Assignment Review Questions - Financial Institutions/Markets | FIN 4303, Assignments of Financial Market

Download Assignment Review Questions - Financial Institutions/Markets | FIN 4303 and more Assignments Financial Market in PDF only on Docsity! Financial Institutions & Markets Preview Questions – Chapter 1-10 For Use with Kidwell, et al textbook Dr. Samuel Bulmash-FIN 4303 Chapter 1 1. The purpose of the financial system is to bring savers and borrowers together. A) True B) False 2. Businesses-are never DSUs. A) True B) False 3. A financial claim is an "IOU" from a deficit spending unit. A) True B) False 4. Investment bankers help DSUs bring new primary security issues to market. A) True B) False 5. Deposits in a credit union by a household are an example of direct fmance. A) True B) False 6. Depository intermediaries issue claims that are for the most part highly liquid. A) True B) False 7. A household is an SSU when income for the period exceeds spending. A) True B) False 8. An efficient financial system A) eliminates search and transactions costs B) is a mere theoretical possibility C) promotes economic growth and social progress D) depends on high volumes of "direct" transactions 9. Pension funds tend to invest in A) higher-yielding long-term securities B) money market securities exclusively C) government securities exclusively D) none of the above Page 1 10. Financial institutions facilitate the flow of investment funds A) from savers to borrowers B) from SSUs to DSUs C) from the household sector to the business sector D) any of the above 11. Which sector has been most consistently in a surplus budget position? A) Business B) Government C) Foreign D) Household 12. In direct financing the lender A) trades a financial claim for money. B) trades money for a financial claim issued by a financial institution. C) trades money with a broker who owns the financial claims of a borrower. D) trades money for the financial claim of the borrower. 13. All but one is associated with direct financing: A) single financial instrument. B) a broker, dealer or investment banker. C) small denominations. D) dominance of governments and businesses as borrowers. 14. Primary capital markets are most likely to finance A) plant and equipment B) inventory C) operating expenses D) none of the above Chapter 2 15. Deposits should expand when reserve requirements increase. A) True B) False 16. The Fed's most influential tool is reserve requirements. A) True B) False 17. Federal Reserve regulations affect many nonbank institutions. A) True B) False 18. Depository institutions create money when they lend or invest excess reserves. A) True B) False Page 2 37. If the money supply increases too rapidly A) inflationary expectations will rise. B) government spending will decrease. C) bank lending will decrease. D) investment spending will fall. 38. Unemployment should fall if A) wages increase and people expect prices to rise, too. B) wages increase and people expect prices to be stable. C) interest rates rise more than prices are expected to rise. D) the money supply decreases. 39. An contraction in the U.S. money supply should A) increase domestic interest rates. B) cause the exchange value of the dollar to increase. C) cause U.S. exports to decrease. D) all of the above. 40. The intended longer run impact of monetary policy is A) to lower interest rates. B) to raise security prices. C) to influence change consumption and investment spending. D) to reduce government spending. 41. Monetary policy impacts the economy A) by affecting real spending directly. B) by affecting real spending through the financial sector. C) by changing interest rates and the cost of housing. D) all of the above Chapter 4 42. The real rate of interest can be viewed as the time value of not consuming. A) True B) False 43. The current rate of inflation affects the expected level of interest rates. A) True B) False 44. The market rate of interest can be viewed as the real rate of interest plus a premium for the expected rate of inflation A) True B) False Page 5 45. Declining interest rates can be caused by an upward shift in the demand for loanable funds relative to the supply of loanable funds. A) True B) False 46. The expected real rate of interest is likely to be negative. A) True B) False 47. The flow of funds forecasting method utilizes the concept of supply and demand of loanable funds. A) True B) False 48. Interest rate forecasting using economic models assumes that financial markets are very efficient. A) True B) False 49. Interest is A) the price of money. B) the rent on money. C) time value of delayed consumption. D) all of the above. 