BUSI 321 test 1 Liberty University complete answers

BUSI 321 test 1 Liberty University complete answers

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Question 1 Which of the following is a money market security?

Question 2 Funds are provided to the initial issuer of securities in the

Question 3 When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

Question 4 Money market securities generally have ____. Capital market securities are typically expected to have a ____.

Question 5 ____ are long­term debt obligations issued by corporations and government agencies to support their operations.

Question 6 Which of the following transactions would not be considered a secondary market transaction?

Question 7 Which of the following is not a reason why depository financial institutions are popular?

Question 8  ____ are classified as a depository institution.

Question 9 Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates.

Question 10 The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds?

Question 11 If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.

Question 12 If a strong economy allows for a large ____ in households income, the supply curve will shift ____.

Question 13 The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.

Question 14 If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____.

Question 15 The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.

Question 16 If the real interest rate was negative for a period of time, then

Question 17 At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.

Question 18 In some time periods there is evidence that corporations initially financed long­term projects with short­term funds. They planned to borrow long­term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.

Question 19 The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

Question 20 You are considering the purchase of a tax­exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after­tax yield, you would consider taxable securities that pay

Question 21 Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the

Question 22 According to segmented markets theory, if investors have mostly short­term funds available and borrowers want long­term funds, there would be ____ pressure on the supply of short­term funds provided by investors and ____ pressure on the yield of longterm securities.

Question 23 The yield offered on a debt security is ____ related to the prevailing risk­free rate and ____ related to the security's risk premium.

Question 24 If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

Question 25 The annualized yield on a three­year security is 13 percent; the annualized two­year interest rate is 12 percent, while the one­year interest rate is 9 percent. The forward rate two years ahead is ____ percent.

Question 26 If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

Question 27 The advisory committee making recommendations to the Fed about economic and banking related issues is the

Question 28 The voting members of the Federal Open Market Committee consist of the Board of Governors plus the

Question 29 When open market operations are used to ____ bank funds, the yield on debt instruments ____.

Question 30 The ____ is directly responsible for setting reserve requirements.

Question 31 The Monetary Control Act of 1980 subjected

Question 32 Which of the following did the Fed not do during the credit crisis?

Question 33 When the Fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth.

Question 34 The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.

Question 35 A ____­money policy can reduce unemployment, and a ____­money policy can reduce inflation.

Question 36 When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.

Question 37 If the Fed uses a passive monetary policy during weak economic conditions,

Question 38 Global crowding out is described in the text to mean the impact of

Question 39 In the “operation twist” strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.

Question 40 A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment.

Question 41 Which of the following is not a reason that a stimulative monetary policy may be ineffective?

Question 42 Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.

Question 43 The money market interest rate paid by corporations that borrow short­term funds in a particular country is typically:

Question 44 If an investor buys a T­bill with a 90­day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

Question 45 When a bank guarantees a future payment to a firm, the financial instrument used is called

Question 46 Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one­year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

Question 47 The rate at which depository institutions effectively lend or borrow funds from each other is the ____.

Question 48 Commercial paper is

Question 49 ____ is a short­term debt instrument issued only be well­known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

Question 50 T­bills and commercial paper are sold

 

Question 1 Systemic risk exists because:

Question 2 Which of the following are not major investors in stocks?

Question 3 Which of the following requires mortgage lenders to verify the income, job status, and credit history of mortgage applicants before extending a mortgage?

Question 4 A five-year security was purchased two years ago by an investor who plans to resell it. The investor will sell the security r in the

Question 5 Which of the following is not an issuer of bonds?

Question 6 If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.

Question 7 Funds are provided to the initial issuer of securities in the

Question 8 The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as:

Question 9 Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?

Question 10 If interest rates are ____, ____ projects will have positive NPVs.

Question 11 When forecasting future interest rates, if the net demand for funds (ND) is _____, there will be an ______ adjustment in interest rates.

Question 12 If the real interest rate was negative for a period of time, then

Question 13 The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.

Question 14 Which of the following is least likely to affect household demand for loanable funds?

Question 15 According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.

Question 16 The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.

Question 17 Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates.

Question 18 According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be ____ pressure on the supply of short-term funds provided by investors and ____ pressure on the yield of long-term securities.

Question 19 In general, securities with ____ characteristics will offer ____ yields.

Question 20 Assume that debt maturity markets are segmented, such that short-term debt markets are funded by surplus units that are different from the surplus units that fund the long-term debt markets. If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates.

Question 21 Which of the following is not a characteristic affecting the yields on debt securities?

Question 22 The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it

Question 23 Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield?

Question 24 If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.

Question 25 Credit (default) risk is likely to be highest for

Question 26 All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.

Question 27 Which of the following is an action that the Fed uses to increase or decrease the money supply?

Question 28 Which of the following did the Fed not do during the credit crisis?

Question 29 Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed.

Question 30 The Depository Institutions Deregulation and Monetary Control Act of 1980 subjected

Question 31 The ____________ the reserve requirement ratio, the ____________ the ultimate effect of any initial increase in the money supply.

Question 32 Which of the following statements is incorrect with respect to a single European monetary policy?

Question 33 The Board of Governors is composed of

Question 34 Which of the following is not a major component of the Federal Reserve System?

Question 35 Which of the following best describes the relationship between the Fed and the presidential administration?

Question 36 Which of the following is not an effect of a stimulative monetary policy?

Question 37 Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed:

Question 38 If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________.

Question 39 ____ serves as the most direct indicator of economic growth in the United States.

Question 40 The time between when the Fed adjusts the money supply and when the adjustment has an effect on the economy is the

Question 41 A loose-money policy tends to ____ economic growth and ____ the inflation rate.

Question 42 Which of the following is not true with respect to inflation targeting?

Question 43 Securities with maturities of one year or less are classified as

Question 44 The minimum denomination of commercial paper is

Question 45 T-bills and commercial paper are sold

Question 46 Which of the following statements is incorrect with respect to the federal funds rate?

Question 47 ____ are the most active participants in the federal funds market.

Question 48 A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?

Question 49 Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

Question 50 Commercial paper is

 

1. According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds.

a. True

b. False

       2.    The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.

a.
higher
b.
lower
c.
zero
d.
negative
 

       3.    At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.

a.
greater; higher
b.
greater; lower
c.
smaller; lower
d.
none of the above
       4.    Businesses demand loanable funds to

a.
finance installment debt.
b.
subsidize other companies.
c.
invest in fixed and short-term assets.
d.
none of the above
 

       5.    The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.

a.
greater; lower
b.
lower; greater
c.
lower; lower
d.
greater; greater
 

       6.    If interest rates are ____, ____ projects will have positive NPVs.

a.
higher; more
b.
lower; more
c.
lower; no
d.
none of the above
 

       7.    The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.

a.
inversely; positively
b.
positively; inversely
c.
inversely; inversely
d.
positively; positively
 

       8.    If economic conditions become less favorable, then:

a.
expected cash flows on various projects will increase.
b.
more proposed projects will have expected returns greater than the hurdle rate.
c.
there would be additional acceptable business projects.
d.
there would be a decreased demand by business for loanable funds.
 

       9.    As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve.

a.
decreased; inward
b.
decreased; outward
c.
increased; outward
d.
increased; inward
 

    10.    The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.

a.
interest elastic; decrease
b.
interest elastic; increase
c.
interest inelastic; increase
d.
interest inelastic; decrease
 

    11.    Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____ related to U.S. interest rates.

a.
less; inversely
b.
more; positively
c.
less; positively
d.
more; inversely
 

    12.    For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates.

a.
positively related to
b.
inversely related to
c.
unrelated to
d.
none of the above
 

    13.    The quantity of loanable funds supplied is normally

a.
highly interest elastic.
b.
more interest elastic than the demand for loanable funds.
c.
less interest elastic than the demand for loanable funds.
d.
equally interest elastic as the demand for loanable funds.
e.
A and B
    14.    The ____ sector is the largest supplier of loanable funds.

a.
household
b.
government
c.
business
d.
none of the above
 

    15.    The supply of loanable funds in the U.S. is partly determined by the monetary policy implemented by the Federal Reserve System.

a. True

b. False

    16.    If a strong economy allows for a large ____ in households income, the supply curve will shift ____.

a.
decrease; outward
b.
increase; inward
c.
increase; outward
d.
none of the above
 

    17.    The equilibrium interest rate

a.
equates the aggregate demand for funds with the aggregate supply of loanable funds.
b.
equates the elasticity of the aggregate demand and supply for loanable funds.
c.
decreases as the aggregate supply of loanable funds decreases.
d.
increases as the aggregate demand for loanable funds decreases.
 

    18.    The equilibrium interest rate should

a.
fall when the aggregate supply funds exceeds aggregate demand for funds.
b.
rise when the aggregate supply of funds exceeds aggregate demand for funds.
c.
fall when the aggregate demand for funds exceeds aggregate supply of funds.
d.
rise when aggregate demand for funds equals aggregate supply of funds.
e.
B and C
 

    19.    Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?

a.
a decrease in savings by foreign savers
b.
an increase in inflation
c.
pessimistic economic projections that cause businesses to reduce expansion plans
d.
a decrease in savings by U.S. households
 

    20.    The Fisher effect states that the

a.
nominal interest rate equals the expected inflation rate plus the real rate of interest.
b.
nominal interest rate equals the real rate of interest minus the expected inflation rate.
c.
real rate of interest equals the nominal interest rate plus the expected inflation rate.
d.
expected inflation rate equals the nominal interest rate plus the real rate of interest.
 

    21.    If the real interest rate was negative for a period of time, then

a.
inflation is expected to exceed the nominal interest rate in the future.
b.
inflation is expected to be less than the nominal interest rate in the future.
c.
actual inflation was less than the nominal interest rate.
d.
actual inflation was greater than the nominal interest rate.
 

    22.    If inflation is expected to decrease, then

a.
savers will provide less funds at the existing equilibrium interest rate.
b.
the equilibrium interest rate will increase.
c.
the equilibrium interest rate will decrease.
d.
borrowers will demand more funds at the existing equilibrium interest rate.
 

    23.    If inflation turns out to be lower than expected

a.
savers benefit.
b.
borrowers benefit while savers are not affected.
c.
savers and borrowers are equally affected.
d.
savers are adversely affected but borrowers benefit.
 

    24.    If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected).

a.
upward; upward
b.
upward; downward
c.
downward; upward
d.
downward; downward
 

    25.    What is the basis of the relationship between the Fisher effect and the loanable funds theory?

a.
the saver's desire to maintain the existing real rate of interest
b.
the borrower's desire to achieve a positive real rate of interest
c.
the saver's desire to achieve a negative real rate of interest
d.
B and C
 

    26.    Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.

a.
decrease; upward
b.
decrease; downward
c.
increase; downward
d.
increase; upward
 

    27.    Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.

a.
decrease; upward
b.
decrease; downward
c.
increase; downward
d.
increase; upward
 

    28.    If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds.

a.
increase; no change
b.
decrease; no change
c.
no change; increase
d.
no change; decrease
 

    29.    If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds.

a.
increase; no change
b.
decrease; no change
c.
no change; increase
d.
no change; decrease
    30.    Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.

a.
increase; decrease
b.
increase; increase
c.
decrease; increase
d.
decrease; decrease
 

    31.    Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.

a.
increase; decrease
b.
increase; increase
c.
decrease; increase
d.
decrease; decrease
 

    32.    If the real interest rate is expected by a particular person to become negative, then the purchasing power of his or her savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate.

a.
decreasing; less than
b.
decreasing; greater than
c.
increasing; greater than
d.
increasing; less than
 

    33.    If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should ____.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
 

    34.    If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
 

    35.    If the real interest rate was stable over time, this would suggest that there is ____ relationship between inflation and nominal interest rate movements.

a.
a positive
b.
an inverse
c.
no
d.
an uncertain (cannot be determined from information above)
 

    36.    If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.

a.
increase
b.
decrease
c.
have an effect, which cannot be determined with above information, on
d.
have no effect on
 

    37.    Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates.

a.
upward; upward
b.
upward; downward
c.
downward; downward
d.
downward; upward
 

    38.    If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds, and places ____ pressure on interest rates.

a.
increases; upward
b.
increases; downward
c.
decreases; downward
d.
decreases; upward
 

    39.    When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will ____, and the U.S. interest rates will ____.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
 

    40.    Which of the following will probably not result in an increase in the business demand for loanable funds?

a.
an increase in positive net present value (NPV) projects
b.
a reduction in interest rates on business loans
c.
a recession
d.
none of the above
 

    41.    If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds.

a.
increase; surplus
b.
increase; shortage
c.
decrease; surplus
d.
decrease; shortage
 

    42.    A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.

a.
higher; inward
b.
higher; outward
c.
lower; outward
d.
none of the above
 

    43.    Which of the following is not true regarding foreign interest rates?

a.
The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.
b.
The expectations of a strong dollar should cause a flow of funds to the U.S.
c.
An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries.
d.
All of the above are true regarding foreign interest rates.
 

    44.    Which of the following is least likely to affect household demand for loanable funds?

a.
a decrease in tax rates
b.
an increase in interest rates
c.
a reduction in positive net present value (NPV) projects available
d.
All of the above are equally likely to affect household demand for loanable funds.
 

    45.    Which of the following statements is incorrect?

a.
The Fed's monetary policy is intended to control the economic conditions in the U.S.
b.
The Fed's monetary policy affects the supply of loanable funds, which affects interest rates.
c.
By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend.
d.
All of the statements above are true.
 

    46.    At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest.

a. True

b. False

    47.    The business demand for funds resulting from short-term investments is inversely related to the number of projects implemented and inversely related to the interest rate.

a. True

b. False

    48.    Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were high relative to U.S. rates.

a. True

b. False

    49.    If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds.

a. True

b. False

    50.    Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and since most of these sectors are likely to demand a larger quantity of funds at lower interest rates (other things being equal), the aggregate demand for loanable funds is positively related to interest rates at any point in time.

a. True

b. False

    51.    In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.

a. True

b. False

    52.    If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds.

a. True

b. False

    53.    The relationship between interest rates and expected inflation is often referred to as the loanable funds theory.

a. True

b. False

    54.    According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate.

a. True

b. False

    55.    To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by subtracting the expected inflation rate over that period from the nominal interest rate quoted for that period.

a. True

b. False

    56.    According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.

a. True

b. False

    57.    Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds.

a. True

b. False

    58.    The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds.

a.
Fisher effect
b.
loanable funds theory
c.
real interest rate
d.
none of the above
 

    59.    Which of the following will probably not result in an increase in the business demand for loanable funds?

a.
an increase in positive net present value (NPV) projects
b.
a reduction in interest rates on business loans
c.
a recession
d.
All of the above will result in an increase in the business demand for loanable funds.
 

    60.    Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates.

a.
smaller; high
b.
larger; high
c.
larger; low
d.
none of the above
 

    61.    The federal government demand for funds is said to be interest inelastic, or ____ to interest rates.

a.
sensitive
b.
insensitive
c.
relatively sensitive as compared to other sectors
d.
none of the above
 

    62.    If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds.

a.
increase; surplus
b.
increase; shortage
c.
decrease; surplus
d.
decrease; shortage
 

    63.    The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the supply schedule.

a.
inward; an inward shift
b.
inward; an outward shift
c.
outward; an inward shift
d.
outward; no obvious change
 

    64.    Which of the following is a valid representation of the Fisher effect?

a.
i = E(INF) + iR
b.
iR = E(INF) + i
c.
E(INF) = i + iR
d.
none of the above
 

    65.    The real interest rate can be forecasted by subtracting the ____ from the ____ for that period.

a.
nominal interest rate; expected inflation rate
b.
prime rate; nominal interest rate
c.
expected inflation rate; nominal interest rate
d.
prime rate; expected inflation rate
 

    66.    According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.

a.
higher nominal interest rate
b.
higher real interest rate
c.
lower nominal interest rate
d.
lower real interest rate
 

    67.    A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.

a.
higher; inward
b.
higher; outward
c.
lower; outward
d.
none of the above
 

 

 

       1.    Financial market participants who provide funds are called

a.
deficit units.
b.
surplus units.
c.
primary units.
d.
secondary units.
 

       2.    The main provider(s) of funds to the U.S. Treasury is (are)

a.
households and businesses.
b.
foreign financial institutions.
c.
the Federal Reserve System.
d.
foreign nonfinancial sectors.
 

       3.    The largest deficit unit is (are)

a.
households and businesses.
b.
foreign financial institutions.
c.
the U.S. Treasury.
d.
foreign nonfinancial sectors.
 

       4.    Those financial markets that facilitate the flow of short-term funds are known as

a.
money markets.
b.
capital markets.
c.
primary markets.
d.
secondary markets.
 

       5.    Funds are provided to the initial issuer of securities in the

a.
secondary market.
b.
primary market.
c.
deficit market.
d.
surplus market.
 

       6.    Which of the following is a capital market instrument?

a.
a six-month CD
b.
a three-month Treasury bill
c.
a ten-year bond
d.
an agreement for a bank to loan funds directly to a company for nine months
 

       7.    Which of the following is a money market security?

a.
Treasury note
b.
municipal bond
c.
mortgage
d.
commercial paper
 

       8.    The creditors in the federal funds market are

a.
households.
b.
depository institutions.
c.
firms.
d.
government agencies.
 

       9.    Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.

a.
higher; higher
b.
lower; lower
c.
lower; higher
d.
higher; lower
 

    10.    Money market securities generally have ____. Capital market securities are typically expected to have a ____.

a.
less liquidity; higher annualized return
b.
more liquidity; lower annualized return
c.
less liquidity; lower annualized return
d.
more liquidity; higher annualized return
 

    11.    If security prices fully reflect all available information, the markets for these securities are

a.
efficient.
b.
primary.
c.
overvalued.
d.
undervalued.
 

    12.    If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.

a.
perfect
b.
active
c.
inefficient
d.
in equilibrium
 

    13.    If financial markets are efficient, this implies that all securities should earn the same return.

a. True

b. False

    14.    The Securities Act of 1933

a.
required complete disclosure of relevant financial information for publicly offered securities in the primary market.
b.
declared trading strategies to manipulate the prices of public secondary securities illegal.
c.
declared misleading financial statements for public primary securities illegal.
d.
required complete disclosure of relevant financial information for securities traded in the secondary market.
e.
all of the above
 

    15.    The Securities Exchange Commission (SEC) was established by the

a.
Federal Reserve Act.
b.
McFadden Act.
c.
Securities Exchange Act of 1934.
d.
Glass-Steagall Act.
e.
none of the above
 

    16.    Common stock is an example of a(n)

a.
debt security.
b.
money market security.
c.
equity security.
d.
A and B
 

    17.    If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.

a.
efficient
b.
inefficient
c.
perfect
d.
imperfect
    18.    The typical role of a securities firm in a public offering of securities is to

a.
purchase the entire issue for its own investment.
b.
place the entire issue with a single large investor.
c.
spread the issue across several investors until the entire issue is sold.
d.
provide all large investors with loans so that they can invest in the offering.
 

