Financial Intermediation
Question Bank
Course Introduction
Financial Intermediation explores the critical role that financial intermediaries such as banks, insurance companies, pension funds, and investment firms play in the economy by channeling funds from savers to borrowers. This course examines how these institutions manage risks, provide liquidity, promote economic efficiency, and facilitate the functioning of financial markets. Students will learn about the structure and operation of various financial intermediaries, the regulatory environment, the potential for market failures, and recent innovations in the industry. Emphasis is placed on understanding the functions, benefits, and challenges of financial intermediation in a globalized financial system.
Recommended Textbook
Financial Markets and Institutions 12th Edition by Jeff Madura
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Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as:
A) systemic risk.
B) leverage risk.
C) financial meltdown risk.
D) credit risk.
Answer: A
Q2) Which of the following is not an issuer of bonds?
A) households
B) corporations
C) the U.S. Treasury
D) government agencies
Answer: A
Q3) Which of the following is a money market security?
A) Treasury note
B) municipal bond
C) mortgage
D) commercial paper
Answer: D
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Page 3
Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) The federal government demand for funds is said to be interest-inelastic, or ____ to interest rates.
A) sensitive
B) insensitive
C) relatively sensitive as compared to other sectors
D) none of the above
Answer: B
Q2) Which of the following is least likely to affect household demand for loanable funds?
A) a decrease in tax rates
B) an increase in interest rates
C) a reduction in positive net present value (NPV) projects available
D) All of the above are equally likely to affect household demand for loanable funds.
Answer: C
Q3) In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.
A)True
B)False
Answer: True
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4
Chapter 3: Structure of Interest Rates
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Q1) Investment-grade bonds are bonds that are rated as Caa or better by Moody's and as CCC or better by Standard & Poor's.
A)True
B)False
Answer: False
Q2) 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
Q3) Interest rate movements across countries tend to be _________ correlated as a result of ____________ financial markets.
A) positively; internationally integrated
B) positively; fully segmented
C) negatively; partially segmented
D) negatively; internationally integrated
Answer: A
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Page 5
Chapter 4: Functions of the Fed
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Q1) When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields.
A) upward; upward
B) downward; downward
C) upward; downward
D) downward; upward
Q2) Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations to buy $200 million worth of Treasury securities. Assuming that banks use all funds exceptrequired reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____.
A) increase; $200 million
B) increase; $1.67 billion
C) decrease; $200 million
D) decrease; $1.67 billion
Q3) Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.
A)True
B)False
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6
Chapter 5: Monetary Policy
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Q1) A ____ dollar tends to exert inflationary pressure in the United States.
A) Stable
B) Strong
C) Weak
D) both A and B
Q2) Which of the following best describes the relationship between the Fed and the presidential administration?
A) The Fed must receive approval by the administration before conducting monetary policy.
B) The Fed must implement a monetary policy specifically to the support the administration's policy.
C) The administration must receive approval from the Fed before implementing fiscal policy.
D) A and C
E) none of the above
Q3) If the Fed uses a passive monetary policy during weak economic conditions,
A) it increases the money supply substantially.
B) it reduces the money supply substantially.
C) it allows the economy to fix itself.
D) it purchases commercial paper and mortgage-backed securities.
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Chapter 6: Money Markets
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Q1) A line of credit provided by a commercial bank gives a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time.
A)True
B)False
Q2) The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London Interbank Offer Rate (LIBOR).
A)True
B)False
Q3) LIBOR is:
A) the interest rate charged on international interbank loans.
B) the average rate charged on commercial loans in Europe
C) the rate charged by the Federal Reserve for loans to banks.
D) the rate charged by the European Central Bank for loans to banks.
Q4) Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.
A)True
B)False
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Chapter 7: Bond Markets
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Q1) Bonds are issued in the primary market through a telecommunications network.
A)True
B)False
Q2) Bonds issued by ____ are backed by the federal government.
A) the Treasury
B) AAA-rated corporations
C) state governments
D) city governments
Q3) Corporate bonds are more standardized than stocks.
A)True
B)False
Q4) Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
A) annual
B) semiannual
C) quarterly
D) monthly
Q5) Treasury bonds are issued by state and local governments.
A)True
B)False
Page 9
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) The actual relationship reflecting the response of a bond's price to a change in bond yields is
A) concave.
