TEST BANK for International Financial Management 14th Edition by Jeff Madura

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TEST BANK

2023

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COMPLETE Elaborated Solution Manual for

International Financial Management 14th Edition Jeff Madura 2023

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International Financial Management 14th Edition by Jeff Madura ISBN-10 0357130545 ISBN-13 978-0357130544

Test bank for International Financial Management 14th Edition by Jeff Madura

ISBN-10 0357130545 ISBN-13 978-0357130544

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TABLE OF CONTENTS

Part I: THE INTERNATIONAL FINANCIAL ENVIRONMENT. 1. Multinational Financial Management: An Overview.

2. International Flow of Funds.

3. International Financial Markets.

4. Exchange Rate Determination.

5. Currency Derivatives.

Part II: EXCHANGE RATE BEHAVIOR. 6. Government Influence on Exchange Rates.

7. International Arbitrage and Interest Rate Parity.

8. Relationships among Inflation, Interest Rates, and Exchange Rates.

Part III: EXCHANGE RATE RISK MANAGEMENT. 9. Forecasting Exchange Rates.

10. Measuring Exposure to Exchange Rate Fluctuations.

11. Managing Transaction Exposure.

12. Managing Economic Exposure and Translation Exposure.

Part IV: LONG-TERM ASSET AND LIABILITY MANAGEMENT. 13. Direct Foreign Investment.

14. Multinational Capital Budgeting.

15. International Corporate Governance and Control.

16. Country Risk Analysis.

17. Multinational Capital Structure and Cost of Capital.

18. Long-Term Debt Financing.

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Part V: SHORT-TERM ASSET AND LIABILITY MANAGEMENT. 19. Financing International Trade.

20. Short-Term Financing.

21. International Cash Management.

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Chapter 01: Role of Financial Markets and Institutions 1. Financial market participants who provide funds are called a. deficit units. b. surplus units. c. primary units. d. secondary units.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/15/2016 6:38 AM DATE MODIFIED: 9/16/2016 1:14 AM 2. Which of the following is NOT an issuer of bonds? a. households b. corporations c. the U.S. Treasury d. government agencies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:15 AM DATE MODIFIED: 5/1/2018 11:55 AM 3. Behavioral finance a. applies concepts from sociology and anthropology to the behavior of market participants. b. studies the behavior of financial markets in response to changes in Federal Reserve policy. c. applies psychology to financial decision making. d. explains why markets are efficient.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:18 AM DATE MODIFIED: 9/16/2016 1:21 AM 4. Those financial markets that facilitate the flow of short-term funds are known as: a. money markets b. capital markets c. primary markets d. secondary markets ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.02 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:21 AM DATE MODIFIED: 5/1/2018 11:56 AM 5. Funds are provided to the initial issuer of securities in the: a. secondary market b. primary market c. deficit market d. surplus market ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:24 AM DATE MODIFIED: 5/1/2018 12:26 PM 6. Which of the following is a capital market instrument? a. a six-month certificate of deposit b. a three-month Treasury bill Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions c. a ten-year bond d. an agreement for a bank to loan funds directly to a company for nine months ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 1:27 AM DATE MODIFIED: 9/16/2016 1:29 AM 7. Which of the following is a money market security? a. Treasury note b. municipal bond c. mortgage d. commercial paper ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 1:29 AM DATE MODIFIED: 9/16/2016 1:31 AM 8. The creditors in the federal funds market are: a. households b. depository institutions c. firms d. government agencies ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/16/2016 1:52 AM 5/1/2018 12:27 PM

9. Investors in equity securities may earn a return from a. coupon payments and the return of principal at the maturity date. b. coupon payments and a capital gain when they sell the securities. c. quarterly dividends (if paid) and a capital gain when they sell the securities. d. quarterly dividends (if paid) and the return of principal at the maturity date.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:56 AM DATE MODIFIED: 9/16/2016 2:59 AM 10. Money market securities generally have ____. a. relatively low liquidity, low expected return, and a high degree of credit risk b. relatively high liquidity, high expected return, and a high degree of credit risk c. relatively low liquidity, high expected return, and a low degree of credit risk d. relatively high liquidity, low expected return, and a low degree of credit risk ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:59 AM DATE MODIFIED: 5/1/2018 12:29 PM 11. If security prices fully reflect all available information, the markets for these securities are: a. efficient b. primary c. overvalued d. undervalued ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:11 AM DATE MODIFIED: 5/1/2018 12:30 PM 12. If markets are ____, investors could use available information ignored by the market to earn abnormally high returns. a. perfect b. active c. inefficient d. in equilibrium ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:14 AM DATE MODIFIED: 9/16/2016 3:15 AM 13. If financial markets are efficient, this implies that all securities should earn the same return. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 3:17 AM DATE MODIFIED: 5/1/2018 12:31 PM 14. The Securities Act of 1933 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions a. required complete disclosure of relevant financial information for publicly offered securities in the primary market. b. declared trading strategies to manipulate the prices of public secondary securities illegal. c. imposed heavy penalties for insider trading. d. required complete disclosure of relevant financial information for securities traded in the secondary market. e. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:19 AM DATE MODIFIED: 5/1/2018 12:32 PM 15. The Securities and Exchange Commission (SEC) was established by the: a. Federal Reserve Act b. McFadden Act c. Securities Exchange Act of 1934 d. Glass-Steagall Act e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:01 AM DATE MODIFIED: 5/1/2018 12:35 PM 16. Stock issued by a corporation is an example of a(n): a. debt security b. money market security c. equity security d. debt security AND money market security ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:06 AM DATE MODIFIED: 5/1/2018 12:38 PM 17. If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors. a. efficient b. inefficient c. perfect d. imperfect ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 5:10 AM DATE MODIFIED: 9/19/2016 5:12 AM 18. Which of the following is NOT a typical function of securities firms? a. provide brokerage services b. provide underwriting services c. accept deposits that are insured by the federal government and use the funds to provide loans to corporations d. offer advice on mergers and other corporate restructurings ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:13 AM DATE MODIFIED: 5/1/2018 12:41 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 19. Without the participation of financial intermediaries in financial market transactions, a. information and transaction costs would be lower. b. transaction costs would be higher but information costs would be unchanged. c. information costs would be higher but transaction costs would be unchanged. d. information and transaction costs would be higher.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 5:16 AM DATE MODIFIED: 9/19/2016 5:20 AM 20. Which of the following is most likely to be described as a depository institution? a. finance companies b. securities firms c. credit unions d. pension funds e. insurance companies ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:47 AM DATE MODIFIED: 9/19/2016 6:50 AM 21. In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions. a. commercial banks b. savings banks c. credit unions d. S&Ls ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:14 AM DATE MODIFIED: 9/19/2016 7:16 AM 22. Which of the following is a non-depository financial institution? a. savings bank b. commercial bank c. savings and loan association d. mutual fund ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:17 AM DATE MODIFIED: 5/1/2018 12:43 PM 23. Which of the following distinguishes credit unions from commercial banks and savings institutions? a. Credit unions are nonprofit. b. Credit unions accept deposits but do not make loans. c. Credit unions make loans but do not accept deposits. d. Savings institutions restrict their business to members who share a common bond.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 7:19 AM DATE MODIFIED: 9/19/2016 7:26 AM 24. When a securities firm acts as a broker, it Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions a. guarantees the issuer a specific price for newly issued securities. b. makes a market in specific securities by adjusting its own inventory. c. executes securities transactions between two parties. d. purchases securities for its own account.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:30 AM DATE MODIFIED: 9/19/2016 7:35 AM 25. When a securities firm acts as a(n) ____, it makes a market in specific securities by maintaining an inventory of those securities. a. adviser b. dealer c. broker d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:36 AM DATE MODIFIED: 5/1/2018 12:44 PM 26. ____ obtain funds by issuing securities and then lend the funds to individuals and small businesses. a. Finance companies b. Securities firms c. Mutual funds d. Insurance companies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:40 AM DATE MODIFIED: 9/19/2016 7:43 AM 27. Households with ____ are served by ____. a. deficient funds; depository institutions and finance companies b. deficient funds; finance companies only c. savings; finance companies only d. savings; pension funds and finance companies ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:44 AM DATE MODIFIED: 9/19/2016 7:49 AM 28. ____ concentrate on mortgage loans. a. Finance companies b. Commercial banks c. Savings institutions d. Credit unions ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:50 AM DATE MODIFIED: 9/19/2016 7:53 AM 29. ____ securities have a maturity of one year or less; ____ securities generally have relatively high liquidity. a. Money market; capital market b. Money market; money market Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions c. Capital market; money market d. Capital market; capital market ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:54 AM DATE MODIFIED: 9/19/2016 7:56 AM 30. Which of the following are NOT major investors in stocks? a. commercial banks b. insurance companies c. mutual funds d. pension funds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:56 AM DATE MODIFIED: 5/1/2018 12:45 PM 31. Which of the following financial intermediaries commonly invests in stocks and bonds? a. pension funds b. insurance companies c. mutual funds d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/19/2016 8:00 AM 5/1/2018 12:46 PM

32. Securities represent a claim on the issuer. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:06 AM DATE MODIFIED: 9/19/2016 8:10 AM 33. Debt securities represent debt (borrowed funds) incurred by the issuer. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:11 AM DATE MODIFIED: 9/19/2016 8:16 AM 34. A five-year security was purchased two years ago by an investor who plans to resell it. The investor will sell the security r in the: a. secondary market b. primary market c. deficit market d. surplus market ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 8:16 AM DATE MODIFIED: 5/1/2018 12:47 PM 35. When security prices fully reflect all available information, the markets for these securities are said to be efficient. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:22 AM DATE MODIFIED: 9/20/2016 1:24 AM 36. If markets are perfect, securities buyers and sellers do not have full access to information and cannot always break down securities to the precise size they desire. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:24 AM DATE MODIFIED: 5/1/2018 12:48 PM 37. A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:26 AM DATE MODIFIED: 9/20/2016 1:30 AM 38. The adoption of the euro increased business between European countries and created a more competitive environment in Europe. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:30 AM DATE MODIFIED: 9/20/2016 1:32 AM 39. In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:32 AM DATE MODIFIED: 9/20/2016 1:35 AM 40. Securities represent a claim on the provider of funds. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:35 AM DATE MODIFIED: 9/20/2016 1:39 AM 41. Debt securities include commercial paper, Treasury bonds, and corporate bonds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:39 AM DATE MODIFIED: 9/20/2016 1:43 AM 42. Common types of capital market securities include Treasury bills and commercial paper. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:44 AM DATE MODIFIED: 9/20/2016 1:47 AM 43. Common types of money market securities include negotiable certificates of deposit and Treasury bills. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:48 AM DATE MODIFIED: 9/20/2016 1:50 AM 44. Money market securities are commonly issued to finance the purchase of assets such as buildings, equipment, or machinery. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 1:59 AM DATE MODIFIED: 9/20/2016 2:04 AM 45. The total asset value of savings institutions is larger than that of commercial banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:05 AM DATE MODIFIED: 9/20/2016 2:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 46. Financial markets facilitating the flow of short-term debt securities with maturities of less than one year are known as: a. secondary markets b. capital markets c. primary markets d. money markets e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:07 AM DATE MODIFIED: 5/1/2018 12:58 PM 47. Which of the following transactions would NOT be considered a secondary market transaction? a. An individual investor purchases some existing shares of stock in Apple through her broker. b. An institutional investor sells some Disney stock through its broker. c. A firm that was privately held engages in an offering of stock to the public. d. All of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 2:20 AM DATE MODIFIED: 5/1/2018 12:59 PM 48. If investors speculate in the underlying asset rather than in 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 POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:26 AM DATE MODIFIED: 9/20/2016 2:29 AM 49. ____ maintain a larger amount of assets in aggregate than the other types of non-depository institutions. a. Finance companies b. Mutual funds c. Life insurance companies d. Securities firms ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:31 AM DATE MODIFIED: 5/1/2018 1:02 PM 50. An asymmetric information problem arises when one party to a transaction has information that is not available to the other party, as when a corporation fails to tell investors the full extent of its losses. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:37 AM DATE MODIFIED: 9/20/2016 2:39 AM 51. Bonds issued by corporations have a ____ expected return and ____ risk than Treasury bonds. a. lower; lower Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. lower; higher c. higher; lower d. higher; higher ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 2:39 AM DATE MODIFIED: 9/20/2016 2:41 AM 52. Systemic risk is the risk that a large decline in one stock’s price could cause investors to sell their stock in other companies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:41 AM DATE MODIFIED: 9/20/2016 2:43 AM 53. The Sarbanes-Oxley Act requires firms to provide complete and accurate financial information and imposes penalties on key executives of the firm if financial fraud is detected. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DATE CREATED: DATE MODIFIED:

9/20/2016 2:44 AM 9/20/2016 2:46 AM

54. Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:46 AM DATE MODIFIED: 9/20/2016 2:49 AM 55. Commercial banks in aggregate have more assets than credit unions. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:50 AM DATE MODIFIED: 9/20/2016 2:52 AM 56. Those participants who receive more money than they spend are referred to as: a. deficit units b. surplus units c. borrowing units d. government units ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 2:56 AM DATE MODIFIED: 5/1/2018 1:03 PM 57. Equity securities a. have a maturity. b. pay interest on a periodic basis. c. represent ownership in the issuer. d. repay the principal amount at maturity.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 3:00 AM DATE MODIFIED: 9/20/2016 3:02 AM 58. ____ involve(s) decisions such as how much funding to obtain and what types of securities to issue when financing operations. a. Corporate finance b. Investment management c. Financial markets and institutions d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 3:03 AM DATE MODIFIED: 5/1/2018 1:04 PM 59. There is a ____ relationship between the risk of a security and the expected return from investing in the security. a. positive Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. negative c. indeterminable d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 3:05 AM DATE MODIFIED: 5/1/2018 1:04 PM 60. If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors. a. rise; lower b. fall; higher c. fall; lower d. rise; higher ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 3:07 AM DATE MODIFIED: 9/20/2016 3:09 AM 61. The credit crisis in the 2008–2009 period was caused by weak economies in Asia. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/20/2016 3:10 AM 9/20/2016 3:12 AM

62. ____ are classified as depository institutions. a. Credit unions b. Pension funds c. Finance companies d. Securities firms ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:23 AM DATE MODIFIED: 9/20/2016 4:26 AM 63. The main reason that depository institutions experienced financial problems during the credit crisis was their investment in: a. mortgages b. money market securities c. stocks d. Treasury bonds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:26 AM DATE MODIFIED: 5/1/2018 1:05 PM 64. Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:31 AM DATE MODIFIED: 9/20/2016 4:33 AM 65. Bonds commonly have maturities of one to three years. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:33 AM DATE MODIFIED: 9/20/2016 4:36 AM 66. Since markets are efficient, institutional and individual investors should ignore the various investment instruments available. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:36 AM DATE MODIFIED: 9/20/2016 4:38 AM 67. Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:39 AM DATE MODIFIED: 9/20/2016 4:40 AM 68. When security prices fully reflect all available information, the markets for these securities are said to be perfect. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:41 AM DATE MODIFIED: 9/20/2016 4:42 AM 69. Securities that are not as safe and liquid as other securities are never considered for investment by anyone. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 4:43 AM DATE MODIFIED: 9/20/2016 4:45 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 70. By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 4:48 AM DATE MODIFIED: 9/20/2016 4:58 AM 71. When a depository institution offers a loan, it is acting as a creditor. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:00 AM DATE MODIFIED: 9/20/2016 5:03 AM 72. Savings institutions are a type of nondepository institution. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:03 AM DATE MODIFIED: 9/20/2016 5:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 73. Most mutual funds raise funds by issuing securities and then lend the funds to individuals and small businesses. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:07 AM DATE MODIFIED: 9/20/2016 5:13 AM 74. Institutional investors not only provide financial support to companies but also exercise some degree of governance over them. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 5:14 AM DATE MODIFIED: 9/20/2016 5:17 AM 75. Which of the following is NOT a reason why depository financial institutions are popular? a. They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units. b. They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units. c. They accept the risk on loans provided. d. They use their information resources to act as a broker, executing securities transactions between two parties. e. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 5:17 AM DATE MODIFIED: 5/1/2018 1:07 PM 76. Which of the following are NOT considered money market securities? a. Treasury bills b. mortgage-backed securities c. negotiable certificates of deposit d. commercial paper ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:20 AM DATE MODIFIED: 5/1/2018 1:14 PM 77. ____ are not considered capital market securities. a. Derivative securities b. Treasury bonds c. Corporate bonds d. Equity securities e. Mortgages ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:23 AM DATE MODIFIED: 9/20/2016 5:26 AM 78. ____ are long-term debt obligations issued by corporations and government agencies to support their operations. a. Common stock Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions b. Derivative securities c. Bonds d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:28 AM DATE MODIFIED: 5/1/2018 1:15 PM 79. Which of the following is an example of an asymmetric information problem? a. A corporation releases toxic wastes into a river. b. A corporation relocates to Ireland to take advantage of lower corporate tax rates. c. A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock. d. A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 5:36 AM DATE MODIFIED: 9/20/2016 5:38 AM 80. If investors speculate in derivative contracts rather than in 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: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 5:39 AM DATE MODIFIED: 9/20/2016 5:41 AM 81. When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors. a. undervalued b. overvalued c. fairly priced d. efficient e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:48 AM DATE MODIFIED: 5/1/2018 1:16 PM 82. Which of the following are NOT considered depository financial institutions? a. finance companies b. commercial banks c. savings institutions d. credit unions e. All of these are depository financial institutions.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:53 AM DATE MODIFIED: 5/1/2018 1:17 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions 83. The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses. a. savings institutions b. commercial banks c. mutual funds d. finance companies e. pension funds ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 5:57 AM DATE MODIFIED: 9/20/2016 6:02 AM 84. Which of the following statements is incorrect? a. Financial markets attract funds from investors and channel the funds to corporations. b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations. c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors. d. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 6:02 AM DATE MODIFIED: 9/20/2016 6:05 AM 85. Which of the following requires mortgage lenders to verify the income, job status, and credit history of mortgage applicants before extending a mortgage? a. Mortgage Lenders Reform Act b. Financial Reform Act of 2010 c. Securities Act of 1933 d. Sarbanes-Oxley Act Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 6:06 AM DATE MODIFIED: 9/20/2016 6:08 AM 86. Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities. a. liquid; many b. liquid; not many c. illiquid; not many d. illiquid; many ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 6:10 AM DATE MODIFIED: 9/20/2016 6:13 AM 87. Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with specific payments at regular intervals. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 6:14 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DATE MODIFIED:

9/20/2016 6:20 AM

88. ____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient. a. Psychological marketing b. Behavioral finance c. Inefficient markets theory d. Financial psychology ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 6:21 AM DATE MODIFIED: 9/20/2016 6:23 AM 89. International integration of securities markets allows a. governments and corporations to have easier access to funding from creditors and investors in other countries. b. investors and creditors to benefit from investment opportunities in other countries. c. one’s country’s financial problems to adversely affect other countries. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 7:12 AM DATE MODIFIED: 5/1/2018 1:18 PM 90. The foreign exchange market facilitates the exchange of: a. information between investors in different countries b. debt securities c. equity securities d. currencies ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 7:15 AM DATE MODIFIED: 5/1/2018 1:19 PM 91. Which of the following is NOT an example of the government’s recent increased role in financial markets? a. the Federal Reserve’s purchase of debt securities during the credit crisis b. regulations changing the way that the credit risk of bonds is assessed c. regulations setting maximum rates for Treasury securities d. increased monitoring of stock trading and prosecution of those who trade on inside information ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 7:23 AM DATE MODIFIED: 5/1/2018 1:20 PM 92. Most of the funds that insurance companies receive from premiums are invested in short-run money market securities. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 7:25 AM DATE MODIFIED: 9/20/2016 7:27 AM 93. The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as: Copyright Cengage Learning. Powered by Cognero.

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Chapter 01: Role of Financial Markets and Institutions a. systemic risk b. leverage risk c. financial meltdown risk d. credit risk ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 7:28 AM DATE MODIFIED: 5/1/2018 1:21 PM 94. Systemic risk exists because a. there is no government regulation of financial markets. b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities. c. financial institutions borrow using long-term debt securities but lend their funds for short-term periods. d. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.01.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/20/2016 7:30 AM DATE MODIFIED: 5/1/2018 1:21 PM

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Chapter 02: Determination of Interest Rates 1. The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods. a. higher b. lower c. zero d. negative ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:10 AM DATE MODIFIED: 12/6/2016 1:11 AM 2. At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest. a. greater; higher b. greater; lower c. smaller; lower d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:12 AM DATE MODIFIED: 5/1/2018 1:48 PM 3. Businesses demand loanable funds to: a. finance installment debt. b. subsidize other companies. c. invest in fixed and short-term assets d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:14 AM DATE MODIFIED: 5/1/2018 1:49 PM 4. The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower. a. greater; lower b. lower; greater c. lower; lower d. greater; greater ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 1:17 AM DATE MODIFIED: 12/6/2016 1:18 AM 5. If interest rates are ____, ____ projects will have positive NPVs. a. higher; more b. lower; more c. lower; no d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:19 AM DATE MODIFIED: 5/1/2018 1:50 PM 6. The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.

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Chapter 02: Determination of Interest Rates a. inversely; positively b. positively; inversely c. inversely; inversely d. positively; positively ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 1:20 AM DATE MODIFIED: 12/6/2016 1:21 AM 7. If economic conditions become less favorable, then a. expected cash flows on various projects will increase. b. more proposed projects will have expected returns greater than the hurdle rate. c. there would be additional acceptable business projects. d. there would be a decreased demand by business for loanable funds.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:21 AM DATE MODIFIED: 5/1/2018 1:51 PM 8. As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve. a. decreased; inward b. decreased; outward c. increased; outward d. increased; inward ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 1:46 AM DATE MODIFIED: 12/6/2016 1:48 AM 9. The federal government’s demand for loanable funds is ____. If the budget deficit is expected to increase, the federal government’s demand for loanable funds would ____. a. interest-elastic; decrease b. interest-elastic; increase c. interest-inelastic; increase d. interest-inelastic; decrease ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:48 AM DATE MODIFIED: 12/6/2016 1:50 AM 10. 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 POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 1:50 AM DATE MODIFIED: 12/6/2016 3:31 AM 11. For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates will be ____ U.S. interest rates. a. positively related to b. inversely related to c. unrelated to d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:32 AM DATE MODIFIED: 5/1/2018 1:51 PM 12. The quantity of loanable funds supplied is normally a. highly interest-elastic. b. more interest-elastic than the demand for loanable funds. c. less interest-elastic than the demand for loanable funds. d. equally as interest-elastic as the demand for loanable funds. e. highly interest-elastic AND more interest-elastic than the demand for loanable funds.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:34 AM DATE MODIFIED: 5/1/2018 1:52 PM 13. The ____ sector is the largest supplier of loanable funds. a. household b. government c. business d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:36 AM DATE MODIFIED: 5/1/2018 1:53 PM 14. If a strong economy allows for a large ____ in households’ income, the supply curve will shift ____. a. decrease; outward b. increase; inward c. increase; outward d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:37 AM DATE MODIFIED: 5/1/2018 1:54 PM 15. The equilibrium interest rate a. equates the aggregate demand for funds with the aggregate supply of loanable funds. b. equates the elasticity of the aggregate demand and supply for loanable funds. c. decreases as the aggregate supply of loanable funds decreases. d. increases as the aggregate demand for loanable funds decreases.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:38 AM DATE MODIFIED: 12/6/2016 3:40 AM 16. The equilibrium interest rate should a. fall when the aggregate supply of funds exceeds the aggregate demand for funds.

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Chapter 02: Determination of Interest Rates b. rise when the aggregate supply of funds exceeds the aggregate demand for funds. c. fall when the aggregate demand for funds exceeds the aggregate supply of funds. d. rise when the aggregate demand for funds equals the aggregate supply of funds. e. rise when the aggregate supply of funds exceeds the aggregate demand for funds AND fall when the aggregate demand for funds exceeds the aggregate supply of funds.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 3:40 AM DATE MODIFIED: 5/1/2018 1:55 PM 17. 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 saving by foreign savers b. an increase in inflation c. pessimistic economic projections that cause businesses to reduce expansion plans d. a decrease in saving by U.S. households ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 3:41 AM DATE MODIFIED: 12/6/2016 3:43 AM 18. The Fisher effect states that the a. nominal interest rate equals the expected inflation rate plus the real rate of interest. b. nominal interest rate equals the real rate of interest minus the expected inflation rate. c. real rate of interest equals the nominal interest rate plus the expected inflation rate. d. expected inflation rate equals the nominal interest rate plus the real rate of interest.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:43 AM DATE MODIFIED: 12/6/2016 3:49 AM 19. If the real interest rate was negative for a period of time, then a. inflation is expected to exceed the nominal interest rate in the future. b. inflation is expected to be less than the nominal interest rate in the future. c. actual inflation was less than the nominal interest rate. d. actual inflation was greater than the nominal interest rate.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:55 AM DATE MODIFIED: 12/6/2016 3:57 AM 20. If inflation is expected to decrease, then a. savers will provide less funds at the existing equilibrium interest rate. b. the equilibrium interest rate will increase. c. the equilibrium interest rate will decrease. d. borrowers will demand more funds at the existing equilibrium interest rate.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 3:59 AM DATE MODIFIED: 12/6/2016 4:00 AM 21. If inflation turns out to be lower than expected a. savers benefit. b. borrowers benefit while savers are not affected.

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Chapter 02: Determination of Interest Rates c. savers and borrowers are equally affected. d. savers are adversely affected but borrowers benefit.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 4:00 AM DATE MODIFIED: 12/6/2016 4:02 AM 22. If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected). a. upward; upward b. upward; downward c. downward; upward d. downward; downward ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:07 AM DATE MODIFIED: 12/6/2016 4:12 AM 23. What is the basis of the relationship between the Fisher effect and the loanable funds theory? a. the saver's desire to maintain the existing real rate of interest b. the borrower's desire to achieve a positive real rate of interest c. the saver's desire to achieve a negative real rate of interest d. the borrower's desire to achieve a positive real rate of interest AND the saver's desire to achieve a negative real rate of interest ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 12/6/2016 4:12 AM 5/1/2018 1:56 PM

24. Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to______ and should place ____ pressure on U.S. interest rates. a. decrease; upward b. decrease; downward c. increase; downward d. increase; upward ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 4:15 AM DATE MODIFIED: 12/6/2016 4:16 AM 25. Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities.

This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates. a. decrease; upward b. decrease; downward c. increase; downward d. increase; upward ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:16 AM DATE MODIFIED: 12/6/2016 4:31 AM 26. If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates funds and a(n) ____ in the demand for loanable funds. a. increase; no change b. decrease; no change c. no change; increase d. no change; decrease ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:32 AM DATE MODIFIED: 12/6/2016 4:34 AM 27. If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds. a. increase; no change b. decrease; no change c. no change; increase d. no change; decrease ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:34 AM DATE MODIFIED: 12/6/2016 4:35 AM 28. When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____. a. increase; decrease b. increase; increase c. decrease; increase d. decrease; decrease ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 4:36 AM DATE MODIFIED: 12/6/2016 4:38 AM 29. If the real interest rate is expected to become negative, then the purchasing power of savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate. a. decreasing; less than b. decreasing; greater than c. increasing; greater than d. increasing; less than ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 4:38 AM DATE MODIFIED: 12/6/2016 4:41 AM 30. If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:42 AM DATE MODIFIED: 12/6/2016 4:44 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates 31. The federal government’s spending policies are generally thought to be _________ interest rates, but municipal governments’ spending is somewhat ________ interest rates. a. independent of; sensitive to b. sensitive to; independent of c. inversely rated to; positively related to d. positively related to; inversely related to ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:44 AM DATE MODIFIED: 12/6/2016 4:46 AM 32. The federal government’s _________ determines the budget deficit and therefore determines the government’s demand for loanable funds. a. monetary policy b. fiscal policy c. congressional policy d. economic policy ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:46 AM DATE MODIFIED: 12/6/2016 4:48 AM 33. Canada and the United States are major trading partners. If Canada experiences a major increase in economic growth, that could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates. a. upward; upward b. upward; downward c. downward; downward d. downward; upward ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 4:48 AM DATE MODIFIED: 12/6/2016 4:51 AM 34. If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds and places ____ pressure on interest rates. a. increases; upward b. increases; downward c. decreases; downward d. decreases; upward ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 4:52 AM DATE MODIFIED: 12/6/2016 4:54 AM 35. When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will ____, and U.S. interest rates will ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DATE CREATED: DATE MODIFIED:

12/6/2016 4:55 AM 12/6/2016 4:56 AM

36. Which of the following will probably NOT result in an increase in the business demand for loanable funds? a. an increase in positive net present value (NPV) projects b. a reduction in interest rates on business loans c. a recession d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:56 AM DATE MODIFIED: 5/1/2018 1:58 PM 37. If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds. a. increase; surplus b. increase; shortage c. decrease; surplus d. decrease; shortage ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 4:58 AM DATE MODIFIED: 12/6/2016 4:59 AM 38. A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule. a. higher; inward b. higher; outward c. lower; outward d. None of these are correct.

