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Category > Management Posted 15 Jun 2017 My Price 15.00

MONEY AND BANKING

THERE ARE 6 PARTS MULTIPLE CHOICE QUESTIONS ON MONEY AND BANKING, THE CHOICES CAN BE FOUND BELOW THE QUESTIONS, EACH QUESTION HAS 4 CHOICES. THE CHOICES ARE NOT NUMBERED BUT EACH CHOICE IS IN A SEPARATE LINE, JUST WRITE THE CORRECT ANSWER UNDER EACH QUESTION IN RED COLOR.

PART 1

Question 1(4 points)

The risk premium is measured:

Question 1 options:

	By an index published monthly by the Securities and Exchange Commission (SEC).
	By the length of time until a bond matures.
	As the difference between the yield on the security and the yield on a U.S. Treasury security of the same maturity.
	As the difference between the nominal yield on a security and the after-tax yield on the security.

Question 2(4 points)

Separate the bond market into municipal bonds and corporate bonds, if the President lowers the federal income tax rate by 5% and holding everything else constant:

Question 2 options:

	The interest rate on both corporate and municipal bonds should increase.
	The interest rate on both corporate and municipal bonds should decrease.
	The interest rate on corporate bonds should increase relative to the rate for municipal bonds (increase the spread between the two).
	The interest rate on corporate bonds should decrease relative to the rate for municipal bonds (decrease the spread between the two).

Question 3(4 points)

The greatest appeal of U.S. Treasury securities is that:

Question 3 options:

	They have high yields relative to corporate bonds.
	They have no default risk.
	The U.S. Treasury will repurchase them at any time.
	Their market prices are fixed.

Question 4(4 points)

The term structure of interest rates:

Question 4 options:

	Represents the variation in yields for related financial instruments differing in maturity.
	Reflects differing tax treatment received by different instruments.
	Always results in an upward-sloping yield curve.
	Reflects differences in liquidity between assets.

Question 5(4 points)

If a one-year bond currently yields 4% and is expected to yield 6% next year, the expectations theory predicts that the current yield on a two-year bond will be:

Question 5 options:

	4%.
	between 4% and 5%.
	5%.
	more than 5%.

Question 6(4 points)

Which of the following is true of the segmented markets theory?

Question 6 options:

	It assumes that borrowers have particular periods for which they want to borrow.
	It assumes that lenders always lend for short periods.
	It provides a good explanation for why yields on different instruments of different maturities tend to move together.
	It assumes that instruments with different maturities are perfect substitutes.

Question 7(4 points)

If market participants expect that future inflation will be lower than it currently is:

Question 7 options:

	The yield curve will have a positive slope as demand for long-term bonds increases relative to short-term bonds.
	The yield curve will have a positive slope as investors try to lock into short-term bonds.
	The Federal Reserve will be expected to use a restrictive monetary policy as a result and the yield curve is likely to become inverted.
	An inverted yield curve is likely as interest rates are also expected to fall in the future.

PART 2

Question 1(3 points)

If the wealth elasticity of demand for stocks exceeds a value of 1.0, this indicates that if your wealth increases by 1%:

Question 1 options:

	Your consumption of goods and services will increase by more than 1%.
	You will increase cash holdings by more than 1%.
	The portion of your asset portfolio held in stocks will increase by more than 1%.
	The portion of your asset portfolio held in stocks will increase by less than 1%.

Question 2(3 points)

Suppose that when your wealth increases from $1 million to $2 million, the balance in your checking account increase from $75,000 to $125,000. Your wealth elasticity of demand for checking account balances then is:

Question 2 options:

	Less than 1 and checking account balances are a luxury asset.
	Less than 1 and checking account balances are a necessity asset.
	Greater than 1 and checking account balances are a luxury asset.
	Greater than 1 and checking account balances are a necessity asset.

