Final Exam Part 2

36 Questions

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Credit Quizzes & Trivia

Sample Test


Questions and Answers
  • 1. 
    In investment banking, a conflict usually is present between the issuers of securities, who __________ , and investors, who ____________.
    • A. 

      A) Benefit from unbiased auditing; desire unbiased consulting

    • B. 

      B) desire unbiased consulting; benefit from unbiased auditing

    • C. 

      C) benefit from optimistic research; desire unbiased research

    • D. 

      D) desire unbiased research; benefit from optimistic research

  • 2. 
    When money prices are used to facilitate comparisons of value, money is said to function as a
    • A. 

      medium of exchange.

    • B. 

      Payments-system ruler.

    • C. 

      Unit of account.

    • D. 

      Store of value.

  • 3. 
    A financial market in which previously issued securities can be resold is called a ________ market.
    • A. 

      Tertiary

    • B. 

      Primary

    • C. 

      Used securities

    • D. 

      Secondary

  • 4. 
    When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.
    • A. 

      Increases; increases; rises

    • B. 

      Decreases; increases; rises

    • C. 

      Decreases; decreases; falls

    • D. 

      Increases; decreases; falls

  • 5. 
    It is possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation.
    • A. 

      Fall; liquidity

    • B. 

      Rise; liquidity

    • C. 

      Fall; risk

    • D. 

      Rise; risk

  • 6. 
    Financial markets promote greater economic efficiency by channeling funds from ________ to ________.
    • A. 

      Investors; savers

    • B. 

      Savers; lenders

    • C. 

      Borrowers; savers

    • D. 

      Savers; borrowers

  • 7. 
    An example of economies of scale in the provision of financial services is
    • A. 

      Providing depositors with a variety of savings certificates.

    • B. 

      Spreading the cost of borrowed funds over many customers

    • C. 

      Spreading the cost of writing a standardized contract over many borrowers.

    • D. 

      Investing in a diversified collection of assets.

  • 8. 
    If an individual moves money from a small-denomination time deposit to a demand deposit account,
    • A. 

      M1 increases and M2 stays the same.

    • B. 

      M1 stays the same and M2 increases

    • C. 

      M1 increases and M2 decreases

    • D. 

      M1 stays the same and M2 stays the same

  • 9. 
    A financial market in which only short-term debt instruments are traded is called the ________ market
    • A. 

      Money

    • B. 

      Capital

    • C. 

      Bond

    • D. 

      Stock

  • 10. 
    The riskiness of an asset's returns due to changes in interest rates is
    • A. 

      Exchange-rate risk

    • B. 

      Asset risk

    • C. 

      Price risk

    • D. 

      Interest-rate risk

  • 11. 
    When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________.
    • A. 

      Market; lend; borrow

    • B. 

      Real; lend; borrow

    • C. 

      Nominal; lend; borrow

    • D. 

      Real; borrow; lend

  • 12. 
    If the maturity of a debt instrument is less than one year, the debt is called ________.
    • A. 

      Intermediate-term

    • B. 

      Long-term

    • C. 

      Short-term

    • D. 

      Prima-term

  • 13. 
    A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant.
    • A. 

      Increase; increase

    • B. 

      Decrease; decrease

    • C. 

      Increase; decrease

    • D. 

      Decrease; increase

  • 14. 
    Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do.
    • A. 

      Agents; principals

    • B. 

      Agents; agents

    • C. 

      Principals; agents

    • D. 

      Principals; principals

  • 15. 
    Suppose that short term interest rates are expected to be 1.05%, 1.55% and 1.90% for the next 3 years. What is the liquidity premium on the 3 year bond if its yield equals 2.0%?
    • A. 

      0.2%

    • B. 

      0.3%

    • C. 

      0.4%

    • D. 

      0.5%

  • 16. 
    Which of the following long-term bonds has the highest interest rate?
    • A. 

      Corporate Aaa bonds

    • B. 

      Municipal bonds

    • C. 

      Corporate Baa bonds

    • D. 

      U.S. Treasury bonds

  • 17. 
    Assume you are in the 20% federal income tax bracket. You can buy a 10-year US Treasury bond with a 4.25% yield to maturity, or a 10-year municipal bond with a 3.80% yield to maturity. The after tax risk premium on the municipal bond is:
    • A. 

      0.45%

    • B. 

      Negative 0.45%

    • C. 

      0.8%

    • D. 

      0.4%

  • 18. 
    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. 

      Default

    • B. 

      Discount

    • C. 

      Collateral

    • D. 

