Introduction to Financial Markets
Mock Exam
Course Introduction
Introduction to Financial Markets provides students with a comprehensive overview of the fundamental concepts, structures, and functions of financial markets. The course explores the roles of various financial institutions, financial instruments such as stocks, bonds, and derivatives, and the mechanisms behind trading and investment. Students will learn about the regulatory environment, the interaction between borrowers and lenders, and the impact of global events on financial market dynamics. Emphasis is placed on understanding risk, returns, and the importance of financial markets in promoting economic growth and stability.
Recommended Textbook
Money Banking and the Financial System 1st Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) Alt-A borrowers were those who
A) used mortgages to purchase apartments.
B) chose adjustable-rate mortgages instead of fixed-rate mortgages.
C) borrowed using "interest-only" mortgages.
D) did not provide documentation of their income when applying for a mortgage.
Answer: D
Q2) Financial intermediaries
A) include banks and other depository institutions.
B) include the New York and American Stock exchanges.
C) directly issue claims on individual borrowers to savers.
D) are owned and operated by the federal government.
Answer: A
Q3) How are interest payments on mortgages distributed to investors who own mortgage-backed securities?
Answer: The banks that grants,or originates,the original mortgages will still collect the interest paid by the borrowers and send those interest payments on to the government agency or financial firm to distribute to the investors who have bought the mortgage-backed security.
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Chapter 2: Money and the Payments System
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Sample Questions
Q1) All of the following are examples of electronic funds EXCEPT A) credit cards.
B) debit cards.
C) stored value cards.
D) e-cash.
Answer: A
Q2) The attribute that distinguishes money from other assets is that only money A) retains its value during times of inflation.
B) is counted in determining the size of an individual's wealth.
C) serves as a medium of exchange.
D) may be used as collateral for a bank loan.
Answer: C
Q3) What are four inefficiencies of a barter system?
Answer: Under a barter system,there are several inefficiencies.First,there must be a double coincidence of wants,resulting in high transaction costs.Second,there will be many prices for each good; one for each good for which it can be traded.Third,there is a lack of standardization in terms of the goods to be exchanged.Fourth,it will be difficult to accumulate wealth.
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) Simple loans and discount bonds differ from coupon bonds and fixed-payment loans in that
A) interest on simple loans and discount bonds is taxable, while interest on coupon bonds and fixed-payment loans is not.
B) interest on coupon bonds and fixed-payment loans is taxable, while interest on simple loans and discount bonds is not.
C) interest rates on simple loans and discount bonds are generally higher than interest rates on comparable coupon bonds and fixed-payment loans.
D) interest on simple loans and discount bonds is paid in a single payment, while issuers of coupon bonds and fixed-payment loans make multiple payments of interest and principal.
Answer: D
Q2) A one-year discount bond has a face value of $1000 and price of $880.What is the yield to maturity on the bond? Report using percentages with two decimal places.
Answer: The yield to maturity is ($1000-$880)/$880 = 13.64%
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Chapter 4: Determining Interest Rates
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Sample Questions
Q1) Suppose that Congress passes an investment tax credit.The likely result will be
A) the supply curve for bonds will shift to the right.
B) the demand curve for bonds will shift to the left.
C) the demand curve for bonds will shift to the right.
D) the equilibrium interest rate will fall.
Q2) If expected inflation declines by 2%,what should happen to nominal interest rates according to the Fisher effect?
A) rise by 2%
B) fall by 2%
C) be cut in half
D) double in size
Q3) In the bond market,the seller is considered to be
A) the lender.
B) the borrower.
C) the lender or the borrower depending upon the use to which the funds are put.
D) the lender or the borrower depending upon whether interest rates are rising or falling.
Q4) Assess the impact on the bond market of the rise in Internet trading of stocks.
Q5) How can diversification reduce idiosyncratic risk but not systematic risk?
Q6) What is a black swan event?
Page 6
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Sample Questions
Q1) During the financial crisis of 2008,the prices of U.S.Treasury securities
A) rose and the price of corporate bonds declined.
B) fell relative to the prices of corporate bonds.
C) remained in the same relative position to the prices of corporate bonds.
D) were frozen by order of the federal government.
Q2) Which of the following bond ratings by Moody's Investors Service would NOT be considered to be below investment grade?
A) Baa
B) Ba
C) B
D) All of these ratings are considered below investment grade.
Q3) When the yield curve is downward-sloping,
A) short-term yields are higher than long-term yields.
B) long-term yields are higher than short-term yields.
C) the bond market is anticipating the U.S. Treasury may default on its obligations.
D) the inflation rate is expected to rise.
Q4) If the expectations theory of the term structure is correct,would a reduction in the supply of thirty-year Treasury bonds affect their yields?
Page 7
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Sample Questions
Q1) According to the Gordon-Growth model,what will be the percentage change in the value of a stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year?
A) 4.0%
B) 17.8%
C) 25.0%
D) 33.3%
Q2) The efficient markets hypothesis implies that stock investments should have the same expected return after adjusting for A) risk.
B) information costs.
C) liquidity.
D) all of the above.
