Financial Markets And Institutions 12th Edition By Jeff Madura TEST BANK

Chapter 01: Role of Financial Markets and Institutions 1. Financial market participants who provide funds are called a. deficit units. b. surplus units. c. primary units. d. secondary units.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/15/2016 6:38 AM DATE MODIFIED: 9/16/2016 1:14 AM 2. Which of the following is NOT an issuer of bonds? a. households b. corporations c. the U.S. Treasury d. government agencies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:15 AM DATE MODIFIED: 5/1/2018 11:55 AM 3. Behavioral finance a. applies concepts from sociology and anthropology to the behavior of market participants. b. studies the behavior of financial markets in response to changes in Federal Reserve policy. c. applies psychology to financial decision making. d. explains why markets are efficient.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:18 AM DATE MODIFIED: 9/16/2016 1:21 AM 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.02 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:21 AM DATE MODIFIED: 5/1/2018 11:56 AM 5. Funds are provided to the initial issuer of securities in the: a. secondary market b. primary market c. deficit market d. surplus market ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:24 AM DATE MODIFIED: 5/1/2018 12:26 PM 6. Which of the following is a capital market instrument? a. a six-month certificate of deposit b. a three-month Treasury bill Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions c. a ten-year bond d. an agreement for a bank to loan funds directly to a company for nine months ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 1:27 AM DATE MODIFIED: 9/16/2016 1:29 AM 7. Which of the following is a money market security? a. Treasury note b. municipal bond c. mortgage d. commercial paper ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 1:29 AM DATE MODIFIED: 9/16/2016 1:31 AM 8. The creditors in the federal funds market are: a. households b. depository institutions c. firms d. government agencies ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/16/2016 1:52 AM 5/1/2018 12:27 PM

9. Investors in equity securities may earn a return from a. coupon payments and the return of principal at the maturity date. b. coupon payments and a capital gain when they sell the securities. c. quarterly dividends (if paid) and a capital gain when they sell the securities. d. quarterly dividends (if paid) and the return of principal at the maturity date.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:56 AM DATE MODIFIED: 9/16/2016 2:59 AM 10. Money market securities generally have ____. a. relatively low liquidity, low expected return, and a high degree of credit risk b. relatively high liquidity, high expected return, and a high degree of credit risk c. relatively low liquidity, high expected return, and a low degree of credit risk d. relatively high liquidity, low expected return, and a low degree of credit risk ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:59 AM DATE MODIFIED: 5/1/2018 12:29 PM 11. If security prices fully reflect all available information, the markets for these securities are: a. efficient b. primary c. overvalued d. undervalued ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:11 AM DATE MODIFIED: 5/1/2018 12:30 PM 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 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:14 AM DATE MODIFIED: 9/16/2016 3:15 AM 13. If financial markets are efficient, this implies that all securities should earn the same return. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 3:17 AM DATE MODIFIED: 5/1/2018 12:31 PM 14. The Securities Act of 1933 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 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. imposed heavy penalties for insider trading. d. required complete disclosure of relevant financial information for securities traded in the secondary market. e. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:19 AM DATE MODIFIED: 5/1/2018 12:32 PM 15. The Securities and 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 these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:01 AM DATE MODIFIED: 5/1/2018 12:35 PM 16. Stock issued by a corporation is an example of a(n): a. debt security b. money market security c. equity security d. debt security AND money market security ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:06 AM DATE MODIFIED: 5/1/2018 12:38 PM 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 5:10 AM DATE MODIFIED: 9/19/2016 5:12 AM 18. Which of the following is NOT a typical function of securities firms? a. provide brokerage services b. provide underwriting services c. accept deposits that are insured by the federal government and use the funds to provide loans to corporations d. offer advice on mergers and other corporate restructurings ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:13 AM DATE MODIFIED: 5/1/2018 12:41 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 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.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 5:16 AM DATE MODIFIED: 9/19/2016 5:20 AM 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:47 AM DATE MODIFIED: 9/19/2016 6:50 AM 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:14 AM DATE MODIFIED: 9/19/2016 7:16 AM 22. Which of the following is a non-depository financial institution? a. savings bank b. commercial bank c. savings and loan association d. mutual fund ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:17 AM DATE MODIFIED: 5/1/2018 12:43 PM 23. Which of the following distinguishes credit unions from commercial banks and savings institutions? a. Credit unions are nonprofit. 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.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 7:19 AM DATE MODIFIED: 9/19/2016 7:26 AM 24. When a securities firm acts as a broker, it Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 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 securities transactions between two parties. d. purchases securities for its own account.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:30 AM DATE MODIFIED: 9/19/2016 7:35 AM 25. When a securities firm acts as a(n) ____, it makes a market in specific securities by maintaining an inventory of those securities. a. adviser b. dealer c. broker d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:36 AM DATE MODIFIED: 5/1/2018 12:44 PM 26. ____ obtain funds by issuing securities and then lend the funds to individuals and small businesses. a. Finance companies b. Securities firms c. Mutual funds d. Insurance companies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:40 AM DATE MODIFIED: 9/19/2016 7:43 AM 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:44 AM DATE MODIFIED: 9/19/2016 7:49 AM 28. ____ concentrate on mortgage loans. a. Finance companies b. Commercial banks c. Savings institutions d. Credit unions ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:50 AM DATE MODIFIED: 9/19/2016 7:53 AM 29. ____ securities have a maturity of one year or less; ____ securities generally have relatively high liquidity. a. Money market; capital market b. Money market; money market Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions c. Capital market; money market d. Capital market; capital market ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:54 AM DATE MODIFIED: 9/19/2016 7:56 AM 30. Which of the following are NOT major investors in stocks? a. commercial banks b. insurance companies c. mutual funds d. pension funds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:56 AM DATE MODIFIED: 5/1/2018 12:45 PM 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 these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/19/2016 8:00 AM 5/1/2018 12:46 PM

32. Securities represent a claim on the issuer. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:06 AM DATE MODIFIED: 9/19/2016 8:10 AM 33. Debt securities represent debt (borrowed funds) incurred by the issuer. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:11 AM DATE MODIFIED: 9/19/2016 8:16 AM 34. 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: a. secondary market b. primary market c. deficit market d. surplus market ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 8:16 AM DATE MODIFIED: 5/1/2018 12:47 PM 35. When security prices fully reflect all available information, the markets for these securities are said to be efficient. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:22 AM DATE MODIFIED: 9/20/2016 1:24 AM 36. If markets are perfect, securities buyers and sellers do not have full access to information and cannot always break down securities to the precise size they desire. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:24 AM DATE MODIFIED: 5/1/2018 12:48 PM 37. A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:26 AM DATE MODIFIED: 9/20/2016 1:30 AM 38. The adoption of the euro increased business between European countries and created a more competitive environment in Europe. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:30 AM DATE MODIFIED: 9/20/2016 1:32 AM 39. In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:32 AM DATE MODIFIED: 9/20/2016 1:35 AM 40. Securities represent a claim on the provider of funds. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:35 AM DATE MODIFIED: 9/20/2016 1:39 AM 41. Debt securities include commercial paper, Treasury bonds, and corporate bonds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:39 AM DATE MODIFIED: 9/20/2016 1:43 AM 42. Common types of capital market securities include Treasury bills and commercial paper. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:44 AM DATE MODIFIED: 9/20/2016 1:47 AM 43. Common types of money market securities include negotiable certificates of deposit and Treasury bills. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:48 AM DATE MODIFIED: 9/20/2016 1:50 AM 44. Money market securities are commonly issued to finance the purchase of assets such as buildings, equipment, or machinery. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:59 AM DATE MODIFIED: 9/20/2016 2:04 AM 45. The total asset value of savings institutions is larger than that of commercial banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:05 AM DATE MODIFIED: 9/20/2016 2:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 46. Financial markets facilitating the flow of short-term debt securities 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 these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:07 AM DATE MODIFIED: 5/1/2018 12:58 PM 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 Apple through her 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 these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 2:20 AM DATE MODIFIED: 5/1/2018 12:59 PM 48. If investors speculate in the underlying asset rather than in 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:26 AM DATE MODIFIED: 9/20/2016 2:29 AM 49. ____ maintain a larger amount of assets in aggregate than the other types of non-depository institutions. a. Finance companies b. Mutual funds c. Life insurance companies d. Securities firms ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:31 AM DATE MODIFIED: 5/1/2018 1:02 PM 50. An asymmetric information problem arises when one party to a transaction has information that is not available to the other party, as when a corporation fails to tell investors the full extent of its losses. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:37 AM DATE MODIFIED: 9/20/2016 2:39 AM 51. Bonds issued by corporations have a ____ expected return and ____ risk than Treasury bonds. a. lower; lower Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. lower; higher c. higher; lower d. higher; higher ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 2:39 AM DATE MODIFIED: 9/20/2016 2:41 AM 52. Systemic risk is the risk that a large decline in one stock’s price could cause investors to sell their stock in other companies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:41 AM DATE MODIFIED: 9/20/2016 2:43 AM 53. The Sarbanes-Oxley Act requires firms to provide complete and accurate financial information and imposes penalties on key executives of the firm if financial fraud is detected. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DATE CREATED: DATE MODIFIED:

9/20/2016 2:44 AM 9/20/2016 2:46 AM

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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:46 AM DATE MODIFIED: 9/20/2016 2:49 AM 55. Commercial banks in aggregate have more assets than credit unions. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:50 AM DATE MODIFIED: 9/20/2016 2:52 AM 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:56 AM DATE MODIFIED: 5/1/2018 1:03 PM 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 3:00 AM DATE MODIFIED: 9/20/2016 3:02 AM 58. ____ involve(s) decisions such as how much funding to obtain and what types of securities to issue when financing operations. a. Corporate finance b. Investment management c. Financial markets and institutions d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 3:03 AM DATE MODIFIED: 5/1/2018 1:04 PM 59. There is a ____ relationship between the risk of a security and the expected return from investing in the security. a. positive Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. negative c. indeterminable d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 3:05 AM DATE MODIFIED: 5/1/2018 1:04 PM 60. 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. a. rise; lower b. fall; higher c. fall; lower d. rise; higher ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 3:07 AM DATE MODIFIED: 9/20/2016 3:09 AM 61. The credit crisis in the 2008–2009 period was caused by weak economies in Asia. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/20/2016 3:10 AM 9/20/2016 3:12 AM

62. ____ are classified as depository institutions. a. Credit unions b. Pension funds c. Finance companies d. Securities firms ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:23 AM DATE MODIFIED: 9/20/2016 4:26 AM 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. stocks d. Treasury bonds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:26 AM DATE MODIFIED: 5/1/2018 1:05 PM 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 ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:31 AM DATE MODIFIED: 9/20/2016 4:33 AM 65. Bonds commonly have maturities of one to three years. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:33 AM DATE MODIFIED: 9/20/2016 4:36 AM 66. Since markets are efficient, institutional and individual investors should ignore the various investment instruments available. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:36 AM DATE MODIFIED: 9/20/2016 4:38 AM 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.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:39 AM DATE MODIFIED: 9/20/2016 4:40 AM 68. When security prices fully reflect all available information, the markets for these securities are said to be perfect. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:41 AM DATE MODIFIED: 9/20/2016 4:42 AM 69. Securities that are not as safe and liquid as other securities are never considered for investment by anyone. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:43 AM DATE MODIFIED: 9/20/2016 4:45 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 70. By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:48 AM DATE MODIFIED: 9/20/2016 4:58 AM 71. When a depository institution offers a loan, it is acting as a creditor. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:00 AM DATE MODIFIED: 9/20/2016 5:03 AM 72. Savings institutions are a type of nondepository institution. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:03 AM DATE MODIFIED: 9/20/2016 5:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 73. Most mutual funds raise funds by issuing securities and then lend the funds to individuals and small businesses. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:07 AM DATE MODIFIED: 9/20/2016 5:13 AM 74. Institutional investors not only provide financial support to companies but also exercise some degree of governance over them. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 5:14 AM DATE MODIFIED: 9/20/2016 5:17 AM 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.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 5:17 AM DATE MODIFIED: 5/1/2018 1:07 PM 76. Which of the following are NOT considered money market securities? a. Treasury bills b. mortgage-backed securities c. negotiable certificates of deposit d. commercial paper ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:20 AM DATE MODIFIED: 5/1/2018 1:14 PM 77. ____ are not considered capital market securities. a. Derivative securities b. Treasury bonds c. Corporate bonds d. Equity securities e. Mortgages ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:23 AM DATE MODIFIED: 9/20/2016 5:26 AM 78. ____ are long-term debt obligations issued by corporations and government agencies to support their operations. a. Common stock Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. Derivative securities c. Bonds d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:28 AM DATE MODIFIED: 5/1/2018 1:15 PM 79. Which of the following is an example of an asymmetric information problem? a. A corporation releases toxic wastes into a river. b. A corporation relocates to Ireland to take advantage of lower corporate tax rates. c. A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock. d. A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 5:36 AM DATE MODIFIED: 9/20/2016 5:38 AM 80. If investors speculate in derivative contracts rather than in 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 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 5:39 AM DATE MODIFIED: 9/20/2016 5:41 AM 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 these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:48 AM DATE MODIFIED: 5/1/2018 1:16 PM 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 these are depository financial institutions.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:53 AM DATE MODIFIED: 5/1/2018 1:17 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and 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 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:57 AM DATE MODIFIED: 9/20/2016 6:02 AM 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.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 6:02 AM DATE MODIFIED: 9/20/2016 6:05 AM 85. Which of the following requires mortgage lenders to verify the income, job status, and credit history of mortgage applicants before extending a mortgage? a. Mortgage Lenders Reform Act b. Financial Reform Act of 2010 c. Securities Act of 1933 d. Sarbanes-Oxley Act Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 6:06 AM DATE MODIFIED: 9/20/2016 6:08 AM 86. Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities. a. liquid; many b. liquid; not many c. illiquid; not many d. illiquid; many ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 6:10 AM DATE MODIFIED: 9/20/2016 6:13 AM 87. Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with specific payments at regular intervals. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 6:14 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DATE MODIFIED:

9/20/2016 6:20 AM

88. ____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient. a. Psychological marketing b. Behavioral finance c. Inefficient markets theory d. Financial psychology ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 6:21 AM DATE MODIFIED: 9/20/2016 6:23 AM 89. International integration of securities markets allows a. governments and corporations to have easier access to funding from creditors and investors in other countries. b. investors and creditors to benefit from investment opportunities in other countries. c. one’s country’s financial problems to adversely affect other countries. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 7:12 AM DATE MODIFIED: 5/1/2018 1:18 PM 90. The foreign exchange market facilitates the exchange of: a. information between investors in different countries b. debt securities c. equity securities d. currencies ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 7:15 AM DATE MODIFIED: 5/1/2018 1:19 PM 91. Which of the following is NOT an example of the government’s recent increased role in financial markets? a. the Federal Reserve’s purchase of debt securities during the credit crisis b. regulations changing the way that the credit risk of bonds is assessed c. regulations setting maximum rates for Treasury securities d. increased monitoring of stock trading and prosecution of those who trade on inside information ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 7:23 AM DATE MODIFIED: 5/1/2018 1:20 PM 92. Most of the funds that insurance companies receive from premiums are invested in short-run money market securities. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 7:25 AM DATE MODIFIED: 9/20/2016 7:27 AM 93. The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as: Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions a. systemic risk b. leverage risk c. financial meltdown risk d. credit risk ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 7:28 AM DATE MODIFIED: 5/1/2018 1:21 PM 94. Systemic risk exists because a. there is no government regulation of financial markets. b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities. c. financial institutions borrow using long-term debt securities but lend their funds for short-term periods. d. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 7:30 AM DATE MODIFIED: 5/1/2018 1:21 PM

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Chapter 02: Determination of Interest Rates 1. The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods. a. higher b. lower c. zero d. negative ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:10 AM DATE MODIFIED: 12/6/2016 1:11 AM 2. 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 are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:12 AM DATE MODIFIED: 5/1/2018 1:48 PM 3. Businesses demand loanable funds to: a. finance installment debt. b. subsidize other companies. c. invest in fixed and short-term assets d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:14 AM DATE MODIFIED: 5/1/2018 1:49 PM 4. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 1:17 AM DATE MODIFIED: 12/6/2016 1:18 AM 5. If interest rates are ____, ____ projects will have positive NPVs. a. higher; more b. lower; more c. lower; no d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:19 AM DATE MODIFIED: 5/1/2018 1:50 PM 6. 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.

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Chapter 02: Determination of Interest Rates a. inversely; positively b. positively; inversely c. inversely; inversely d. positively; positively ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 1:20 AM DATE MODIFIED: 12/6/2016 1:21 AM 7. 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.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:21 AM DATE MODIFIED: 5/1/2018 1:51 PM 8. 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 1:46 AM DATE MODIFIED: 12/6/2016 1:48 AM 9. The federal government’s demand for loanable funds is ____. If the budget deficit is expected to increase, the federal government’s demand for loanable funds would ____. a. interest-elastic; decrease b. interest-elastic; increase c. interest-inelastic; increase d. interest-inelastic; decrease ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:48 AM DATE MODIFIED: 12/6/2016 1:50 AM 10. 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:50 AM DATE MODIFIED: 12/6/2016 3:31 AM 11. For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates will be ____ U.S. interest rates. a. positively related to b. inversely related to c. unrelated to d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:32 AM DATE MODIFIED: 5/1/2018 1:51 PM 12. 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 as interest-elastic as the demand for loanable funds. e. highly interest-elastic AND more interest-elastic than the demand for loanable funds.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:34 AM DATE MODIFIED: 5/1/2018 1:52 PM 13. The ____ sector is the largest supplier of loanable funds. a. household b. government c. business d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:36 AM DATE MODIFIED: 5/1/2018 1:53 PM 14. 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 are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:37 AM DATE MODIFIED: 5/1/2018 1:54 PM 15. 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.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:38 AM DATE MODIFIED: 12/6/2016 3:40 AM 16. The equilibrium interest rate should a. fall when the aggregate supply of funds exceeds the aggregate demand for funds.

