Money and Banking
Pre-Test Questions
Course Introduction
Money and Banking explores the fundamental role of financial institutions, financial markets, and the central banking system in modern economies. The course examines the nature, functions, and evolution of money; the workings of commercial banks; the process of money creation; and tools of monetary policy. It delves into the structure and operation of central banks including their influence on interest rates, inflation, and economic stability as well as analyzing the impact of regulation, financial innovation, and globalization on banking practices. Through theoretical and practical analysis, students gain critical insights into the interconnectedness of money, banking, and the overall economy.
Recommended Textbook
Financial Markets and Institutions 11th Edition by Jeff Madura
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Q1) Common stock is an example of a(n)
A)debt security.
B)money market security.
C)equity security.
D)A and B
Answer: C
Q2) By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.
A)True
B)False
Answer: False
Q3) If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
A)lower; lower
B)lower; higher
C)higher; lower
D)higher; higher
Answer: A
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Page 3
Chapter 2: Determination of Interest Rates
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Q1) 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
Q2) Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?
A)a decrease in savings by foreign savers
B)an increase in inflation
C)pessimistic economic projections that cause businesses to reduce expansion plans
D)a decrease in savings by U.S. households
Answer: C
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4
Chapter 3: Structure of Interest Rates
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Q1) If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause
A)long-term yields to rise.
B)short-term yields to decrease.
C)prices of long-term securities to decrease.
D)A and B
E)none of the above
Answer: E
Q2) 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
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Chapter 4: Functions of the Fed
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Sample Questions
Q1) To increase the money supply growth, the Fed could
A)sell government securities in the secondary market.
B)increase the primary credit lending rate.
C)increase the reserve requirement ratio.
D)all of the above
E)none of the above
Q2) ____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items.
A)M1
B)M2
C)M3
D)None of the above
Q3) Which of the following is not an activity of Fed district banks?
A)clearing checks
B)replacing old currency
C)providing loans to depository institutions
D)acting as an intermediary to match up lenders and borrowers in the stock market
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6
Chapter 5: Monetary Policy
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Sample Questions
Q1) The time lag between when an economic problem arises and when it is reported in economic statistics is the
A)recognition lag.
B)implementation lag.
C)impact lag.
D)open-market lag.
Q2) The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth.
A)True
B)False
Q3) In the "operation twist" strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.
A)long-term; short-term
B)short-term; long-term.
C)short-term; long-term
D)long-term; short-term.
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Chapter 6: Money Markets
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Sample Questions
Q1) Junk commercial paper is commercial paper that is not rated or rated low.
A)True
B)False
Q2) At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.
A)slightly less than
B)slightly higher than C)equal to
D)A and B both occur with about equal frequency
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) Commercial paper is subject to:
A)interest rate risk.
B)default risk.
C)A and B.
D)none of the above.
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Chapter 7: Bond Markets
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Sample Questions
Q1) Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.
A)rise
B)decline
C)be zero
D)be unaffected
Q2) The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders.
A)True
B)False
Q3) ____ bonds have the most active secondary market.
A)Treasury
B)Zero-coupon corporate
C)Junk
D)Municipal
Q4) Rule 144A creates liquidity for securities that are privately placed.
A)True
B)False
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) The appropriate price of a bond is simply the sum of the cash flows to be received.
A)True
B)False
Q2) A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?
A)$1,021
B)$1,000
C)$981
D)$951
E)none of the above
Q3) Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.
A)True
B)False
Q4) Bonds that sell below their par value are called premium bonds.
A)True
B)False
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) ____ mortgages enabled more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.
A)Prime
B)Balloon
C)Amortized
D)Subprime
Q2) A financial institution may service a mortgage even after selling it.
A)True
B)False
Q3) Mortgages are rarely sold in the secondary market.
A)True
B)False
Q4) Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.
A)True
B)False
Q5) Non-U.S. financial institutions never hold mortgages on U.S. property. A)True
B)False
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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) Venture capital funds typically take over businesses and manage them.
A)True
B)False
Q3) According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time.
A)True
B)False
Q4) The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised.
A)1
B)3
C)7
D)25
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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) If the returns of two stocks are perfectly correlated, then
A)their betas should each equal 1.0.
B)the sum of their betas should equal 1.0.
C)their correlation coefficient should equal 1.0.
D)their portfolio standard deviation should equal 1.0.
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 given confidence level.
A)True
B)False
Q4) The market risk premium is stable over time and is not affected by stock market conditions.
A)True
B)False
Page 13
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) Dark pools:
A)are private stock markets used by institutional investors.
B)are stocks issued by firms that have disclosed very limited financial information.
C)are stock option contracts that cover positions in stocks.
D)are contracts used to bet against the default of a debt instrument.
Q2) A(n) ____ from a broker requires the investor to put up additional collateral.
A)maintenance margin
B)initial margin
C)margin call
D)trading halt
Q3) A ____ order to buy or sell a stock means to execute the transaction at the best possible price.
A)market
B)limit
C)stop-loss
D)stop-buy
Q4) Trading halts are intended to prevent insider trading.
A)True
B)False
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Chapter 13: Financial Futures Markets
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Sample Questions
Q1) 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
Q2) 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 the above
Q3) 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
Q4) The price of stock index futures may reflect investor expectations about the market more rapidly than stock prices.
A)True
B)False
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Chapter 14: Options Markets
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Sample Questions
Q1) 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
Q2) 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.
