Download 2nd Homework - Samuel Moon Jung

2nd Homework
Money and Banking
1) The risk structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different bonds with the same maturity.
C) the relationship among the term to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
2) Which of the following bonds are considered to be default-risk free?
A) Municipal bonds
B) Investment-grade bonds
C) U.S. Treasury bonds
D) Junk bonds
3) U.S. government bonds have no default risk because
A) they are backed by the full faith and credit of the federal government.
B) the federal government can increase taxes to pay its obligations.
C) they are backed with gold reserves.
D) they can be exchanged for silver at any time.
4) A bond with default risk will always have a ________ risk premium and an increase in
its default risk will ________ the risk premium.
A) positive; raise
B) positive; lower
C) negative; raise
D) negative; lower
5) A(n) ________ in the riskiness of corporate bonds will ________ the price of
corporate bonds and ________ the yield on corporate bonds, all else equal.
A) increase; increase; increase
B) increase; decrease; increase
C) decrease; increase; increase
D) decrease; decrease;decrease
6) A decrease in the liquidity of corporate bonds, other things being equal, shifts the
demand curve for corporate bonds to the ________ and the demand curve for Treasury
bonds shifts to the ________.
A) right; right
B) right; left
C) left; left
D) left; right
7) Municipal bonds have default risk, yet their interest rates are lower than the rates on
default-free Treasury bonds. This suggests that
A) the benefit from the tax-exempt status of municipal bonds is less than their default
risk.
B) the benefit from the tax-exempt status of municipal bonds equals their default risk.
C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk.
D) Treasury bonds are not default-free.
8) Which of the following statements are true?
A) An increase in tax rates will increase the demand for Treasury bonds, lowering their
interest rates.
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) Interest rates on municipal bonds will be higher than comparable bonds without the
tax exemption.
D) Because coupon payments on municipal bonds are exempt from federal income tax,
the expected after-tax return on them will be higher for individuals in lower income tax
brackets.
9) In the one-period valuation model, the current stock price increases if
A) the expected sales price increases.
B) the expected sales price falls.
C) the required return increases.
D) dividends are cut.
10) Using the Gordon growth model, a stock's price will increase if
A) the dividend growth rate increases.
B) the growth rate of dividends falls.
C) the required rate of return on equity rises.
D) the expected sales price rises.
11) A stock's price will fall if there is
A) a decrease in perceived risk.
B) an increase in the required rate of return.
C) an increase in the future sales price.
D) current dividends are high.
12) The global financial crisis lead to a decline in stock prices because
A) of a lowered expected dividend growth rate.
B) of a lowered required return on investment in equity.
C) higher expected future stock prices.
D) higher current dividends.
13) 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) expectations influence the behavior of participants in the economy and thus have a
major impact on economic activity.
B) expectations influence only a few individuals, have little impact on the overall
economy, but can have important effects on a few markets.
C) expectations influence many individuals, have little impact on the overall economy,
but can have distributional effects.
D) models that ignore expectations have little predictive power, even in the short run.
14) If additional information is not used when forming an optimal forecast because it is
not available at that time, then expectations are
A) obviously formed irrationally.
B) still considered to be formed rationally.
C) formed adaptively.
D) formed equivalently.
15) According to rational expectations theory, forecast errors of expectations
A) are more likely to be negative than positive.
B) are more likely to be positive than negative.
C) tend to be persistently high or low.
D) are unpredictable.
16) The theory of rational expectations, when applied to financial markets, is known as
A) monetarism.
B) the efficient markets hypothesis.
C) the theory of strict liability.
D) the theory of impossibility.
17) Regulation of the financial system
A) occurs only in the United States.
B) protects the jobs of employees of financial institutions.
C) protects the wealth of owners of financial institutions.
D) ensures the stability of the financial system.
18) One purpose of regulation of financial markets is to
A) limit the profits of financial institutions.
B) increase competition among financial institutions.
C) promote the provision of information to shareholders, depositors and the public.
D) guarantee that the maximum rates of interest are paid on deposits.
19) The problem faced by the lender that the borrower may take on additional risk after
receiving the loan is called
A) adverse selection.
B) moral hazard.
C) transactions costs.
D) diversification.
20) An example of the ________ problem would be if Brian borrowed money from Sean
in order to purchase a used car and instead took a trip to Atlantic City using those funds.
A) moral hazard
B) adverse selection
C) costly state verification
D) agency
21) 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 lender's inability to legally require sufficient collateral to cover a 100% loss if the
borrower defaults.
C) the borrower's lack of incentive to seek a loan for highly risky investments.
D) the lender's inability to restrict the borrower from changing his behavior once given a
loan.
22) In the United States, the government agency requiring that firms that sell securities in
public markets adhere to standard accounting principles and disclose information about
their sales, assets, and earnings is the
A) Federal Communications Commission.
B) Federal Trade Commission.
C) Securities and Exchange Commission.
D) Federal Reserve System.
23) If uncertainty about banks' health causes depositors to begin to withdraw their funds
from banks, the country experiences a(n)
A) banking crisis.
B) financial recovery.
C) reduction of the adverse selection and moral hazard problems.
D) increase in information available to investors.
24) Debt deflation occurs when
A) an economic downturn causes the price level to fall and a deterioration in firms' net
worth because of the increased burden of indebtedness.
B) rising interest rates worsen adverse selection and moral hazard problems.
C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers
the value of collateral.
D) corporations pay back their loans before the scheduled maturity date.
25) The economy recovers quickly from most recessions, but the increase in adverse
selection and moral hazard problems in the credit markets caused by ________ led to the
severe economic contraction known as The Great Depression.
A) debt deflation
B) illiquidity
C) an improvement in banks' balance sheets
D) increases in bond prices
26) ________ is a process of bundling together smaller loans (like mortgages) into
standard debt securities.
A) Securitization
B) Origination
C) Debt deflation
D) Distribution
27) Mortgage brokers often did not make a strong effort to evaluate whether the borrower
could pay off the loan. This created a
A) severe adverse selection problem.
B) decline in mortgage applications.
C) call to deregulate the industry.
D) decrease in the demand for houses.
28) Which investment bank filed for bankruptcy on September 15, 2008 making it the
largest bankruptcy filing in U.S. history?
A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs
29) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets
include
A) failure of the Mexican oil monopoly.
B) the ratification of the North American Free Trade Agreement.
C) increased uncertainty from political shocks.
D) decline in interest rates.
30) Before the South Korean financial crisis, sales by the top five chaebols (familyowned conglomerates) were
A) nearly 50% of GDP.
B) about 10% of GDP.
C) almost 90% of GDP.
D) nearly 25% of GDP.
31) The chaebols encouraged the Korean government to open up Korean financial
markets to foreign capital. The Korean government responded by
A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions
on long-term foreign borrowing by financial institutions.
B) allowing unlimited short-term and long-term foreign borrowing by financial
institutions.
C) maintaining quantity restrictions on short-term foreign borrowing but allowing
unlimited long-term foreign borrowing by financial institutions.
D) not allowing any foreign borrowing by financial institutions.
32) At the time of the South Korean financial crisis, the government allowed many
chaebol owned finance companies to convert to merchant banks. Finance companies
________ allowed to borrow abroad and merchant banks ________.
A) were not; could borrow abroad
B) were not; could not borrow abroad
C) were; could borrow abroad
D) were; could not borrow abroad
33) At the time of the South Korean financial crisis, the merchant banks were
A) almost virtually unregulated.
B) subject to heavy government regulation.
C) engaged in long-term lending to the corporate sector.
D) restricted to long-term foreign borrowing.