FIN 310 FIRST TEST Flashcards
(65 cards)
1
Q
What was the name of the first federal bank formed in America?
a. Bank of the United States
b. National Bank of the Americas
c. The Federal Reserve Bank
d. None of the above
A
a. Bank of the United States
2
Q
How long was the charter for America’s first national bank?
a. Ten years
b. Twenty years
c. Thirty years
d. None of the above
A
Twenty years
3
Q
What percent of the United State’s population lived in cities during the time of the First Bank of the United States?
a. 5%
b. 10-20%
c. 30-40%
d. None of the above
A
a. 5%
4
Q
- What year was the federal reserve system started?
a. 1884
b. During the panic of 1894
c. During the panic of 1907
d. None of the above
A
d. none of the above (correct is 1913)
5
Q
The ____ sector is the largest supplier of loanable funds.
a. household
b. government
c. business
d. none of the above
A
a. household
6
Q
The required return to implement a given business project will be ____ if interest rates are higher. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are higher.
a. greater; lower
b. lower; greater
c. lower; lower
d. greater; greater
A
b. lower, greater
7
Q
- According to the Fisher Effect, if Nominal rates were 7% and the
rate of inflation was 3%, the real rate of return would be
A) 9%
B) .5%
C) 3%
D) None of the above
A
d. none of the above (correct:10%, just add the two values)
8
Q
- Securities that offer ____ liquidity will need to offer a ____ yield.
a. lower; higher
b. lower; lower
c. higher; higher
d. B and C
A
a. lower; higher
9
Q
- Within the category of capital market securities, municipal bonds have the ____
before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from
the perspective of investors in high tax brackets.
a. highest; below that
b. lowest; above that
c. highest; above that
d. lowest; below that
A
b. lowest; above that
10
Q
- Assume an investor’s tax rate is 20 percent. The before-tax yield on a security is 12
percent. What is the after-tax yield?
a. 16.00 percent
b. 10.40 percent
c. 7.80 percent
d. 3.00 percent
e. none of the above
A
e. none of the above
11
Q
f shorter term securities have lower annualized yields than longer
term securities, the yield curve
a. is horizontal.
b. is upward sloping.
c. is downward sloping.
d. cannot be determined unless we know additional information
(such as the level of market interest rates).
A
b. is upward sloping.
12
Q
The form of money consisting of currency held by the public and checkable deposits at depository institutions is called
a. M1.
b. M2.
c. M3.
d. MMDA.
A
a. M1
13
Q
- The Board of Governors is composed of
a. seven members appointed by the President of the United States.
b. the 12 presidents of Fed district banks.
c. the Federal Open Market Committee, plus the Federal Advisory Council.
d. the Federal Open Market Committee, plus the President of the United States.
A
a. seven members appointed by the President of the United States
14
Q
The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.
a. federal funds
b. prime
c. primary credit lending
d. real
A
c. primary credit lending
15
Q
- To increase money supply, the Fed could ____ the reserve requirement ratio.
a. increase
b. stabilize
c. reduce
d. issue stock
A
c. reduce
16
Q
When open market operations are used to reduce bank funds, the yield on debt instruments ___________
a. increases
b. decreases
A
a. increases
17
Q
What bonds have the lowest before-stock yield?
A
municipal bonds
18
Q
Funds are provided to the initial issuer of
securities in the
A
primary market
19
Q
Those financial markets that facilitate the flow of long-term funds are known as
a. money markets.
b. capital markets.
c. primary markets.
d. secondary markets.
A
capital markets
20
Q
If a corporation wants to borrow funds, it can issue bonds in the ______ market.
a. secondary
b. primary
c. deficit
d. surplus
A
b. primary
21
Q
Indiana Bank purchased corporate bonds with a 10-year maturity 3 years ago. If it now needs funds, it could sell those bonds in the ______ market.
a. secondary
b. primary
c. deficit
d. surplus
A
a. secondary
22
Q
Which of the following is a money market security?
a. six-month treasury bill
b. municipal bond
c. mortgage
d. corporate bond
A
a. six-month treasury bill
23
Q
The _______________________ required complete disclosure of relevant financial information for publicly offered securities in the primary market..
a. Glass-Steagall Act
b. Federal Reserve Act
c. Sarbanes-Oxley Act
d. Securities Act of 1933
A
d. Securities Act of 1933
24
Q
Because financial markets are ____, securities buyers and sellers do not have full access to information and cannot always break down securities to the precise size they desire.
a. efficient
b. inefficient
c. perfect
d. imperfect
A
d. imperfect
25
Which of the following is most likely to be described as a depository institution?