    19.    Without the participation of financial intermediaries in financial market transactions,

a.
information and transaction costs would be lower.
b.
transaction costs would be higher but information costs would be unchanged.
c.
information costs would be higher but transaction costs would be unchanged.
d.
information and transaction costs would be higher.
 

    20.    Which of the following is most likely to be described as a depository institution?

a.
finance companies
b.
securities firms
c.
credit unions
d.
pension funds
e.
insurance companies
 

    21.    In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.

a.
commercial banks
b.
savings banks
c.
credit unions
d.
S&Ls
 

    22.    Which of the following is a nondepository financial institution?

a.
savings banks
b.
commercial banks
c.
savings and loan associations
d.
mutual funds
 

    23.    Which of the following distinguishes credit unions from commercial banks and savings institutions?

a.
Credit unions are non-profit
b.
Credit unions accept deposits but do not make loans
c.
Credit unions make loans but do not accept deposits
d.
Savings institutions restrict their business to members who share a common bond
 

    24.    When a securities firm acts as a broker, it

a.
guarantees the issuer a specific price for newly issued securities.
b.
makes a market in specific securities by adjusting its own inventory.
c.
executes transactions between two parties.
d.
purchases securities for its own account.
 

    25.    When a securities firm acts as a(n) ____, it maintains a position in securities.

a.
adviser
b.
dealer
c.
broker
d.
none of the above
 

    26.    ____ obtain funds by issuing securities, then lend the funds to individuals and small businesses.

a.
Finance companies
b.
Securities firms
c.
Mutual funds
d.
Insurance companies
 

    27.    Households with ____ are served by ____.

a.
deficient funds; depository institutions and finance companies
b.
deficient funds; finance companies only
c.
savings; finance companies only
d.
savings; pension funds and finance companies
 

    28.    ____ concentrate on mortgage loans.

a.
Finance companies
b.
Commercial banks
c.
Savings institutions
d.
Credit unions
 

    29.    ____ securities have a maturity of one year or less; ____ securities are generally more liquid.

a.
Money market; capital market
b.
Money market; money market
c.
Capital market; money market
d.
Capital market; capital market
 

    30.    Which of the following is not a major investor in stocks?

a.
commercial banks
b.
insurance companies
c.
mutual funds
d.
pension funds
 

    31.    Which of the following financial intermediaries commonly invests in stocks and bonds?

a.
pension funds
b.
insurance companies
c.
mutual funds
d.
all of the above
 

    32.    Securities are certificates that represent a claim on the issuer.

a. True

b. False

    33.    Debt securities are certificates that represent debt (borrowed funds) by the issuer.

a. True

b. False

    34.    A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called

a.
secondary market.
b.
primary market.
c.
deficit market.
d.
surplus market.
 

    35.    When security prices fully reflect all available information, the markets for these securities are said to be efficient.

a. True

b. False

    36.    If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.

a. True

b. False

    37.    A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.

a. True

b. False

    38.    The euro increased business between European countries and created a more competitive environment in Europe.

a. True

b. False

    39.    In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.

a. True

b. False

    40.    Securities are certificates that represent a claim on the provider of funds.

a. True

b. False

    41.    Debt securities include commercial paper, Treasury bonds, and corporate bonds.

a. True

b. False

    42.    Common types of capital market securities include Treasury bills and commercial paper.

a. True

b. False

    43.    Common types of money market securities include negotiable certificates of deposit and Treasury bills.

a. True

b. False

    44.    Money market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

a. True

b. False

    45.    The total asset value of savings institutions is larger than that of commercial banks.

a. True

b. False

    46.    Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as

a.
secondary markets.
b.
capital markets.
c.
primary markets.
d.
money markets.
e.
none of the above
 

    47.    Which of the following transactions would not be considered a secondary market transaction?

a.
An individual investor purchases some existing shares of stock in IBM through his broker.
b.
An institutional investor sells some Disney stock through its broker.
c.
A firm that was privately held engages in an offering of stock to the public.
d.
All of the above are secondary market transactions.
 

    48.    If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

a.
lower; lower
b.
lower; higher
c.
higher; lower
d.
higher; higher
 

    49.    ____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.

a.
Finance companies
b.
Mutual funds
c.
Life insurance companies
d.
Securities firms
 

    50.    A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses.

a.
savings institutions
b.
commercial banks
c.
mutual funds
d.
finance companies
 

    51.    Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities.

a.
lower; lower
b.
lower; higher
c.
higher; lower
d.
higher; higher
 

    52.    Common types of capital market securities include Treasury bills and commercial paper.

a. True

b. False

    53.    Common types of money market securities include negotiable certificates of deposit and Treasury bills.

a. True

b. False

    54.    Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

a. True

b. False

    55.    Commercial banks in aggregate have more assets than credit unions.

a. True

b. False

    56.    Those participants who receive more money than they spend are referred to as

a.
deficit units.
b.
surplus units.
c.
borrowing units.
d.
government units.
 

    57.    Equity securities

a.
have a maturity.
b.
pay interest on a periodic basis.
c.
represent ownership in the issuer.
d.
repay the principal amount at maturity.
    58.    The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.

a.
corporate finance
b.
investment management
c.
financial markets and institutions
d.
none of the above
 

    59.    There is a ____ relationship between the risk of a security and the expected return from investing in the security.

a.
positive
b.
negative
c.
indeterminable
d.
none of the above
 

    60.    If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.

a.
rise; lower
b.
fall; higher
c.
fall; lower
d.
rise; higher
 

    61.    The credit crisis in the 2008-2009 period was caused by weak economies in Asia.

a. True

b. False

    62.    ____ are classified as a depository institution.

a.
Credit unions
b.
Pension funds
c.
Finance companies
d.
Securities firms
 

    63.    The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:

a.
mortgages.
b.
money market securities.
c.
stock.
d.
Treasury bonds.
 

    64.    Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets.

a. True

b. False

    65.    Treasury bonds have a maturity of one to three years.

a. True

b. False

    66.    Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.

a. True

b. False

    67.    Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.

a. True

b. False

    68.    When security prices fully reflect all available information, the markets for these securities are said to be perfect.

a. True

b. False

    69.    Securities that are not as safe and liquid as other securities are never considered for investment by anyone.

a. True

b. False

    70.    By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.

a. True

b. False

    71.    When a depository institution offers a loan, it is acting as a creditor.

a. True

b. False

    72.    Savings institutions represent a nondepository institution.

a. True

b. False

    73.    Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small businesses.

a. True

b. False

    74.    Institutional investors not only provide financial support to companies but exercise some degree of corporate control over them.

a. True

b. False

    75.    Which of the following is not a reason why depository financial institutions are popular?

a.
They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
b.
They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
c.
They accept the risk on loans provided.
d.
They use their information resources to act as a broker, executing securities transactions between two parties.
e.
They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.
 

    76.    According to your text, which of the following is not considered a money market security?

a.
Treasury bills
b.
Treasury notes
c.
retail CD
d.
banker's acceptance
e.
commercial paper
 

    77.    ____ are not considered capital market securities.

a.
Repurchase agreements
b.
Municipal bonds
c.
Corporate bonds
d.
Equity securities
e.
Mortgages
 

    78.    ____ are long-term debt obligations issued by corporations and government agencies to support their operations.

a.
Common stock
b.
Derivative securities
c.
Bonds
d.
None of the above
 

    79.    Equity securities should normally have a ____ expected return and ____ risk than money market securities.

a.
lower; lower
b.
lower; higher
c.
higher; lower
d.
higher; higher
 

    80.    If investors speculate in derivative contracts rather than the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

a.
lower; lower
b.
lower; higher
c.
higher; lower
d.
higher; higher
 

    81.    When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

a.
undervalued
b.
overvalued
c.
fairly priced
d.
efficient
e.
none of the above
 

    82.    Which of the following are not considered depository financial institutions?

a.
finance companies
b.
commercial banks
c.
savings institutions
d.
credit unions
e.
All of the above are depository financial institutions.
 

    83.    The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.

a.
savings institutions
b.
commercial banks
c.
mutual funds
d.
finance companies
e.
pension funds
 

    84.    Which of the following statements is incorrect?

a.
Financial markets attract funds from investors and channel the funds to corporations.
b.
Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
c.
Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
d.
Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.
 

    85.    Which of the following is not a typical money market security?

a.
Treasury bills
b.
Treasury bonds
c.
Commercial paper
d.
Negotiable certificates of deposit
 

 

         

       1.    In general, securities with ____ characteristics will offer ____ yields.

a.
favorable; higher
b.
favorable; lower
c.
unfavorable; lower
d.
none of the above
 

       2.    Default risk is likely to be highest for

a.
short-term Treasury securities.
b.
AAA corporate securities.
c.
long-term Treasury securities.
d.
BBB corporate securities.
 

       3.    Some financial institutions such as commercial banks are required by law to invest only in

a.
junk bonds.
b.
corporate stock.
c.
Treasury securities.
d.
investment-grade bonds.
 

       4.    Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.

a. True

b. False

       5.    If a security can easily be converted to cash without a loss in value, it

a.
is liquid.
b.
has a high after-tax yield.
c.
has high default risk.
d.
is illiquid.
 

       6.    Securities that offer ____ liquidity will need to offer a ____ yield.

a.
lower; higher
b.
lower; lower
c.
higher; higher
d.
B and C
 

       7.    If all other characteristics are similar, ____ would have to offer ____.

a.
taxable securities; a higher after-tax yield than tax-exempt securities
b.
taxable securities; a higher before-tax yield than tax-exempt securities
c.
tax-exempt securities; a higher after-tax yield than taxable securities
d.
tax-exempt securities; a higher before-tax yield than taxable securities
       8.    Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield?

a.
16.00 percent
b.
9.25 percent
c.
9.00 percent
d.
3.00 percent
e.
none of the above
 

       9.    An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

a.
7.7 percent
b.
15.71 percent
c.
130 percent
d.
11.00 percent
e.
none of the above
 

    10.    A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of

a.
7.0 percent.
b.
10.8 percent.
c.
20.0 percent.
d.
none of the above
 

    11.    Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the

a.
term structure of interest rates.
b.
default structure of interest rates.
c.
liquidity structure of interest rates.
d.
tax structure of interest rates.
e.
none of the above
 

    12.    The term structure of interest rates defines the relationship

a.
between risk and return.
b.
between risk and maturity.
c.
between maturity and yield.
d.
between default risk ratings and maturity.
 

    13.    Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.

a. True

b. False

    14.    If shorter term securities have higher annualized yields than longer term securities, the yield curve

a.
is horizontal.
b.
is upward sloping.
c.
is downward sloping.
d.
cannot be determined unless we know additional information (such as the level of market interest rates).
 

    15.    Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to

a.
become inverted.
b.
become flat.
c.
become upward sloping.
d.
be unaffected.
 

    16.    If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause

a.
long-term yields to rise.
b.
short-term yields to decrease.
c.
prices of long-term securities to decrease.
d.
A and B
e.
none of the above
    17.    Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets.

a.
highest; below that
b.
lowest; above that
c.
highest; above that
d.
lowest; below that
 

    18.    The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.

a.
negatively; negatively
b.
positively; positively
c.
negatively; positively
d.
positively; negatively
    19.    The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the

a.
segmented markets theory.
b.
liquidity premium theory.
c.
pure expectations theory.
d.
theory of rational expectations.
 

    20.    Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?

a.
15.08 percent
b.
3.00 percent
c.
12.00 percent
d.
12.62 percent
e.
11.41 percent
 

    21.    Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to

a.
remain flat.
b.
become upward sloping.
c.
become downward sloping.
d.
none of the above
 

    22.    According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.

a.
upward; upward
b.
downward; downward
c.
upward; downward
d.
downward; upward
 

    23.    The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if

a.
most debt is financed by foreign investors.
b.
the Treasury's debt level is small.
c.
maturity markets are segmented.
d.
A and B
 

    24.    According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today's one-year interest rate, the ____ is the expected change in the one-year interest rate.

a.
greater; less
b.
less; greater
c.
greater; greater
d.
less; less
e.
C and D
 

    25.    Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one-year forward rate two years from now?

a.
12.67 percent
b.
113 percent
c.
195 percent
d.
15.67 percent
e.
none of the above
    26.    Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).

a.
slight downward slope
b.
slight upward slope
c.
steep upward slope
d.
steep downward slope
 

    27.    According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities.

a.
equal
b.
be less than
c.
be greater than
d.
B and C are possible, depending on the size of the liquidity premium
 

    28.    Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is

a.
8.0 percent.
b.
7.6 percent.
c.
3.0 percent.
d.
7.0 percent.
 

    29.    If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market's expectation of the future interest rate.

a.
overestimates
b.
accurately estimates
c.
underestimates
d.
is an unbiased forecast of (it has an equal chance of overestimating or underestimating)
 

    30.    If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.

a.
no changes
b.
a slight decrease
c.
a slight increase
d.
a large increase
 

    31.    The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the

a.
pure expectations theory.
b.
liquidity premium theory.
c.
segmented markets theory.
d.
liquidity habitat theory.
 

    32.    According to the segmented markets theory, if most investors suddenly preferred to invest in short-term securities and most borrowers suddenly preferred to issue long-term securities there would be

a.
upward pressure on the price of long-term securities.
b.
upward pressure on the price of short-term securities.
c.
downward pressure on the yield of long-term securities.
d.
A and C
 

    33.    A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the

a.
liquidity premium theory.
b.
efficient markets theory.
c.
pure expectations theory.
d.
preferred habitat theory.
 

    34.    According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be ____ pressure on the supply of short-term funds provided by investors and ____ pressure on the yield of long-term securities.

a.
upward; upward
b.
downward; downward
c.
upward; downward
d.
downward; upward
 

    35.    If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called

a.
riding the yield curve.
b.
liquidating the yield curve.
c.
segmenting the yield curve.
d.
a forward roll.
e.
none of the above
 

    36.    Other things equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same.

a.
greater than
b.
equal to
c.
less than
d.
All of the above are possible, depending on the size of the bond offering.
 

    37.    Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.

a.
greater than
b.
equal to
c.
less than
d.
A or B are both common
 

    38.    In some time periods there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.

a.
liquidity premium theory
b.
expectations theory
c.
segmented markets theory
d.
A and C
 

    39.    According to expectations theory, the sudden expectation of lower interest rates in the future will cause a ____ supply of short-term funds provided by investors, and a ____ supply of long-term funds.

a.
large; large
b.
large; small
c.
small; small
d.
small; large
 

    40.    The yield curve in a foreign country is

a.
always downward sloping.
b.
non-existent.
c.
the same as the United States at any point in time.
d.
none of the above
 

    41.    If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the

a.
liquidity premium theory.
b.
expectations theory.
c.
segmented markets theory.
d.
A and B
 

    42.    If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the

a.
liquidity premium theory.
b.
real interest rate theory.
c.
expectations theory.
d.
segmented markets theory.
 

    43.    If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates, and corporations may reduce their investment in fixed assets.

a.
long-term; long-term
b.
long-term; short-term
c.
short-term; long-term
d.
B and C
 

    44.    You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay

a.
31.1 percent.
b.
19 percent.
c.
12.5 percent.
d.
14 percent.
 

    45.    The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is ____ percent.

a.
2.8
b.
115
c.
103
d.
15.1
 

    46.    The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is ____ percent.

a.
1.8
b.
9.0
c.
15.0
d.
none of the above
 

    47.    According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will be ____ sloping.

a.
upward; downward
b.
downward; upward
c.
upward; upward
d.
downward; downward
 

    48.    An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

a.
longer; lower
b.
longer; higher
c.
shorter; lower
d.
shorter; higher
e.
B and C
 

    49.    Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will ____ the supply of T-bills in the market and places ____ pressure on the yield of T-bills.

a.
decrease; downward
b.
decrease; upward
c.
increase; upward
d.
increase; downward
 

    50.    Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper.

a.
8.0
b.
7.6
c.
7.5
d.
7.9
e.
none of the above
 

    51.    If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.

a. True

b. False

    52.    The yield curve for corporate bonds.

a.
would typically lie below the Treasury yield curve.
b.
is identical to the Treasury yield curve.
c.
typically has the same slope as the Treasury yield curve.
d.
is irrelevant to investors.
 

    53.    Some types of debt securities always offer a higher yield than others.

a. True

b. False

    54.    Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.

a. True

b. False

    55.    The higher a bond rating, the lower the perceived default risk.

a. True

b. False

    56.    Treasury securities are exempt from federal and state income taxes.

a. True

b. False

    57.    The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.

a. True

b. False

    58.    The graphic comparison of maturities and annualized yields is known as the interest rate curve.

a. True

b. False

    59.    According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.

a. True

b. False

    60.    The forward rate is commonly used to represent the market's forecast of the future interest rate.

a. True

b. False

    61.    Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.

a. True

b. False

    62.    The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.

a. True

b. False

    63.    When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.

a. True

b. False

    64.    The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

a. True

b. False

    65.    If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve.

a. True

b. False

    66.    Yield curves are always upward sloping.

a. True

b. False

    67.    Which of the following statements is not true with respect to debt securities?

a.
Some types of debt securities always offer a higher yield than others.
b.
Debt securities offer different yields because they exhibit different characteristics that influence the offered yield.
c.
In general, securities with favorable characteristics will offer higher yields to entice investors.
d.
All of the above are true with respect to debt securities.
 

    68.    Which of the following is not a characteristic affecting the yields on debt securities?

a.
default risk
b.
liquidity
c.
tax status
d.
term to maturity
e.
All of the above affect yields on debt securities.
 

    69.    All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.

a.
lower; higher
b.
higher; higher
c.
lower; lower
d.
none of the above
 

    70.    A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.

a.
longer; lower
b.
longer; higher
c.
shorter; lower
d.
shorter; higher
e.
Answers A and D are correct.
 

    71.    Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.

a.
decrease; downward
b.
decrease; upward
c.
increase; upward
d.
increase; downward
 

    72.    If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be

a.
flat.
b.
downward sloping.
c.
upward sloping.
d.
none of the above.
 

    73.    If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping.

a.
increase; upward
b.
increase; downward
c.
decrease; upward
d.
decrease; downward
 

    74.    According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be ____ sloping.

a.
upward; downward
b.
downward; upward
c.
upward; upward
d.
downward; downward
 

    75.    The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.

a.
pure expectations
b.
liquidity premium
c.
segmented markets
d.
preferred habitat
 

    76.    If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.

a.
short-term; downward
b.
long-term; downward
c.
short-term; upward
d.
long-term; upward
 

 

         

 

       1.    The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth.

a. True

b. False

       2.    The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply.

a.
increase; decreasing
b.
decrease; increasing
c.
decrease; decreasing
d.
increase; increasing
 

       3.    A credit crunch occurs when:

a.
interest rates decline.
b.
interest rates rise.
c.
creditors restrict the amount of loans they are willing to provide.
d.
the economy is strong.
 