B) convex.
C) linear.
D) quadratic.
Q2) Which of the following is most likely to cause a decrease in bond prices?
A) a decrease in money supply growth and an increase in the demand for loanable funds
B) a forecast of decreasing oil prices
C) a forecast of a stronger dollar
D) an increase in money supply growth and no change in the demand for loanable funds
Q3) If the coupon rate ____ the required rate of return, the price of a bond ____ par value.
A) equals; equals
B) exceeds; is less than C) is less than; is greater than D) B and C
E) none of the above
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) Which of the following is not true with respect to a growing-equity mortgage?
A) It is similar to a graduated-payment mortgage
B) It allows borrowers to initially make small payments on the mortgage.
C) It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage.
D) It involves payments that level off after the first five to ten years of the mortgage.
Q2) Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?
A) second mortgage
B) growing-equity mortgage
C) graduated-payment mortgage
D) shared-appreciation mortgage
Q3) Mortgage-backed securities are assigned ratings by:
A) rating agencies.
B) the Treasury.
C) the Fed.
D) the mortgage originator.
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Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) Preferred shareholders
A) typically have the same voting rights as common shareholders.
B) do not share the ownership of the firm with common shareholders.
C) typically participate in the profits of the firm beyond the stated fixed annual dividend.
D) may not receive a dividend every year.
Q2) When a firm goes public and issues stock in the primary market,
A) the equity investment in the firm declines.
B) the firm's debt level increases.
C) the number of the firm's owners increases.
D) A and C
Q3) ____ represents ownership of a foreign stock.
A) ADR
B) SEAQ
C) Nasdaq
D) AMEX
Q4) Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) The limitations of the dividend discount model are more pronounced when valuing stocks
A) that pay most of their earnings as dividends.
B) that retain most of their earnings.
C) that have a long history of dividends.
D) that have constant earnings growth
Q2) Divestitures are commonly viewed as a favorable signal about a firm if the divested assets are unrelated to the firm's core business.
A)True
B)False
Q3) Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a givenconfidence level.
A)True
B)False
Q4) For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) Which of the following is incorrect in regard to short selling?
A) Naked short selling involves selling a stock short without first borrowing the stock.
B) During the credit crisis, the SEC temporarily protected more than 800 firms from short selling.
C) The SEC's uptick rule prevents speculators from taking a short position in stocks that have declined at least 15 percent for the day, except when the most trade resulted in an increase in the stock price.
D) During the credit crisis, some short sellers focused particularly on the stocks of financial institutions.
E) none of the above
Q2) The bid-ask spread is negatively related to A) order costs
B) inventory costs.
C) Risk
D) trading volume
Q3) Trading halts are intended to prevent insider trading.
A)True
B)False
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14
Chapter 13: Financial Futures Markets
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Sample Questions
Q1) 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.
Q2) 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 differencebetween the selling and purchase price of the futures contract?
A) $.50
B) $50
C) $500
D) $5,000
E) none of the above
Q3) Purchasers of financial futures contracts usually know who the sellers are, and vice versa.
A)True
B)False
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15
Chapter 14: Options Markets
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Sample Questions
Q1) 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
Q2) Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.
A)True
B)False
Q3) 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
Q4) American-style stock options can be exercised only just before expiration.
A)True
B)False
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Chapter 15: Swap Markets
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Sample Questions
Q1) ____ 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 the above
Q2) Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a rate-capped swap, its ____ payments will be capped, and it will ____anup-front premium in exchange for the cap.
A) outflow; receive
B) outflow; pay
C) inflow; pay
D) inflow; receive
Q3) Systemic risk is the risk that a firm involved in an interest rate swap may not meet its payment obligations.
A)True
B)False
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17
Chapter 16: Foreign Exchange Derivative Markets
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Q1) 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 the above
Q2) 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
Q3) 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 pricewithin a given period.
A)True
B)False
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18
Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) 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
Q2) 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
Q3) 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
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Chapter 18: Bank Regulation
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Q1) Federal deposit insurance
A) has existed since the 1800s.
B) was created in 1933
C) was created after World War II.
D) was created in 1960.
Q2) 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
Q3) The Reigle-Neal Interstate Banking and Branching Efficiency Act allowed banks to achieve economies of scale through nationwide interstate banking.
A)True
B)False
Q4) Banks commonly use depositor funds to invest in stocks.