a. savings institutions
b. securities firms
c. finance companies
d. pension funds
e. insurance companies
a. savings institutions
26
Which of the following financial intermediaries are NOT major investors in stocks?
a. commercial banks
b. insurance companies
c. mutual funds
d. pension funds
a. commercial banks
27
One reason for the __________ was that mortgage lenders did not always properly verify the income, job status, and credit history of mortgage applicants before extending a mortgage.
a. credit crisis in the 2008-2009 period
b. stock market crash in 2013
c. mutual fund crisis in 2015
d. oil crisis in 2012
a. credit crisis in the 2008-2009 period
28
If economic conditions become more favorable, then
a. expected cash flows on various projects will decrease.
b. fewer proposed projects will have expected returns greater than the hurdle rate.
c. there would be additional acceptable business projects.
d. there would be an increased demand by business for loanable funds.
c. there would be additional acceptable business projects.
29
As a result of less favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve.
a. decreased; inward
b. decreased; outward
c. increased; outward
d. increased; inward
a. decreased; inward
30
Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were suddenly higher than U.S. rates. For a given foreign interest rate level, foreign demand for U.S. funds is ____ related to U.S. interest rates.
a. less; inversely
b. more; positively
c. less; positively
d. more; inversely
d. more; inversely
31
If the real interest rate was large during the last year, then
a. inflation is expected to exceed the nominal interest rate in the future.
b. inflation is expected to be less than the nominal interest rate in the future.
c. actual inflation was less than the nominal interest rate.
d. actual inflation was greater than the nominal interest rate.
c. actual inflation was less than the nominal interest rate.
32
If the economy strengthens, there is ____ pressure on interest rates. If the Federal Reserve decreases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected).
a. upward; upward
b. upward; downward
c. downward; upward
d. downward; downward
a. upward; upward
33
Assume that foreign investors who have invested in U.S. securities decide to increase their investment in U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.
a. decrease; upward
b. decrease; downward
c. increase; downward
d. increase; upward
c. increase; downward
34
If the federal government needs to borrow less funds, this borrowing reflects a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds.
a. increase; no change
b. decrease; no change
c. no change; increase
d. no change; decrease
d. no change; decrease
35
Which of the following conditions would place the most downward pressure on interest rates?
a. an increase in both the supply of and the demand for loanable funds
b. a decrease in both the supply of and the demand for loanable funds
c. a decrease in the supply of loanable funds and an increase in the demand for loanable funds
d. an increase in the supply of loanable funds and a decrease in the demand for loanable funds
d. an increase in the supply of loanable funds and a decrease in the demand for loanable funds
36
If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
a. increase; increase
37
When there are expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.
a. increase; decrease
b. increase; increase
c. decrease; increase
d. decrease; decrease
a. increase; decrease
38
In general, securities with ____ credit risk and _______ liquidity will offer higher yields.
a. higher; higher.
b. higher; lower
c. lower; lower
d. lower; higher
b. higher; lower
39
Check My Work
Assume an investor's tax rate is 20 percent. The before-tax yield on a security is 10 percent. What is the after-tax yield?
a. 12.00 percent
b. 7.25 percent
c. 9.00 percent
d. 8.00 percent
d. 8.00 percent
40
The ___________curve represents the relationship between the maturity and the annualized yield of Treasury debt securities.
a. liquidity
b. default
c. yield
d. maturity
c. yield
41
In response to criticism of the ratings they assigned before the credit crisis, credit rating agencies now
a. are paid through fees assessed on the purchasers of bonds.
b. are depending more on sensitivity analysis in which they assess how creditworthiness may change in response to abrupt changes in the economy.
c. are not allowing employees who work in the agency's sales and marketing departments to influence the ratings that the agency assigns.
d. B and C
d. B and C
42
Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will decrease, their actions may cause the yield curve to
a. become inverted.
b. become flat.
c. become upward sloping.
d. be unaffected.
a. become inverted.
43
Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly became more important, the yield curve would now have a(n) ____ (assuming no other changes).
a. slight downward slope
b. upward slope
c. flat slope (no slope)
d. steep downward slope
b. upward slope
44
Burke Co. is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. It believes that a 0.3 percent credit risk premium and a 0.2 percent liquidity premium are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 8 percent. Based on this information, Burke should offer ____ percent on its commercial paper.
a. 8.5
b. 8.1
c. 7.5
a. 8.5
45
Assume that the Treasury issues a large number of Treasury bonds. This action will ____ the demand for funds in the market and place ____ pressure on the yield of Treasury bonds.
a. decrease; downward
b. decrease; upward
c. increase; upward
d. increase; downward
c. increase; upward
46
According to the segmented markets theory, if most investors suddenly preferred to invest in long-term securities and most borrowers suddenly preferred to issue short-term securities, there would be
a. downward pressure on the price of long-term securities.
b. downward pressure on the short-term yields.
c. downward pressure on the yield of long-term securities.
d. A and C
c. downward pressure on the yield of long-term securities.
