Quiz 1 with Answers | Fixed Income Securities | FIN 4224, Quizzes of Finance

Download Quiz 1 with Answers | Fixed Income Securities | FIN 4224 and more Quizzes Finance in PDF only on Docsity! Quiz 1 STUDENT NAME:_______________________________ STUDENT NUMBER:______________________________ Virginia Polytechnic Institute and State University FIN 4224 Fall 2006 (Schneller) 12:30 Quiz 1 Question 1: Suppose the current reserves requirement ratio (RRR) is 8.125% and no bank has excess reserves. The effect of increasing the RRR to 12% will be a. Banks should be able to increase their deposits by approximately 8.333% b. Banks will be able to increase their deposits by approximately 47% c. Banks will have to decrease their deposits by approximately 33% d. Not enough information e. None of the above Answer: c Computation: 1 1 .12 .08125 0.3229 33% 1 0.08125 - =- @- Question 2: For RRR=10% the money multiplier is computed to be 10. Which of the following is NOT a reason why the actual (real life) multiplier is lower than 10: a. Some of the money generated is always being absorbed by the Federal Open Market Committee b. The money generation process does not continue ad infinitum c. Some borrowers withdraw some of the money granted to them in the form of cash in hand d. Some bank are conservative and keep excess reserves e. All of the above are good reasons why the money multiplier is less than 10. Answer: a (For a given RRR, the FOMC has no effect on the money multiplier) Question 3: When the FOMC (Federal Open Market Committee) buys 10-year bonds from the public it ________________ short-term interest rates and __________________ 10-year interest rates a. lowers ; lowers b. lowers ; jacks up c. jacks up ; lowers d. jacks up ; jacks up Answer: a When the FOMC purchases a 10-year T-bond it increases the demand for this security, P↑ and the 10-year rate↓. At same time, the FOMC increases reserves in the banking system, thus leading to lower short-term interest rates.