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Chapter 15: Swap Markets
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Sample Questions
Q1) 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
Q2) 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
Q3) Assume a financial institution that has rate-sensitive liabilities and rate-insensitive assets. If interest rates are expected to decline consistently, this institution would benefit by negotiating a(n)
A)forward swap.
B)callable swap.
C)extendable swap.
D)none of the above
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Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) The speculative risk of purchasing a ____ is that the foreign currency value ____ over time.
A)put option; increases
B)put option; decreases
C)call option; increases
D)futures contract; increases
Q2) 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
Q3) The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.
A)True
B)False
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18
Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt.
A)True
B)False
Q2) 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
Q3) Like other market interest rates, the primary credit lending rate moves in reaction to changes in demand or supply of funds or both.
A)True
B)False
Q4) 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
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Page 19
Chapter 18: Bank Regulation
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Sample Questions
Q1) The provision of a letter of credit by a bank to issue commercial paper issued by a corporation is an example of an off-balance sheet commitment.
A)True
B)False
Q2) The moral hazard problem is minimized when deposit insurance premiums are
A)zero (not imposed by the FDIC).
B)the same percentage of assets for all banks.
C)set at a fixed percentage of assets for large banks, and is zero for small banks.
D)set at a percentage of assets that is based on the bank's risk level.
Q3) Deposit insurance now covers all bank deposits without imposing any limit.
A)True
B)False
Q4) In general, a bank defines its value-at-risk as the estimated potential loss from its traditional businesses that could result from adverse movements in market prices.
A)True
B)False
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Page 20
Chapter 19: Bank Management
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Sample Questions
Q1) 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 are similar.
C)rate sensitivity of assets and liabilities is matched for each currency.
D)A and B
Q2) 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
Q3) ____ is (are) least likely to be used as a method of reducing interest rate risk.
A)Maturity matching
B)Using floating-rate loans
C)Stock options
D)Using interest rate swaps
E)Using interest rate caps
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Chapter 20: Bank Performance
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Sample Questions
Q1) 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.
Q2) If a bank had long-term fixed-rate assets and short-term liabilities, and interest rates increased over time, its net interest margin should
A)decrease.
B)increase.
C)stay the same.
D)either A or B, depending on whether the asset maturities exceed 10 years
Q3) Banks with relatively ____ ROAs often incur ____ noninterest expenses.
A)low; very low
B)low; very high
C)high; very high
D)none of the above
Q4) The value of a commercial bank can be modeled as the present value of its future cash flows.
A)True
B)False
Page 22
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Chapter 21: Thrift Operations
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Sample Questions
Q1) Today, credit unions are regulated as to the A)types of services they can offer.
B)rates they offer on deposits.
C)maturity of residential loans they make.
D)size of residential mortgage loans.
Q2) The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited
A)savings institutions from merging.
B)commercial banks from acquiring savings institutions.
C)savings institutions.
D)savings institutions from making loans to foreign governments.
Q3) Which of the following is not an objective of a credit union?
A)to satisfy credit union members
B)to act as an intermediary for members by repackaging deposits
C)to provide loans to members who are in need of funds
D)all of the above are objectives of credit unions.
Q4) Today, savings institutions are not permitted to invest in junk bonds.
A)True
B)False
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) Many consumer finance companies also provide personal loans, directly to individuals to finance purchases of large household items.
A)True
B)False
Q2) ____ finance companies concentrate on purchasing credit contracts from retailers and dealers.
A)Consumer
B)Sales
C)Commercial
D)None of the above
Q3) Finance companies would prefer to increase their long-term debt most once interest rates
A)have declined.
B)have increased.
C)were stable for several years.
D)were projected to decline.
Q4) Finance companies are not subject to state regulations on intrastate business.
A)True B)False
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Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) Mutual fund managers seek securities that have much liquidity so that they could easily sell them in the secondary market at any time.
A)True
B)False
Q2) Investors who invest in a hedge fund of funds essentially pay two layers of management fees.
A)True
B)False
Q3) The majority of mutual fund assets are in the form of
A)common stocks.
B)preferred stocks.
C)U.S. government bonds.
D)municipal bonds.
Q4) The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.
A)True
B)False
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Page 25
Chapter 24: Securities Operations
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Sample Questions
Q1) The value of a securities firm is typically ____ related to interest rate movements.
A)positively
B)not
C)inversely
D)A or B
Q2) The ____ is not involved in the regulation of the securities industry.
A)Deposit Insurance Fund
B)National Association of Securities Dealers
C)Securities and Exchange Commission
D)Federal Reserve Board
E)All of the above are involved in the regulation of the securities industry.
Q3) Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of future financing.
A)True
B)False
Q4) One of the main functions of securities firms is raising capital for corporations.
A)True
B)False
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Chapter 25: Insurance and Pension Fund Operations
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Q1) A life insurance policy that protects the policyholder until death, or as long as premiums are promptly paid is a
A)whole life policy.
B)term policy.
C)universal life policy.
D)B and C
Q2) ____ insurance covers losses due to dishonest employees.
A)Key employee
B)Credit line
C)Malpractice
D)Fidelity bond
Q3) The adverse selection problem as related to the insurance industry means that people who have insurance are less likely to suffer losses than people who do not have insurance.
A)True
B)False
Q4) Public pension funds can be classified by the manner in which contributions are received and benefits are paid.
A)True
B)False
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