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Chapter 02: Determination of Interest Rates b. rise when the aggregate supply of funds exceeds the aggregate demand for funds. c. fall when the aggregate demand for funds exceeds the aggregate supply of funds. d. rise when the aggregate demand for funds equals the aggregate supply of funds. e. rise when the aggregate supply of funds exceeds the aggregate demand for funds AND fall when the aggregate demand for funds exceeds the aggregate supply of funds.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 3:40 AM DATE MODIFIED: 5/1/2018 1:55 PM 17. 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 saving by foreign savers b. an increase in inflation c. pessimistic economic projections that cause businesses to reduce expansion plans d. a decrease in saving by U.S. households ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 3:41 AM DATE MODIFIED: 12/6/2016 3:43 AM 18. 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.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:43 AM DATE MODIFIED: 12/6/2016 3:49 AM 19. 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.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:55 AM DATE MODIFIED: 12/6/2016 3:57 AM 20. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:59 AM DATE MODIFIED: 12/6/2016 4:00 AM 21. If inflation turns out to be lower than expected a. savers benefit. b. borrowers benefit while savers are not affected.

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Chapter 02: Determination of Interest Rates c. savers and borrowers are equally affected. d. savers are adversely affected but borrowers benefit.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 4:00 AM DATE MODIFIED: 12/6/2016 4:02 AM 22. 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 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:07 AM DATE MODIFIED: 12/6/2016 4:12 AM 23. 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. the borrower's desire to achieve a positive real rate of interest AND the saver's desire to achieve a negative real rate of interest ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 4:12 AM DATE MODIFIED: 5/1/2018 1:56 PM 24. 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 4:15 AM DATE MODIFIED: 12/6/2016 4:16 AM 25. 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 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:16 AM DATE MODIFIED: 12/6/2016 4:31 AM 26. If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates 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 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:32 AM DATE MODIFIED: 12/6/2016 4:34 AM 27. 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 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:34 AM DATE MODIFIED: 12/6/2016 4:35 AM 28. When there are 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 4:36 AM DATE MODIFIED: 12/6/2016 4:38 AM 29. If the real interest rate is expected to become negative, then the purchasing power of 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 4:38 AM DATE MODIFIED: 12/6/2016 4:41 AM 30. 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 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:42 AM DATE MODIFIED: 12/6/2016 4:44 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates 31. The federal government’s spending policies are generally thought to be _________ interest rates, but municipal governments’ spending is somewhat ________ interest rates. a. independent of; sensitive to b. sensitive to; independent of c. inversely rated to; positively related to d. positively related to; inversely related to ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:44 AM DATE MODIFIED: 12/6/2016 4:46 AM 32. The federal government’s _________ determines the budget deficit and therefore determines the government’s demand for loanable funds. a. monetary policy b. fiscal policy c. congressional policy d. economic policy ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:46 AM DATE MODIFIED: 12/6/2016 4:48 AM 33. Canada and the United States are major trading partners. If Canada experiences a major increase in economic growth, that 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 ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 4:48 AM DATE MODIFIED: 12/6/2016 4:51 AM 34. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 4:52 AM DATE MODIFIED: 12/6/2016 4:54 AM 35. 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 U.S. interest rates will ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DATE CREATED: DATE MODIFIED:

12/6/2016 4:55 AM 12/6/2016 4:56 AM

36. 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 are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:56 AM DATE MODIFIED: 5/1/2018 1:58 PM 37. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:58 AM DATE MODIFIED: 12/6/2016 4:59 AM 38. 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 are correct.

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Chapter 02: Determination of Interest Rates ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:00 AM DATE MODIFIED: 5/1/2018 1:59 PM 39. 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 United States. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:01 AM DATE MODIFIED: 5/1/2018 2:00 PM 40. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 12/6/2016 5:03 AM 5/1/2018 2:06 PM

41. Which of the following statements is incorrect? a. The Fed's monetary policy is intended to influence U.S. economic conditions. 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 these are true.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:05 AM DATE MODIFIED: 5/1/2018 2:08 PM 42. 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 these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:07 AM DATE MODIFIED: 5/1/2018 2:09 PM 43. When forecasting future interest rates, if the net demand for funds (ND) is _____, there will be an ______ adjustment in interest rates. a. negative; upward b. negative; downward c. positive; upward Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates d. positive; downward ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:10 AM DATE MODIFIED: 12/6/2016 5:11 AM 44. 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 these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 5:13 AM DATE MODIFIED: 5/1/2018 2:16 PM 45. 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 these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates KEYWORDS: DATE CREATED: DATE MODIFIED:

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46. In computing the net present value of a proposed project, the required rate of return to implement the project will be ______ if interest rates are ________. a. lower; higher b. lower; lower c. higher; lower d. higher; unchanged ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:19 AM DATE MODIFIED: 12/6/2016 5:20 AM 47. 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 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:20 AM DATE MODIFIED: 12/6/2016 5:21 AM 48. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:21 AM DATE MODIFIED: 5/1/2018 2:18 PM 49. 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:26 AM DATE MODIFIED: 12/6/2016 5:28 AM 50. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DATE CREATED: DATE MODIFIED:

12/6/2016 5:28 AM 12/6/2016 5:30 AM

51. 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 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:30 AM DATE MODIFIED: 12/6/2016 5:31 AM 52. 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. an increase in both the supply of and the demand for loanable funds b. a decrease in both the supply of and the demand for loanable funds c. a decrease in the supply of loanable funds and an increase in the demand for loanable funds d. an increase in the supply of loanable funds and a decrease in the demand for loanable funds ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:32 AM DATE MODIFIED: 12/6/2016 5:33 AM 53. The crowding-out effect occurs when a. foreign investors crowd out U.S. investors in the market for loanable funds. b. the federal government’s demand for loanable funds due to a higher budget deficit crowds out the private demand in the market for loanable funds. c. institutional investors crowd out individual investors in the market for loanable funds. d. firms and municipal governments crowd out households in the market for loanable funds.

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Chapter 02: Determination of Interest Rates ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:33 AM DATE MODIFIED: 5/1/2018 2:19 PM 54. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:35 AM DATE MODIFIED: 12/6/2016 5:36 AM 55. The supply of loanable funds in the United States is partly determined by the monetary policy implemented by the Federal Reserve System. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:36 AM DATE MODIFIED: 12/6/2016 5:38 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates 56. At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:38 AM DATE MODIFIED: 12/6/2016 5:39 AM 57. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:40 AM DATE MODIFIED: 12/6/2016 5:41 AM 58. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DATE CREATED: DATE MODIFIED:

12/6/2016 5:41 AM 12/6/2016 5:42 AM

59. If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:42 AM DATE MODIFIED: 12/6/2016 5:44 AM 60. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:44 AM DATE MODIFIED: 12/6/2016 5:46 AM 61. In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:46 AM DATE MODIFIED: 12/6/2016 5:47 AM 62. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:47 AM DATE MODIFIED: 12/6/2016 5:48 AM 63. The relationship between interest rates and expected inflation is often referred to as the loanable funds theory. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:49 AM DATE MODIFIED: 12/6/2016 5:50 AM 64. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:50 AM DATE MODIFIED: 12/6/2016 5:52 AM 65. 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:52 AM DATE MODIFIED: 12/6/2016 5:53 AM 66. According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:53 AM DATE MODIFIED: 12/6/2016 5:54 AM 67. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:54 AM DATE MODIFIED: 12/6/2016 5:56 AM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 1. In general, securities with ____ characteristics will offer ____ yields. a. favorable; higher b. favorable; lower c. unfavorable; lower d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:05 AM DATE MODIFIED: 5/2/2018 5:56 AM 2. Credit (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 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:12 AM DATE MODIFIED: 5/2/2018 5:56 AM 3. Some financial institutions such as commercial banks typically invest only in: a. junk bonds b. corporate bonds rated B or higher c. Treasury securities d. investment-grade bonds ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:17 AM DATE MODIFIED: 5/2/2018 5:57 AM 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:50 AM DATE MODIFIED: 9/16/2016 2:51 AM 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 credit risk. d. is illiquid.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:27 AM DATE MODIFIED: 5/2/2018 5:58 AM 6. Interest rate movements across countries tend to be _________ correlated as a result of ____________ financial markets. a. positively; internationally integrated b. positively; fully segmented Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates c. negatively; partially segmented d. negatively; internationally integrated ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:30 AM DATE MODIFIED: 9/16/2016 2:32 AM 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:33 AM DATE MODIFIED: 9/16/2016 2:35 AM 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 these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Application 9/16/2016 2:37 AM 5/2/2018 5:59 AM

9. According to the segmented markets theory, if most investors suddenly preferred to invest in long-term securities and most borrowers suddenly preferred to issue short-term securities, there would be a. downward pressure on the price of long-term securities. b. downward pressure on the short-term yields. c. downward pressure on the yield of long-term securities. d. downward pressure on the price of long-term securities AND downward pressure on the yield of long-term securities.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False DATE CREATED: 9/16/2016 2:42 AM DATE MODIFIED: 5/2/2018 6:07 AM 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 these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 2:45 AM DATE MODIFIED: 5/2/2018 6:18 AM 11. Holding other factors such as risk constant, the relationship between the maturity and the annualized yield of debt 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 these are correct.

ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:54 AM DATE MODIFIED: 5/2/2018 6:19 AM 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:57 AM DATE MODIFIED: 9/16/2016 2:59 AM 13. 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).

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:00 AM DATE MODIFIED: 9/16/2016 3:02 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 14. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 3:03 AM DATE MODIFIED: 9/16/2016 3:05 AM 15. 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. long-term yields to rise AND short-term yields to decrease. e. None of these are correct.

ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 3:06 AM DATE MODIFIED: 5/2/2018 6:20 AM 16. 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 ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:10 AM DATE MODIFIED: 5/2/2018 6:23 AM 17. The yield offered on a debt security is related to the prevailing risk-free rate and to the security's risk premium. a. negatively; negatively b. positively; positively c. negatively; positively d. positively; negatively ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:12 AM DATE MODIFIED: 5/2/2018 6:24 AM

related

18. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE CREATED: DATE MODIFIED:

9/16/2016 3:14 AM 9/16/2016 3:15 AM

19. 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 3:17 AM DATE MODIFIED: 9/16/2016 3:18 AM 20. 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 these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:20 AM DATE MODIFIED: 5/2/2018 6:25 AM 21. 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates d. downward; upward ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:22 AM DATE MODIFIED: 9/16/2016 3:28 AM 22. 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. most debt is financed by foreign investors AND the Treasury's debt level is small.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:29 AM DATE MODIFIED: 5/2/2018 6:26 AM 23. 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. greater; greater AND less; less ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:32 AM DATE MODIFIED: 5/2/2018 6:27 AM 24. 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 these are correct.

ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 5:52 AM DATE MODIFIED: 5/2/2018 6:28 AM 25. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:55 AM DATE MODIFIED: 9/16/2016 5:58 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 26. 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. be less than AND be greater than are possible, depending on the size of the liquidity premium ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:58 AM DATE MODIFIED: 5/2/2018 6:29 AM 27. 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.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 6:00 AM DATE MODIFIED: 9/16/2016 6:02 AM 28. 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) ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:03 AM DATE MODIFIED: 9/16/2016 6:04 AM 29. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:05 AM DATE MODIFIED: 9/16/2016 6:06 AM 30. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:07 AM DATE MODIFIED: 9/16/2016 6:10 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 31. 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. upward pressure on the price of long-term securities AND downward pressure on the yield of long-term securities.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:11 AM DATE MODIFIED: 5/2/2018 6:30 AM 32. 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.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:20 AM DATE MODIFIED: 9/16/2016 6:24 AM 33. According to segmented markets theory, if investors have mostly short-term funds available and borrowers want longterm 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:24 AM DATE MODIFIED: 9/16/2016 6:26 AM 34. 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 these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:26 AM DATE MODIFIED: 5/2/2018 6:31 AM 35. Other things being 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 these are possible, depending on the size of the bond offering.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/16/2016 6:29 AM 5/2/2018 6:31 AM

36. Assume that the Treasury bond yield today is 2 percentage points higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4 percentage point 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 6:32 AM DATE MODIFIED: 9/16/2016 6:33 AM 37. 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. liquidity premium theory AND segmented markets theory ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:33 AM DATE MODIFIED: 5/2/2018 6:35 AM 38. According to expectations theory, the sudden expectation of lower interest rates in the future will cause investors to provide a ____ supply of short-term funds and a ____ supply of long-term funds.

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Chapter 03: Structure of Interest Rates a. large; large b. large; small c. small; small d. small; large ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:36 AM DATE MODIFIED: 9/16/2016 6:38 AM 39. The yield curve in a foreign country is: a. always downward sloping b. nonexistent c. the same as the United States at any point in time d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:39 AM DATE MODIFIED: 5/2/2018 6:41 AM 40. 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. liquidity premium theory AND expectations theory ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:41 AM DATE MODIFIED: 5/2/2018 6:45 AM 41. If research showed that all investors attempt to purchase securities that perfectly match the time for 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.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:43 AM DATE MODIFIED: 9/16/2016 6:45 AM 42. 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. a. long-term; long-term b. long-term; short-term c. short-term; long-term d. long-term; short-term AND short-term; long-term ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:46 AM DATE MODIFIED: 5/2/2018 6:46 AM 43. You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 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.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 6:47 AM DATE MODIFIED: 9/16/2016 6:50 AM 44. 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 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 5:55 AM DATE MODIFIED: 9/19/2016 5:57 AM 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 two years ahead is ____ percent. a. 1.8 b. 9.0 c. 15.0 d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 5:57 AM DATE MODIFIED: 5/2/2018 6:47 AM 46. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want shortterm 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 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:59 AM DATE MODIFIED: 9/19/2016 5:59 AM 47. 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. longer; higher AND shorter; low ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:00 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE MODIFIED:

5/2/2018 6:47 AM

48. 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 place ____ pressure on the yield of T-bills. a. decrease; downward b. decrease; upward c. increase; upward d. increase; downward ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 6:03 AM DATE MODIFIED: 9/19/2016 6:04 AM 49. 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 credit 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 these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 6:05 AM DATE MODIFIED: 5/2/2018 6:48 AM 50. If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:07 AM DATE MODIFIED: 9/19/2016 6:09 AM 51. The yield curve for corporate bonds a. would typically lie below the Treasury yield curve. b. identical to the Treasury yield curve. c. typically has the same slope as the Treasury yield curve. d. is irrelevant to investors.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:09 AM DATE MODIFIED: 9/19/2016 6:15 AM 52. Some types of debt securities always offer a higher yield than others. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:22 AM DATE MODIFIED: 9/19/2016 6:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 53. Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:24 AM DATE MODIFIED: 9/19/2016 6:25 AM 54. The higher a bond rating, the lower the perceived credit risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:25 AM DATE MODIFIED: 9/19/2016 6:27 AM 55. Treasury securities are exempt from federal and state income taxes. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:27 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE MODIFIED:

9/19/2016 6:29 AM

56. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:29 AM DATE MODIFIED: 9/19/2016 6:31 AM 57. The graphic comparison of maturities and annualized yields is known as the interest rate curve. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:31 AM DATE MODIFIED: 9/19/2016 6:33 AM 58. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/19/2016 6:33 AM 9/19/2016 6:35 AM

59. The forward rate is commonly used to represent the market's forecast of the future interest rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:35 AM DATE MODIFIED: 9/19/2016 6:36 AM 60. Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:36 AM DATE MODIFIED: 9/19/2016 6:38 AM 61. The preference for more liquid short-term securities places downward pressure on the slope of the yield curve. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:38 AM DATE MODIFIED: 5/2/2018 6:48 AM 62. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:40 AM DATE MODIFIED: 9/19/2016 6:41 AM 63. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:42 AM DATE MODIFIED: 9/19/2016 6:43 AM 64. 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 ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:43 AM DATE MODIFIED: 9/19/2016 6:45 AM 65. Yield curves are always upward sloping. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:45 AM DATE MODIFIED: 9/19/2016 6:45 AM 66. 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 these are correct with respect to debt securities.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:25 AM DATE MODIFIED: 5/2/2018 6:50 AM 67. Which of the following is NOT a characteristic affecting the yields on debt securities?