50. Which one of the following is not an explanation for paying interest on borrowed money? A) Interest is the rental cost of purchasing power. B) Interest is the penalty paid for consuming income before it is earned. C) Interest is always paid at the maturity of a loan. D) Interest is the time value of delayed consumption. 51. Interest rates will decline when the demand for loanable funds A) shifts to the left. B) shifts to the right. C) anticipates reduced growth in the economy. D) "a" and "c" above. 52. All but one of the following affects the supply of loanable funds? A) the level of exports. B) the investment opportunities in the economy. C) the savings rate. D) Federal Reserve monetary policy actions. Page 6 53. An increase in the rate of expected inflation will A) shift the demand for loanable funds to the left (down). B) shift the supply of loanable h d s to the left (down). C) shift demand and supply for loanable funds to the right (up) decreasing interest rates. D) shift demand and supply for loanable finds to the right (up) increasing interest rates. 54. Deficit spending units (DSU) are represented in loanable funds theory as A) suppliers of loanable funds. B) demanders of financial claims. C) demanders of loanable funds. D) DSUs are not represented in the loanable funds theory of interest rate determination. 55. An investor received an 8 percent coupon rate last year on a $1000 bond purchased at par. The inflation rate during the year was 4 percent and is expected to be 5 percent next year. The realized real rate earned by the investor last year was: A) 8% B) 3% C) 4% D) -1 percent. Chapter 5 56. The coupon rate may be the market rate of interest for a bond. A) True B) False 57. The price of a bond and the market rate of interest are inversely related. A) True B) False 58. The price of a bond is the present value of future payments discounted at the coupon rate. A) True B) False 59. Yield to maturity assumes reinvestment of coupons at the same yield. A) True B) False 60. The realized yield may be influenced by coupon reinvestment rates. A) True B) False Page 7 78. Which of the following statements is true? A) Interest rat& move inversely with economic activity. B) Default risk premiums vary inversely with economic activity. C) Municipal bond yields are usually higher than similar risk corporate yields. D) Treasury bond yields are always higher than Treasury bill yields. 79. A bond investor is more likely to exercise a put option in a bond contract if A) interest rates increase. B) interest rates decrease. C) the default risk of a bond decreases. D) tax-free municipals are now available. 80. The term structure of interest rates A) describes the relationship between maturity and yield for similar securities. B) ranks security yield according to the default risk structure. C) describes how interest rates vary over time. D) describes the pattern of interest rates over the business cycle. 81. The yield curve is a plot of A) maturity changes as risk changes. B) yields by varied risk-taking of varied bond issuers. C) yields by maturity of securities with similar default risk. D) interest rates over time past. 82. The source of data for a yield curve might be A) bond yield by issuers over time. B) historical Treasury security yields. C) realized Treasury security yields by time. D) outstanding Treasury security yields by maturity. Use the following to answer questions 83: The following interest rates prevail in the market and are used to answer the question(s) below. 90-day Treasury bills 8.36 percent 1 80-day Treasury bills 8.48 percent 3-year Treasury securities 9.25 percent 2-year Treasury securities 9.10 percent 90-day Commercial paper 9.15 percent 3-year Corporate bonds (AA) 10.1 percent 3-year Municipal (AA) 7.10 percent Expected 2-year inflation rate 3.50 percent 83. Which security below did the market view as having the greatest default risk? A) 90-day Treasury securities B) 180-day Treasury securities C) 10-year Treasury securities D) 90-day Commercial paper Page 10 Chapter 7 84. Many diverse institutions borrow in the money markets, while relatively few invest. A) True B) False 85. All money market instruments are short-term debt. A) True B) Fake 86. Treasury bills are sold on a discount basis, with interest paid separately at maturity. A) True B) False 87. Commercial banks act as dealers and are major investors in Treasury securities. A) True B) False 88. For large corporations, commercial paper is more expensive but is a more assured alternative to bank borrowing. A) True B) False 89. Commercial paper is more likely to be placed directly by large finance companies. A) True B) False 90. The Federal Funds market is not available for the smaller, regional bank. A) True B) False 91. Which of the following may be a liability of a non-financial business corporation? A) commercial paper B) Federal Funds C) Treasury securities D) agency securities 92. Federal Funds are typically A) Treasury deposits. B) Federal Reserve assets. C) commercial bank deposits at the Federal Reserve. D) overnight loans settled in immediately available finds. Page 11 93. The most important money market instrument utilized in the Fed's open market operation is A) Federal Funds. B) commercial paper. C) Treasury bills. D) Agency securities. 