Question 3(3 points)

The interest earned on securities issued by state and local governments generally are:

Question 3 options:

	Not subject to federal taxation.
	Not taxed at the federal level if the interest is used to purchase newly issued municipal bonds.
	Subject to the same tax rates as corporate bonds are.
	Subject to the same tax rates as corporate stocks are.

Question 4(3 points)

Which of the following assets has yielded the greatest average annual rate of return:

Question 4 options:

	Gold.
	Municipal bonds.
	Stocks
	Treasury bonds.

Question 5(3 points)

The main reason for diversifying a stock portfolio is:

Question 5 options:

	To take advantage of the favorable tax treatment of diversified portfolios.
	That diversified portfolios have greater liquidity than non-diversified portfolios.
	To make the portfolio less subject to market volatility.
	To reduce the portfolio volatility associated with changes in any given stock.

Question 6(3 points)

As the likelihood that a company will default on its bonds increases, then the yields on the company's bonds will:

Question 6 options:

	Rise to compensate investors for this greater risk.
	Fall because the company will not be able to afford to pay as much interest.
	Fall as investors insist on higher prices for the binds to compensate them for the greater risk.
	Be unchanged.

Question 7(3 points)

An efficient financial market is one in which:

Question 7 options:

	Transactions costs for trading securities are zero.
	All information available to market participants is reflected in market prices.
	All securities are very liquid.
	There are no capital gains taxes.

Question 8(3 points)

In an efficient market, the market price of an asset:

Question 8 options:

	Reflects the returns the asset has been earning previously.
	Is fixed by federal regulators.
	Equals the present value of expected future returns.
	Is largely determined on the demand side, since the supply of assets is fixed.

Question 9(3 points)

How is a bond affected by a decline in market interest rates:

Question 9 options:

	Reduces the value of future interest coupon payments.
	The par value of the bond falls when it matures.
	Increases the prices of newly issued bonds.
	Increases the prices of bonds already in circulation.

Question 10(3 points)

According to the efficient market hypothesis:

Question 10 options:

	Common stock prices should be constant.
	The price of a corporation's stock will adjust to new information about the company's prospects.
	The price of a corporation's stock will be determined by charts that describe past movements in a stock's price.
	The trend is your friend and you can predict future movements of stock prices with reasonable accuracy.

Question 11(3 points)

A bubble occurs when:

Question 11 options:

	The price of a stock moves significantly higher than its fundamental value.
	Inside information is used to make profits from trading a company's stock.
	A company reports profits that a above the consensus forecast.
	The futures price is greater than the spot market price.

PART 3

Question 1(3 points)

Derivative instruments are:

Question 1 options:

	Assets such as bonds and stocks that derive their value from the value of the companies that issue them.
	Government bonds.
	Assets that derive their value from underlying assets.
	An index of stock values such as the S&P 500.

Question 2(3 points)

An options contract:

Question 2 options:

	Confers the right to buy or sell an asset at a predetermined price at a predetermined time.
	Is a contract that requires delivery of a commodity on a specific date.
	Gives the buyer the option to purchase a futures contract by a given date.
	Is only used for foreign exchange transactions.

Question 3(3 points)

The buyer of a call option:

Question 3 options:

	Must purchase the underlying asset on the expiration date of the contract.
	Must sell the underlying asset on the expiration date of the contract.
	May exercise the contract if the price of the underlying asset increases above the strike price.
	May exercise the contract if the price of the underlying asset decreases below the strike price.

Question 4(3 points)

The buyer of a put option:

Question 4 options:

	Must purchase the underlying asset on the expiration date of the contract.
	Must sell the underlying asset on the expiration date of the contract.
	May exercise the contract if the price of the underlying asset increases above the strike price.
	May exercise the contract if the price of the underlying asset decreases below the strike price.

Question 5(3 points)

If prices of existing options contracts for call options on IBM stocks are rising, this would be the result of:

Question 5 options:

	Call option prices will soon fall again.
	A reduction in the dividend paid by IBM.
	IBM share prices will be higher in the future.
	IBM share prices will be lower in the future.

