International Financial Markets
Final Exam Questions
Course Introduction
International Financial Markets examines the structure, function, and dynamics of financial markets operating across national borders. The course explores the various instruments traded internationally, such as foreign exchange, derivatives, equities, and bonds, and analyzes the roles of key institutions including central banks, multinational corporations, and regulatory agencies. Students gain insight into how factors like interest rates, exchange rates, and global economic events influence capital flows and investment decisions on a global scale. The course also addresses the challenges of risk management, market integration, and regulatory frameworks, preparing students to navigate and analyze the complexities of modern international finance.
Recommended Textbook
Financial Markets and Institutions 7th Edition by Frederic S. Mishkin
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Chapter 1: Why Study Financial Markets and Institutions
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Sample Questions
Q1) What is money?
Answer: not answered
Q2) Interest rates are determined in the bond markets.
A)True
B)False
Answer: True
Q3) A declining stock market index due to lower share prices
A)reduces people's wealth and as a result may reduce their willingness to spend.
B)increases people's wealth and as a result may increase their willingness to spend.
C)decreases the amount of funds that business firms can raise by selling newly issued stock.
D)both A and C of the above.
E)both B and C of the above.
Answer: D
Q4) Why should consumers be concerned with movements in foreign exchange rates?
Answer: not answered
Q5) Have interest rates been more or less volatile in recent years? Why?
Answer: not answered
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a
A)bank holiday.
B)financial panic.
C)financial disintermediation.
D)financial collapse.
Answer: B
Q2) Which of the following can be described as involving direct finance?
A)A corporation's stock is traded in an over-the-counter market.
B)People buy shares in a mutual fund.
C)A pension fund manager buys commercial paper in the secondary market.
D)An insurance company buys shares of common stock in the over-the-counter markets.
E)None of the above.
Answer: E
Q3) A pension fund is not a contractual savings institution.
A)True
B)False
Answer: False
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Page 4
Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation
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Sample Questions
Q1) When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a ________.
A)fixed-payment loan
B)discount loan
C)simple loan
D)none of the above
Answer: C
Q2) The yield to maturity for a one-year discount bond equals
A)the increase in price over the year, divided by the initial price.
B)the increase in price over the year, divided by the face value.
C)the increase in price over the year, divided by the interest rate.
D)none of the above.
Answer: A
Q3) An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of A)5 percent.
B)8 percent.
C)10 percent.
D)40 percent.
Answer: A
Page 5
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Chapter 4: Why Do Interest Rates Change
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Sample Questions
Q1) An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________.
A)increase, left
B)increase, right
C)decrease, left
D)decrease, right
Q2) An increase in the inflation rate will cause the demand curve for bonds to shift to the right.
A)True
B)False
Q3) Identify and describe three factors that cause the supply curve for bonds to shift.
Q4) When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A)above; demand; fall
B)above; demand; rise
C)below; supply; fall
D)above; supply; rise
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates
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Sample Questions
Q1) Typically, yield curves are
A)gently upward-sloping.
B)gently downward-sloping.
C)flat.
D)bowl shaped.
E)mound shaped.
Q2) According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects
A)short-term interest rates to rise sharply.
B)short-term interest rates to drop sharply.
C)short-term interest rates to stay near their current levels.
D)none of the above.
Q3) (I)If a corporate bond becomes less liquid, the interest rate on the bond will fall. (II)If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall.
A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.
Q4) Explain why the liquidity premium theory is so widely accepted.
Page 7
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Chapter 6: Are Financial Markets Efficient
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Sample Questions
Q1) What is a rational bubble?
Q2) Why are expectations important in understanding how financial instruments are valued?
Q3) Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is
A)clearly inconsistent with the efficient market hypothesis.
B)consistent with the efficient market hypothesis if the earnings were not as high as anticipated.
C)consistent with the efficient market hypothesis if the earnings were not as low as anticipated.
D)the result of none of the above.
Q4) Which of the following is an insight from behavioral finance?
A)The price of securities fully reflects all available information.
B)Investor overconfidence leads to high trading volumes.
C)The optimal forecast of a security's return equals the security's equilibrium return.
D)Investment advisers cannot consistently beat the market.
Q5) What is the optimal investment strategy according to the efficient market hypothesis? Why?
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Chapter 7: Why Do Financial Institutions Exist
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Sample Questions
Q1) In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay will
A)reflect the highest quality of used cars in the market.
B)reflect the lowest quality of used cars in the market.
C)reflect the average quality of used cars in the market.
D)none of the above.
Q2) A venture capital firm protects its equity investment from moral hazard through which of the following means?