       4.    According to the theory of rational expectations, higher inflationary expectations encourage businesses and households to reduce their demand for loanable funds.

a. True

b. False

       5.    A passive monetary policy adjusts money supply automatically in response to economic conditions.

a. True

b. False

       6.    If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated substantially from the Fed's target inflation rate, the Fed could lose credibility.

a. True

b. False

       7.    In general, there is:

a.
a positive relationship between unemployment and inflation.
b.
an inverse relationship between unemployment and inflation.
c.
an inverse relationship between GNP and inflation.
d.
a positive relationship between GNP and unemployment.
 

       8.    A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.

a.
tight; loose
b.
loose; tight
c.
tight; tight
d.
loose; loose
 

       9.    A loose money policy tends to ____ economic growth and ____ the inflation rate.

a.
stimulate; place downward pressure on
b.
stimulate; place upward pressure on
c.
dampen; place upward pressure on
d.
dampen; place downward pressure on
 

    10.    When both inflation and unemployment are relatively high, there is more disagreement among FOMC members about the proper monetary policy to implement.

a. True

b. False

    11.    ____ serves as the most direct indicator of economic growth in the United States.

a.
Gross domestic product (GDP)
b.
National income
c.
The unemployment rate
d.
The industrial production index
 

    12.    Which of the following is not an indicator of inflation?

a.
housing price indexes
b.
wage rates
c.
oil prices
d.
consumer confidence surveys
 

    13.    The ____ indicators tend to occur before a business cycle.

a.
leading
b.
lagging
c.
coincident
d.
none of the above
 

    14.    The ____ indicators tend to occur after a business cycle.

a.
leading
b.
lagging
c.
coincident
d.
none of the above
 

    15.    The ____ indicators tend to occur before a business cycle.

a.
leading
b.
lagging
c.
coincident
d.
none of the above
 

    16.    The time lag between when an economic problem arises and when it is reported in economic statistics is the

a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.
 

    17.    The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the

a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.
 

    18.    The time between when the Fed adjusts the money supply and when interest rates change reflects the

a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.
 

    19.    If the Fed attempts to reduce inflation, it would likely increase money supply growth.

a. True

b. False

    20.    Which of the following best describes the relationship between the Fed and the Administration?

a.
The Fed must receive approval by the Administration before conducting monetary policy.
b.
The Fed must implement a monetary policy specifically to the support the Administration's policy.
c.
The Administration must receive approval from the Fed before implementing fiscal policy.
d.
A and C
e.
none of the above
 

    21.    A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates.

a.
upward; upward
b.
upward; downward
c.
downward; downward
d.
downward; upward
 

    22.    The Fed is usually more willing to monetize the debt when inflation is relatively high.

a. True

b. False

    23.    International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy.

a.
inflows; loose
b.
inflows; tight
c.
outflows; loose
d.
outflows; tight
e.
none of the above
 

    24.    Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed:

a.
monetizes the debt.
b.
maintains a stable money supply.
c.
uses a tight-money policy.
d.
uses a loose-money policy.
 

    25.    The ____ lag represents the time from when an economic problem exists until it is recognized.

a.
recognition
b.
adjustment
c.
implementation
d.
none of the above
 

    26.    A ____ dollar tends to exert inflationary pressure in the U.S.

a.
stable
b.
strong
c.
weak
d.
both A and B
 

    27.    According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase.

a.
higher; reduce
b.
higher; increase
c.
lower; reduce
d.
lower; increase
 

    28.    Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.

a.
increase; upward
b.
increase; downward
c.
decrease; downward
d.
decrease; upward
 

    29.    If the Fed uses a passive monetary policy during weak economic conditions,

a.
it increases money supply substantially.
b.
it reduces money supply substantially.
c.
it allows the economy to fix itself.
d.
it focuses on monetizing the debt.
 

    30.    Which of the following is true?

a.
Federal deficits require that the Fed purchase government securities.
b.
Federal deficits will always result in an increase in money supply.
c.
The Federal Reserve monetizes debt by selling securities which ultimately increases money supply.
d.
An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases.
e.
None of the above.
 

    31.    Inflation is commonly the result of a

a.
large budget deficit.
b.
high level of interest rates.
c.
high level of unemployment.
d.
high level of aggregate demand.
 

    32.    According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely

a.
a reduction in interest rates.
b.
an increase in interest rates.
c.
no effect on the interest rates.
d.
the impact on interest rates cannot be determined.
 

    33.    The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are

a.
low and steady.
b.
low, but rising.
c.
very high, but declining slightly.
d.
very high and rising.
 

    34.    Global crowding out is described in the text to mean the impact of

a.
excessive U.S. population growth on interest rates.
b.
excessive global population growth on interest rates.
c.
an excessive budget deficit in one country on interest rates of another country.
d.
an excessive budget deficit in one country on exchange rates.
 

    35.    If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects

a.
the crowding-out effect.
b.
dynamic open market operations.
c.
defensive open market operations.
d.
monetizing the debt.
 

    36.    When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., there will be

a.
an outward shift in the supply schedule of loanable funds.
b.
an inward shift in the supply schedule of loanable funds.
c.
no shift in the supply schedule of loanable funds.
d.
an inward shift in the demand schedule for loanable funds.
 

    37.    When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be

a.
an outward shift in the supply schedule of loanable funds.
b.
an inward shift in the supply schedule of loanable funds.
c.
no shift in the supply schedule of loanable funds.
d.
an outward shift in the demand schedule for loanable funds.
 

    38.    Which of the following is not a disadvantage of inflation targeting?

a.
If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility.
b.
The Fed's complete focus on inflation could result in a much higher unemployment level.
c.
The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth.
d.
All of the above are disadvantages of inflation targeting.
    39.    Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates.

a.
unfavorably; decreases
b.
unfavorably; increases
c.
favorably; increases
d.
Answer A and C are correct.
 

    40.    According to the theory of rational expectations, higher inflationary expectations encourage businesses and households to reduce their demand for loanable funds.

a. True

b. False

    41.    A passive monetary policy adjusts money supply automatically in response to economic conditions.

a. True

b. False

    42.    If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated substantially from the Fed's target inflation rate, the Fed could lose credibility.

a. True

b. False

    43.    If the Fed attempts to reduce inflation, it would likely increase money supply growth.

a. True

b. False

    44.    The relationship between the interest rate on loanable funds and the level of business investment is positive.

a. True

b. False

    45.    The supply schedule of loanable funds indicates the quantity of funds that would be demanded at various possible interest rates.

a. True

b. False

    46.    To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary market.

a. True

b. False

    47.    One of the disadvantages of inflation targeting is that the Fed could lose credibility is the U.S. inflation rate deviates substantially from the Fed's target inflation rate.

a. True

b. False

    48.    Economists who work at the Fed recognize that a stimulative monetary policy will not always cure a high unemployment rate and could even ignite inflation.

a. True

b. False

    49.    An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a limited effect if long-term interest rates remain unaffected.

a. True

b. False

    50.    The Fed needs the approval of the presidential administration to make decisions.

a. True

b. False

    51.    The Fed is more likely to use a stimulative policy during a strong-dollar period.

a. True

b. False

    52.    A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment.

a.
increase; decrease
b.
decrease; decrease
c.
increase; increase
d.
decrease; increase
 

    53.    Which of the following is probably not a goal the Fed is trying to achieve consistently?

a.
low inflation
b.
high interest rates
c.
steady GNP growth
d.
low unemployment
 

    54.    The ____ is not an indicator of economic growth.

a.
producer price index
b.
gross domestic product
c.
national income
d.
unemployment rate
e.
All of the above are indicators of economic growth.
 

    55.    Which of the following is not true with respect to inflation targeting?

a.
The Fed could lose credibility is the inflation rate deviates substantially from the Fed's target inflation rate.
b.
A complete focus on inflation could result in a much higher unemployment rate.
c.
Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run.
d.
If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.
 

    56.    A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.

a.
leading
b.
coincident
c.
lagging
d.
none of the above
 

    57.    A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy.

a.
U.S. exports; U.S. imports; weaken
b.
U.S. exports; U.S. imports; stimulate
c.
U.S. imports; U.S. exports; stimulate
d.
none of the above
 

    58.    The interest rate that the Fed targets for its monetary policy is the:

a.
commercial paper rate.
b.
federal funds rate.
c.
Treasury bond coupon rate.
d.
1-year certificate of deposit rate.
 

 

1. Which of the following is not a major component of the Federal Reserve System?

a.
member banks
b.
Federal Open Market Committee
c.
Securities and Exchange Commission
d.
Board of Governors
 

       2.    As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial products and services.

a.
Federal Advisory Committee
b.
Federal Open Market Committee
c.
Consumer Financial Protection Bureau
d.
Board of Governors
       3.    Which of the following is not an activity of Fed district banks?

a.
clearing checks
b.
replacing old currency
c.
providing loans to depository institutions
d.
acting as an intermediary to match up lenders and borrowers in the stock market
 

       4.    All ____ are required to be members of the Federal Reserve System.

a.
state banks
b.
national banks
c.
savings and loan associations
d.
finance companies
e.
A and B
 

       5.    The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.

a.
Board of Governors
b.
Federal Reserve district bank
c.
Federal Open Market Committee (FOMC)
d.
Securities and Exchange Commission
 

       6.    Which of the following is currently a main role of the Federal Reserve's Board of Governors?

a.
regulating commercial banks
b.
regulating foreign trade
c.
controlling monetary policy
d.
A and C
 

       7.    Members of the Board of Governors serve 14-year nonrenewable terms.

a. True

b. False

       8.    With regard to monetary policy, which of the following is under direct control of the Federal Reserve's Board of Governors?

a.
revise reserve requirements for depository institutions
b.
authorize changes in the amount of borrowing by the Treasury
c.
monitor the stock market for insider trading
d.
monitor the derivatives market for illegal trading strategies
 

       9.    The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.

a.
federal funds
b.
prime
c.
primary credit lending
d.
real
 

    10.    Which of the following is an action that the Fed uses to increase or decrease the money supply?

a.
buying or selling Treasury securities in the secondary market
b.
adjusting the tax rate imposed on income earned on Treasury securities
c.
adjusting the coupon rate on Treasury bonds
d.
selling Treasury securities in the primary market
 

    11.    The Policy Directive is provided by Board of Governors to the FOMC.

a. True

b. False

    12.    Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed.

a.
increase; purchased
b.
increase; sold
c.
decrease; purchased
d.
A and B
    13.    The purchase of government securities by someone other than the Fed results in

a.
an overall increase in funds among commercial banks.
b.
an overall decrease in funds among commercial banks.
c.
offsetting changes in funds at commercial banks.
d.
an increase in securities maintained by the Fed.
 

    14.    As the supply of funds in the banking system ____, the federal funds rate ____.

a.
increases; declines
b.
increases; increases
c.
declines, declines
d.
none of the above
 

    15.    Repurchase agreements are purchased by the Fed to

a.
temporarily decrease the aggregate level of bank funds.
b.
permanently increase the aggregate level of bank funds.
c.
permanently decrease the aggregate level of bank funds.
d.
temporarily increase the aggregate level of bank funds.
 

    16.    When open market operations are used to ____ bank funds, the yield on debt instruments ____.

a.
reduce; decreases
b.
reduce; increases
c.
increase; increases
d.
none of the above
 

    17.    ____ open market operations offset the impact of other conditions that affect the level of funds.

a.
Active
b.
Passive
c.
Dynamic
d.
Defensive
 

    18.    The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign currencies.

a. True

b. False

    19.    The primary credit lending rate changes in accordance with changes in the federal funds rate.

a. True

b. False

    20.    ____ credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness.

a.
Primary
b.
Secondary
c.
Tertiary
d.
None of the above
 

    21.    To decrease money supply, the Fed could ____ the reserve requirement ratio.

a.
increase
b.
stabilize
c.
reduce
d.
eliminate
 

    22.    The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply.

a.
lower; less
b.
lower; greater
c.
greater; less
d.
B and C
 

    23.    The ____ is directly responsible for controlling money supply growth.

a.
Federal Advisory Council
b.
FOMC
c.
Board of Governors
d.
President of the United States
 

    24.    Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in a maximum change in the money supply of

a.
$150 million.
b.
$1 billion.
c.
$1 million.
d.
$22.5 million.
 

    25.    The form of money consisting of currency held by the public and checkable deposits at depository institutions is called

a.
M1.
b.
M2.
c.
M3.
d.
MMDA.
 

    26.    The Monetary Control Act of 1980 subjected

a.
only member banks to the reserve requirements set by the Fed.
b.
only S&Ls to the reserve requirements set by the Fed.
c.
all depository institutions to the reserve requirements set by the Fed.
d.
only national banks to reserve requirements set by the Fed.
 

    27.    The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial banks.

a. True

b. False

    28.    The voting members of the Federal Open Market Committee consist of the Board of Governors plus the

a.
President of the United States.
b.
Presidents of the 12 Fed district banks.
c.
Presidents of 5 Fed district banks.
d.
Federal Advisory Council.
 

    29.    The Board of Governors is composed of

a.
seven members appointed by the President of the United States.
b.
the 12 presidents of Fed district banks.
c.
the Federal Open Market Committee, plus the Federal Advisory Council.
d.
the Federal Open Market Committee, plus the President of the United States.
 

    30.    The ____ is directly responsible for setting reserve requirements.

a.
Federal Advisory Council
b.
FOMC
c.
Board of Governors
d.
President of the United States
 

    31.    The ____ is directly responsible for conducting monetary policy.

a.
Federal Advisory Council
b.
FOMC
c.
Senate
d.
President of the United States
 

    32.    Based on a 2003 policy, the primary credit lending rate is set

a.
lower than the federal funds rate.
b.
lower than the prevailing Treasury bill rate.
c.
lower than the expected inflation rate.
d.
above the federal funds rate.
 

    33.    A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds.

a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
B and C
 

    34.    The ____ consists of seven members, each of whom is appointed by the President of the United States.

a.
Federal Open Market Committee (FOMC)
b.
Federal Advisory Council
c.
Board of Governors
d.
none of the above
    35.    Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____.

a.
increase; $200 million
b.
increase; $1.67 billion
c.
decrease; $200 million
d.
decrease; $1.67 billion
 

    36.    The federal funds rate is the rate at which the Fed lends money directly to member banks.

a. True

b. False

    37.    When the Fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth.

a.
increase; loosening
b.
decrease; tightening
c.
decrease; loosening
d.
increase; tightening
e.
none of the above
 

    38.    The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will ____ the federal funds rate to a new targeted level set by the FOMC.

a.
buy; decrease
b.
sell; increase
c.
buy; increase
d.
sell; decrease
e.
A and B
 

    39.    Which of the following statements is incorrect with respect to a single European monetary policy?

a.
It allows for more consistent economic conditions across the countries.
b.
It prevents any participating European country from solving local economic problems with its own unique monetary policy.
c.
A policy used in a particular period may not affect the participating countries equally, since they all have the same currency.
d.
Each participating country will still be able to apply its own fiscal policy (tax and government expenditure decisions).
e.
All of the above are true with respect to a single European monetary policy.
 

    40.    Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the

a.
discount rate.
b.
primary credit lending rate.
c.
Federal funds rate.
d.
prime rate
 

    41.    ____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness.

a.
Primary
b.
Secondary
c.
Tertiary
d.
None of the above
 

    42.    Most of the Fed's income is transferred to the U.S. Department of Justice.

a. True

b. False

    43.    All commercial banks are required to be members of the Fed.

a. True

b. False

    44.    Each member of the Board of Governors is appointed by the president of the United States and serves a nonrenewable 14-year term.

a. True

b. False

    45.    Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.

a. True

b. False

    46.    When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking system. Consequently, the federal funds rate decreases along with other interest rates.

a. True

b. False

    47.    Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.

a. True

b. False

    48.    To increase the money supply, the Trading Desk would be instructed to sell government securities.

a. True

b. False

    49.    To increase the money supply, the Fed may increase the reserve requirement ratio.

a. True

b. False

    50.    Which of the following is not true with respect to the Federal Reserve Act of 1913?

a.
It established reserve requirements for member commercial banks.
b.
It specified fourteen districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established.
c.
Each district focused on its particular district, without much concern for other districts.
d.
All of the above are true.
 

    51.    ____ is (are) not a component of the Fed as it exists today.

a.
The Federal Advisory Council
b.
The Board of Governors
c.
National banks
d.
The U.S. Department of Commerce
e.
All of the above are components of the Fed.
 

    52.    The advisory committee making recommendations to the Fed about economic and banking related issues is the

a.
Consumer Advisory Council.
b.
Thrift Institutions Advisory Council.
c.
Federal Advisory Council.
d.
none of the above
 

    53.    The advisory committee offering views on issues related to credit unions is the

a.
Consumer Advisory Council.
b.
Thrift Institutions Advisory Council.
c.
Federal Advisory Council.
d.
none of the above
 

    54.    If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.

a.
increase; purchase
b.
increase; sell
c.
decrease; purchase
d.
Answers B and C are correct.
 