47
Assume that you derive the one-year forward interest rate without considering liquidity. Assuming that liquidity affects the yield, the forward interest rate that you derived would _____________ the market's expectation of the future interest rate.
a. overestimate
b. accurately estimate
c. underestimate
d. be an unbiased forecast of (it has an equal chance of overestimating or underestimating)
a. overestimate
48
Check My Work
The federal funds rate is the interest rate charged on short-term loans between_____________.
a. federal government agencies
b. non-depository institutions
c. households who need funding before applying for mortgages
d. depository institutions
d. depository institutions
49
The most common method that the Federal Reserve would use to change market interest rates is to
a. change the reserve requirement ratio.
b. reduce the criteria required by applicants to obtain mortgages.
c. buy or sell Treasury securities in the secondary market.
d. buy or sell Treasury securities in the primary market for Treasury securities.
c. buy or sell Treasury securities in the secondary market.
50
The Federal Open Market Committee is directly responsible for controlling ____________.
a. housing applications
b. housing prices
c. income tax rates
d. money supply growth
d. money supply growth
51
The Federal Advisory Council makes recommendations to the Fed about
a. economic and banking issues.
b. reserve requirements.
c. insider trading.
d. controlling money supply growth.
a. economic and banking issues.
52
When the Fed initiated a program to purchase commercial paper, one of its primary goals was to
a. prevent financial institutions from holding commercial paper.
b. require that financial institutions increase their holdings of commercial paper.
c. increase activity in the market for commercial paper and boost the confidence of investors in commercial paper.
d. prevent financial institutions from issuing commercial paper in the future.
c. increase activity in the market for commercial paper and boost the confidence of investors in commercial paper.
53
uantitative easing was motivated by the theory that
a. the Fed should focus solely on controlling the short-term Treasury rate.
b. the Fed should focus solely on controlling the commercial paper rate.
c. the Fed should focus solely on controlling stock market conditions.
d. control of the short-term Treasury rate is not necessarily sufficient to improve liquidity in the debt security markets.
d. control of the short-term Treasury rate is not necessarily sufficient to improve liquidity in the debt security markets.
54
If the Fed initiates a program to purchase long-term Treasury securities, it is most likely attempting to
a. reduce the rate on commercial paper.
b. decrease; no change
c. reduce inflation.
d. reduce long-term interest rates.
d. reduce long-term interest rates.
55
____ is (are) not a component of the Fed as it exists today.
a. The Federal Advisory Council
b. The Board of Governors
c. National banks
d. The U.S. Department of Commerce
e. All of the above are components of the Fed.
d. The U.S. Department of Commerce
56
A criticism of the Fed's actions during the credit crisis is that it
a. did not attempt to increase the liquidity of the debt markets.
b. focused too much on financial institutions.
c. allowed Bear Stearns to fail and file for bankruptcy.
d. periodically raised the primary credit rate.
b. focused too much on financial institutions.
57
If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.
a. increase; purchase
b. increase; sell
c. decrease; purchase
d. B and C
a. increase; purchase
58
Distinguish between primary and secondary markets. Distinguish between money
and capital markets
primary markets are used for the issuance of new securities while secondary markets are used for the trading of existing securities.
59
Explain the meaning of surplus units and deficit units.
Surplus units provide funds to the financial markets while deficit units obtain funds from
the financial markets. Surplus units include households with savings, while deficit units include firms
or government agencies that borrow funds
60
Explain the meaning of efficient markets.
If markets are efficient then prices of securities available in these markets properly reflect
all information.
61
What is the function of a mutual fund?
mutual fund sells shares to investors, pools the funds, and invests the funds in a
portfolio of securities.
62
Which factors influence a security’s liquidity?
Debt securities with shorter maturities are more liquid.
63
Explain what is meant by interest elasticity.
nterest elasticity of supply represents a change in the quantity of loanable funds supplied
in response to a change in interest rates
64
Explain why interest rates tend to decrease during recessionary periods.
uring a recession, firms and consumers reduce their amount of borrowing.
65
Would increasing the money supply growth place upward or
downward pressure on interest rates?
f one believes that higher money supply growth will not cause inflationary expectations,
the additional supply of funds places downward pressure on interest rates