Q3) The efficient markets hypothesis
A) assumes that market participants form their expectations adaptively.
B) applies rational expectations to the pricing of assets.
C) applies to the stock market, but not to the bond market.
D) indicates that the stock market is efficient, but not rational.
Q4) What is the difference between adaptive expectations and rational expectations?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) All of the following describe the market for credit default swaps on mortgage-backed securities in the mid 2000s EXCEPT
A) an increasing number of buyers were speculators.
B) AIG apparently underestimated the risk involved with mortgage-backed securities.
C) the volume of credit default swaps was too low making it difficult to assess their value.
D) payments by buyers were too low relative to risk.
Q2) If market participants believe that the wheat crop is likely to be unusually small,
A) the spot price of wheat is likely to be above the futures price of wheat.
B) the spot price of wheat is likely to be below the futures price of wheat.
C) it will not be possible to find a seller of a futures contract in wheat.
D) it will not be possible to find a buyer of a futures contract in wheat.
Q3) As an option nears its expiration date,the size of the premium approaches A) zero.
B) infinity.
C) its intrinsic value.
D) an amount which varies, depending on prevailing market interest rates on the expiration date.
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Chapter 8: The Market for Foreign Exchange
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Sample Questions
Q1) The theory of purchasing power parity
A) extends the law of one price to a group of goods.
B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates.
C) assumes that inflation rates are roughly the same in most countries.
D) was valid only under the gold standard.
Q2) If the interest rate in the United States rises
A) investors increase their demand for dollars and the U.S. exchange rate appreciates.
B) investors increase their demand for dollars and the U.S. exchange rate depreciates.
C) investors decrease their demand for dollars and the U.S. exchange rate appreciates.
D) investors decrease their demand for dollars and the U.S. exchange rate depreciates.
Q3) In forward transactions,
A) the exchange takes place at the same exchange rate as in the spot market.
B) currencies are exchanged at a set date in the future.
C) currencies may only be exchanged at rates set by governments well in advance.
D) currency is bought and sold for delivery later that same day.
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Page 10
Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) Requirements for information disclosure for firms that desire to sell securities in financial markets
A) are very common in industrialized countries, including the United States.
B) are common in other industrialized countries, but have not yet been adopted in the United States.
C) have been adopted in the United States, but have not yet been adopted in other industrialized countries.
D) have yet to be adopted in the United States or other industrialized countries.
Q2) Transactions costs are
A) zero in financial markets.
B) zero in financial intermediaries.
C) the costs of direct financial transactions.
D) equal to the taxes imposed on financial transactions.
Q3) In the United States the stake of top management in firms' ownership usually is
A) less than 5%.
B) more than 25%.
C) more than 50%.
D) more than 75%.
Q4) What are the information costs faced by savers?
Page 11
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) The United States has a dual banking system in the sense that A) the public may deposit money in either commercial banks or savings-and-loan associations.
B) banks offer both demand deposits and time deposits to savers.
C) banks are chartered by the federal government and by state governments.
D) banks both take in deposits and make loans.
Q2) All of the following are reasons that small businesses had difficulty receiving credit in the late 2000s EXCEPT
A) declining commercial real estate value resulted in a decline in he value of their collateral.
B) many banks feared adverse selection and moral hazard and thus tightened lending standards.
C) banks reduce business credit card limits.
D) banks tried to reduce their reserves making lending more difficult.
Q3) The FDIC was created in
A) 1863.
B) 1913.
C) 1934.
D) 1991.
Q4) How does moral hazard contribute to high bank leverage?
Page 12
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Chapter 11: Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System
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Q1) Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%.What happens to its return on equity investment?
A) declines by 1%
B) increases by 1%
C) declines by 100%
D) increases by 100%
Q2) A load fund
A) charges a commission for purchases or sales.
B) is not obligated to redeem shares issued.
C) earns income only from management fees.
D) issues shares that may sell at a discount to the market value of the underlying assets.
Q3) The risk that increased market interest rates will cause a decline in the value of an investment bank's holdings of long-term securities is known as
A) credit risk.
B) interest-rate risk.
C) currency risk.
D) security risk.
Q4) How is the use of leverage a "double-edged sword"?
Page 13
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Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) Why was the Fed reluctant to rescue insolvent banks?
A) It thought it may lead to moral hazard.
B) It thought it may lead to adverse selection.
C) It thought they were still liquid.
D) It did not think they were insolvent.
Q2) What are the two most common reasons for a sovereign debt crisis?
Q3) When did Regulation Q finally disappear?
A) 1934
B) 1945
C) 1986
D) 2000
Q4) By the summer of 2008,about what percent of subprime mortgages were overdue by at least 30 days?
A) 10%
B) 25%
C) 34%
D) 50%
Q5) Describe the four stages of the financial regulatory pattern.
Q6) Describe the debt-deflation process.
Q7) What are two ways that governments can prevent banking panics?
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Chapter 13: The Federal Reserve and Central Banking
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Sample Questions
Q1) How do individual become members of the Board of Governors?
Q2) The public interest view of Fed motivation holds that the Fed acts in the interest of A) the general public.