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Chapter 03: Structure of Interest Rates a. credit (default) risk b. liquidity c. tax status d. term to maturity e. All of these are correct and affect yields on debt securities.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:28 AM DATE MODIFIED: 5/2/2018 6:51 AM 68. 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 these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:30 AM DATE MODIFIED: 5/2/2018 6:51 AM 69. 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. longer; lower AND shorter; higher ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:31 AM DATE MODIFIED: 5/2/2018 6:52 AM 70. 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:36 AM DATE MODIFIED: 10/3/2016 9:59 AM 71. 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 these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:39 AM DATE MODIFIED: 5/2/2018 6:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 72. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:41 AM DATE MODIFIED: 9/19/2016 7:42 AM 73. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want shortterm 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:43 AM DATE MODIFIED: 9/19/2016 7:45 AM 74. 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 ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:45 AM DATE MODIFIED: 5/2/2018 6:54 AM 75. 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 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:47 AM DATE MODIFIED: 9/19/2016 7:49 AM 76. Bonds issued at different times by the same corporation may not receive the same rating from a rating agency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:50 AM DATE MODIFIED: 9/19/2016 7:51 AM 77. Investment-grade bonds are bonds that are rated as Caa or better by Moody’s and as CCC or better by Standard & Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates Poor’s. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:52 AM DATE MODIFIED: 9/19/2016 7:53 AM 78. A flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future and that interest rates will rise. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:55 AM DATE MODIFIED: 9/19/2016 7:56 AM 79. The yields of securities commonly move in the same direction over time. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:56 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE MODIFIED:

9/19/2016 7:58 AM

80. Because interest rates may vary significantly across countries at a given point in time, investors do not monitor the term structures of interest rates in foreign countries unless they are interested in investing in a particular foreign country. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:58 AM DATE MODIFIED: 9/19/2016 8:01 AM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 1. A(n) ____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. a. option contract b. brokerage contract c. financial futures contract d. margin call ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:24 AM DATE MODIFIED: 9/29/2016 6:26 AM 2. Interest rate futures are not available on a. Treasury bonds. b. Treasury notes. c. Eurodollar CDs. d. the S&P 500 index.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:27 AM DATE MODIFIED: 9/29/2016 6:29 AM 3. ____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices. a. Hedgers b. Day traders c. Position traders d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:29 AM DATE MODIFIED: 5/8/2018 12:38 AM 4. The initial margin of a futures contract is typically between ____ percent of a futures contract's full value. a. 0 and 2 b. 5 and 18 c. 25 and 40 d. 45 and 60 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:32 AM DATE MODIFIED: 9/29/2016 6:34 AM 5. Futures exchanges take buy or sell positions on futures contracts. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.03 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:35 AM DATE MODIFIED: 9/29/2016 6:36 AM 6. Assume that a T-bill futures contract with a face value of $1 million is purchased at a price of $95.00 per $100 face value. At settlement, the price of T-bills is $95.50. What is the difference between the selling and purchase price of the futures contract? a. $.50 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets b. $50 c. $500 d. $5,000 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 6:37 AM DATE MODIFIED: 5/8/2018 12:39 AM 7. If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today. a. increase; selling b. increase; buying c. decrease, selling d. decrease; purchasing a call option on ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 6:40 AM DATE MODIFIED: 9/29/2016 6:43 AM 8. Financial futures contracts on U.S. securities are ____ by non-U.S. financial institutions. a. not allowed to be traded b. are rarely desired c. are commonly traded d. not allowed to be traded AND are rarely desire ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/29/2016 6:43 AM 5/8/2018 12:39 AM

9. Assume that speculators purchased a futures contract at the beginning of the year. If the price of a security represented by the futures contract ____ over the year, then these speculators would likely have purchased the futures contract for ____ than they can sell it for. a. increased; more b. decreased; less c. remains the same; more d. increased; less ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:13 AM DATE MODIFIED: 9/29/2016 7:15 AM 10. Assume that a futures contract on Treasury bonds with a face value of $100,000 is purchased at 93-00. If the same contract is later sold at 94-18, what is the gain, ignoring transaction costs? a. $1,180,000 b. $118 c. $11,800 d. $15,625 e. $1,562.50 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 7:15 AM DATE MODIFIED: 9/29/2016 7:17 AM 11. The use of financial leverage Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets a. magnifies the positive returns of futures contracts. b. magnifies losses of futures contracts. c. magnifies the positive returns of futures contracts AND magnifies losses of futures contracts. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:17 AM DATE MODIFIED: 5/8/2018 12:40 AM 12. According to the text, when a financial institution sells futures contracts on debt securities in order to hedge against an increase in interest rates, this is referred to as a. a long hedge. b. a short hedge. c. a closed out position. d. basis trading.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:20 AM DATE MODIFIED: 9/29/2016 7:22 AM 13. A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____, and the position in futures contracts will result in a ____. a. increase; gain b. increase; loss c. decrease; gain d. decrease; loss ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:22 AM DATE MODIFIED: 9/29/2016 7:25 AM 14. As applied to the futures markets, the basis is the a. difference between the price of a security and the price of a futures contract on the security. b. gain or loss from hedging with futures contracts. c. difference between a futures contract price and the initial deposit required. d. price paid for a futures contract after accounting for transaction costs. e. price paid for an option contract.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:25 AM DATE MODIFIED: 9/29/2016 7:27 AM 15. Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be ____ affected if interest rates increase. To partially hedge its position, it could ____ futures contracts. a. adversely; purchase b. favorably; sell c. favorably; purchase d. adversely; sell ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:28 AM DATE MODIFIED: 9/29/2016 7:31 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 16. According to the text, using a futures contract on one financial instrument to hedge a position in a different financial instrument is known as a. cross-hedging. b. ratio hedging. c. basis hedging. d. liquid hedging.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:31 AM DATE MODIFIED: 9/29/2016 7:33 AM 17. The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:34 AM DATE MODIFIED: 9/29/2016 7:36 AM 18. In cross-hedging, if the value of the futures contract is more volatile than the portfolio’s value, the amount of principal represented by the futures contracts will be ____ the market value of the portfolio to be hedged. a. smaller than b. greater than c. equal to d. greater than AND equal to ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:36 AM DATE MODIFIED: 5/8/2018 12:41 AM 19. __________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firm desires. a. Credit risk b. Control risk c. Operational risk d. Management risk ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:39 AM DATE MODIFIED: 9/29/2016 7:41 AM 20. Systemic risk reflects the risk that a particular event could a. cause losses at a firm due to inadequate management control. b. spread adverse effects among several firms or among financial markets. c. cause a loss in value due to market conditions. d. have a larger effect on the futures position than on the position being hedged.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:43 AM DATE MODIFIED: 9/29/2016 7:49 AM 21. If a financial institution expects that the market value of its municipal bonds will decline because of economic Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets conditions, it could hedge its position by ____ futures contracts on ____. a. purchasing; Treasury bonds b. purchasing; the S&P 500 Index c. purchasing; the Municipal Bond Index d. selling; the Municipal Bond Index ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:49 AM DATE MODIFIED: 9/29/2016 7:52 AM 22. The net gain or loss on a futures contract for a stock index that is not closed out is the difference between the futures price when the initial position was created and the futures price at a. the settlement date. b. the date at which the futures price reaches its maximum. c. the date at which the futures price reaches its minimum. d. the date three months beyond the date when the initial position was taken.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:52 AM DATE MODIFIED: 9/29/2016 7:59 AM 23. The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on the S&P 500 index is 1612 at the time of purchase. If the index price is 1619 when the position is closed out, the gain is a. $700. b. $7,000. c. $3,190. d. $3,120. e. $3,500.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 8:10 AM DATE MODIFIED: 9/29/2016 8:13 AM 24. Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund a. liquidates its stocks whenever it expects a market downturn. b. maintains a constant buy position in stock index futures. c. maintains a constant sell position in stock index futures. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 8:14 AM DATE MODIFIED: 5/8/2018 12:43 AM 25. Companies with international trade can hedge ____ by ____ currency futures. a. payables; selling b. receivables; buying c. payables; buying d. payables; selling AND receivables; buying e. receivables; buying AND payables; buying ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets DATE MODIFIED:

5/8/2018 12:44 AM

26. Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the credit (default) risk.

A short position in Treasury bill futures ____ an effective hedge against the credit (default) risk. a. would be; would be b. would be; would not be c. would not be; would not be d. would not be; would be ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 8:22 AM DATE MODIFIED: 9/29/2016 8:25 AM 27. Which of the following statements is incorrect with respect to cross-hedging? a. Even when the futures contract is highly correlated with the portfolio being hedged, the value of the futures contract may change by a higher or lower percentage than the portfolio's market value. b. If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts. c. The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments. d. If the price of the underlying security of the futures contract moves closely in tandem with the security being hedged, the futures contract can provide an effective hedge. e. All of these are correct with respect to cross-hedging.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 8:25 AM DATE MODIFIED: 5/8/2018 12:45 AM 28. ____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.

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Chapter 13: Financial Futures Markets a. Market b. Liquidity c. Credit d. Basis e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:32 AM DATE MODIFIED: 5/8/2018 12:46 AM 29. Trading restrictions imposed on specific stocks or stock indexes are referred to as a. index busters. b. index options. c. circuit breakers. d. protective covenants.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:35 AM DATE MODIFIED: 9/29/2016 8:38 AM 30. Currency futures may be purchased to hedge ____ or to capitalize on the expected ____ of that currency against the dollar. a. receivables; appreciation b. receivables; depreciation c. payables; depreciation d. payables; appreciation ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:41 AM DATE MODIFIED: 9/29/2016 8:43 AM 31. The values of stock index futures contracts are insulated from market risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 9:07 AM DATE MODIFIED: 9/29/2016 9:47 AM 32. Dynamic asset allocation involves the switching between risky and low-risk investments by institutional investors over time in response to changing expectations. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 9:48 AM DATE MODIFIED: 9/29/2016 9:49 AM 33. The prices of stock index futures a. are always the same as the prices of the stocks representing the index. b. are always a little above the prices of the stocks representing the index. c. are always a little below the prices of the stocks representing the index. d. None of these are correct.

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Chapter 13: Financial Futures Markets ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 9:49 AM DATE MODIFIED: 5/8/2018 12:47 AM 34. The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be a. equal to the prevailing stock prices. b. below the prevailing stock prices. c. above the prevailing stock prices. d. negative.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 9:51 AM DATE MODIFIED: 9/29/2016 9:52 AM 35. Speculators who normally close out their futures positions on the same day that the positions were initiated are referred to as a. day traders. b. hedgers. c. closed-end traders. d. position traders.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/29/2016 9:53 AM 9/29/2016 9:54 AM

36. Speculators in futures contracts that normally maintain their futures positions for extended periods of time (such as weeks or months) are referred to as a. day traders. b. hedgers. c. closed-end traders. d. position traders.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 9:54 AM DATE MODIFIED: 9/29/2016 9:56 AM 37. Which of the following is incorrect regarding organized exchanges trading financial futures contracts? a. Organized exchanges establish and enforce rules for the trading of financial futures contracts. b. Organized exchanges ensure that the seller of the futures contract always delivers the securities covered by the contract, whether the contract was settled prior to the settlement date or not. c. Organized exchanges clear, settle, and guarantee all transactions that occur on their exchanges. d. The operations of financial futures exchanges are regulated by the Commodity Futures Trading Commission (CFTC). e. . All of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 9:56 AM DATE MODIFIED: 5/8/2018 12:47 AM 38. Laura sells an S&P 500 futures contract with a September settlement date when the index is 1750. By the settlement date, the S&P 500 index falls to 1400. The return on Laura's position in the S&P 500 futures contract is ____ percent. a. 20 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets b. 10 c. 25 d. 20 e. 0 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 9:58 AM DATE MODIFIED: 9/29/2016 10:00 AM 39. Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates will decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____. a. sell; loss b. purchase; gain c. purchase; loss d. sell; gain e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/29/2016 10:00 AM DATE MODIFIED: 5/8/2018 12:48 AM 40. If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed. a. more; decrease b. more; rise c. fewer; rise d. None of these are correct.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:02 AM DATE MODIFIED: 5/8/2018 12:48 AM 41. Which of the following statements is incorrect? a. Circuit breakers are trading restrictions imposed on specific stocks or stock indexes. b. Circuit breakers guarantee that prices will turn upward. c. Circuit breakers may be able to prevent large declines in prices that would be attributed to panic selling rather than to fundamental forces. d. Circuit breakers may allow investors to determine whether circulating rumors are true.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:04 AM DATE MODIFIED: 9/29/2016 10:05 AM 42. Financial futures contracts on stock indexes are referred to as interest rate futures. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:05 AM DATE MODIFIED: 9/29/2016 10:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 43. Financial futures contracts are rarely sold over the counter. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:07 AM DATE MODIFIED: 9/29/2016 10:08 AM 44. Brokers commonly require margin deposits from their customers above those required by the exchanges. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:08 AM DATE MODIFIED: 9/29/2016 10:10 AM 45. Purchasers of financial futures contracts usually know who the sellers are, and vice versa. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:10 AM DATE MODIFIED: 9/29/2016 10:11 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 46. The futures price is mainly a function of the prevailing price of the underlying security plus an expected adjustment in that price by the settlement date. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:12 AM DATE MODIFIED: 9/29/2016 10:13 AM 47. A financial institution that hedges with interest rate futures is less sensitive to economic events than an institution that does not hedge. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:13 AM DATE MODIFIED: 9/29/2016 10:14 AM 48. A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/29/2016 10:14 AM 9/29/2016 10:16 AM

49. Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:16 AM DATE MODIFIED: 9/29/2016 10:17 AM 50. Stock index futures cannot be closed out before the settlement date. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:17 AM DATE MODIFIED: 5/8/2018 12:49 AM 51. The value of a stock index futures contract has little correlation with the value of the underlying stock index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/29/2016 10:19 AM 9/29/2016 10:20 AM

52. Since stock index futures prices are primarily driven by movements in the corresponding stock indexes, participants in stock index futures monitor indicators that may signal changes in the stock indexes. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:38 AM DATE MODIFIED: 9/29/2016 10:40 AM 53. The price of stock index futures may reflect investor expectations about the market more rapidly than stock prices. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:40 AM DATE MODIFIED: 9/29/2016 10:41 AM 54. Financial futures contracts on U.S. securities are commonly traded by non-U.S. financial institutions that maintain holdings of U.S. securities. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:42 AM DATE MODIFIED: 9/29/2016 10:43 AM 55. Purchasers of currency futures contracts are required to hold the contract until the settlement date and accept delivery of the foreign currency at that time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:43 AM DATE MODIFIED: 9/29/2016 10:44 AM 56. Which of the following statements is incorrect regarding single stock futures? a. Investors who expect a particular stock’s price to decline over time can sell futures contracts on that stock, or they can sell the stock short. b. Single stock futures are available only on stocks of companies that are in the S&P 500 index. c. Single stock futures are traded in the United States at OneChicago. d. Single stock futures are regulated by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission. e. All of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:44 AM DATE MODIFIED: 5/8/2018 12:49 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 57. Stock index futures are priced ____ than the stock index itself. a. higher b. lower c. either higher or lower d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:46 AM DATE MODIFIED: 5/8/2018 12:49 AM 58. An unexpected ____ in the consumer price index tends to create expectations of ____ interest rates and places ____ pressure on Treasury bond futures prices. a. increase; higher; downward b. increase; lower; downward c. increase; higher; upward d. decrease; higher; downward e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:48 AM DATE MODIFIED: 9/29/2016 10:50 AM 59. Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12. Two months later, Baher sells the same futures contract in order to close out the position. At that time, the futures contract specifies 103-15.

What is Baher's nominal profit? The par value of the futures contract is $100,000. a. $1,030.00; profit b. $1,030.00; loss c. $1,093.75; profit d. $1,093.75; loss e. None of these are correct.

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Chapter 13: Financial Futures Markets ANSWER: c POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 10:50 AM DATE MODIFIED: 5/8/2018 12:50 AM 60. Clarke Company plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million.

However, Clarke is concerned that interest rates might increase over the next three months. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells ____ futures contract for a price of 99-12.

Assuming that the actual price of the futures contract declines to 97-20, Clarke would make a ____ of $____ from closing out the futures position. a. 40; profit; $76,800 b. 40; loss; $76,800 c. 50; profit; $70,000 d. 40; profit; $70,000 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 10:52 AM DATE MODIFIED: 5/8/2018 12:50 AM 61. _________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions. a. Speculators; hedgers b. Hedgers; speculators c. Arbitrageurs; speculators d. Hedgers; arbitrageurs ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:54 AM DATE MODIFIED: 9/29/2016 10:56 AM 62. Some specialized futures contracts are sold over the counter, whereas standardized financial futures contracts are traded on exchanges. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:56 AM DATE MODIFIED: 9/29/2016 10:58 AM 63. A financial institution that wishes to reduce its exposure to the possibility of declining interest rates might use: a. a long hedge b. a short hedge c. a day hedge d. index arbitrage ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:58 AM DATE MODIFIED: 5/8/2018 12:51 AM 64. Settlement of stock index futures contracts occurs through delivery of the underlying securities. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 11:00 AM DATE MODIFIED: 9/29/2016 11:01 AM 65. ___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises. a. Dynamic asset allocation b. Cross-hedging c. Index arbitrage d. Net hedging ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 11:02 AM DATE MODIFIED: 9/29/2016 11:03 AM 66. Which of the following is NOT a type of risk associated with futures contracts? a. basis risk b. liquidity risk c. market risk d. postpayment risk ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 11:03 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets DATE MODIFIED:

5/8/2018 12:51 AM

67. Credit risk exists for futures contracts traded on exchanges, but it is normally not a concern for over-the-counter futures transactions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 11:06 AM DATE MODIFIED: 9/29/2016 11:07 AM

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Chapter 14: Options Markets 1. A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time. a. call option b. put option c. sale of a futures contract d. purchase of a futures contract ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:28 AM DATE MODIFIED: 9/23/2016 2:29 AM 2. A ____ requires a premium above and beyond the price to be paid for the financial instrument. a. futures contract b. call option c. put option d. call option AND put option ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:40 AM DATE MODIFIED: 5/8/2018 12:55 AM 3. A put option is "out of the money" when the a. market price of the security exceeds the exercise price. b. market price of the security equals the exercise price. c. market price of the security is less than the exercise price. d. premium on the option is less than the exercise price.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 9/23/2016 2:43 AM 9/23/2016 2:43 AM