    55.    When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields.

a.
upward; upward
b.
downward; downward
c.
upward; downward
d.
downward; upward
 

    56.    To increase the money supply growth, the Fed could

a.
sell government securities in the secondary market.
b.
increase the primary credit lending rate.
c.
increase the reserve requirement ratio.
d.
all of the above
e.
none of the above
 

    57.    When the Fed sells securities, the total funds of commercial banks ____ by the market value of securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth.

a.
increase; loosening
b.
decrease; loosening
c.
increase; tightening
d.
decrease; tightening
e.
none of the above
 

    58.    ____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items.

a.
M1
b.
M2
c.
M3
d.
None of the above
 

    59.    The ____ consists of seven members, each of whom is appointed by the president of the United States.

a.
Federal Open Market Committee (FOMC)
b.
Federal Advisory Council
c.
Board of Governors
d.
none of the above
 

       1.    Securities with maturities of one year or less are classified as

a.
capital market instruments.
b.
money market instruments.
c.
preferred stock.
d.
none of the above
 

       2.    Which of the following is not a money market security?

a.
Treasury bill
b.
negotiable certificate of deposit
c.
common stock
d.
federal funds
 

       3.    ____ are sold at an auction at a discount from par value.

a.
Treasury bills
b.
Repurchase agreements
c.
Banker's acceptances
d.
Commercial paper
 

       4.    Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction?

a.
13.43 percent
b.
2.78 percent
c.
10.55 percent
d.
2.80 percent
e.
none of the above
 

       5.    If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

a.
about 13.4 percent
b.
about 12.5 percent
c.
about 11.3 percent
d.
about 11.6 percent
e.
about 10.7 percent
 

       6.    An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

a.
about 10.1 percent
b.
about 12.6 percent
c.
about 11.4 percent
d.
about 13.5 percent
e.
about 14.3 percent
 

       7.    Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.

a.
10,000
b.
9,524
c.
9,756
d.
none of the above
 

       8.    A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?

a.
10.26 percent
b.
0.26 percent
c.
$2,500
d.
10.00 percent
e.
11.00 percent
 

       9.    Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.

a.
competitive
b.
noncompetitive
c.
very small
d.
none of the above
    10.    At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.

a.
slightly less than
b.
slightly higher than
c.
equal to
d.
A and B both occur with about equal frequency
 

    11.    T-bills and commercial paper are sold

a.
with a stated coupon rate.
b.
at a discount from par value.
c.
at a premium about par value.
d.
A and C
e.
none of the above
 

    12.    ____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

a.
A banker's acceptance
b.
A repurchase agreement
c.
Commercial paper
d.
A Treasury bill
 

    13.    Commercial paper has a maximum maturity of ____ days.

a.
45
b.
270
c.
360
d.
none of the above
 

    14.    An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?

a.
8.62 percent
b.
8.78 percent
c.
8.90 percent
d.
9.14 percent
e.
9.00 percent
 

    15.    A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

a.
12.12 percent
b.
11.11 percent
c.
13.00 percent
d.
14.08 percent
e.
15.25 percent
 

    16.    When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.

a.
higher; higher
b.
lower; lower
c.
A and B
d.
none of the above
 

    17.    Which of the following is not a money market instrument?

a.
banker's acceptance
b.
commercial paper
c.
negotiable CDs
d.
repurchase agreements
e.
all of the above are money market instruments
 

    18.    A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?

a.
9.43 percent
b.
9.28 percent
c.
9.14 percent
d.
9.00 percent
 

    19.    The federal funds market allows depository institutions to borrow

a.
short-term funds from each other.
b.
short-term funds from the Treasury.
c.
long-term funds from each other.
d.
long-term funds from the Federal Reserve.
e.
B and D
 

    20.    When a bank guarantees a future payment to a firm, the financial instrument used is called

a.
a repurchase agreement.
b.
a negotiable CD.
c.
a banker's acceptance.
d.
commercial paper.
 

    21.    Which of the following instruments has a highly active secondary market?

a.
banker's acceptances
b.
commercial paper
c.
federal funds
d.
repurchase agreements
 

    22.    Which of the following is true of money market instruments?

a.
Their yields are highly correlated over time.
b.
They typically sell for par value when they are initially issued (especially T-bills and commercial paper).
c.
Treasury bills have the highest yield.
d.
They all make periodic coupon (interest) payments.
e.
A and B
 

    23.    An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is

a.
2.0 percent.
b.
5.10 percent.
c.
5.00 percent.
d.
2.04 percent.
 

    24.    An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.

a.
3.10
b.
0.77
c.
1.00
d.
none of the above
 

    25.    The rate at which depository institutions effectively lend or borrow funds from each other is the ____.

a.
federal funds rate
b.
discount rate
c.
prime rate
d.
repo rate
 

    26.    ____ are the most active participants in the federal funds market.

a.
Savings and loan associations
b.
Securities firms
c.
Credit unions
d.
Commercial banks
 

    27.    Eurodollar deposits

a.
are U.S. dollars deposited in the U.S. by European investors.
b.
are subject to interest rate ceilings.
c.
have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States).
d.
are not subject to reserve requirements.
 

    28.    Which money market transaction is most likely to represent a loan from one commercial bank to another?

a.
banker's acceptance
b.
negotiable CD
c.
federal funds
d.
commercial paper
 

    29.    The rate on Eurodollar floating rate CDs is based on

a.
a weighted average of European prime rates.
b.
the London Interbank Offer Rate.
c.
the U.S. prime rate.
d.
a weighted average of European discount rates.
 

    30.    Treasury bills

a.
have a maturity of up to five years.
b.
have an active secondary market.
c.
are commonly sold at par value.
d.
commonly offer coupon payments.
 

    31.    The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

a.
greater than; recessionary
b.
greater than; boom economy
c.
less than; boom economy
d.
less than; recessionary
 

    32.    The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.

a.
greater than; recessionary
b.
greater than; boom economy
c.
less than; boom economy
d.
less than; recessionary
 

    33.    Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds?

a.
NCDs
b.
retail CDs
c.
commercial paper
d.
federal funds
 

    34.    The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be

a.
eliminated.
b.
reduced.
c.
increased.
d.
unchanged (there is no effect).
 

    35.    The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.

a.
increased
b.
reduced
c.
always negative
d.
unaffected
 

    36.    The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar.

a.
increased
b.
reduced
c.
always negative
d.
unaffected
 

    37.    Treasury bills are sold through ____ when initially issued.

a.
insurance companies
b.
commercial paper dealers
c.
auction
d.
finance companies
 

    38.    At a given point in time, the actual price paid for a three-month Treasury bill is

a.
usually equal to the par value.
b.
more than the price paid for a six-month Treasury bill.
c.
equal to the price paid for a six-month Treasury bill.
d.
none of the above
 

    39.    The minimum denomination of commercial paper is

a.
$25,000.
b.
$100,000.
c.
$150,000.
d.
$200,000.
 

    40.    Commercial paper is

a.
always directly placed with investors.
b.
always placed with the help of commercial paper dealers.
c.
placed either directly or with the help of commercial paper dealers.
d.
always placed by bank holding companies.
 

    41.    An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to maturity, the annualized yield is ____ percent.

a.
6.02
b.
1.54
c.
1.50
d.
6.20
e.
none of the above
 

    42.    When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.

a.
5.93
b.
6.12
c.
6.20
d.
6.02
e.
none of the above
 

    43.    Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

a.
25.00 percent
b.
35.41 percent
c.
14.59 percent
d.
none of the above
 

    44.    An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places ____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities.

a.
upward; upward
b.
downward; downward
c.
upward; downward
d.
downward; upward
 

    45.    Which of the following statements is incorrect with respect to the federal funds rate?

a.
It is the rate charged by financial institutions on loans they extend to each other.
b.
It is not influenced by the supply and demand for funds in the federal funds market.
c.
The federal funds rate is closely monitored by all types of firms.
d.
Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates.
e.
The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.
 

    46.    Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.

a.
7.08
b.
6.95
c.
6.99
d.
7.04
e.
none of the above
    47.    Commercial paper is subject to:

a.
interest rate risk.
b.
default risk.
c.
A and B.
d.
none of the above.
 

    48.    If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which placed ____ pressure on the yields of money market securities.

a.
weak; downward
b.
weak; upward
c.
strong; upward
d.
none of the above
 

    49.    In general the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information.

a. True

b. False

    50.    Money market securities are must have a maturity of three months or less.

a. True

b. False

    51.    Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.

a. True

b. False

    52.    An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds.

a. True

b. False

    53.    The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London interbank offer rate (LIBOR).

a. True

b. False

    54.    Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.

a. True

b. False

    55.    Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.

a. True

b. False

    56.    There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.

a. True

b. False

    57.    T-bills do not offer coupon payments but are sold at a discount from par value.

a. True

b. False

    58.    Junk commercial paper is commercial paper that is not rated or rated low.

a. True

b. False

    59.    A line of credit provided by a commercial bank allows a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time.

a. True

b. False

    60.    T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety.

a. True

b. False

    61.    Most repo transactions use government securities.

a. True

b. False

    62.    Exporters can hold a banker's acceptance until the date at which payment is to be made, yet they frequently sell the acceptance before then at a discount to obtain cash immediately.

a. True

b. False

    63.    Money market security values are less sensitive to interest rate movements than bonds.

a. True

b. False

    64.    During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities.

a. True

b. False

    65.    The price noncompetitive bidders will pay at a Treasury bill auction is the

a.
highest price entered by a competitive bidder.
b.
highest price entered by a noncompetitive bidder.
c.
weighted average price paid by all competitive bidders whose bids were accepted.
d.
equally weighted average price paid by all competitive bidders whose bids were accepted.
e.
none of the above
 

    66.    Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent.

a.
6.02
b.
1.54
c.
1.50
d.
6.20
e.
none of the above
 

    67.    You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill discount is ____ percent.

a.
5.93
b.
6.12
c.
6.20
d.
6.02
e.
none of the above
    68.    A ____ is not a money market security.

a.
Treasury bill
b.
negotiable certificate of deposit
c.
bond
d.
banker's acceptance
e.
All of the above are money market securities.
 

    69.    Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.

a.
14.39
b.
14.13
c.
14.59
d.
14.33
e.
none of the above
 

    70.    When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated.

a.
higher; higher
b.
lower; lower
c.
higher; lower
d.
lower; higher
e.
Answers C and D are correct.
 

    71.    Which of the following securities is most likely to be used in a repo transaction?

a.
commercial paper
b.
certificate of deposit
c.
Treasury bill
d.
common stock
e.
All of the above are equally likely to be used in a repo transaction.
 

the securities exchange commission (SEC) was established by the:

common stock is an example of a(n)

if financial markets were ________ all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors
a) perfect
b) inefficient
c) perfect
d) imperfect

the typical role of securities firm in a public offering of securities is to 
a) purchase the entire issue for its own investment
b) place the entire issue with a single large investor
c) spread the issue across several investors until the entire issue is sold
d) provide all large investors with loans so that they can invest in the offering

Without the participation of financial intermediaries in financial market transactions,:
A) information and transaction costs would be lower.
B) transaction costs would be higher but information costs would be unchanged.
C) information costs would be higher but transaction costs would be unchanged.
D) information and transaction costs would be higher.

Which of the following is most likely to be described as a depository institution?
A) finance companies
B) securities firms
C) credit unions
D) pension funds
E) insurance companies

n aggregate, _______ are the most dominant depository institution.
A) commercial banks
B) savings banks
C) credit unions
D) S&Ls

Which of the following is a nondepository financial insti¬tu¬tion?
A) savings banks
B) commercial banks
C) savings and loan associations
D) mutual funds

Which of the following distinguishes credit unions from commercial banks and savings institutions?
A) Credit unions are non profit.
B) Credit unions accept deposits but do not make loans.
C) Credit unions make loans but do not accept deposits.
D) Savings institutions restrict their business to members who share a common bond.

financial market participants who provide funds are called

the main provider(s) of funds to the US Treasury is (are):

the largest deficit unit is (are):

those financial markets that facilitate the flow of short-term funds are known as:

funds are provided to the initial issuer of securities in the:

which of the following is a capital market instrument?
a)six month CD
b) three month Treasury bill
c) ten year bond
d) agreement for a bank to loan funds directly to a company for 9 months

which of the following is a money market security?
a) treasury note
b) municipal bond
c)mortgage
d) commercial paper

the most common investors in federal funds are:

equity securities have a _________ expected return than most long-term debt securities, and they exhibit a ________ degree of risk

money market securities generally have __________ liquidity. Capital market securities are typically expected to have a _______ annualized return.

if security prices fully reflected all available information, the markets for these securities are:

if markets were _________, investors could use available information ignored by the market to earn abnormally high returns

the securities act of 1933:
a) required complete disclosure of relevant information for publicly offered securities in the primary market
b) declared trading strategies to manipulate the prices of public secondary securities illegal
c) declared misleading financial statements for public primary securities illegal 
d) required complete disclosure of relevant financial information for securities traded in the secondary market
e) did all of these

 

When a securities firm acts as a broker, it:
A) guarantees the issuer a specific price for newly issued securities.
B) makes a market in specific securities by adjusting its own inventory.
C) executes transactions between two parties.
D) purchases securities for its own account.

When a securities firm acts as a(n) _______, it maintains a position in securities.
A) adviser
B) dealer
C) broker
D) none of these

_______ obtain funds by issuing securities, then lend the funds to individuals and small businesses.
A) Finance companies
B) Securities firms
C) Mutual funds
D) Insurance companies

Households with _______ are served by _______.
A) deficient funds; depository institutions and finance companies
B) deficient funds; finance companies only
C) savings; finance companies only
D) savings; pension funds and finance companies

_______ concentrate on mortgage loans.
A) Finance companies
B) Commercial banks
C) Savings institutions
D) Credit unions

The main source of funds for _______ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.
A) savings institutions
B) commercial banks
C) mutual funds
D) finance companies
E) pension funds

Which of the following is not a reason why depository financial institutions are popular?
A) They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
B) They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
C) They accept the risk on loans provided.
D) They use their information resources to act as a broker, executing securities transactions between two parties.
E) They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

Long-term debt securities tend to have a _______ expected return and _______ risk than money market securities.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Those participants who receive more money than they spend are referred to as _______ units. 
A) deficit
B) surplus
C) borrowing
D) government

Equity securities:
A) have a maturity.
B) pay interest on a periodic basis.
C) represent ownership in the issuer.
D) repay the principal amount at maturity.

_______ securities have a maturity of one year or less; _______ securities are generally more liquid.
A) Money market; capital market
B) Money market; money market
C) Capital market; money market
D) Capital market; capital market

Which of the following is not a major investor in stocks?
A) commercial banks
B) insurance companies
C) mutual funds
D) pension funds

Which of the following financial intermediaries commonly invests in stocks and bonds?
A) pension funds
B) insurance companies
C) mutual funds
D) all of these

A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called _______ market.
A) secondary
B) primary
C) deficit
D) surplus

Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as _______ markets.
A) money
B) capital
C) primary
D) secondary
E) none of these

Which of the following transactions would not be considered a secondary market transaction?
A) an individual investor purchases some existing shares of stock in IBM through his broker
B) an institutional investor sells some Disney stock through its broker
C) Microsoft issues new shares of common stock using its investment bank
D) All of these would occur on the New York Stock Exchange.

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve _______ returns, and they are exposed to relatively _______ risk.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

_______ maintain a larger amount of assets than the other types of depository institutions.
A) Credit unions
B) Commercial banks
C) Life insurance companies
D) Savings institutions

 

The finance segment known as _______ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.
A) corporate finance
B) investment management
C) financial markets and institutions
D) none of these

Which of the following statements is incorrect?
A) Financial markets attract funds from investors and channel the funds to corporations.
B) Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
C) Financial institutions serve solely as intermediaries with the financial markets and never serve as investors. 
D) Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

There is a _______ relationship between the risk of a security and the expected return from investing in the security.
A) positive
B) negative
C) indeterminable
D) none of these

Which of the following is not a typical money market security?
A) Treasury bills
B) Treasury bonds
C) commercial paper
D) negotiable certificates of deposit

If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will _______, resulting in a _______ return for those investors.
A) rise; lower
B) fall; higher
C) fall; lower
D) rise; higher

Which of the following statements is incorrect?
A) It is probably safe to say that various forms of unethical behavior will continue in the future.
B) New financial scandals will likely result in new regulations.
C) New regulations will likely be followed by new types of scandals that circumvent the latest regulations.
D) The most naïve investors are often the ones that benefit the most from financial scandals.

_______ is not a securities firm.
A) American Express
B) Merrill Lynch
C) Morgan Stanley
D) Goldman Sachs

Currently, _______ hold the largest amount of assets of all financial institutions.
A) commercial banks
B) credit unions
C) finance companies
D) securities firms

 

. The Securities Act of 1933
A) required complete disclosure of relevant financial information for publicly offered securities in the primary market.
B) declared trading strategies to manipulate the prices of public secondary securities illegal.
C) declared misleading financial statements for public primary securities illegal.
D) required complete disclosure of relevant financial information for securities traded in the secondary market.
E) all of the above

The Securities Exchange Commission (SEC) was established by the
A) Federal Reserve Act.
B) McFadden Act.
C) Securities Exchange Act of 1934.
D) Glass Steagall Act.
E) none of the above

Common stock is an example of a(n)
A) debt security.
B) money market security.
C) equity security.
D) A and B

. If financial markets were ______, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.
A) efficient
B) inefficient
C) perfect
D) imperfect

The typical role of a securities firm in a public offering of securities is to
A) purchase the entire issue for its own investment.
B) place the entire issue with a single large investor.
C) spread the issue across several investors until the entire issue is sold.
D) provide all large investors with loans so that they can invest in the offering.

Without the participation of financial intermediaries in financial market transactions,
A) information and transaction costs would be lower.
B) transaction costs would be higher but information costs would be unchanged.
C) information costs would be higher but transaction costs would be unchanged.
D) information and transaction costs would be higher.

Which of the following is most likely to be described as a depository institution?
A) finance companies
B) securities firms
C) credit unions
D) pension funds
E) insurance companies

21. In aggregate, ___________ are the most dominant depository institution.
A) commercial banks
B) savings banks
C) credit unions
D) S&Ls

Which of the following is a nondepository financial insti¬tu¬tion?
A) savings banks
B) commercial banks
C) savings and loan associations
D) mutual funds

Which of the following distinguishes credit unions from commercial banks and savings institutions?
A) Credit unions are non profit
B) Credit unions accept deposits but do not make loans
C) Credit unions make loans but do not accept deposits
D) Savings institutions restrict their business to members who share a common bond

Financial market participants who provide funds are called
A) deficit units.
B) surplus units.
C) primary units.
D) secondary units.

The main provider(s) of funds to the U.S. Treasury is (are)
A) households and businesses.
B) foreign financial institutions.
C) the Federal Reserve System.
D) foreign nonfinancial sectors

The largest deficit unit is (are)
A) households and businesses.
B) foreign financial institutions.
C) the U.S. Treasury.
D) foreign nonfinancial sectors

Those financial markets that facilitate the flow of short-term funds are known as
A) money markets.
B) capital markets.
C) primary markets.
D) secondary markets.

Funds are provided to the initial issuer of securities in the
A) secondary market.
B) primary market.
C) deficit market.
D) surplus market.

Which of the following is a capital market instrument?
A) a six month CD
B) a three month Treasury bill
C) a ten year bond
D) an agreement for a bank to loan funds directly to a company for nine months.

Which of the following is a money market security?
A) Treasury note
B) municipal bond
C) mortgage
D) commercial paper

The most common investors in Federal funds are
A) households.
B) depository institutions.
C) firms.
D) government agencies.

Equity securities have a ________ expected return than most long-term debt securities, and they exhibit a _________ degree of risk.
A) higher; higher
B) lower; lower
C) lower; higher
D) higher; lower

Money market securities generally have ______. Capital market securities are typically expected to have a ______.
A) less liquidity; higher annualized return
B) more liquidity; lower annualized return
C) less liquidity; lower annualized return
D) more liquidity; higher annualized return

If security prices fully reflect all available information, the markets for these securities are
A) efficient.
B) primary.
C) overvalued.
D) undervalued.

If markets are ______, investors could use available infor¬mation ignored by the market to earn abnormally high returns.
A) perfect
B) active
C) inefficient
D) in equilibrium

 

When a securities firm acts as a broker, it
A) guarantees the issuer a specific price for newly issued securities.
B) makes a market in specific securities by adjusting its own inventory.
C) executes transactions between two parties.
D) purchases securities for its own account.