      Premium

  • 19. 
    An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.
    • A. 

      Reduce; reduce

    • B. 

      Reduce; increase

    • C. 

      Increase; reduce

    • D. 

      Increase; increase

  • 20. 
    A disadvantage of ________ is that it is very heavy and hard to transport from one place to another.
    • A. 

      Electronic money

    • B. 

      Fiat money

    • C. 

      Commodity money

    • D. 

      Paper money

  • 21. 
    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. 

      Bond markets.

    • C. 

      Financial intermediaries.

    • D. 

      Equities markets.

  • 22. 
    An inverted yield curve predicts that short-term interest rates
    • A. 

      Will rise and then fall in the future.

    • B. 

      Are expected to rise in the future

    • C. 

      Will remain unchanged in the future.

    • D. 

      Will fall in the future

  • 23. 
    The components of the U.S. M1 money supply are demand and checkable deposits plus
    • A. 

      Currency plus travelers checks plus money market deposits.

    • B. 

      Currency.

    • C. 

      Currency plus travelers checks.

    • D. 

      Currency plus savings deposits.

  • 24. 
    Holding all other factors constant, the quantity demanded of an asset is 
    • A. 

      Negatively related to its expected return relative to alternative assets.

    • B. 

      Negatively related to its liquidity relative to alternative assets.

    • C. 

      Positively related to the risk of its returns relative to alternative assets.

    • D. 

      Positively related to wealth.

  • 25. 
    An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.
    • A. 

      Moral hazard

    • B. 

      Agency

    • C. 

      Costly state verification

    • D. 

      Adverse selection

  • 26. 
    Conflicts of interest may arise within the credit rating agencies because
    • A. 

      The investors pay the credit agencies for ratings.

    • B. 

      The credit rating agencies are involved in offering credit counseling to investors.

    • C. 

      The credit rating agencies provide auditing services to issuers of debt securities.

    • D. 

      The issuers of debt securities pay the credit agencies for ratings.

  • 27. 
    A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.
    • A. 

      Discount bond; discount

    • B. 

      Coupon bond; discount

    • C. 

      Coupon bond; face

    • D. 

      Discount bond; face

  • 28. 
    ________ is the relative ease and speed with which an asset can be converted into a medium of exchange.
    • A. 

      Deflation

    • B. 

      Liquidity

    • C. 

      Specialization

    • D. 

      Efficiency

  • 29. 
    The present value of an expected future payment ________ as the interest rate increases
    • A. 

      Is constant

    • B. 

      Rises

    • C. 

      Is unaffected

    • D. 

      Falls

  • 30. 
    Which of the following $1,000 face-value securities has the highest yield to maturity?
    • A. 

      A 10 percent coupon bond selling for $1,000

    • B. 

      A 5 percent coupon bond selling for $1,000

    • C. 

      A 12 percent coupon bond selling for $1,100

    • D. 

      A 12 percent coupon bond selling for $1,000

  • 31. 
    Everything else held constant, when the government has higher budget deficits
    • A. 

      The supply curve for bonds shifts to the right and the interest rate falls.

    • B. 

      The supply curve for bonds shifts to the right and the interest rate rises

    • C. 

      The demand curve for bonds shifts to the left and the interest rate falls

    • D. 

      The demand curve for bonds shifts to the left and the interest rate rises

  • 32. 
    If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of
    • A. 

      Moral hazard.

    • B. 

      Adverse selection

    • C. 

      Costly state verification

    • D. 

      Free-riding.

  • 33. 
    Government regulations require publicly traded firms to provide information, reducing
    • A. 

      Economies of scale

    • B. 

      The need for diversification

    • C. 

      The adverse selection problem

    • D. 

      Transactions costs

  • 34. 
    If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?
    • A. 

      A bond with five years to maturity

    • B. 

      A bond with twenty years to maturity

    • C. 

      A bond with one year to maturity

    • D. 

      A bond with ten years to maturity

  • 35. 
    What is the expected one-year interest rate one year from today if the interest rate on the one-year bond today is 0.25% and the interest rate on the two-year bond is 0.3%?
    • A. 

      0.45%

    • B. 

      0.25%

    • C. 

      0.35%

    • D. 

      0.55%

  • 36. 
    Which of the following can be described as involving indirect finance?
    • A. 

      You make a loan to your neighbor.

    • B. 

      You make a deposit at a bank.

    • C. 

      You buy a U.S. Treasury bill from the U.S. Treasury.

    • D. 

      A corporation buys a share of common stock issued by another corporation in the primary market