4. When the market price of the underlying security exceeds the exercise price, a a. call option is in the money. b. put option is in the money. c. call option is at the money. d. call option is out of the money.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:45 AM DATE MODIFIED: 9/23/2016 2:45 AM 5. Sellers (writers) of call options can offset their position at any point in time by a. selling a put option on the same stock. b. buying identical call options. c. selling additional call options on the same stock. d. All of these are correct. e. selling a put option on the same stock AND buying identical call options.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:46 AM DATE MODIFIED: 5/8/2018 12:56 AM 6. The ____ is the most important exchange for trading options. a. New York Stock Exchange (NYSE) b. Chicago Board Options Exchange (CBOE) c. Boston Options Exchange d. NYSE MKT ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:50 AM DATE MODIFIED: 9/23/2016 2:50 AM 7. The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:02 AM DATE MODIFIED: 9/23/2016 3:02 AM 8. ____ execute transactions desired by investors and trade stock options for their own account. a. Floor brokers b. Discount brokers c. Market makers d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:04 AM DATE MODIFIED: 5/8/2018 12:57 AM 9. A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? a. $50 b. $58 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets c. $52 d. $53 e. $49 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:06 AM DATE MODIFIED: 9/23/2016 3:07 AM 10. A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time? a. $4 b. $3 c. $2 d. $2 e. $3 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:08 AM DATE MODIFIED: 9/23/2016 3:09 AM 11. A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? a. $26 b. $34 c. $28 d. $29 e. $32 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:18 AM DATE MODIFIED: 9/23/2016 4:19 AM 12. The ____, the higher the call option premium, other things being equal. a. lower the existing price of the security relative to the exercise price b. lower the variability of the security's market price c. longer the maturity of the option d. lower the existing price of the security relative to the exercise price AND lower the variability of the security's market price ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:21 AM DATE MODIFIED: 5/8/2018 1:11 AM 13. The longer the time to maturity, the ____ the call option premium and the ____ the put option premium. a. higher; lower b. lower; higher c. higher; higher d. lower; lower ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:23 AM DATE MODIFIED: 5/8/2018 1:12 AM 14. The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. a. higher; lower Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets b. lower; higher c. higher; higher d. lower; lower ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:34 AM DATE MODIFIED: 9/23/2016 4:35 AM 15. The sale of a call option on a stock the seller already owns is referred to as a. a covered call. b. a naked call. c. call on futures. d. futures on options.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:37 AM DATE MODIFIED: 9/23/2016 4:38 AM 16. Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)? a. $4 gain b. $6 loss c. $2 loss d. $1 gain e. $0 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 9/23/2016 4:40 AM 9/23/2016 4:41 AM

17. Covered call writing ____ the upside potential return and ____ the risk of an investment in stock. a. increases; increases b. increases; decreases c. limits; increases d. limits; decreases ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:43 AM DATE MODIFIED: 9/23/2016 4:43 AM 18. Put options are typically used to hedge when portfolio managers are mainly concerned about a. a permanent decline in a stock's value. b. a permanent increase in a stock's value. c. a temporary decline in a stock's value. d. a temporary increase in a stock's value.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:44 AM DATE MODIFIED: 9/23/2016 4:45 AM 19. A speculator purchases a put option on Treasury bond futures with a September delivery date with an exercise price of 85-00. The option has a premium of 2-00. Assume that the price of the futures contract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain? a. $1,968.75 b. $3,750.00 c. $3,000.00 d. $2,000.00 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets e. $1,000.00 ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:46 AM DATE MODIFIED: 9/23/2016 4:47 AM 20. Assume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 times the index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract? a. $15,000 b. $7,500 c. $3,300 d. $4,000 e. $1,500 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:48 AM DATE MODIFIED: 9/23/2016 4:50 AM 21. Corporations involved in international business transactions can ____ to hedge future ____. a. sell currency call options; payables b. purchase currency put options; receivables c. purchase currency call options, receivables d. purchase currency put options, payables e. sell currency call options; payables AND purchase currency put options; receivables ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 4:51 AM 5/8/2018 1:13 AM

22. If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due. a. exercise the option; greater b. exercise the option; less c. let the option expire; greater d. let the option expire; less e. exercise the option; greater AND let the option expire; less ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:54 AM DATE MODIFIED: 5/8/2018 1:13 AM 23. Speculators purchase currency ____ on currencies they expect to ____ against the dollar. a. call options; weaken b. put options; strengthen c. futures; weaken d. put options; weaken ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:56 AM DATE MODIFIED: 9/23/2016 4:56 AM 24. Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar. a. put; strengthen b. put; weaken c. call; strengthen d. call; weaken Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets e. put; strengthen AND call; weaken ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:58 AM DATE MODIFIED: 5/8/2018 1:14 AM 25. European-style stock options a. are long-term options (at least one year until expiration at the time they are created). b. can be exercised after the expiration date. c. can be exercised any time until the expiration date. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False DATE CREATED: 9/23/2016 5:01 AM DATE MODIFIED: 5/8/2018 1:14 AM 26. A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator? a. 25 percent b. 25 percent c. 3.2 percent d. 2.9 percent ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:02 AM DATE MODIFIED: 9/23/2016 5:02 AM 27. The premium on an existing call option should ____ when the underlying stock price decreases. a. be negative Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:04 AM DATE MODIFIED: 5/8/2018 1:15 AM 28. The premium on an existing put option should ____ when the underlying stock price increases. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:06 AM DATE MODIFIED: 5/8/2018 1:16 AM 29. The premium on an existing put option should ____ when there is an increase in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:08 AM DATE MODIFIED: 5/8/2018 1:16 AM 30. The premium on an existing call option should ____ when there is a reduction in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:11 AM DATE MODIFIED: 5/8/2018 1:17 AM 31. The premium on an existing put option should ____ when there is a reduction in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:13 AM DATE MODIFIED: 5/8/2018 1:17 AM 32. The premium on an existing call option should ____ when there is an increase in the expected short-term volatility of the stock price.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:18 AM DATE MODIFIED: 5/8/2018 1:18 AM 33. When a stock index option is exercised, the cash payment is equal to a specified dollar amount a. multiplied by the index level. b. multiplied by the exercise price. c. multiplied by the difference between the index level and the exercise price. d. multiplied by the sum of the index level and the exercise price.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:20 AM DATE MODIFIED: 9/23/2016 5:21 AM 34. When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions. a. reduce b. completely eliminate c. have no effect on d. increase ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.05 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 9/23/2016 5:22 AM 9/23/2016 5:22 AM

35. Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____. a. available; in numerous non-U.S. countries b. not available; in numerous non-U.S. countries c. available; only in the United States d. not available; only in the United States ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:24 AM DATE MODIFIED: 9/23/2016 5:24 AM 36. Which of the following is NOT a difference between purchasing an option and purchasing a futures contract? a. The option requires that a premium be paid in addition to the price of the financial instrument. b. Owners of options can choose to let the option expire on the so-called expiration date without exercising it. c. The fulfillment of futures contracts is regulated by exchanges, while the fulfillment of options is not. d. All of these are differences between purchasing an option and purchasing a futures.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 5/8/2018 1:19 AM 37. Marcie purchases a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, Marcie decides to exercise the option and closes out the position by selling an identical futures contract. Marcie's net gain from this strategy is $____. a. 2,687.50 b. 2,687.50 c. 2,375.00 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets d. 7,437.50 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 5/8/2018 1:20 AM 38. Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $____. a. 2,687.50 b. 2,687.50 c. 2,375.00 d. 7,437.50 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 5/8/2018 1:20 AM 39. Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____. a. 406.25 b. 4,718.75 c. 4,718.75 d. 812.50 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 5/8/2018 1:21 AM 40. Which of the following is NOT an assumption underlying the Black-Scholes option-pricing model? a. The risk-free rate is known and constant over the life of the option. b. The probability distribution of stock prices is lognormal. c. The world is risk-neutral. d. The variability of a stock's return is constant. e. There are no transaction costs involved in trading options.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.APP NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 5/8/2018 1:21 AM 41. Which of the following is NOT true with respect to market makers? a. They benefit from the spread. b. They may earn profits when they take positions in options. c. They are not subject to a risk of loss on their positions in options. d. All of these are true with respect to market makers.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:00 AM DATE MODIFIED: 5/8/2018 1:23 AM 42. Option trading is regulated by the a. Options Clearing Corporation.

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Chapter 14: Options Markets b. International Securities Exchange. c. Securities and Exchange Commission. d. Federal Reserve.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:11 AM DATE MODIFIED: 9/23/2016 6:12 AM 43. On an exchange, option trades can be executed: a. by a floor broker b. electronically c. by a market maker d. All of these are correct. e. by a floor broker AND electronically ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:13 AM DATE MODIFIED: 5/8/2018 1:25 AM 44. When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked." a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:16 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

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45. Backdating occurs when CEOs (or other executives) reset the date that their options were granted to an earlier date when the stock price was lower. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:18 AM DATE MODIFIED: 9/23/2016 6:18 AM 46. The motive for CEOs to backdate options is that it allows them to exercise the options at a lower exercise price. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:19 AM DATE MODIFIED: 9/23/2016 6:20 AM 47. Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE CREATED: DATE MODIFIED:

9/23/2016 6:21 AM 9/23/2016 6:23 AM

48. The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:23 AM DATE MODIFIED: 9/23/2016 6:23 AM 49. A call option is said to be at the money when the market price of the underlying security exceeds the exercise price. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:24 AM DATE MODIFIED: 9/23/2016 6:25 AM 50. Market makers can execute stock option transactions for customers but do not trade stock options for their own account. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE CREATED: DATE MODIFIED:

9/23/2016 6:26 AM 9/23/2016 6:26 AM

51. American-style stock options can be exercised only just before expiration. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:13 AM DATE MODIFIED: 9/23/2016 7:13 AM 52. An option with a higher exercise price has a higher call option premium and a lower put option premium. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:15 AM DATE MODIFIED: 9/23/2016 7:15 AM 53. Several call options are available for a given stock, and the risk-return potential will vary among them a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

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54. The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:19 AM DATE MODIFIED: 9/23/2016 7:19 AM 55. The longer a call option's time to maturity, the lower the call option premium, other things being equal. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:20 AM DATE MODIFIED: 9/23/2016 7:20 AM 56. The results with covered call writing are better than without covered call writing when the stock performs poorly and better when the stock performs well. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:21 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

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57. Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline in a stock's value. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:23 AM DATE MODIFIED: 9/23/2016 7:23 AM 58. An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:24 AM DATE MODIFIED: 9/23/2016 7:24 AM 59. Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:26 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

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60. Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:27 AM DATE MODIFIED: 9/23/2016 7:27 AM 61. Speculators sell call options on currencies that they expect to strengthen against the dollar. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:29 AM DATE MODIFIED: 9/23/2016 7:29 AM 62. A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must reach a certain minimum level. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:31 AM DATE MODIFIED: 9/23/2016 7:32 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets 63. Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium. a. higher; higher; higher b. higher; higher; lower c. higher; lower; higher d. lower; lower; higher e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:33 AM DATE MODIFIED: 5/8/2018 1:25 AM 64. Which of the following statements is least correct regarding corporations involved in international business transactions? a. They may purchase currency put options to hedge future receivables denominated in a foreign currency. b. They may purchase currency call options to hedge future payables denominated in a foreign currency. c. They may purchase currency call options to hedge future receivables denominated in a foreign currency. d. They benefit from currency put options if the currency's value declines before the expiration date of the option.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:37 AM DATE MODIFIED: 9/23/2016 7:38 AM 65. The ____ is not a factor affecting the call option premium. a. market price of the underlying instrument (relative to the option's exercise price) b. volatility of the underlying instrument c. current price of futures contracts on the underlying instrument d. time to maturity of the call option ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:39 AM DATE MODIFIED: 9/23/2016 7:40 AM 66. Speculators who anticipate a decline in interest rates may consider ____ a ____ option on Treasury bond futures. a. purchasing; put b. selling; call c. purchasing; call d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:41 AM DATE MODIFIED: 5/8/2018 1:26 AM 67. Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 97-00. The premium paid for the put option is 3-00. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 89-00. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad's net gain from this speculative strategy is $____, and his return on his investment is about _______ percent. a.  b. 11,000; 27 c. 5,000; −167 d.  e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:43 AM DATE MODIFIED: 5/8/2018 1:27 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets 68. Which of the following statements is incorrect? a. Some firms allowed their CEOs to backdate options that they were granted to an earlier period when the stock price was lower. b. Backdating is completely inconsistent with the idea of granting options to encourage managers to focus on maximizing the stock price. c. Firms readily promote their option compensation programs and are more than willing to acknowledge that the options are an expense. d. All of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:46 AM DATE MODIFIED: 5/8/2018 1:27 AM 69. The purchaser of an American-style put option is always better off exercising the option at the expiration date than before that date. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:49 AM DATE MODIFIED: 9/23/2016 7:50 AM 70. Which of the following does NOT directly affect a call option premium? a. volatility of the underlying instrument b. market price of the underlying instrument c. analyst rating of the underlying instrument d. time to maturity of the option ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 7:51 AM 5/8/2018 1:28 AM

71. Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:57 AM DATE MODIFIED: 9/23/2016 7:57 AM 72. Which of the following can normally be found in quotations for stock options provided by the financial media? a. exercise price, expiration date, and implied volatility b. exercise price, expiration date, and most recently quoted premium c. expiration date, implied volatility, and trading volume d. expiration date, most recently quoted premium, and implied volatility ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:59 AM DATE MODIFIED: 9/23/2016 8:00 AM

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Chapter 15: Swap Markets 1. Financial institutions with ____ interest rate–sensitive liabilities than assets are ____ affected by rising interest rates. a. more; adversely b. fewer; adversely c. more; favorably d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 2:54 AM DATE MODIFIED: 5/8/2018 1:41 AM 2. Which of the following statements is incorrect? a. Interest rate swaps are sometimes used by financial institutions and other firms for speculative purposes. b. A primary reason for the popularity of interest rate swaps is the existence of market imperfections. c. Swaps are necessary for some financial institutions to obtain the maturities or rate sensitivities on funds that they desire. d. Most financial institutions that anticipate that interest rates will move in an unfavorable direction do not hedge their positions.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 2:57 AM DATE MODIFIED: 9/23/2016 2:58 AM 3. Savings institutions participate in the swap market primarily to a. serve as an intermediary by matching up two parties in a swap. b. serve as a dealer by taking the counterparty position in a swap. c. reduce interest rate risk. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 2:58 AM DATE MODIFIED: 5/8/2018 1:42 AM 4. In a swap arrangement, the most common index used for floating-rate payments is the a. coupon rate on existing bonds. b. stock dividend rate based on a U.S. stock index. c. London Interbank Offer Rate (LIBOR). d. Treasury bond yield.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:00 AM DATE MODIFIED: 9/23/2016 3:02 AM 5. The most likely users of plain vanilla swaps would be a. commercial banks that focus on short-term consumer loans. b. savings institutions. c. manufacturing companies. d. municipal governments.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:02 AM DATE MODIFIED: 5/8/2018 1:47 AM 6. Swap transactions are only used to Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets a. hedge against upward interest rate movements. b. hedge against downward interest rate movements. c. speculate. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:03 AM DATE MODIFIED: 5/8/2018 1:48 AM 7. If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments. a. fixed-rate; floating-rate b. fixed-rate euro; fixed-rate dollar c. stock dividend; fixed-rate d. stock dividend; floating-rate ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:05 AM DATE MODIFIED: 9/23/2016 3:06 AM 8. A(n) ____ swap allows the party making fixed payments to extend the swap period. a. forward b. extendable c. callable d. putable ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 3:07 AM 9/23/2016 3:09 AM

9. A(n) ____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity. a. forward b. extendable c. callable d. putable ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:09 AM DATE MODIFIED: 9/23/2016 3:11 AM 10. A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped. a. rate-capped b. zero-coupon-for-floating c. callable d. putable ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:11 AM DATE MODIFIED: 9/23/2016 3:13 AM 11. The option on a callable swap would most likely be exercised if interest rates a. rise. b. fall. c. remain constant.