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Chapter 02: Determination of Interest Rates ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:00 AM DATE MODIFIED: 5/1/2018 1:59 PM 39. Which of the following is NOT true regarding foreign interest rates? a. The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries. b. The expectations of a strong dollar should cause a flow of funds to the United States. c. An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries. d. All of these are true regarding foreign interest rates.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:01 AM DATE MODIFIED: 5/1/2018 2:00 PM 40. Which of the following is least likely to affect household demand for loanable funds? a. a decrease in tax rates b. an increase in interest rates c. a reduction in positive net present value (NPV) projects available d. All of these are equally likely to affect household demand for loanable funds.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 12/6/2016 5:03 AM 5/1/2018 2:06 PM

41. Which of the following statements is incorrect? a. The Fed's monetary policy is intended to influence U.S. economic conditions. b. The Fed's monetary policy affects the supply of loanable funds, which affects interest rates. c. By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend. d. . All of the these are true.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:05 AM DATE MODIFIED: 5/1/2018 2:08 PM 42. The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds. a. Fisher effect b. loanable funds theory c. real interest rate d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:07 AM DATE MODIFIED: 5/1/2018 2:09 PM 43. When forecasting future interest rates, if the net demand for funds (ND) is _____, there will be an ______ adjustment in interest rates. a. negative; upward b. negative; downward c. positive; upward Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates d. positive; downward ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:10 AM DATE MODIFIED: 12/6/2016 5:11 AM 44. Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates. a. smaller; high b. larger; high c. larger; low d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 12/6/2016 5:13 AM DATE MODIFIED: 5/1/2018 2:16 PM 45. The federal government demand for funds is said to be interest-inelastic, or ____ to interest rates. a. sensitive b. insensitive c. relatively sensitive as compared to other sectors d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 12/6/2016 5:17 AM 5/1/2018 2:17 PM

46. In computing the net present value of a proposed project, the required rate of return to implement the project will be ______ if interest rates are ________. a. lower; higher b. lower; lower c. higher; lower d. higher; unchanged ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:19 AM DATE MODIFIED: 12/6/2016 5:20 AM 47. The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the supply schedule. a. inward; an inward shift b. inward; an outward shift c. outward; an inward shift d. outward; no obvious change ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:20 AM DATE MODIFIED: 12/6/2016 5:21 AM 48. Which of the following is a valid representation of the Fisher effect? a. i = E(INF) + iR b. iR = E(INF) + i c. E(INF) = i + iR Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:21 AM DATE MODIFIED: 5/1/2018 2:18 PM 49. The real interest rate can be forecasted by subtracting the ___ from the ____ for that period. a. nominal interest rate; expected inflation rate b. prime rate; nominal interest rate c. expected inflation rate; nominal interest rate d. prime rate; expected inflation rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:26 AM DATE MODIFIED: 12/6/2016 5:28 AM 50. According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings. a. higher nominal interest rate b. higher real interest rate c. lower nominal interest rate d. lower real interest rate ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DATE CREATED: DATE MODIFIED:

12/6/2016 5:28 AM 12/6/2016 5:30 AM

51. The federal government’s demand for funds is ________, and municipal governments’ demand for funds is somewhat ____________. a. interest-inelastic; interest-inelastic b. interest-elastic; interest-elastic c. interest-inelastic; interest-elastic d. interest-elastic; interest-inelastic ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:30 AM DATE MODIFIED: 12/6/2016 5:31 AM 52. The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds? a. an increase in both the supply of and the demand for loanable funds b. a decrease in both the supply of and the demand for loanable funds c. a decrease in the supply of loanable funds and an increase in the demand for loanable funds d. an increase in the supply of loanable funds and a decrease in the demand for loanable funds ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:32 AM DATE MODIFIED: 12/6/2016 5:33 AM 53. The crowding-out effect occurs when a. foreign investors crowd out U.S. investors in the market for loanable funds. b. the federal government’s demand for loanable funds due to a higher budget deficit crowds out the private demand in the market for loanable funds. c. institutional investors crowd out individual investors in the market for loanable funds. d. firms and municipal governments crowd out households in the market for loanable funds.

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Chapter 02: Determination of Interest Rates ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:33 AM DATE MODIFIED: 5/1/2018 2:19 PM 54. According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:35 AM DATE MODIFIED: 12/6/2016 5:36 AM 55. The supply of loanable funds in the United States is partly determined by the monetary policy implemented by the Federal Reserve System. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:36 AM DATE MODIFIED: 12/6/2016 5:38 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates 56. At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:38 AM DATE MODIFIED: 12/6/2016 5:39 AM 57. The business demand for funds resulting from short-term investments is inversely related to the number of projects implemented and inversely related to the interest rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:40 AM DATE MODIFIED: 12/6/2016 5:41 AM 58. Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were high relative to U.S. rates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates DATE CREATED: DATE MODIFIED:

12/6/2016 5:41 AM 12/6/2016 5:42 AM

59. If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:42 AM DATE MODIFIED: 12/6/2016 5:44 AM 60. Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and since most of these sectors are likely to demand a larger quantity of funds at lower interest rates (other things being equal), the aggregate demand for loanable funds is positively related to interest rates at any point in time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:44 AM DATE MODIFIED: 12/6/2016 5:46 AM 61. In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 12/6/2016 5:46 AM 12/6/2016 5:47 AM

62. If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:47 AM DATE MODIFIED: 12/6/2016 5:48 AM 63. The relationship between interest rates and expected inflation is often referred to as the loanable funds theory. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:49 AM DATE MODIFIED: 12/6/2016 5:50 AM 64. According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:50 AM DATE MODIFIED: 12/6/2016 5:52 AM 65. To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by subtracting the expected inflation rate over that period from the nominal interest rate quoted for that period. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:52 AM DATE MODIFIED: 12/6/2016 5:53 AM 66. According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 12/6/2016 5:53 AM DATE MODIFIED: 12/6/2016 5:54 AM 67. Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 02: Determination of Interest Rates ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.02.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 12/6/2016 5:54 AM DATE MODIFIED: 12/6/2016 5:56 AM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 1. In general, securities with ____ characteristics will offer ____ yields. a. favorable; higher b. favorable; lower c. unfavorable; lower d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:05 AM DATE MODIFIED: 5/2/2018 5:56 AM 2. Credit (default) risk is likely to be highest for: a. short-term Treasury securities b. AAA corporate securities c. long-term Treasury securities d. BBB corporate securities ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:12 AM DATE MODIFIED: 5/2/2018 5:56 AM 3. Some financial institutions such as commercial banks typically invest only in: a. junk bonds b. corporate bonds rated B or higher c. Treasury securities d. investment-grade bonds ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:17 AM DATE MODIFIED: 5/2/2018 5:57 AM 4. Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:50 AM DATE MODIFIED: 9/16/2016 2:51 AM 5. If a security can easily be converted to cash without a loss in value, it a. is liquid. b. has a high after-tax yield. c. has high credit risk. d. is illiquid.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:27 AM DATE MODIFIED: 5/2/2018 5:58 AM 6. Interest rate movements across countries tend to be _________ correlated as a result of ____________ financial markets. a. positively; internationally integrated b. positively; fully segmented Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates c. negatively; partially segmented d. negatively; internationally integrated ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:30 AM DATE MODIFIED: 9/16/2016 2:32 AM 7. If all other characteristics are similar, ____ would have to offer ____. a. taxable securities; a higher after-tax yield than tax-exempt securities b. taxable securities; a higher before-tax yield than tax-exempt securities c. tax-exempt securities; a higher after-tax yield than taxable securities d. tax-exempt securities; a higher before-tax yield than taxable securities ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:33 AM DATE MODIFIED: 9/16/2016 2:35 AM 8. Assume an investor's tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield? a. 16.00 percent b. 9.25 percent c. 9.00 percent d. 3.00 percent e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Application 9/16/2016 2:37 AM 5/2/2018 5:59 AM

9. According to the segmented markets theory, if most investors suddenly preferred to invest in long-term securities and most borrowers suddenly preferred to issue short-term securities, there would be a. downward pressure on the price of long-term securities. b. downward pressure on the short-term yields. c. downward pressure on the yield of long-term securities. d. downward pressure on the price of long-term securities AND downward pressure on the yield of long-term securities.

ANSWER: b POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False DATE CREATED: 9/16/2016 2:42 AM DATE MODIFIED: 5/2/2018 6:07 AM 10. A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of: a. 7.0 percent b. 10.8 percent c. 20.0 percent d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 2:45 AM DATE MODIFIED: 5/2/2018 6:18 AM 11. Holding other factors such as risk constant, the relationship between the maturity and the annualized yield of debt securities is called the: a. term structure of interest rates b. default structure of interest rates c. liquidity structure of interest rates d. tax structure of interest rates e. None of these are correct.

ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:54 AM DATE MODIFIED: 5/2/2018 6:19 AM 12. The term structure of interest rates defines the relationship a. between risk and return. b. between risk and maturity. c. between maturity and yield. d. between default risk ratings and maturity.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:57 AM DATE MODIFIED: 9/16/2016 2:59 AM 13. If shorter-term securities have higher annualized yields than longer-term securities, the yield curve a. is horizontal. b. is upward sloping. c. is downward sloping. d. cannot be determined unless we know additional information (such as the level of market interest rates).

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:00 AM DATE MODIFIED: 9/16/2016 3:02 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 14. 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 POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 3:03 AM DATE MODIFIED: 9/16/2016 3:05 AM 15. 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. long-term yields to rise AND short-term yields to decrease. e. None of these are correct.

ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 3:06 AM DATE MODIFIED: 5/2/2018 6:20 AM 16. Within the category of capital market securities, municipal bonds have the before-tax yield, and their after-tax yield is typically of Treasury bonds from the perspective of investors in high tax brackets. a. highest; below that b. lowest; above that c. highest; above that d. lowest; below that ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:10 AM DATE MODIFIED: 5/2/2018 6:23 AM 17. The yield offered on a debt security is related to the prevailing risk-free rate and to the security's risk premium. a. negatively; negatively b. positively; positively c. negatively; positively d. positively; negatively ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:12 AM DATE MODIFIED: 5/2/2018 6:24 AM

related

18. The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the a. segmented markets theory. b. liquidity premium theory. c. pure expectations theory. d. theory of rational expectations.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE CREATED: DATE MODIFIED:

9/16/2016 3:14 AM 9/16/2016 3:15 AM

19. Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory? a. 15.08 percent b. 3.00 percent c. 12.00 percent d. 12.62 percent e. 11.41 percent ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 3:17 AM DATE MODIFIED: 9/16/2016 3:18 AM 20. Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to: a. remain flat. b. become upward sloping. c. become downward sloping. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:20 AM DATE MODIFIED: 5/2/2018 6:25 AM 21. According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers. a. upward; upward b. downward; downward c. upward; downward Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates d. downward; upward ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:22 AM DATE MODIFIED: 9/16/2016 3:28 AM 22. The degree to which the Treasury's debt management policy could affect the term structure of interest rates is greatest if a. most debt is financed by foreign investors. b. the Treasury's debt level is small. c. maturity markets are segmented. d. most debt is financed by foreign investors AND the Treasury's debt level is small.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:29 AM DATE MODIFIED: 5/2/2018 6:26 AM 23. According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today's one-year interest rate, the ____ is the expected change in the one-year interest rate. a. greater; less b. less; greater c. greater; greater d. less; less e. greater; greater AND less; less ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:32 AM DATE MODIFIED: 5/2/2018 6:27 AM 24. Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one-year forward rate two years from now? a. 12.67 percent b. 113 percent c. 195 percent d. 15.67 percent e. None of these are correct.

ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 5:52 AM DATE MODIFIED: 5/2/2018 6:28 AM 25. Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes). a. slight downward slope b. slight upward slope c. steep upward slope d. steep downward slope ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:55 AM DATE MODIFIED: 9/16/2016 5:58 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 26. According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities. a. equal b. be less than c. be greater than d. be less than AND be greater than are possible, depending on the size of the liquidity premium ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:58 AM DATE MODIFIED: 5/2/2018 6:29 AM 27. Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent.

If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is a. 8.0 percent. b. 7.6 percent. c. 3.0 percent. d. 7.0 percent.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 6:00 AM DATE MODIFIED: 9/16/2016 6:02 AM 28. If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market's expectation of the future interest rate. a. overestimates b. accurately estimates c. underestimates d. is an unbiased forecast of (it has an equal chance of overestimating or underestimating) ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:03 AM DATE MODIFIED: 9/16/2016 6:04 AM 29. If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates. a. no changes b. a slight decrease c. a slight increase d. a large increase ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:05 AM DATE MODIFIED: 9/16/2016 6:06 AM 30. The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the a. pure expectations theory. b. liquidity premium theory. c. segmented markets theory. d. liquidity habitat theory.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:07 AM DATE MODIFIED: 9/16/2016 6:10 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 31. According to the segmented markets theory, if most investors suddenly preferred to invest in short-term securities and most borrowers suddenly preferred to issue long-term securities, there would be a. upward pressure on the price of long-term securities. b. upward pressure on the price of short-term securities. c. downward pressure on the yield of long-term securities. d. upward pressure on the price of long-term securities AND downward pressure on the yield of long-term securities.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:11 AM DATE MODIFIED: 5/2/2018 6:30 AM 32. A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the a. liquidity premium theory. b. efficient markets theory. c. pure expectations theory. d. preferred habitat theory.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:20 AM DATE MODIFIED: 9/16/2016 6:24 AM 33. According to segmented markets theory, if investors have mostly short-term funds available and borrowers want longterm funds, there would be ____ pressure on the supply of short-term funds provided by investors and ____ pressure on the yield of long-term securities. a. upward; upward b. downward; downward c. upward; downward d. downward; upward Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:24 AM DATE MODIFIED: 9/16/2016 6:26 AM 34. If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called: a. riding the yield curve b. liquidating the yield curve c. segmenting the yield curve d. a forward roll e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:26 AM DATE MODIFIED: 5/2/2018 6:31 AM 35. Other things being equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same. a. greater than b. equal to c. less than d. All of these are possible, depending on the size of the bond offering.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/16/2016 6:29 AM 5/2/2018 6:31 AM

36. Assume that the Treasury bond yield today is 2 percentage points higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4 percentage point since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago. a. greater than b. equal to c. less than d. A or B are both common ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 6:32 AM DATE MODIFIED: 9/16/2016 6:33 AM 37. In some time periods, there is evidence that corporations initially financed long-term projects with short-term funds.

They planned to borrow long-term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates. a. liquidity premium theory b. expectations theory c. segmented markets theory d. liquidity premium theory AND segmented markets theory ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:33 AM DATE MODIFIED: 5/2/2018 6:35 AM 38. According to expectations theory, the sudden expectation of lower interest rates in the future will cause investors to provide a ____ supply of short-term funds and a ____ supply of long-term funds.

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Chapter 03: Structure of Interest Rates a. large; large b. large; small c. small; small d. small; large ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:36 AM DATE MODIFIED: 9/16/2016 6:38 AM 39. The yield curve in a foreign country is: a. always downward sloping b. nonexistent c. the same as the United States at any point in time d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:39 AM DATE MODIFIED: 5/2/2018 6:41 AM 40. If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the: a. liquidity premium theory b. expectations theory c. segmented markets theory d. liquidity premium theory AND expectations theory ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:41 AM DATE MODIFIED: 5/2/2018 6:45 AM 41. If research showed that all investors attempt to purchase securities that perfectly match the time for which they will have available funds, this would specifically support the argument made by the a. liquidity premium theory. b. real interest rate theory. c. expectations theory. d. segmented markets theory.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:43 AM DATE MODIFIED: 9/16/2016 6:45 AM 42. Assume that debt maturity markets are segmented, such that short-term debt markets are funded by surplus units that are different from the surplus units that fund the long-term debt markets. If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates. a. long-term; long-term b. long-term; short-term c. short-term; long-term d. long-term; short-term AND short-term; long-term ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:46 AM DATE MODIFIED: 5/2/2018 6:46 AM 43. You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay a. 31.1 percent. b. 19 percent. c. 12.5 percent. d. 14 percent.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 6:47 AM DATE MODIFIED: 9/16/2016 6:50 AM 44. The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is ____ percent. a. 2.8 b. 115 c. 103 d. 15.1 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 5:55 AM DATE MODIFIED: 9/19/2016 5:57 AM 45. The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is ____ percent. a. 1.8 b. 9.0 c. 15.0 d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 5:57 AM DATE MODIFIED: 5/2/2018 6:47 AM 46. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want shortterm funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will be ____ sloping. a. upward; downward b. downward; upward c. upward; upward d. downward; downward ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 5:59 AM DATE MODIFIED: 9/19/2016 5:59 AM 47. An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields. a. longer; lower b. longer; higher c. shorter; lower d. shorter; higher e. longer; higher AND shorter; low ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:00 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE MODIFIED:

5/2/2018 6:47 AM

48. Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills.

This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills. a. decrease; downward b. decrease; upward c. increase; upward d. increase; downward ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 6:03 AM DATE MODIFIED: 9/19/2016 6:04 AM 49. Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent credit risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper. a. 8.0 b. 7.6 c. 7.5 d. 7.9 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/19/2016 6:05 AM DATE MODIFIED: 5/2/2018 6:48 AM 50. If liquidity influences the yield curve, the forward rate underestimates the market's expectation of the future interest rate. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:07 AM DATE MODIFIED: 9/19/2016 6:09 AM 51. The yield curve for corporate bonds a. would typically lie below the Treasury yield curve. b. identical to the Treasury yield curve. c. typically has the same slope as the Treasury yield curve. d. is irrelevant to investors.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:09 AM DATE MODIFIED: 9/19/2016 6:15 AM 52. Some types of debt securities always offer a higher yield than others. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:22 AM DATE MODIFIED: 9/19/2016 6:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 53. Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:24 AM DATE MODIFIED: 9/19/2016 6:25 AM 54. The higher a bond rating, the lower the perceived credit risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:25 AM DATE MODIFIED: 9/19/2016 6:27 AM 55. Treasury securities are exempt from federal and state income taxes. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:27 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE MODIFIED:

9/19/2016 6:29 AM

56. The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:29 AM DATE MODIFIED: 9/19/2016 6:31 AM 57. The graphic comparison of maturities and annualized yields is known as the interest rate curve. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:31 AM DATE MODIFIED: 9/19/2016 6:33 AM 58. According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/19/2016 6:33 AM 9/19/2016 6:35 AM

59. The forward rate is commonly used to represent the market's forecast of the future interest rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:35 AM DATE MODIFIED: 9/19/2016 6:36 AM 60. Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:36 AM DATE MODIFIED: 9/19/2016 6:38 AM 61. The preference for more liquid short-term securities places downward pressure on the slope of the yield curve. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:38 AM DATE MODIFIED: 5/2/2018 6:48 AM 62. When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:40 AM DATE MODIFIED: 9/19/2016 6:41 AM 63. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:42 AM DATE MODIFIED: 9/19/2016 6:43 AM 64. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:43 AM DATE MODIFIED: 9/19/2016 6:45 AM 65. Yield curves are always upward sloping. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 6:45 AM DATE MODIFIED: 9/19/2016 6:45 AM 66. Which of the following statements is NOT true with respect to debt securities? a. Some types of debt securities always offer a higher yield than others. b. Debt securities offer different yields because they exhibit different characteristics that influence the offered yield. c. In general, securities with favorable characteristics will offer higher yields to entice investors. d. All of these are correct with respect to debt securities.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:25 AM DATE MODIFIED: 5/2/2018 6:50 AM 67. Which of the following is NOT a characteristic affecting the yields on debt securities?

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Chapter 03: Structure of Interest Rates a. credit (default) risk b. liquidity c. tax status d. term to maturity e. All of these are correct and affect yields on debt securities.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:28 AM DATE MODIFIED: 5/2/2018 6:51 AM 68. All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred. a. lower; higher b. higher; higher c. lower; lower d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:30 AM DATE MODIFIED: 5/2/2018 6:51 AM 69. A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields. a. longer; lower b. longer; higher c. shorter; lower d. shorter; higher e. longer; lower AND shorter; higher ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:31 AM DATE MODIFIED: 5/2/2018 6:52 AM 70. Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills. a. decrease; downward b. decrease; upward c. increase; upward d. increase; downward ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:36 AM DATE MODIFIED: 10/3/2016 9:59 AM 71. If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be: a. flat b. downward sloping. c. upward sloping. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:39 AM DATE MODIFIED: 5/2/2018 6:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates 72. If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping. a. increase; upward b. increase; downward c. decrease; upward d. decrease; downward ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:41 AM DATE MODIFIED: 9/19/2016 7:42 AM 73. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want shortterm funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be ____ sloping. a. upward; downward b. downward; upward c. upward; upward d. downward; downward ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:43 AM DATE MODIFIED: 9/19/2016 7:45 AM 74. The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. a. pure expectations b. liquidity premium c. segmented markets d. preferred habitat ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:45 AM DATE MODIFIED: 5/2/2018 6:54 AM 75. If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields. a. short-term; downward b. long-term; downward c. short-term; upward d. long-term; upward ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:47 AM DATE MODIFIED: 9/19/2016 7:49 AM 76. Bonds issued at different times by the same corporation may not receive the same rating from a rating agency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:50 AM DATE MODIFIED: 9/19/2016 7:51 AM 77. Investment-grade bonds are bonds that are rated as Caa or better by Moody’s and as CCC or better by Standard & Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates Poor’s. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:52 AM DATE MODIFIED: 9/19/2016 7:53 AM 78. A flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future and that interest rates will rise. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:55 AM DATE MODIFIED: 9/19/2016 7:56 AM 79. The yields of securities commonly move in the same direction over time. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:56 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 03: Structure of Interest Rates DATE MODIFIED:

9/19/2016 7:58 AM

80. Because interest rates may vary significantly across countries at a given point in time, investors do not monitor the term structures of interest rates in foreign countries unless they are interested in investing in a particular foreign country. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 7:58 AM DATE MODIFIED: 9/19/2016 8:01 AM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed 1. Which of the following is NOT a major component of the Federal Reserve System? a. member banks b. Federal Open Market Committee c. Securities and Exchange Commission d. Board of Governors ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 1:54 AM DATE MODIFIED: 5/2/2018 7:45 AM 2. As a result of the Financial Reform Act of 2010, the ____ was established to regulate financial products and services. a. Federal Advisory Committee b. Federal Open Market Committee c. Consumer Financial Protection Bureau d. Board of Governors ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:01 AM DATE MODIFIED: 9/16/2016 2:06 AM 3. 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 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:06 AM DATE MODIFIED: 5/2/2018 7:46 AM 4. All ____ are required to be members of the Federal Reserve System. a. state banks b. national banks c. savings and loan associations d. finance companies e. state banks AND national banks ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:10 AM DATE MODIFIED: 5/2/2018 7:46 AM 5. The ____ is made up of seven individual members, and each member is appointed by the president of the United States. a. Board of Governors b. Federal Reserve district bank c. Federal Open Market Committee (FOMC) d. Securities and Exchange Commission ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:18 AM DATE MODIFIED: 9/16/2016 2:21 AM 6. Which of the following is currently a main role of the Federal Reserve's Board of Governors? a. regulating commercial banks Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed b. regulating foreign trade c. controlling monetary policy d. regulating commercial banks AND controlling monetary policy ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:22 AM DATE MODIFIED: 5/2/2018 7:47 AM 7. Members of the Board of Governors serve 14-year nonrenewable terms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:52 AM DATE MODIFIED: 9/16/2016 2:54 AM 8. With regard to monetary policy, which of the following is under the direct control of the Federal Reserve's Board of Governors? a. revising reserve requirements for depository institutions b. authorizing changes in the amount of borrowing by the Treasury c. monitoring the stock market for insider trading d. monitoring the derivatives market for illegal trading strategies ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/16/2016 2:32 AM 9/16/2016 2:37 AM

9. The ____ rate is the interest rate charged on the Fed’s short-term loans to depository institutions. a. federal funds b. prime c. primary credit lending d. real ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:38 AM DATE MODIFIED: 9/16/2016 2:42 AM 10. Which of the following is an action that the Fed uses to increase or decrease the money supply? a. buying or selling Treasury securities in the secondary market b. adjusting the tax rate imposed on income earned on Treasury securities c. adjusting the coupon rate on Treasury bonds d. selling Treasury securities in the primary market ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:42 AM DATE MODIFIED: 9/16/2016 2:44 AM 11. The policy directive is provided by Board of Governors to the FOMC. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 2:48 AM DATE MODIFIED: 9/16/2016 2:50 AM 12. Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed. a. increase; purchased b. increase; sold c. decrease; purchased d. increase; purchased AND increase; sold ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 2:57 AM DATE MODIFIED: 5/2/2018 7:48 AM 13. The purchase of government securities by someone other than the Fed results in a. an overall increase in funds among commercial banks. b. an overall decrease in funds among commercial banks. c. offsetting changes in funds at commercial banks. d. an increase in securities maintained by the Fed. ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:00 AM DATE MODIFIED: 9/16/2016 3:05 AM 14. As the supply of funds in the banking system ____, the federal funds rate ____. a. increases; declines Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed b. increases; increases c. declines, declines d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:05 AM DATE MODIFIED: 5/2/2018 7:48 AM 15. Repurchase agreements are purchased by the Fed to a. temporarily decrease the aggregate level of bank funds. b. permanently increase the aggregate level of bank funds. c. permanently decrease the aggregate level of bank funds. d. temporarily increase the aggregate level of bank funds.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 3:09 AM DATE MODIFIED: 9/16/2016 3:19 AM 16. When open market operations are used to ____ bank funds, the yield on debt instruments ____. a. reduce; decreases b. reduce; increases c. increase; increases d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/16/2016 3:20 AM 5/2/2018 7:49 AM

17. ____ open market operations offset the impact of other conditions that affect the level of funds. a. Active b. Passive c. Dynamic d. Defensive ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:23 AM DATE MODIFIED: 9/16/2016 3:29 AM 18. The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign currencies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 3:29 AM DATE MODIFIED: 9/16/2016 3:33 AM 19. The primary credit lending rate changes in accordance with changes in the federal funds rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:33 AM DATE MODIFIED: 9/16/2016 5:35 AM 20. credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness. a. Primary b. Secondary c. Tertiary d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:35 AM DATE MODIFIED: 5/2/2018 7:50 AM 21. To decrease the money supply, the Fed could the reserve requirement ratio. a. increase b. stabilize c. reduce d. eliminate ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:38 AM DATE MODIFIED: 9/16/2016 5:40 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed 22. The the reserve requirement ratio, the the ultimate effect of any initial increase in the money supply. a. lower; less b. lower; greater c. greater; less d. lower; greater AND greater; less ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/16/2016 5:40 AM DATE MODIFIED: 5/2/2018 7:51 AM 23. The is directly responsible for controlling money supply growth. a. Federal Advisory Council b. FOMC c. Board of Governors d. President of the United States ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:43 AM DATE MODIFIED: 5/2/2018 7:52 AM 24. Assume that the reserve requirements ratio is 15 percent. An initial injection of $150 million could result in a maximum change in the money supply of a. $150 million. b. $1 billion. c. $1 million. d. $22.5 million.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 5:48 AM DATE MODIFIED: 9/16/2016 5:50 AM 25. The form of money consisting of currency held by the public and checkable deposits at depository institutions is called: a. M1 b. M2 c. M3 d. MMDA ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:51 AM DATE MODIFIED: 5/2/2018 7:52 AM 26. The Depository Institutions Deregulation and Monetary Control Act of 1980 subjected a. only member banks to the reserve requirements set by the Fed. b. only S&Ls to the reserve requirements set by the Fed. c. all depository institutions to the reserve requirements set by the Fed. d. only national banks to reserve requirements set by the Fed. ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 5:54 AM DATE MODIFIED: 9/16/2016 5:56 AM 27. The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:20 AM DATE MODIFIED: 9/16/2016 6:24 AM 28. The voting members of the Federal Open Market Committee consist of the Board of Governors plus the a. President of the United States. b. presidents of the 12 Fed district banks. c. presidents of 5 Fed district banks. d. Federal Advisory Council.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:25 AM DATE MODIFIED: 9/16/2016 6:28 AM 29. The Board of Governors is composed of a. seven members appointed by the President of the United States. b. the 12 presidents of Fed district banks. c. the Federal Open Market Committee, plus the Federal Advisory Council. d. the Federal Open Market Committee, plus the President of the United States.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/16/2016 6:29 AM 9/16/2016 6:31 AM

30. The ____ is directly responsible for setting reserve requirements. a. Federal Advisory Council b. FOMC c. Board of Governors d. President of the United States ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:32 AM DATE MODIFIED: 9/16/2016 6:34 AM 31. The ____ is directly responsible for conducting monetary policy. a. Federal Advisory Council b. FOMC c. Senate d. President of the United States ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:34 AM DATE MODIFIED: 9/16/2016 6:37 AM 32. Based on a 2003 policy, the primary credit lending rate is set a. lower than the federal funds rate. b. lower than the prevailing Treasury bill rate. c. lower than the expected inflation rate. d. above the federal funds rate.