When a securities firm acts as a(n) ______, it maintains a position in securities.
A) adviser
B) dealer
C) broker
D) none of the above

________ obtain funds by issuing securities, then lend the funds to individuals and small businesses.
A) Finance companies
B) Securities firms
C) Mutual funds
D) Insurance companies

Households with ______ are served by ______.
A) deficient funds; depository institutions and finance companies
B) deficient funds; finance companies only
C) savings; finance companies only
D) savings; pension funds and finance companies

_______________ concentrate on mortgage loans.
A) Finance companies
B) Commercial banks
C) Savings institutions
D) Credit unions

_____ securities have a maturity of one year or less; _____ securities are generally more liquid.
A) Money market; capital market
B) Money market; money market
C) Capital market; money market
D) Capital market; capital market

Which of the following is not a major investor in stocks?
A) commercial banks
B) insurance companies
C) mutual funds
D) pension funds

Which of the following financial intermediaries commonly invests in stocks and bonds?
A) pension funds
B) insurance companies
C) mutual funds
D) all of the above

A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called
A) secondary market.
B) primary market.
C) deficit market.
D) surplus market.

Financial markets facilitating the flow of short-term funds with maturities of less than one year are 
known as
A) secondary markets.
B) capital markets.
C) primary markets.
D) money markets.
E) none of the above

Which of the following transactions would not be considered a secondary market transaction?
A) An individual investor purchases some existing shares of stock in IBM through his broker.
B) An institutional investor sells some Disney stock through its broker.
C) A firm that was privately held engages in an offering of stock to the public. 
D) All of the above are secondary market transactions

____________ are long-term debt obligations issued by corporations and government agencies to
support their operations.
A) Common stock
B) Derivative securities
C) Bonds
D) None of the above

Equity securities should normally have a ___________ expected return and _________ risk than
money market securities.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

If investors speculate in derivative contracts rather than the underlying asset, they will probably
achieve ____________ returns, and they are exposed to relatively ___________ risk.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

When particular securities are perceived to be ______________ by the market, their prices decrease
when they are sold by investors.
A) undervalued
B) overvalued
C) fairly priced
D) efficient
E) none of the above

Which of the following are not considered depository financial institutions?
A) finance companies
B) commercial banks
C) savings institutions
D) credit unions
E) All of the above are depository financial institutions.

The main source of funds for ________________ is proceeds from selling securities to households
and businesses, while their main use of funds is providing loans to households and businesses.
A) savings institutions
B) commercial banks
C) mutual funds
D) finance companies
E) pension funds

Which of the following statements is incorrect?
A) Financial markets attract funds from investors and channel the funds to corporations.
B) Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
C) Financial institutions serve solely as intermediaries with the financial markets and never serve as investors. 
D) Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

Which of the following is not a typical money market security?
A) Treasury bills
B) Treasury bonds
C) Commercial paper
D) Negotiable certificates of deposit

 

The level of installment debt as a percentage of disposable income has been _______ in recent years; it is generally _______ in recessionary periods.
A) increasing; higher
B) increasing; lower
C) decreasing; higher
D) decreasing; lower

At any given point in time, households would demand a _______ quantity of loanable funds at _______ rates of interest.
A) greater; higher
B) greater; lower
C) smaller; lower
D) none of these

Businesses demand loanable funds to:
A) finance installment debt.
B) subsidize other companies.
C) invest in fixed and short-term assets.
D) do none of these.

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, 
they will probably achieve ________ returns, and they are exposed to relatively _________ risk.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

_________________ maintain a larger amount of assets in aggregate than the other types of
depository institutions.
A) Credit unions
B) Commercial banks
C) Life insurance companies
D) Savings institutions

A common use of funds for ________________ is investment in stocks. 
and businesses, while their main use of funds is providing loans to households and businesses.
A) savings institutions
B) commercial banks
C) mutual funds
D) finance companies

Long-term debt securities tend to have a ___________ expected return and _________ risk than 
money market securities.
A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Those participants who receive more money than they spend are referred to as 
A) deficit units.
B) surplus units.
C) borrowing units.
D) government units.

Equity securities
A) have a maturity.
B) pay interest on a periodic basis.
C) represent ownership in the issuer.
D) repay the principal amount at maturity

The term ____________ involves decisions such as how much funding to obtain, and how to invest
the proceeds to expand operations.
A) corporate finance
B) investment management
C) financial markets and institutions
D) None of the above

There is a ___________ relationship between the risk of a security and the expected return from
investing in the security.
A) positive
B) negative
C) indeterminable
D) none of the above

If a security is undervalued, some investors would capitalize from this by purchasing that security.
As a result, the security's price will _______, resulting in a _______ return for those investors.
A) rise; lower
B) fall; higher
C) fall; lower
D) rise; higher

Currently, _________ hold the largest amount of assets of all financial institutions.
A) commercial banks
B) credit unions
C) finance companies
D) securities firms

The main reason that depository institutions experienced financial problems during the credit crisis
was their investment in:
A) mortgages.
B) money market securities.
C) stock.
D) Treasury bonds.

Which of the following is not a reason why depository financial institutions are popular?
A) They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
B) They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
C) They accept the risk on loans provided.
D) They use their information resources to act as a broker, executing securities transactions between two parties.
E) They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

According to your text, which of the following is not considered a money market security?
A) Treasury bills
B) Treasury notes
C) retail CD
D) banker's acceptance
E) commercial paper

________________ are not considered capital market securities.
A) Repurchase agreements
B) Municipal bonds
C) Corporate bonds
D) Equity securities
E) Mortgages

 

The required return to implement a given business project will be _______ if interest rates are lower. This implies that businesses will demand a _______ quantity of loanable funds when interest rates are lower.
A) greater; lower
B) lower; greater
C) lower; lower
D) greater; greater

If interest rates are _______, _______ projects will have positive NPVs.
A) higher; more
B) lower; more 
C) lower; no
D) none of these

The demand for funds resulting from business investment in short term assets is _______ related to the number of pro¬jects implemented, and is therefore _______ related to the interest rate.
A) inversely; positively
B) positively; inversely
C) inversely; inversely
D) positively; positively

If economic conditions become less favorable,:
A) expected cash flows on various projects will increase.
B) more proposed projects will have expected returns greater than the hurdle rate.
C) there would be additional acceptable business projects.
D) there would be a decreased demand by business for loanable funds.

As a result of more favorable economic conditions, there is a(n) _______ demand for loanable funds, causing an _______ shift in the demand curve.
A) decreased; inward
B) decreased; outward
C) increased; outward
D) increased; inward

The federal government demand for loanable funds is interest _______. If the budget deficit was expected to increase, the federal government demand for loanable funds would _______.
A) elastic; decrease
B) elastic; increase
C) inelastic; increase
D) inelastic; decrease

Other things being equal, foreign governments and corpora¬tions would demand _______ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is _______ related to U.S. interest rates.
A) less; inversely 
B) more; positively
C) less; positively
D) more; inversely

If the economy weakens, there is _______ pressure on interest rates. If the Federal Reserve increases the money supply, there is _______ pressure on interest rates (assume that inflationary expectations are not affected).
A) upward; upward
B) upward; downward
C) downward; upward
D) downward; downward

What is the basis of the relationship between the Fisher effect and the loanable funds theory?
A) the saver's desire to maintain the existing real rate of interest
B) the borrower's desire to achieve a positive real rate of interest
C) the saver's desire to achieve a negative real rate of interest
D) none of these

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. secur¬ities and instead increase their holdings of securities in their own countries. This should cause the supply of loan¬able funds in the United States to _______ and should place _______ pressure on U.S. interest rates.
A) decrease; upward
B) decrease; downward
C) increase; downward
D) increase; upward

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. secur¬ities. This should cause the supply of loanable funds in the United States to _______ and should place _______ pressure on U.S. interest rates.
A) decrease; upward
B) decrease; downward
C) increase; downward
D) increase; upward

If the federal government needs to borrow additional funds, this borrowing reflects _______ in the supply of loanable funds, and _______ in the demand for loanable funds.
A) an increase; no change
B) a decrease; no change
C) no change; an increase
D) no change; a decrease

If the federal government reduces its budget deficit, this causes _______ in the supply of loanable funds, and _______ in the demand for loanable funds.
A) an increase; no change
B) a decrease; no change
C) no change; an increase
D) no change; a decrease

Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to _______ and the demand for loanable funds to _______.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to _______ and the demand for loanable funds to _______.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

If the real interest rate is expected by a particular person to become negative, then the purchasing power of his or her savings would be _______, as the inflation rate is expected to be _______ the existing nominal interest rate.
A) decreasing; less than
B) decreasing; greater than
C) increasing; greater than
D) increasing; less than

If economic expansion is expected to increase, then demand for loanable funds should _______ and interest rates should _______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

If economic expansion is expected to decrease, the demand for loanable funds should _______ and interest rates should _______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

If the real interest rate was stable over time, this would suggest that there is _______ relationship between inflation and nominal interest rate movements.
A) a positive
B) an inverse
C) no
D) an uncertain (cannot be determined from information given)

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be _______ U.S. interest rates.
A) positively related to
B) inversely related to
C) unrelated to
D) none of these

The quantity of loanable funds supplied is normally:
A) highly interest elastic.
B) more interest elastic than the demand for loanable funds.
C) less interest elastic than the demand for loanable funds.
D) equally interest elastic as the demand for loanable funds.

The _______ sector is the largest supplier of loanable funds.
A) household
B) government
C) business
D) none of these

If a strong economy allows for a large _______ in households income, the supply curve will shift _______.
A) decrease; outward
B) increase; inward
C) increase; outward
D) none of these

The equilibrium interest rate:
A) equates the aggregate demand for funds with the aggre¬gate supply of loanable funds.
B) equates the elasticity of the aggregate demand and supply for loanable funds.
C) decreases as the aggregate supply of loanable funds decreases.
D) increases as the aggregate demand for loanable funds decreases.

The equilibrium interest rate should:
A) fall when the aggregate supply funds exceeds aggregate demand for funds.
B) rise when the aggregate supply of funds exceeds aggre¬gate demand for funds.
C) fall when the aggregate demand for funds exceeds aggre¬gate supply of funds.
D) rise when aggregate demand for funds equals aggregate supply of funds.

Which of the following are likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?
A) a decrease in savings by foreign savers
B) an increase in inflation
C) pessimistic economic projections that cause businesses to reduce expansion plans
D) a decrease in savings by U.S. households

The Fisher effect states that the:
A) nominal interest rate equals the expected infla¬tion rate plus the real rate of interest.
B) nominal interest rate equals the real rate of interest minus the expected inflation rate.
C) real rate of interest equals the nominal interest rate plus the expected inflation rate.
D) expected inflation rate equals the nominal interest rate plus the real rate of interest.

If the real interest rate was negative for a period of time, then:
A) inflation is expected to exceed the nominal interest rate in the future.
B) inflation is expected to be less than the nominal interest rate in the future.
C) actual inflation was less than the nominal interest rate.
D) actual inflation was greater than the nominal interest rate.

If inflation is expected to decrease, then:
A) savers will provide less funds at the existing equilibrium interest rate.
B) the equilibrium interest rate will increase.
C) the equilibrium interest rate will decrease.
D) borrowers will demand more funds at the existing equilibrium interest rate.

If inflation turns out to be lower than expected,:
A) savers benefit.
B) borrowers benefit while savers are not affected.
C) savers and borrowers are equally affected.
D) savers are adversely affected but borrowers benefit.

 

If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would _______ the volatility of the real interest rate move¬ments over time.
A) increase
B) decrease
C) have an effect, which cannot be determined with above information, on
D) have no effect on

Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place _______ pressure on Canadian interest rates and _______ pressure on U.S. interest rates.
A) upward; upward
B) upward; downward
C) downward; downward
D) downward; upward

If investors shift funds from stocks into bank deposits, this _______ the supply of loanable funds, and places _______ pressure on interest rates.
A) increases; upward
B) increases; downward
C) decreases; downward
D) decreases; upward

When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will _______, and the U.S. interest rates will _______.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Which of the following will probably NOT result in an increase in the business demand for loanable funds?
A) an increase in positive net present value (NPV) projects
B) a reduction in interest rates on business loans
C) a recession
D) none of these

If the aggregate demand for loanable funds increases without a corresponding _______ in aggregate supply, there will be a _______ of loanable funds.
A) increase; surplus
B) increase; shortage
C) decrease; surplus
D) decrease; shortage

A _______ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an _______ shift in the demand schedule.
A) higher; inward
B) higher; outward
C) lower; outward
D) none of these

Which of the following is not true regarding foreign interest rates?
A) The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.
B) The expectations of a strong dollar should cause a flow of funds to the U.S.
C) An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries.
D) All of these are true regarding foreign interest rates.

Which of the following is a nondepository financial institution?
a. savings banks
b. commercial banks
c. savings and loan associations
d. mutual funds

A common use for __ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses.
a. commercial banks
b. finance companies
c. savings institutions
d. mutual funds

___ obtain funds by issuing securities, then lend the funds to individuals and small businesses.
a. Finance companies
b. Insurance companies
c. Securities firms
d. Mutual funds

Which of the following distinguishes credit unions from commercial banks and savings institutions?
a. Credit unions are non-profit
b. Credit unions accept deposits but do not make loans
c. Credit unions make loans but do not accept deposits
d. Savings institutions restrict their business to members who share a common bond

If financial markets were __, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.
a. inefficient
b. imperfect
c. perfect
d. efficient

The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:
a. stock
b. mortgages
c. money market securities
d. Treasury bonds

Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as
a. secondary markets
b. capital markets
c. primary markets
d. money markets
e. none of the above

Long-term debt securities tend to have a ___ expected return and ____ risk than money market securities.
a. higher;lower
b. lower;lower
c. higher;higher
d. lower;higher

When particular securities are perceived to be ___ by the market, their prices decrease when they are sold by investors.
a. undervalued
b. overvalued
c. fairly priced
d. efficient
e. none of the above

The main provider(s) of funds to the U.S. Treasury is (are)
a. the Federal Reserve System
b. foreign financial institutions
c. foreign nonfinancial sectors
d. households and businesses

_________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient.
a. Financial psychology
b. Inefficient markets theory
c. Psychological marketing
d. Behavioral finance

The largest deficit unit is (are)
a. foreign nonfinancial sectors
b. the U.S. Treasury
c. foreign financial institutions
d. households and businesses

If security prices fully reflect all available information, the markets for these securities are
a. undervalued
b. primary
c. overvalued
d. efficient

Which of the following is most likely to be described as a depository institution?
a. securities firms
b. finance companies
c. insurance companies
d. credit unions
e. pension funds

Which of the following is least likely to affect household demand for loanable funds?
A) a decrease in tax rates
B) an increase in interest rates
C) a reduction in positive net present value (NPV) projects available
D) All of these are equally likely to affect household demand for loanable funds.

Which of the following statements is incorrect?
A) The Fed's monetary policy is intended to control the economic conditions in the U.S.
B) The Fed's monetary policy affects the supply of loanable funds, which affects interest rates.
C) By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend.
D) All of these statements are correct.

 

The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the supply schedule. 
a. outward; an inward shift
b. outward; no obvious change
c. inward; an outward shift
d. inward; an inward shift

If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.
a. decrease
b. increase
c. have an effect, which cannot be determined with above information, on
d. have no effect on

A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule. 
a. higher; inward
b. higher; outward
c. lower; outward
d. none of the above

Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____. 
a. decrease; decrease
b. decrease; increase
c. increase; decrease
d. increase; increase

If economic conditions become less favorable, then: 
a. there would be additional acceptable business projects.
b. more proposed projects will have expected returns greater than the hurdle rate.
c. there would be a decreased demand by business for loanable funds.
d. expected cash flows on various projects will increase.

Businesses demand loanable funds to 
a. finance installment debt.
b. subsidize other companies
c. invest in fixed and short-term assets.
d. none of the above

If the real interest rate was negative for a period of time, then
a. actual inflation was greater than the nominal interest rate.
b. inflation is expected to be less than the nominal interest rate in the future.
c. actual inflation was less than the nominal interest rate.
d. inflation is expected to exceed the nominal interest rate in the future.

The ____ sector is the largest supplier of loanable funds. 
a. household
b. government
c. business
d. none of the above

If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds.
a. increase; shortage
b. decrease; surplus
c. increase; surplus
d. decrease; shortage

If the real interest rate was stable over time, this would suggest that there is ____ relationship between inflation and nominal interest rate movements. 
a. an inverse
b. an uncertain (cannot be determined from information above)
c. no
d. a positive

If the real interest rate is expected by a particular person to become negative, then the purchasing power of his or her savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate.
a. decreasing; less than
b. increasing; greater than
c. increasing; less than
d. decreasing; greater than

Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____ related
to U.S. interest rates. 
a. more; positively
b. more; inversely
c. less; positively
d. less; inversely

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates. 
a. positively related to
b. inversely related to
c. unrelated to
d. none of the above

The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds?
a. a decrease in both the supply of and the demand for loanable funds
b. an increase in both the supply of and the demand for loanable funds
c. an increase in the supply of loanable funds and a decrease in the demand for loanable funds
d. a decrease in the supply of loanable funds and an increase in the demand for loanable funds

If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____.
a. decrease; decrease
b. increase; increase
c. decrease; increase
d. increase; decrease

 

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ___ returns, and they are exposed to relatively ___ risk.
a. lower;higher
b. lower;lower
c. higher;higher
d. higher;lower

 

The term ___ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.
a. corporate finance
b. investment management
c. financial markets and institutions
d. none of the above

If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will ___, resulting in a ___ return for those investors.
a. rise;higher
b. fall;higher
c. fall;lower
d. rise;lower

Funds are provided to the initial issuer of securities in the 
a. primary market
b. secondary market
c. surplus market
d. deficit market

A five-year security was purchased two years ago by an investor who pans to resell it. The security will be sold by the investor in the so-called
a. primary market
b. secondary market
c. surplus market
d. deficit market

The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as:
a. credit risk
b. leverage risk
c. systemic risk
d. financial meltdown risk

Systemic risk exists because:
a. financial institutions invest in similar securities and therefore are similarly exposed to larger declines in prices of those securities.
b. financial institutions borrow using long-term debt securities but lend their funds for short-term periods.
c. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.
d. there is no government regulation of financial markets.