A)It places people on the board of directors to better monitor the borrowing firm's activities.
B)It writes contracts that prohibit the sale of an equity investment to anyone but the venture capital firm.
C)It prohibits the borrowing firm from replacing its management.
D)It does both A and B of the above.
E)It does both A and C of the above.
Q3) What facts about financial structure can be explained by moral hazard?
Q4) What are economies of scale in financial transactions? How can financial intermediaries achieve these economies?
Q5) What is the principal-agent problem?
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Chapter 8: Why Do Financial Crises Occur and Why Are
They so Damaging to the Economy
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Sample Questions
Q1) Stage Three of a financial crisis in an emerging market economy features
A)a general increase in inflation.
B)debt deflation.
C)an increase in general price levels.
D)a full-fledged financial crisis.
Q2) Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.
A)currency
B)stock market
C)banking
D)commodities
Q3) Describe the sequence of events in a financial crisis in an advanced economy and explain why they can cause economic activity to decline.
Q4) Debt deflation refers to
A)an increase in net worth, leading to a relative fall in general debt levels.
B)a decline in general debt levels due to deleveraging.
C)a decline in bond prices as default rates rise.
D)a decline in net worth as price levels fall while debt burden remains unchanged.
Q5) What does the "twin crises" in an emerging economy financial crisis refer to?
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) Countries with more independent central banks have lower inflation rates, but these have come at the expense of greater output fluctuations.
A)True
B)False
Q2) Which of the following is an element of the Federal Reserve System?
A)The Federal Reserve banks
B)The Board of Governors
C)The FDIC
D)All of the above
E)Only A and B of the above
Q3) According to the textbook authors,
A)the Fed appears to be remarkably free of the political pressures that influence other government agencies.
B)since the president can protect the Fed from Congress, the Fed may be responsive to the president's policy preferences.
C)the Fed appears to be more responsive to the political pressures that influence other government agencies.
D)both A and B of the above.
E)both B and C of the above.
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed
A)raises reserves requirements.
B)does an open market purchase.
C)does an open market sale.
D)raises the discount rate.
Q2) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by
A)encouraging firms to invest and people to save.
B)encouraging firms to limit their price increases.
C)encouraging people to consume.
D)all of the above.
E)only A and C of the above.
Q3) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by
A)encouraging firms to invest.
B)encouraging people to save.
C)both A and B of the above.
D)neither A nor B of the above.
Page 12
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Chapter 11: The Money Markets
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Sample Questions
Q1) The U.S. Treasury Department is the single most influential participant in the U.S. money market.
A)True
B)False
Q2) Money market securities have all the following characteristics except they are not A)short term.
B)money.
C)low risk.
D)very liquid.
Q3) Explain why banks, which would seem to have a comparative advantage in gathering information, have not eliminated the need for the money markets.
Q4) How are Treasury bills sold? How do competitive and noncompetitive bids differ?
Q5) Interest rates on banker's acceptances are low because the risk of default is very low.
A)True
B)False
Q6) Explain why money market interest rates move so closely together over time.
Q7) Explain why the money markets are referred to as wholesale markets.
Page 13
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Chapter 12: The Bond Market
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Sample Questions
Q1) The prices of Treasury notes, bonds, and bills are quoted
A)as a percentage of the coupon rate.
B)as a percentage of the previous day's closing value.
C)as a percentage of $100 face value.
D)as a multiple of the annual interest paid.
Q2) Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called
A)junk bonds.
B)callable bonds.
C)convertible bonds.
D)debentures.
Q3) When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk.
A)premium; below
B)premium; above C)discount; below
D)discount; above
Q4) What is a bond indenture?
Q5) Distinguish between general obligation and revenue municipal bonds.
Page 14
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Chapter 13: The Stock Market
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Sample Questions
Q1) (I)A share of common stock in a firm represents an ownership interest in that firm. (II)A share of preferred stock is as much like a bond as it is like common stock.
A)(I)is true, (II)false.
B)(I)is false, (II)true.
C)Both are true.
D)Both are false.
Q2) More stock trading in the U.S. occurs in over-the-counter markets rather than on organized exchanges.
A)True
B)False
Q3) Preferred stockholders hold a claim on assets that has priority over the claims of
A)both common stockholders and bondholders.
B)neither common stockholders nor bondholders.
C)common stockholders, but after that of bondholders.
D)bondholders, but after that of common stockholders.
Q4) How do common stocks differ from preferred stocks?
Q5) How do corporate stocks differ from bonds?
Q6) What are the objectives of the Securities and Exchange Commission?
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) Which of the following are important ways in which mortgage markets differ from the stock and bond markets?
