Money and Banking Question
Bank
Course Introduction
Money and Banking examines the vital role of financial institutions, monetary systems, and central banks in modern economies. The course explores the functions and types of money, how banks create credit, and the mechanisms through which central banks influence money supply and interest rates. Students will gain an understanding of how monetary policy is formulated and implemented, the effects of financial markets on economic stability, and the impact of banking regulations. Key topics include the structure of commercial banking, payment systems, financial intermediation, monetary theory, and the global implications of monetary policies.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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Page 2
Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) Compared to interest rates on long-term U.S.government bonds,interest rates on ________ fluctuate more and are lower on average.
A) medium-quality corporate bonds
B) low-quality corporate bonds
C) high-quality corporate bonds
D) three-month Treasury bills
E) none of the above
Answer: D
Q2) Economists group commercial banks,savings and loan associations,credit unions,mutual funds,mutual savings banks,insurance companies,pension funds,and finance companies together under the heading financial intermediaries.Financial intermediaries
A) act as middlemen, borrowing funds from those who have saved and lending these funds to others.
B) produce nothing of value and are therefore a drain on society's resources.
C) help promote a more efficient and dynamic economy.
D) do all of the above.
E) do only A and C of the above.
Answer: E
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3
Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Intermediaries who are agents of investors and match buyers with sellers of securities are called
A) investment bankers.
B) traders.
C) brokers.
D) dealers.
E) none of the above.
Answer: C
Q2) Asymmetric information can lead to the widespread collapse of financial intermediaries,referred as financial ________.
A) panic
B) bubble
C) asset
D) transaction
Answer: A
Q3) Every financial market allows loans to be made.
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) The process of calculating what dollars received in the future are worth today is called
A) calculating the yield to maturity.
B) discounting the future.
C) compounding the future.
D) compounding the present.
Answer: B
Q2) Which of the following are generally true of all bonds?
A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period.
B) A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period.
C) The longer a bond's maturity, the greater is the price change associated with a given interest rate change.
D) All of the above are true.
E) Only A and B of the above are true.
Answer: D
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5
Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) A movement along the demand (or supply)curve occurs when the quantity demanded (or supplied)changes at each given price (or interest rate)of the bond in response to a change in some other factor besides the bond's price or interest rate.
A)True
B)False
Q2) When the federal government's budget deficit decreases,the ________ curve for bonds shifts to the ________.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
Q3) Identify and describe three factors that cause the supply curve for bonds to shift.
Q4) A decline in the price level causes the demand for money to ________ and the demand curve to shift to the ________.
A) decrease; right
B) decrease; left
C) increase; right
D) increase; left
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6
Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities.
A)True
B)False
Q2) The spread between interest rates on low-quality corporate bonds and U.S.government bonds ________ during the Great Depression. A) was reversed
B) narrowed significantly
C) widened significantly
D) did not change
Q3) The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years.As a result of this tax cut,the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________.
A) right; decline
B) right; increase
C) left; decline
D) left; increase
Q4) What do credit-rating agencies do and why is this work important?
Page 7
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) Does the efficient market hypothesis imply that financial markets are efficient? Explain.
Q2) The efficient market hypothesis applies to
A) both the stock market and the foreign exchange market.
B) the stock market but not the foreign exchange market.
C) the foreign exchange market but not the stock market.
D) neither the stock market nor the foreign exchange market.
Q3) Raj Rajaratnam,a successful investor in the 2000s who consistently beat the market,was able to outperform the market on a consistent basis,indicating that A) securities markets are not efficient.
B) unexploited profit opportunities were abundant.
C) investors can outperform the market with inside information.
D) only B and C of the above.
Q4) Which of the following does not weaken the efficient markets hypothesis?
A) Mean reversion
B) Success of buy-and-hold strategy
C) January effect
D) Excessive volatility
Q5) Give evidence both for and against market efficiency.
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) If borrowers take on big risks after obtaining a loan,then lenders face the problem of A) free-riding.
B) adverse selection.
C) moral hazard.
D) costly state verification.
Q2) What conflicts of interest can arise in credit-rating agencies?
Q3) The principal-agent problem
A) occurs when managers have more incentive to maximize profits than the stockholders-owners do.
B) would not arise if the owners of the firm had complete information about the activities of the managers.
C) in financial markets helps to explain why equity is a relatively important source of finance for American businesses.
D) all of the above.
E) only A and B of the above.
Q4) Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.
Q5) What factors usually cause an increase in moral hazard?