Question 6(3 points)

The buyers of a futures contract:

Question 6 options:

	Assumes the short position.
	Assumes the long position.
	Is required to receive the underlying stock or commodity at the specified future date.
	Is expecting the price of the underlying stock or commodity to decrease before the contract expires.

Question 7(3 points)

If you sell a futures contract for IBM and on the delivery date the share price of IBM is lower than the contract price:

Question 7 options:

	Lost money on your long position.
	Lost money on your short position.
	Gained money on your long position.
	Gained money on your short position.

Question 8(3 points)

Potential loses are unbounded (unlimited):

Question 8 options:

	If the buyer of a long contract sees the price of the underlying asset increase.
	If the buyer of a long contract sees the price of the underlying asset decrease.
	If the seller of a short contract sees the price of the underlying asset increase.
	If the seller of a short contract sees the price of the underlying asset decrease.

Question 9(3 points)

Assume that IBM is trading for $100 a share and you purchase a call option with a strike price of $105 a share. Also assume that the price of the option equals $200.

Question 9 options:

	You would profit by exercising the option if IBM's share price increases to $103 a share.
	You would profit by exercising the option if IBM's share price increases to $110 a share.
	You would profit by exercising the option if IBM's share price decreases to $97 a share.
	Both answers a) and b) are correct.

Question 10(3 points)

Assume that IBM is trading for $100 a share and you purchase a put option with a strike price of $95 a share. Also assume that the price of the option equals $500.

Question 10 options:

You would profit by exercising the option if IBM's share price increases to $103 a share.

You would profit by exercising the option if IBM's share price decreases to $97 a share.

You would profit by exercising the option if IBM's share price decreases to $88 a share.

Both answers b) and c) are correct.

PART - 4

Question 1(3 points)

The general role of financial intermediaries is to:

Question 1 options:

	Channel money from savers to those who want to borrow.
	Provide funds to the federal government to finance a trade deficit.
	Provide advice to consumers on how they should handle their finances.
	Help ensure there is enough money in circulation.

Question 2(3 points)

Underwriting by investment banking firms involves:

Question 2 options:

	Insuring the life or health of individuals.
	Guaranteeing a price for new capital to the issuing firm.
	Selling stock over the Internet.
	Issuing stock and using the proceeds to purchase bonds.

Question 3(3 points)

Merchant banking refers to:

Question 3 options:

	Banking services that are only available to retail merchants.
	Investment banks investing their own funds in companies.
	Banking services that are only available to business but not the general public.
	Banking activities that are carried out by companies that are not banks.

Question 4(3 points)

Mutual funds

Question 4 options:

	Take in deposits from savers and make direct loans to borrowers.
	Provide another source for borrowers to take out a home mortgage.
	Sell shares to savers and purchase assets with the funds.
	Allow for savers to undertake direct investment in companies of their choice.

Question 5(3 points)

On a bank's balance sheet, assets are:

Question 5 options:

	The use of acquired funds.
	The source of funds.
	Equal to the money held by savers.
	The same as a bank's net worth.

Question 6(3 points)

On a bank's balance sheet, liabilities are:

Question 6 options:

	The use of acquired funds.
	The source of funds.
	Equal to the money held by savers in the form of Certificate of Deposits.
	The same as a bank's net worth.

Question 7(3 points)

The Federal funds market involves:

Question 7 options:

	The tax revenues of the Federal government.
	Loans by the Federal Reserve to banks.
	Loans by banks to the Federal Reserve.
	A market for loans made between banks.

Question 8(3 points)

A bank's equity capital is:

Question 8 options:

	The current market value of the bank's physical assets.
	The book value of a bank's assets.
	The sum of the value of the bank's assets plus its liabilities.
	Money the bank has raised by selling stock shares plus retained profits.

Question 9(3 points)

Which of the following is true regarding a bank's capital-asset ratio?

Question 9 options:

	High capital-asset ratios are desirable as they offer a buffer against non-performing bank loans.
	The ratio is defined as the excess of bank liabilities over assets.
	A bank can raise the ratio by reducing the number of stock shares it has outstanding.
	The ratio gives an overall picture of the quality of business loans the bank is making.

