Solved Previous Quiz 7 - Financial Markets and Economic Fluctuations | ECON 423, Quizzes of Financial Market

Download Solved Previous Quiz 7 - Financial Markets and Economic Fluctuations | ECON 423 and more Quizzes Financial Market in PDF only on Docsity! Econ 423: Questions from Previous Versions of Quiz 7 [Fall 2000-present] 1. The Federal Reserve System’s only tool that, in the long run, alters the money supply by systematically changing both the actual money multiplier and monetary base is: (a) the discount rate. (b) the reserve requirements rate. (c) open market operations. (d) the margin requirement. (e) check clearing. 2. Commercial paper is unlike other money market instruments in that trading in the transactions in the secondary markets are rare. Major reasons are that individual commercial banks specialize in making short-term loans [commercial paper] to individual corporations because: (a) they are better able to exploit the advantages of insider information, and they gain insight into particular industry dynamics through a “learning- by-doing” process. (b) this facilitates customization of the loan instruments, and it also facilitates dealing with potential abuses of asymmetric information. (c) the “spread” is greater on commercial loans than it is with such capital market instruments as Treasury bills or corporate debentures. (d) individual corporate borrowers are more likely to keep their demand and time deposits in the banks that are willing to lend them short-term funds. 3. Money market securities: (a) have a relatively high default risk, making them risk averse. (b) mature in less than five years from the time of issue. (c) are issued only by extremely large and reputable entities and are usually sold in hefty denominations. (d) are primarily issued by federal and local governments. 4. Money market instruments do not include: (a) U.S. Treasury bills. (b) commercial paper and repos. (c) Treasury bonds and financial derivatives. (d) banker’s acceptances and loans through the federal funds market. (e) Eurodollar accounts and short term negotiable certificates of deposit. 5. A tool once administered by the Comptroller of the Currency for national banks and by state banking authorities for state banks, but now set exclusively by the Federal Reserve System is the: (a) reserve requirement ratio, which applies to all deposits upon which customers can write checks. (b) federal funds rate that banks can charge each other for overnight loans. (c) ceiling interest rate that can be paid to a bank’s depositors. (d) discount rate charged banks on their discount loans. (e) interest rate ceiling [usury rate] that can be charged to borrowers. 6. A bidder at a Treasury auction is certain to secure the amounts of T-Bills it wants to buy if it: (a) makes a noncompetitive bid for T-bills. (b) bids more than the average of all bids received by the Treasury. (c) structures a “repo” for T-bills that is lower than any other repo offered on the market. (d) bids less than the average of all bids received by the Treasury. (e) bids strategically, basing its bids on a “second bidder” approach. 7. The financial markets or instruments that are least attributable to creative responses in financial markets would be: (a) the Eurodollar market. (b) the federal funds market. (c) discount loans from a FRS District Bank. (d) the emergence of large saving and loan associations and credit unions in the 1930s. 8. Banker’s acceptances are important primarily because they facilitate: (a) increased velocity in secondary markets for money market instruments. (b) the generation of discretionary revenue for commercial banks. (c) the process of creative response. (d) international 1 transactions between individuals or firms concerned about the credit risk associated with dealing with foreign buyers. 9. The explicit rate of interest paid on T-bills is: (a) paid by the government who issues it. (b) zero because T-bills are sold at a discount from their face value at maturity, so interest is implicit. (c) usually higher than the rate of interest on Treasury bonds. (d) equal to the prime rate plus one or two percentage points. 10. If the FED buys $100,000 worth of U.S. bonds from the Junk Dealers Credit Union, which keeps 20% of demand deposits as reserves, the Credit Union could reasonably be expected to quickly: (a) lend $100,000 privately because this merely exchanges a loan to the government for a private loan, with no immediate change in the credit union's liabilities. (b) contract private loans by $80,000. (c) privately lend an additional $20,000. (d) reduce private loans by $100,000. 11. Many financial institutions “warehouse” surplus funds in money market instruments because: (a) money markets usually generate the highest average rates of return. (b) capital markets are less risky and tend to yield lower rates of return. (c) they may expect to have to make a large payment relatively soon, or the timing may not be quite right for longer-term investments in higher-yield stocks, bonds, or loans. (d) most financial institution are quite risk averse and thus, are reluctant to invest in capital securities. 