The federal government's demand for funds is ___, and municipal governments' demand for funds is somewhat _____.
a. interest-inelastic; interest-inelastic
b. interest-elastic; interest-elastic
c. interest-inelastic; interest-elastic
d. interest-elastic; interest-inelastic

If economic expansion is expected to increase, then the demand for loanable funds should ___ and interest rates should ___.
a. increase; decrease
b. increase; increase
c. decrease; increase
d. decrease; decrease

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the US to ___ and should place ___ pressure on U.S. interest rates.
a. decrease; upward
b. increase; upward
c. increase; downward
d. decrease; downward

If the federal government reduces its budget deficit, this causes a(n) ___ in the supply of loanable funds, and a(n) ___ in the demand for loanable funds.
a. no change; increase
b. increase; no change
c. decrease; no change
d. no change; decrease

The ___ sector is the largest supplier of loanable funds.
a. household
b. government
c. business
d. none of the above

If economic conditions become less favorable, then:
a. more proposed projects will have expected returns greater than the hurdle rate.
b. there would be a decrease demand by business for loanable funds.
c. expected cash flows on various projects increase.
d. there would be additional acceptable business projects.

If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ___ the volatility of the real interest rate movements over time.
a. decrease
b. increase
c. have an effect, which cannot be determined with above information, on
d. have no effect on

The level of installment debts as a percentage of disposable income is generally ___ during recessionary periods.
a. negative
b. higher
c. zero
d. lower

The equilibrium interest rate
a. equates the elasticity of the aggregate demand and supply for loanable funds.
b. decreases as the aggregate supply of loanable funds decreases.
c. equates the aggregate demand for funds with the aggregate supply of loanable funds
d. increases as the aggregate demand for loanable funds decreases.

When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will ____, and the U.S. interest rates will ____.
a. decrease; increase
b. decrease; decrease
c. increase; decrease
d. increase; increase

The crowding-out effect occurs when:
a. firms and municipal governments crowd out households in the market for loanable funds.
b. institutional investors crowd out individual investors in the market for loanable funds.
c. the federal government's demand for loanable funds due to higher budget deficit crowds out the private demand in the market for loanable funds.
d. foreign investors crowd out U.S. investors in the market for loanable funds.

If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should _____.
a. decrease; increase
b. increase; increase
c. decrease; decrease
d. increase; decrease

The yield curve in a foreign country is
a. always downward sloping
b. non-existent
c. the same as the US at any point in time
d. none of the above

In some time periods there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. This specifically supports the ____ for explaining in term structure of interest rates.
a. liquidity premium theory
b. expectations theory
c. segmented markets theory
d. A and C

If a security can easily be converted to cash without a loss in value, it
a. is illiquid
b. has a high after-tax yield
c. has high default risk
d. is liquid

There is a ___ relationship between the risk of a security and the expected return from investing in the security.
a. positive
b. negative
c. indeterminable
d. none of the above

Equity securities
a. repay the principal amount at maturity.
b. have a maturity.
c. pay interest on a periodic basis.
d. represent ownership in the issuer

When a securities firm acts as a(n) ___, it maintains a position in securities
a. adviser
b. dealer
c. broker
d. none of the above

____ concentrate on mortgage loans.
a. Savings institutions
b. Credit unions
c. Finance companies
d. Commercial banks

Which of the following statements is incorrect?
a. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.
b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
c. Financial markets attract funds from investors and channel the funds to corporations.
d. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.

Other things being equal, a ___ quantity of U.S. fund would be demanded by foreign governments and corporations if their domestic interest rates were ___ relative to the U.S. rates.
a. smaller; high
b. larger; high
c. larger; low
d. none of the above

Businesses demand loanable funds to
a. finance installment debt
b. subsidize other companies
c. invest in fixed and short-term assets 
d. none of the above

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ___ and should place ____ pressure on U.S. interest rates.
a. increase; upward
b. increase; downward
c. decrease; downward
d. decrease; upward

A ___ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing a ___ shift in the demand schedule.
a. higher; inward
b. higher; outward
c. lower; outward
d. none of the above

The ___ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds.
a. Fisher effect
b. loanable funds theory
c. real interest rate
d. none of the above

The federal government demand for funds is said to be interest inelastic, or ___ to interest rates.
a. sensitive
b. insensitive
c. relatively sensitive as compared to other sectors
d. none of the above

If interest rates are ___, ___ projects will have positive NPVs. 
a. higher; more
b. lower; more
c. lower; no
d. none of the above

The quantity of loanable funds supplied is normally 
a. highly interest elastic
b. more interest elastic than the demand for loanable funds
c. less interest elastic than the demand for loanable funds
e. A and B

The fisher effect states that the 
a. nominal interest rate equals the real rate of interest minus the expected inflation rate.
b. nominal interest rate equals the real rate of interest plus the expected inflation rate.
c. expected inflation rate equals the nominal interest rate plus the real rate of interest.
d. real rate of interest equals the nominal interest rate plus the expected inflation rate.

Due to expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ___ and the demand for loanable funds to ___.
a. decrease; decrease
b. decrease; increase
c. increase; increase
d. increase; decrease

If inflation turns out to be lower than expected
a. savers benefit.
b. borrowers benefit while savers are not affected.
c. savers are adversely affected but borrowers benefit.
d. savers and borrowers are equally affected.

If investors shift funds from stocks into bank deposits; this ___ the supply of loanable funds, and places ___ pressure on interest rates.
a. increases; upward
b. increases; downward
c. decreases; upward
d. decreases; downward

 

If the Treasury uses a relatively large portion of ____ debt to finance the deficit, this may place an upward pressure on ____ interest rates, and corporations may reduce their investment in fixed assets.
a. long-term; long-term
b. long-term; short-term
c. short-term; long-term
d. B and C

Default risk is likely highest for
a. short-term Treasury securities
b. AAA corporate securities
c. long-term Treasury securities
d. BBB corporate securities

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
a. longer; lower
b. longer; higher
c. shorter; lower
d. shorter; higher
e. B and C

In general, securities with ____ characteristics will offer ____ yields.
a. favorable; higher
b. favorable; lower
c. unfavorable; lower
d. none of the above

If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be
a. flat.
b. downward sloping.
c. upward sloping.
d. none of the above.

Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.
a. greater than
b. equal to
c. less than
d. A or B are both common

If liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.
a. a slight decrease
b. a slight increase
c. a large increase
d. no changes

An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?
a. 7.7 percent
b. 15.71 percent
c. 130 percent
d. 11 percent
e. none of the above

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will be ____ sloping.
a. downward; upward
b. upward; downward
c. downward; downward
d. upward; upward

Which of the following did the Fed NOT do during the credit crisis?
a. purchase mortgage-backed securities
b. reduce the targeted federal funds rate
c. purchase commercial paper
d. prevent depository institutions from obtaining funding through the discount window

To decrease money supply, the Fed could ____ the reserve requirement ratio.
a. stabilize
b. increase
c. reduce
d. eliminate

Based on a 2003 policy, the primary credit lending rate is set
a. lower than the expected inflation rate
b. above the federal funds rate
c. lower than the prevailing Treasury bill rate
d. lower than the federal funds rate

A criticism of the Fed's actions during the credit crisis is that is:
a. focused too much on financial institutions
b. allowed Bear Stearns to fail and file for bankruptcy
c. periodically raised the primary credit rate
d. did not attempt to increase the liquidity of the debt markets

All ____ are required to be members of the Federal Reserve System.
a. state banks
b. national banks
c. savings and loan associations
d. finance companies
e. A and B

____ open market operations offset the impact of other conditions that affect the level of funds.
a. Dynamic
b. Defensive
c. Active
d. Passive

If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.
a. increase; purchase
b. increase; sell
c. decrease; purchase
d. Answers B and C are correct.

The form of money consisting of currency held by the public and checkable deposits at depository institutions are alled
a. M2
b. M1
c. MMDA
d. M3

____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts and some other items.
a. M1
b. M2
c. M3
d. None of the above.

The ____ the reserve requirement ration, the ____ the ultimate effect of any initial increase in money supply.
a. lower; less
b. lower; greater
c. greater; less
d. B and C

The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.
a. federal funds
b. prime
c. primary credit lending
d. real

Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.
a. increase; downward
b. decrease; downward
c. increase; upward
d. decrease; upward

The interest rate that the Fed targets for its monetary policy is the:
a. Treasury bond coupon rate
b. federal funds rate
c. 1-year certificate of deposit rate
d. commercial paper rate

If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the 
a. expectations theory.
b. real interest rate theory.
c. segmented market theory.
d. liquidity premium theory.

According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today's one-year interest rate, the ____ is expected change in one-year interest rate.
a. greater; less
b. less; greater
c. greater; greater
d. less; less
e. C and D

The yield curve for corporate bonds
a. would typically lie below the Treasury yield curve.
b. is irrelevant to investors.
c. typically has the same slope as the Treasury yield curve.
d. is identical to the Treasury yield curve.

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?
a. 11.41 percent
b. 12.62 percent
c. 3.00 percent
d. 12.00 percent
e. 15.08 percent

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay
a. 31.1 percent
b. 14 percent
c. 12.5 percent
d. 19 percent

Other things equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same.
a. greater than
b. equal to
c. less than
d. All of the above are possible, depending on the size of the bond offering.

Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to
a. remain flat.
b. become upward sloping.
c. become downward sloping.
d. none of the above.

The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.
a. negatively; negatively
b. positively; negatively
c. negatively; positively
d. positively; positively

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).
a. slight downward slope
b. steep downward slope
c. slight upward slope
d. steep upward slope

According to expectations theory, the sudden expectation of lower interest rates in the future will cause a ____ supply of short-term funds provided by investors, and a ____ supply of long-term funds.
a. small; small
b. large; small
c. small; large
d. large; larger

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if
a. most debt is financed by foreign investors.
b. the Treasury's debt level is small.
c. maturity markets are segmented.
d. A and B

The theory of term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the 
a. liquidity habitat theory
b. liquidity premium theory
c. segmented markets theory
d. pure expectations theory

Which of the following is not a characteristic affecting the yields on debt securities?
a. default risk
b. liquidity
c. tax status
d. term to maturity
e. All of the above affect yields on debt securities.

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be ____ sloping.
a. upward; upward
b. downward; downward
c. downward; upward
d. upward; downward

Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____.
a. increase; $1.67 billion
b. decrease; $200 million
c. decrease; $1.67 billion
d. increase; $200 million

As the supply of funds in the banking system ____, the federal funds rate ____.
a. increases; declines
b. increases; increases
c. declines; declines
d. none of the above

Which of the following is not a major component of the Federal Reserve System?
a. Securities and Exchange Commission
b. Board of Governors
c. Federal Open Market Committee
d. member banks

To increase the money supply growth, the Fed could
a. sell government securities in the secondary market
b. increase the primary credit lending rate
c. increase the reserve requirement ratio
d. all of the above
e. none of the above

 

Which of the following is true?
a. Federal deficits require that the Fed purchase government securities.
b. Federal deficits will always result in an increase in money supply.
c. The Federal Reserve monetizes debt by selling securities which ultimately increases money supply.
d. An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases.
e. None of the above.

Which of the following is probably not a goal the Fed is trying to achieve consistently?
a. higher interest rates
b. steady GNP growth
c. low unemployment
d. low inflation

The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the
a. open-market lag.
b. recognition lag.
c. impact lag.
d. implementation lag.

Which of the following is NOT a reason that a stimulative monetary policy may be ineffective?
a. Lending institutions may increase their standards for borrowers, so some potential borrowers may not qualify for loans.
b. The effects of a stimulative policy may be disrupted by expectations of inflation.
c. Higher interest rates encourage individuals to increase their savings.
d. Retirees who rely on interest income may restrict their spending.

Inflation is commonly the result of a
a. large budget deficit.
b. high level of unemployment.
c. high level of aggregate demand.
d. high level of interest rates.

When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be
a. an outward shift in the supply schedule of loanable funds.
b. no shift in the supply schedule of loanable funds.
c. an inward shift in the supply schedule of loanable funds.
d. an outward shift in the demand schedule for loanable funds.

A ____ dollar tends to exert inflationary pressure in the U.S.
a. stable
b. strong
c. weak
d. both A and B

A loose money policy tends to ____ economic growth and ____ the inflation rate.
a. stimulate; place upward pressure on
b. dampen; place downward pressure on
c. stimulate; place downward pressure on
d. dampen; place upward pressure on

If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds.
a. 
increase; surplus
b. 
increase; shortage
c. 
decrease; shortage
d. 
decrease; surplus

Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.
a. 
lower; lower
b. 
higher; lower
c. 
lower; higher
d. 
higher; higher

Money market securities generally have ____. Capital market securities are typically expected to have a ____.
a. 
less liquidity; lower annualized return
b. 
less liquidity; higher annualized return
c. 
more liquidity; higher annualized return
d. 
more liquidity; lower annualized return

A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of
a. 
7.0 percent.
b. 
10.8 percent.
c. 
20.0 percent.
d. 
none of the above

If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the
a. 
liquidity premium theory.
b. 
expectations theory.
c. 
segmented markets theory.
d. 
A and B

Securities are certificates that represent a claim on the provider of funds.
True
False

The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the supply schedule.
a. 
outward; no obvious change
b. 
inward; an inward shift
c. 
outward; an inward shift
d. 
inward; an outward shift

Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic growth, it could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates.
a. 
upward; upward
b. 
upward; downward
c. 
downward; downward
d. 
downward; upward

If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds.
True
False

____ concentrate on mortgage loans.
a. 
Finance companies
b. 
Savings institutions
c. 
Commercial banks
d. 
Credit unions

If interest rates are ____, ____ projects will have positive NPVs.
a. 
higher; more
b. 
lower; more
c. 
lower; no
d. 
none of the above

Common stock is an example of a(n)
a. 
debt security.
b. 
money market security.
c. 
equity security.
d. 
A and B

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the
a. 
pure expectations theory.
b. 
segmented markets theory.
c. 
theory of rational expectations.
d. 
liquidity premium theory.

The euro increased business between European countries and created a more competitive environment in Europe.
True
False

Which of the following distinguishes credit unions from commercial banks and savings institutions?
a. 
Savings institutions restrict their business to members who share a common bond
b. 
Credit unions are non-profit
c. 
Credit unions accept deposits but do not make loans
d. 
Credit unions make loans but do not accept deposits

In aggregate, ____ are the most dominant depository institution.
a. 
S&Ls
b. 
commercial banks
c. 
savings banks
d. 
credit unions

Common types of capital market securities include Treasury bills and commercial paper.
True
False

The ____ is not an indicator of economic growth.
a. producer price index
b. gross domestic product
c. national income
d. unemployment rate
e. All of the above are indicators of economic growth.

Which of the following is not an indicator of inflation?
a. wage rates
b. housing price indexes
c. oil prices
d. consumer confidence surveys

The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply.
a. decrease; decreasing
b. decrease; increasing
c. increase; decreasing
d. increase; increasing

The ____ indicators tend to occur before a business cycle.
a. leading 
b. lagging
c. coincident
d. none of the above

International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy. 
a. inflows; loose
b. inflows; tight
c. outflows; loose
d. outflows; tight
e. none of the above

 

Securities that offer ____ liquidity will offer a ____ yield to be preferred.
a. 
lower; higher
b. 
lower; lower
c. 
higher; higher
d. 
B and C

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates.
a. 
positively related to
b. 
inversely related to
c. 
unrelated to
d. 
none of the above

Securities are certificates that represent a claim on the issuer.
True
False

Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.
True
False

If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____.
a. 
increase; increase
b. 
increase; decrease
c. 
decrease; decrease
d. 
decrease; increase

Which of the following transactions would not be considered a secondary market transaction?
a. 
An individual investor purchases some existing shares of stock in IBM through his broker.
b. 
An institutional investor sells some Disney stock through its broker.
c. 
A firm that was privately held engages in an offering of stock to the public.
d. 
All of the above are secondary market transactions.

a firm that was privately held engages in an offering of stock

 

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. 
higher; higher
b. 
lower; higher
c. 
lower; lower
d. 
higher; lower

Common types of money market securities include negotiable certificates of deposit and Treasury bills.
True
False

Which of the following financial intermediaries commonly invests in stocks and bonds?
a. 
pension funds
b. 
insurance companies
c. 
mutual funds
d. 
all of the above

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates.
a. 
decrease; upward
b. 
decrease; downward
c. 
increase; downward
d. 
increase; upward

Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.
a. 
greater than
b. 
equal to
c. 
less than
d. 
A or B are both common

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?
a. 
15.08 percent
b. 
12.00 percent
c. 
11.41 percent
d. 
12.62 percent
e. 
3.00 percent

Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.
True
False

 

The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.
a. 
lower; greater
b. 
lower; lower
c. 
greater; greater
d. 
greater; lower

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the
a. 
liquidity premium theory.
b. 
segmented markets theory.
c. 
theory of rational expectations.
d. 
pure expectations theory.

Which of the following is not a characteristic affecting the yields on debt securities?
a. 
default risk
b. 
liquidity
c. 
tax status
d. 
term to maturity
e. 
All of the above affect yields on debt securities.

____ are long-term debt obligations issued by corporations and government agencies to support their operations.
a. 
Common stock
b. 
Derivative securities
c. 
Bonds
d. 
None of the above

The credit crisis in the 2008-2009 period was caused by weak economies in Asia.
True
False

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is ____ percent.
a. 
2.8
b. 
103
c. 
115
d. 
15.1

Without the participation of financial intermediaries in financial market transactions,
a. 
information and transaction costs would be lower.
b. 
information and transaction costs would be higher.
c. 
transaction costs would be higher but information costs would be unchanged.
d. 



If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.
a. 
have no effect on
b. 
decrease
c. 
increase
d. 
have an effect, which cannot be determined with above information, on

If financial markets are efficient, this implies that investors can ignore the various investment instruments available.
True
False

The term structure of interest rates defines the relationship
a. 
between default risk ratings and maturity.
b. 
between risk and maturity.
c. 
between risk and return.
d. 
between maturity and yield.

Which of the following is a money market security?
a. 
mortgage
b. 
commercial paper
c. 
municipal bond
d. 
Treasury note

Savings institutions are the most dominant financial institution.
True
False

The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.
a. 
positively; inversely
b. 
positively; positively
c. 
inversely; inversely
d. 
inversely; positively

According to the segmented markets theory, if most investors suddenly preferred to invest in short-term securities and most borrowers suddenly preferred to issue long-term securities there would be
a. 
upward pressure on the price of long-term securities.
b. 
upward pressure on the price of short-term securities.
c. 
downward pressure on the yield of long-term securities.
d. 
A and C

The forward rate is commonly used to represent the market's forecast of the future interest rate.
True
False

Which of the following is not a typical money market security?
a. 
Treasury bonds
b. 
Treasury bills
c. 
Negotiable certificates of deposit
d. 
Commercial paper

If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable funds, and a(n) ____ in the demand for loanable funds.
a. 
no change; decrease
b. 
increase; no change
c. 
no change; increase
d. 
decrease; no change

Equity securities should normally have a ____ expected return and ____ risk than money market securities.
a. 
higher; lower
b. 
lower; lower
c. 
higher; higher
d. 
lower; higher

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates.
a. 
positively related to
b. 
inversely related to
c. 
unrelated to
d. 
none of the above

Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to
a. 
remain flat.
b. 
become upward sloping.
c. 
become downward sloping.
d. 
none of the above

Which of the following is a capital market instrument?
a. 
a six-month CD
b. 
a three-month Treasury bill
c. 
an agreement for a bank to loan funds directly to a company for nine months
d. 
a ten-year bond

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if
a. 
most debt is financed by foreign investors.
b. 
the Treasury's debt level is small.
c. 
maturity markets are segmented.
d. 
A and B

The graphic comparison of maturities and annualized yields is known as the interest rate curve.
True
False

information costs would be higher but transaction costs would be unchanged.