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Chapter 15: Swap Markets d. remain somewhat stable.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:13 AM DATE MODIFIED: 9/23/2016 3:15 AM 12. The option on a putable swap would most likely be exercised if interest rates a. rise. b. fall. c. remain constant. d. remain somewhat stable.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:18 AM DATE MODIFIED: 9/23/2016 3:19 AM 13. A(n) ____ swap involves an exchange of interest payments over a swap period that does not begin until a specified future point in time. a. forward b. extendable c. callable d. putable ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/23/2016 3:19 AM 9/23/2016 3:21 AM

14. Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a ratecapped swap, its ____ payments will be capped, and it will ____ an up-front premium in exchange for the cap. a. outflow; receive b. outflow; pay c. inflow; pay d. inflow; receive ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:21 AM DATE MODIFIED: 9/23/2016 3:23 AM 15. An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:23 AM DATE MODIFIED: 9/23/2016 3:24 AM 16. Assume a U.S. savings institution funds its fixed-rate mortgages by attracting short-term deposits. If it engages in an interest rate swap, but the index on the swap does not move in perfect tandem with its cost of deposits, this reflects: a. sovereign risk b. basis risk c. credit risk d. None of these are correct.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:25 AM DATE MODIFIED: 5/8/2018 1:49 AM 17. ____ risk prevents an interest rate swap from completely eliminating a financial institution's exposure to interest rate risk. a. Credit b. Basis c. Sovereign d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:27 AM DATE MODIFIED: 5/8/2018 1:49 AM 18. ____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party. a. Basis b. Credit c. Sovereign d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE CREATED: DATE MODIFIED:

9/23/2016 3:29 AM 5/8/2018 1:50 AM

19. Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:31 AM DATE MODIFIED: 9/23/2016 3:33 AM 20. In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions. a. many; lower b. many; higher c. few; lower d. few; higher ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:33 AM DATE MODIFIED: 9/23/2016 3:35 AM 21. An interest rate swap agreement indicates the ____ value, is represents the principal amount to which interest rates are applied to determine the interest payments involved. a. vanilla b. LIBOR c. programmed d. notional ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:23 AM DATE MODIFIED: 9/23/2016 4:25 AM 22. Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns. a. increase; increase b. increase; reduce c. reduce; increase d. reduce; reduce ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:26 AM DATE MODIFIED: 9/23/2016 4:28 AM 23. An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments. a. callable swap b. putable swap c. zero-coupon for floating swap d. forward swap ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:28 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE MODIFIED:

9/23/2016 4:30 AM

24. The advantage of a rate-capped interest rate swap (relative to a plain vanilla swap) to the party exchanging fixed payments for floating payments is that a. there is a minimum limit set on interest rate payments received. b. there is a maximum limit set on the interest payments it will provide. c. it receives an up-front fee. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:31 AM DATE MODIFIED: 5/8/2018 1:50 AM 25. A plain vanilla swap enables firms to exchange ____ for ____. a. fixed-rate payments; floating-rate payments b. a high interest rate foreign currency; a low interest rate foreign currency c. a low interest rate foreign currency; a high interest rate foreign currency d. bonds; stocks that pay dividends ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:33 AM DATE MODIFIED: 9/23/2016 4:35 AM 26. An arrangement that enables firms to exchange currencies at periodic intervals is called a(n) a. currency swap. b. interest rate swap. c. swap exchange. d. Eurobond swap.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:35 AM DATE MODIFIED: 9/23/2016 4:37 AM 27. When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it a. can match up two parties but cannot take a position in the swap. b. can match up two parties or can take a position in the swap. c. cannot match up two parties and cannot take a position in the swap. d. cannot match up two parties but can take a position in the swap.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:37 AM DATE MODIFIED: 9/23/2016 4:38 AM 28. An equity swap involves the exchange of a. preferred stock for common stock. b. interest payments for an equity position in the counterparty's firm. c. interest payments for payments linked to the degree of change in a stock index. d. interest payments for newly issued stock by financial institutions.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:39 AM DATE MODIFIED: 9/23/2016 4:40 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 29. A firm is involved in an agreement whereby it receives payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has a. purchased an interest rate cap. b. sold an interest rate cap. c. purchased an interest rate floor. d. sold an interest rate floor.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:41 AM DATE MODIFIED: 9/23/2016 4:42 AM 30. The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates. a. favorably; rising b. favorably; falling c. adversely; rising d. adversely; falling ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:43 AM DATE MODIFIED: 9/23/2016 4:44 AM 31. A firm is involved in an agreement whereby it makes payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has a. purchased an interest rate cap. b. sold an interest rate cap. c. purchased an interest rate floor. d. sold an interest rate floor.

ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:44 AM DATE MODIFIED: 9/23/2016 4:46 AM 32. A firm is involved in an agreement whereby it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has a. purchased an interest rate cap. b. sold an interest rate cap. c. purchased an interest rate floor. d. sold an interest rate floor.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:46 AM DATE MODIFIED: 9/23/2016 4:48 AM 33. An interest rate collar involves the ____ of an interest rate cap and the simultaneous ____ of an interest rate floor. a. sale; sale b. sale; purchase c. purchase; purchase d. purchase; sale ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:48 AM DATE MODIFIED: 9/23/2016 4:50 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 34. Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate– sensitive ____ than ____ and therefore were adversely affected by ____ interest rates. a. assets; liabilities; increasing b. liabilities; assets; decreasing c. liabilities; assets; increasing d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:50 AM DATE MODIFIED: 5/8/2018 1:51 AM 35. The Bank of Moronto has negotiated a plain vanilla swap whereby it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million? a. $600,000 b. $600,000 c. $450,000 d. $450,000 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:52 AM DATE MODIFIED: 5/8/2018 1:51 AM 36. Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent over the year, Hewitt will a. have to make a payment of $70,000. b. have to make a payment of $90,000.

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Chapter 15: Swap Markets c. receive a payment of $70,000. d. receive a payment of $90,000. e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:57 AM DATE MODIFIED: 5/8/2018 1:52 AM 37. Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. LIBOR is 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The total payments received (or paid) by Lizard, including the initial fee, are $____. a. 500,000 b. 500,000 c. 1,500,000 d. 1,500,000 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:59 AM DATE MODIFIED: 5/8/2018 1:52 AM 38. In a ____, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract. a. default option contract b. default futures contract c. bankruptcy contract d. credit default swap ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:01 AM DATE MODIFIED: 9/23/2016 5:02 AM 39. A common maturity of a credit default swap contract is: a. one month b. three months c. five years d. 25 years ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:03 AM DATE MODIFIED: 9/23/2016 5:04 AM 40. AIG's financial problems during the credit crisis were attributed to: a. its weak returns on its investments in junk bonds. b. its potential losses from its life insurance policies. c. fraud from avoiding taxes on its gains from credit default swaps. d. its potential losses from credit default swaps.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:04 AM DATE MODIFIED: 9/23/2016 5:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 41. The primary purpose of interest rate swaps is to reduce exchange rate risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:06 AM DATE MODIFIED: 9/23/2016 5:11 AM 42. A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:12 AM DATE MODIFIED: 9/23/2016 5:13 AM 43. A putable swap gives the party making the fixed-rate payments the right to terminate the swap. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:14 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE MODIFIED:

9/23/2016 5:22 AM

44. A rate-capped swap may limit the fixed-rate payer's ability to effectively hedge against interest rate risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:22 AM DATE MODIFIED: 9/23/2016 5:23 AM 45. An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:24 AM DATE MODIFIED: 9/23/2016 5:25 AM 46. Systemic risk is the risk that a firm involved in an interest rate swap may not meet its payment obligations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/23/2016 5:25 AM 9/23/2016 5:27 AM

47. If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:27 AM DATE MODIFIED: 9/23/2016 5:28 AM 48. The most common proxy for the benchmark rate from which a floating-rate payment is determined is the prime rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/23/2016 5:29 AM DATE MODIFIED: 9/23/2016 5:30 AM 49. Interest rate swaps are rarely used by companies that issue bonds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 5:31 AM 9/23/2016 5:32 AM

50. An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:32 AM DATE MODIFIED: 9/23/2016 5:34 AM 51. Interest rate floors are commonly used to hedge against lower interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:34 AM DATE MODIFIED: 9/23/2016 5:36 AM 52. An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 9/23/2016 5:37 AM 53. Which of the following is not a typical provision of an interest rate swap? a. the notional principal value to which the interest rates are applied to determine the interest payments involved b. the fixed interest rate c. the formula and type of index used to determine the floating interest rate d. the underwriter of the bond e. All of these are provisions of an interest rate swap.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 5/8/2018 1:53 AM 54. A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time. a. plain vanilla b. zero-coupon-for-floating c. forward d. seasoned vanilla e. putable ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 9/23/2016 5:42 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 55. If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterparty is likely adversely affected by ____ interest rates. a. increase; increasing b. increase; declining c. decrease; declining d. decrease; increasing e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 5/8/2018 1:54 AM 56. A(n) ____ swap provides the party making the floating-rate payments with a right to terminate the swap. a. callable b. extendable c. plain vanilla d. putable e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 5/8/2018 1:54 AM 57. Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps. a. caps b. floors c. collars d. All of these are correct.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:46 AM DATE MODIFIED: 5/8/2018 1:55 AM 58. Which of the following is not a reason why financial institutions engage in interest rate swaps? a. to reduce interest rate risk b. to act as an intermediary c. to act as a dealer in swaps d. All of these are reasons why financial institutions engage in swaps.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:49 AM DATE MODIFIED: 5/8/2018 1:56 AM 59. A financial institution may participate in the swaps markets by a. serving as an intermediary by matching up parties that wish to engage in a swap. b. engaging in swaps to reduce interest rate risk. c. assuming the credit risk involved in a swap by guaranteeing that the payments will be made. d. serving as an intermediary by matching up parties that wish to engage in a swap AND engaging in swaps to reduce interest rate risk.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE MODIFIED:

5/8/2018 1:56 AM

60. The London Interbank Offer Rate (LIBOR) varies among currencies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:55 AM DATE MODIFIED: 9/23/2016 5:56 AM 61. During the credit crisis, many mortgage-backed securities defaulted, generating large profits for sellers of credit default swaps and large losses for buyers of the swaps. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:56 AM DATE MODIFIED: 9/23/2016 5:58 AM 62. After the credit crisis, new rules and regulations were issued to reform the swap markets. Which of the following is NOT one of the requirements of these new rules and regulations? a. Dealers and major participants in swaps must register with the Commodities Futures Trading Commission or the Securities and Exchange Commission. b. To make the market more transparent, the majority of swaps are to be traded on electronic platforms called swap execution facilities. c. Credit default swaps can no longer be created for mortgage-backed securities. d. Information about all swaps must be reported to a swap data repository.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:59 AM DATE MODIFIED: 5/8/2018 1:58 AM 63. The same types of risks that apply to interest rate swaps may also apply to currency swaps, except that currency swaps are not subject to basis risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:01 AM DATE MODIFIED: 9/23/2016 6:02 AM

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Chapter 16: Foreign Exchange Derivative Markets 1. At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it. a. higher than b. lower than c. the same as d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 2:58 AM DATE MODIFIED: 5/8/2018 2:07 AM 2. Which of the following are most likely to provide currency forward contracts to their customers? a. commercial banks b. international mutual funds c. brokerage firms d. insurance companies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:00 AM DATE MODIFIED: 9/23/2016 3:02 AM 3. The Bretton Woods era was the era a. of free-floating exchange rates. b. of floating rates without boundaries, but subject to government intervention. c. in which governments maintained exchange rates within 1 percent of a specified rate. d. in which exchange rates were maintained within 10 percent of a specified rate.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:02 AM DATE MODIFIED: 9/23/2016 3:04 AM 4. A system whereby exchange rates are market determined without boundaries but subject to government intervention is called a. a dirty float. b. a free float. c. the gold standard. d. the Bretton Woods era.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:11 AM DATE MODIFIED: 9/23/2016 3:12 AM 5. A country that pegs its currency is still able to maintain complete control over its local interest rates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:13 AM DATE MODIFIED: 9/23/2016 3:14 AM 6. If the demand for British pounds ____, the pound will ____, other things being equal. a. increases; appreciate b. decreases; appreciate c. increases; depreciate Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets d. decreases; appreciate AND increases; depreciate ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:15 AM DATE MODIFIED: 5/8/2018 2:08 AM 7. A(n) ____ in the supply of euros for sale will cause the euro to ____. a. increase; appreciate b. increase; depreciate c. decrease; depreciate d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:17 AM DATE MODIFIED: 5/8/2018 2:09 AM 8. Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries. a. income b. interest rate c. inflation d. tax ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/23/2016 3:19 AM 9/23/2016 3:21 AM

9. In reality, exchange rates do not always change as suggested by purchasing power parity. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:21 AM DATE MODIFIED: 9/23/2016 3:22 AM 10. If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:23 AM DATE MODIFIED: 9/23/2016 3:24 AM 11. When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of a. direct intervention. b. indirect intervention. c. a freely floating system. d. a pegged system.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:24 AM DATE MODIFIED: 9/23/2016 3:26 AM 12. Which of the following statements is incorrect? a. Central banks often consider adjusting a currency's value to influence economic conditions. b. If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar. c. A weaker dollar could cause U.S. inflation by reducing foreign competition. d. Direct intervention occurs when the central bank influences the factors that determine the dollar's value.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:27 AM DATE MODIFIED: 9/23/2016 3:29 AM 13. Direct intervention is always extremely effective. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:30 AM DATE MODIFIED: 9/23/2016 3:32 AM 14. If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets currencies and would place ____ pressure on the values of foreign currencies (with respect to the dollar). a. increase; upward b. increase, downward c. limit; upward d. limit; downward ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:34 AM DATE MODIFIED: 9/23/2016 4:25 AM 15. If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars. a. short; short b. long; short c. short; long d. long; long ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:25 AM DATE MODIFIED: 9/23/2016 4:27 AM 16. Generally, a ____ home currency can ____ domestic economic growth. a. weak; dampen b. strong; stimulate c. strong; dampen d. weak; dampen AND strong; stimulate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:28 AM DATE MODIFIED: 5/8/2018 2:10 AM 17. If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____. a. exceeds; discount b. is below; premium c. is below; discount d. exceeds; discount AND is below; premium ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:30 AM DATE MODIFIED: 5/8/2018 2:11 AM 18. ____ forecasting involves the use of historical exchange rate data to predict future values. a. Technical b. Fundamental c. Market-based d. Mixed ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:32 AM DATE MODIFIED: 9/23/2016 4:33 AM 19. Fundamental forecasting has been found to be consistently superior to the other forecasting techniques. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:33 AM DATE MODIFIED: 9/23/2016 4:35 AM 20. Which of the following is NOT a method of forecasting exchange rate volatility? a. using the volatility of historical exchange rate movements b. using a time series of volatility patterns in previous periods c. using the volatility of future exchange rate movements d. using the exchange rate's implied standard deviation ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:35 AM DATE MODIFIED: 5/8/2018 2:12 AM 21. A speculator who expects the euro to appreciate might a. purchase euros forward; when they are received, sell them in the spot market. b. sell euros forward, and then purchase them in the spot market just before fulfilling the forward obligation. c. sell futures contracts on euros, and then purchase euros in the spot market just before fulfilling the futures obligation. d. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Application 9/23/2016 4:37 AM 5/8/2018 2:13 AM

22. Which of the following statements is incorrect? a. Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date. b. The forward market is located in New York City. c. Many of the commercial banks that offer foreign exchange on a spot basis also offer forward transactions for the widely traded currencies. d. Forward contracts can hedge a corporation's risk that a currency's value may appreciate over time.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:39 AM DATE MODIFIED: 9/23/2016 4:40 AM 23. If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount? a. 2.5 percent discount b. 2.5 percent premium c. 10 percent premium d. 5 percent discount e. 5 percent premium ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:41 AM DATE MODIFIED: 9/23/2016 4:42 AM 24. Currency futures contracts differ from forward contracts in that they a. are an obligation. b. are not an obligation.

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Chapter 16: Foreign Exchange Derivative Markets c. are standardized. d. can specify any amount and maturity date.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:43 AM DATE MODIFIED: 9/23/2016 4:44 AM 25. If the spot rate ____ the exercise price, a currency ____ option will not be exercised. a. remains below; call b. remains below; put c. remains above; call d. remains below; call AND remains below; put ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:44 AM DATE MODIFIED: 5/8/2018 2:14 AM 26. A pegged exchange rate system is no longer used by any countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:46 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets DATE MODIFIED:

9/23/2016 4:48 AM

27. Assume that a British pound put option has a premium of $.03 per unit and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date, if at all. What is the expected per unit net gain (or loss) resulting from purchasing the put option? a. $.01 loss b. $.09 loss c. $.09 gain d. $.05 gain ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:48 AM DATE MODIFIED: 9/23/2016 4:49 AM 28. The speculative risk of purchasing a ____ is that the foreign currency’s value ____ over time. a. put option; increases b. put option; decreases c. call option; increases d. futures contract; increases ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:50 AM DATE MODIFIED: 9/23/2016 4:51 AM 29. According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign country will have a ____. a. higher; discount b. lower; premium c. higher; premium d. higher; discount AND lower; premium ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:51 AM DATE MODIFIED: 5/8/2018 2:14 AM 30. ____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers. a. pension funds b. international mutual funds c. insurance companies d. commercial banks e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:53 AM DATE MODIFIED: 5/8/2018 2:16 AM 31. In the Wall Street Journal, you observe that the British pound (£) is quoted at $1.65. The Australian dollar (A$) is quoted at $0.60. What is the value of the Australian dollar in British pounds? a. A$2.75 b. A$0.36 c. £2.75 d. £0.36 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.10 Bloom's: Application 9/23/2016 4:55 AM 5/8/2018 2:16 AM

32. If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro. a. increase; decline; upward b. increase; decline; downward c. decrease; increase; upward d. decrease; increase; downward e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:57 AM DATE MODIFIED: 5/8/2018 2:19 AM 33. Assume the following information.     

Interest rate on borrowed euros is 5 percent annualized.

Interest rate on dollars loaned out is 6 percent annualized.

Spot rate is 1.10 euros per dollar (one euro = $0.909).

Expected spot rate in five days is 1.15 euros per dollar.

Fabrizio Bank can borrow 10 million euros.

If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period is: a. 2,653,597.22 euros b. 455,266.81 euros c. 452,426.04 euros d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Application 9/23/2016 5:01 AM 5/8/2018 2:21 AM

34. A country that pegs its exchange rate to another exchange rate does not have complete control over its interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:05 AM DATE MODIFIED: 9/23/2016 5:06 AM 35. The euro is presently pegged to the British pound in order to stabilize international payments between European countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:06 AM DATE MODIFIED: 9/23/2016 5:08 AM 36. Financial institutions rarely use the forward market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.10 Bloom's: Knowledge 9/23/2016 5:09 AM 9/23/2016 5:11 AM

37. If the quoted cross-exchange rate between two foreign currencies is not aligned with the two corresponding exchange rates, investors can profit from triangular arbitrage. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:11 AM DATE MODIFIED: 9/23/2016 5:12 AM 38. The indirect exchange rate specifies the value of the currency in U.S. dollars. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:12 AM DATE MODIFIED: 9/23/2016 5:14 AM 39. The forward rate premium is dictated by the national income differential of the two currencies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:20 AM DATE MODIFIED: 9/23/2016 5:21 AM 40. The potential benefits from using foreign exchange derivatives are independent of the expected exchange rate movements. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:22 AM DATE MODIFIED: 9/23/2016 5:23 AM 41. The forward rate is the exchange rate for immediate delivery. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:23 AM DATE MODIFIED: 9/23/2016 5:25 AM 42. The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:25 AM DATE MODIFIED: 9/23/2016 5:27 AM 43. The European Central Bank is responsible for setting fiscal policy for all countries in the eurozone. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:27 AM DATE MODIFIED: 9/23/2016 5:28 AM 44. Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:29 AM DATE MODIFIED: 9/23/2016 5:31 AM 45. Central bank intervention can be overwhelmed by market forces and may not always succeed in reversing exchange rate movements. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:31 AM DATE MODIFIED: 9/23/2016 5:32 AM 46. When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:32 AM DATE MODIFIED: 9/23/2016 5:34 AM 47. The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:34 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets DATE MODIFIED:

9/23/2016 5:36 AM

48. The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 9/23/2016 5:38 AM 49. A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when received, sell it in the spot market. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 9/23/2016 5:39 AM 50. The following information refers to Fresno Bank and Champaign Bank.