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Chapter 04: Functions of the Fed ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:38 AM DATE MODIFIED: 9/16/2016 6:40 AM 33. A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds. a. increase; increase b. increase; decrease c. decrease; decrease d. increase; increase AND decrease; decrease ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:40 AM DATE MODIFIED: 5/2/2018 7:53 AM 34. The chief objective of the European Central Bank is ____ in the countries of the eurozone. a. maintaining low unemployment b. ensuring that budget deficits do not exceed certain limits c. maintaining price and currency stability d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:43 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed DATE MODIFIED:

5/2/2018 7:53 AM

35. Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations to buy $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____. a. increase; $200 million b. increase; $1.67 billion c. decrease; $200 million d. decrease; $1.67 billion ANSWER: b POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/16/2016 6:45 AM DATE MODIFIED: 9/16/2016 6:47 AM 36. The federal funds rate is the rate at which the Fed lends money directly to member banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:48 AM DATE MODIFIED: 9/16/2016 6:50 AM 37. When the Fed purchases securities, the total funds of commercial banks ____ by the market value of the securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth. a. increase; loosening b. decrease; tightening c. decrease; loosening d. increase; tightening e. None of these are correct.

ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/16/2016 6:50 AM DATE MODIFIED: 5/2/2018 7:54 AM 38. The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities to ____ the federal funds rate to a new targeted level set by the FOMC. a. buy; decrease b. sell; increase c. buy; increase d. sell; decrease e. buy; decrease AND sell; increase ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 8:13 AM DATE MODIFIED: 5/2/2018 7:55 AM 39. Which of the following statements is incorrect with respect to a single European monetary policy? a. It allows for more consistent economic conditions across the countries. b. It prevents any participating European country from solving local economic problems with its own unique monetary policy. c. It allows each country in Europe to use its own currency. d. Each participating country will still be able to apply its own fiscal policy (tax and government expenditure decisions). e. All of these are true with respect to a single European monetary policy.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.05 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/19/2016 8:15 AM 5/2/2018 7:55 AM

40. Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the: a. discount rate b. primary credit lending rate c. federal funds rate d. prime rate ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:18 AM DATE MODIFIED: 5/2/2018 7:56 AM 41. The euro has been adopted by all of the major countries of Western Europe, including Switzerland and the United Kingdom. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:20 AM DATE MODIFIED: 9/19/2016 8:21 AM 42. Most of the Fed's income is transferred to the U.S. Department of Justice. a. True b. False ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:22 AM DATE MODIFIED: 9/19/2016 8:23 AM 43. All commercial banks are required to be members of the Fed. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:24 AM DATE MODIFIED: 9/19/2016 8:38 AM 44. The effects of the credit crisis in 2008 were largely confined to the United States, so central banks in other nations did not have to reduce their targeted interest rate levels. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:38 AM DATE MODIFIED: 9/19/2016 8:40 AM 45. Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:40 AM DATE MODIFIED: 9/19/2016 8:41 AM 46. When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking system. Consequently, the federal funds rate decreases along with other interest rates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/19/2016 8:42 AM DATE MODIFIED: 9/19/2016 8:44 AM 47. Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:44 AM DATE MODIFIED: 9/19/2016 8:45 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed 48. To increase the money supply, the Trading Desk would be instructed to sell government securities. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:46 AM DATE MODIFIED: 9/19/2016 8:48 AM 49. To increase the money supply, the Fed may increase the reserve requirement ratio. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/19/2016 8:49 AM DATE MODIFIED: 9/19/2016 8:52 AM 50. Which of the following is NOT true with respect to the Federal Reserve Act of 1913? a. It established reserve requirements for member commercial banks. b. It specified 14 districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established. c. Congress was motivated to pass the act and establish a central bank because the United States had experienced several banking panics in the preceding years. d. All of these are true.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Comprehension 9/19/2016 8:52 AM 5/2/2018 1:31 PM

51. The advisory committee making recommendations to the Fed about economic and banking related issues is the: a. Community Advisory Council b. Community Depository Institutions Advisory Council c. Federal Advisory Council d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:12 AM DATE MODIFIED: 5/2/2018 1:32 PM 52. The advisory committee offering views on issues related to credit unions is the: a. Community Advisory Council b. Community Depository Institutions Advisory Council c. Federal Advisory Council d. Federal Open Market Committee ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:14 AM DATE MODIFIED: 5/2/2018 1:34 PM 53. When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields. a. upward; upward b. downward; downward c. upward; downward d. downward; upward Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 8:16 AM DATE MODIFIED: 9/20/2016 8:18 AM 54. 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 these are correct. e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:18 AM DATE MODIFIED: 5/2/2018 1:35 PM 55. When the Fed sells securities, the total funds of commercial banks ____ by the market value of the securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth. a. increase; loosening b. decrease; loosening c. increase; tightening d. decrease; tightening e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/20/2016 8:21 AM 5/2/2018 1:36 PM

56. ____ includes 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 these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:23 AM DATE MODIFIED: 5/2/2018 1:37 PM 57. The ____ meets with the Board of Governors twice a year and offers views on the economic circumstances and financial services needs of consumers and communities. a. Consumer Financial Protection Bureau b. Federal Advisory Council c. Community Advisory Council d. Federal Trade Commission ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:25 AM DATE MODIFIED: 9/20/2016 8:26 AM 58. The Fed’s primary goal has historically been to add liquidity to the mortgage market by continuously purchasing mortgage-backed securities. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 8:27 AM DATE MODIFIED: 9/20/2016 8:28 AM 59. When the Fed purchases _______, it is attempting to directly stimulate the housing market. a. commercial paper b. short-term Treasury securities c. mortgage-backed securities d. consumer loans ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:28 AM DATE MODIFIED: 9/20/2016 8:30 AM 60. The Fed’s purchases of long-term Treasury securities in recent years were intended to a. reduce long-term interest rates. b. reduce interest rates on credit cards and consumer loans. c. increase the federal funds rate. d. restore confidence in the market for these securities.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:31 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed DATE MODIFIED:

5/2/2018 1:39 PM

61. Which of the following did the Fed NOT do during the credit crisis? a. purchase mortgage-backed securities b. purchase commercial paper c. reduce the targeted federal funds rate d. prevent depository institutions from obtaining funding through the discount window ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:33 AM DATE MODIFIED: 5/2/2018 1:40 PM 62. The term “quantitative easing” refers to the Fed’s a. purchases of only short-term Treasury securities. b. sales of only short-term Treasury securities. c. purchases of various types of debt securities, including risky debt securities. d. purchases of only commodities such as gold.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:35 AM DATE MODIFIED: 5/2/2018 1:42 PM 63. When the Fed initiated a program to purchase commercial paper, one of its primary goals was to a. prevent financial institutions from holding commercial paper. b. require that financial institutions increase their holdings of commercial paper. c. increase activity in the market for commercial paper and boost the confidence of investors in commercial paper. d. prevent financial institutions from issuing commercial paper in the future.

ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Functions of the Fed DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:39 AM DATE MODIFIED: 5/2/2018 1:43 PM 64. If the Fed initiates a program to purchase long-term Treasury securities, it is most likely attempting to a. reduce the rate on short-term Treasury securities. b. reduce the rate on commercial paper. c. reduce inflation. d. reduce long-term interest rates.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.04.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:42 AM DATE MODIFIED: 5/2/2018 1:44 PM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy 1. 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:12 AM DATE MODIFIED: 9/20/2016 8:13 AM 2. The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply. a. increase; decreasing b. decrease; increasing c. decrease; decreasing d. increase; increasing ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:13 AM DATE MODIFIED: 5/2/2018 2:03 PM 3. A credit crunch occurs when: a. interest rates decline. b. interest rates rise. c. creditors restrict the amount of loans they are willing to provide. d. the economy is strong.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/20/2016 8:15 AM 9/20/2016 8:17 AM

4. According to the theory of rational expectations, higher inflationary expectations encourage businesses and households to reduce their demand for loanable funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/20/2016 8:17 AM DATE MODIFIED: 9/20/2016 8:18 AM 5. A passive monetary policy adjusts the money supply automatically in response to economic conditions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:20 AM DATE MODIFIED: 9/20/2016 8:21 AM 6. If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated substantially from the Fed's target inflation rate, the Fed could lose credibility. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 8:25 AM DATE MODIFIED: 9/20/2016 8:27 AM 7. In general, there is a. a positive relationship between unemployment and inflation. b. an inverse relationship between unemployment and inflation. c. an inverse relationship between GDP and inflation. d. a positive relationship between GDP and unemployment.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:27 AM DATE MODIFIED: 5/2/2018 2:04 PM 8. A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation. a. tight; loose b. loose; tight c. tight; tight d. loose; loose ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:29 AM DATE MODIFIED: 9/20/2016 8:30 AM 9. A loose-money policy tends to ____ economic growth and ____ the inflation rate.

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Chapter 05: Monetary Policy a. stimulate; place downward pressure on b. stimulate; place upward pressure on c. dampen; place upward pressure on d. dampen; place downward pressure on ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 8:31 AM DATE MODIFIED: 9/20/2016 8:32 AM 10. When both inflation and unemployment are relatively high, there is more disagreement among FOMC members about the proper monetary policy to implement. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/20/2016 8:32 AM DATE MODIFIED: 9/20/2016 8:34 AM 11. ____ serves as the most direct indicator of economic growth in the United States. a. Gross domestic product (GDP) b. National income c. The unemployment rate d. The industrial production index ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/20/2016 8:34 AM 9/20/2016 8:36 AM

12. Which of the following is NOT an indicator of inflation? a. housing price indexes b. wage rates c. oil prices d. consumer confidence surveys ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:36 AM DATE MODIFIED: 5/2/2018 2:05 PM 13. The ____ indicators tend to rise or fall after a business cycle. a. leading b. lagging c. coincident d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 8:38 AM DATE MODIFIED: 5/2/2018 2:05 PM 14. The ____ indicators tend to rise or fall at the same time as a business cycle. a. leading b. lagging c. coincident d. None of these are correct.

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Chapter 05: Monetary Policy ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 9:07 AM DATE MODIFIED: 5/2/2018 2:06 PM 15. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/20/2016 9:18 AM DATE MODIFIED: 5/2/2018 2:06 PM 16. The time between when the Fed adjusts the money supply and when the adjustment has an effect on the economy is the: a. recognition lag b. implementation lag c. impact lag d. open-market lag ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy DATE CREATED: DATE MODIFIED:

9/20/2016 9:26 AM 5/2/2018 2:07 PM

17. If the Fed attempts to reduce inflation, it would likely increase money supply growth. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:45 AM DATE MODIFIED: 9/21/2016 1:47 AM 18. Which of the following best describes the relationship between the Fed and the presidential administration? a. The Fed must receive approval by the administration before conducting monetary policy. b. The Fed must implement a monetary policy specifically to the support the administration's policy. c. The administration must receive approval from the Fed before implementing fiscal policy. d. The Fed must receive approval by the administration before conducting monetary policy AND the administration must receive approval from the Fed before implementing fiscal policy. e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 1:47 AM DATE MODIFIED: 5/2/2018 2:07 PM 19. A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money supply tends to place ____ pressure on interest rates. a. upward; upward b. upward; downward c. downward; downward d. downward; upward ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 1:49 AM DATE MODIFIED: 9/21/2016 1:51 AM 20. The Fed is usually more willing to maintain a stimulative monetary policy when inflation is relatively high. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:51 AM DATE MODIFIED: 9/21/2016 1:53 AM 21. Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate loans. It should be adversely affected when the Fed: a. purchases Treasury securities b. maintains a stable money supply c. uses a tight-money policy d. uses a loose-money policy ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 1:53 AM DATE MODIFIED: 5/2/2018 2:08 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy 22. The ____ lag is the time from when an economic problem arises until it is recognized. a. Recognition b. Adjustment c. Implementation d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:56 AM DATE MODIFIED: 5/2/2018 2:09 PM 23. A ____ dollar tends to exert inflationary pressure in the United States. a. Stable b. Strong c. Weak d. Stable AND strong ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:58 AM DATE MODIFIED: 5/2/2018 2:09 PM 24. There is some evidence that high money supply growth may lead to _______ U.S. inflation over time, which in turn places ____ pressure on U.S. interest rates. a. higher; upward b. higher; downward c. lower; downward d. lower; upward ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:00 AM DATE MODIFIED: 9/21/2016 2:01 AM 25. If the Fed uses a passive monetary policy during weak economic conditions, a. it increases the money supply substantially. b. it reduces the money supply substantially. c. it allows the economy to fix itself. d. it purchases commercial paper and mortgage-backed securities.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:02 AM DATE MODIFIED: 9/21/2016 2:04 AM 26. Which of the following is true about an increase in the U.S. government’s budget deficit? a. It will lead to global crowding out if U.S. interest rates fall below the level of interest rates in other countries. b. It will cause outflows of foreign funds from the United States as foreign investors move their funds to other countries. c. It will cause an inward shift in the aggregate demand for funds curve. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:04 AM DATE MODIFIED: 5/2/2018 2:10 PM 27. Inflation is commonly the result of a: Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy a. large budget deficit b. high level of interest rates c. high level of unemployment d. high level of aggregate demand ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:06 AM DATE MODIFIED: 5/2/2018 2:11 PM 28. According to the theory of rational expectations, if the Fed uses open market operations to increase the supply of loanable funds, the ultimate effect on interest rates a. is a reduction in interest rates. b. is an increase in interest rates. c. is no effect on interest rates. d. cannot be determined.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:08 AM DATE MODIFIED: 9/21/2016 2:10 AM 29. The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession if oil prices are: a. low and steady b. low, but rising c. very high, but declining slightly d. very high and rising ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:11 AM DATE MODIFIED: 5/2/2018 2:12 PM 30. Global crowding out is described in the text to mean the impact of a. excessive U.S. population growth on interest rates. b. excessive global population growth on interest rates. c. an excessive budget deficit in one country on interest rates of another country. d. an excessive budget deficit in one country on exchange rates.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:13 AM DATE MODIFIED: 9/21/2016 2:14 AM 31. Which of the following is NOT an effect of a stimulative monetary policy? a. The risk-free rate and the credit risk premium increase. b. A firm’s cost of debt decreases. c. A firm’s cost of equity decreases. d. Depository institutions experience an increase in their supply of funds.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:15 AM DATE MODIFIED: 5/2/2018 2:12 PM 32. When the Fed uses open market operations to sell some of its Treasury securities, there will be a. an outward shift in the supply schedule of loanable funds. b. an inward shift in the supply schedule of loanable funds.

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Chapter 05: Monetary Policy c. no shift in the supply schedule of loanable funds. d. an outward shift in the demand schedule for loanable funds.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:17 AM DATE MODIFIED: 9/21/2016 2:19 AM 33. Which of the following is NOT a disadvantage of inflation targeting? a. If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed could lose credibility. b. The Fed's focus on inflation could result in a much higher unemployment level. c. The Fed's focus on inflation could result in much higher interest rates, which would discourage economic growth. d. All of these are disadvantages of inflation targeting.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:20 AM DATE MODIFIED: 5/2/2018 2:13 PM 34. Financial institutions such as commercial banks, bond mutual funds, insurance companies, and pension funds maintain large portfolios of bonds, so their portfolios are ____ affected when the Fed ____ interest rates. a. unfavorably; decreases b. unfavorably; increases c. favorably; increases d. unfavorably; decreases AND favorably; increase ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy LEARNING OBJECTIVES: FMAI.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:28 AM DATE MODIFIED: 5/2/2018 2:14 PM 35. According to the theory of rational expectations, higher inflationary expectations encourage businesses and households to reduce their demand for loanable funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:32 AM DATE MODIFIED: 9/21/2016 2:34 AM 36. During the 2008–2015 period, the Fed reduced the federal funds rate to 6 percent in an effort to stimulate the economy. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:35 AM DATE MODIFIED: 9/21/2016 2:40 AM 37. In recent years, the Fed has made an effort to be more transparent in its communications to financial markets about its future policy. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:50 AM DATE MODIFIED: 9/21/2016 2:52 AM 38. The Fed faces a trade-off in monetary policy between reducing unemployment and reducing the federal government’s budget deficit. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:52 AM DATE MODIFIED: 9/21/2016 2:54 AM 39. The relationship between the interest rate on loanable funds and the level of business investment is positive. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:54 AM DATE MODIFIED: 9/21/2016 2:56 AM 40. The supply schedule of loanable funds indicates the quantity of funds that would be demanded at various possible interest rates. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:56 AM DATE MODIFIED: 9/21/2016 3:00 AM 41. To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:02 AM DATE MODIFIED: 9/21/2016 3:08 AM 42. When the Fed wants to encourage businesses to increase their spending on long-term projects, it may use a stimulative policy focused on reducing long-term Treasury yields. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:08 AM DATE MODIFIED: 9/21/2016 3:13 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy 43. Economists who work at the Fed recognize that a stimulative monetary policy will not always reduce a high unemployment rate and could even ignite inflation. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:15 AM DATE MODIFIED: 9/21/2016 6:17 AM 44. An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a limited effect if long-term interest rates remain unaffected. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:18 AM DATE MODIFIED: 9/21/2016 6:20 AM 45. The Fed needs the approval of the presidential administration to make decisions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 6:20 AM 9/21/2016 6:22 AM

46. The Fed is more likely to use a stimulative policy during a strong-dollar period. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:23 AM DATE MODIFIED: 9/21/2016 6:25 AM 47. A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the level of business investment. a. increase; decrease b. decrease; decrease c. increase; increase d. decrease; increase ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:25 AM DATE MODIFIED: 9/21/2016 6:27 AM 48. Which of the following is NOT true with respect to inflation targeting? a. The Fed could lose credibility if the inflation rate deviates substantially from the Fed's target inflation rate. b. A focus on inflation could result in a much higher unemployment rate. c. Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run. d. If unemployment is slightly higher than normal, while inflation is at the peak of the target range, an inflation targeting approach would like advocate a loose monetary policy.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:27 AM DATE MODIFIED: 5/2/2018 2:15 PM 49. A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and contractions. a. leading b. coincident c. lagging d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:30 AM DATE MODIFIED: 5/2/2018 2:15 PM 50. A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy. a. U.S. exports; U.S. imports; weaken b. U.S. exports; U.S. imports; stimulate c. U.S. imports; U.S. exports; stimulate d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:32 AM DATE MODIFIED: 5/2/2018 2:16 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy 51. The interest rate that the Fed targets for its monetary policy is the: a. commercial paper rate b. federal funds rate c. Treasury bond coupon rate d. one-year certificate of deposit rate ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:35 AM DATE MODIFIED: 5/2/2018 2:16 PM 52. Which of the following might be monitored as an indicator of inflation? a. consumer price index b. gold prices c. oil prices d. All of these may be indicators of inflation.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:39 AM DATE MODIFIED: 5/2/2018 2:17 PM 53. The Fed’s monetary policy is commonly intended to alter the supply of funds in the banking system in order to achieve a specific targeted: a. discount rate b. required reserve requirement c. federal funds rate d. prime rate ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:44 AM DATE MODIFIED: 5/2/2018 2:17 PM 54. If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________. a. 7 percent; 10 percent b. 4 percent; 6 percent c. 7 percent; 9 percent d. 1 percent; 3 percent ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 6:47 AM DATE MODIFIED: 9/21/2016 6:48 AM 55. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:10 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy DATE MODIFIED:

9/21/2016 7:12 AM

56. The intent of the Fed’s operation twist strategy in 2011 and 2012 was to: a. increase long-term interest rates. b. require corporations to issue more commercial paper. c. require bond rating agencies to impose higher standards on their ratings. d. reduce long-term interest rates.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:12 AM DATE MODIFIED: 9/21/2016 7:15 AM 57. Which of the following is NOT a reason that a stimulative monetary policy may be ineffective? a. The effects of a stimulative policy may be disrupted by expectations of inflation. b. Retirees who rely on interest income may restrict their spending. c. Lending institutions may increase their standards for borrowers, so some potential borrowers may not qualify for loans. d. Higher interest rates encourage individuals to increase their savings.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:15 AM DATE MODIFIED: 5/2/2018 2:18 PM 58. In 2012, the Fed stated that it would continue to purchase Treasury bonds in the financial markets until GDP growth increased to a target level. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:20 AM DATE MODIFIED: 9/21/2016 7:22 AM 59. Which of the following was NOT true of the eurozone during the Greek crisis? a. Fear of a financial crisis throughout Europe discouraged investors and firms from moving funds into Europe. b. By using a more stimulative monetary policy than it desired, the European Central Bank aroused concerns about potential inflation in the eurozone. c. There was concern that the austerity conditions could weaken the country’s economy further. d. Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:23 AM DATE MODIFIED: 5/2/2018 2:19 PM 60. The Fed’s purchase of Treasury securities is primarily intended to ensure liquidity in the commercial paper market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI MADU 15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU. 1503 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s Knowledge DATE CREATED: 9/21/2016 7:25 AM DATE MODIFIED: 9/21/2016 7:28 AM 61. The Fed’s main focus in the years 2010–2014 following the credit crisis was on controlling inflation. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 05: Monetary Policy b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU 15.05.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.1503 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s Knowledge DATE CREATED: 9/21/2016 7:29 AM DATE MODIFIED: 9/21/2016 7:31 AM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets 1. Securities with maturities of one year or less are classified as: a. capital market instruments b. money market instruments c. preferred stock d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:35 AM DATE MODIFIED: 5/2/2018 2:34 PM 2. Which of the following is NOT a money market security? a. Treasury bill b. negotiable certificate of deposit c. common stock d. federal funds ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:40 AM DATE MODIFIED: 5/2/2018 2:35 PM 3. ____ is/are sold at an auction at a discount from par value. a. Treasury bills b. Repurchase agreements c. Banker's acceptances d. Commercial paper ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:42 AM DATE MODIFIED: 9/21/2016 1:44 AM 4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from this transaction? a. 13.43 percent b. 2.78 percent c. 10.55 percent d. 2.80 percent e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 1:44 AM DATE MODIFIED: 5/2/2018 2:36 PM 5. Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____. a. 10,000 b. 9,524 c. 9,756 d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 1:48 AM DATE MODIFIED: 5/2/2018 2:36 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets 6. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount? a. 10.26 percent b. 0.26 percent c. $2,500 d. 10.00 percent e. 11.00 percent ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:02 AM DATE MODIFIED: 9/21/2016 2:05 AM 7. Large corporations typically make ____ bids for T-bills so they can purchase larger amounts. a. competitive b. noncompetitive c. very small d. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:05 AM DATE MODIFIED: 9/21/2016 2:07 AM 8. 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. slightly less than AND slightly higher than ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:07 AM DATE MODIFIED: 5/2/2018 2:37 PM 9. T-bills and commercial paper are sold: a. with a stated coupon rate b. at a discount from par value c. at a premium about par value d. with a stated coupon rate AND at a premium about par value e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:09 AM DATE MODIFIED: 5/2/2018 2:38 PM 10. Commercial paper has a maximum maturity of ____ days. a. 45 b. 270 c. 360 d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:11 AM DATE MODIFIED: 5/2/2018 2:38 PM 11. An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets holds it to maturity. What is the annualized yield? a. 8.62 percent b. 8.78 percent c. 8.90 percent d. 9.14 percent e. 9.00 percent ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:13 AM DATE MODIFIED: 9/21/2016 2:15 AM 12. A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the firm's cost of borrowing? a. 12.12 percent b. 11.11 percent c. 13.00 percent d. 14.08 percent e. 15.25 percent ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:15 AM DATE MODIFIED: 9/21/2016 2:18 AM 13. Which of the following is NOT a money market instrument? a. banker's acceptance b. commercial paper c. negotiable CDs d. repurchase agreements e. All of these are money market instruments.

ANSWER: e Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:18 AM DATE MODIFIED: 5/2/2018 2:39 PM 14. A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60 days for $5,000,000. What is the yield? a. 9.43 percent b. 9.28 percent c. 9.14 percent d. 9.00 percent ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:21 AM DATE MODIFIED: 9/21/2016 2:23 AM 15. The federal funds market allows depository institutions to borrow a. short-term funds from each other. b. short-term funds from the Treasury. c. long-term funds from each other. d. long-term funds from the Federal Reserve. e. short-term funds from the Treasury AND long-term funds from the Federal Reserve.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets DATE CREATED: DATE MODIFIED:

9/21/2016 2:23 AM 5/2/2018 2:39 PM

16. When a bank guarantees a future payment to a firm, the financial instrument used is called a. a repurchase agreement. b. a negotiable CD. c. a banker's acceptance. d. commercial paper.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:27 AM DATE MODIFIED: 9/21/2016 2:30 AM 17. Which of the following is true of money market instruments? a. Their yields are highly correlated over time. b. They typically sell for par value when they are initially issued (especially T-bills and commercial paper). c. Treasury bills have the highest yield. d. They all make periodic coupon (interest) payments. e. Their yields are highly correlated over time AND they typically sell for par value when they are initially issued (especially T-bills and commercial paper).

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:30 AM DATE MODIFIED: 5/2/2018 2:40 PM 18. An investor purchased an NCD a year ago in the secondary market for $980,000. She redeems it today and receives $1,000,000. She also receives interest of $30,000. The investor's annualized yield on this investment is: a. 2.0 percent b. 5.10 percent c. 5.00 percent Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets d. 2.04 percent ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:33 AM DATE MODIFIED: 5/2/2018 2:41 PM 19. An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent. a. 3.10 b. 0.77 c. 1.00 d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:35 AM DATE MODIFIED: 5/2/2018 2:41 PM 20. The rate at which depository institutions effectively lend or borrow funds from each other is the ____. a. federal funds rate b. discount rate c. prime rate d. repo rate ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 2:37 AM 9/21/2016 2:39 AM

21. ____ are the most active participants in the federal funds market. a. Savings and loan associations b. Securities firms c. Credit unions d. Commercial banks ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:39 AM DATE MODIFIED: 9/21/2016 2:41 AM 22. Eurodollar deposits a. are U.S. dollars deposited in the United States by European investors. b. are subject to interest rate ceilings. c. have a relatively large spread between deposit and loan rates (compared to the spread between deposits and loans in the United States). d. are not subject to reserve requirements.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:41 AM DATE MODIFIED: 9/21/2016 2:43 AM 23. Which money market transaction is most likely to represent a loan from one commercial bank to another? a. banker's acceptance b. negotiable CD c. federal funds d. commercial paper Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:43 AM DATE MODIFIED: 9/21/2016 2:46 AM 24. The rate on Eurodollar floating-rate CDs is based on a. a weighted average of European prime rates. b. the London Interbank Offer Rate. c. the U.S. prime rate. d. a weighted average of European discount rates.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:46 AM DATE MODIFIED: 9/21/2016 2:48 AM 25. Treasury bills a. have a maturity of up to five years. b. have an active secondary market. c. are commonly sold at par value. d. commonly offer coupon payments.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:48 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets DATE MODIFIED:

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26. The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. higher than; recessionary b. higher than; boom economy c. less than; boom economy d. less than; recessionary ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:50 AM DATE MODIFIED: 9/21/2016 2:52 AM 27. The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period. a. higher than; recessionary b. higher than; boom economy c. less than; boom economy d. less than; recessionary ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:52 AM DATE MODIFIED: 5/2/2018 2:42 PM 28. Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow funds? a. NCDs b. retail CDs c. commercial paper d. federal funds ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:54 AM DATE MODIFIED: 9/21/2016 2:56 AM 29. The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be a. eliminated. b. reduced. c. increased. d. unchanged (there is no effect).