B) banks.
C) Congress.
D) itself.
Q3) How did the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affect the Fed's
Q4) All of the following help make the Fed independent of the political process EXCEPT A) financial independence.
B) chair of Fed receives a lifetime appointment.
C) Board members receive a long, nonrenewable appointment.
D) Board members' terms expire at different times, reducing the possible number of appointees by any one president.
Q5) What was the original intent of the Federal Reserve Act of 1913?
Q6) Who are the members of the Financial Stability Oversight Council?
Q7) What are the three books to which the FOMC has access and what information is included in each?
Page 15
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) What is the maximum amount a bank can lend?
A) its total reserves
B) its excess reserves
C) its excess reserves divided by the required reserve ratio
D) the value of its checkable deposits times the required reserve ratio
Q2) The interest rate the Fed charges on loans to depository institutions is known as
A) the federal funds rate.
B) the Fed loan rate.
C) the discount rate.
D) the interbank clearing rate.
Q3) When the Fed extends loans to depository institutions
A) it increases the level of reserves.
B) it decreases the level of reserves.
C) it reduces the total value of the assets on its balance sheet.
D) it reduces the total value of the liabilities on its balance sheet.
Q4) Suppose the Fed makes a $5 million discount loan to a bank.Illustrate how this affects the balance sheets of the Fed and the banking system.
Q5) Briefly explain the process of multiple deposit creation.
Page 16
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Chapter 15: Monetary Policy
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Q1) The Fed uses operating targets as well as intermediate targets because
A) the Federal Reserve Act of 1913 requires it to do so.
B) the Fed controls intermediate targets only indirectly.
C) the public is much more unfamiliar with the variables used as operating targets, so for policy to be effective intermediate targets must also be announced.
D) if one set of targets proves ineffective in attaining policy goals, the other set is available.
Q2) Which central bank has its exchange rate as a focus of its monetary policy?
A) Bank of Canada
B) Bank of England
C) European Central Bank
D) Federal Reserve
Q3) Which chair of the Fed advocated that the Fed engage in inflation targeting?
A) Greenspan
B) Bernanke
C) Volcker
D) Martin
Q4) Describe the three types of unemployment?
Q5) How does the interest paid on reserves set a floor for the federal funds rate?
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Chapter 16: The International Financial System and Monetary Policy
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Q1) If a central bank wishes to raise the foreign-exchange value of its currency,it will
A) buy domestic currency and sell foreign assets.
B) sell domestic currency and buy foreign assets.
C) attempt to reduce domestic interest rates.
D) attempt to raise the domestic price level relative to foreign price levels.
Q2) Deliberate actions by a central bank to influence the exchange rate are known as A) current account actions.
B) foreign-exchange market interventions.
C) dollar-value operations.
D) foreign-commerce maneuvers.
Q3) When a central bank buys foreign assets,
A) its assets and liabilities rise by the same amount.
B) its assets and liabilities fall by the same amount.
C) the composition of its assets changes, but its liabilities are unaffected.
D) the composition of its liabilities changes, but its assets are unaffected.
Q4) How does a sterilized intervention by the Fed in foreign exchange market differ from an unsterilized intervention?
Q5) Why do some economists think a global savings glut contributed to the U.S.running a current account deficit in the 2000s?
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Chapter 17: Monetary Theory I: the Aggregate Demand and Aggregate Supply Model
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Q1) Between 1992 and the 2000s,Poland experienced
A) strong economic growth, but increasing inflation.
B) weak economic growth, but falling inflation.
C) strong economic growth and falling inflation.
D) weak economic growth and increasing inflation.
Q2) An increase in the price level reduces net exports because
A) it leads indirectly to a higher exchange rate.
B) it leads indirectly to a lower exchange rate.
C) it leads indirectly to a lower real interest rate.
D) it leads directly to higher real money balances.
Q3) The Federal Reserve pursued an expansionary monetary policy during 1964 in order to
A) pull the United States out of a deep recession.
B) counteract the effects of a deep cut in federal income taxes.
C) keep interest rates from rising.
D) bring down the inflation rate.
Q4) How does an increase in the price level lead to a higher interest rate?
Q5) Make use of the misperceptions theory to explain why the short-run aggregate supply curve is upward sloping.
Q6) What are the principal sources of change in productivity growth? Page 19
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Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) Suppose the stock market crashes resulting in a significant decline in the wealth of consumers.Make use of the IS-MP model to illustrate the impact this has on the economy.How is the Fed likely to respond? Show the impact of the change in monetary policy on the graph of the IS-MP model.
Q2) Changes in net worth and liquidity may significantly affect the volume of lending and economic activity according to the
A) interest rate channel.
B) balance sheet channel.
C) money channel.
D) bank lending channel.
Q3) A closed economy is one in which
A) investment spending is zero.
B) government spending is zero.
C) there are no imports or exports.
D) demand equals supply in every market.
Q4) What is the multiplier? If MPC =0.75,what is the value of the multiplier in the simple model of the economy?
Q5) What is the multiplier effect?
Q6) What three parts of the economy are represented in the IS-MP model?
Page 21
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