A)True
B)False
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Page 20
Chapter 19: Bank Management
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Q1) 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 the above
Q2) A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets.
A)True
B)False
Q3) 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
Q4) Floating-rate loans completely eliminate interest rate risk.
A)True
B)False
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Chapter 20: Bank Performance
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Sample Questions
Q1) Banks increase their loan loss reserves in order to boost their reported earnings.
A)True
B)False
Q2) When only equity counts as capital, the leverage measure is
A) equal to the capital ratio.
B) equal to return on assets.
C) the inverse of return on assets.
D) the inverse of the capital ratio.
Q3) Interest paid on deposits and borrowed funds is called
A) net interest expense.
B) net interest margin.
C) gross interest expense.
D) net spread expense.
Q4) When only equity counts as capital, the higher the capital ratio, the A) lower the leverage measure.
B) lower the degree of financial leverage.
C) higher the leverage measure.
D) A and B
E) B and C
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Chapter 21: Thrift Operations
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Sample Questions
Q1) Which of the following statements is incorrect?
A) A mutual-to-stock conversion allows savings institutions to obtain additional capital by issuing stock.
B) Because of their ownership structure, mutual savings institutions are more susceptible to unfriendly takeovers.
C) When a mutual savings institution is involved in an acquisition, it first converts to a stock-owned savings institution.
D) Consolidation and acquisitions have caused the number of mutual and stock savings institutions to decline consistently over the years.
Q2) Which of the following is not an asset of savings institutions?
A) loans
B) mortgages
C) NOW accounts
D) mortgage-backed securities
Q3) Because credit unions are for-profit organizations, their income is taxable.
A)True
B)False
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) When interest rates increase, finance companies tend to use more long-term debt to lock in their cost of funds over an extended period of time.
A)True
B)False
Q2) Finance companies differ from commercial banks, savings institutions, and credit unions in that they
A) do not rely heavily on deposits as a source of funds.
B) focus on financing acquisitions by companies.
C) focus on providing residential mortgages.
D) use most of their funds to purchase stocks
Q3) Which of the following is not a main source of funds for finance companies?
A) bank loans
B) commercial paper issues
C) bonds
D) borrowing from the Federal Reserve
Q4) Finance companies are not subject to state regulations on intrastate business.
A)True
B)False
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Page 24
Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) Mutual funds must register with the U.S. Treasury and provide interested investors with a prospectus that discloses details about the components of the funds and the risks involved.
A)True
B)False
Q2) Shares of exchange-traded funds can be sold _________, and shares of open-end mutual funds can be sold _________.
A) at any time during trading hours; at any time via private trading networks
B) only at the end of the day; at any time during trading hours
C) at any time via private trading networks; at any time during trading hours
D) at any time during trading hours; only at the end of the day
Q3) A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.
A) specialty
B) growth
C) capital appreciation
D) growth and income
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Chapter 24: Securities Operations
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Q1) When securities firms facilitate initial public offerings, they attempt to price the stock high enough to satisfy the issuing firm.
A)True
B)False
Q2) Flotation costs as a percentage of the value of securities issued are ____ for ____ issues.
A) lower; small
B) lower; large
C) higher; large
D) A and C
Q3) Securities firms serve as an intermediary for each of the following, except A) stock offerings.
B) debt offerings.
C) IPOs.
D) They serve as intermediary for all of the above.
Q4) The Securities and Exchange Commission's approval of a registration statement guarantees the quality and safety of the securities to be issued.
A)True
B)False
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Chapter 25: Insurance Operations
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Q1) Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
A)True B)False
Q2) Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.
A) less; less B) more; more C) less; more D) none of the above
Q3) The most common use of funds for property and casualty insurance companies is for
A) corporate bonds and municipal securities.
B) Treasury bills.
C) corporate stock.
D) commercial paper.
Q4) Bond insurance is available only for corporate bonds and not for municipal securities.
A)True B)False
Page 27
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Chapter 26: Pension Fund Operations
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Q1) Public pension funds can be classified by the manner in which contributions are received and benefits are paid.
A)True
B)False
Q2) A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.
A)True
B)False
Q3) 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.
Q4) Pension funds managed by life insurance companies concentrate on A) common stock.
B) bonds and mortgages.
C) preferred stock.
D) money market instruments.
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