94. Banks can satisfy their short-term borrowing needs by A) Federal Funds purchased. B) Federal Funds sold. C) issuing negotiable CDs. D) both a and c 95. Large industrial U.S. corporations are involved in the money market by A) investing excess cash balances. B) buying and selling goods on credit in international trade. C) issuing commercia1 paper. D) all of the above 96. Banks invest in government securities for a variety of reasons except A) income. B) safety. C) acceptable for collateral. D) high relative yield. 97. Even a small bank can even finance in the money market by A) investing in negotiable CDs. B) selling federal funds. C) purchasing federal funds. D) buying banker's acceptances. Chapter 8 98. Capital market securities are used to finance real capital investments, A) True B) False 99. Money market securities have better liquidity than capital market securities. A) True B) False 100. Money market securities are all debt securities, while capital market securities are either debt or equity securities. A) True B) False Page 12 118. A lender with a fixed-rate mortgage bears the risk of future inflation A) True B) False 119. Mortgages are issued in standard denominations like corporate and municipal bonds. A) True B) False 120. Most mortgage loans are amortized over the maturity of the loan with interest computed on the declining principal. A) True B) False 121. In a conventional mortgage agreement the borrower owns the mortgaged home; the lender takes a lien against the home. A) True B) False 122. An ARM, compared to a FRM, shifts the interest rate risk from the borrower to the lender. A) True B) False 123. CMO residual tranches have the first claim on the cash flow from a pool of mortgages. A) True B) False 124. Mortgage-backed securities have improved mortgage liquidity for home buyers. A) True B) False 125. Mortgage pool securities have encouraged individuals, insurance companies, and pension funds to provide indirect mortgage financing. A) True B) False 126. Home equity credit lines are a form of second mortgage financing. A) True B) False 127. Pass-through mortgage securities have standard denominations but uncertain cash flow. A) True B) False Page 15 128. Pass-through securities pass through all principal and interest payments collected from homeowners, providing a predictable stream of cash flow to the investor. A) True B) False 129. REMIC securities are a form of collateralized mortgage obligation that provide tax-free income to investor. A) True B) False Use the following to answer questions 130-131: Consider a $1 00,000 fixed rate loan with a 6.5% rate with a term of 30 years. 130. What is the monthly payment? A) $657 B) $632 C) $638 D) $612 131. With reference to the information above, if you added $1 00 to the monthly payment, how soon would your loan be paid off! A) 249 months B) 227 months C) 185 months D) 278 months Use the following to answer questions 132-133: You have just purchased a home and borrowed $50,000, 7 percent for 25 years, payable monthly. 132. What is your monthly payment? A) $338 B) $339 C) $353 D) $369 133. With reference to the information above, what was the amount of interest paid in the first month of the loan? (Assume a January payment in a 365 day year) A) $305 B) $265 C) $257 D) $297 Page 16 134. How long does it take to repay one-half of the principal on a $70,000, 7 percent, 15 year mortgage loan? A) 112 months B) 95 months C) 123 months D) 131 months 135. Which of the following mortgages would you most like to hold if you were a lender and you expected inflation of uncertain magnitude? A) reverse annuity mortgage B) conventional fixed-rate mortgage C) adjustable-rate mortgage loan D) none of the above 136. Which of the following holds the largest percentage of mortgages outstanding in the United States? A) life insurance companies and pension funds B) government agencies C) mortgage pools D) thrift institutions Chapter 10 137. The Dow Jones Industrial Average is a price-weighted index. A) True B) False 138. The NASDAQ is associated with a stock exchange. A) True B) False 139. The secondary market for capital market securities is important because it provides funds directly to deficit spending units. A) True B) False 140. Primary capital market securities provide marketability and possibilities-for investors to alter the riskiness of their portfolios. A) True B) False 141. Stock with betas less than one tend to have more price variability than the market. A) True B) False Page 17