According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.
a. 
upward; downward
b. 
upward; upward
c. 
downward; upward
d. 
downward; downward

Which of the following is most likely to be described as a depository institution?
a. 
finance companies
b. 
securities firms
c. 
pension funds
d. 
credit unions
e. 
insurance companies

If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.
a. 
long-term; downward
b. 
long-term; upward
c. 
short-term; downward
d. 
short-term; upward

Yield curves are always upward sloping.
True
False

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay
a. 
14 percent.
b. 
12.5 percent.
c. 
31.1 percent.
d. 
19 percent.

The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.
a. 
pure expectations
b. 
liquidity premium
c. 
preferred habitat
d. 
segmented markets

When a securities firm acts as a broker, it
a. 
makes a market in specific securities by adjusting its own inventory.
b. 
executes transactions between two parties.
c. 
purchases securities for its own account.
d. 
guarantees the issuer a specific price for newly issued securities.

If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.
True
False

According to expectations theory, the sudden expectation of lower interest rates in the future will cause a ____ supply of short-term funds provided by investors, and a ____ supply of long-term funds.
a. 
small; small
b. 
large; large
c. 
small; large
d. 
large; small

The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.
a. 
interest elastic; decrease
b. 
interest inelastic; decrease
c. 
interest inelastic; increase
d. 
interest elastic; increase

Which of the following is a valid representation of the Fisher effect?
a. 
i = E(INF) + iR
b. 
iR = E(INF) + i
c. 
E(INF) = i + iR
d. 
none of the above

If inflation and nominal interest rates move more closely together over time than they did in earlier periods, this would ____ the volatility of the real interest rate movements over time.
a. 
have an effect, which cannot be determined with above information, on
b. 
increase
c. 
have no effect on
d. 
decrease

If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate.
True
False

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the
a. 
liquidity premium theory.
b. 
pure expectations theory.
c. 
liquidity habitat theory.
d. 
segmented markets theory.

The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security's risk premium.
a. 
positively; negatively
b. 
negatively; positively
c. 
positively; positively
d. 
negatively; negatively

 

According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.
a. 
lower nominal interest rate
b. 
higher nominal interest rate
c. 
higher real interest rate
d. 
lower real interest rate

If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
a. 
perfect
b. 
in equilibrium
c. 
active
d. 
inefficient

If the real interest rate was negative for a period of time, then
a. 
actual inflation was greater than the nominal interest rate.
b. 
inflation is expected to exceed the nominal interest rate in the future.
c. 
inflation is expected to be less than the nominal interest rate in the future.
d. 
actual inflation was less than the nominal interest rate.

If all other characteristics are similar, ____ would have to offer ____.
a. 
taxable securities; a higher before-tax yield than tax-exempt securities
b. 
tax-exempt securities; a higher after-tax yield than taxable securities
c. 
tax-exempt securities; a higher before-tax yield than taxable securities
d. 
taxable securities; a higher after-tax yield than tax-exempt securities

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.
a. 
a slight decrease
b. 
no changes
c. 
a large increase
d. 
a slight increase

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will ____ the supply of T-bills in the market and places ____ pressure on the yield of T-bills.
a. 
increase; upward
b. 
decrease; downward
c. 
increase; downward
d. 
decrease; upward

Which of the following statements is incorrect?
a. 
The Fed's monetary policy is intended to control the economic conditions in the U.S.
b. 
The Fed's monetary policy affects the supply of loanable funds, which affects interest rates.
c. 
By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend.
d. 
All of the statements above are true.

The equilibrium interest rate should
a. 
fall when the aggregate supply funds exceeds aggregate demand for funds.
b. 
rise when the aggregate supply of funds exceeds aggregate demand for funds.
c. 
fall when the aggregate demand for funds exceeds aggregate supply of funds.
d. 
rise when aggregate demand for funds equals aggregate supply of funds.
e. 
B and C

The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.
True
False

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. 
The Treasury bill discount is _______ percent.

Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins?

An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places _______ pressure on the yields of low-yield securities and _______ on the yields of high-yield securities.

Which of the following statements is incorrect with respect to the federal funds rate?

Bullock Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a price of $4,950,000 at the end of a 30-day period. The repo rate is _______ percent.

At a given point in time, the yield on a T-bill is slightly higher than the yield on commercial paper with the same maturity, because commercial paper has higher:

If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a _______ demand for money market securities, which placed _______ pressure on the yields of money market securities.

 

 

What is the basis of the relationship between the Fisher effect and the loanable funds theory?
a. 
the saver's desire to maintain the existing real rate of interest
b. 
the borrower's desire to achieve a positive real rate of interest
c. 
the saver's desire to achieve a negative real rate of interest
d. 
B and C

Which of the following is not true regarding foreign interest rates?
a. 
The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.
b. 
The expectations of a strong dollar should cause a flow of funds to the U.S.
c. 
An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries.
d. 
All of the above are true regarding foreign interest rates.

Equity securities
a. 
pay interest on a periodic basis.
b. 
represent ownership in the issuer.
c. 
have a maturity.
d. 
repay the principal amount at maturity.

Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small businesses.
True
False

If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.
a. 
efficient
b. 
imperfect
c. 
inefficient
d. 
perfect

Some financial institutions such as commercial banks are required by law to invest only in
a. 
investment-grade bonds.
b. 
corporate stock.
c. 
Treasury securities.
d. 
junk bonds.

If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve.
True
False

If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the
a. 
segmented markets theory.
b. 
liquidity premium theory.
c. 
real interest rate theory.
d. 
expectations theory.

Which of the following will probably not result in an increase in the business demand for loanable funds?
a. 
an increase in positive net present value (NPV) projects
b. 
a reduction in interest rates on business loans
c. 
a recession
d. 
none of the above

The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds.
a. 
Fisher effect
b. 
loanable funds theory
c. 
real interest rate
d. 
none of the above

 

Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to become ________ _________

When two securities have the same expected cash flows, the value of ______-_______ security will be higher then the value of the _____-____security.

The federal government demand for loanable funds is ________. If the budget deficit was expected to increase, the federal government demand for loanable funds would

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the

Default risk is likely to be highest for

If the federal government needs to borrow additional funds, this borrowing reflects a(n) ________in the supply of loanable funds, and a(n) _______in the demand for loanable funds.

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place _________pressure on the demand for long-term funds issued by borrowers and the yield curve will be __________sloping.

Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the ____ _______ of interest rates.

If economic expansion is expected to increase, then demand for loanable funds should ________and interest rates should __________

 

In general, securities with _______ characteristics will offer _______ yields.

Default risk is likely to be highest for:

Some financial institutions, such as commercial banks, are required by law to invest only in:

If a security can easily be converted to cash without a loss in value, it:

Securities that offer _______ liquidity will offer a _______ yield to be preferred

If all other characteristics are similar, _______ would have to offer _______.

Assume an investor's tax rate is 25 percent. The before tax yield on a security is 12 percent. What is the after tax yield?

An investor's tax rate is 30 percent. What must the before tax yield on a security be to have an after tax yield of 11 percent?

A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of _______ percent.

The supply of loanable funds in the U.S. is partly determined by the monetary policy implemented by the Federal Reserve System.
True
False

An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
a. 
longer; lower
b. 
longer; higher
c. 
shorter; lower
d. 
shorter; higher
e. 
B and C

The main provider(s) of funds to the U.S. Treasury is (are)
a. 
foreign nonfinancial sectors.
b. 
households and businesses.
c. 
foreign financial institutions.
d. 
the Federal Reserve System.

Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
True
False

If inflation turns out to be lower than expected
a. 
savers and borrowers are equally affected.
b. 
savers are adversely affected but borrowers benefit.
c. 
savers benefit.
d. 
borrowers benefit while savers are not affected.

The real interest rate can be forecasted by subtracting the ____ from the ____ for that period.
a. 
nominal interest rate; expected inflation rate
b. 
prime rate; nominal interest rate
c. 
prime rate; expected inflation rate
d. 
expected inflation rate; nominal interest rate

____ securities have a maturity of one year or less; ____ securities are generally more liquid.
a. 
Money market; capital market
b. 
Capital market; capital market
c. 
Capital market; money market
d. 
Money market; money market

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?
a. 
an increase in inflation
b. 
pessimistic economic projections that cause businesses to reduce expansion plans
c. 
a decrease in savings by foreign savers
d. 
a decrease in savings by U.S. households

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is
a. 
7.6 percent.
b. 
8.0 percent.
c. 
3.0 percent.
d. 
7.0 percent.

The most common investors in Federal funds are
a. 
households.
b. 
depository institutions.
c. 
government agencies.
d. 
firms.

If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected).
a. 
downward; downward
b. 
downward; upward
c. 
upward; downward
d. 
upward; upward

Businesses demand loanable funds to
a. 
finance installment debt.
b. 
subsidize other companies.
c. 
invest in fixed and short-term assets.
d. 
none of the above

 

Holding other factors, such as risk constant, the relation¬ship between the maturity and annualized yield of securities is called the _______ structure of interest rates.

The term structure of interest rates defines the relationship between _______ and _______.

If shorter term securities have higher annualized yields than longer term securities, the yield curve:

Assume that annualized yields of short term and long term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to:

If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause:

Within the category of capital market securities, municipal bonds have the _______ before-tax yield, and their after-tax yield is typically _______ of Treasury bonds from the perspective of investors in high tax brackets.

The yield offered on a debt security is _______ related to the prevailing risk-free rate and _______ related to the security's risk premium

The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the:

Assume investors are indifferent among security maturities. Today, the annualized two year interest rate is 12 percent, and the one year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?

Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to:

According to pure expectations theory, if interest rates are expected to decrease, there will be _______ pressure on the demand for short-term funds by borrowers and _______ pressure on the demand for long-term funds issued by borrowers.

The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if:

According to the pure expectations theory of the term structure of interest rates, the _______ the difference between the implied one year forward rate and today's one year interest rate, the _______ is the expected change in the one year interest rate.

Assume that today, the annualized two year interest rate is 12 percent, and the one year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one year forward rate two years from now?

Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a _______ slope (assuming no other changes).

According to the liquidity premium theory, the expected yield on a two year security will _______ the expected yield from consecutive investments in one year securities.

Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is _______ percent.

If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate _______ the market's expectation of the future interest rate.

If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting _______ in interest rates.

The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the _______ theory.

According to the segmented markets theory, if most investors suddenly preferred to invest in short term securities and most borrowers suddenly preferred to issue long term securities, there would be:

____ credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness.

21. To decrease money supply, the Fed could ____ the reserve requirement ratio.

22. The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply.

The ____ is directly responsible for controlling money supply growth.

Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in a maximum change in the money supply of

The form of money consisting of currency held by the public and checkable deposits at depository institutions is called

The Monetary Control Act of 1980 subjected

The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial banks.

The voting members of the Federal Open Market Committee consist of the Board of Governors plus the

The Board of Governors is composed of

The ____ is directly responsible for setting reserve requirements.

The ____ is directly responsible for conducting monetary policy.

Based on a 2003 policy, the primary credit lending rate is set

A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds.

The ____ consists of seven members, each of whom is appointed by the President of the United States.

Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____.

The federal funds rate is the rate at which the Fed lends money directly to member banks.

When the Fed purchases securities, the total funds of commercial banks _____ by the market value of securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ___ of money supply growth.

The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will ____ the federal funds rate to a new targeted level set by the FOMC.

Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the

____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness.

Most of the Fed's income is transferred to the U.S. Department of Justice.

All commercial banks are required to be members of the Fed.

Each member of the Board of Governors is appointed by the president of the United States and serves a nonrenewable 14-year term.

Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.

When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking system. Consequently, the federal funds rate decreases along with other interest rates.

Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.

To increase the money supply, the Trading Desk would be instructed to sell government securities.

To increase the money supply, the Fed may increase the reserve requirement ratio.

Which of the following is not true with respect to the Federal Reserve Act of 1913?

The advisory committee making recommendations to the Fed about economic and banking related issues is the

The advisory committee offering views on issues related to, among others, credit unions is the

If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.

When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields.

When the Fed sells securities, the total funds of commercial banks ___ by the market value of securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth.

____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items.

The ____ consists of seven members, each of whom is appointed by the president of the United States.

 

The Fed can _______ the level of spending as a means of stimulating the economy by _______ the money supply. 
A) increase; decreasing
B) decrease; increasing
C) decrease; decreasing
D) increase; increasing

A credit crunch can occur in periods:
A) when a stimulative monetary policy is implemented.
B) when a restrictive monetary policy is implemented.
C) when both of these occur.
D) when neither of these occur.

In general, there is a(n):
A) positive relationship between unemployment and inflation.
B) inverse relationship between unemployment and inflation.
C) inverse relationship between GNP and inflation.
D) positive relationship between GNP and unemployment.

A _______ money policy can reduce unemployment, and a _______ money policy can reduce inflation.
A) tight; loose
B) loose; tight
C) tight; tight
D) loose; loose

A loose money policy tends to _______ economic growth and place _______ pressure on the inflation rate.
A) stimulate; downward
B) stimulate; upward
C) dampen; upward
D) dampen; downward

_______ serves as the most direct indicator of economic growth in the United States.
A) GDP
B) National income
C) The unemployment rate
D) The industrial production index

Which of the following is not an indicator of inflation?
A) housing price indexes
B) wage rates
C) oil prices
D) consumer confidence surveys

The M2 money supply is a _______ economic indicator.
A) leading
B) lagging
C) coincident
D) none of these

Manufacturing and trade sales are a _______ economic indicator.
A) leading
B) lagging
C) coincident
D) none of these

The average prime rate is a _______ economic indicator.
A) leading
B) lagging
C) coincident
D) none of these

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the _______ theory.

According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be _______ pressure on the supply of short-term funds provided by investors and _______ pressure on the yield of long-term securities.

If a yield curve is upward sloping, the investment strategy of buying long term securities, then selling them after a short period (say, one year) is called:

Other things equal, the yield required on A-rated bonds should be _______ the yield required on B-rated bonds whose other characteristics are exactly the same

The price at which non convertible bonds can be issued should be _______ the price at which convertible bonds can be issued (assuming that all other characteristics of the two types of bonds are exactly the same).

In some time periods, there is evidence that corporations initially financed long term projects with short term funds. They planned to borrow long term funds once inter¬est rates were lower. This specifically supports the _______ theory for explaining the term structure of interest rates.

According to the expectations theory, the sudden expectation of lower interest rates in the future will cause a _______ supply of short term funds provided by investors, and a _______ supply of long term funds.

The yield curve of Canada is:

If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short term or long term securities, this would support the argument made by the _______ theory.

If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the _______ theory.

You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay _______ percent.

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is _______ percent.

The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is _______ percent.

According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place _______ pressure on the demand for long-term funds issued by borrowers and the yield curve will be _______ sloping.

Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will _______ the supply of T-bills in the market and places _______ pressure on the yield of T-bills.

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer _______ percent on its commercial paper.

The yield curve for corporate bonds:

 

Which of the following is not a major component of the Federal Reserve System?

Of the nine directors of each Fed district bank, ____ are elected by member banks in that district.

Which of the following is not an activity of Fed district banks?

All ____ are required to be members of the Federal Reserve System.

The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.

Which of the following is currently a main role of the Federal Reserve's Board of Governors?

Members of the Board of Governors serve 14-year nonrenewable terms.

With regard to monetary policy, which of the following is under direct control of the Federal Reserve's Board of Governors?

The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.

Which of the following is an action that the Fed uses to increase or decrease the money supply?

The Policy Directive is provided by Board of Governors to the FOMC.

Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed.

The purchase of government securities by someone other than the Fed results in

As the supply of funds in the banking system ____, the federal funds rate ____.

Repurchase agreements are purchased by the Fed to

When open market operations are used to ____ bank funds, the yield on debt instruments____.

____ open market operations offset the impact of other conditions that affect the level of funds.

The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign currency.

The primary credit lending rate changes in accordance with changes in the federal funds rate.

 

The time lag between when an economic problem arises and when it is reported in economic statistics is the _______ lag.
A) recognition
B) implementation
C) impact
D) open-market

The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the _______ lag.
A) recognition
B) implementation
C) impact
D) open-market

The time between when the Fed adjusts the money supply and when interest rates change reflects the _______ lag.
A) recognition
B) implementation
C) impact
D) open-market

Which of the following best describes the relationship between the Fed and the Administration?
A) The Fed must receive approval by the Administration before conducting monetary policy.
B) The Fed must implement a monetary policy specifically to the support the Administration's policy.
C) The Administration must receive approval from the Fed before implementing fiscal policy.
D) None of these statements describe the relationship between the Fed and the Administration.

When the Fed attempts to counter rising rates (caused by an increase in the budget deficit) by loosening the money supply, this is known as:
A) monetizing the debt.
B) the crowding-out effect.
C) both monetizing the debt and the crowding-out effect.
D) neither of these,

International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign _______ of funds, the Fed may not feel compelled to use a _______ monetary policy.
A) inflows; loose
B) inflows; tight
C) outflows; loose
D) outflows; tight
E) none of these

Which of the following is NOT a disadvantage of inflation targeting?
A) If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility.
B) The Fed's complete focus on inflation could result in a much higher unemployment level.
C) The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth.
D) All of these are disadvantages of inflation targeting.

Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is _______ affected when the Fed _______ interest rates.
A) unfavorably; decreases
B) unfavorably; increases
C) favorably; increases
D) none of these

 

2. The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply.
a.
increase; decreasing
b.
decrease; increasing
c.
decrease; decreasing
d.
increase; increasing

3. A credit crunch occurs when:
a.
interest rates decline.
b.
interest rates rise.
c.
creditors restrict the amount of loans they are willing to provide.
d.
the economy is strong.

7. In general, there is:
a.
a positive relationship between unemployment and inflation.
b.
an inverse relationship between unemployment and inflation.
c.
an inverse relationship between GNP and inflation.
d.
a positive relationship between GNP and unemployment.