Question 10(3 points)

Banks are exposed to interest rate risk primarily because:

Question 10 options:

	Interest rates are very difficult to forecast.
	Borrowers from banks are prone to default.
	Depositors withdraw their money from banks when interest rates fall.
	The maturities of bank's assets and liabilities differ.

Question 11(3 points)

To increase its return, a bank that expects interest rates to fall will:

Question 11 options:

	Want the duration of its assets to be greater than the duration of its liabilities - a positive duration gap.
	Want the duration of its assets to be less than the duration of its liabilities - a positive duration gap.
	Want the duration of its assets to be greater than the duration of its liabilities - a negative duration gap.
	Want the duration of its assets to be less than the duration of its liabilities - a negative duration gap.

Question 12(3 points)

The primary focus of the Glass-Steagall Act:

Question 12 options:

	Prevent foreign ownership of U.S. banks.
	Separate banking and investment banking institutions.
	Prevent national branch banking.
	Allow for an expansion of allowable bank services.

PART 5

Question 1(3 points)

The exchange rate refers to:

Question 1 options:

	The price of one currency in terms of another currency.
	The relationship between the real price level and the nominal price level.
	The ratio between imports and exports.
	The ratio between imports and net exports.

Question 2(3 points)

Floating (flexible) exchange rate systems occur when:

Question 2 options:

	Exchange rates are determined by the central bank of a country.
	Exchange rates are determined by the government of a country.
	Exchange rates are determined by the supply and demand for a currency in the domestic economy.
	Exchange rates are determined by the supply and demand for a currency in the foreign exchange market.

Question 3(3 points)

In January 2001, $1 was equal to 1.06 euro. By January 2005, $1 was worth 0.76 euro. During this period:

Question 3 options:

	The dollar appreciated and the euro depreciated.
	The dollar depreciated and the euro appreciated.
	Both the dollar and the euro depreciated.
	Both the dollar and the euro appreciated.

Question 4(3 points)

In January 2001, $1 was equal to 1.06 euro. By January 2005, $1 was worth 0.76 euro. As a result of the change in the value of the dollar:

Question 4 options:

	The prices of imports from Europe decreased and the prices of U.S. exports to European consumers increased.
	The prices of imports from Europe increased and the prices of U.S. exports to European consumers decreased.
	The prices of imports from Europe increased and the prices of U.S. exports to European consumers increased.
	The prices of imports from Europe decreased and the prices of U.S. exports to European consumers decreased.

Question 5(3 points)

Caterpillar is a U.S. company that makes construction equipment manufactured in the United States and exported throughout the world. Which of the following scenarios will be the most advantageous for the company's international sales:

Question 5 options:

	The dollar depreciates and there is a decrease in the U.S. economic growth.
	The dollar depreciates and there is a decrease in foreign economic growth.
	The dollar depreciates and there is an increase in foreign economic growth.
	The dollar appreciates and there is an increase in foreign economic growth.

Question 6(3 points)

Siemens is a European industrial firm. Which of the following scenarios will be the most advantageous for the company's exports to the United States.

Question 6 options:

	The dollar depreciates and there is a decrease in foreign economic growth.
	The dollar depreciates and there is an increase in U.S. economic growth.
	The dollar appreciates and there is an increase in foreign economic growth.
	The dollar appreciates and there is an increase in U.S. economic growth.

Question 7(3 points)

Assume that in the past month there is a $200 billion increase from the previous month in US exports of airplanes, computer software and other goods. Holding everything else constant (including imports), the effect will be:

Question 7 options:

	A decrease in the value of GDP.
	An increase in the value of GDP.
	This is a current account transaction, thus there is no change in the value of GDP.
	This is a capital account transaction, thus there is no change in the value of GDP.

