an unqualified failure.
B)
differ significantly around the world.
C)
in industrialized nations are similar.
D)
are unnecessary.
Answer: C
Ques
Status: Previous Edition
AACSB: Dynamics of the global economy
14)
How do regulators help to ensure the soundness of financial intermediaries?
Answer: Regulators restrict who can set up a
financial intermediary, conduct regular examinations, restrict assets, and
provide insurance to help ensure the soundness of financial intermediaries.
Ques
Status: Previous Edition
AACSB: Reflective thinking skills
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