Fresno Bank Champaign Bank

Bid Rate on Euros $1.002 $0.997

Ask Rate on Euros $1.009 $1.000

Based on this information, locational arbitrage would be profitable. a. True b. False ANSWER: POINTS:

a 1

Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 9/23/2016 5:41 AM 51. Purchasing power parity suggests that the forward rate premium (or discount) should be about equal to the differential in interest rates between the countries of concern. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 9/23/2016 5:43 AM 52. ____ are not foreign exchange derivatives. a. Forward contracts b. Currency futures contracts c. Currency swaps d. Currency options e. All of these are foreign exchange derivatives.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 5/8/2018 2:22 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets 53. Which of the following is typically used as the basis of a market-based forecast? a. the currency’s spot rate b. a time-series model showing the currency’s moving average c. the currency’s volatility index d. the currency’s forward rate e. the currency's spot rate AND the currency's forward rate ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:54 AM DATE MODIFIED: 5/8/2018 2:22 AM 54. In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.67. The Australian dollar (A$) is quoted for $0.62. What is the value of the Australian dollar in British pounds? a. A$2.69 b. £0.37 c. £2.69 d. A$0.37 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 6:03 AM DATE MODIFIED: 5/8/2018 2:23 AM 55. In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention. a. pegged b. dirty floating c. freely floating d. Bretton Woods e. None of these are correct.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:06 AM DATE MODIFIED: 5/8/2018 2:23 AM 56. The supply and demand for a currency are influenced by all of the following, EXCEPT a. differential interest rates. b. differential inflation rates. c. direct government intervention. d. indirect government intervention. e. All of these affect the supply and demand for a currency.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:09 AM DATE MODIFIED: 5/8/2018 2:24 AM 57. If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro. a. increase; decline; upward b. increase; decline; downward c. decrease; increase; upward d. decrease; increase; downward e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.10 Bloom's: Comprehension 9/23/2016 6:11 AM 5/8/2018 2:25 AM

58. Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity. a. appreciate; 2 b. depreciate; 2 c. appreciate; 4 d. depreciate; 4 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/23/2016 6:13 AM DATE MODIFIED: 5/8/2018 2:26 AM 59. The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called a. triangular arbitrage. b. locational arbitrage. c. covered interest arbitrage. d. interest rate parity.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:15 AM DATE MODIFIED: 9/23/2016 6:17 AM 60. The indirect exchange rate is always the reciprocal of the direct exchange rate. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:17 AM DATE MODIFIED: 9/23/2016 6:19 AM 61. The exchange rate between two foreign (nondollar) currencies is known as a(n): a. indirect dollar rate b. forward rate c. cross-exchange rate d. derived exchange rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:19 AM DATE MODIFIED: 5/8/2018 2:26 AM 62. The devaluation of a country’s currenc a. makes foreign products more expensive for consumers in that country. b. increases foreign demand for that country’s exports. c. can lead to deflation in that country. d. makes foreign products more expensive for consumers in that country AND increases foreign demand for that country’s exports.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Comprehension 9/23/2016 6:21 AM 5/8/2018 2:27 AM

63. Currency futures contracts are standardized, whereas forward contracts are more flexible and can specify whatever amount and maturity date are desired. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:23 AM DATE MODIFIED: 9/23/2016 6:25 AM 64. When the Federal Reserve attempts to lower interest rates by increasing the U.S. money supply and has no impact on inflationary expectations, it puts upward pressure on the value of the dollar. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:25 AM DATE MODIFIED: 9/23/2016 6:28 AM

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Chapter 17: Commercial Bank Operations 1. Which of the following statements is incorrect? a. Banks have expanded their business across services over time. b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale. c. The banking industry has become less concentrated in recent years. d. All of these statements are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:30 AM DATE MODIFIED: 5/8/2018 2:31 AM 2. Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:33 AM DATE MODIFIED: 9/23/2016 5:35 AM 3. A commercial bank can be a lender or a borrower when using repurchase agreements and loans in the federal funds market. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 5:35 AM 9/23/2016 5:36 AM

4. The operations, management, and regulation of a commercial bank are the same irrespective of the types of services offered. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 9/23/2016 5:38 AM 5. A financial institution is likely to call a callable CD before its maturity if interest rates have risen since the CD was issued. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 5/8/2018 2:31 AM 6. A(n) ____ account provides checking and debit card services as well as interest. a. demand deposit b. negotiable order of withdrawal (NOW) c. passbook savings d. time deposit ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 9/23/2016 5:42 AM 7. Protective covenants impose conditions that require the bank to provide additional loans to a borrower to protect the borrower from going bankrupt. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 9/23/2016 5:44 AM 8. A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, a minimum deposit of $100,000 or more, and a secondary market. a. retail CD b. negotiable CD c. market CD d. protective CD ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 9/23/2016 5:46 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations 9. A bank's sources of funds represent liabilities or equity of the bank. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:47 AM DATE MODIFIED: 9/23/2016 5:49 AM 10. Money market deposit accounts differ from conventional time deposits in that they: a. specify a maturity b. offer limited check-writing privileges c. are less liquid d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:49 AM DATE MODIFIED: 5/8/2018 2:32 AM 11. For any given bank, federal funds ____ represent a(n) ____. a. purchased; asset b. sold; liability c. purchased; liability d. purchased; asset AND sold; liability ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 5:51 AM 5/8/2018 2:33 AM

12. The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity. a. substantially above b. substantially below c. close to d. None of these are correct; the rate is much higher than the Treasury yield in some periods and much lower than the Treasury yield in other periods.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:53 AM DATE MODIFIED: 5/8/2018 2:33 AM 13. Obtaining funds through ____ is not a common way for banks to satisfy a temporary deficiency of funds. a. issuing bonds b. the federal funds market c. repurchase agreements d. borrowing from the Federal Reserve ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:55 AM DATE MODIFIED: 9/23/2016 5:57 AM 14. The Federal Reserve provides loans to banks in order to a. resolve permanent shortages of funds experienced by banks. b. resolve temporary shortages of funds experienced by banks. c. finance the shortages of funds of finance companies.

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Chapter 17: Commercial Bank Operations d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:24 AM DATE MODIFIED: 5/8/2018 2:34 AM 15. When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a a. federal funds loan. b. discount window loan. c. repurchase agreement. d. commercial paper transaction.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:26 AM DATE MODIFIED: 9/23/2016 6:30 AM 16. When banks need funding for just a few days, they would most likely a. issue bonds and then call them. b. issue stock and then repurchase it. c. borrow in the federal funds market. d. issue NCDs. ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Comprehension 9/23/2016 6:30 AM 9/23/2016 6:32 AM

17. Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:32 AM DATE MODIFIED: 9/23/2016 6:34 AM 18. All other things being equal, when banks issue new stock, they a. increase reported earnings per share. b. decrease their ability to absorb operating losses. c. dilute the ownership of the bank. d. increase reported earnings per share AND decrease their ability to absorb operating losses.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:34 AM DATE MODIFIED: 5/8/2018 2:34 AM 19. Cash held ____ represents the major portion of a bank's required reserves. a. at other commercial banks b. in a bank's vault c. on deposit at the federal funds window d. on deposit with the Board of Governors ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:36 AM DATE MODIFIED: 9/23/2016 6:38 AM 20. The main use of bank funds is for: a. loans b. investment securities c. fixed assets d. repurchase agreements ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:38 AM DATE MODIFIED: 5/8/2018 2:35 AM 21. ____ loans are primarily used to finance the purchase of fixed assets. a. Term b. Working capital c. Informal line of credit d. Revolving credit ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:42 AM DATE MODIFIED: 9/23/2016 6:43 AM 22. Which of the following is most appropriate for a business that may experience a sudden need for funds but does not Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations know precisely when? a. working capital loan b. direct lease loan c. term loan d. informal line of credit ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:44 AM DATE MODIFIED: 9/23/2016 6:45 AM 23. A ____ loan may be especially appropriate when a firm wishes to avoid adding more debt to its balance sheet. a. term b. bullet c. direct lease d. revolving credit ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:46 AM DATE MODIFIED: 9/23/2016 6:47 AM 24. The interest rate banks charge on business loans is known as the: a. federal funds rate b. primary credit lending rate c. prime rate d. call money rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:10 AM DATE MODIFIED: 5/8/2018 2:36 AM 25. Transaction deposits do not include: a. demand deposits. b. NCDs c. NOW accounts d. All of these are transactions deposits.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:13 AM DATE MODIFIED: 5/8/2018 2:40 AM 26. Commercial banks are not allowed to invest in: a. Treasury securities. b. Freddie Mac securities. c. Fannie Mae securities. d. All of these are correct; banks can invest in all of these securities.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:15 AM DATE MODIFIED: 5/8/2018 2:41 AM 27. Money market deposit accounts (MMDAs) a. require a maturity of six months or longer. b. allow a limited number of checks to be written against the account.

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Chapter 17: Commercial Bank Operations c. pay a higher interest rate than CDs. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:24 AM DATE MODIFIED: 5/8/2018 2:42 AM 28. Which of the following types of deposits does NOT allow any check-writing privileges? a. NOW accounts b. money market deposit accounts (MMDAs) c. retail CDs d. All of these allow checks to be written.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:26 AM DATE MODIFIED: 5/8/2018 2:43 AM 29. Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds? a. MMDAs b. federal funds c. the discount window d. retail CDs ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 7:29 AM 9/23/2016 7:31 AM

30. The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company's own stock, and acquire other firms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:31 AM DATE MODIFIED: 9/23/2016 7:33 AM 31. Like other market interest rates, the federal funds rate moves in reaction to changes in demand or supply of funds or both. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:33 AM DATE MODIFIED: 9/23/2016 7:39 AM 32. The yield on repurchase agreements is slightly higher than the federal funds rate at any given point in time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:39 AM DATE MODIFIED: 9/23/2016 7:40 AM 33. Bank regulators are concerned that banks may maintain a higher level of capital than they should and have therefore imposed capital requirements on them. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:41 AM DATE MODIFIED: 9/23/2016 7:44 AM 34. In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:44 AM DATE MODIFIED: 9/23/2016 7:45 AM 35. Bank rates on credit card balances are usually similar to the rate charged on business loans. a. True b. False ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:45 AM DATE MODIFIED: 9/23/2016 7:48 AM 36. The most common way for U.S. commercial banks to expand internationally is by purchasing banks in other countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:49 AM DATE MODIFIED: 9/23/2016 7:51 AM 37. ____ is (are) not a major source of funds for commercial banks. a. deposit accounts b. borrowed funds c. commercial loans d. bank capital e. All of these are sources of funds for commercial banks.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:51 AM DATE MODIFIED: 5/8/2018 2:45 AM 38. Which of the following statements is incorrect with respect to the federal funds market?

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Chapter 17: Commercial Bank Operations a. It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions. b. Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them. c. The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed. d. All of these are correct with respect to the federal funds market.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:53 AM DATE MODIFIED: 5/8/2018 2:47 AM 39. The federal funds rate is typically ____ the primary credit lending rate. a. greater than b. less than c. equal to d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:55 AM DATE MODIFIED: 5/8/2018 2:48 AM 40. ____ are the largest bank source of funds as a percentage of total liabilities. a. Small-denomination time deposits b. Money market deposit accounts (MMDAs) c. Transaction deposits d. Borrowed funds e. Savings deposits (including MMDAs) ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:58 AM DATE MODIFIED: 9/23/2016 8:00 AM 41. With a _________, a bank agrees to purchase a firm’s __________ if the firm cannot place the issue in the market at an acceptable interest rate. a. note issuance facility; commercial paper b. note issuance facility; bonds c. paper placement commitment; commercial paper d. bond placement commitment; bonds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 8:01 AM DATE MODIFIED: 9/23/2016 8:04 AM 42. A ____ is a type of loan commitment. a. standby letter of credit (SLC) b. note issuance facility (NIF) c. forward contract d. swap contract e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:08 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DATE MODIFIED:

5/8/2018 2:48 AM

43. When a bank obtains funds through a ____, the provider of the funds receives collateral. a. retail CD b. NOW account c. repurchase agreement d. money market deposit account ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:11 AM DATE MODIFIED: 9/24/2016 1:12 AM 44. When banks obtain funds in the federal funds market, the providers of the funds are a. other depository institutions. b. nonfinancial corporations. c. consumers. d. the Federal Reserve.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:13 AM DATE MODIFIED: 9/24/2016 1:14 AM 45. A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____. a. just a few days; one year or more b. several weeks; one year or more c. several weeks; just a few days d. just a few days; just a few days ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:15 AM DATE MODIFIED: 9/24/2016 1:17 AM 46. The interest rate charged on loans between depository institutions is commonly referred to as the: a. federal funds rate b. discount rate c. primary credit lending rate d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:17 AM DATE MODIFIED: 5/8/2018 2:50 AM 47. The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the: a. federal funds rate b. primary credit lending rate c. repo rate d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:19 AM DATE MODIFIED: 5/8/2018 2:51 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations 48. The primary credit lending rate is determined by a. the Federal Reserve. b. Congress. c. the Treasury. d. the President of the United States.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:21 AM DATE MODIFIED: 9/24/2016 1:22 AM 49. Bank capital represents funds obtained through ____ and through ____. a. issuing stock; offering long-term CDs b. issuing repurchase agreements; issuing bonds c. issuing stock; retaining earnings d. offering long-term CDs; issuing bonds ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:23 AM DATE MODIFIED: 9/24/2016 1:24 AM 50. When a bank obtains funds through ____, households are not a common provider of the funds. a. NOW accounts b. retail CDs c. passbook savings accounts d. NCDs ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:25 AM DATE MODIFIED: 9/24/2016 1:26 AM 51. Which of the following is NOT an off-balance sheet activity? a. highly leveraged transactions (HLTs) b. standby letters of credit c. forward contracts d. swap contracts ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:27 AM DATE MODIFIED: 5/8/2018 2:53 AM 52. A bank's uses of funds represent liabilities of a bank. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:29 AM DATE MODIFIED: 9/24/2016 1:31 AM 53. States may enact _______ to set a maximum on the rate of interest that banks can charge. a. leveraged loan laws b. credit protection laws c. consumer interest laws d. usury laws Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:31 AM DATE MODIFIED: 9/24/2016 1:32 AM 54. The five largest banks in the United States account for about one-tenth of all assets in U.S. banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.03 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:33 AM DATE MODIFIED: 9/24/2016 1:34 AM 55. From a bank manager’s perspective, the differential in interest between a bank’s loans and its deposits a. must not exceed the federal funds rate. b. is called the primary credit lending rate. c. must be sufficient to cover the bank’s other expenses and generate a reasonable profit for the bank’s owners. d. must be sufficient to cover the bank’s deposit insurance premiums and its reserve requirements at the Federal Reserve.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 1:35 AM DATE MODIFIED: 5/8/2018 2:54 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations 56. In a loan participation arrangement, normally all of the participating banks are exposed to credit (default) risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:42 AM DATE MODIFIED: 9/24/2016 1:44 AM 57. Banks will not accept intangible assets, such as patents and brand names, as collateral for commercial loans. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:44 AM DATE MODIFIED: 9/24/2016 1:46 AM 58. Proprietary trading is generally less risky than a bank’s lending operations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DATE MODIFIED:

9/24/2016 1:48 AM

59. When a bank engages in proprietary trading, it a. uses its own funds to make investments. b. is not subject to regulations. c. lends the funds in the federal funds market. d. normally uses the funds to build its capital.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:48 AM DATE MODIFIED: 5/8/2018 2:58 AM 60. In a standby letter of credit, a bank agrees to a. charge a fixed interest rate for a line of credit for a specified period. b. back a customer’s obligation to a third party. c. provide a customer with funds up to a specified maximum amount over a specified period. d. service credit card loans originated by another bank.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:51 AM DATE MODIFIED: 5/8/2018 2:58 AM 61. A forward contract on currency: a. is a way to hedge credit (default) risk. b. is used to swap fixed interest payments in euros for variable interest payments in dollars. c. is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate. d. is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:53 AM DATE MODIFIED: 9/24/2016 1:55 AM 62. Before establishing foreign branches, a U.S. bank must obtain the approval of the: a. U.S. Treasury b. U.S. Commerce Department. c. Federal Deposit Insurance Corporation. d. Federal Reserve ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:56 AM DATE MODIFIED: 9/24/2016 1:57 AM

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Chapter 18: Bank Regulation 1. Deposit insurance has a limit of: a. $10,000. b. $25,000. c. $100,000. d. $250,000.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:01 AM DATE MODIFIED: 9/24/2016 2:04 AM 2. The opening of a commercial bank in the United States a. does not require a charter. b. always requires a charter from a state government. c. always requires a charter from the federal government. d. requires a charter from a state or the federal government. e. requires a charter from both the state and federal government.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:05 AM DATE MODIFIED: 9/24/2016 2:07 AM 3. National banks are regulated by ____, and state banks are regulated by ____. a. the Comptroller of the Currency; their state agency b. the Comptroller of the Currency; the Comptroller of the Currency c. their state agency; their state agency d. their state agency; the Comptroller of the Currency ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:07 AM DATE MODIFIED: 9/24/2016 2:09 AM 4. All Fed member banks must hold a. private insurance on deposits. b. FDIC insurance on deposits. c. both FDIC and private insurance on deposits. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:09 AM DATE MODIFIED: 5/8/2018 3:06 AM 5. In making loans to a single customer, commercial banks ____ restricted to a maximum percentage of their capital, and they ____ allowed to use borrowed or deposited funds to purchase common stock. a. are; are b. are; are not c. are not; are d. are not; are not ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:11 AM DATE MODIFIED: 9/24/2016 2:12 AM 6. Banks commonly use depositor funds to invest in stocks.