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) Describe how the European debt crisis evolved.
Q2) In addition to having a direct effect on increasing adverse selection problems,increases in interest rates also promote financial crises by ________ firms' and households' interest payments,thereby ________ their cash flow.
A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing
Q3) Financial crises
A) cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers.
B) are a recent phenomenon that occur only in developing countries.
C) invariably lead to debt deflation.
D) all of the above.
E) none of the above.
Q4) In Europe,Greece was the first nation to face a debt crisis.
A)True
B)False
Q5) Explain the relationship between agency theory and a financial crisis.
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) Of all commercial banks,about ________ percent belong to the Federal Reserve System.
A) 10
B) 25
C) 33
D) 50
Q2) The Federal Reserve banks act as liaisons between the business community and the Federal Reserve System.
A)True
B)False
Q3) The case for Federal Reserve independence does not include the idea that A) political pressure would impart an inflationary bias to monetary policy.
B) the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day.
C) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level.
D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced.
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) An open market transaction intended to change the level of bank reserves is a A) repurchase agreement.
B) reverse repo.
C) dynamic operation.
D) defensive operation.
Q2) If the Federal Reserve wants to expand reserves in the banking system,it will A) purchase government securities.
B) raise the discount rate.
C) sell government securities.
D) raise reserve requirements.
Q3) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor.Economists call this level of unemployment the
A) frictional rate of unemployment.
B) structural rate of unemployment.
C) natural rate of unemployment.
D) ideal rate of unemployment.
Q4) The federal funds rate is an operating target.
A)True B)False
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Chapter 11: The Money Markets
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Sample Questions
Q1) In a direct placement
A) the issuer bypasses the dealer and sells indirectly to the end investor.
B) the dealer sells directly to the end investor.
C) the issuer bypasses the dealer and sells directly to the end investor.
D) none of the above.
Q2) Commercial banks are large holders of ________ and are the major issuer of
A) negotiable certificates of deposit; U.S. government securities
B) U.S. government securities; negotiable certificates of deposit
C) commercial paper; Eurodollars
D) Eurodollars; commercial paper
Q3) The Fed is an active participant in money markets mainly because of its responsibility to
A) lower borrowing costs to encourage capital investment.
B) control the money supply.
C) increase the interest income of retirees holding money market instruments.
D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants.
Q4) Explain how the Federal Reserve can influence the federal funds interest rate.
Q5) How are Treasury bills sold? How do competitive and noncompetitive bids differ?
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Chapter 12: The Bond Market
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Sample Questions
Q1) What is a bond's current yield? How does the current yield differ from the yield to maturity and what determines how close the two values are?
Q2) Policies that limit the discretion of managers as a way of protecting bondholders' interests are called
A) restrictive covenants.
B) debentures.
C) sinking funds.
D) bond indentures.
Q3) The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount.
A)True
B)False
Q4) Restrictive covenants can
A) limit the amount of dividends the firm can pay.
B) limit the ability of the firm to issue additional debt.
C) restrict the ability of the firm to enter into a merger agreement.
D) do all of the above.
E) do only A and B of the above.
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Chapter 13: The Stock Market
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Sample Questions
Q1) The main cause of fluctuations in stock prices is changes in A) tax laws.
B) errors in technical stock analysis.
C) daily trading volume in stock markets.
D) information available to investors.
E) total household wealth in the economy.
Q2) In the one-period valuation model,a stock's value falls if the ________ rises.
A) dividend
B) expected future price
C) required return on equity
D) current price
Q3) The PE ratio approach to valuing stock is especially useful for valuing A) privately held firms.
B) firms that don't pay dividends.
C) both A and B of the above.
D) neither A nor B of the above.
Q4) A lower than average PE may mean that the market expects earnings to rise in the future.
A)True
B)False
Page 15
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) (I)Conventional mortgages are originated by private lending institutions,and FHA or VA loans are originated by the government.
(II)Conventional mortgages are insured by private companies,and FHA or VA loans are insured by the government.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q2) Which of the following reduces moral hazard for the mortgage borrower?
A) Collateral
B) Down payments
C) Private mortgage insurance
D) Borrower qualifications
Q3) In 2012,mortgage loans to farms represented the largest proportion of mortgage lending in the U.S.
A)True
B)False
Q4) How has the modern mortgage market changed over recent years?
Q5) What are points? What is their purpose?
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits,there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.
