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FINAL EXAM PRACTICE QUESTIONS
1) If a $12,000 coupon bond has a coupon rate of 8 percent, then the coupon payment every year is
A) $480.
B) $240.
C) $48.
D) $960
E) none of the above.
2) Which of the following are true for the current yield?
A) The current yield is defined as the yearly coupon payment divided by the price of the security.
B) The current yield and the yield to maturity always move together.
C) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond.
D) All of the above are true.
E) Only A and B of the above are true.
3) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 next year is
A) 10 percent. B) 5 percent. C) 15 percent. D) 14 percent.
4) A fully amortized loan is another name for
A) a fixed-payment loan. B) a simple loan.
C) an unsecured loan. D) a commercial loan.
5) In Japan in 1998, interest rates were negative for a short period of time because investors found it convenient to
hold six-month bills as a store of value because
A) the bills still returned more than cash.
B) the bills were denominated in small amounts and could be stored electronically.
C) these bills sold at a discount from face value.
D) the bills were denominated in large amounts and could be stored electronically.
E) of the high inflation rate.
6) Comparing a discount bond and a coupon bond with the same maturity,
A) the discount bond has the greater effective maturity.
B) the coupon bond has the greater effective maturity.
C) both bonds have the same effective maturity.
D) effective maturity cannot be calculated for a discount bond.
E) effective maturity cannot be calculated for a coupon bond.
7) For a bond selling for $4000, with a par value of $5000 and a coupon rate of 10 percent, the current yield is
A) 10 percent.
B) 5 percent.
C) 25 percent.
D) 20 percent.
E) 12.5 percent.
Figure 5-1
8) In Figure 5-1, factors that could cause the supply of bonds to increase (shift to the right) include:
A) an increase in government budget deficits.
B) a decrease in expected inflation.
C) expectations of more profitable investment opportunities.
D) all of the above.
E) only A and C of the above.
9) Factors that decrease the demand for bonds include
A) a decrease in the inflation rate.
B) an increase in the liquidity of stocks.
C) an increase in the volatility of stock prices.
D) all of the above.
E) only A and B of the above.
10) In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else
unchanged), the expected return on money _____, causing the demand for _____ to fall.
A) rises; money B) falls; money
C) falls; bonds D) rises; bonds
11) A fall in the savings rate will ______ interest rates, and ________ investment in capital goods
A) decrease; decrease
B) increase; increase
C) increase; decrease
D) decrease; not affect
E) decrease; increase
12) A lower level of income causes the demand for money to _____ and the demand curve for money to shift to the
_____.
A) decrease; left B) increase; left
C) increase; right D) decrease; right
13) Factors that decrease the demand for bonds include
A) an increase in the liquidity of stocks.
B) an increase in the inflation rate.
C) a decrease in the volatility of stock prices.
D) all of the above.
E) none of the above.
14) If the expected return on NBC stock rises from 5 to 10 percent and the expected return on CBS stock rises from 12
to 18 percent, then the expected return of holding CBS stock _____ relative to NBC stock and the demand for CBS
stock _____.
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
15) As their relative riskiness _____, the expected return on corporate bonds _____ relative to the expected return on
default-free bonds.
A) increases; does not change
B) decreases; does not change
C) decreases; decreases
D) increases; decreases
E) increases; increases
16) A decrease in the liquidity of corporate bonds will _____ the price of corporate bonds and _____ the yield of
Treasury bonds.
A) increase; reduce
B) increase; increase
C) reduce; reduce
D) reduce; increase
E) reduce; not affect
17) If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and
3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of
A) four years. B) two years. C) three years. D) one year.
18) According to the expectations theory of the term structure
A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur
over the life of the long-term bonds.
B) interest rates on bonds of different maturities move together over time.
C) buyers of bonds do not prefer bonds of one maturity over another.
D) all of the above.
E) only A and B of the above.
19) Which of the following statements are true?
A) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption.
B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low,
they had higher interest rates than U.S. government bonds before World War II.
C) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates.
D) Only A and B are true statements.
20) The bankruptcy of the Enron Corporation
A) increased the perceived riskiness of Treasury securities.
B) increased the perceived riskiness of municipal bonds.
C) reduced the Baa-Aaa spread.
D) did not affect the corporate bond market.
E) increased the Baa-Aaa spread.
21) A reduction of the riskiness of corporate bonds will _____ the yield on corporate bonds and _____ the yield on
Treasury securities.
A) reduce; increase
B) increase; increase
C) reduce; reduce
D) increase; reduce
E) reduce; not affect
22) Using the one-period valuation model, assuming a year-end dividend of $0.50, an expected sales price of $50, and
a required rate of return of 10%, the current price of the stock would be
A) $45.00.
B) $50.00.
C) $50.50.
D) $45.91.
E) indeterminate.
23) In the one-period valuation model, the value of an investment depends upon
A) the present value of both dividends and the expected sales price.
B) only the present value of the expected sales price.
C) the future value of dividends and the actual sales price.