Question 8(3 points)

Assume that in the past month there is a $200 billion increase from the previous month in the value of US imports of oil due to higher oil prices. Holding everything else constant (including exports), the effect will be:

Question 8 options:

	A decrease in the value of GDP.
	An increase in the value of GDP.
	This is a current account transaction, thus there is no change in the value of GDP.
	This is a capital account transaction, thus there is no change in the value of GDP.

Question 9(3 points)

Assume that Toyota spends $100 billion to build an assembly plant in Kentucky. The effect will be:

Question 9 options:

	A decrease in the value of GDP.
	An increase in the value of GDP.
	This is a current account transaction, thus there is no change in the value of GDP.
	This is a capital account transaction, thus there is no change in the value of GDP.

Question 10(3 points)

Which of the following occurs when the FED undertakes policies which increase interest rates in the United States?

Question 10 options:

	The demand for dollars increases in the foreign exchange market and the dollar appreciates.
	The demand for dollars increases in the foreign exchange market and the dollar depreciates.
	The demand for dollars decreases in the foreign exchange market and the dollar appreciates.
	The demand for dollars decreases in the foreign exchange market and the dollar depreciates.

Question 11(3 points)

When the dollar appreciates, it means that:

Question 11 options:

	It takes more dollars to purchase foreign currencies.
	It takes more dollars to purchase a fixed amount of gold.
	It takes fewer dollars to purchase foreign currencies.
	It takes a constant amount of dollars to purchase foreign currencies.

Question 12(3 points)

An expansionary monetary policy by the Fed would tend to:

Question 12 options:

	Lower the U.S. inflation rate, (intially holding exchange rates constant) make exports more expensive, make imports cheaper, and as a result lower the value of the dollar.
	Lower the U.S. inflation rate, (intially holding exchange rates constant) make exports cheaper, make imports more expensive, and as a result raise the value of the dollar.
	Raise the U.S. inflation rate, (intially holding exchange rates constant) make exports cheaper, make imports more expensive, and as a result raise the value of the dollar.
	Raise the U.S. inflation rate, (intially holding exchange rates constant) make exports more expensive, make imports cheaper, and as a result lower the value of the dollar.

Question 13(3 points)

If there is an increase in domestic economic growth and consumer incomes (holding the inflation rate constant), we can expect:

Question 13 options:

	An increase in the supply of dollars in the foreign exchange market and the dollar will appreciate.
	An increase in the supply of dollars in the foreign exchange market and the dollar will depreciate.
	A decrease in the supply of dollars in the foreign exchange market and the dollar will appreciate.
	A decrease in the supply of dollars in the foreign exchange market and the dollar will depreciate.

Question 14(3 points)

Assume there is an increase in domestic economic growth in the United States. As a result we would expect:

Question 14 options:

	The dollar to depreciate, the prices of imports will fall and export prices will increase. As a result, NX will decrease.
	No change in the value of the dollar or NX.
	The dollar to appreciate, the prices of imports will fall and export prices will decrease. As a result, NX will increase.
	The dollar to depreciate, the prices of imports will increase and export prices will fall. As a result, NX will increase.

Question 15(3 points)

Assume that there is another boom in the U.S. stock market. As a result we would expect:

Question 15 options:

	An increase in foreign savings, a current account surplus, an increase in the supply of dollars and an appreciation of the dollar.
	A decrease in domestic savings, a capital account deficit as domestic savings moves abroad, an increase in the supply of dollars and an appreciation of the dollar.
	An increase in foreign savings, a capital account surplus, an increase in the demand for the dollar and an appreciation of the dollar.
	An increase in foreign savings, a capital account surplus, a decrease in the demand for the dollar and the dollar will depreciate.

PART - 6

Question 1(3 points)

If the forward exchange rate of the yen in terms of dollars is greater than the spot exchange rate:

Question 1 options:

	Japanese interest rates must be higher than U.S. interest rates.
	U.S. interest rates must be higher than Japanese interest rates.
	Market participants must be expecting the dollar to appreciate against the yen.
	Market participants must be expecting the dollar to depreciate against the yen.