12. The United States Department of the Treasury is a unique participant in the money market because it: (a) is never a supplier of funds in the market. (b) always buys more bonds than it sells if the federal budget is in surplus. (c) sells more bonds than it buys only when the federal budget is in deficit. (d) never deals in the market directly, instead using the Fed open market operations as a surrogate. 13. When a Federal Reserve District Bank purchases a security [usually, a T-bill] with an agreement that the seller will buy the security back in a short period, usually 1 to 15 days, the transaction is known as: (a) a matched sale-purchase. (b) a repo. (c) a long sell. (d) an intermediation. (e) a short buy. (f) a noncompetitive auction. (g) interest swap. 14. Transaction costs incurred by a lender who desired to sell would be highest for the lender if the money market assets to be sold were: (a) U.S. Treasury bills. (b) negotiable CDs. (c) commercial paper. (d) banker’s acceptances. (e) Eurodollars. 15. If the Federal Reserve System buys more bonds than it sells, the money supply grows because of increases in: (a) our national debt and the indebtedness of the U.S. Treasury. (b) total bank reserves. (c) the actual money multiplier. (d) the proportion of stock-and- bond portfolios that financial investors can legally finance with credit. (e) the potential money multiplier. 16. The relatively least standardized forms of money market securities are: (a) repos. (b) bankers acceptances. (c) commercial paper. (d) Treasury bills. (e) Eurodollar accounts. 17. The Federal Reserve System’s Board of Governors does not have the absolute legal authority to: (a) set a uniform discount rate that member banks face in all 12 District Banks. (b) establish, within limits, reserve requirements. (c) set margin requirements. (d) participate in determining open market operations as members of the Federal Open Market Committee.. (e) announce target rates for the federal funds market. 2 39. The idea that people or firms that successfully buy goods or sell services [“getting a contract”] through a bidding process are disadvantaged because they probably lack information possessed by unsuccessful bidders is known as: (a) negative returns. (b) the winner’s curse. (c) the loser dilemma. (d) cut-throat losses. (e) animal spirits. 40. A bond issuer retains the right to force a holder to sell a debenture back to the issuer if the bond contains a: (a) reclaim provision. (b) call provision. (b) reissue provision. (c) recall clause. (e) rebound provision. 41. If a company were to go bankrupt, the residual claimants are entitled to what is left after the debts have been paid off. The order in which residual claimants would be paid off first is: (a) bondholders, regular stockholders, then preferred stockholders. (b) regular stockholders, bondholders, then preferred stockholders. (c) bondholders, preferred stockholders, then common stockholders. (d) preferred stockholders, common stockholders, then bondholders. 42. In situations where the asymmetric information problem is not severe: (a) the money markets have a distinct cost advantage over banks in providing short-term funds. (b) banks have a distinct cost advantage over the money markets in providing short-term funds. (c) banks have a comparative advantage over the money markets in providing short-term funds. (d) banks have an absolute advantage over the money markets in providing short- term funds. 43. The price of a share of common stock divided by the earnings per share of stock is a stock’s: (a) price earnings ratio. (b) value. (c) expected growth rate. (d) market capitalization. (e) none of the above. 44. Finance companies play a unique role in money markets by: (a) giving consumers indirect access to money markets. (b) combining consumers’ investments to purchase money market securities on their behalf. (c) borrowing in capital markets to finance purchases of money market securities. (d) assisting the government in its sales of U.S. treasury securities. 45. Banker’s acceptances: (a) can be bought and sold until they mature. (b) are issued only by large money center banks. (c) carry low interest rates because of the very low default risk. (d) are all of the above. 46. The Federal Reserve can influence the federal funds interest rate by buying securities, which: (a) adds reserves, thereby raising the federal funds rate. (b) removes reserves, thereby lowering the federal funds rate. (c) adds reserves, thereby lowering the federal funds rate. (d) removes reserves, thereby raising the federal funds interest rate. 47. The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will: (a) rise before they pay off their debt. (b) fall before they pay off their debt. (c) become more volatile before they pay off their debt. (d) become more stable before they pay off their debt. 48. The primary issuers of capital market securities include: (a) the federal and local governments. (b) the federal and local governments, and corporations. (c) the federal and local governments, corporations, and financial institutions. (d) local governments and corporations. 