8. A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.
a.
tight; loose
b.
loose; tight
c.
tight; tight
d.
loose; loose

9. A loose money policy tends to ____ economic growth and ____ the inflation rate.
a.
stimulate; place downward pressure on
b.
stimulate; place upward pressure on
c.
dampen; place upward pressure on
d.
dampen; place downward pressure on

11. ____ serves as the most direct indicator of economic growth in the United States.
a.
Gross domestic product (GDP)
b.
National income
c.
The unemployment rate
d.
The industrial production index

12. Which of the following is not an indicator of inflation?
a.
housing price indexes
b.
wage rates
c.
oil prices
d.
consumer confidence surveys

Costner National, a commercial bank, operates primarily in the money market. Which of the following is not a way in which Costner is affected by the Fed's monetary policy?
A) a change in interest rates that affects the risk-free interest rate
B) a change in interest rates that affects the secondary market values of existing money market securities
C) a change in interest rates that affects the yields on newly issued money market securities
D) a change in economic growth that affects the risk premium on money market securities
E) All of these are correct.

The _______ lag represents the time from when an economic problem exists until it is recognized.
A) recognition
B) adjustment
C) implementation
D) none of these

A _______ dollar tends to exert inflationary pressure in the U.S.
A) stable
B) strong
C) weak
D) strong and stable

According to the theory of rational expectations, _______ inflationary expectations encourage businesses and households to _______ their demand for loanable funds in order to borrow and make planned expenditures increase.
A) higher; reduce
B) higher; increase
C) lower; reduce
D) lower; increase

Historical evidence has shown that, when the Fed significantly increases the money supply, U.S. inflation tends to _______ shortly thereafter which in turn places _______ pressure on U.S. interest rates.
A) increase; upward
B) increase; downward
C) decrease; downward
D) decrease; upward

Under a passive monetary policy,:
A) the economy cannot be expected to correct itself without participation by the Fed.
B) interest rates should ultimately increase in a weak economy because the demand for loanable funds should decline as economic growth weakens. 
C) the level of business investment should ultimately increase, which should lead to a stronger economy and more jobs. However, the adjustment could take as long as years.
D) the Fed would purchase Treasury securities in order to increase the supply of loanable funds in a weak economy.

Which of the following is true?
A) Federal deficits require that the Fed purchase government securities.
B) Federal deficits will always result in an increase in the money supply.
C) The Federal Reserve monetizes debt by selling securities which ultimately increases the money supply.
D) An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases.
E) None of these statements are true.

Inflation is commonly the result of a:
A) large budget deficit.
B) high level of interest rates.
C) high level of unemployment.
D) high level of aggregate demand.

According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, what is the ultimate effect on interest rates?
A) There will be a reduction in interest rates.
B) There will be an increase in interest rates.
C) There will be no effect on the interest rates.
D) The impact on interest rates cannot be determined.

The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are:
A) low and steady.
B) low, but rising.
C) very high, but declining slightly.
D) very high and rising.

Global crowding out is described in the text to mean the impact of:
A) excessive U.S. population growth on interest rates.
B) excessive global population growth on interest rates.
C) an excessive budget deficit in one country on interest rates of another country.
D) an excessive budget deficit in one country on exchange rates.

If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects:
A) the crowding-out effect.
B) dynamic open market operations.
C) defensive open market operations.
D) monetizing the debt.

When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., there will be:
A) an outward shift in the supply schedule of loanable funds.
B) an inward shift in the supply schedule of loanable funds.
C) no shift in the supply schedule of loanable funds.
D) an inward shift in the demand schedule for loanable funds.

When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be:
A) an outward shift in the supply schedule of loanable funds.
B) an inward shift in the supply schedule of loanable funds.
C) no shift in the supply schedule of loanable funds.
D) an outward shift in the demand schedule for loanable funds.

 

13. The ____ indicators tend to occur before a business cycle.
a.
leading
b.
lagging
c.
coincident
d.
none of the above

14. The ____ indicators tend to occur after a business cycle.
a.
leading
b.
lagging
c.
coincident
d.
none of the above

15. The ____ indicators tend to occur before a business cycle.
a.
leading
b.
lagging
c.
coincident
d.
none of the above

16. The time lag between when an economic problem arises and when it is reported in economic statistics is the
a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.

17. The time between when an economic problem is realized and when the Fed tries to correct it with its policies is the
a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.

18. The time between when the Fed adjusts the money supply and when interest rates change reflects the
a.
recognition lag.
b.
implementation lag.
c.
impact lag.
d.
open-market lag.

20. Which of the following best describes the relationship between the Fed and the Administration?
a.
The Fed must receive approval by the Administration before conducting monetary policy.
b.
The Fed must implement a monetary policy specifically to the support the Administration's policy.
c.
The Administration must receive approval from the Fed before implementing fiscal policy.
d.
A and C
e.
none of the above

31. Inflation is commonly the result of a
a.
large budget deficit.
b.
high level of interest rates.
c.
high level of unemployment.
d.
high level of aggregate demand.

32. According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely
a.
a reduction in interest rates.
b.
an increase in interest rates.
c.
no effect on the interest rates.
d.
the impact on interest rates cannot be determined.

33. The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are
a.
low and steady.
b.
low, but rising.
c.
very high, but declining slightly.
d.
very high and rising.

34. Global crowding out is described in the text to mean the impact of
a.
excessive U.S. population growth on interest rates.
b.
excessive global population growth on interest rates.
c.
an excessive budget deficit in one country on interest rates of another country.
d.
an excessive budget deficit in one country on exchange rates.

35. If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects
a.
the crowding-out effect.
b.
dynamic open market operations.
c.
defensive open market operations.
d.
monetizing the debt.

36. When the Fed uses open market operations by purchasing Treasury securities from various financial institutions in the U.S., there will be
a.
an outward shift in the supply schedule of loanable funds.
b.
an inward shift in the supply schedule of loanable funds.
c.
no shift in the supply schedule of loanable funds.
d.
an inward shift in the demand schedule for loanable funds.

37. When the Fed uses open market operations by selling some of its Treasury securities to investors in the U.S., there will be
a.
an outward shift in the supply schedule of loanable funds.
b.
an inward shift in the supply schedule of loanable funds.
c.
no shift in the supply schedule of loanable funds.
d.
an outward shift in the demand schedule for loanable funds

38. Which of the following is not a disadvantage of inflation targeting?
a.
If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility.
b.
The Fed's complete focus on inflation could result in a much higher unemployment level.
c.
The Fed's complete focus on inflation could result in much higher interest rates, which would discourage economic growth.
d.
All of the above are disadvantages of inflation targeting.

39. Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed ____ interest rates.
a.
unfavorably; decreases
b.
unfavorably; increases
c.
favorably; increases
d.
Answer A and C are correct.

52. A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment.
a.
increase; decrease
b.
decrease; decrease
c.
increase; increase
d.
decrease; increase

53. Which of the following is probably not a goal the Fed is trying to achieve consistently?
a.
low inflation
b.
high interest rates
c.
steady GNP growth
d.
low unemployment

54. The ____ is not an indicator of economic growth.
a.
producer price index
b.
gross domestic product
c.
national income
d.
unemployment rate
e.
All of the above are indicators of economic growth.

55. Which of the following is not true with respect to inflation targeting?
a.
The Fed could lose credibility is the inflation rate deviates substantially from the Fed's target inflation rate.
b.
A complete focus on inflation could result in a much higher unemployment rate.
c.
Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run.
d.
If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.

21. A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates.
a.
upward; upward
b.
upward; downward
c.
downward; downward
d.
downward; upward

23. International flows of funds can affect the Fed's monetary policy. For example, if there is downward pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy.
a.
inflows; loose
b.
inflows; tight
c.
outflows; loose
d.
outflows; tight
e.
none of the above

24. Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed:
a.
monetizes the debt.
b.
maintains a stable money supply.
c.
uses a tight-money policy.
d.
uses a loose-money policy.

25. The ____ lag represents the time from when an economic problem exists until it is recognized.
a.
recognition
b.
adjustment
c.
implementation
d.
none of the above

26. A ____ dollar tends to exert inflationary pressure in the U.S.
a.
stable
b.
strong
c.
weak
d.
both A and B

27. According to the theory of rational expectations, ____ inflationary expectations encourage businesses and households to ____ their demand for loanable funds in order to borrow and make planned expenditures increase.
a.
higher; reduce
b.
higher; increase
c.
lower; reduce
d.
lower; increase

28. Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.
a.
increase; upward
b.
increase; downward
c.
decrease; downward
d.
decrease; upward

29. If the Fed uses a passive monetary policy during weak economic conditions,
a.
it increases money supply substantially.
b.
it reduces money supply substantially.
c.
it allows the economy to fix itself.
d.
it focuses on monetizing the debt.

30. Which of the following is true?
a.
Federal deficits require that the Fed purchase government securities.
b.
Federal deficits will always result in an increase in money supply.
c.
The Federal Reserve monetizes debt by selling securities which ultimately increases money supply.
d.
An agreement between the Fed and the Treasury exists whereby the Fed is directly responsible for monetizing the debt whenever the deficit increases.
e.
None of the above.

 

56. A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions.
a.
leading
b.
coincident
c.
lagging
d.
none of the above

57. A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy.
a.
U.S. exports; U.S. imports; weaken
b.
U.S. exports; U.S. imports; stimulate
c.
U.S. imports; U.S. exports; stimulate
d.
none of the above

58. The interest rate that the Fed targets for its monetary policy is the:
a.
commercial paper rate.
b.
federal funds rate.
c.
Treasury bond coupon rate.
d.
1-year certificate of deposit rate.

59. When the Fed purchases Treasury securities, the account balances of the investors who sell their securities to the Fed _________, and there are _________ in the account balances of other financial institutions.
a.
increase; offsetting decreases
b.
increase; no offsetting decreases
c.
decrease; offsetting increases
d.
decrease; no offsetting increases

60. The Fed's monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted:
a.
discount rate.
b.
required reserve requirement.
c.
federal funds rate.
d.
prime rate.

61. If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________. 
a.
7 percent; 10 percent
b.
4 percent; 6 percent
c.
7 percent; 9 percent
d.
1 percent; 3 percent

62. In the "operation twist" strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities. 
a.
long-term; short-term
b.
short-term; long-term
c.
short-term; long-term
d.
long-term; short-term

63. The intent of the Fed's operation twist strategy in 2011 and 2012 was to:.
a.
increase long-term interest rates. 
b.
require corporations to issue more commercial paper. 
c.
require bond rating agencies to impose higher standards on their ratings. 
d.
reduce long-term interest rates.

64. Which of the following is not a reason that a stimulative monetary policy may be ineffective?
a.
The effects of a stimulative policy may be disrupted by expectations of inflation.
b.
Retirees who rely on interest income may restrict their spending
c.
Lending institutions may increase their standards for borrowers, so some potential borrowers may not qualify for loans.
d.
Higher interest rates encourage individuals to increase their savings

66. Which of the following was not true of the eurozone during the Greek crisis?
a.
Fear of a financial crisis throughout Europe discouraged investors and firms from moving funds into Europe.
b.
By using a more stimulative monetary policy than it desired, the European Central Bank aroused concerns about potential inflation in the eurozone.
c.
There was concern that the austerity conditions could weaken the country's economy further.
d.
Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.

 

At any given time, the yield on commercial paper is __ than the yield on a T-Bill with the same maturity.

__ is a short-term debt instrument only used by well-known creditworthy firms and is normally issued to provide or finance a firm's investment in inventory and accounts receivable.

When a bank guarantees a future payment to a firm, the financial instrument used is called a __.

The first time issuance of shares by a specific firm to the public is referred to as an __.

__ are employed by brokerage firms and execute orders for clients on the floor of the NYSE.

Firms listed as "pink sheets" on the OTC market __.

The __ is a value-weighted average of stock prices of 30 large U.S. firms.

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is __ at its prevailing price.

Shareholders can most easily measure a firm's performance by monitoring changes in its __ over time.

An example of shareholder activism is __.

__ are not barriers to corporate control to eliminate agency problems.

American Depository Receipts (ADRs) are similar to __.

__ sell shares to investors and use to proceeds to invest in portfolios of international stocks created and managed by portfolio managers.

Which of the following is not true with respect to venture capital funds?

Which of the following is not a form of shareholder activism?

When a firm goes public and issues stock in the primary market, __.

With a __ order, an investor specifies a purchase price that is above the current market price.

When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a __.

__ are enforced to restrict the amount of credit extended to customers by stockholders.

__ facilitate stock transactions by taking positions in specific stocks.

Short selling a stock refers to __.

The size of the spread on stocks that have relatively little trading is __.

The Division of __ of the SEC regulates the fair and orderly disclosure trading by ensuring honest practices by various organizations that facilitate the trading of securities.

__ offer advice to customers on stocks to buy or sell.

A __ from a broker requires the investors to put up additional collateral.

A short seller __.

The SEC's ___ requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities.

Dark pools are ___.

A criticism of dark pools is that they ___.

Which of the following is true of money market instruments?

__ are the most active participants in the federal funds market.

Which money market transaction is most likely to represent a loan from one commercial bank to another?

Treasury bills __.

The yield on NCDs is __ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a __ period.

__ is placed either directly or with the help of commercial paper dealers.

The LIBOR scandal in 2012 involved

The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically __.

Investors in Treasury notes and bonds receive __ interest payments from the Treasury.

Interest earned from Treasury bonds is __.

__ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.

Bonds issued by the __ are backed by the federal government.

In general, variable-rate munis are desirable to investors who expect that the interest rates will __.

When would a firm most likely call bonds?

Assume that you purchased corporate bonds one year ago that have no protective connate. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely __ as a result.

__ bonds have the most active secondary market.

__ are not primary purchasers of bonds

Which of the following is not true regarding the call provision?

Which of the following is not an example of a muni?

A ___ has first claim on specified assets, while a ___ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.

For bonds issued under a __ argument, the underwriter guarantees the issuer that the bonds will be sold at a specific price.

A credit rating agency is paid by __.

Preferred shareholders __.

A __ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock.

When a corporation first decides to issue stock to the public, it engages in an __.

The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible __ prices is referred to as __.

The purpose of a lockup provision is to __.

Buy and sellers on the OTC market are completed by a __.

 

The insurance premium is __ related to the uncertainty about the size of the payments; the premium is also __ for group plans.

A __ life insurance company is owned by its policyholders; most life insurance companies are __.

___ insurance provides insurance for a policyholder only over a specified period.

___ is not a typical source of funds to life insurance companies.

Which of the following is not a common use of funds by life insurance companies?

The ratio of an insurance company's net profit to policyholders' surplus is called ___.

Life insurance companies can attempt to reduce their exposure to interest rate risk by ___.

The most common use of funds for property and casualty insurance companies is ___.

___ effectively relocates a portion of an insurance company's return and risk to other insurance companies.

___ usually require individuals to choose a primary care physician.

All regulation of insurance companies is performed by __.

The most common type of mortgages held by life insurance companies are __ mortgages.

Life insurance companies can reduce their exposure to ___ risk by diversifying the age distribution of their customer base.

A pension plan that provides benefits that are determined by the accumulated contributions and return on the funds investment performance is called a ___ plan.

Pension funds managed by life insurance companies are normally referred to as ___.

The asset composition of private pension portfolios is most heavily concentrated in __.

Pension funds managed by life insurance companies concentrate on __.

TO reduce interest rate risk, pension fund managers can __.

The ___ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern.

Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction?

If an investor buys a T bill with a 90 day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?

An investor buys a T bill with 180 days to maturity and $250,000 par value for $242,000. He plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $_______.

A newly issued T bill with a $10,000 par value sells for $9,750, and has a 90 day maturity. What is the discount?

Large corporations typically make _______ bids for T-bills so they can purchase larger amounts.

At any given time, the yield on commercial paper is _______ the yield on a T bill with the same maturity.

T bills and commercial paper are sold:

_______ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.

Commercial paper with a maturity exceeding _______ must be registered with the SEC.

An investor buys commercial paper with a 60 day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yield?

A firm plans to issue 30 day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing?

When firms sell commercial paper at a _______ price than they projected, their cost of raising funds is _______ than projected.

A) banker's acceptance
B) commercial paper
C) negotiable CDs
D) repurchase agreements
E) All of these are money market instruments.
Which of the following is not a money market instrument?

A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield?

The federal funds market allows depository institutions to borrow:

When a bank guarantees a future payment to a firm, the financial instrument used is called:

Which of the following instruments has a highly active secondary market?

Which of the following is true of money market instruments?

An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is _______ percent.

An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is _______ percent.

The rate at which depository institutions effectively lend or borrow funds from each other is the _______ rate.

_______ are the most active participants in the federal funds market

Eurodollar deposits

Which money market transaction is most likely to represent a loan from one commercial bank to another?

The rate on Eurodollar floating rate CDs is based on:

Treasury bills:

The yield on commercial paper is _______ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a _______ period.

__ life insurance specifies a period of time over which the policy will exist but also builds a cash value for policyholders over time.

Property and casualty insurance differs from life insurance in all of the following ways except __.

In a __ strategy investment decisions re made with the objective of generating cash flows that matched future outflow payments.

If a pension fund holds long-term, fixed-rate bonds, the market value of the portfolio will __ during periods when interest rates __.

The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising premiums when interest rates decline is called __.

The problems that some state government agencies are experiencing with underfunded pension plans can be attributed to __.

In periods when the risk-free interest rate __ substantially, the required rate of return by bondholders __ and most bond portfolios managed by pension funds perform __.

When long-term interest rates are very low, the future returns that a pension fund can earn on long-term low-risk bonds are __ if the bonds are held to maturity; if the bonds are not held to maturity, there is __ potential for their prices to increase.

 

Securities with maturities of one year or less are classified as

which of the following is NOT a money market security?

________ are sold at an auction at a discount from par value

jarrod king, a private investor, purchases a treasury bill with a $10,000 par value for $9645. One hundred days later jarrod sells the T-bill for 9719. What is jarrod's expected annualized yield from this transaction?

if an investor buys a t-bill with a 90-day maturity and $50,000 par value for $48,500 and hold it to maturity, what is the annualized yield?

an investor buys a t-bill with 180 days to maturity and $250,000 par value for $242,000. he plans to sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield based on this expectation?

assume investors require a 5% annualized return on a six-month t-bill with a par value of $10,000. The price investors would be willing to pay is $

 

Securities with maturities of one year or less are classified as:

Which of the following is not a money market security?

_______ are sold at an auction at a discount from par value.

 

The yield on NCDs is _______ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a _______ period.

Which of the following is sometimes issued in the primary market by non financial firms to borrow funds?

The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be:

The effective yield of a foreign money market security is _______ when the foreign currency strengthens against the dollar.

The effective yield of a foreign money market security is _______ when the foreign currency weakens against the dollar.

Treasury bills are sold through _______ when initially issued.

At a given point in time, the actual price paid for a three-month Treasury bill is:

The minimum denomination of commercial paper is $_______.

Commercial paper is:

Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. 
If Bill Yates holds the Treasury bill to maturity, his annualized yield is _______ percent.
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