Extra Credit Multiple Choice Exam 1 Flashcards
Consolidation of Financial services such as commercial banking, insurance, and investment banking under one role has led to the creation of a business entity called the:
a) Commercial banking company
b) Financial services holding company
c) Mutual saving bank
d) Bank holding company
b) Financial services holding company
_____ and _____ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors’ money in riskier illiquid assets
a) Diversification; high equity returns
b) Price risk; collateral
c) Free riders; regulations
d) Monitoring; diversification
d) Monitoring; diversification
Insolvency risk as a financial intermediary (FI) is the risk:
a) incurred by an FI when the maturity of its assets and liabilities do not match
b) that a sudden urge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices
c) incurred by an FI when its investments in technology do not result in cost savings or revenue growth
d) that an FI may not have enough capital to offset a sudden decline in the value of its assets
d) that an FI may not have enough capital to offset a sudden decline in the value of its assets
Arrange the following events in the order of their occurrence:
A. Black Monday, B. Black Tuesday, C. Black Thursday
a) A, B, C
b) B, A, C
c) C, A, B
d) C, B, A
d) C, B, A
The securities Exchange Commission (SEC) does not
a) decide whether a public issue is fairly priced
b) decide whether a firm making a public issue has provided enough information for investors to decide whether the issue is fairly priced
c) require exchanges to monitor trading to prevent insider trading
d) attempt to reduce excessive price fluctuations
a) decide whether a public issue is fairly priced
Money markets trade securities that:
1. Mature in one year or less
2. Have little chance of loss of principal
3. Must be guaranteed by the federal government
a) 1 only
b) 2 only
c) 1 and 2 only
d) 1 and 3 only
e) 1, 2 and 3 only
c) 1 and 2 only
Which of the following is true?
a) As the risk of financial security increases, the supply of loanable funds increases
b) As the risk of financial security decreases, the supply of loanable funds decreases
c) As the risk of financial security increases, the supply of loanable funds decreases
d) As the risk of financial security decreases, the supply of loanable funds increases
c) As the risk of financial security increases, the supply of loanable funds decreases
according to the liquidity premium theory of interest rates:
a) long-term spot rates are higher than the average of current and expected future short-term rates
b) investors prefer certain maturities and will not normally switch out of those maturities
c) investors are indifferent between different maturities if the long-term spot rates are equal to the average of current and expected future short-term rates
d) the term structure must always be upward sloping
e) long-term spot rates are totally unrelated to expectations of future short-term rates
a) long-term spot rates are higher than the average of current and expected future short-term rates
According to the unbiased expectation theory:
a) markets are segmented and buyers stay in their own segment
b) liquidity premiums are negative and time-varying
c) the term structure will most often be upward sloping
d) the long-term spot rate is an average of the current and expected future short-term interest rates
e) forward rates are less than the expected future spot rates
d) the long-term spot rate is an average of the current and expected future short-term interest rates
The term structure of interest rates is upward-sloping for all bond types. A certain AAA-rated, noncallable 10-year corporate bond has been issued at a 6.15 percent promised yield. Which one of the following bonds has a higher promised yield?
a) A noncallable, AAA-rated corporate bond with a five year maturity
b) A callable, AAA-rate corporate bond with a 15 year maturity
c) A noncallable, AAA-rated convertible bond with a 10-year maturity
d) All of these choices are correct
b) A callable, AAA-rate corporate bond with a 15 year maturity
Classify each of the following in terms of its effect on interest rates (increase or decrease).
I. Covenants on borrowing become more restrictive
II. The Federal Reserve increase the money supply
III. Total household wealth increases
a) I increases; II decreases; III increases
b) I increases; II decreases; III decreases
c) I decreases; II increases; III increases
d) I decreases; II decreases; III decreases
e) None of these choices are correct
d) I decreases; II decreases; III decreases
Which of the following bond types pays interest that is exempt from federal taxation?
a) Municipal bonds
b) Corporate bonds
c) Treasury bonds
d) Convertible bonds
e) Municipal bonds and Treasury bonds
a) Municipal bonds
Which of the following is true for a stock with zero growth in dividends
a) P0 = D1/R-g
b) P0 = D1/R
c) P0 = D0(1+g)/(R-g)
d) None
b) P0 = D1/R
A security has an expected return less than its required return. This security is:
a) selling at a premium to par
b) selling at a discount to par
c) selling for more than its present value
d) selling for less than its present value
c) selling for more than its present value
A decrease in interest rates will
a) decrease the bond’s present value
b) increase the bond’s duration
c) lower the bond’s coupon rate
d) change the bond payment’s frequency
e) not affect the bond’s duration
b) increase the bond’s duration