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Chapter 18: Bank Regulation a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:13 AM DATE MODIFIED: 9/24/2016 2:15 AM 7. The liquidity coverage ratio, which is measured under the Basel III guidelines, is the ratio of a bank’s _________ to its ___________. a. liquid assets; projected net cash outflow b. liquid assets; retained earnings c. Tier 1 capital; liquid assets d. projected net cash outflow; Tier 1 capital ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:17 AM DATE MODIFIED: 9/24/2016 2:20 AM 8. The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own a. reserve requirements. b. capital ratios. c. interest rates on savings deposits. d. corporate loan interest rates.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/24/2016 2:20 AM 9/24/2016 2:22 AM

9. The Glass-Steagall Act of 1933 prevented a. any firm that accepts deposits from underwriting stocks and bonds of corporations. b. any firm that accepts deposits from underwriting general obligation bonds of states and municipalities. c. any firm that accepts deposits from holding any corporate bonds in its asset portfolio. d. state-chartered banks from offering commercial loans.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:23 AM DATE MODIFIED: 9/24/2016 2:24 AM 10. Which of the following was NOT achieved by the Depository Institutions Deregulation and Monetary Control Act of 1980? a. removed interest rate ceilings on deposits b. allowed banks to offer NOW accounts c. increased competition among depository institutions d. allowed interstate banking for depository institutions in most states ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:25 AM DATE MODIFIED: 5/8/2018 3:07 AM 11. The Garn-St Germain Act of 1982 a. permitted depository institutions to offer money market deposit accounts. b. prevented depository institutions from acquiring problem institutions across geographic boundaries. c. required the Fed to explicitly charge depository institutions for its services.

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Chapter 18: Bank Regulation d. allowed the Fed to provide check clearing to depository institutions at no charge.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:29 AM DATE MODIFIED: 9/24/2016 2:31 AM 12. Which of the following is NOT a specific criterion that regulators use to monitor banks? a. capital adequacy b. dollar value of fixed assets c. asset quality d. earnings e. sensitivity to financial market conditions ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:31 AM DATE MODIFIED: 5/8/2018 3:07 AM 13. The potential risk that financial problems can spread through financial institutions and the financial system is referred to as ________ risk. a. systemic b. systematic c. unsystematic d. market ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/24/2016 2:34 AM 9/24/2016 2:36 AM

14. The Basel framework recommends that banks maintain capital in proportion to their: a. mortgages b. commercial paper c. liabilities d. risk-weighted assets ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:36 AM DATE MODIFIED: 9/24/2016 2:38 AM 15. In general, a bank defines its value-at-risk as the estimated potential loss from its trading businesses that could result from adverse movements in market prices. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:38 AM DATE MODIFIED: 9/24/2016 2:40 AM 16. Which of the following is an "off-balance-sheet commitment”? a. long-term debt b. additional paid-in capital c. notes payable d. letters of credit backing commercial paper issued by firms ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:40 AM DATE MODIFIED: 9/24/2016 2:42 AM 17. The liquidity component of the CAMELS rating refers to a. how a bank's earnings would change if economic conditions change. b. how readily a bank's management would detect its financial problems. c. a bank's sensitivity to financial market conditions. d. the type of loans that a bank provides, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases. e. whether a bank frequently needs to borrow from outside sources, such as the discount window.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:42 AM DATE MODIFIED: 9/24/2016 2:45 AM 18. Which of the following is NOT a corrective action that regulators may take when a bank is identified as a problem bank? a. examine the bank frequently and thoroughly b. request that the bank boost its capital level or delay its plans to expand c. require the bank to provide additional financial information that is periodically updated to allow continued monitoring d. take legal action against the bank if it does not comply with their suggested remedies e. All of these are possible corrective actions taken by bank regulators.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/24/2016 2:45 AM 5/8/2018 3:09 AM

19. The fee banks pay to the FDIC for deposit insurance is now a. a fixed dollar amount for all banks. b. a fixed percentage of the bank's deposits for all banks. c. a fixed percentage of the bank's loan volume for all banks. d. based on the risk of the bank.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:48 AM DATE MODIFIED: 5/8/2018 3:10 AM 20. Generally, the failure of small banks a. causes more widespread concern about the safety of the banking system than the failure of large banks. b. causes equal concern about the safety of the banking system as the failure of large banks. c. causes less concern about the safety of the banking system than the failure of large banks. d. EITHER causes more widespread concern about the safety of the banking system than the failure of large banks OR causes equal concern about the safety of the banking system as the failure of large banks can be true, depending on the type of business cycle that exists while the failures occur.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:50 AM DATE MODIFIED: 5/8/2018 3:10 AM 21. The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:53 AM DATE MODIFIED: 9/24/2016 2:55 AM 22. The key reason for regulatory examinations (such as CAMELS ratings) is to a. rate past performance b. detect problems of a bank in time to correct them. c. check for embezzlement. d. monitor reserve requirements.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:55 AM DATE MODIFIED: 9/24/2016 2:57 AM 23. Deposit insurance now covers all bank deposits without any limit. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:57 AM DATE MODIFIED: 9/24/2016 2:59 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation 24. Which banking act allowed banks to cross state lines in order to acquire a failing institution? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St Germain Act ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:59 AM DATE MODIFIED: 9/24/2016 3:01 AM 25. Which banking act allowed for the creation of NOW accounts? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St Germain Act ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:01 AM DATE MODIFIED: 9/24/2016 3:03 AM 26. Which banking act allowed interstate banking? a. Reigle-Neal Interstate Banking and Branching Efficiency Act b. Glass-Steagall Act c. DIDMCA d. Sarbanes-Oxley Act ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:04 AM DATE MODIFIED: 9/24/2016 3:06 AM 27. Which banking act removed deposit rate ceilings? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St Germain Act ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:07 AM DATE MODIFIED: 9/24/2016 3:07 AM 28. The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on: a. economies of scale b. financial leverage c. diseconomies of scale d. capital adequacy theory ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:09 AM DATE MODIFIED: 5/8/2018 3:11 AM 29. Federal deposit insurance Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation a. has existed since the 1800s. b. was created in 1933. c. was created after World War II. d. was created in 1960.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:12 AM DATE MODIFIED: 5/8/2018 3:12 AM 30. ____ is not a characteristics used by bank regulators to rate banks. a. capital adequacy b. current stock price c. asset quality d. management e. All of these are used to rate banks.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:16 AM DATE MODIFIED: 5/8/2018 3:18 AM 31. The moral hazard problem is minimized when deposit insurance premiums are a. zero (not imposed by the FDIC). b. the same percentage of deposits for all banks. c. set at a fixed percentage of deposits for large banks, and at zero for small banks. d. set at a percentage of deposits that is based on the bank's risk.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:18 AM DATE MODIFIED: 9/24/2016 3:20 AM 32. Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999? a. It expanded the Glass-Steagall Act. b. It enabled commercial banks to more easily pursue securities and insurance activities. c. It allowed securities firms and insurance companies to acquire banks. d. It required commercial banks to have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities. e. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:21 AM DATE MODIFIED: 5/8/2018 3:19 AM 33. The ____ is the fund used to cover insured depositors. a. Deposit Insurance Fund b. Federal Deposit Insurance Corporation Fund c. Bank Depository Insurance Fund d. Financial Institution Insurance Fund e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:33 AM DATE MODIFIED: 5/8/2018 3:20 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation 34. ____ is not a rating criterion used by bank regulators. a. Capital adequacy b. Savings deposit volume c. Asset quality d. Management e. Liquidity ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:35 AM DATE MODIFIED: 9/24/2016 3:37 AM 35. The act of taking on more risk because of protection from adverse consequences due to the risk is referred to as a moral hazard problem. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:38 AM DATE MODIFIED: 9/24/2016 3:40 AM 36. The Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more transparent process for reporting on a firm’s productivity and the financial condition. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/24/2016 3:40 AM 9/24/2016 3:42 AM

37. The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:43 AM DATE MODIFIED: 9/24/2016 3:45 AM 38. Publicly traded banks have incurred larger reporting expenses as a result of having to comply with the Sarbanes-Oxley Act. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:45 AM DATE MODIFIED: 9/24/2016 3:47 AM 39. The Financial Services Modernization Act of 1999 a. gave banks and other financial service firms less freedom to merge. b. allowed financial institutions to offer a diversified set of financial services. c. offered very few benefits to a financial institution's clients. d. increased the reliance of financial institutions on the demand for the single service they offer.

ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:47 AM DATE MODIFIED: 9/24/2016 3:49 AM 40. When the Federal Reserve conducts stress tests of banks, it may examine the U.S. operations of foreign-based banks as well as U.S. banks. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:49 AM DATE MODIFIED: 9/24/2016 3:51 AM 41. All state banks are required to be members of the Federal Reserve System. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:52 AM DATE MODIFIED: 9/24/2016 3:55 AM 42. State banks are regulated by the Comptroller of the Currency. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:55 AM DATE MODIFIED: 9/24/2016 3:57 AM 43. Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the FDIC. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:58 AM DATE MODIFIED: 9/24/2016 4:00 AM 44. Commercial banks are allowed to invest in junk bonds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:00 AM DATE MODIFIED: 9/24/2016 4:02 AM 45. During the credit crisis, banks argued that they should be allowed to use fair value accounting in valuing their assets for purposes of meeting capital requirements.

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Chapter 18: Bank Regulation a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:04 AM DATE MODIFIED: 9/24/2016 4:06 AM 46. The provision of a letter of credit by a bank to back commercial paper issued by a corporation is an example of an offbalance sheet commitment. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:06 AM DATE MODIFIED: 9/24/2016 4:08 AM 47. The Reigle-Neal Interstate Banking and Branching Efficiency Act allowed banks to achieve economies of scale through nationwide interstate banking. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:08 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DATE MODIFIED:

9/24/2016 4:11 AM

48. Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affected by rising interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:11 AM DATE MODIFIED: 9/24/2016 4:13 AM 49. During the credit crisis, the U.S. government purchased the common stock of the largest banks in order to inject funds into the banks and cushion their losses. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:13 AM DATE MODIFIED: 9/24/2016 4:15 AM 50. Which of the following was NOT a provision of the Financial Reform Act (Dodd-Frank Act) of 2010? a. established the Financial Stability Oversight Council b. put limits on banks’ proprietary trading c. established the Consumer Financial Protection Bureau d. reestablished the separation between banking and securities activities that had existed under the Glass-Steagall Act e. required derivative securities to be traded through a clearinghouse or exchange ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:16 AM DATE MODIFIED: 5/8/2018 3:20 AM 51. A federal bank charter is issued by the: a. Comptroller of the Currency b. Securities and Exchange Commission c. U.S. Treasury d. Federal Reserve e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:26 AM DATE MODIFIED: 5/8/2018 3:21 AM 52. Bank regulations typically: a. involve a trade-off between the safety of the banking system and the efficiency of bank operations. b. impose restrictions on the types of assets in which banks can invest. c. set requirements for the minimum amount of capital that banks must hold. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:29 AM DATE MODIFIED: 5/8/2018 3:22 AM 53. When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity.

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Chapter 18: Bank Regulation a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:33 AM DATE MODIFIED: 9/24/2016 4:37 AM 54. Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:38 AM DATE MODIFIED: 9/24/2016 4:41 AM 55. A bank can increase its capital ratio by a. buying back shares of its stock from shareholders. b. selling assets. c. increasing its dividend to encourage more investors to purchase its stock. d. increasing its off-balance sheet activities.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DATE CREATED: DATE MODIFIED:

9/24/2016 4:41 AM 5/8/2018 3:22 AM

56. The Basel III framework proposes a. lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis. b. relying on the rating agencies to assess the risk of bank assets. c. increased capital requirements and liquidity requirements for banks. d. using the gap ratio to set the capital ratio.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:44 AM DATE MODIFIED: 5/8/2018 3:23 AM 57. During the credit crisis, all of the following occurred EXCEPT: a. some securities firms were allowed to become bank holding companies. b. the Federal Reserve rescued American International Group, an insurance company. c. the Treasury injected funds into financial institutions. d. the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:46 AM DATE MODIFIED: 5/8/2018 3:24 AM 58. The Volcker rule, named for a former Fed chair a. is intended to increase the powers of the Fed. b. states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system. c. sets limits on banks’ proprietary trading. d. requires all banks to undergo annual stress tests.

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Chapter 18: Bank Regulation ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:48 AM DATE MODIFIED: 5/8/2018 3:24 AM 59. The Financial Reform Act (Wall Street Reform and Consumer Protection Act or Dodd-Frank Act) of 2010 a. ended the system of risk-based insurance premiums. b. set requirements for the Deposit Insurance Fund’s reserves. c. raised the limit for insured deposits to $750,000 per depositor. d. allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:51 AM DATE MODIFIED: 5/8/2018 3:25 AM 60. The Volcker Rule prohibits banks from sponsoring or holding an ownership interest in a hedge fund or a private equity fund. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s Knowledge DATE CREATED: 9/24/2016 4:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DATE MODIFIED:

9/24/2016 4:55 AM

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Chapter 19: Bank Management 1. Which of the following statements is incorrect? a. Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests. b. Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk. c. To prevent agency problems, some banks provide stock as compensation to managers. d. The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 6:03 AM DATE MODIFIED: 9/24/2016 6:10 AM 2. Banks can resolve cash deficiencies by: a. creating additional liabilities b. selling assets c. buying back common stock d. increasing dividend payouts e. creating additional liabilities AND selling assets ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 6:13 AM DATE MODIFIED: 5/8/2018 3:29 AM 3. As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability. a. higher; higher b. lower; lower c. higher; lower d. lower; higher ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:19 AM DATE MODIFIED: 9/28/2016 1:21 AM 4. Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:21 AM DATE MODIFIED: 9/28/2016 1:23 AM 5. During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets. a. increase; more rate sensitive than b. decrease; more rate sensitive than c. increase; equally rate sensitive as d. decrease; equally rate sensitive as ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:23 AM DATE MODIFIED: 9/28/2016 1:25 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 6. If a bank expects interest rates to consistently ____ over time, it will consider allocating most funds to rate-____ assets. a. decrease; sensitive b. decrease; insensitive c. increase; insensitive d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:26 AM DATE MODIFIED: 5/8/2018 3:30 AM 7. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. Petri Bank's net interest margin is ____ percent. a. 4.0 b. 3.6 c. 6.7 d. 5.0 ANSWER: d POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 1:29 AM DATE MODIFIED: 9/28/2016 1:30 AM 8. The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called: a. gap measurement b. duration measurement c. duration ratio d. gap ratio ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:31 AM DATE MODIFIED: 5/8/2018 3:31 AM 9. A gap ratio of less than one suggests that a. rate-sensitive assets exceed rate-sensitive liabilities. b. an increase in interest rates would increase the bank's net interest margin. c. rate-sensitive liabilities exceed rate-sensitive assets. d. a decrease in interest rates would decrease the bank's net interest margin. e. an increase in interest rates would increase the bank's net interest margin AND a decrease in interest rates would decrease the bank's net interest margin.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:34 AM DATE MODIFIED: 5/8/2018 3:31 AM 10. Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:38 AM DATE MODIFIED: 9/28/2016 1:39 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 11. The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity. a. lower than b. higher than c. the same as d. lower than AND higher than, depending on the size of the coupon payment ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:41 AM DATE MODIFIED: 5/8/2018 3:31 AM 12. Other things being equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations. a. shorter; longer b. shorter; shorter c. longer; shorter d. longer; longer ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:47 AM DATE MODIFIED: 9/28/2016 1:49 AM 13. For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____. a. exceeds; zero b. exceeds; negative c. exceeds; positive d. is less than; negative ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:55 AM DATE MODIFIED: 9/28/2016 2:02 AM 14. Other things being equal, assets with ____ maturities and ____ frequent coupon payments have longer durations. a. shorter; more b. shorter; less c. longer; more d. longer; less ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 2:49 AM DATE MODIFIED: 9/28/2016 2:52 AM 15. If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's: a. credit risk would decrease b. credit risk would increase c. liquidity risk would increase d. liquidity risk would decrease e. credit risk would increase AND liquidity risk would decrease.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 2:52 AM DATE MODIFIED: 5/8/2018 3:32 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 16. Which of the following is NOT a likely method used by a bank to reduce interest rate risk? a. maturity matching b. using fixed-rate loans c. using interest rate futures contracts d. using interest rate caps ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 2:54 AM DATE MODIFIED: 5/8/2018 3:34 AM 17. Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affected by interest rate fluctuations. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 2:56 AM DATE MODIFIED: 9/28/2016 2:58 AM 18. The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses. a. sale; increases b. sale; reduces c. purchase; reduces d. sale; increases AND purchase; reduces ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:01 AM DATE MODIFIED: 5/8/2018 3:51 AM 19. Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk? a. one whose assets and liabilities are equally interest-rate sensitive b. one whose assets are more interest-rate sensitive than its liabilities c. one whose liabilities are more interest-rate sensitive than its assets d. one whose gap ratio is equal to 1.0 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:07 AM DATE MODIFIED: 9/28/2016 3:09 AM 20. Banks increase their risk by increasing their capital as a percentage of assets a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 3:10 AM DATE MODIFIED: 9/28/2016 3:11 AM 21. Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak. a. increase; increase b. reduce; reduce c. increase; reduce Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management d. reduce; increase ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:12 AM DATE MODIFIED: 9/28/2016 3:14 AM 22. Banks tend to focus their loans in one industry so that they can specialize on that industry and reduce the credit risk of their loan portfolio. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:14 AM DATE MODIFIED: 9/28/2016 3:16 AM 23. Most loan sales enable the bank originating the loan to continue servicing the loan. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 3:16 AM DATE MODIFIED: 9/28/2016 3:19 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 24. ROE is defined as: a. b. c. d.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 7:18 AM DATE MODIFIED: 5/8/2018 3:52 AM 25. The greater the ____, the greater the amount of assets per dollar's worth of equity. a. leverage measure b. ratio of equity to debt c. capital ratio d. proportion of loans to securities in the asset portfolio ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 8:15 AM DATE MODIFIED: 9/28/2016 8:17 AM 26. A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity? a. 10 percent b. .2 percent c. 2 percent Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management d. 20 percent e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 8:17 AM DATE MODIFIED: 5/8/2018 3:52 AM 27. A bank has the following asset and liability portfolios. What is the gap?