D) only the present value of the future dividends.
E) the actual value of the dividends and expected sales price received in one year.
24) Another way to state the efficient markets condition is: in an efficient market,
A) unexploited profit opportunities will never exist as market participants ensure that they are instantaneously
dissipated.
B) every financial market participant must be well informed about securities.
C) unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them.
D) only A and C of the above.
25) According to the efficient markets hypothesis, purchasing the reports of financial analysts
A) is likely to increase one's returns by an average of about 2 to 3%.
B) is not likely to be an effective strategy for increasing financial returns.
C) is likely to increase one's returns by an average of 10%.
D) guarantees negative returns.
E) is likely to increase one's returns by about 3 to 5%.
26) Economists have focused more attention on the formation of expectations in recent years. This increase in interest
can probably best be explained by the recognition that
A) models that ignore expectations have little predictive power, even in the short run.
B) expectations influence many individuals, have little impact on the overall economy, but can have distributional
effects.
C) expectations influence the behavior of participants in the economy and thus have a major impact on economic
activity.
D) expectations influence only a few individuals, have little impact on the overall economy, but can have important
effects on a few markets.
27) New information about an asset can result in a decrease in the asset's price due to
A) an expected decrease in the level of future dividends.
B) an expected increase in the future sales price.
C) a decrease in the required rate of return.
D) an expected increase in the dividend growth rate.
E) none of the above.
28) During the past decade, the average rate of monetary growth has been 5%, and the average inflation rate has been
5%. If the Federal Reserve announces that the new rate of monetary growth will be 10%, the rational expectation
forecast of inflation will be
A) more than 10%.
B) between 5 and 10%.
C) 5%.
D) 10%.
E) less than 5%.
29) Which of the following is the primary source of external funds used by American businesses to finance their
activities?
A) Bonds and commercial paper B) Other loans
C) Bank loans D) Stock
30) Because of the adverse selection problem,
A) lenders typically require collateral before making a loan.
B) lenders may choose to lend only to those who "do not need the money."
C) lenders may refuse loans to individuals with low net worth.
D) all of the above.
31) A key finding of the economic analysis of financial structure is that
A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in
financing the activities of businesses.
B) economists do not have a very good explanation for why securities markets are so heavily regulated.
C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic
consequence in these markets.
D) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless
the majority of funds going to businesses are channeled through securities markets.
32) Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.
B) the borrower's lack of incentive to seek a loan for highly risky investments.
C) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.
D) none of the above.
33) Financial intermediaries provide their customers with
A) reduced transactions costs.
B) greater liquidity.
C) increased diversification and reduced risk.
D) all of the above.
E) only B and C of the above.
34) Financial systems in developing and transition countries face several difficulties that keep them from operating
efficiently, including:
A) self-serving governments that use their financial systems to direct credit to favored sectors of the economy by
setting interest rates at artificially low levels.
B) poorly developed legal systems that make it extremely difficult for lenders to enforce restrictive covenants.
C) under-developed regulatory systems that retard the provision of adequate information to the marketplace.
D) all of the above.
35) The fact that the largest, most established corporations are the most likely to raise funds by issuing securities is
know as
A) the pecking order hypothesis.
B) the "only those that don't need the money can borrow" hypothesis.
C) the "too-big-to-fail" hypothesis.
D) the "larger is better" hypothesis.
E) the efficient markets hypothesis.
36) In the absence of regulation, banks would probably hold
A) too much capital, reducing the efficiency of the payments system.
B) too little capital.
C) too much capital, reducing the profitability of banks.
D) none of the above.
37) The benefits to a bank from making loans include
A) safety.
B) liquidity.
C) high returns.
D) all of the above.
E) both A and C of the above.
38) A bank holding insufficient reserves can meet its reserve requirements by
A) borrowing federal funds.
B) selling secondary reserves.
C) borrowing from the Fed.
D) all of the above.
E) both A and B of the above.
39) Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles
such as:
A) credit rationing.
B) collateral and compensating balances.
C) screening and monitoring of loan applicants.
D) all of the above.
E) only A and B of the above.
40) Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face
the _____ problem that banks may take on too _____ risk.
A) moral hazard; little B) adverse selection; little
C) adverse selection; much D) moral hazard; much
41) Which of the following statements are true?
A) Checkable deposits are payable on demand.
B) Checkable deposits include NOW accounts.
C) Checkable deposits are the primary source of bank funds.
D) All of the above are true.
E) Only A and B of the above are true.
42) If the First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will
cause profits to
A) decline by $1.0 million. B) increase by $1.0 million.
C) decline by $10 million. D) increase by $10 million.
43) A commercial bank is classified as a depository institution because it
A) accepts deposits from institutions.
B) makes loans.
C) accepts deposits from individuals.
D) does all of the above.
E) does both A and B of the above.
44) Of the four players in the money supply process, most observers agree that the most important player is
A) banks. B) depositors. C) the Fed. D) borrowers.