A) dollar; dollar
B) dollar; foreign
C) foreign; dollar
D) foreign; foreign
Q2) As the relative expected return on dollar deposits increases,foreigners will want to hold more ________ deposits and less ________ deposits.
A) foreign; foreign
B) foreign; dollar
C) dollar; foreign
D) dollar; dollar
Q3) There are two kinds of exchange rate transactions: spot transactions and forward transactions.
A)True
B)False
Q4) Explain graphically how a change in the foreign interest rate will affect exchange rates.
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Chapter 16: The International Financial System
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Sample Questions
Q1) When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base,it is called
A) a sterilized foreign exchange intervention.
B) an unsterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money-neutral foreign exchange intervention.
Q2) The difference between merchandise exports and imports is called the
A) current account balance.
B) capital account balance.
C) balance of payments.
D) trade balance.
Q3) The official reserve transactions balance
A) equals the current account balance plus the items in the capital account.
B) tells us the net amount of international reserves that must move between central banks in order to finance international transactions.
C) has an important impact on the money supply.
D) is all of the above.
Q4) What was the European Monetary System? How did its exchange rate mechanism work?
Q5) Describe the pros and cons for controls on capital inflows and outflows.
Page 18
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) The most important category of assets on a bank's balance sheet is
A) discount loans.
B) securities.
C) loans.
D) cash items in the process of collection.
Q2) How did liability management change during the 1960s?
Q3) What is the major focus of each of the following bank management concerns: asset management,liability management,liquidity management,and capital adequacy management?
Q4) Net profit after taxes per dollar of assets is a basic measure of bank profitability called
A) return on assets.
B) return on capital.
C) return on equity.
D) return after taxes.
Q5) Bank failure is less likely to occur when a bank
A) holds less in U.S. government securities.
B) suffers large deposit outflows.
C) holds more excess reserves.
D) has less bank capital.
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Chapter 18: Financial Regulation
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Sample Questions
Q1) Once a bank has been chartered,it is required to file periodic call reports that reveal the bank's assets and liabilities,income,ownership,and other details.
A)True
B)False
Q2) "Truth in lending" was mandated under the Consumer Protection Act of 1969 and requires all lenders to reveal the annual percentage rate,or APR,on loans.
A)True
B)False
Q3) Which of the following solutions have been proposed to solve the too-big-to-fail problem?
A) Break up large, systemically important financial institutions.
B) Impose higher capital requirements on large, systemically important financial institutions.
C) Do nothing, since Dodd-Frank effectively eliminated the problem.
D) All of the above have been proposed.
Q4) How has bank regulation in the United States changed since the late 1980s? What accounts for these changes?
Q5) How does Dodd-Frank claim to eliminate the too-big-to-fail problem?
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) Before 1863,
A) federally chartered banks had regulatory advantages not granted to state-chartered banks.
B) the number of federally chartered banks grew at a much faster rate than at any other time since the end of the Civil War.
C) banks acquired funds by issuing banknotes.
D) the Federal Reserve System regulated only federally chartered banks.
E) the Comptroller of the Currency regulated both state and federally chartered banks.
Q2) In a ________ banking system,commercial banks engage in securities underwriting,but separate subsidiaries conduct the different activities.Also,banking and insurance are not typically undertaken together in this system.
A) universal
B) British-style universal
C) divided
D) compartmentalized
E) severable
Q3) Explain what happened to the large,free-standing investment banks as a result of the Global Financial Crisis.
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Chapter 20: The Mutual Fund Industry
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Q1) Mutual funds
A) pool the resources of many small investors by selling these investors shares and using the proceeds to buy securities.
B) allow small investors to obtain the benefits of lower transaction costs in purchasing securities.
C) provide small investors a diversified portfolio that reduces risk.
D) do all of the above.
E) do only A and B of the above.
Q2) At the end of 2012 there were over ________ separate mutual funds with total assets over ________.
A) 800; $10 trillion
B) 7,500; $13 trillion
C) 10,000; $10 trillion
D) 1,000; $7 trillion
Q3) Government bonds are essentially default risk-free,________ returns.
A) and will yield high
B) and will yield the highest
C) but will have relatively low
D) none of the above
Q4) What is the difference between an open-end and a closed-end mutual fund?
Page 22
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide are an example of a ________.
A) restrictive provision
B) restrictive covenant
C) anti-fraud exclusion
D) risk-based deductible
Q2) The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of coinsurance.
A)True
B)False
Q3) The federal regulatory agency responsible for regulating the activities of life insurance companies is
A) the Federal Deposit Insurance Corporation.