5 49. The distribution of a firm’s capital between debt and equity is its: (a) leverage ratio. (b) liability structure. (c) acid ratio. (d) capital structure. 50. Money market instruments are not: (a) very liquid, relative to capital market instruments. (b) usually sold in large denominations. (c) subject to relatively low default risk. (d) scheduled to mature in one year or less. 51. It is untrue of money markets that: (a) the single most influential participant in the U.S. money market is the U.S. Treasury Department. (b) most money market securities do not explicitly pay interest; investors buys securities at discounts from face value. (c) pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations. (d) unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier. 52. The Fed can lower the federal funds interest rate by: (a) selling securities, thereby adding reserves. (b) selling securities, thereby lowering reserves. (c) buying securities, thereby adding reserves. (d) buying securities, thereby lowering reserves. 53. The _____ rate is the rate of interest that the issuer must pay. (a) market (b) coupon (c) discount (d) funds 54. The most influential participants in the U.S. money market are: (a) the Federal Reserve and the U.S. Treasury Department. (b) finance companies and major U.S. industrial corporations. (c) the 100 largest money center banks. (d) are the “big eight” investment banks that underwrite securities. 55. Repos are not: (a) usually low risk loans. (b) instruments that allow collateralized lending or borrowing for a day or two.(c) very low interest rate loans. (d) usually collateralized with Treasury securities. (e) poor tools for managing liquidity. (e) used to take advantage of anticipated changes in interest rates. 56. Mishkin and Eakins’ assertion that governmental entities never issue stock is: (a) reflective of the U.S. Constitution’s prohibitions of such actions. (b) refuted by the fact that the FRS is in reality an agency of the federal government, and it does sell stock. (c) based on the fact that all government agencies, including the U.S. Treasury, rely exclusively on tax revenues or sales of bonds to finance all their spending. (d) applicable only to federal government functions, but not to state and local government functions. 57. Federal funds (a) are short-term funds transferred between financial institutions, usually for a period of one day. (b) actually have nothing directly to do with the federal government budget. (c) lent by banks that have an excess of reserves. (d) provide banks with an immediate infusion of reserves should they be short. (e) usually overnight investments. (f) borrowed by banks that have a deficit of reserves. (g) All of these. 58. Unlike most other money market securities, commercial paper: (a) is seldom traded in a secondary market. (b) usually has a term to maturity that is longer than a year. (c) is relatively unpopular with most money market investors because of the high default risk. (d) is primarily issued by relatively small corporations unable to secure low-interest financing unless they pledge their accounts receivable. 6 59. A firm that chooses to finance a new plant by issuing money market securities: (a) avoids additional transaction costs when it rolls over its debt. (b) runs the down-side risk that interest rates may fall before it rolls over its debt. (c) incurs both the cost of reissuing securities and the risk of having to pay higher interest rates on the new debt. (d) is more likely to profit if interest rates rise while the plant is being constructed. 60. Securities not listed on one of the exchanges trade in the over-the-counter market, in which dealers “make a market” by (a) establishing security prices through a public auction system. (b) buying stocks for inventory when investors want to sell, and selling securities when investors want to buy. (c) establishing syndicates to ensure that newly-issued secondary market issues are sold. (d) certifying that the annual reports of the issuing corporations conform to accounting standards. 61. The _____ value of a bond is the amount that the issuer must pay at maturity. (a) market (b) present (c) face (d) amortized 62. If your noncompetitive bid for a Treasury bill is successful, then you will (a) certainly pay less than if you had submitted a competitive bid. (b) probably pay more than if you had submitted a competitive bid. (c) pay the average of prices offered in successful competitive bids. (d) pay the same as the lowest successful competitive bidders. 63. The bond contract specifying the lender’s rights and privileges and the borrower’s obligations is called the (a) bond syndicate. (b) restrictive covenant. (c) bond covenant. (d) bond indenture. (e) subordination clause. (f) collateralization clause. 64. The assets of money market mutual funds increased from under $100 billion in 1980 to more than (a) $500 billion in 2000. (b) $1 trillion in 2000. (c) $1.5 trillion in 2000. (d) $2 trillion in 2000 7