Ratesensitive assets

Amount (in millions)

Floating-rate loans

$4,000

Floating-rate mortgages

1,000

Short-term Treasury securities

Rate-sensitive liabilities NOW accounts

MMDAs 1,500 $6,500

Amount (in millions) $1,750

4,500

Short-term CDs

1,000 $7,250

a. $750 million b. $750 million c. 1.12 d. .896 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 8:24 AM DATE MODIFIED: 5/8/2018 3:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 28. If Bank A has a negative gap and Bank B has a positive gap, which of the following is true? a. Bank A is more favorably affected by rising interest rates. b. Bank B is more favorably affected by falling interest rates. c. Bank A is adversely affected by falling interest rates. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 8:32 AM DATE MODIFIED: 5/8/2018 3:53 AM 29. Which of the following is a measure for banks to use to assess their exposure to interest rate risk? a. capital ratio b. leverage measure c. duration measurement d. gap ratio e. duration measurement AND gap ratio ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 8:35 AM DATE MODIFIED: 5/8/2018 3:54 AM 30. If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses. a. reduces the potential adverse effect; reduces the potential favorable effect b. increases the potential adverse effect; increases the potential favorable effect c. decreases the potential adverse effect; increases the potential favorable effect d. increases the potential adverse effect; decreases the potential favorable effect ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:04 AM DATE MODIFIED: 9/28/2016 10:07 AM 31. Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer ____ and more ____. a. excess reserves; Treasury bills b. Treasury bonds; corporate bonds c. loans; Treasury bills d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:07 AM DATE MODIFIED: 5/8/2018 3:54 AM 32. Banks would reduce their liquidity by restructuring their asset portfolio to contain fewer ____ and more ____. a. Treasury securities; excess reserves b. loans; Treasury securities c. corporate bonds; Treasury securities d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:10 AM DATE MODIFIED: 5/8/2018 3:55 AM 33. Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management a. Treasury bonds; corporate bonds b. Treasury bonds; municipal bonds c. Treasury bonds; commercial loans d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:13 AM DATE MODIFIED: 5/8/2018 3:55 AM 34. Banks can increase their potential interest revenues by restructuring their asset portfolio to contain fewer ____ and more ____. a. Treasury bonds; commercial loans b. Treasury bonds; excess reserves c. consumer loans; Treasury bills d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:15 AM DATE MODIFIED: 5/8/2018 3:56 AM 35. If a bank desires to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ____ and use most of its funds for ____ (assuming that all loans will be repaid). a. traditional demand deposits; commercial loans b. traditional demand deposits; consumer loans c. NOW accounts; consumer loans d. NOW accounts; commercial loans ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:18 AM DATE MODIFIED: 9/28/2016 10:20 AM 36. When measuring exposure to market risk, banks commonly use the ________. a. value-at-risk method b. operating leverage measure c. matching maturity method d. forward rate method ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:20 AM DATE MODIFIED: 9/28/2016 10:22 AM 37. A bank's net interest margin is commonly defined as: a. interest revenues minus interest expenses b. (interest revenues minus interest expenses)/total assets c. (interest revenues minus interest expenses)/total liabilities d. (interest revenues minus interest expenses)/capital ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:22 AM DATE MODIFIED: 5/8/2018 3:57 AM 38. A common method for banks to reduce their credit risk is to a. specialize in loans to just one or a few particular industries in which they have expertise in assessing Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management creditworthiness. b. specialize in loans to companies whose earnings patterns are quite similar over time. c. specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness AND specialize in loans to companies whose earnings patterns are quite similar over time. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:24 AM DATE MODIFIED: 5/8/2018 3:57 AM 39. International diversification of loans can best reduce a bank's overall credit risk if a. the countries where loans are given are clustered together in a single continent. b. the countries where loans are given have economic cycles that do not move together over time. c. the countries where loans are given are clustered together in a single continent AND the countries where loans are given have economic cycles that do not move together over time. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:27 AM DATE MODIFIED: 5/8/2018 3:58 AM 40. During a period of rising interest rates, a bank's net interest margin will likely decline if it has a large amount of a. rate-sensitive assets and no rate-sensitive liabilities. b. rate-sensitive liabilities and no rate-sensitive assets. c. loans to technology firms. d. real estate loans.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:29 AM DATE MODIFIED: 9/28/2016 10:38 AM 41. When a bank makes an international loan containing a clause that allows repayment in a foreign currency, the bank is exposed to a. loan settlement risk. b. exchange rate risk. c. global exchange risk. d. currency transaction risk.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:08 PM DATE MODIFIED: 9/28/2016 10:10 PM 42. Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is a. $1 million. b. $1 million. c. 5 percent. d. 5 percent.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:10 PM DATE MODIFIED: 9/28/2016 10:12 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 43. ____ is not a method used to assess interest rate risk. a. Efficiency analysis b. Gap analysis c. Duration analysis d. Regression analysis ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:12 PM DATE MODIFIED: 9/28/2016 10:14 PM 44. Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Durango's gap is ____, and Durango is probably more concerned about a(n) ____ in interest rates. a. $1 million; increase b. $1 million; decrease c. $1 million; increase d. $1 million; decrease e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:14 PM DATE MODIFIED: 5/8/2018 3:59 AM 45. Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Leskar's gap ratio is ____. a. 1.5 b. 0.67 c. $1 million d. None of these are correct.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:16 PM DATE MODIFIED: 5/8/2018 3:59 AM 46. ____ is (are) least likely to be used as a method of reducing interest rate risk. a. Maturity matching b. Floating-rate loans c. Stock options d. Interest rate swaps e. Interest rate caps ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:18 PM DATE MODIFIED: 9/28/2016 10:20 PM 47. Ringo Bank has a profit after taxes of $3 million, total assets of $300 million, and shareholder's equity of $30 million.

Ringo's return on equity (ROE) is ____ percent. a. 1.0 b. 10.0 c. 3.0 d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:20 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DATE MODIFIED:

5/8/2018 4:00 AM

48. For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is: a. zero b. positive c. negative d. positive AND negative ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:22 PM DATE MODIFIED: 5/8/2018 4:01 AM 49. Assume a bank accepts deposits in Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank's profit margin? a. The A$ appreciates against the pound. b. The A$ is stable against the pound. c. The A$ depreciates against the pound. d. British interest rates increase. e. The A$ depreciates against the pound AND British interest rates increase.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:24 PM DATE MODIFIED: 5/8/2018 4:01 AM 50. The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is a. unaffected if euro interest rates increase and U.S. rates decrease. b. unaffected if U.S. interest rates increase and euro interest rates decrease. c. adversely affected if euro interest rates increase and U.S. rates decrease. d. adversely affected if U.S. interest rates increase and euro rates decrease.

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Chapter 19: Bank Management e. unaffected if euro interest rates increase and U.S. rates decrease AND unaffected if U.S. interest rates increase and euro interest rates decrease.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:26 PM DATE MODIFIED: 5/8/2018 4:02 AM 51. If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the a. currency mix of assets is similar to that of liabilities. b. overall rate sensitivity of assets and liabilities is similar. c. rate sensitivity of assets and liabilities is matched for each currency. d. currency mix of assets is similar to that of liabilities AND overall rate sensitivity of assets and liabilities is similar.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:28 PM DATE MODIFIED: 5/8/2018 4:02 AM 52. The risk of a loss due to closing out a transaction is referred to as ____ risk. a. credit b. settlement c. interest rate d. exchange rate e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.07 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/28/2016 10:30 PM 5/8/2018 4:03 AM

53. The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:32 PM DATE MODIFIED: 9/28/2016 10:35 PM 54. Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:35 PM DATE MODIFIED: 9/28/2016 10:37 PM 55. A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:37 PM DATE MODIFIED: 9/28/2016 10:39 PM 56. For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:39 PM DATE MODIFIED: 9/28/2016 10:41 PM 57. Floating-rate loans completely eliminate interest rate risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:41 PM DATE MODIFIED: 9/28/2016 10:43 PM 58. A bank can usually simultaneously maximize its return on assets and minimize credit risk. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:43 PM DATE MODIFIED: 9/28/2016 10:45 PM 59. If the duration of all banks assets with a maturity of greater than one year is similar to that of its liabilities with a maturity greater than one year, interest rate risk is nonexistent. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:45 PM DATE MODIFIED: 5/8/2018 4:03 AM 60. Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million.

Macon Bank's net interest margin is a. $1 million. b. $1 million. c. 5 percent. d. 5 percent.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:47 PM DATE MODIFIED: 9/28/2016 10:49 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 61. ____ is not a method used to assess interest rate risk. a. Gap analysis b. Ratio analysis c. Duration analysis d. Regression analysis e. All of these are methods to assess interest rate risk.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:49 PM DATE MODIFIED: 5/8/2018 4:04 AM 62. The say on pay rules require all decisions about executive compensation to be made only by outside directors. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:52 PM DATE MODIFIED: 9/28/2016 10:53 PM 63. Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder's equity of $10 million.

Crazer's return on equity (ROE) is ____ percent. a. 18 b. 210 c. 15 d. 20 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:53 PM DATE MODIFIED: 5/8/2018 4:05 AM 64. If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets. a. decrease; sensitive b. increase; insensitive c. increase; sensitive d. decrease; sensitive AND increase;insensitive e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:56 PM DATE MODIFIED: 5/8/2018 4:05 AM 65. During a period of ____ interest rates, a bank's net interest margin will likely ____ if its liabilities are more rate sensitive than its assets. a. decreasing; decrease b. increasing; increase c. decreasing; increase d. increasing; decrease e. decreasing; increase AND increasing; decrease ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DATE CREATED: DATE MODIFIED:

9/28/2016 10:58 PM 5/8/2018 4:06 AM

66. If interest rates ____, banks with ____ duration gaps will be ____ affected. a. rise; positive; positively b. rise; positive; adversely c. decrease; positive; adversely d. decrease; negative; positively e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:01 PM DATE MODIFIED: 5/8/2018 4:07 AM 67. In a regression analysis using a bank's stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank’s performance is ____ affected by ____ interest rates. a. positive; adversely; rising b. positive; favorably; declining c. negative; adversely; rising d. negative; favorably; rising ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:03 PM DATE MODIFIED: 9/28/2016 11:05 PM 68. If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration. a. negative; smaller b. positive; larger c. negative; larger d. None of these are correct.

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Chapter 19: Bank Management ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:05 PM DATE MODIFIED: 5/8/2018 4:07 AM 69. In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate. a. more; fixed; variable b. more; variable; fixed c. less; fixed; variable d. less; fixed; fixed e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:07 PM DATE MODIFIED: 5/8/2018 4:08 AM 70. Because riskier assets offer ____ returns, a bank's strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio. a. lower; increase b. lower; decrease c. higher; increase d. higher; decrease e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/28/2016 11:09 PM 5/8/2018 4:08 AM

71. When determining the appropriate interest rate to charge on a loan, a bank uses the Federal Reserve’s primary credit lending rate as a benchmark and adds a premium to this rate for less creditworthy customers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:12 PM DATE MODIFIED: 9/28/2016 11:13 PM 72. An effective way to align bank managers’ interests with shareholders’ goal of higher returns is to compensate the managers with fixed salaries without a bonus. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:13 PM DATE MODIFIED: 9/28/2016 11:15 PM 73. Which of the following is NOT a function of a bank’s board of directors? a. overseeing acquisitions b. determining a compensation system for the bank’s executives c. overseeing policies for changing the bank’s capital structure d. pursuing a proxy contest to change the bank’s dividend policy ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:15 PM DATE MODIFIED: 5/8/2018 4:09 AM 74. A(n) ____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date. a. interest rate cap b. interest rate futures contract c. interest rate swap d. maximum rate contract ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:18 PM DATE MODIFIED: 9/28/2016 11:19 PM 75. Which of the following is a method that a bank can use to reduce its credit risk? a. diversifying its loans across industries b. focusing on credit card loans c. focusing on consumer loans d. selling its holdings of Treasury securities ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:20 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DATE MODIFIED:

9/28/2016 11:21 PM

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Chapter 26: Pension Fund Operations 1. Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans. a. defined-benefit b. defined-contribution c. beneficiary d. guarantor-insured ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:37 AM DATE MODIFIED: 9/21/2016 6:38 AM 2. A pension plan that provides benefits that are determined by the accumulated contributions and return on the fund's investment performance is called a ____ plan. a. defined-benefit b. defined-contribution c. beneficiary d. guarantor-insured ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:38 AM DATE MODIFIED: 9/21/2016 6:39 AM 3. A ____ plan allows a firm to know with certainty the amount of funds to contribute. The ____ plan allows a firm to know with certainty the amount of benefits that must be provided. a. defined-benefit; defined-benefit b. defined-contribution; defined-contribution c. defined-contribution; defined-benefit d. defined-benefit; defined-contribution ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:41 AM DATE MODIFIED: 9/21/2016 6:42 AM 4. If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matched funding and projective funding, ____ is more flexible for portfolio managers. a. matched funding; matched funding b. projective funding; matched funding c. projective funding; projective funding d. matched funding; projective funding ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:43 AM DATE MODIFIED: 9/21/2016 6:44 AM 5. Pension funds managed by life insurance companies are normally referred to as: a. trust portfolios b. insured plans c. matched plans d. projective plans ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:45 AM DATE MODIFIED: 5/8/2018 7:04 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations 6. The asset composition of private pension portfolios is most heavily concentrated in: a. corporate bonds b. mortgages c. common stock d. money market securities ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:46 AM DATE MODIFIED: 5/8/2018 7:05 AM 7. Investing in a bond index portfolio is an example of a(n) ____ approach. Investing in an equity portfolio that mirrors the stock market is an example of a(n) ____ approach. a. passive; active b. active; active c. active; passive d. passive; passive ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:58 AM DATE MODIFIED: 9/21/2016 8:03 AM 8. Pension funds managed by life insurance companies concentrate on: a. common stock b. bonds and mortgages c. preferred stock d. money market instruments ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:04 AM DATE MODIFIED: 5/8/2018 7:06 AM 9. To reduce interest rate risk, pension fund managers can a. shift from variable-rate to fixed-rate bonds. b. increase the average maturity on fixed-rate bonds. c. sell bond futures contracts. d. reduce the investment in money market securities.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:11 AM DATE MODIFIED: 9/21/2016 8:13 AM 10. Most pension fund contributions are contributed by the: a. employer b. employee c. state government d. federal government e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:13 AM DATE MODIFIED: 5/8/2018 7:07 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations 11. Public pension funds can be classified by the manner in which contributions are received and benefits are paid. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:19 AM DATE MODIFIED: 9/21/2016 8:21 AM 12. A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:22 AM DATE MODIFIED: 9/21/2016 8:24 AM 13. In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:25 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations DATE MODIFIED:

9/21/2016 8:27 AM

14. Projective funding limits the manager's discretion, allowing only investments that match future payouts. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:27 AM DATE MODIFIED: 9/21/2016 8:29 AM 15. Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:30 AM DATE MODIFIED: 9/21/2016 8:32 AM 16. The composition of the stocks in a pension fund's portfolio is determined by the fund's portfolio managers. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 8:32 AM 9/21/2016 8:35 AM

17. With a ____ funding strategy, investment decisions are made with the objective of generating cash flows that match planned outflow payments. a. matched b. mixed c. projective d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:35 AM DATE MODIFIED: 5/8/2018 7:08 AM 18. Underfunded pensions are primarily a problem with defined-contribution pension plans. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:37 AM DATE MODIFIED: 9/21/2016 8:39 AM 19. The government agency that guarantees that participants in defined-benefit plans will receive their benefits upon retirement is the: a. Federal Pension Insurance Corporation b. Pension Benefit Guaranty Corporation c. Office of Pension Insurance d. Employee Pension Protection Bureau ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:39 AM DATE MODIFIED: 5/8/2018 7:08 AM 20. A pension fund manager might hedge against interest rate movements by selling bond futures contracts. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:43 AM DATE MODIFIED: 9/21/2016 8:46 AM

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