B) the Federal Reserve.
C) the Federal Life Insurance Board.
D) none of the above; there is no such federal regulatory agency.
Q4) The Social Security system is an example of a pension plan that is fully funded.
A)True
B)False
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Sample Questions
Q1) An investment bank is a financial institution that
A) bundles small deposits into larger loans.
B) helps corporations raise funds.
C) holds most of its assets in commercial paper.
D) does all of the above.
E) does only A and B of the above.
Q2) Discuss the several ways in which venture capitalists reduce asymmetric information.
Q3) A securities dealer stands ready to make a market in the security at any time. For this reason,dealers are also called ________.
A) market makers
B) "brokers and dealers"
C) liquidity traders
D) demand dealers
Q4) Which of the following is the second phase in the life cycle of a venture capital deal?
A) A limited partnership is formed and funds are raised.
B) Funds are invested in start-up companies.
C) The venture firm exits the investment.
D) The venture firm seeks approval from the S.E.C.
Page 24
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Chapter 23: Risk Management in Financial Institutions
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Q1) A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.
A) increase; increase
B) decrease; increase
C) decrease; decrease
D) increase; decrease
Q2) Refer to Table 23.2.Assuming that the average duration of the bank's assets is four years,while the average duration of its liabilities is three years,a rise in interest rates from 5 percent to 10 percent will cause the net worth of First National to ________ by ________ of the total original asset value.
A) decline; 5%
B) decline; 1.3%
C) decline; 6.2%
D) increase; 5%
Q3) The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.
A)True
B)False
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25
Chapter 24: Hedging with Financial Derivatives
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Q1) All other things held constant,premiums on call options will increase when the A) exercise price falls.
B) volatility of the underlying asset falls.
C) term to maturity decreases.
D) futures price increases.
Q2) The main disadvantage of futures contracts as compared to options on futures contracts is that futures
A) remove the possibility of gains.
B) increase the transactions cost.
C) are not as effective a hedge.
D) do not remove the possibility of losses.
Q3) A short contract obligates the holder to sell securities in the future.
A)True
B)False
Q4) Distinguish between forward and futures contracts.
Q5) The agency which regulates futures options is the
A) Securities and Exchange Commission.
B) Commodities Futures Trading Commission.
C) Federal Trade Commission.
D) Both A and B are true.
26
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) Contrast the stages of a financial crisis between an advanced economy and an emerging market economy.
Q2) In Stage Three of a financial crisis in an emerging market economy,the currency mismatch refers to ________.
A) the mismatch between size of the actual notes and the high price levels need to buy basic goods
B) the difference in the currency FX markets over time
C) the mismatch between the currency of the stock and bond markets
D) the fact that most debt in emerging market economies is denominated in U.S. dollars
Q3) A speculative attack on the currency of a country is the focus of Stage Two of a financial crisis in an emerging market economy.
A)True
B)False
Q4) Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy.
Q5) Describe the differences in the evolution of the financial crises in South Korea (1997-1998)and Argentina (2001-2002).
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Chapter 26: Savings Associations and Credit Unions
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Q1) Since 1990,the number of credit union members has ________.
A) increased substantially
B) increased slightly
C) decreased substantially
D) decreased slightly
Q2) Since 1993,the number of savings and loan associations has ________.
A) held steady
B) risen sharply
C) risen slightly
D) declined substantially
Q3) ________ view credit unions as unfair competitors due to government support they receive in the form of tax advantages.
A) Regulators
B) The Federal Reserve
C) Commercial banks
D) none of the above
Q4) Why did the Competitive Equality in Banking Act of 1987 fail to solve the problems in the thrift industry?
Q5) Why have commercial banks gone to court in an effort to limit the activities of credit unions?
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Chapter 27: Finance Companies
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Sample Questions
Q1) Consumer finance companies make loans to borrowers who would not qualify for bank loans due to low income or poor credit.
A)True
B)False
Q2) Two growth areas for consumer finance companies are
A) first mortgages and vacation financing.
B) marine vessel loans and auto loans.
C) home equity loans and educational loans.
D) home equity loans and "private label" retail credit cards.
Q3) Discuss the regulatory environment for finance companies relative to commercial banks.
Q4) In 2013,the largest portion of loans made by finance companies was ________,representing 60% of the loans.
A) consumer loans
B) factoring loans
C) business loans
D) real estate
Q5) Factoring refers to purchasing a firm's accounts receivables at a premium.
A)True
B)False
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