Question 2(3 points)

When a country's real exchange rate appreciates:

Question 2 options:

	Its nominal exchange must have also appreciated.
	Foreign goods become more expensive in terms of domestic purchasing power.
	It could result if the domestic exchange rate is pegged in terms of the foreign exchange rate and foreign inflation rates are relatively high compared to domestic inflation rates.
	It could result if the domestic exchange rate is pegged in terms of the foreign exchange rate and domestic inflation rates are relatively high compared to foreign inflation rates.

Question 3(3 points)

The law of one price states that:

Question 3 options:

	Most countries require that all imports have the same price.
	Most countries require that all exports have the same price.
	Identical goods such as gold should have the same price anywhere in the world.
	The prices of non-traded goods are fixed in global markets.

Question 4(3 points)

Under what condition would you maximize your return from investing in Japanese assets vs U.S. assets:

Question 4 options:

	Annual rate of return on U.S. assets = 6%, annual rate of return on Japanese assets = 8%, dollar is expected to depreciate by 10% against the Japanese yen during the next year.
	Annual rate of return on U.S. assets = 6%, annual rate of return on Japanese assets = 8%, dollar is expected to appreciate by 10% against the Japanese yen during the next year.
	Annual rate of return on U.S. assets = 12%, annual rate of return on Japanese assets = 6%, dollar is expected to depreciate by 10% against the Japanese yen during the next year.
	Annual rate of return on U.S. assets = 12%, annual rate of return on Japanese assets = 6%, dollar is expected to appreciate by 10% against the Japanese yen during the next year.

Question 5(3 points)

If an individual bank has $100,000 in new checking deposits and the required reserve ratio is 10 percent, the bank can make loans equal to:

Question 5 options:

	$100,000.
	$90,000.
	$9000,000
	$50,000.

Question 6(3 points)

In order to function as a medium of exchange used in the transaction of goods and services, money must:

Question 6 options:

	Maintain a relatively constant value over an extended period of time.
	Be in the form of a precious metal such as gold.
	Have a fixed value in foreign exchange markets.
	Be traded in international currency markets.

Question 7(3 points)

The required reserve ratio refers to:

Question 7 options:

	The percentage of excess reserves in the vault of a bank.
	Capital stock to total assets.
	The percentage of deposits that a bank must keep with the Federal Reserve.
	The percentage of deposits that banks must hold in government debt.

Question 8(3 points)

Which of the following is not considered an asset for a bank:

Question 8 options:

	U.S. government treasury bills.
	U.S. government issued debt.
	Loans issued to corporations.
	Customer deposits.

Question 9(3 points)

Which of the following is a liability to the Federal Reserve Board:

Question 9 options:

	U.S. government securities.
	Currency in circulation.
	Excess reserves in the banking system.
	Checkable deposits in commercial banks.

Question 10(3 points)

Open market operations involve:

Question 10 options:

	The Fed making discount loans to depository institutions.
	The Fed buying and selling common stock in order to affect the liquidity of the stock market.
	The Fed buying and selling U.S. government securities with banks.
	Private investors buying and selling securities directly on exchanges rather than through brokers.

Question 11(3 points)

Assume that the money multiplier equals 2.5 and if the Fed purchases $10 million in bonds from a bank, the monetary base will:

Question 11 options:

	Increase by $10 million.
	Increase by $25 million.
	Decrease by $10 million.
	Decrease by $25 million.

Question 12(3 points)

Assume that the money multiplier equals 2.5 and if the Fed purchases $10 million in bonds from a bank, the monetary supply will:

Question 12 options:

	Increase by $10 million.
	Increase by $25 million.
	Decrease by $10 million.
	Decrease by $25 million.

Question 13(3 points)

Monetizing the debt refers to:

Question 13 options:

	The Treasury selling securities to foreign investors.
	The federal government skips interest payments on its debt.
	The Fed purchasing Treasury securities from banks.
	The Fed purchasing Treasury securities to finance government budget deficits.

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