A)The usual borrowers in the capital markets are government entities and businesses, whereas the usual borrowers in the mortgage markets are individuals.
B)Most mortgages are secured by real estate, whereas the majority of capital market borrowing is unsecured.
C)Because mortgages are made for different amounts and different maturities, developing a secondary market has been more difficult.
D)All of the above are important differences.
E)Only A and B of the above are important differences.
Q2) Distinct elements of a mortgage loan include A)origination.
B)investment.
C)servicing.
D)all of the above.
E)only B and C of the above.
Q3) How does an amortizing mortgage loan differ from a balloon mortgage loan?
Q4) What are points? What is their purpose?
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.
A)appreciation; 4
B)appreciation; 2
C)depreciation; 2
D)depreciation; 4
Q2) According to the interest parity condition, if the domestic interest rate is ________ the foreign interest rate, then ________.
A)above; there is expected appreciation of the foreign currency
B)above; there is expected depreciation of the foreign currency
C)below; there is expected appreciation of the foreign currency
D)below; the interest parity condition is violated
Q3) As the relative expected return on dollar deposits increases,
A)foreigners will want to hold fewer dollar deposits and more foreign deposits.
B)Americans will want to hold more dollar deposits and less foreign deposits.
C)Americans will want to hold fewer dollar deposits and more foreign deposits.
D)Americans and foreigners will be indifferent toward holding dollar deposits or foreign deposits.
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Page 17
Chapter 16: The International Financial System
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Sample Questions
Q1) Explain graphically how a country must intervene in the foreign exchange market under a fixed exchange rate regime if its currency is undervalued.
Q2) What shows international transactions that involve currently produced goods and services?
A)current account
B)balance of payments
C)trade balance
D)capital account
Q3) Which of the following appears in the capital account part of the balance of payments?
A)a gift to an American from his English aunt
B)a purchase by the Honda corporation of a U.S. Treasury bill
C)a purchase by the Bank of England of a U.S. Treasury bill
D)income earned by the Honda corporation on its automobile plant in Ohio
Q4) Explain graphically the speculative attacks that occurred against the British pound in 1992, the Mexican peso in 1994, the Thai baht in 1997, the Brazilian real in 1999, and the Argentine peso in 2002.
Q5) How does a fixed exchange rate regime differ from a system of floating exchange rates?
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Checkable deposits and money market deposit accounts are
A)payable on demand.
B)liabilities of the banks.
C)assets of the banks.
D)only A and B of the above.
E)only A and C of the above.
Q2) A bank's largest source of funds is its
A)nontransaction deposits.
B)checking deposits.
C)borrowing from the Fed.
D)federal funds.
Q3) Discount loans are also known as ________.
A)interest-free loans
B)advances
C)credits
D)market loans
Q4) When a bank receives additional deposits, it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves.
A)True
B)False
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Chapter 18: Financial Regulation
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Sample Questions
Q1) Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.
A)True
B)False
Q2) Just prior to the 2007 financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan?
A)A loan issued by a Japanese bank, thus avoiding U.S. regulation.
B)A loan document originated by a mortgage banker named Bruce Lee.
C)A loan issued to borrowers with no income, employment, nor assets to speak of.
D)A loan issued with a "martial arts" clause.
Q3) Discuss the role of mark-to-market accounting during the 2007-2009 financial crisis. Did it help or hurt credit markets and bank lending?
Q4) The possibility that the failure of one bank can hasten the failure of other banks is called the
A)bank run effect.
B)moral hazard effect.
C)contagion effect.
D)adverse selection effect.
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by the
A)Gramm-Leach-Bliley Financial Services Modernization Act.
B)Competitive Equality in Banking Act.
C)Depositary Institution Deregulation and Monetary Control Act.
D)Glass-Steagall Act.
Q2) The driving force behind the securitization of mortgages and automobile loans has been
A)the rising regulatory constraints on substitute financial instruments.
B)the desire of mortgage and auto lenders to exit this field of lending.
C)the improvement in computer technology.
D)the relaxation of regulatory restrictions on credit card operations.
Q3) A firm issuing credit cards earns income from
A)loans it makes to credit card holders.
B)payments made to it by stores on credit card purchases.
C)payments made to it by manufacturers of the products sold in stores on credit card purchases.
D)all of the above.
E)only A and B of the above.
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Page 21
Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) One factor explaining the rapid growth in mutual funds is that they are financial intermediaries that are not regulated by the federal government.
A)True
B)False
Q2) Money market mutual funds originated when the brokerage firm Merrill Lynch offered its customers an account from which funds could be taken to purchase securities and into which funds could be deposited when securities were sold.