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:56 AM DATE MODIFIED: 9/21/2016 2:58 AM 30. The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar. a. increased b. reduced c. always negative d. unaffected ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:58 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets DATE MODIFIED:

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31. The effective yield of a foreign money market security is ____ when the foreign currency weakens against the dollar. a. increased b. reduced c. always negative d. unaffected ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:05 AM DATE MODIFIED: 9/21/2016 3:08 AM 32. Treasury bills are sold through ____ when initially issued. a. insurance companies b. commercial paper dealers c. auction d. finance companies ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:08 AM DATE MODIFIED: 9/21/2016 3:11 AM 33. At a given point in time, the actual price paid for a three-month Treasury bill is a. usually equal to the par value. b. more than the price paid for a six-month Treasury bill. c. equal to the price paid for a six-month Treasury bill. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:11 AM DATE MODIFIED: 5/2/2018 2:47 PM 34. The minimum denomination of commercial paper is: a. $25,000 b. $100,000 c. $150,000 d. $200,000 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:15 AM DATE MODIFIED: 5/2/2018 2:47 PM 35. Commercial paper is a. always directly placed with investors. b. always placed with the help of commercial paper dealers. c. placed either directly or with the help of commercial paper dealers. d. always placed by bank holding companies.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:18 AM DATE MODIFIED: 9/21/2016 3:20 AM 36. An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the Treasury bill is held to Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets maturity, the annualized yield is ____ percent. a. 6.02 b. 1.54 c. 1.50 d. 6.20 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 3:21 AM DATE MODIFIED: 5/2/2018 2:48 PM 37. When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent. a. 5.93 b. 6.12 c. 6.20 d. 6.02 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 3:23 AM DATE MODIFIED: 5/2/2018 2:48 PM 38. Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12 to $.11. What is the effective yield earned by Robbins? a. 25.00 percent b. 35.41 percent c. 14.59 percent d. None of these are correct.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 3:26 AM DATE MODIFIED: 5/2/2018 2:49 PM 39. Which of the following statements is incorrect with respect to the federal funds rate? a. It is the rate charged by financial institutions on loans they extend to each other. b. It is not influenced by the supply of and demand for funds in the federal funds market. c. The federal funds rate is closely monitored by all types of firms. d. Many market participants view changes in the federal funds rate as an indicator of potential changes in other money market rates. e. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:30 AM DATE MODIFIED: 9/21/2016 3:32 AM 40. Commercial paper is subject to: a. interest rate risk b. credit risk c. interest rate risk AND credit risk d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 4:24 AM 5/2/2018 2:49 PM

41. If economic conditions cause investors to sell stocks because they want to invest in safer securities with much liquidity, this should cause a ____ demand for money market securities, which would place ____ pressure on the yields of money market securities. a. weak; downward b. weak; upward c. strong; upward d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:27 AM DATE MODIFIED: 5/2/2018 2:50 PM 42. In general, the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:30 AM DATE MODIFIED: 9/21/2016 4:32 AM 43. Money market securities are must have a maturity of three months or less. a. True b. False ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:33 AM DATE MODIFIED: 9/21/2016 4:34 AM 44. Money market securities are issued in the primary market through a telecommunications network by the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:34 AM DATE MODIFIED: 9/21/2016 4:36 AM 45. An international interbank market facilitates the transfer of funds from banks with excess funds to those with deficient funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:37 AM DATE MODIFIED: 9/21/2016 4:38 AM 46. The interest rate charged for a short-term loan from a bank to a corporation is referred to as the London Interbank Offer Rate (LIBOR). a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:38 AM DATE MODIFIED: 9/21/2016 4:40 AM 47. Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:40 AM DATE MODIFIED: 9/21/2016 4:42 AM 48. Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:42 AM DATE MODIFIED: 9/21/2016 4:43 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets 49. There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:43 AM DATE MODIFIED: 9/21/2016 4:45 AM 50. T-bills do not offer coupon payments but are sold at a discount from par value. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:46 AM DATE MODIFIED: 9/21/2016 4:47 AM 51. Junk commercial paper is commercial paper that is not rated or is rated low. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets DATE MODIFIED:

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52. A line of credit provided by a commercial bank gives a company the right (but not the obligation) to borrow a specified maximum amount of funds over a specified period of time. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:52 AM DATE MODIFIED: 9/21/2016 4:53 AM 53. T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less liquidity and safety. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:53 AM DATE MODIFIED: 9/21/2016 4:55 AM 54. Most repo transactions use government securities. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 4:55 AM 9/21/2016 4:57 AM

55. Exporters can hold a banker's acceptance until the date at which payment is to be made, but they frequently sell the acceptance before then at a discount to obtain cash immediately. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:57 AM DATE MODIFIED: 9/21/2016 4:59 AM 56. Money market security values are less sensitive to interest rate movements than bonds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:00 AM DATE MODIFIED: 9/21/2016 5:01 AM 57. During periods of uncertainty about the economy, there is a shift from risky money market securities to Treasury securities. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:01 AM DATE MODIFIED: 9/21/2016 5:03 AM 58. The price that competitive and noncompetitive bidders will pay at a Treasury bill auction is the a. highest price entered by a competitive bidder. b. highest price entered by a noncompetitive bidder. c. lowest price entered by a competitive bidder. d. equally weighted average price paid by all competitive bidders whose bids were accepted. e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:03 AM DATE MODIFIED: 5/2/2018 2:51 PM 59. A private investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,800. If she holds the Treasury bill to maturity, her annualized yield is ____ percent. a. 3.96 b. 4.54 c. 1.50 d. 4.09 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 5:06 AM DATE MODIFIED: 5/2/2018 2:51 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets 60. You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,800. The Treasury bill discount is ____ percent. a. 3.96 b. 4.09 c. 6.20 d. 3.56 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 5:09 AM DATE MODIFIED: 5/2/2018 2:51 PM 61. A ____ is not a money market security. a. Treasury bill b. negotiable certificate of deposit c. Bond d. banker's acceptance e. All of these are money market securities.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:11 AM DATE MODIFIED: 5/2/2018 2:53 PM 62. Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent. a. 14.39 b. 14.13 c. 14.59 d. 14.33 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 5:13 AM DATE MODIFIED: 5/2/2018 2:53 PM 63. When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated. a. higher; higher b. lower; lower c. higher; lower d. lower; higher e. higher; lower AND lower; higher ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:16 AM DATE MODIFIED: 5/2/2018 2:54 PM 64. Which of the following securities is most likely to be used in a repo transaction? a. commercial paper b. certificate of deposit c. Treasury bill d. common stock e. All of these are equally likely to be used in a repo transaction.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 5:20 AM 5/2/2018 2:55 PM

65. A major drawback to investing in Treasury bills is that they cannot easily be liquidated. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:22 AM DATE MODIFIED: 9/21/2016 5:23 AM 66. At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices paid for sixmonth bills. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:23 AM DATE MODIFIED: 9/21/2016 5:25 AM 67. Ignoring transaction costs, the cost of borrowing with commercial paper is equal to a. the yield on T-bills of the same maturity. b. the yield earned by investors holding the paper until maturity. c. the federal funds rate. d. the par value of the paper.

ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:25 AM DATE MODIFIED: 5/2/2018 2:55 PM 68. 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.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:27 AM DATE MODIFIED: 5/2/2018 2:56 PM 69. The LIBOR scandal in 2012 involved a. banks reporting inflated earnings from their loans. b. hackers breaking into the loan documentation files. c. banks falsely reporting the interest rates they offered in the interbank market. d. collusion among the banks when setting the commercial paper rate.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:34 AM DATE MODIFIED: 5/2/2018 2:56 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 06: Money Markets 70. Credit guarantees for commercial paper a. ensure that the issuer of commercial paper will use the funds obtained to provide credit. b. are issued by the Federal Reserve Bank of New York. c. are only as good as the credit of the guarantor. d. ensure that the issuer of commercial paper will use the funds obtained to provide credit AND are only as good as the credit of the guarantor.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:36 AM DATE MODIFIED: 5/2/2018 2:57 PM 71. The money market interest rate paid by corporations that borrow short-term funds in a particular country is typically a. equal to the rate paid by that country’s government. b. slightly higher than the rate paid by that country’s government. c. mostly influenced by the demand for and supply of long-term funds in that country. d. set by the country’s central bank.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.06.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:38 AM DATE MODIFIED: 5/2/2018 2:58 PM

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Chapter 07: Bond Markets 1. ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments. a. Bearer b. Registered c. Treasury d. Corporate ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:35 AM DATE MODIFIED: 9/21/2016 1:38 AM 2. The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:41 AM DATE MODIFIED: 9/21/2016 1:43 AM 3. Note maturities are usually ____, while bond maturities are ____. a. less than 10 years; 10 years or more b. 10 years or more; less than 10 years c. less than 5 years; 5 years or more d. 5 years or more; less than 5 years ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 1:43 AM 9/21/2016 1:45 AM

4. Investors in Treasury notes and bonds receive ____ interest payments from the Treasury. a. annual b. semiannual c. quarterly d. monthly ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:46 AM DATE MODIFIED: 9/21/2016 1:47 AM 5. The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit. a. 50 b. 70 c. 10 d. 5 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:48 AM DATE MODIFIED: 9/21/2016 1:56 AM 6. Interest earned from Treasury bonds is a. exempt from all income tax. b. exempt from federal income tax. c. exempt from state and local taxes.

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Chapter 07: Bond Markets d. subject to all income taxes.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 1:56 AM DATE MODIFIED: 9/21/2016 1:58 AM 7. Treasury bond auctions are normally conducted only at the beginning of each year. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 1:58 AM DATE MODIFIED: 9/21/2016 2:00 AM 8. ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased. a. Competitive b. Noncompetitive c. Negotiable d. Non-negotiable ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:00 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets DATE MODIFIED:

9/21/2016 2:02 AM

9. Treasury bond dealers a. quote an ask price for customers who want to sell existing Treasury bonds to the dealers. b. profit from a very wide spread between bid and ask prices in the Treasury securities market. c. may trade Treasury bonds among themselves. d. make a primary market for Treasury bonds.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:02 AM DATE MODIFIED: 9/21/2016 2:04 AM 10. Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:04 AM DATE MODIFIED: 9/21/2016 2:06 AM 11. A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____. a. 250 b. 255 c. 500 d. 510 ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:10 AM DATE MODIFIED: 9/21/2016 2:12 AM 12. Bonds issued by ____ are backed by the federal government. a. the Treasury b. AAA-rated corporations c. state governments d. city governments ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:12 AM DATE MODIFIED: 9/21/2016 2:15 AM 13. Municipal general obligation bonds are ____. Municipal revenue bonds are ____. a. supported by the municipal government's ability to tax; supported by the municipal government's ability to tax b. supported by the municipal government's ability to tax; supported by revenue generated from the project c. always subject to federal taxes; always exempt from state and local taxes d. typically zero-coupon bonds; typically zero-coupon bonds ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:15 AM DATE MODIFIED: 9/21/2016 2:17 AM 14. In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ______.

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Chapter 07: Bond Markets a. remain unchanged b. fall c. rise d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:17 AM DATE MODIFIED: 5/7/2018 5:07 AM 15. A variable-rate bond allows a. investors to benefit from declining rates over time. b. issuers to benefit from rising market interest rates over time. c. investors to benefit from rising market interest rates over time. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:19 AM DATE MODIFIED: 5/7/2018 5:12 AM 16. Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields. a. higher; lower b. lower; lower c. higher; higher d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 2:22 AM 5/7/2018 5:13 AM

17. A private bond placement has to be registered with the SEC. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:28 AM DATE MODIFIED: 9/21/2016 2:30 AM 18. Which of the following institutions is most likely to purchase a private bond placement? a. commercial bank b. finance company c. insurance company d. savings institution ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:30 AM DATE MODIFIED: 9/21/2016 2:33 AM 19. A call provision on bonds normally a. allows the firm to sell new bonds at par value. b. gives the firm to sell new bonds above market value. c. allows the firm to sell bonds to the Treasury. d. allows the firm to buy back bonds that it previously issued.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:33 AM DATE MODIFIED: 9/21/2016 2:34 AM 20. Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate without exchange rate risk by denominating the bonds in a. dollars. b. euros and making payments from U.S. headquarters. c. euros and making payments from its German subsidiary. d. dollars and making payments from its German subsidiary.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:35 AM DATE MODIFIED: 9/21/2016 2:36 AM 21. Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:37 AM DATE MODIFIED: 9/21/2016 2:38 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets 22. Bonds that are not secured by specific property are called: a. a chattel mortgage b. open-end mortgage bonds c. debentures d. blanket mortgage bonds ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:38 AM DATE MODIFIED: 5/7/2018 5:14 AM 23. The coupon rate of most variable-rate bonds is tied to: a. the prime rate b. the discount rate c. LIBOR d. the federal funds rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:40 AM DATE MODIFIED: 5/7/2018 5:14 AM 24. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:42 AM DATE MODIFIED: 9/21/2016 2:45 AM 25. During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:45 AM DATE MODIFIED: 9/21/2016 2:47 AM 26. ____ bonds have the most active secondary market. a. Treasury b. Zero-coupon corporate c. Junk d. Municipal ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:48 AM DATE MODIFIED: 9/21/2016 2:50 AM 27. ____ are not primary purchasers of bonds. a. Insurance companies Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets b. Finance companies c. Mutual funds d. Pension funds ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:50 AM DATE MODIFIED: 9/21/2016 2:53 AM 28. Leveraged buyouts are commonly financed by the issuance of: a. money market securities b. Treasury bonds c. corporate bonds d. municipal bonds ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:53 AM DATE MODIFIED: 5/7/2018 5:15 AM 29. When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index. a. auction-rate securities b. structured notes c. leveraged notes d. stripped securities ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.06 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 2:55 AM 9/21/2016 2:57 AM

30. Which of the following statements is true regarding STRIPS? a. They are issued by the Treasury. b. They are created and sold by various financial institutions. c. They are not backed by the U.S. government. d. They have to be held until maturity. e. All of theses are true regarding STRIPS. ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:57 AM DATE MODIFIED: 5/7/2018 5:15 AM 31. (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent. a. 9.96 b. 10.00 c. 10.33 d. 10.24 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 3:05 AM DATE MODIFIED: 5/7/2018 5:16 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets 32. Devin, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 12 b. 9 c. 10.5 d. more information is needed to answer this question ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 3:10 AM DATE MODIFIED: 9/21/2016 3:13 AM 33. Which of the following is NOT true regarding zero-coupon bonds? a. They are issued at a deep discount from par value. b. Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity. c. The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest. d. Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts. e. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:13 AM DATE MODIFIED: 5/7/2018 5:16 AM 34. Which of the following is NOT true regarding the call provision? a. It typically requires a firm to pay a price above par value when it calls its bonds. b. The difference between the market value of the bond and the par value is called the call premium. c. A principal use of the call provision is to lower future interest payments. d. A principal use of the call provision is to retire bonds as required by a sinking-fund provision. e. A call provision is normally viewed as a disadvantage to bondholders.

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Chapter 07: Bond Markets ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:15 AM DATE MODIFIED: 5/7/2018 5:17 AM 35. If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called. a. decline; more b. decline; less c. increase; more d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:17 AM DATE MODIFIED: 5/7/2018 5:18 AM 36. Which of the following would NOT be a likely example of a protective covenant provision? a. a limit on the amount of dividends a firm can pay b. a limit on the corporate officers' salaries a firm can pay c. the amount of additional debt a firm can issue d. a call feature ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:19 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets DATE MODIFIED:

5/7/2018 5:18 AM

37. Bonds are issued in the primary market through a telecommunications network. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:21 AM DATE MODIFIED: 9/21/2016 3:23 AM 38. Corporate bonds can be placed with investors through a public offering or a private placement. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:24 AM DATE MODIFIED: 9/21/2016 3:26 AM 39. When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as pension funds, bond mutual funds, and insurance companies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 4:29 AM 9/21/2016 4:31 AM

40. Rule 144A allows small individual investors to trade privately placed bonds (and some other securities) with each other without requiring the firms that issued the securities to register them with the SEC. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:31 AM DATE MODIFIED: 9/21/2016 4:33 AM 41. Rule 144A creates liquidity for securities that are privately placed. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:33 AM DATE MODIFIED: 9/21/2016 4:34 AM 42. Corporate bonds are more standardized than stocks. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 4:35 AM 9/21/2016 4:37 AM

43. Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:37 AM DATE MODIFIED: 9/21/2016 4:39 AM 44. Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 4:39 AM DATE MODIFIED: 9/21/2016 4:40 AM 45. The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:40 AM DATE MODIFIED: 9/21/2016 4:42 AM 46. Bond dealers do not have an inventory of bonds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:42 AM DATE MODIFIED: 9/21/2016 4:44 AM 47. Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:44 AM DATE MODIFIED: 9/21/2016 4:53 AM 48. Many bonds are listed on the New York Stock Exchange (NYSE). a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:54 AM DATE MODIFIED: 9/21/2016 4:55 AM 49. The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:55 AM DATE MODIFIED: 9/21/2016 5:03 AM 50. The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:03 AM DATE MODIFIED: 9/21/2016 5:05 AM 51. Treasury bonds are issued by state and local governments. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:05 AM DATE MODIFIED: 9/21/2016 5:07 AM 52. Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:08 AM DATE MODIFIED: 9/21/2016 5:09 AM 53. Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:10 AM DATE MODIFIED: 9/21/2016 5:11 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets 54. Savings bonds are bonds issued by the Federal Reserve. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:11 AM DATE MODIFIED: 9/21/2016 5:13 AM 55. Corporate bonds usually pay interest on an annual basis. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:13 AM DATE MODIFIED: 9/21/2016 5:14 AM 56. The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets DATE CREATED: DATE MODIFIED:

9/21/2016 5:15 AM 9/21/2016 5:16 AM

57. A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:17 AM DATE MODIFIED: 9/21/2016 5:18 AM 58. Subordinated indentures have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular debentures. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:21 AM DATE MODIFIED: 9/21/2016 5:22 AM 59. High-risk bonds are called trash bonds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 5:22 AM 9/21/2016 5:24 AM

60. Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:24 AM DATE MODIFIED: 9/21/2016 5:26 AM 61. If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:26 AM DATE MODIFIED: 9/21/2016 5:28 AM 62. Which of the following statements is NOT true regarding STRIPS? a. They are not issued by the Treasury. b. They are created and sold by various financial institutions. c. They are backed by the U.S. government. d. They have to be held until maturity. e. All of these are true regarding STRIPS. ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:33 AM DATE MODIFIED: 5/7/2018 5:19 AM 63. Which of the following is NOT an advantage of online bond brokerage services? a. Pricing is more transparent because investors can easily compare bid and ask spreads. b. Some services charge commissions, which may be more easily understood than bid and ask spreads. c. Some brokers have narrowed their spreads so that they do not lose business to competitors. d. All of these are advantages of online bond brokerage services.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:36 AM DATE MODIFIED: 5/7/2018 5:20 AM 64. Jim purchases $10,000 par value bonds with a 10 percent coupon rate and a 7 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent. a. 8.00 b. 7.00 c. 10.00 d. More information is needed to answer this question.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 5:39 AM DATE MODIFIED: 9/21/2016 5:43 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets 65. Which of the following statements is incorrect? a. A municipal bond must pay a risk premium to compensate for the possibility of default risk. b. A Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds. c. The income earned from municipal bonds is exempt from federal taxes. d. All of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:43 AM DATE MODIFIED: 5/7/2018 5:20 AM 66. Which of the following is NOT mentioned in your text as a protective covenant? a. a limit on the amount of dividends a firm can pay b. a limit on the corporate officers' salaries a firm can pay c. the amount of additional debt a firm can issue d. the appointment of a trustee in all bond indentures e. All of theses are mentioned in the text as protective covenants.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:46 AM DATE MODIFIED: 5/7/2018 5:22 AM 67. Everything else being equal, which of the following bond ratings is associated with the highest yield? a. Baa b. A c. Aa d. Aaa ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:49 AM DATE MODIFIED: 9/21/2016 5:51 AM 68. A _____ has first claim on specified assets, while a _____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures. a. first mortgage bond; second mortgage bond b. first mortgage bond; debenture c. first mortgage bond; subordinated debenture d. chattel mortgage bond; subordinated debenture e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:52 AM DATE MODIFIED: 5/7/2018 5:23 AM 69. If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage. a. more; less; lower b. more; less; higher c. less; more; higher d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:57 AM DATE MODIFIED: 5/7/2018 5:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets 70. The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:00 AM DATE MODIFIED: 9/21/2016 6:02 AM 71. The issuance of municipal securities is regulated by: a. the Securities and Exchange Commission. b. the Consumer Financial Protection Bureau. c. their respective state governments. d. the Federal Reserve.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:02 AM DATE MODIFIED: 9/21/2016 6:05 AM 72. For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price. a. specific value b. fixed proceeds c. best efforts d. firm commitment ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:06 AM DATE MODIFIED: 9/21/2016 6:08 AM 73. For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but makes no guarantee to the issuer. a. floating value b. variable proceeds c. best efforts d. firm commitment ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:09 AM DATE MODIFIED: 9/21/2016 6:11 AM 74. Which of the following eurozone countries has NOT recently experienced debt repayment problems? a. Finland b. Greece c. Portugal d. Spain ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:11 AM DATE MODIFIED: 5/7/2018 5:24 AM 75. The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.

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Chapter 07: Bond Markets a. Federal Ratings Bureau b. Office of Credit Ratings c. Office of Agency Supervision d. Ratings Oversight Commission ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:13 AM DATE MODIFIED: 9/21/2016 6:16 AM 76. A credit rating agency is paid by a. the purchasers of the bonds that the agency rates. b. the issuers of the bonds that the agency rates. c. the taxpayers, because the rating agencies are government agencies. d. the New York Stock Exchange or the over-the-counter market where the bonds are listed.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:16 AM DATE MODIFIED: 5/7/2018 5:26 AM 77. All of the bonds issued by a particular company will have the same maturity, price, and credit rating. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 07: Bond Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 6:20 AM 9/21/2016 6:23 AM

78. Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the interest or principal payments generated by the debt securities. a. collateralized debt obligations (CDOs) b. credit default swaps c. reverse loans d. inverted bonds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.07.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Comprehension DATE CREATED: 9/21/2016 6:23 AM DATE MODIFIED: 9/21/2016 6:25 AM

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Chapter 08: Bond Valuation and Risk 1. The appropriate discount rate for valuing any bond is the a. bond's coupon rate. b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond. c. Treasury bill rate with an adjustment to include a risk premium if one exists. d. yield that could be earned on alternative investments with similar risk and maturity.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:23 AM DATE MODIFIED: 5/17/2018 8:00 AM 2. The valuation of bonds is generally perceived to be ____ the valuation of equity securities. a. more difficult than b. easier than c. just as difficult as d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:32 AM DATE MODIFIED: 5/7/2018 5:34 AM 3. A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price? a. $1,069.31 b. $1,000.00 c. $9712 d. $927.66 e. None of these are correct.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:35 AM DATE MODIFIED: 5/7/2018 5:35 AM 4. A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____. a. 1,302 b. 763 c. 761 d. 1,299 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 2:50 AM DATE MODIFIED: 9/21/2016 2:52 AM 5. From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon. a. high yield; appreciates b. high yield; remains stable c. low yield; appreciates d. low yield; depreciates ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 2:55 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk DATE MODIFIED:

9/21/2016 2:55 AM

6. The value of ____-risk securities will be relatively ____. a. high; high b. high; low c. low; low d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 2:57 AM DATE MODIFIED: 5/7/2018 5:35 AM 7. If the coupon rate equals the required rate of return, the price of the bond a. should be above its par value. b. should be below its par value. c. should be equal to its par value. d. is negligible.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 3:00 AM DATE MODIFIED: 9/21/2016 3:01 AM 8. When financial institutions expect interest rates to ____, they may ____. a. increase; sell bonds and buy short-term securities b. increase; sell short-term securities and buy bonds c. decrease; sell bonds and buy short-term securities d. increase; sell short-term securities and buy bonds AND decrease; sell bonds and buy short-term securities ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:03 AM DATE MODIFIED: 5/7/2018 5:36 AM 9. For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the a. greater is the premium on the price. b. greater is the discount on the price. c. smaller is the premium on the price. d. smaller is the discount on the price.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 3:06 AM DATE MODIFIED: 9/21/2016 3:07 AM 10. Zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years and a required rate of return of 9 percent. What is the current price? a. $363,212 b. $385,500 c. $422,400 d. $424,100 e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 3:08 AM DATE MODIFIED: 5/7/2018 5:36 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk 11. If the coupon rate ____ the required rate of return, the price of a bond ____ par value. a. equals; equals b. exceeds; is less than c. is less than; is greater than d. exceeds; is less than AND is less than; is greater than e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 3:11 AM DATE MODIFIED: 5/7/2018 5:39 AM 12. The prices of bonds with ____ are most sensitive to interest rate movements. a. high coupon payments b. zero coupon payments c. small coupon payments d. None of these are correct. (The size of the coupon payment does not affect the sensitivity of bond prices to interest rate movements.)

ANSWER: b POINTS: 1 DIFFICULTY: FMAI.MADU.15.08.03 QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:14 AM DATE MODIFIED: 5/7/2018 5:40 AM 13. A(n) ____ in the expected level of inflation results in ____ pressure on bond prices. a. increase; upward b. increase; downward c. decrease; downward d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 3:16 AM DATE MODIFIED: 5/7/2018 5:41 AM 14. Other things held constant, bond prices should increase when inflationary expectations rise. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 3:20 AM DATE MODIFIED: 9/21/2016 3:21 AM 15. Assume that the price of a $1,000 zero-coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond? a. .980 b. +.980 c. .494 d. +.494 e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:23 AM DATE MODIFIED: 5/7/2018 5:41 AM 16. If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____. a. high-coupon bonds; more favorably affected by declining interest rates b. zero- or low-coupon bonds; more favorably affected by declining interest rates c. zero- or low-coupon bonds; more favorably affected by rising interest rates d. high-coupon bonds; completely insulated from rising interest rates Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:27 AM DATE MODIFIED: 9/21/2016 4:27 AM 17. The prices of ____-coupon bonds and bonds with ____ maturities are most sensitive to changes in the required rate of return. a. low; short b. low; long c. high; short d. high; long ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:30 AM DATE MODIFIED: 9/21/2016 4:30 AM 18. A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity? a. 13 percent b. 12 percent c. 11 percent d. 10 percent ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:32 AM DATE MODIFIED: 9/21/2016 4:33 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk 19. A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds make annual payments. The bonds mature in four years. The bank wants to sell them in two years and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years? a. $24,113,418 b. $24,667,230 c. $25,000,000 d. $25,891,632 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:34 AM DATE MODIFIED: 9/21/2016 4:35 AM 20. The prices of short-term bonds are commonly ____ those of long-term bonds. a. more volatile than b. equally volatile as c. less volatile than d. more volatile than AND less volatile than occur with about equal frequency ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:37 AM DATE MODIFIED: 5/7/2018 5:43 AM 21. If interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.) a. consistently increase b. consistently decrease c. remain unchanged d. change in a direction that cannot be determined with the above information ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:39 AM DATE MODIFIED: 9/21/2016 4:40 AM 22. If interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.) a. consistently increase b. consistently decrease c. remain unchanged d. change in a direction that cannot be determined with the above information ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:42 AM DATE MODIFIED: 9/21/2016 4:42 AM 23. If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:44 AM DATE MODIFIED: 9/21/2016 4:44 AM 24. Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bond will be ____ its par value. a. above; above Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk b. above; below c. below; below d. below; above ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:46 AM DATE MODIFIED: 9/21/2016 4:47 AM 25. If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:49 AM DATE MODIFIED: 9/21/2016 4:50 AM 26. Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.) a. reduced Treasury borrowing along with anticipation that money supply growth will decrease b. reduced Treasury borrowing along with anticipation that money supply growth will increase c. an anticipated drop in money supply growth along with increasing Treasury borrowing d. higher levels of Treasury borrowing and corporate borrowing ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk STATE STANDARDS: DATE CREATED: DATE MODIFIED:

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27. If the U.S. government announces that it will borrow an additional $400 billion, this announcement will normally cause bond traders to expect a. higher interest rates in the future, and they will buy bonds now. b. higher interest rates in the future, and they will sell bonds now. c. stable interest rates in the future, and they will buy bonds now. d. lower interest rates in the future, and they will buy bonds now. e. lower interest rates in the future, and they will sell bonds now.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:54 AM DATE MODIFIED: 9/21/2016 4:56 AM 28. The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____. a. slightly; rises b. very; rises c. very; declines d. slightly; declines ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 4:57 AM DATE MODIFIED: 9/21/2016 4:58 AM 29. The bonds that are most sensitive to interest rate movements have a. no coupon and a short-term maturity. b. high coupons and a short-term maturity. c. high coupons and a long-term maturity. d. no coupon and a long-term maturity.