45) If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the reserve requirement
is 20 percent, then the bank has total reserves of
A) $36,000.
B) $20,000.
C) $6,000.
D) $16,000.
E) $26,000.
46) When the Fed buys $100 worth of bonds from the First National Bank, reserves in the banking system
A) decrease by more than $100. B) increase by $100.
C) increase by more than $100. D) decrease by $100.
47) When a member of the nonbank public withdraws currency from a bank,
A) bank reserves fall, but the monetary base remains unchanged.
B) both the monetary base and bank reserves fall.
C) the monetary base falls, but bank reserves remain unchanged.
D) both currency in circulation and the monetary base rise.
48) U.S. Treasury deposits at the Fed are a(n) _____ for the Fed but a(n) _____ for the Treasury. Thus an increase in
U.S. Treasury deposits _____ the monetary base.
A) asset; liability; increases B) asset; liability; decreases
C) liability; asset; increases D) liability; asset; decreases
49) An increase in which of the following leads to an increase in the monetary base?
A) Float
B) Foreign currency deposits
C) U.S. Treasury deposits at the Fed
D) All of the above
E) Only A and B of the above
50) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000
billion, and excess reserves total $1 billion, then the money multiplier is approximately
A) 2.5. B) 2.0. C) 0.7. D) 2.8.
51) A _____ in market interest rates relative to the discount rate will cause discount borrowing to _____
A) fall; decrease
B) rise; remain unchanged
C) rise decrease
D) rise; increase
E) fall; increase
52) The M2 money multiplier is
A) positively related to the time deposit ratio.
B) positively related to the required reserve ratio.
C) negatively related to high-powered money.
D) positively related to the excess reserves ratio.
53) For a given level of the monetary base, a decrease in the time deposit ratio will mean a(n) _____ in the M2 money
multiplier and a(n) _____ in the M2 money supply.
A) increase; increase B) increase; decrease
C) decrease; increase D) decrease; decrease
54) Because an increase in the monetary base will mean an increase in the level of currency in circulation,
A) a given change in the monetary base will lead to a smaller increase in checkable deposits than indicated by the
simple deposit multiplier.
B) a given change in the monetary base will lead to a larger increase in checkable deposits than indicated by the simple
deposit multiplier.
C) the actual money multiplier will be larger than the simple deposit multiplier.
D) both A and C of the above will occur.
55) The money supply is _____ related to expected deposit outflows, and is _____ related to the market interest rate
A) positively; negatively B) negatively; negatively
C) positively; positively D) negatively; positively
56) Factors that cause the excess reserves ratio to rise include:
A) a rise in expected deposit outflows.
B) a decline in market interest rates.
C) a rise in market interest rates.
D) only A and B of the above.
E) only A and C of the above.
57) The starting point for understanding how exchange rates are determined is a simple idea called _____, which
states: if two countries produce an identical good, the price of the good should be the same throughout the world no
matter which country produces it.
A) Gresham's law B) arbitrage
C) purchasing power parity D) the law of one price
58) A _____ in the domestic interest rate (iD) shifts the expected return on domestic deposits to the _____ and causes
an appreciation of the foreign currency.
A) fall; right B) rise; left C) rise; right D) fall; left
59) The theory of purchasing power parity states that in the long run
A) exchange rates adjust to changes in relative productivity.
B) exchange rates adjust to changes in relative interest rates.
C) exchange rates adjust to changes in relative price levels.
D) none of the above.
60) When the exchange rate falls by more in the short run than it does in the long run when the money supply
increases, it is called
A) the J-curve effect. B) exchange rate sterilization.
C) exchange rate disequilibrium. D) none of the above.
61) If the central bank decides to increase the level of the money supply, the higher money supply will lead to a higher
real money supply in the short run,
A) causing iD to rise and the RD schedule to shift to the right.
B) causing iD to rise and the RD schedule to shift to the left.
C) causing iD to fall and the RD schedule to shift to the right.
D) causing iD to fall and the RD schedule to shift to the left.
62) A decrease in the domestic interest rate shifts the expected return schedule for _____ deposits to the _____ and
causes the domestic currency to depreciate.
A) foreign; right B) domestic; left
C) domestic; right D) foreign; left
63) If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and
if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on
euro-denominated assets is
A) 9 percent.
B) 11 percent.
C) 13 percent.
D) 19 percent.
E) 17 percent.
1) D
2) E
3) C
4) A
5) D
6) A
7) E
8) E
9) B
10) B
11) C
12) A
13) D
14) A
15) D
16) C
17) D
18) D
19) B
20) E
21) A
22) D
23) A
24) C
25) B
26) C
27) A
28) D
29) C
30) D
31) A
32) A
33) D
34) D
35) A
36) B
37) C
38) D
39) D
40) D
41) E
42) A
43) D
44) C
45) A
46) B
47) A
48) D
49) E
50) D
51) D
52) A
53) D
54) A
55) D
56) D
57) D
58) D
59) C
60) D
61) D
62) B
63) E