A)True
B)False
Q3) Which of the following is most likely to be a no-load fund?
A)value funds
B)hedge funds
C)growth funds
D)index funds
Q4) Mutual funds are regulated under four federal laws designed to protect investors. A)True
B)False
Q5) How is a mutual fund's net asset value calculated?
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?
A)collection of information and screening of potential policyholders
B)risk-based premiums
C)cancellation of insurance
D)all of the above
Q2) Which life insurance policy usually requires the insured to pay a level premium for the duration of the policy, and the overpayment accumulates as a cash value that can be borrowed by the insured at reasonable rates?
A)whole life
B)term
C)universal life
D)none of the above
Q3) Which of the following do not help people during their retirement?
A)term life insurance
B)annuity
C)whole life insurance
D)universal life insurance
Q4) Distinguish between different types of life insurance.
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Q1) Which of the following is not a service securities brokers offer their clients?
A)holding customers' stock for safekeeping
B)providing insurance against loss of the securities
C)providing insurance against loss of value of the securities
D)extending margin credit
Q2) Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included
A)helping firms that want to acquire another firm locate a firm to pursue.
B)helping would-be acquirers solicit shareholders through a tender offer.
C)helping target firms ward off undesired takeover attempts.
D)all of the above.
E)only A and B of the above.
Q3) The most active investment banking firm in the private placement market is
A)Merrill Lynch
B)Lehman Brothers
C)Goldman Sachs
D)Morgan Stanley
Q4) What is underwriting?
Page 24
Q5) Describe the differences between securities brokers and securities dealers.
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Chapter 23: Risk Management in Financial Institutions
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Q1) Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as
A)screening and monitoring of loan applicants.
B)collateral and compensating balances.
C)credit rationing.
D)all of the above.
E)only A and B of the above.
Q2) How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt?
Q3) What special assumptions do income and duration gap analyses make about interest rate changes and the yield curve?
Q4) Banks face the problem of adverse selection in loan markets because bad credit risks are the ones most likely to seek bank loans.
A)True
B)False
Q5) How is credit risk related to the concepts of adverse selection and moral hazard?
Q6) Explain how banks benefit from long-term customer relationships.
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Chapter 24: Hedging With Financial Derivatives
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Q1) Explain the advantages of protecting against interest-rate risk using options rather than futures contracts.
Q2) Explain how a long hedge could be used to protect a bank from the risk that interest rates could rise before a loan is funded.
Q3) How would a firm use exchange rate futures to lock in current exchange rates?
Q4) The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is
A)controlled while preserving the possibility of gains.
B)controlled while removing the possibility of losses.
C)not controlled but the possibility of gains is preserved.
D)not controlled but the possibility of gains is lost.
Q5) By selling short a futures contract of $100,000 at a price of 115, you are agreeing to deliver ________ face value securities for ________.
A)$100,000; $115,000
B)$115,000; $110,000
C)$100,000; $100,000
D)$115,000; $115,000
Q6) Why have the futures markets grown so rapidly in recent years?
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Chapter 25: Savings Associations and Credit Unions
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Q1) The political economy of the S&L crisis shows that the principal-agent problem occurs in politics. In this instance, the agent-regulators did not act to protect the principal-taxpayers because
A)regulators wanted to escape blame, hoping the situation would improve before others discovered the problem.
B)regulators responded to pressure to pursue regulatory forbearance from politicians who had accepted campaign donations from owners of S&Ls.
C)Congress was unwilling to allocate the necessary funds regulators needed to close insolvent S&Ls.
D)all of the above.
E)only A and B of the above.
Q2) Federal legislation allows credit unions representing groups with different common bonds to merge into a single credit union.
A)True
B)False
Q3) Explain the advantages and disadvantages between mutual savings banks and savings and loans.
Q4) What factors contributed to creating the thrift crisis?
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Chapter 26: Finance Companies
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Sample Questions
Q1) In 2010, the largest portion of loans made by finance companies was ________, representing 43.3% of the loans.
A)consumer loans
B)factoring loans
C)business loans
D)real estate
Q2) A balloon loan requires
A)multiple payments at odd, random intervals.
B)periodic payments of principle and interest.
C)a single large payment at the loan's maturity to retire the debt.
D)a steadily increasing payment (floating balloon)to retire the debt.
Q3) By the beginning of 2010, banks held $1,177 billion in consumer loans. Finance companies held about ________ of that figure.
A)40%
B)60%
C)90%
D)110%
Q4) Discuss the types of risk faced by finance companies. Are these risks similar to banks?
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