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Chapter 08: Bond Valuation and Risk ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:08 AM DATE MODIFIED: 9/21/2016 5:09 AM 30. When two securities have the same expected cash flows, the value of the ____ security will be higher than the value of the ____ security. a. high-risk; low-risk b. low-risk; high-risk c. high-risk; high-risk d. low-risk; low-risk e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:11 AM DATE MODIFIED: 5/7/2018 5:43 AM 31. Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond? a. $1,000.00 b. $1,147.20 c. $856.80 d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk DATE CREATED: DATE MODIFIED:

9/21/2016 5:13 AM 5/7/2018 5:43 AM

32. Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio? a. 10 percent b. 8.82 percent c. 4.32 percent d. 13.86 percent e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.APP NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:17 AM DATE MODIFIED: 5/7/2018 5:45 AM 33. Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Hurricane intends to sell the bonds in two years and expects investors' required rate of return on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years? a. $9.33 million b. $11.00 million c. $10.64 million d. $9.82 million e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:19 AM DATE MODIFIED: 5/7/2018 5:45 AM 34. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is: a. 1.90 years Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk b. 1.50 years c. 1.92 years d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 5:25 AM DATE MODIFIED: 5/7/2018 5:46 AM 35. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is: a. 1.73 years b. 1.71 years c. 1.90 years d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:27 AM DATE MODIFIED: 5/7/2018 5:46 AM 36. The actual relationship reflecting the response of a bond's price to a change in bond yields is a. concave. b. convex. c. linear. d. quadratic.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk STATE STANDARDS: DATE CREATED: DATE MODIFIED:

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37. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds. a. increase; upward; downward b. decrease; upward; downward c. decrease; upward; upward d. increase; downward; upward e. increase; upward; upward ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:32 AM DATE MODIFIED: 9/21/2016 5:33 AM 38. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes. a. matching b. laddered c. barbell d. interest rate e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:34 AM DATE MODIFIED: 5/7/2018 5:47 AM 39. With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs. a. matching b. laddered Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk c. barbell d. interest rate e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:36 AM DATE MODIFIED: 5/7/2018 5:47 AM 40. Which of the following bonds is most susceptible to interest rate risk from an investor's perspective? a. short-term, high-coupon b. short-term, low-coupon c. long-term, high-coupon d. long-term, zero-coupon ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:39 AM DATE MODIFIED: 9/21/2016 5:40 AM 41. Which of the following is most likely to cause a decrease in bond prices? a. a decrease in money supply growth and an increase in the demand for loanable funds b. a forecast of decreasing oil prices c. a forecast of a stronger dollar d. an increase in money supply growth and no change in the demand for loanable funds ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk DATE MODIFIED:

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42. If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity. a. downward pressure; downward pressure b. downward pressure; upward pressure c. upward pressure; upward pressure d. upward pressure; downward pressure ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 5:52 AM DATE MODIFIED: 9/21/2016 5:53 AM 43. Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____. a. increase; long-maturity bonds with zero-coupon rates b. decrease; short-maturity bonds with high-coupon rates c. increase; high-coupon bonds with long maturities d. decrease; long-maturity bonds with zero-coupon rates ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 5:54 AM DATE MODIFIED: 9/21/2016 5:55 AM 44. The market price of a bond is partly determined by the timing of the payments made to bondholders. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:09 AM DATE MODIFIED: 9/21/2016 6:09 AM 45. The appropriate price of a bond is simply the sum of the cash flows to be received. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:11 AM DATE MODIFIED: 9/21/2016 6:11 AM 46. The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:13 AM DATE MODIFIED: 9/21/2016 6:13 AM 47. Bonds that sell below their par value are called premium bonds. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:14 AM DATE MODIFIED: 9/21/2016 6:15 AM 48. A zero-coupon bond makes no coupon payments. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:16 AM DATE MODIFIED: 9/21/2016 6:16 AM 49. If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:18 AM DATE MODIFIED: 9/21/2016 6:18 AM 50. An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:19 AM DATE MODIFIED: 9/21/2016 6:20 AM 51. The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: FMAI.MADU.15.08.02 QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:21 AM DATE MODIFIED: 9/21/2016 6:21 AM 52. If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:23 AM DATE MODIFIED: 9/21/2016 6:23 AM 53. 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 ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:24 AM DATE MODIFIED: 9/21/2016 6:25 AM 54. Any announcement that signals stronger than expected economic growth tends to increase bond prices. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:26 AM DATE MODIFIED: 9/21/2016 6:26 AM 55. Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:28 AM DATE MODIFIED: 9/21/2016 6:28 AM 56. As interest rates increase, prices of short-term bonds will decline by a greater degree than prices of long-term bonds. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:32 AM DATE MODIFIED: 9/21/2016 6:33 AM 57. Duration is a measure of the life of a bond on a present value basis. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:34 AM DATE MODIFIED: 9/21/2016 6:34 AM 58. A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:36 AM DATE MODIFIED: 9/21/2016 6:39 AM 59. International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk LEARNING OBJECTIVES: FMAI.MADU.15.08.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:43 AM DATE MODIFIED: 9/21/2016 6:44 AM 60. In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/21/2016 6:45 AM DATE MODIFIED: 9/21/2016 6:46 AM 61. Which of the following formulas best describes the value of a bond? a. b. c. d. e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 12:42 AM DATE MODIFIED: 5/7/2018 5:48 AM 62. Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond? a. $1,000.00 b. $951.97 c. $856.80 d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 12:53 AM DATE MODIFIED: 5/7/2018 5:50 AM 63. Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond? a. $1,063.40 b. $1,000 c. $939.25 d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 12:57 AM DATE MODIFIED: 5/7/2018 5:51 AM 64. To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond? a. The annualized coupon should be split in half. b. The annual discount rate should be divided by 2. c. The number of annual periods should be doubled. d. The par value should be split in half. e. All of these adjustments have to be made.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 12:59 AM DATE MODIFIED: 5/7/2018 5:51 AM 65. A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for a. $1,000.00. b. $1,081.11. c. $798.70. d. $880.22. e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:02 AM DATE MODIFIED: 5/7/2018 5:52 AM 66. An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____. a. weak; decrease b. strong; increase c. weak; increase d. strong; decrease e. weak; increase AND strong; decrease ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:04 AM DATE MODIFIED: 5/7/2018 5:53 AM 67. Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is a. 0.77. b. 0.77. c. 0.90. d. 1.06. e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:06 AM DATE MODIFIED: 5/7/2018 5:54 AM 68. The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is a. 0.36. b. 0.44. c. 0.55. d. 0.67. e. 0.67.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:09 AM DATE MODIFIED: 9/22/2016 1:10 AM 69. Assume a bond with a $1,000 par value and a 7 percent coupon rate, three years remaining to maturity, and a 9 percent yield to maturity. The duration of this bond is ____ years. a. 1.92 b. 2.5 c. 2.8 d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:12 AM DATE MODIFIED: 5/7/2018 5:55 AM 70. A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years. a. 1.33 b. 1.27 c. 3.24 d. 1.31 e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:14 AM DATE MODIFIED: 5/7/2018 5:55 AM 71. If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates. a. underestimate; underestimate b. overestimate; overestimate c. underestimate; overestimate d. overestimate; underestimate ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:16 AM DATE MODIFIED: 9/22/2016 1:17 AM 72. The process by which higher credit risk in one country is transmitted to another country is known as: Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk a. credit epidemic b. credit expansion c. credit contagion d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:18 AM DATE MODIFIED: 5/7/2018 5:56 AM 73. Systemic risk could be avoided if all financial institutions would use derivative securities as a means of insuring against the default of the debt securities that they hold. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:21 AM DATE MODIFIED: 9/22/2016 1:21 AM 74. Which of the following is NOT a factor affecting the market price of a foreign bond held by a U.S. investor? a. foreign interest rate movements b. credit risk c. exchange rate fluctuations d. All of these are factors affecting the market price of a foreign bond.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:23 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk DATE MODIFIED:

5/7/2018 5:57 AM

75. When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds. a. higher; lower b. higher; higher c. lower; higher d. lower; lower ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:25 AM DATE MODIFIED: 9/22/2016 1:26 AM 76. Holding other factors constant, a higher budget deficit leads to ______ interest rates, and higher inflationary expectations lead to _______ interest rates. a. higher; lower b. higher; higher c. lower; higher d. lower; lower ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:27 AM DATE MODIFIED: 9/22/2016 1:28 AM 77. The credit risk premium tends to be larger for bonds that have longer terms to maturity. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:29 AM DATE MODIFIED: 9/22/2016 1:29 AM 78. The ____________ was recently established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks. a. Financial Risk Assessment Commission b. Financial Markets Protection Agency c. Financial Stability Oversight Council d. Federal Bureau of Financial Markets ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:31 AM DATE MODIFIED: 9/22/2016 1:32 AM 79. When the European Central Bank provides credit to a country that is experiencing debt repayment problems, the ECB commonly a. allows the country’s government to conduct its own monetary policy. b. recommends that the country withdraw from the eurozone. c. urges the country’s government to increase spending and lower taxes to stimulate the economy. d. imposes austerity conditions to enable the government to reduce its budget deficit.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:33 AM DATE MODIFIED: 5/7/2018 5:57 AM 80. Although the European debt crisis had substantial effects on European financial markets, the crisis was contained and did not affect markets and financial institutions outside Europe. a. True b. False ANSWER: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 08: Bond Valuation and Risk POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.08.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.01 DATE CREATED: 9/22/2016 1:35 AM DATE MODIFIED: 9/22/2016 1:35 AM

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Chapter 09: Mortgage Markets 1. Mortgage-backed securities are commonly contained within collateralized debt obligations. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:19 AM DATE MODIFIED: 9/21/2016 3:20 AM 2. Federally insured mortgages guarantee a. loan repayment to the lending financial institution. b. that the interest rate will not increase during the life of the mortgage. c. the lending financial institution a selling price for the mortgage in the secondary market. d. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 3:20 AM DATE MODIFIED: 5/7/2018 6:05 AM 3. At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage. a. below b. above c. equal to d. All of these are very common.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 4:32 AM 5/7/2018 6:05 AM

4. An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates. a. stable; decreasing b. increasing; stable c. increasing; decreasing d. decreasing; increasing ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:34 AM DATE MODIFIED: 9/21/2016 4:37 AM 5. Rates for adjustable-rate mortgages are commonly tied to the a. average prime rate over the previous year. b. Fed's discount rate over the previous year. c. average Treasury bill rate over the previous year. d. average Treasury bond rate over the previous year.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:37 AM DATE MODIFIED: 9/21/2016 4:39 AM 6. Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically a. 2 percent per year and 5 percent for the mortgage lifetime. b. 5 percent per year and 15 percent for the mortgage lifetime.

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Chapter 09: Mortgage Markets c. 0 percent per year and 10 percent for the mortgage lifetime. d. 3 percent per year and 8 percent for the mortgage lifetime.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:39 AM DATE MODIFIED: 9/21/2016 4:40 AM 7. From the perspective of the lending financial institution, interest rate risk is a. lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage. b. lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. c. higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. d. higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 4:41 AM DATE MODIFIED: 9/21/2016 4:42 AM 8. Mortgage companies specialize in a. purchasing mortgages originated by other financial institutions. b. investing and maintaining mortgages that they create. c. originating mortgages and selling those mortgages. d. borrowing money through the creation of mortgages that is used to invest in real estate.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 4:43 AM 9/21/2016 4:44 AM

9. For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage. a. greater; greater b. greater; lower c. lower; greater d. lower; lower ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:10 AM DATE MODIFIED: 9/21/2016 5:12 AM 10. A financial institution has a higher degree of interest rate risk on a ____ than a ____. a. 30-year fixed-rate mortgage; 15-year fixed-rate mortgage b. 30-year variable-rate mortgage; 30-year fixed-rate mortgage c. 15-year fixed-rate mortgage; 30-year fixed-rate mortgage d. 15-year variable-rate mortgage; 15-year fixed-rate mortgage ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:12 AM DATE MODIFIED: 9/21/2016 5:14 AM 11. A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:14 AM DATE MODIFIED: 9/21/2016 5:15 AM 12. Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest. a. 1,014; 264 b. 1,241; 750 c. 1,014; 750 d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/21/2016 5:16 AM DATE MODIFIED: 5/7/2018 6:06 AM 13. A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n) a. chattel mortgage. b. balloon-payment mortgage. c. variable-rate mortgage. d. open-ended mortgage bond.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets DATE MODIFIED:

9/21/2016 5:19 AM

14. A mortgage with low initial payments that increase over time without ever leveling off is a a. graduated payment mortgage. b. growing-equity mortgage. c. second mortgage. d. shared-appreciation mortgage.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:19 AM DATE MODIFIED: 9/21/2016 5:21 AM 15. The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default. a. higher than; behind b. equal to that; equal to c. lower than; ahead of d. higher than; ahead of e. lower than; behind ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 5:21 AM DATE MODIFIED: 9/21/2016 5:23 AM 16. Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage? a. second mortgage b. growing-equity mortgage c. graduated-payment mortgage d. shared-appreciation mortgage Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:23 AM DATE MODIFIED: 9/21/2016 5:25 AM 17. A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off. a. graduated-payment mortgage b. growing-equity mortgage c. second mortgage d. shared-appreciation mortgage ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:25 AM DATE MODIFIED: 9/21/2016 5:27 AM 18. Mortgage companies, commercial banks, and savings institutions are the primary originators of mortgages. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:27 AM DATE MODIFIED: 9/21/2016 5:36 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets 19. ____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on mortgages that meet specific criteria. a. Freddie Mac b. Ginnie Mae c. Fannie Mae d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:37 AM DATE MODIFIED: 5/7/2018 6:06 AM 20. "Securitization" refers to the private insurance of conventional mortgages. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:47 AM DATE MODIFIED: 9/21/2016 5:53 AM 21. A financial institution may service a mortgage even after selling it. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 5:53 AM 9/21/2016 5:54 AM

22. The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to a. interest rate risk. b. reinvestment rate risk. c. credit risk. d. insurance risk.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:54 AM DATE MODIFIED: 9/21/2016 5:56 AM 23. Which of the following is NOT a guarantor of federally insured mortgages? a. Federal Housing Administration (FHA) b. Veterans Administration (VA) c. Federal Deposit Insurance Corporation (FDIC) d. All of these are guarantors of federally insured mortgages.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 5:57 AM DATE MODIFIED: 5/7/2018 6:07 AM 24. ___ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages. a. Strong; increase; decrease b. Strong; increase; increase c. Weak; decrease; increase d. Weak; increase; increase Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets e. Weak; decrease; decrease ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:05 AM DATE MODIFIED: 9/21/2016 6:08 AM 25. A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off from there on. a. balloon-payment b. graduated-payment c. shared-appreciation d. growing-equity e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:08 AM DATE MODIFIED: 5/7/2018 6:08 AM 26. An adjustable-rate mortgage increases interest rate risk for the ____, but reduces interest rate risk for the ____. a. originator; borrower b. borrower; originator c. government; originator d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 6:11 AM 5/7/2018 6:08 AM

27. When financial institutions originate residential mortgages, the mortgage contract should not specify a. whether the mortgage is federally insured. b. the amount of the loan. c. whether the interest rate is fixed or adjustable. d. the maturity. e. The mortgage contract should specify all of these.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:13 AM DATE MODIFIED: 5/7/2018 6:08 AM 28. Which of the following is NOT a common type of mortgage-backed security according to your text? a. participation certificates (PCs) b. collateralized mortgage obligations (CMOs) c. balloon-payment mortgage certificates d. private-label pass-through securities e. All of these are common types of mortgage pass-through securities.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:15 AM DATE MODIFIED: 5/7/2018 6:09 AM 29. ____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates. a. Interest rate b. Credit Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets c. Prepayment d. Reinvestment rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:18 AM DATE MODIFIED: 9/21/2016 6:21 AM 30. Mortgage-backed securities are assigned ratings by: a. rating agencies b. the Treasury c. the Fed d. the mortgage originator ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:21 AM DATE MODIFIED: 5/7/2018 6:10 AM 31. In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes). a. balloon payments b. caps c. tranches d. strips ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 6:23 AM 9/21/2016 6:25 AM

32. The credit crisis is mostly attributed to the use of a. strict criteria applied by mortgage originators. b. liberal criteria applied by mortgage originators. c. very tough credit ratings applied to mortgages. d. fixed-rate mortgages with long terms to maturity.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:25 AM DATE MODIFIED: 5/7/2018 6:10 AM 33. Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they a. were unwilling to finance new mortgages. b. invested heavily in balloon mortgages. c. invested only in prime mortgages that offered very low returns. d. invested heavily in subprime mortgages.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:28 AM DATE MODIFIED: 5/7/2018 6:11 AM 34. ____ 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 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:30 AM DATE MODIFIED: 9/21/2016 6:32 AM 35. The secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before maturity. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:32 AM DATE MODIFIED: 9/21/2016 6:35 AM 36. Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:35 AM DATE MODIFIED: 9/21/2016 6:38 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets 37. Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixedrate mortgage within a specified period. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:38 AM DATE MODIFIED: 9/21/2016 6:40 AM 38. Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:40 AM DATE MODIFIED: 9/21/2016 6:42 AM 39. A balloon-payment mortgage requires interest payments for a three- to five-year period. At the end of this period, full payment of the principal (the balloon payment) is required. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 6:42 AM 9/21/2016 6:44 AM

40. During the early years of a mortgage, most of the monthly payment reflects principal. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:45 AM DATE MODIFIED: 9/21/2016 6:46 AM 41. Mortgages are rarely sold in the secondary market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:47 AM DATE MODIFIED: 9/21/2016 6:49 AM 42. An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgage price to decrease. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/21/2016 7:10 AM 9/21/2016 7:12 AM

43. Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:13 AM DATE MODIFIED: 9/21/2016 7:15 AM 44. The higher the level of equity invested by the borrower, the higher the probability that the loan will default. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:15 AM DATE MODIFIED: 9/21/2016 7:17 AM 45. Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:17 AM DATE MODIFIED: 9/21/2016 7:19 AM 46. Non-U.S. financial institutions never hold mortgages on U.S. property. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:19 AM DATE MODIFIED: 9/21/2016 7:21 AM 47. The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity. a. primary b. secondary c. money d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:21 AM DATE MODIFIED: 5/7/2018 6:12 AM 48. Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans. a. exchange rate Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets b. prepayment c. reinvestment rate d. interest rate e. exchange rate ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:23 AM DATE MODIFIED: 9/21/2016 7:26 AM 49. From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages. a. higher; shorter b. higher; longer c. lower; shorter d. lower; higher e. higher; longer AND lower; shorter ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:26 AM DATE MODIFIED: 5/7/2018 6:15 AM 50. In the earlier years of a mortgage, a. most of the monthly payment reflects principal reduction. b. most of the monthly payment reflects interest. c. about half of the monthly payment reflects interest. d. all of the monthly payment reflects principal reduction.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:29 AM DATE MODIFIED: 9/21/2016 7:31 AM 51. Which of the following will typically require homeowners to ultimately request a new mortgage? a. graduated-payment mortgage (GPM) b. growing-equity mortgage c. balloon-payment mortgage d. shared-appreciation mortgage ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:31 AM DATE MODIFIED: 9/21/2016 7:33 AM 52. Which of the following is NOT true with respect to a growing-equity mortgage? a. It is similar to a graduated-payment mortgage. b. It allows borrowers to initially make small payments on the mortgage. c. It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage. d. It involves payments that level off after the first five to ten years of the mortgage.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:33 AM DATE MODIFIED: 5/7/2018 6:16 AM 53. Which of the following is NOT a correct description of qualified mortgages? a. They must comply with regulations issued by the Consumer Financial Protection Bureau.

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Chapter 09: Mortgage Markets b. Their term cannot exceed 30 years. c. They cannot be interest-only mortgages or result in negative amortization. d. They must be retained by the lending institution that originated the mortgages and cannot be sold. e. They place limits on the borrower’s debt-to-income ratio.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:35 AM DATE MODIFIED: 5/7/2018 6:17 AM 54. The probability that a borrower will default (credit risk) is influenced by all of the following, EXCEPT a. economic conditions. b. the level of equity invested by the borrower. c. the borrower's income level. d. the borrower's credit history. e. Credit risk is affected by all of these.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:37 AM DATE MODIFIED: 5/7/2018 6:18 AM 55. In a short sale of a home a. the lender forecloses and then sells the home for less than what is owed on the mortgage. b. the lender allows the homeowner to sell the home for less than what is owed on the mortgage. c. the lender does not recover the full amount of the mortgage. d. the lender allows the homeowner to sell the home for less than what is owed on the mortgage AND the lender does not recover the full amount of the mortgage. e. the lender forecloses and then sells the home for less than what is owed on the mortgage AND the lender does not recover the full amount of the mortgage.

ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:40 AM DATE MODIFIED: 5/7/2018 6:19 AM 56. An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:42 AM DATE MODIFIED: 9/21/2016 7:45 AM 57.

The valuation of mortgage-backed securities is difficult because of limited transparency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:45 AM DATE MODIFIED: 9/21/2016 7:47 AM 58. A(n) _________ problem occurs when a person or institution does not have to bear the full consequences of its behavior and therefore assumes more risk than it otherwise would.

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Chapter 09: Mortgage Markets a. asymmetric information b. moral hazard c. risk adjustment d. specific hazard ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:47 AM DATE MODIFIED: 9/21/2016 7:49 AM 59. A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities. a. default insurance contract b. default risk swap c. credit default swap d. collateralized debt obligation ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:50 AM DATE MODIFIED: 9/21/2016 7:51 AM 60. Speculators sell credit default swaps to benefit from the default of specific subprime mortgages. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 7:52 AM 9/21/2016 7:53 AM

61. Financial institutions may purchase credit default swaps on mortgages if they expect defaults on many mortgages. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/21/2016 7:54 AM DATE MODIFIED: 9/21/2016 7:55 AM 62. Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/21/2016 7:59 AM DATE MODIFIED: 9/21/2016 8:01 AM 63. At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities that are covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time. a. positively; positively b. positively; inversely c. Inversely; positively d. inversely; inversely ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/21/2016 8:02 AM DATE MODIFIED: 9/21/2016 8:05 AM 64. Bear Stearns commonly used __________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral. a. commercial paper b. Treasury securities c. its stock d. mortgages ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/21/2016 8:05 AM DATE MODIFIED: 9/21/2016 8:07 AM 65. Lehman Brothers commonly used _________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral. a. commercial paper b. Treasury securities c. its stock d. mortgages ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.09.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/21/2016 8:07 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 09: Mortgage Markets DATE MODIFIED:

9/21/2016 8:14 AM

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Chapter 10: Stock Offerings and Investor Monitoring 1. Which of the following statements is incorrect? a. A stock represents partial ownership in a corporation. b. Like debt securities, common stock is issued by firms to obtain funds. c. Stocks are issued by corporations to raise short-term funds. d. The secondary stock market enables investors to sell stocks that they had previously purchased.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:05 AM DATE MODIFIED: 9/21/2016 6:08 AM 2. 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.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:08 AM DATE MODIFIED: 9/21/2016 6:09 AM 3. From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 6:10 AM 9/21/2016 6:11 AM

4. A ____ prevents dividends from being paid on common stock until all current and previously omitted dividends are paid on preferred stock. a. residual claim b. preferred margin c. cumulative provision d. liquidation claim ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:11 AM DATE MODIFIED: 9/21/2016 6:13 AM 5. Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy. a. more; can b. less; can c. more; cannot d. less; cannot ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:13 AM DATE MODIFIED: 9/21/2016 6:15 AM 6. When a corporation first decides to issue stock to the public, it engages in a(n): a. secondary offering b. initial public offering c. seasoned equity offering Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:15 AM DATE MODIFIED: 5/7/2018 6:30 AM 7. A firm can avoid the time lag between registering new securities with the SEC and actually selling them by using a. a proxy. b. shelf registration. c. a margin call. d. preemptive rights.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:17 AM DATE MODIFIED: 9/21/2016 6:19 AM 8. To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:35 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring DATE MODIFIED:

9/21/2016 6:36 AM

9. The transaction costs to the issuing firm in an IPO are usually ____ percent of the funds raised. a. 1 b. 3 c. 7 d. 25 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:37 AM DATE MODIFIED: 9/21/2016 6:38 AM 10. If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price. a. upward pressure b. downward pressure c. no additional pressure d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:38 AM DATE MODIFIED: 5/7/2018 6:31 AM 11. The purpose of a lockup provision is to a. keep individual investors from buying and selling stock. b. prevent downward pressure on the stock's price. c. increase the number of outstanding shares. d. allocate a larger proportion of stock to institutional investors.

ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:41 AM DATE MODIFIED: 9/21/2016 6:44 AM 12. IPOs tend to occur more frequently during recessions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:46 AM DATE MODIFIED: 9/21/2016 7:15 AM 13. The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years. a. 10 b. 20 c. 30 d. 50 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:15 AM DATE MODIFIED: 9/21/2016 7:16 AM 14. The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called: a. flipping. b. skiing.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring c. flopping. d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:17 AM DATE MODIFIED: 5/7/2018 6:32 AM 15. When brokers encourage investors to place first-day bids for IPO shares that are above the offer price, this is referred to as: a. flipping b. spinning c. laddering d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:19 AM DATE MODIFIED: 5/7/2018 6:33 AM 16. On average, IPOs of firms tend to perform ____ over a period of a year or longer. a. well b. poorly c. about the same as the S&P 500 index d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 7:21 AM 5/7/2018 6:34 AM

17. A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:23 AM DATE MODIFIED: 9/21/2016 7:26 AM 18. A firm will typically attempt to sell shares from a secondary offering a. far below the prevailing market price. b. far above the prevailing market price. c. at the prevailing market price. d. at the offer price of the IPO. ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:26 AM DATE MODIFIED: 9/21/2016 7:28 AM 19. A(n) ____ represents ownership of a foreign stock. a. ADR b. SEAQ c. Nasdaq d. AMEX ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:29 AM DATE MODIFIED: 9/21/2016 7:30 AM 20. The first-time issuance of shares by a specific firm to the public is referred to as a(n) a. stock repurchase. b. secondary stock offering. c. initial rights issue. d. initial public offering (IPO).

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:31 AM DATE MODIFIED: 9/21/2016 7:32 AM 21. A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n) a. stock repurchase. b. secondary stock offering. c. initial rights issue. d. initial public offering (IPO).

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:32 AM DATE MODIFIED: 9/21/2016 7:34 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring 22. The largest organized exchange in the United States, listing the largest firms, is the a. New York Stock Exchange. b. American Stock Exchange. c. Midwest Stock Exchange. d. Pacific Stock Exchange.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:35 AM DATE MODIFIED: 9/21/2016 7:36 AM 23. ____ are employed by brokerage firms and execute orders for clients on the NYSE. a. Specialists b. Commission brokers c. Venture managers d. Dealers ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:37 AM DATE MODIFIED: 9/21/2016 7:39 AM 24. The OTC market does not have a trading floor. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 7:39 AM 9/21/2016 7:41 AM

25. Firms listed on the "pink sheets" of the OTC market a. are typically very large. b. satisfy the Nasdaq's listing requirements. c. are typically owned by various institutional and individual investors. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:42 AM DATE MODIFIED: 5/7/2018 6:34 AM 26. The prevailing price per share divided by the firm's earnings per share is known as the a. dividend yield. b. price-earnings ratio. c. fully diluted earnings per share. d. annual dividend.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:45 AM DATE MODIFIED: 9/21/2016 7:47 AM 27. The ____ is a value-weighted average of stock prices of 30 large U.S. firms. a. Dow Jones Industrial Average b. Standard and Poor's 500 c. New York Stock Exchange Index d. Nasdaq Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:47 AM DATE MODIFIED: 9/21/2016 7:49 AM 28. The ____ is a value-weighted index of stock prices of 500 large U.S. firms. a. Dow Jones Industrial Average b. Standard and Poor's 500 c. New York Stock Exchange Index d. Nasdaq ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:49 AM DATE MODIFIED: 9/21/2016 7:51 AM 29. Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price. a. overvalued b. fixed c. appropriate d. undervalued ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring DATE CREATED: DATE MODIFIED:

9/21/2016 7:52 AM 9/21/2016 7:53 AM

30. Analysts periodically communicate with high-level managers of the firms whose stock they rate. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:54 AM DATE MODIFIED: 9/21/2016 7:56 AM 31. Shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time. a. share price b. employee job descriptions c. board of directors d. asset size ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:56 AM DATE MODIFIED: 9/21/2016 7:59 AM 32. Which of the following is NOT true regarding the Sarbanes-Oxley Act? a. It requires firms to establish an internal control process for their financial reporting. b. It requires a firm’s CEO and CFO to certify that the audited financial statements are accurate. c. It allows public accounting firms to offer nonaudit consulting services to an audit client whether the client's audit committee pre-approves the nonaudit services or not. d. It prevents members of a firm's audit committee from receiving consulting or advising fees or other compensation from the firm beyond that earned from serving on the board.

ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:59 AM DATE MODIFIED: 5/7/2018 6:37 AM 33. An example of shareholder activism is a. communication with the firm. b. engaging in a proxy contest. c. filing a lawsuit against the board. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:02 AM DATE MODIFIED: 5/7/2018 6:37 AM 34. ____ are acquisitions that require substantial amounts of borrowed funds. a. Stock repurchases b. Corporate controls c. Leveraged buyouts d. Stock splits ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:05 AM DATE MODIFIED: 9/21/2016 8:07 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring 35. ____ are not barriers to corporate control to eliminate agency problems. a. Leveraged buyouts b. Antitakeover amendments c. Poison pills d. Golden parachutes ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:09 AM DATE MODIFIED: 9/21/2016 8:21 AM 36. Listing stock on a foreign stock exchange a. may increase the stock's liquidity. b. may enhance the firm's global image. c. may increase the pool of potential investors, making it easier to place an entire issue of stock. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:21 AM DATE MODIFIED: 5/7/2018 6:37 AM 37. American depository receipts (ADRs) are similar to a. stock options. b. bank deposits. c. stocks. d. bonds.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:23 AM DATE MODIFIED: 9/21/2016 8:25 AM 38. ____ are portfolios of international stocks created and managed by various financial institutions. a. International mutual funds b. American depository receipts c. Exchange rate options d. Initial public offerings ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:25 AM DATE MODIFIED: 9/21/2016 8:27 AM 39. ____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers. a. International mutual funds b. American depository receipts c. World equity depository receipts d. Initial public depository receipts ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:27 AM DATE MODIFIED: 9/21/2016 8:29 AM 40. When a firm buys some of its shares that it had previously issued, this is referred to as a: a. reverse IPO Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring b. leveraged buyout c. ladder spin d. stock repurchase ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:29 AM DATE MODIFIED: 5/7/2018 6:38 AM 41. Whenever _____ the stock price will be driven up. a. supply exceeds demand b. demand exceeds supply c. demand is reduced d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:31 AM DATE MODIFIED: 5/7/2018 6:39 AM 42. Which of the following is NOT a form of shareholder activism? a. investors communicating their concerns to other investors and to a firm’s high-level managers in an effort to place pressure on the firm's managers or its board members b. poison pills c. shareholder lawsuits d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/22/2016 12:20 AM 5/7/2018 6:39 AM

43. Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:53 AM DATE MODIFIED: 9/22/2016 1:01 AM 44. Initial public offerings (IPOs) typically perform ____ on the day of the IPO and ____ for periods of a year or longer after the IPO. a. well; poorly b. poorly; well c. well; well d. poorly; poorly ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 12:38 AM DATE MODIFIED: 9/22/2016 12:45 AM 45. Which of the following is NOT a part of the over-the-counter market? a. the Nasdaq b. the pink sheets c. the OTC Bulletin Board d. the New York Stock Exchange Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:46 AM DATE MODIFIED: 5/7/2018 6:40 AM 46. A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is a. .74 percent. b. 1.34 percent. c. 7.44 percent. d. 1.14 percent.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:48 AM DATE MODIFIED: 9/22/2016 12:51 AM 47. If the secondary market for a stock is inactive, then the shares are illiquid. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:02 AM DATE MODIFIED: 9/22/2016 1:04 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring 48. Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:04 AM DATE MODIFIED: 9/22/2016 1:06 AM 49. Venture capital (VC) funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:06 AM DATE MODIFIED: 9/22/2016 1:07 AM 50. Venture capital (VC) funds commonly serve as advisers to the businesses in which they invest. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring DATE CREATED: DATE MODIFIED:

9/22/2016 1:07 AM 9/22/2016 1:09 AM

51. Venture capital (VC) funds usually invest in publicly traded businesses. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:10 AM DATE MODIFIED: 9/22/2016 1:11 AM 52. Venture capital (VC) funds typically plan to exit from their original investment within about one year. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:12 AM DATE MODIFIED: 9/22/2016 1:13 AM 53. The phrase "leaving money on the table" refers to investors paying more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/22/2016 1:14 AM 9/22/2016 1:15 AM

54. Underwriters sell most or all of the shares of an IPO to institutional investors. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:15 AM DATE MODIFIED: 9/22/2016 1:17 AM 55. The total cost of engaging in an IPO is usually about 1 percent of the total proceeds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:17 AM DATE MODIFIED: 9/22/2016 1:18 AM 56. Crowdfunding is a way that small businesses can raise funds from a number of investors over the Internet. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/22/2016 1:19 AM 9/22/2016 1:25 AM

57. In general, secondary offerings cause an immediate increase in the market price of the stock. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:25 AM DATE MODIFIED: 9/22/2016 1:27 AM 58. In addition to extended sessions offered by the stock exchanges, some electronic communications networks (ECNs) allow for trading at any time. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:27 AM DATE MODIFIED: 9/22/2016 1:29 AM 59. As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:29 AM DATE MODIFIED: 9/22/2016 1:30 AM 60. The Sarbanes-Oxley Act has improved transparency, but investors may still have limited information about publicly traded firms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:30 AM DATE MODIFIED: 9/22/2016 1:32 AM 61. The legal protection of shareholders varies substantially among countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:32 AM DATE MODIFIED: 9/22/2016 1:34 AM 62. Common law countries such as the United States, Canada, and the United Kingdom allow for more legal protections for shareholders than civil law countries such as France or Italy. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:34 AM DATE MODIFIED: 9/22/2016 1:37 AM 63. The government enforcement of securities laws varies among countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:37 AM DATE MODIFIED: 9/22/2016 1:39 AM 64. All countries that have stock markets have similar laws regarding the financial information that must be provided by public companies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:40 AM DATE MODIFIED: 9/22/2016 1:42 AM 65. Index-traded funds are passive funds that track a specific index.

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Chapter 10: Stock Offerings and Investor Monitoring a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:42 AM DATE MODIFIED: 9/22/2016 1:44 AM 66. A venture capital fund typically plans to exit from its original investment within about four to seven years. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:44 AM DATE MODIFIED: 9/22/2016 1:46 AM 67. Venture capital funds typically take over businesses and manage them. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:46 AM DATE MODIFIED: 9/22/2016 1:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring 68. Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:48 AM DATE MODIFIED: 9/22/2016 1:49 AM 69. If shareholders become dissatisfied with a firm's performance, they may engage in a proxy contest in an attempt to change the composition of the board of directors. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:52 AM DATE MODIFIED: 9/22/2016 1:54 AM 70. Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring DATE CREATED: DATE MODIFIED:

9/22/2016 1:55 AM 9/22/2016 1:57 AM

71. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:57 AM DATE MODIFIED: 9/22/2016 1:59 AM 72. Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:00 AM DATE MODIFIED: 9/22/2016 2:02 AM 73. In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/22/2016 2:03 AM 9/22/2016 2:05 AM

74. The Dow Jones Industrial Average (DJIA) is a value-weighted average of stock prices of 30 large U.S. firms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:06 AM DATE MODIFIED: 9/22/2016 2:07 AM 75. Research studies have found that the share prices of target firms and of acquiring firms react very positively to announcements of an acquisition. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:08 AM DATE MODIFIED: 9/22/2016 2:10 AM 76. If managers believe that their firm's stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:10 AM DATE MODIFIED: 9/22/2016 2:14 AM 77. International exchange-traded funds (ETFs) represent international indexes that reflect the stock markets of particular countries; shares of an index can be purchased or sold, thereby allowing investors to invest directly in a stock index representing any one of several countries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:15 AM DATE MODIFIED: 5/7/2018 6:41 AM 78. Which of the following is NOT true with respect to venture capital (VC) funds? a. When a VC fund decides to invest in a business, it will negotiate the terms of its investment, including the amount of funds it is willing to invest. b. One common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering. c. VC funds receive money from wealthy investors and from pension funds that are willing to maintain the investment for a long-term period. d. All of these are true with respect to VC funds.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:20 AM DATE MODIFIED: 5/7/2018 6:42 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring 79. Assume that a firm is valued at $800 million and has 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share. a. 6.00 b. 80.00 c. 133.33 d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 2:22 AM DATE MODIFIED: 5/7/2018 6:43 AM 80. The owners of common stock are permitted to vote on the a. election of the board of directors. b. authorization to issue new shares of common stock. c. approval of amendments to the corporate charter. d. adoption of bylaws. e. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:24 AM DATE MODIFIED: 5/7/2018 6:43 AM 81. Which of the following is NOT true with respect to preferred stock? a. Preferred stock usually does not allow for significant voting rights. b. If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy. c. Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend. d. Payment of preferred dividends is not a tax-deductible expense. e. All of these are correct.

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Chapter 10: Stock Offerings and Investor Monitoring ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:26 AM DATE MODIFIED: 5/7/2018 6:44 AM 82. Which of the following is false with respect to initial public offerings (IPOs)? a. IPOs are first-time offerings of shares by a specific firm to the public. b. Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock to issue and the asking price for the stock. c. Owners of firms that engage in IPOs are normally required to retain their shares for at least three years before selling them in the secondary market. d. IPOs are typically intended to raise funds so the corporation can expand.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 5:35 AM DATE MODIFIED: 9/22/2016 5:38 AM 83. To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a ____ period of time. a. fewer; long b. more; short c. more; long d. fewer; long AND more; short ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/22/2016 5:38 AM 5/7/2018 6:44 AM

84. Google’s IPO used a _________ auction process, which enabled it to attract a diversified investor base including many individual investors. a. Dutch b. venture c. laddered d. leveraged ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:53 AM DATE MODIFIED: 9/22/2016 5:54 AM 85. Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively a. high. b. low. c. either high or low, depending on the overall market. d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:55 AM DATE MODIFIED: 5/7/2018 6:45 AM 86. "Pink sheets" are traded on the a. New York Stock Exchange. b. American Stock Exchange.

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Chapter 10: Stock Offerings and Investor Monitoring c. over-the-counter market. d. Nasdaq market.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:57 AM DATE MODIFIED: 9/22/2016 5:58 AM 87. Which of the following is NOT true regarding overallotment options? a. Overallotment options are rarely used in IPOs today. b. An overallotment option allows the lead underwriter to allocate an additional 15 percent of the shares of a firm engaging in an IPO. c. The option allows the lead underwriter to purchase additional shares at the offer price. d. The lead underwriter may use the shares from an overallotment option to help stabilize the stock price in the days after the IPO. ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 5:58 AM DATE MODIFIED: 5/7/2018 6:45 AM 88. In preparing for an IPO, a prospectus must be filed with the a. stock market where the firm will be listed. b. Securities and Exchange Commission. c. Consumer Financial Protection Bureau. d. Federal Trade Commission.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.06 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/22/2016 6:01 AM 9/22/2016 6:02 AM

89. Which of the following is NOT a barrier to corporate control? a. antitakeover amendments b. proxy contests c. poison pills d. golden parachutes e. All of these are barriers to corporate control.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:03 AM DATE MODIFIED: 5/7/2018 6:46 AM 90. Possible disadvantages of private stock exchanges to investors include a. only large institutional investors may purchase shares in privately listed stocks. b. required disclosures may be less than those required when a firm goes public. c. trading volume is limited. d. required disclosures may be less than those required when a firm goes public AND trading volume is limited.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:05 AM DATE MODIFIED: 5/7/2018 6:47 AM 91. After an IPO, firms commonly list their shares on a private stock exchange. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:07 AM DATE MODIFIED: 9/22/2016 6:10 AM 92. Managers protected by golden parachutes may be more willing to make decisions that increase the company’s earnings in the long run, even though the decisions adversely affect the stock price in the short run. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:14 AM DATE MODIFIED: 9/22/2016 6:15 AM 93. A firm whose stock price has risen: a. will not have to pay a premium if it acquires another firm. b. has an incentive to use its stock as currency to acquire the shares of a target firm. c. is likely to be a candidate for a leveraged buyout. d. is likely to repurchase some of its shares.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:16 AM DATE MODIFIED: 9/22/2016 6:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring 94. Most individual investors attend road shows of firms that are about to go public before they purchase shares at the time of an IPO. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:18 AM DATE MODIFIED: 9/22/2016 6:19 AM 95. When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving them: a. preemptive rights b. limit orders c. subscription rights d. presumptive rights ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:20 AM DATE MODIFIED: 5/7/2018 6:48 AM 96. When a firm goes public and issues stock in the primary market, a. the equity investment in the firm declines. b. the firm’s debt level increases. c. the number of the firm’s owners increases. d. the equity investment in the firm declines AND the number of the firm’s owners increases.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:22 AM DATE MODIFIED: 5/7/2018 6:49 AM 97. The investment by a private equity fund in a business is normally much larger than the typical investment by a venture capital fund. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.0 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.0 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/22/2016 6:24 AM DATE MODIFIED: 9/22/2016 6:25 AM 98. Private equity funds tend to use mostly _________ when acquiring stakes in businesses. a. their equity from issuing common stock b. their equity from retaining earnings c. their equity from issuing preferred stock d. borrowed funds ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.0 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.0 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/22/2016 6:25 AM DATE MODIFIED: 9/22/2016 6:27 AM 99. Private equity funds commonly exit their investment in a business by a. selling their stake to another company. b. engaging in a credit default swap with the business.

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Chapter 10: Stock Offerings and Investor Monitoring c. investing in shares of the business when the business engages in an IPO. d. repurchasing shares of their own stock in the secondary market.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.0 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.0 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/22/2016 6:28 AM DATE MODIFIED: 9/22/2016 6:30 AM 100. Venture capital funds commonly exit their investment in a business by a. receiving dividends from the business. b. engaging in a credit default swap with the business. c. selling shares of the business when the business engages in an IPO. d. repurchasing shares of their own stock in the secondary market.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.0 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.0 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/22/2016 6:30 AM DATE MODIFIED: 5/7/2018 6:50 AM 101. The phrase “__________” implies that the company engaged in an IPO could have received a larger amount of funds had the offer price been set at a higher level. a. synchronizing the order b. covering the spread c. offsetting the flow d. leaving money on the table ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.0 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 10: Stock Offerings and Investor Monitoring STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.0 Bloom’s: Knowledge 9/22/2016 6:32 AM 9/22/2016 6:34 AM

102. For many IPOs, the lead underwriter has a(an) _______ option, which allows it to allocate an additional 15 percent of the firm’s shares for a period of up to 30 days after the IPO. a. credit default b. quantitative c. overallotment d. lockup ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.10.0 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.0 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/22/2016 6:35 AM DATE MODIFIED: 9/22/2016 6:37 AM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk 1. The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to value the firm's stock. a. firm's; industry b. firm's; firm's c. average industry; industry d. average industry; firm's ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:28 AM DATE MODIFIED: 9/22/2016 12:30 AM 2. The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 12:31 AM DATE MODIFIED: 9/22/2016 12:33 AM 3. Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share. a. 33.33 b. 166.67 c. 41.67 d. 60.00 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 12:33 AM DATE MODIFIED: 9/22/2016 12:35 AM 4. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:35 AM DATE MODIFIED: 9/22/2016 12:37 AM 5. Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel's industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____. a. 113.95 b. 111.32 c. 105.25 d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 12:37 AM DATE MODIFIED: 5/7/2018 7:07 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk 6. When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns. a. beta; standard deviation b. standard deviation; beta c. intercept; beta d. beta; error term ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 12:41 AM DATE MODIFIED: 9/22/2016 12:44 AM 7. The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model. a. Treasury bond rate b. prime rate c. discount rate d. federal funds rate ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:44 AM DATE MODIFIED: 9/22/2016 12:46 AM 8. A beta of 1.8 implies that the stock has a risk premium of 1.8 percent. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/22/2016 12:46 AM 9/22/2016 12:48 AM

9. Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar. a. favorably; adversely b. adversely; adversely c. favorably; favorably d. adversely; favorably ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:48 AM DATE MODIFIED: 9/22/2016 12:50 AM 10. A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:51 AM DATE MODIFIED: 9/22/2016 12:52 AM 11. The January effect refers to the ____ pressure on ____ stocks in January of every year. a. downward; large b. upward; large c. downward; small d. upward; small Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:52 AM DATE MODIFIED: 9/22/2016 12:54 AM 12. The expected acquisition of a firm typically results in ____ in the target's stock price. a. an increase b. a decrease c. no change d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:54 AM DATE MODIFIED: 5/7/2018 7:08 AM 13. The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's volatility. a. Sharpe b. Treynor c. arbitrage d. margin ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk DATE CREATED: DATE MODIFIED:

9/22/2016 12:56 AM 9/22/2016 12:57 AM

14. The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta. a. Sharpe b. Treynor c. arbitrage d. margin ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 12:58 AM DATE MODIFIED: 9/22/2016 1:01 AM 15. Stock price volatility increased during the credit crisis. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:02 AM DATE MODIFIED: 9/22/2016 1:03 AM 16. The Sharpe index measures the a. average return on a stock. b. variability of stock returns per unit of return. c. stock's beta adjusted for risk. d. excess return above the risk-free rate per unit of risk.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:04 AM DATE MODIFIED: 5/7/2018 7:08 AM 17. A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1, and the standard deviation of its returns is 10 percent. What is the Sharpe index? a. .05 b. .5 c. .1 d. .02 e. .2 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:06 AM DATE MODIFIED: 9/22/2016 1:07 AM 18. A stock's average return is 10 percent. The average risk-free rate is 7 percent. The standard deviation of the stock's return is 4 percent, and the stock's beta is 1.5. What is the Treynor index for the stock? a. .03 b. .75 c. 1.33 d. .02 e. 50 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:08 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk DATE MODIFIED:

9/22/2016 1:10 AM

19. If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are: a. weak-form efficient b. semistrong-form efficient. c. strong-form efficient. d. semistrong-form efficient AND strong-form efficient e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:10 AM DATE MODIFIED: 5/7/2018 7:09 AM 20. If security markets are semistrong-form efficient, investors cannot solely use ____ to earn excess returns. a. previous price movements b. insider information c. publicly available information d. previous price movements AND publicly available information ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:12 AM DATE MODIFIED: 5/7/2018 7:09 AM 21. The ____ is often used to estimate the required rate of return for any firm with public traded stock. a. capital asset pricing model b. Treynor index c. Sharpe index d. Treynor index AND Sharpe index ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:14 AM DATE MODIFIED: 5/7/2018 7:10 AM 22. According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar. a. adversely; favorably b. favorably; adversely c. favorably; favorably d. adversely; adversely ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:16 AM DATE MODIFIED: 9/22/2016 1:18 AM 23. The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.) a. strengthen b. weaken c. stabilize d. weaken AND stabilize ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk DATE CREATED: DATE MODIFIED:

9/22/2016 1:18 AM 5/7/2018 7:10 AM

24. A higher beta for an asset reflects a. lower risk. b. lower covariance between the asset's returns and market returns. c. higher covariance between the asset's returns and the market returns. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:20 AM DATE MODIFIED: 5/7/2018 7:11 AM 25. The "January effect" refers to a large a. rise in the price of small stocks in January. b. decline in the price of small stocks in January. c. decline in the price of large stocks in January. d. rise in the price of large stocks in January.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:22 AM DATE MODIFIED: 5/7/2018 7:11 AM 26. Technical analysis relies on the use of ____ to make investment decisions. a. interest rates b. inflationary expectations c. industry conditions d. recent stock price trends ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:25 AM DATE MODIFIED: 9/22/2016 1:27 AM 27. The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's : a. prevailing level of the industry competition. b. beta. c. liquidity. d. size (market capitalization).

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:27 AM DATE MODIFIED: 9/22/2016 1:29 AM 28. According to the capital asset pricing model, the required return by investors on a security is a. inversely related to the risk-free rate. b. inversely related to the firm's beta. c. inversely related to the market return. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:29 AM DATE MODIFIED: 5/7/2018 7:14 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk 29. Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is: a. 0.35 b. 0.36 c. 0.45 d. 0.28 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:31 AM DATE MODIFIED: 5/7/2018 7:15 AM 30. Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is: a. 0.0625 b. 0.05 c. 0.35 d. 0.03 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:33 AM DATE MODIFIED: 5/7/2018 7:17 AM 31. Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is: a. 0.05 b. 0.35 c. 0.25 d. 0.45 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:36 AM DATE MODIFIED: 5/7/2018 7:18 AM 32. Sorvino Co. is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____. a. 4.06 b. 4.16 c. 40.63 d. 24.62 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:39 AM DATE MODIFIED: 5/7/2018 7:18 AM 33. Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____. a. 39.67 b. 41.67 c. 33.33 d. 31.73 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:43 AM DATE MODIFIED: 5/7/2018 7:19 AM 34. LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model? a. $150.00 b. $163.91 c. $45.00 d. $168.83 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 1:45 AM DATE MODIFIED: 5/7/2018 7:19 AM 35. Tarzak Inc. has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model. a. $116.41 b. $104.91 c. $161.15 d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Application 9/22/2016 1:47 AM 5/7/2018 7:20 AM

36. The standard deviation of a stock's returns is used to measure the stock's a. volatility. b. beta. c. Treynor index. d. risk-free rate.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:52 AM DATE MODIFIED: 9/22/2016 1:54 AM 37. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 1:56 AM DATE MODIFIED: 9/22/2016 1:57 AM 38. A stock's beta can be measured from the estimate of the ________ using regression analysis. a. intercept b. market return c. risk-free rate d. slope coefficient ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 1:57 AM DATE MODIFIED: 9/22/2016 1:59 AM 39. A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction. a. risk-free rate b. stock's value c. stock's standard deviation d. correlation coefficient ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/22/2016 1:59 AM DATE MODIFIED: 9/22/2016 2:02 AM 40. The beta of a stock portfolio is equal to a weighted average of the a. betas of stocks in the portfolio. b. betas of stocks in the portfolio, plus their correlation coefficients. c. standard deviations of stocks in the portfolio. d. correlation coefficients between stocks in the portfolio.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:02 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk DATE MODIFIED:

9/22/2016 2:04 AM

41. Value at risk estimates the ____ a particular investment for a specified confidence level. a. beta of b. risk-free rate of c. largest expected loss to d. standard deviation of ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:05 AM DATE MODIFIED: 9/22/2016 2:07 AM 42. A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .2 percent. The lower boundary is a. 1.45 percent. b. 1.85 percent c. 0 percent. d. 1.65 percent.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 2:07 AM DATE MODIFIED: 9/22/2016 2:09 AM 43. A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .1 percent. The lower boundary is a. 1.65 percent. b. 3.00 percent c. 4.85 percent.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk d. 5.05 percent.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 2:09 AM DATE MODIFIED: 9/22/2016 2:12 AM 44. Which of the following is NOT commonly used as an estimate of a stock's volatility? a. the estimate of its standard deviation of returns over a recent period b. the trend of historical standard deviations of returns over recent periods c. the implied volatility derived from an option pricing model d. the estimate of its option premium derived from an option pricing model ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:12 AM DATE MODIFIED: 5/7/2018 7:20 AM 45. The credit crisis caused major problems in the mortgage market but had no impact on the stock market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:15 AM DATE MODIFIED: 9/22/2016 2:18 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk 46. When a firm’s announced earnings are lower than expected, investors will increase their valuation of the firm’s future cash flows and its stock. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:18 AM DATE MODIFIED: 9/22/2016 2:20 AM 47. A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings for the year. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 2:20 AM DATE MODIFIED: 9/22/2016 2:21 AM 48. While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Comprehension 9/22/2016 2:22 AM 9/22/2016 2:23 AM

49. If investors agree on a firm's forecasted earnings, they will derive the same value for that firm using the PE method to value the firm's stock. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:23 AM DATE MODIFIED: 9/22/2016 2:25 AM 50. The dividend discount model states that the price of a stock should reflect the present value of the stock's future dividends. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 2:26 AM DATE MODIFIED: 9/22/2016 2:27 AM 51. The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:03 AM DATE MODIFIED: 9/22/2016 5:04 AM 52. For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:05 AM DATE MODIFIED: 9/22/2016 5:07 AM 53. The capital asset pricing model (CAPM) is based on the premise that the only important risk of a firm is unsystematic risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:27 AM DATE MODIFIED: 9/22/2016 5:29 AM 54. The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM). a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:30 AM DATE MODIFIED: 9/22/2016 5:31 AM 55. A stock with a beta of 2.3 means that for every 1 percent change in the market overall, the stock tends to change by 2.3 percent in the same direction. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 5:32 AM DATE MODIFIED: 9/22/2016 5:34 AM 56. Stocks that have relatively little trading are normally subject to less price volatility. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:34 AM DATE MODIFIED: 9/22/2016 5:35 AM 57. A firm's stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:36 AM DATE MODIFIED: 9/22/2016 5:37 AM 58. Divestitures are commonly viewed as a favorable signal about a firm if the divested assets are unrelated to the firm’s core business. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 5:37 AM DATE MODIFIED: 9/22/2016 5:39 AM 59. The main source of uncertainty in computing the return of a stock is the dividend to be received next year. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 5:39 AM DATE MODIFIED: 9/22/2016 5:42 AM 60. A stock portfolio has more volatility when its individual stock returns are uncorrelated. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:43 AM DATE MODIFIED: 9/22/2016 5:45 AM 61. Beta serves as a measure of risk because it can be used to derive a probability distribution of returns based on a set of market returns. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:46 AM DATE MODIFIED: 9/22/2016 5:48 AM 62. The value-at-risk method is intended to warn investors about the potential maximum loss that could occur. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:49 AM DATE MODIFIED: 9/22/2016 5:50 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk 63. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 5:51 AM DATE MODIFIED: 9/22/2016 5:52 AM 64. Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:53 AM DATE MODIFIED: 9/22/2016 5:54 AM 65. Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option-pricing model, it is possible to derive the anticipated volatility level. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/22/2016 5:54 AM 9/22/2016 5:56 AM

66. A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:56 AM DATE MODIFIED: 9/22/2016 5:57 AM 67. If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 5:58 AM DATE MODIFIED: 9/22/2016 6:00 AM 68. The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk LEARNING OBJECTIVES: FMAI.MADU.15.11.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:00 AM DATE MODIFIED: 9/22/2016 6:02 AM 69. Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock price per share is $____. a. 13.33 b. 3.00 c. 20.00 d. 30.00 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/22/2016 6:03 AM DATE MODIFIED: 5/7/2018 7:21 AM 70. The ____ is not a measure of a stock's risk. a. stock's price volatility b. stock's return c. stock's beta d. value-at-risk method e. All of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:05 AM DATE MODIFIED: 5/7/2018 7:31 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk 71. If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock's returns will be within ____ percentage points of the expected outcome. a. 68; 4 b. 68; 8 c. 95; 8 d. 95; 6 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/22/2016 6:07 AM DATE MODIFIED: 5/7/2018 7:31 AM 72. The limitations of the dividend discount model are most pronounced for a firm that a. has a high beta. b. has high expected future earnings. c. distributes most of its earnings as dividends. d. retains all of its earnings. e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:11 AM DATE MODIFIED: 5/7/2018 7:32 AM 73. Which of the following is incorrect regarding the capital asset pricing model (CAPM)? a. It is sometimes used to estimate the required rate of return for any firm with publicly traded stock. b. It is based on the premise that the only important risk of a firm is systematic risk. c. It is concerned with unsystematic risk. d. All of these are correct.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:14 AM DATE MODIFIED: 5/7/2018 7:32 AM 74. The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset. a. prevailing risk-free rate b. dividend growth rate c. market return d. covariance between the asset's returns and market returns e. All of these are factors used in the CAPM. ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:16 AM DATE MODIFIED: 5/7/2018 7:33 AM 75. Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent. a. 21.5 b. 6.5 c. 16.5 d. 14.0 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Application 9/22/2016 6:18 AM 5/7/2018 7:33 AM

76. Which of the following is not a type of factor that drives stock prices, according to your text? a. economic factors b. market-related factors c. firm-specific factors d. All of the above are factors that affect stock prices.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:21 AM DATE MODIFIED: 9/22/2016 6:22 AM 77. The general mood of investors represents: a. investor sentiment b. beta c. systematic risk d. unsystematic risk ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:23 AM DATE MODIFIED: 5/7/2018 7:40 AM 78. ____ are not a firm-specific factor that affect stock prices. a. Exchange rates b. Dividend policy changes c. Acquisitions and divestitures d. Earnings surprises e. All of these are firm-specific factors that affect stock prices.

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Chapter 11: Stock Valuation and Risk ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:24 AM DATE MODIFIED: 5/7/2018 7:41 AM 79. The U.S. government’s budget deficit has a significant impact on the bond market but does not affect the stock market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:26 AM DATE MODIFIED: 9/22/2016 6:28 AM 80. Investors can avoid unsystematic risk by a. using the capital asset pricing model. b. investing in stocks with low PE ratios. c. holding diversified portfolios. d. using the free cash flow model.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:28 AM DATE MODIFIED: 5/7/2018 7:41 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk 81. The market risk premium is a. the yield on newly issued Treasury bonds. b. the return of the market in excess of the risk-free rate. c. the covariance between the risk-free rate and the return of the market. d. the return of the market in excess of expected cash flows.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:30 AM DATE MODIFIED: 5/7/2018 7:42 AM 82. The market risk premium is stable over time and is not affected by stock market conditions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/22/2016 6:32 AM DATE MODIFIED: 9/22/2016 6:34 AM 83. Holding other factors constant, an increase in the capital gains tax rate will a. have more effect on the valuation of dividend-paying stocks than on stocks with high growth prospects. b. have less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects. c. have no effect on the valuations of stocks. d. have the same effect on the valuation of dividend-paying stocks and stocks with high growth prospects.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/22/2016 6:35 AM 5/7/2018 7:52 AM

84. VIX (CBOE Volatility Index) indicates the volatility of the bond market in general. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:37 AM DATE MODIFIED: 9/22/2016 6:38 AM 85. Holding other factors constant, a stock portfolio has more volatility when its individual stock volatilities are ________ and its individual stock returns have _______ correlations. a. high; low b. low; high c. low; low d. high; high ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:38 AM DATE MODIFIED: 9/22/2016 6:40 AM 86. Even though a foreign stock appears to be overvalued in its own country, the stock may not generate a reasonable return for a U.S. investor if the currency of that country appreciates against the U.S. dollar. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 11: Stock Valuation and Risk POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:40 AM DATE MODIFIED: 9/22/2016 6:42 AM 87. As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.11.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/22/2016 6:42 AM DATE MODIFIED: 9/22/2016 6:43 AM

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Chapter 12: Market Microstructure and Strategies 1. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 12:28 AM DATE MODIFIED: 9/22/2016 12:30 AM 2. With a ____ order, the investor specifies a purchase price that is above the current market price. a. market b. limit c. stop-loss d. stop-buy ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 12:30 AM DATE MODIFIED: 9/22/2016 12:32 AM 3. When investors buy stock with borrowed funds, this is sometimes referred to as a. use of proxy. b. purchasing stock on margin. c. a margin call. d. a margin residual claim.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 12:33 AM DATE MODIFIED: 9/22/2016 12:35 AM 4. The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 12:36 AM DATE MODIFIED: 9/22/2016 12:38 AM 5. Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year? a. 50 percent b. 30 percent c. 10 percent d. 16 percent e. 8 percent ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Application DATE CREATED: 9/22/2016 12:38 AM DATE MODIFIED: 9/22/2016 12:40 AM 6. When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies a. margin call. b. short sale. c. proxy fight. d. hedge.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 12:40 AM DATE MODIFIED: 9/22/2016 12:42 AM 7. Which of the following statements is incorrect? a. In a short sale, investors place an order to sell a stock that they do not own. b. Investors sell a stock short when they anticipate that its price will rise. c. When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it. d. Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 12:42 AM DATE MODIFIED: 9/22/2016 12:44 AM 8. Which of the following statements about program trading is incorrect? a. It represents a computerized response by institutional investors to either buy or sell a large basket of stocks in response to movements in a particular stock index. b. It may involve the purchase of stocks that have become "underpriced." c. It may involve the sale of stocks that have become "overpriced." d. It is designed to capitalize on Federal Reserve monetary policy announcements. e. None of these are correct.

ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 12:44 AM DATE MODIFIED: 5/8/2018 12:12 AM 9. You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been a. positive. b. more negative than if you had covered the entire investment with cash. c. negative, but more favorable than if you had covered the entire investment with cash. d. zero.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Application DATE CREATED: 9/22/2016 12:47 AM DATE MODIFIED: 5/8/2018 12:12 AM 10. Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock? a. 30.00 percent b. −42.86 percent c. −30.00 percent d. 42.86 percent e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Application Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies DATE CREATED: DATE MODIFIED:

9/22/2016 12:50 AM 5/8/2018 12:13 AM

11. Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year.

Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent. a. 42.86 b. 85.71 c. 73.71 d. 30.00 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Application DATE CREATED: 9/22/2016 12:52 AM DATE MODIFIED: 9/22/2016 12:54 AM 12. Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock? a. 27.60 percent b. 82.61 percent c. 76.09 percent d. 58.70 percent e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Application DATE CREATED: 9/22/2016 12:55 AM DATE MODIFIED: 5/8/2018 12:13 AM 13. Under the present margin requirements, at least ____ percent of an investor's invested funds must be paid in cash. a. 20 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies b. 30 c. 40 d. 50 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 12:57 AM DATE MODIFIED: 5/8/2018 12:14 AM 14. The short interest ratio is commonly measured as the number of shares sold short divided by the number of shares that the firm has repurchased in the last quarter. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 12:59 AM DATE MODIFIED: 9/22/2016 1:01 AM 15. Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies DATE CREATED: DATE MODIFIED:

9/22/2016 1:01 AM 9/22/2016 1:02 AM

16. A short seller a. anticipates that the price of the stock sold short will increase. b. earns the difference between what was initially paid for the stock versus what the stock is later sold for. c. makes a profit equal to the difference between the original selling price and the price paid for the stock, after subtracting any dividend payments made. d. is essentially lending the stock to another investor and will ultimately receive that stock back from that investor. e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 1:03 AM DATE MODIFIED: 5/8/2018 12:14 AM 17. ____ are enforced to restrict the amount of credit extended to customers by stockbrokers. a. Limit orders b. Margin requirements c. Maintenance margins d. Initial margins ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:05 AM DATE MODIFIED: 9/22/2016 1:07 AM 18. Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is a. 60 percent b. 44 percent.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies c. 30 percent. d. 69 percent.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Application DATE CREATED: 9/22/2016 1:07 AM DATE MODIFIED: 9/22/2016 1:09 AM 19. Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is a. 26.5 percent. b. 28.5 percent. c. 30.5 percent. d. 34.5 percent.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Application DATE CREATED: 9/22/2016 1:10 AM DATE MODIFIED: 9/22/2016 1:12 AM 20. The risk of a short sale is that the stock price: a. may decrease over time b. will remain the same c. may increase over time d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Comprehension 9/22/2016 1:12 AM 5/8/2018 12:15 AM

21. ____ may facilitate stock transactions by taking positions in specific stocks. a. Board members b. Capstone members c. Market makers d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:14 AM DATE MODIFIED: 5/8/2018 12:15 AM 22. ____ may facilitate transactions on a stock exchange by executing stock transactions for their clients. a. Board members b. Capstone members c. Floor brokers d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:17 AM DATE MODIFIED: 5/8/2018 12:16 AM 23. The short interest represents the amount of interest that borrowers owe on loans used to purchase stock. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:20 AM DATE MODIFIED: 9/22/2016 1:22 AM 24. A short interest ratio of 20 or higher indicates that many investors a. believe that the stock price is currently overvalued. b. believe that the stock price is currently undervalued. c. are selling the stock short. d. believe that the stock price is currently overvalued AND are selling the stock short.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 1:22 AM DATE MODIFIED: 5/8/2018 12:16 AM 25. Short selling a stock refers to a. poor performance from purchasing an overvalued stock. b. the new issuance of low-priced stocks by firms. c. the new issuance of stocks by financially weak firms. d. the borrowing of stock owned by someone else and selling it in the market.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:25 AM DATE MODIFIED: 9/22/2016 1:28 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies 26. Trading halts are imposed by a. the SEC. b. brokers. c. stock exchanges. d. the Treasury.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:28 AM DATE MODIFIED: 9/22/2016 1:32 AM 27. Kayla would like to purchase a stock priced at $30. The stock is not expected to pay any dividends in the coming year.

She thinks she can sell the stock for $36 after one year. Her estimated return on the stock would be ____ percent. a. 6 b. 10 c. 15 d. 20 ANSWER: d POINTS: 1 QUESTION TYPE: Multiple Choice HAS VARIABLES: False DATE CREATED: 9/22/2016 1:33 AM DATE MODIFIED: 5/8/2018 12:32 AM 28. The ____ the trading volume of a stock, the ____ the spread. a. higher; wider b. higher; narrower c. lower; narrower d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies KEYWORDS: DATE CREATED: DATE MODIFIED:

Comprehension 9/22/2016 1:39 AM 5/8/2018 12:23 AM

29. Electronic communications networks are primarily intended to prevent executives from using inside information when trading stocks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:41 AM DATE MODIFIED: 9/22/2016 1:42 AM 30. A ____ is a trading platform on a computer website that allows investors to trade stocks without the use of a broker. a. direct access broker b. program trader c. market maker d. communication network ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:44 AM DATE MODIFIED: 9/22/2016 1:45 AM 31. The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are valued at more than $1 million. a. direct access brokering b. electronic communication networking c. program trading d. regulation of stock trading ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 1:46 AM DATE MODIFIED: 9/22/2016 1:53 AM 32. Trading halts are intended to ensure that the market has complete information before trading on news. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:02 AM DATE MODIFIED: 9/22/2016 2:04 AM 33. The Division of ____ of the SEC requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities. a. Corporate Finance b. Enforcement c. Administration d. Market Regulation ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:04 AM DATE MODIFIED: 9/22/2016 2:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies 34. The Division of ____ of the SEC assesses possible violations of SEC regulations and can take action against individuals or firms. a. Corporate Finance b. Enforcement c. Administration d. Market Regulation ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:06 AM DATE MODIFIED: 9/22/2016 2:08 AM 35. Until recently, international trading of stocks was limited by: a. transaction costs b. information costs c. exchange rate risk d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:08 AM DATE MODIFIED: 5/8/2018 12:24 AM 36. The transaction costs associated with international trading of stocks have been reduced by a. the consolidation of stock exchanges b. extensive computerization c. the Eurolist system d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:10 AM DATE MODIFIED: 5/8/2018 12:25 AM 37. The exchange rate risk associated with international trading of stock has been reduced by a. information available on the Internet. b. extensive computerization of stock exchanges. c. the conversion of many European countries to a single currency. d. the Eurolist system.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 2:13 AM DATE MODIFIED: 9/22/2016 2:15 AM 38. A market order is an order to buy or sell a stock at the best possible price. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:16 AM DATE MODIFIED: 9/22/2016 2:17 AM 39. A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:18 AM DATE MODIFIED: 9/22/2016 2:20 AM 40. When investors place a limit order, they can place it for the day only. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:20 AM DATE MODIFIED: 9/22/2016 2:22 AM 41. The initial margin is the minimum amount of margin that investors must maintain as a percentage of the stock's value without receiving a margin call. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:22 AM DATE MODIFIED: 9/22/2016 2:24 AM 42. A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies stock. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 2:45 AM DATE MODIFIED: 9/22/2016 2:47 AM 43. When investors sell short, they are essentially lending the stock to another investor and will ultimately receive that stock back from the investor to whom they lent it. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 2:52 AM DATE MODIFIED: 9/22/2016 2:53 AM 44. When the ratio of the number of shares of a stock sold short divided by the total number of shares outstanding is 3 percent or higher, this suggests a large amount of short positions in the market, which implies that a relatively large number of investors expect the stock's price to decline. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies KEYWORDS: DATE CREATED: DATE MODIFIED:

Comprehension 9/22/2016 4:32 AM 9/22/2016 4:34 AM

45. Trading halts are intended to prevent insider trading. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 4:34 AM DATE MODIFIED: 9/22/2016 4:37 AM 46. A trading halt prevents a stock from experiencing a loss in response to news. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 4:38 AM DATE MODIFIED: 9/22/2016 4:41 AM 47. The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and can take action against individuals or firms. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Knowledge 9/22/2016 4:42 AM 9/22/2016 4:50 AM

48. Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most important clients. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 4:51 AM DATE MODIFIED: 9/22/2016 4:53 AM 49. ____ offer advice to customers on stocks to buy or sell. a. Full-service brokers b. Discount brokers c. Floor brokers d. Specialists e. Market makers ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 4:54 AM DATE MODIFIED: 9/22/2016 4:56 AM 50. Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)? a. It requires firms to disclose relevant information broadly to investors at the same time. b. It restricts firms from providing analysts with information that they could use before the market is aware of the information. c. It requires firms to announce a change in expected earnings to all investors and other interested parties at the Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies same time. d. It prohibits firms from communicating with analysts after a news announcement is made to all investors. e. All of these are correct with respect to Regulation FD. ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 4:57 AM DATE MODIFIED: 5/8/2018 12:25 AM 51. 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:05 AM DATE MODIFIED: 9/22/2016 5:21 AM 52. Which of the following is incorrect in regard to short selling? a. Naked short selling involves selling a stock short without first borrowing the stock. b. During the credit crisis, the SEC temporarily protected more than 800 firms from short selling. c. The SEC’s uptick rule prevents speculators from taking a short position in stocks that have declined at least 15 percent for the day, except when the most trade resulted in an increase in the stock price. d. During the credit crisis, some short sellers focused particularly on the stocks of financial institutions. e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:21 AM DATE MODIFIED: 5/8/2018 12:26 AM 53. The bid-ask spread is negatively related to: a. order costs b. inventory costs c. Risk d. trading volume ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:26 AM DATE MODIFIED: 5/8/2018 12:26 AM 54. Which of the following statements is incorrect with respect to the structure of the SEC? a. It is composed of seven commissioners appointed by the president of the United States. b. The president selects one commissioner to chair the commission. c. Each commissioner serves a five-year term. d. Commissioners' terms are staggered. e. Commissioners meet to assess whether existing regulations are successfully preventing abuses and to revise the regulations as needed.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 5:29 AM DATE MODIFIED: 9/22/2016 5:32 AM 55. Which of the following is incorrect with regard to taxes imposed on stock transactions?

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Chapter 12: Market Microstructure and Strategies a. Stock transactions are subject to dividend and capital gains tax at the federal level and may be subject to state income tax as well. b. Stocks have to be held for at least one year to qualify for the long-term capital gains tax. c. The maximum federal tax on dividends and long-term capital gains is 14 percent. d. Higher tax rates are imposed on the dividends and capital gains of individuals in high tax brackets.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:32 AM DATE MODIFIED: 9/22/2016 5:35 AM 56. The SEC's ____ reviews the registration statement filedwhen a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues. a. Division of Corporate Finance b. Division of Market Regulation c. Division of Enforcement d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:35 AM DATE MODIFIED: 5/8/2018 12:27 AM 57. Under the SEC’s uptick rule, speculators are prohibited from taking a short position in stocks that have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a decrease in the stock price. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:42 AM DATE MODIFIED: 5/8/2018 12:27 AM 58. In naked short selling, short-sellers sell a stock short that they currently own. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:47 AM DATE MODIFIED: 9/22/2016 5:52 AM 59. 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.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 5:53 AM DATE MODIFIED: 9/22/2016 5:54 AM 60. It is not illegal for investors to take positions in a stock based on inside information that they received from an insider at the company, although it would be illegal for the insider to take a position based on that information. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Comprehension DATE CREATED: 9/22/2016 6:04 AM DATE MODIFIED: 9/22/2016 6:08 AM 61. When the price of a company’s stock increases or decreases significantly in advance of a public announcement of an event affecting the company, there are suspicions that __________ may have occurred. a. bid rigging b. default inversion c. insider trading d. an increase in margin requirements ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:13 AM DATE MODIFIED: 9/22/2016 6:16 AM 62. A criticism of dark pools is that they a. reduce transparency. b. are more expensive than the public stock exchanges. c. are not accessible to institutional investors. d. cannot be used to trade large blocks of stock.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies DATE MODIFIED:

5/8/2018 12:27 AM

63. Expert networks consisting of managers or executives of a publicly traded company who are hired as consultants (“experts”) by a hedge fund to provide insight about the company: a. are illegal under Regulation FD. b. are legitimate if the consultants divulge only information that is already public. c. have raised concerns that the consultants provide inside information. d. are legitimate if the consultants divulge only information that is already public AND have raised concerns that the consultants provide inside information.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:20 AM DATE MODIFIED: 5/8/2018 12:28 AM 64. To prosecute defendants connected with the Galleon Fund for __________, the government effectively used wiretap evidence. a. dark pool trading b. naked short selling c. insider trading d. accounting fraud ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:23 AM DATE MODIFIED: 9/22/2016 6:25 AM 65. ______________ represents the use of electronic platforms to execute orders based on an algorithm with programmed instructions. a. High frequency trading b. Mechanical analysis c. Liquidity trading d. Technical analysis Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:25 AM DATE MODIFIED: 9/22/2016 6:28 AM 66. Traders that engage in high frequency trading commonly close out their positions in: a. one day b. one month c. three months d. one year ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:28 AM DATE MODIFIED: 5/8/2018 12:29 AM 67. High frequency traders set up their own _________ that specify the conditions under which a specific stock should be purchased or sold, the size of the transaction, and the price that should be paid. a. algorithms b. inverse programs c. circuit breakers d. nextron networks ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.12.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies DATE CREATED: DATE MODIFIED:

9/22/2016 6:31 AM 9/22/2016 6:42 AM

68. On May 6, 2010, the “__________” occurred, when stocks on the New York Stock Exchange (NYSE) declined by more than 9 percent on average before reversing and recovering most of those losses on that same day. Much of the trading occurred within a half hour, which is thought to be the most volatile half hour in the history of the NYSE. a. credit cefault crisis b. swap crisis c. specialist crash d. flash crash ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:42 AM DATE MODIFIED: 9/22/2016 6:45 AM 69. While an investor’s ability to simultaneously consider multiple markets to accommodate its orders was perceived to allow for more competitive pricing (lower transactions costs), it also led to a form of “_______________” whereby traders with relatively faster access to specific markets can use another trader’s planned orders and move ahead of that order. a. randomized algo b. front running c. circuit breaking d. specialist surfing ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 6:46 AM DATE MODIFIED: 9/22/2016 6:48 AM 70. Many high frequency traders are willing to serve as intermediaries (similar to market makers) by

accommodating orders that they believe will ultimately result in profits. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 12: Market Microstructure and Strategies b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Knowledge DATE CREATED: 9/22/2016 7:10 AM DATE MODIFIED: 9/22/2016 7:12 AM

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Chapter 13: Financial Futures Markets 1. A(n) ____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. a. option contract b. brokerage contract c. financial futures contract d. margin call ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:24 AM DATE MODIFIED: 9/29/2016 6:26 AM 2. Interest rate futures are not available on a. Treasury bonds. b. Treasury notes. c. Eurodollar CDs. d. the S&P 500 index.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:27 AM DATE MODIFIED: 9/29/2016 6:29 AM 3. ____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices. a. Hedgers b. Day traders c. Position traders d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:29 AM DATE MODIFIED: 5/8/2018 12:38 AM 4. The initial margin of a futures contract is typically between ____ percent of a futures contract's full value. a. 0 and 2 b. 5 and 18 c. 25 and 40 d. 45 and 60 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:32 AM DATE MODIFIED: 9/29/2016 6:34 AM 5. Futures exchanges take buy or sell positions on futures contracts. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.03 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:35 AM DATE MODIFIED: 9/29/2016 6:36 AM 6. Assume that a T-bill futures contract with a face value of $1 million is purchased at a price of $95.00 per $100 face value. At settlement, the price of T-bills is $95.50. What is the difference between the selling and purchase price of the futures contract? a. $.50 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets b. $50 c. $500 d. $5,000 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 6:37 AM DATE MODIFIED: 5/8/2018 12:39 AM 7. If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today. a. increase; selling b. increase; buying c. decrease, selling d. decrease; purchasing a call option on ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 6:40 AM DATE MODIFIED: 9/29/2016 6:43 AM 8. Financial futures contracts on U.S. securities are ____ by non-U.S. financial institutions. a. not allowed to be traded b. are rarely desired c. are commonly traded d. not allowed to be traded AND are rarely desire ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/29/2016 6:43 AM 5/8/2018 12:39 AM

9. Assume that speculators purchased a futures contract at the beginning of the year. If the price of a security represented by the futures contract ____ over the year, then these speculators would likely have purchased the futures contract for ____ than they can sell it for. a. increased; more b. decreased; less c. remains the same; more d. increased; less ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:13 AM DATE MODIFIED: 9/29/2016 7:15 AM 10. Assume that a futures contract on Treasury bonds with a face value of $100,000 is purchased at 93-00. If the same contract is later sold at 94-18, what is the gain, ignoring transaction costs? a. $1,180,000 b. $118 c. $11,800 d. $15,625 e. $1,562.50 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 7:15 AM DATE MODIFIED: 9/29/2016 7:17 AM 11. The use of financial leverage Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets a. magnifies the positive returns of futures contracts. b. magnifies losses of futures contracts. c. magnifies the positive returns of futures contracts AND magnifies losses of futures contracts. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:17 AM DATE MODIFIED: 5/8/2018 12:40 AM 12. According to the text, when a financial institution sells futures contracts on debt securities in order to hedge against an increase in interest rates, this is referred to as a. a long hedge. b. a short hedge. c. a closed out position. d. basis trading.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:20 AM DATE MODIFIED: 9/29/2016 7:22 AM 13. A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____, and the position in futures contracts will result in a ____. a. increase; gain b. increase; loss c. decrease; gain d. decrease; loss ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:22 AM DATE MODIFIED: 9/29/2016 7:25 AM 14. As applied to the futures markets, the basis is the a. difference between the price of a security and the price of a futures contract on the security. b. gain or loss from hedging with futures contracts. c. difference between a futures contract price and the initial deposit required. d. price paid for a futures contract after accounting for transaction costs. e. price paid for an option contract.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:25 AM DATE MODIFIED: 9/29/2016 7:27 AM 15. Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be ____ affected if interest rates increase. To partially hedge its position, it could ____ futures contracts. a. adversely; purchase b. favorably; sell c. favorably; purchase d. adversely; sell ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:28 AM DATE MODIFIED: 9/29/2016 7:31 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 16. According to the text, using a futures contract on one financial instrument to hedge a position in a different financial instrument is known as a. cross-hedging. b. ratio hedging. c. basis hedging. d. liquid hedging.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:31 AM DATE MODIFIED: 9/29/2016 7:33 AM 17. The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:34 AM DATE MODIFIED: 9/29/2016 7:36 AM 18. In cross-hedging, if the value of the futures contract is more volatile than the portfolio’s value, the amount of principal represented by the futures contracts will be ____ the market value of the portfolio to be hedged. a. smaller than b. greater than c. equal to d. greater than AND equal to ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:36 AM DATE MODIFIED: 5/8/2018 12:41 AM 19. __________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firm desires. a. Credit risk b. Control risk c. Operational risk d. Management risk ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:39 AM DATE MODIFIED: 9/29/2016 7:41 AM 20. Systemic risk reflects the risk that a particular event could a. cause losses at a firm due to inadequate management control. b. spread adverse effects among several firms or among financial markets. c. cause a loss in value due to market conditions. d. have a larger effect on the futures position than on the position being hedged.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:43 AM DATE MODIFIED: 9/29/2016 7:49 AM 21. If a financial institution expects that the market value of its municipal bonds will decline because of economic Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets conditions, it could hedge its position by ____ futures contracts on ____. a. purchasing; Treasury bonds b. purchasing; the S&P 500 Index c. purchasing; the Municipal Bond Index d. selling; the Municipal Bond Index ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 7:49 AM DATE MODIFIED: 9/29/2016 7:52 AM 22. The net gain or loss on a futures contract for a stock index that is not closed out is the difference between the futures price when the initial position was created and the futures price at a. the settlement date. b. the date at which the futures price reaches its maximum. c. the date at which the futures price reaches its minimum. d. the date three months beyond the date when the initial position was taken.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 7:52 AM DATE MODIFIED: 9/29/2016 7:59 AM 23. The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on the S&P 500 index is 1612 at the time of purchase. If the index price is 1619 when the position is closed out, the gain is a. $700. b. $7,000. c. $3,190. d. $3,120. e. $3,500.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 8:10 AM DATE MODIFIED: 9/29/2016 8:13 AM 24. Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund a. liquidates its stocks whenever it expects a market downturn. b. maintains a constant buy position in stock index futures. c. maintains a constant sell position in stock index futures. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 8:14 AM DATE MODIFIED: 5/8/2018 12:43 AM 25. Companies with international trade can hedge ____ by ____ currency futures. a. payables; selling b. receivables; buying c. payables; buying d. payables; selling AND receivables; buying e. receivables; buying AND payables; buying ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets DATE MODIFIED:

5/8/2018 12:44 AM

26. Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the credit (default) risk.

A short position in Treasury bill futures ____ an effective hedge against the credit (default) risk. a. would be; would be b. would be; would not be c. would not be; would not be d. would not be; would be ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 8:22 AM DATE MODIFIED: 9/29/2016 8:25 AM 27. Which of the following statements is incorrect with respect to cross-hedging? a. Even when the futures contract is highly correlated with the portfolio being hedged, the value of the futures contract may change by a higher or lower percentage than the portfolio's market value. b. If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts. c. The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments. d. If the price of the underlying security of the futures contract moves closely in tandem with the security being hedged, the futures contract can provide an effective hedge. e. All of these are correct with respect to cross-hedging.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 8:25 AM DATE MODIFIED: 5/8/2018 12:45 AM 28. ____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.

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Chapter 13: Financial Futures Markets a. Market b. Liquidity c. Credit d. Basis e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:32 AM DATE MODIFIED: 5/8/2018 12:46 AM 29. Trading restrictions imposed on specific stocks or stock indexes are referred to as a. index busters. b. index options. c. circuit breakers. d. protective covenants.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:35 AM DATE MODIFIED: 9/29/2016 8:38 AM 30. Currency futures may be purchased to hedge ____ or to capitalize on the expected ____ of that currency against the dollar. a. receivables; appreciation b. receivables; depreciation c. payables; depreciation d. payables; appreciation ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 8:41 AM DATE MODIFIED: 9/29/2016 8:43 AM 31. The values of stock index futures contracts are insulated from market risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 9:07 AM DATE MODIFIED: 9/29/2016 9:47 AM 32. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 9:48 AM DATE MODIFIED: 9/29/2016 9:49 AM 33. The prices of stock index futures a. are always the same as the prices of the stocks representing the index. b. are always a little above the prices of the stocks representing the index. c. are always a little below the prices of the stocks representing the index. d. None of these are correct.

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Chapter 13: Financial Futures Markets ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 9:49 AM DATE MODIFIED: 5/8/2018 12:47 AM 34. The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be a. equal to the prevailing stock prices. b. below the prevailing stock prices. c. above the prevailing stock prices. d. negative.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 9:51 AM DATE MODIFIED: 9/29/2016 9:52 AM 35. Speculators who normally close out their futures positions on the same day that the positions were initiated are referred to as a. day traders. b. hedgers. c. closed-end traders. d. position traders.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/29/2016 9:53 AM 9/29/2016 9:54 AM

36. Speculators in futures contracts that normally maintain their futures positions for extended periods of time (such as weeks or months) are referred to as a. day traders. b. hedgers. c. closed-end traders. d. position traders.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 9:54 AM DATE MODIFIED: 9/29/2016 9:56 AM 37. Which of the following is incorrect regarding organized exchanges trading financial futures contracts? a. Organized exchanges establish and enforce rules for the trading of financial futures contracts. b. Organized exchanges ensure that the seller of the futures contract always delivers the securities covered by the contract, whether the contract was settled prior to the settlement date or not. c. Organized exchanges clear, settle, and guarantee all transactions that occur on their exchanges. d. The operations of financial futures exchanges are regulated by the Commodity Futures Trading Commission (CFTC). e. . All of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 9:56 AM DATE MODIFIED: 5/8/2018 12:47 AM 38. Laura sells an S&P 500 futures contract with a September settlement date when the index is 1750. By the settlement date, the S&P 500 index falls to 1400. The return on Laura's position in the S&P 500 futures contract is ____ percent. a. −20 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets b. −10 c. 25 d. 20 e. 0 ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 9:58 AM DATE MODIFIED: 9/29/2016 10:00 AM 39. Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates will decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____. a. sell; loss b. purchase; gain c. purchase; loss d. sell; gain e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/29/2016 10:00 AM DATE MODIFIED: 5/8/2018 12:48 AM 40. 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 these are correct.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:02 AM DATE MODIFIED: 5/8/2018 12:48 AM 41. Which of the following statements is incorrect? a. Circuit breakers are trading restrictions imposed on specific stocks or stock indexes. b. Circuit breakers guarantee that prices will turn upward. c. Circuit breakers may be able to prevent large declines in prices that would be attributed to panic selling rather than to fundamental forces. d. Circuit breakers may allow investors to determine whether circulating rumors are true.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:04 AM DATE MODIFIED: 9/29/2016 10:05 AM 42. Financial futures contracts on stock indexes are referred to as interest rate futures. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:05 AM DATE MODIFIED: 9/29/2016 10:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 43. Financial futures contracts are rarely sold over the counter. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:07 AM DATE MODIFIED: 9/29/2016 10:08 AM 44. Brokers commonly require margin deposits from their customers above those required by the exchanges. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:08 AM DATE MODIFIED: 9/29/2016 10:10 AM 45. Purchasers of financial futures contracts usually know who the sellers are, and vice versa. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:10 AM DATE MODIFIED: 9/29/2016 10:11 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 46. The futures price is mainly a function of the prevailing price of the underlying security plus an expected adjustment in that price by the settlement date. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:12 AM DATE MODIFIED: 9/29/2016 10:13 AM 47. A financial institution that hedges with interest rate futures is less sensitive to economic events than an institution that does not hedge. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:13 AM DATE MODIFIED: 9/29/2016 10:14 AM 48. A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/29/2016 10:14 AM 9/29/2016 10:16 AM

49. Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:16 AM DATE MODIFIED: 9/29/2016 10:17 AM 50. Stock index futures cannot be closed out before the settlement date. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:17 AM DATE MODIFIED: 5/8/2018 12:49 AM 51. The value of a stock index futures contract has little correlation with the value of the underlying stock index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/29/2016 10:19 AM 9/29/2016 10:20 AM

52. Since stock index futures prices are primarily driven by movements in the corresponding stock indexes, participants in stock index futures monitor indicators that may signal changes in the stock indexes. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:38 AM DATE MODIFIED: 9/29/2016 10:40 AM 53. The price of stock index futures may reflect investor expectations about the market more rapidly than stock prices. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:40 AM DATE MODIFIED: 9/29/2016 10:41 AM 54. Financial futures contracts on U.S. securities are commonly traded by non-U.S. financial institutions that maintain holdings of U.S. securities. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:42 AM DATE MODIFIED: 9/29/2016 10:43 AM 55. Purchasers of currency futures contracts are required to hold the contract until the settlement date and accept delivery of the foreign currency at that time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:43 AM DATE MODIFIED: 9/29/2016 10:44 AM 56. Which of the following statements is incorrect regarding single stock futures? a. Investors who expect a particular stock’s price to decline over time can sell futures contracts on that stock, or they can sell the stock short. b. Single stock futures are available only on stocks of companies that are in the S&P 500 index. c. Single stock futures are traded in the United States at OneChicago. d. Single stock futures are regulated by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission. e. All of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:44 AM DATE MODIFIED: 5/8/2018 12:49 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets 57. Stock index futures are priced ____ than the stock index itself. a. higher b. lower c. either higher or lower d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:46 AM DATE MODIFIED: 5/8/2018 12:49 AM 58. An unexpected ____ in the consumer price index tends to create expectations of ____ interest rates and places ____ pressure on Treasury bond futures prices. a. increase; higher; downward b. increase; lower; downward c. increase; higher; upward d. decrease; higher; downward e. none of the above ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:48 AM DATE MODIFIED: 9/29/2016 10:50 AM 59. Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12. Two months later, Baher sells the same futures contract in order to close out the position. At that time, the futures contract specifies 103-15.

What is Baher's nominal profit? The par value of the futures contract is $100,000. a. $1,030.00; profit b. $1,030.00; loss c. $1,093.75; profit d. $1,093.75; loss e. None of these are correct.

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Chapter 13: Financial Futures Markets ANSWER: c POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 10:50 AM DATE MODIFIED: 5/8/2018 12:50 AM 60. Clarke Company plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million.

However, Clarke is concerned that interest rates might increase over the next three months. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells ____ futures contract for a price of 99-12.

Assuming that the actual price of the futures contract declines to 97-20, Clarke would make a ____ of $____ from closing out the futures position. a. 40; profit; $76,800 b. 40; loss; $76,800 c. 50; profit; $70,000 d. 40; profit; $70,000 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/29/2016 10:52 AM DATE MODIFIED: 5/8/2018 12:50 AM 61. _________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions. a. Speculators; hedgers b. Hedgers; speculators c. Arbitrageurs; speculators d. Hedgers; arbitrageurs ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:54 AM DATE MODIFIED: 9/29/2016 10:56 AM 62. Some specialized futures contracts are sold over the counter, whereas standardized financial futures contracts are traded on exchanges. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 10:56 AM DATE MODIFIED: 9/29/2016 10:58 AM 63. A financial institution that wishes to reduce its exposure to the possibility of declining interest rates might use: a. a long hedge b. a short hedge c. a day hedge d. index arbitrage ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 10:58 AM DATE MODIFIED: 5/8/2018 12:51 AM 64. Settlement of stock index futures contracts occurs through delivery of the underlying securities. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 11:00 AM DATE MODIFIED: 9/29/2016 11:01 AM 65. ___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises. a. Dynamic asset allocation b. Cross-hedging c. Index arbitrage d. Net hedging ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 11:02 AM DATE MODIFIED: 9/29/2016 11:03 AM 66. Which of the following is NOT a type of risk associated with futures contracts? a. basis risk b. liquidity risk c. market risk d. postpayment risk ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 11:03 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 13: Financial Futures Markets DATE MODIFIED:

5/8/2018 12:51 AM

67. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.13.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 11:06 AM DATE MODIFIED: 9/29/2016 11:07 AM

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Chapter 14: Options Markets 1. A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time. a. call option b. put option c. sale of a futures contract d. purchase of a futures contract ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:28 AM DATE MODIFIED: 9/23/2016 2:29 AM 2. A ____ requires a premium above and beyond the price to be paid for the financial instrument. a. futures contract b. call option c. put option d. call option AND put option ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:40 AM DATE MODIFIED: 5/8/2018 12:55 AM 3. A put option is "out of the money" when the a. market price of the security exceeds the exercise price. b. market price of the security equals the exercise price. c. market price of the security is less than the exercise price. d. premium on the option is less than the exercise price.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 9/23/2016 2:43 AM 9/23/2016 2:43 AM

4. When the market price of the underlying security exceeds the exercise price, a a. call option is in the money. b. put option is in the money. c. call option is at the money. d. call option is out of the money.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:45 AM DATE MODIFIED: 9/23/2016 2:45 AM 5. Sellers (writers) of call options can offset their position at any point in time by a. selling a put option on the same stock. b. buying identical call options. c. selling additional call options on the same stock. d. All of these are correct. e. selling a put option on the same stock AND buying identical call options.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:46 AM DATE MODIFIED: 5/8/2018 12:56 AM 6. The ____ is the most important exchange for trading options. a. New York Stock Exchange (NYSE) b. Chicago Board Options Exchange (CBOE) c. Boston Options Exchange d. NYSE MKT ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 2:50 AM DATE MODIFIED: 9/23/2016 2:50 AM 7. The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:02 AM DATE MODIFIED: 9/23/2016 3:02 AM 8. ____ execute transactions desired by investors and trade stock options for their own account. a. Floor brokers b. Discount brokers c. Market makers d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:04 AM DATE MODIFIED: 5/8/2018 12:57 AM 9. A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even? a. $50 b. $58 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets c. $52 d. $53 e. $49 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:06 AM DATE MODIFIED: 9/23/2016 3:07 AM 10. A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time? a. $4 b. $3 c. $2 d. $2 e. $3 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 3:08 AM DATE MODIFIED: 9/23/2016 3:09 AM 11. A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? a. $26 b. $34 c. $28 d. $29 e. $32 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:18 AM DATE MODIFIED: 9/23/2016 4:19 AM 12. The ____, the higher the call option premium, other things being equal. a. lower the existing price of the security relative to the exercise price b. lower the variability of the security's market price c. longer the maturity of the option d. lower the existing price of the security relative to the exercise price AND lower the variability of the security's market price ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:21 AM DATE MODIFIED: 5/8/2018 1:11 AM 13. The longer the time to maturity, the ____ the call option premium and the ____ the put option premium. a. higher; lower b. lower; higher c. higher; higher d. lower; lower ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:23 AM DATE MODIFIED: 5/8/2018 1:12 AM 14. The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium. a. higher; lower Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets b. lower; higher c. higher; higher d. lower; lower ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:34 AM DATE MODIFIED: 9/23/2016 4:35 AM 15. The sale of a call option on a stock the seller already owns is referred to as a. a covered call. b. a naked call. c. call on futures. d. futures on options.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:37 AM DATE MODIFIED: 9/23/2016 4:38 AM 16. Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)? a. $4 gain b. $6 loss c. $2 loss d. $1 gain e. $0 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 9/23/2016 4:40 AM 9/23/2016 4:41 AM

17. Covered call writing ____ the upside potential return and ____ the risk of an investment in stock. a. increases; increases b. increases; decreases c. limits; increases d. limits; decreases ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:43 AM DATE MODIFIED: 9/23/2016 4:43 AM 18. Put options are typically used to hedge when portfolio managers are mainly concerned about a. a permanent decline in a stock's value. b. a permanent increase in a stock's value. c. a temporary decline in a stock's value. d. a temporary increase in a stock's value.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:44 AM DATE MODIFIED: 9/23/2016 4:45 AM 19. A speculator purchases a put option on Treasury bond futures with a September delivery date with an exercise price of 85-00. The option has a premium of 2-00. Assume that the price of the futures contract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain? a. $1,968.75 b. $3,750.00 c. $3,000.00 d. $2,000.00 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets e. $1,000.00 ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:46 AM DATE MODIFIED: 9/23/2016 4:47 AM 20. Assume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 times the index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract? a. $15,000 b. $7,500 c. $3,300 d. $4,000 e. $1,500 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:48 AM DATE MODIFIED: 9/23/2016 4:50 AM 21. Corporations involved in international business transactions can ____ to hedge future ____. a. sell currency call options; payables b. purchase currency put options; receivables c. purchase currency call options, receivables d. purchase currency put options, payables e. sell currency call options; payables AND purchase currency put options; receivables ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 4:51 AM 5/8/2018 1:13 AM

22. If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due. a. exercise the option; greater b. exercise the option; less c. let the option expire; greater d. let the option expire; less e. exercise the option; greater AND let the option expire; less ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:54 AM DATE MODIFIED: 5/8/2018 1:13 AM 23. Speculators purchase currency ____ on currencies they expect to ____ against the dollar. a. call options; weaken b. put options; strengthen c. futures; weaken d. put options; weaken ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:56 AM DATE MODIFIED: 9/23/2016 4:56 AM 24. Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar. a. put; strengthen b. put; weaken c. call; strengthen d. call; weaken Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets e. put; strengthen AND call; weaken ANSWER: e POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 4:58 AM DATE MODIFIED: 5/8/2018 1:14 AM 25. European-style stock options a. are long-term options (at least one year until expiration at the time they are created). b. can be exercised after the expiration date. c. can be exercised any time until the expiration date. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False DATE CREATED: 9/23/2016 5:01 AM DATE MODIFIED: 5/8/2018 1:14 AM 26. A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator? a. 25 percent b. 25 percent c. 3.2 percent d. 2.9 percent ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:02 AM DATE MODIFIED: 9/23/2016 5:02 AM 27. The premium on an existing call option should ____ when the underlying stock price decreases. a. be negative Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:04 AM DATE MODIFIED: 5/8/2018 1:15 AM 28. The premium on an existing put option should ____ when the underlying stock price increases. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:06 AM DATE MODIFIED: 5/8/2018 1:16 AM 29. The premium on an existing put option should ____ when there is an increase in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:08 AM DATE MODIFIED: 5/8/2018 1:16 AM 30. The premium on an existing call option should ____ when there is a reduction in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:11 AM DATE MODIFIED: 5/8/2018 1:17 AM 31. The premium on an existing put option should ____ when there is a reduction in the expected short-term volatility of the stock price. a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:13 AM DATE MODIFIED: 5/8/2018 1:17 AM 32. The premium on an existing call option should ____ when there is an increase in the expected short-term volatility of the stock price.

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Chapter 14: Options Markets a. be negative b. decline c. increase d. be unaffected e. be negative AND decline ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:18 AM DATE MODIFIED: 5/8/2018 1:18 AM 33. When a stock index option is exercised, the cash payment is equal to a specified dollar amount a. multiplied by the index level. b. multiplied by the exercise price. c. multiplied by the difference between the index level and the exercise price. d. multiplied by the sum of the index level and the exercise price.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:20 AM DATE MODIFIED: 9/23/2016 5:21 AM 34. 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 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.05 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 9/23/2016 5:22 AM 9/23/2016 5:22 AM

35. Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____. a. available; in numerous non-U.S. countries b. not available; in numerous non-U.S. countries c. available; only in the United States d. not available; only in the United States ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:24 AM DATE MODIFIED: 9/23/2016 5:24 AM 36. Which of the following is NOT a difference between purchasing an option and purchasing a futures contract? a. The option requires that a premium be paid in addition to the price of the financial instrument. b. Owners of options can choose to let the option expire on the so-called expiration date without exercising it. c. The fulfillment of futures contracts is regulated by exchanges, while the fulfillment of options is not. d. All of these are differences between purchasing an option and purchasing a futures.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 5/8/2018 1:19 AM 37. Marcie purchases a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, Marcie decides to exercise the option and closes out the position by selling an identical futures contract. Marcie's net gain from this strategy is $____. a. 2,687.50 b. 2,687.50 c. 2,375.00 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets d. 7,437.50 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 5/8/2018 1:20 AM 38. Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $____. a. 2,687.50 b. 2,687.50 c. 2,375.00 d. 7,437.50 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 5/8/2018 1:20 AM 39. Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____. a. 406.25 b. 4,718.75 c. 4,718.75 d. 812.50 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 5/8/2018 1:21 AM 40. Which of the following is NOT an assumption underlying the Black-Scholes option-pricing model? a. The risk-free rate is known and constant over the life of the option. b. The probability distribution of stock prices is lognormal. c. The world is risk-neutral. d. The variability of a stock's return is constant. e. There are no transaction costs involved in trading options.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.APP NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 5/8/2018 1:21 AM 41. Which of the following is NOT true with respect to market makers? a. They benefit from the spread. b. They may earn profits when they take positions in options. c. They are not subject to a risk of loss on their positions in options. d. All of these are true with respect to market makers.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:00 AM DATE MODIFIED: 5/8/2018 1:23 AM 42. Option trading is regulated by the a. Options Clearing Corporation.

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Chapter 14: Options Markets b. International Securities Exchange. c. Securities and Exchange Commission. d. Federal Reserve.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:11 AM DATE MODIFIED: 9/23/2016 6:12 AM 43. On an exchange, option trades can be executed: a. by a floor broker b. electronically c. by a market maker d. All of these are correct. e. by a floor broker AND electronically ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:13 AM DATE MODIFIED: 5/8/2018 1:25 AM 44. When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked." a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:16 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

9/23/2016 6:16 AM

45. Backdating occurs when CEOs (or other executives) reset the date that their options were granted to an earlier date when the stock price was lower. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:18 AM DATE MODIFIED: 9/23/2016 6:18 AM 46. The motive for CEOs to backdate options is that it allows them to exercise the options at a lower exercise price. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:19 AM DATE MODIFIED: 9/23/2016 6:20 AM 47. Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE CREATED: DATE MODIFIED:

9/23/2016 6:21 AM 9/23/2016 6:23 AM

48. The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:23 AM DATE MODIFIED: 9/23/2016 6:23 AM 49. A call option is said to be at the money when the market price of the underlying security exceeds the exercise price. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 6:24 AM DATE MODIFIED: 9/23/2016 6:25 AM 50. Market makers can execute stock option transactions for customers but do not trade stock options for their own account. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE CREATED: DATE MODIFIED:

9/23/2016 6:26 AM 9/23/2016 6:26 AM

51. American-style stock options can be exercised only just before expiration. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:13 AM DATE MODIFIED: 9/23/2016 7:13 AM 52. An option with a higher exercise price has a higher call option premium and a lower put option premium. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:15 AM DATE MODIFIED: 9/23/2016 7:15 AM 53. Several call options are available for a given stock, and the risk-return potential will vary among them a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

9/23/2016 7:17 AM

54. The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:19 AM DATE MODIFIED: 9/23/2016 7:19 AM 55. The longer a call option's time to maturity, the lower the call option premium, other things being equal. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:20 AM DATE MODIFIED: 9/23/2016 7:20 AM 56. The results with covered call writing are better than without covered call writing when the stock performs poorly and better when the stock performs well. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:21 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

9/23/2016 7:22 AM

57. Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline in a stock's value. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:23 AM DATE MODIFIED: 9/23/2016 7:23 AM 58. An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:24 AM DATE MODIFIED: 9/23/2016 7:24 AM 59. Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:26 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets DATE MODIFIED:

9/23/2016 7:26 AM

60. Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:27 AM DATE MODIFIED: 9/23/2016 7:27 AM 61. Speculators sell call options on currencies that they expect to strengthen against the dollar. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:29 AM DATE MODIFIED: 9/23/2016 7:29 AM 62. A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must reach a certain minimum level. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:31 AM DATE MODIFIED: 9/23/2016 7:32 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets 63. Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium. a. higher; higher; higher b. higher; higher; lower c. higher; lower; higher d. lower; lower; higher e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:33 AM DATE MODIFIED: 5/8/2018 1:25 AM 64. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:37 AM DATE MODIFIED: 9/23/2016 7:38 AM 65. The ____ is not a factor affecting the call option premium. a. market price of the underlying instrument (relative to the option's exercise price) b. volatility of the underlying instrument c. current price of futures contracts on the underlying instrument d. time to maturity of the call option ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:39 AM DATE MODIFIED: 9/23/2016 7:40 AM 66. Speculators who anticipate a decline in interest rates may consider ____ a ____ option on Treasury bond futures. a. purchasing; put b. selling; call c. purchasing; call d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:41 AM DATE MODIFIED: 5/8/2018 1:26 AM 67. Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 97-00. The premium paid for the put option is 3-00. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 89-00. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad's net gain from this speculative strategy is $____, and his return on his investment is about _______ percent. a.  b. 11,000; 27 c. 5,000; −167 d.  e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:43 AM DATE MODIFIED: 5/8/2018 1:27 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets 68. Which of the following statements is incorrect? a. Some firms allowed their CEOs to backdate options that they were granted to an earlier period when the stock price was lower. b. Backdating is completely inconsistent with the idea of granting options to encourage managers to focus on maximizing the stock price. c. Firms readily promote their option compensation programs and are more than willing to acknowledge that the options are an expense. d. All of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:46 AM DATE MODIFIED: 5/8/2018 1:27 AM 69. The purchaser of an American-style put option is always better off exercising the option at the expiration date than before that date. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:49 AM DATE MODIFIED: 9/23/2016 7:50 AM 70. Which of the following does NOT directly affect a call option premium? a. volatility of the underlying instrument b. market price of the underlying instrument c. analyst rating of the underlying instrument d. time to maturity of the option ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 14: Options Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 7:51 AM 5/8/2018 1:28 AM

71. Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:57 AM DATE MODIFIED: 9/23/2016 7:57 AM 72. Which of the following can normally be found in quotations for stock options provided by the financial media? a. exercise price, expiration date, and implied volatility b. exercise price, expiration date, and most recently quoted premium c. expiration date, implied volatility, and trading volume d. expiration date, most recently quoted premium, and implied volatility ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.14.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 DATE CREATED: 9/23/2016 7:59 AM DATE MODIFIED: 9/23/2016 8:00 AM

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Chapter 15: Swap Markets 1. Financial institutions with ____ interest rate–sensitive liabilities than assets are ____ affected by rising interest rates. a. more; adversely b. fewer; adversely c. more; favorably d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 2:54 AM DATE MODIFIED: 5/8/2018 1:41 AM 2. Which of the following statements is incorrect? a. Interest rate swaps are sometimes used by financial institutions and other firms for speculative purposes. b. A primary reason for the popularity of interest rate swaps is the existence of market imperfections. c. Swaps are necessary for some financial institutions to obtain the maturities or rate sensitivities on funds that they desire. d. Most financial institutions that anticipate that interest rates will move in an unfavorable direction do not hedge their positions.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 2:57 AM DATE MODIFIED: 9/23/2016 2:58 AM 3. Savings institutions participate in the swap market primarily to a. serve as an intermediary by matching up two parties in a swap. b. serve as a dealer by taking the counterparty position in a swap. c. reduce interest rate risk. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 2:58 AM DATE MODIFIED: 5/8/2018 1:42 AM 4. In a swap arrangement, the most common index used for floating-rate payments is the a. coupon rate on existing bonds. b. stock dividend rate based on a U.S. stock index. c. London Interbank Offer Rate (LIBOR). d. Treasury bond yield.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:00 AM DATE MODIFIED: 9/23/2016 3:02 AM 5. The most likely users of plain vanilla swaps would be a. commercial banks that focus on short-term consumer loans. b. savings institutions. c. manufacturing companies. d. municipal governments.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:02 AM DATE MODIFIED: 5/8/2018 1:47 AM 6. Swap transactions are only used to Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets a. hedge against upward interest rate movements. b. hedge against downward interest rate movements. c. speculate. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:03 AM DATE MODIFIED: 5/8/2018 1:48 AM 7. If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments. a. fixed-rate; floating-rate b. fixed-rate euro; fixed-rate dollar c. stock dividend; fixed-rate d. stock dividend; floating-rate ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:05 AM DATE MODIFIED: 9/23/2016 3:06 AM 8. A(n) ____ swap allows the party making fixed payments to extend the swap period. a. forward b. extendable c. callable d. putable ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 3:07 AM 9/23/2016 3:09 AM

9. A(n) ____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity. a. forward b. extendable c. callable d. putable ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:09 AM DATE MODIFIED: 9/23/2016 3:11 AM 10. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:11 AM DATE MODIFIED: 9/23/2016 3:13 AM 11. The option on a callable swap would most likely be exercised if interest rates a. rise. b. fall. c. remain constant.

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Chapter 15: Swap Markets d. remain somewhat stable.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:13 AM DATE MODIFIED: 9/23/2016 3:15 AM 12. The option on a putable swap would most likely be exercised if interest rates a. rise. b. fall. c. remain constant. d. remain somewhat stable.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:18 AM DATE MODIFIED: 9/23/2016 3:19 AM 13. A(n) ____ swap involves an exchange of interest payments over a swap period that does not begin until a specified future point in time. a. forward b. extendable c. callable d. putable ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/23/2016 3:19 AM 9/23/2016 3:21 AM

14. Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a ratecapped swap, its ____ payments will be capped, and it will ____ an up-front premium in exchange for the cap. a. outflow; receive b. outflow; pay c. inflow; pay d. inflow; receive ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:21 AM DATE MODIFIED: 9/23/2016 3:23 AM 15. An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:23 AM DATE MODIFIED: 9/23/2016 3:24 AM 16. Assume a U.S. savings institution funds its fixed-rate mortgages by attracting short-term deposits. If it engages in an interest rate swap, but the index on the swap does not move in perfect tandem with its cost of deposits, this reflects: a. sovereign risk b. basis risk c. credit risk d. None of these are correct.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:25 AM DATE MODIFIED: 5/8/2018 1:49 AM 17. ____ risk prevents an interest rate swap from completely eliminating a financial institution's exposure to interest rate risk. a. Credit b. Basis c. Sovereign d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:27 AM DATE MODIFIED: 5/8/2018 1:49 AM 18. ____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party. a. Basis b. Credit c. Sovereign d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE CREATED: DATE MODIFIED:

9/23/2016 3:29 AM 5/8/2018 1:50 AM

19. Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:31 AM DATE MODIFIED: 9/23/2016 3:33 AM 20. In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions. a. many; lower b. many; higher c. few; lower d. few; higher ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:33 AM DATE MODIFIED: 9/23/2016 3:35 AM 21. An interest rate swap agreement indicates the ____ value, is represents the principal amount to which interest rates are applied to determine the interest payments involved. a. vanilla b. LIBOR c. programmed d. notional ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:23 AM DATE MODIFIED: 9/23/2016 4:25 AM 22. Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns. a. increase; increase b. increase; reduce c. reduce; increase d. reduce; reduce ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:26 AM DATE MODIFIED: 9/23/2016 4:28 AM 23. An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments. a. callable swap b. putable swap c. zero-coupon for floating swap d. forward swap ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:28 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE MODIFIED:

9/23/2016 4:30 AM

24. The advantage of a rate-capped interest rate swap (relative to a plain vanilla swap) to the party exchanging fixed payments for floating payments is that a. there is a minimum limit set on interest rate payments received. b. there is a maximum limit set on the interest payments it will provide. c. it receives an up-front fee. d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:31 AM DATE MODIFIED: 5/8/2018 1:50 AM 25. A plain vanilla swap enables firms to exchange ____ for ____. a. fixed-rate payments; floating-rate payments b. a high interest rate foreign currency; a low interest rate foreign currency c. a low interest rate foreign currency; a high interest rate foreign currency d. bonds; stocks that pay dividends ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:33 AM DATE MODIFIED: 9/23/2016 4:35 AM 26. An arrangement that enables firms to exchange currencies at periodic intervals is called a(n) a. currency swap. b. interest rate swap. c. swap exchange. d. Eurobond swap.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:35 AM DATE MODIFIED: 9/23/2016 4:37 AM 27. When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it a. can match up two parties but cannot take a position in the swap. b. can match up two parties or can take a position in the swap. c. cannot match up two parties and cannot take a position in the swap. d. cannot match up two parties but can take a position in the swap.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:37 AM DATE MODIFIED: 9/23/2016 4:38 AM 28. An equity swap involves the exchange of a. preferred stock for common stock. b. interest payments for an equity position in the counterparty's firm. c. interest payments for payments linked to the degree of change in a stock index. d. interest payments for newly issued stock by financial institutions.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:39 AM DATE MODIFIED: 9/23/2016 4:40 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 29. A firm is involved in an agreement whereby it receives payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has a. purchased an interest rate cap. b. sold an interest rate cap. c. purchased an interest rate floor. d. sold an interest rate floor.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:41 AM DATE MODIFIED: 9/23/2016 4:42 AM 30. The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates. a. favorably; rising b. favorably; falling c. adversely; rising d. adversely; falling ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:43 AM DATE MODIFIED: 9/23/2016 4:44 AM 31. A firm is involved in an agreement whereby it makes payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has a. purchased an interest rate cap. b. sold an interest rate cap. c. purchased an interest rate floor. d. sold an interest rate floor.

ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:44 AM DATE MODIFIED: 9/23/2016 4:46 AM 32. A firm is involved in an agreement whereby it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has a. purchased an interest rate cap. b. sold an interest rate cap. c. purchased an interest rate floor. d. sold an interest rate floor.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:46 AM DATE MODIFIED: 9/23/2016 4:48 AM 33. An interest rate collar involves the ____ of an interest rate cap and the simultaneous ____ of an interest rate floor. a. sale; sale b. sale; purchase c. purchase; purchase d. purchase; sale ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:48 AM DATE MODIFIED: 9/23/2016 4:50 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 34. Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate– sensitive ____ than ____ and therefore were adversely affected by ____ interest rates. a. assets; liabilities; increasing b. liabilities; assets; decreasing c. liabilities; assets; increasing d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:50 AM DATE MODIFIED: 5/8/2018 1:51 AM 35. The Bank of Moronto has negotiated a plain vanilla swap whereby it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million? a. $600,000 b. $600,000 c. $450,000 d. $450,000 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:52 AM DATE MODIFIED: 5/8/2018 1:51 AM 36. Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent over the year, Hewitt will a. have to make a payment of $70,000. b. have to make a payment of $90,000.

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Chapter 15: Swap Markets c. receive a payment of $70,000. d. receive a payment of $90,000. e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:57 AM DATE MODIFIED: 5/8/2018 1:52 AM 37. Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. LIBOR is 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The total payments received (or paid) by Lizard, including the initial fee, are $____. a. 500,000 b. 500,000 c. 1,500,000 d. 1,500,000 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:59 AM DATE MODIFIED: 5/8/2018 1:52 AM 38. In a ____, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract. a. default option contract b. default futures contract c. bankruptcy contract d. credit default swap ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:01 AM DATE MODIFIED: 9/23/2016 5:02 AM 39. A common maturity of a credit default swap contract is: a. one month b. three months c. five years d. 25 years ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:03 AM DATE MODIFIED: 9/23/2016 5:04 AM 40. AIG's financial problems during the credit crisis were attributed to: a. its weak returns on its investments in junk bonds. b. its potential losses from its life insurance policies. c. fraud from avoiding taxes on its gains from credit default swaps. d. its potential losses from credit default swaps.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:04 AM DATE MODIFIED: 9/23/2016 5:06 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 41. The primary purpose of interest rate swaps is to reduce exchange rate risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:06 AM DATE MODIFIED: 9/23/2016 5:11 AM 42. A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:12 AM DATE MODIFIED: 9/23/2016 5:13 AM 43. A putable swap gives the party making the fixed-rate payments the right to terminate the swap. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:14 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE MODIFIED:

9/23/2016 5:22 AM

44. A rate-capped swap may limit the fixed-rate payer's ability to effectively hedge against interest rate risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:22 AM DATE MODIFIED: 9/23/2016 5:23 AM 45. An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:24 AM DATE MODIFIED: 9/23/2016 5:25 AM 46. Systemic risk is the risk that a firm involved in an interest rate swap may not meet its payment obligations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/23/2016 5:25 AM 9/23/2016 5:27 AM

47. If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:27 AM DATE MODIFIED: 9/23/2016 5:28 AM 48. The most common proxy for the benchmark rate from which a floating-rate payment is determined is the prime rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/23/2016 5:29 AM DATE MODIFIED: 9/23/2016 5:30 AM 49. Interest rate swaps are rarely used by companies that issue bonds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 5:31 AM 9/23/2016 5:32 AM

50. An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:32 AM DATE MODIFIED: 9/23/2016 5:34 AM 51. Interest rate floors are commonly used to hedge against lower interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:34 AM DATE MODIFIED: 9/23/2016 5:36 AM 52. An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 9/23/2016 5:37 AM 53. Which of the following is not a typical provision of an interest rate swap? a. the notional principal value to which the interest rates are applied to determine the interest payments involved b. the fixed interest rate c. the formula and type of index used to determine the floating interest rate d. the underwriter of the bond e. All of these are provisions of an interest rate swap.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 5/8/2018 1:53 AM 54. A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time. a. plain vanilla b. zero-coupon-for-floating c. forward d. seasoned vanilla e. putable ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 9/23/2016 5:42 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets 55. If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterparty is likely adversely affected by ____ interest rates. a. increase; increasing b. increase; declining c. decrease; declining d. decrease; increasing e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 5/8/2018 1:54 AM 56. A(n) ____ swap provides the party making the floating-rate payments with a right to terminate the swap. a. callable b. extendable c. plain vanilla d. putable e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 5/8/2018 1:54 AM 57. Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps. a. caps b. floors c. collars d. All of these are correct.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:46 AM DATE MODIFIED: 5/8/2018 1:55 AM 58. Which of the following is not a reason why financial institutions engage in interest rate swaps? a. to reduce interest rate risk b. to act as an intermediary c. to act as a dealer in swaps d. All of these are reasons why financial institutions engage in swaps.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:49 AM DATE MODIFIED: 5/8/2018 1:56 AM 59. A financial institution may participate in the swaps markets by a. serving as an intermediary by matching up parties that wish to engage in a swap. b. engaging in swaps to reduce interest rate risk. c. assuming the credit risk involved in a swap by guaranteeing that the payments will be made. d. serving as an intermediary by matching up parties that wish to engage in a swap AND engaging in swaps to reduce interest rate risk.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets DATE MODIFIED:

5/8/2018 1:56 AM

60. The London Interbank Offer Rate (LIBOR) varies among currencies. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:55 AM DATE MODIFIED: 9/23/2016 5:56 AM 61. During the credit crisis, many mortgage-backed securities defaulted, generating large profits for sellers of credit default swaps and large losses for buyers of the swaps. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:56 AM DATE MODIFIED: 9/23/2016 5:58 AM 62. After the credit crisis, new rules and regulations were issued to reform the swap markets. Which of the following is NOT one of the requirements of these new rules and regulations? a. Dealers and major participants in swaps must register with the Commodities Futures Trading Commission or the Securities and Exchange Commission. b. To make the market more transparent, the majority of swaps are to be traded on electronic platforms called swap execution facilities. c. Credit default swaps can no longer be created for mortgage-backed securities. d. Information about all swaps must be reported to a swap data repository.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 15: Swap Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:59 AM DATE MODIFIED: 5/8/2018 1:58 AM 63. 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 ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.15.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:01 AM DATE MODIFIED: 9/23/2016 6:02 AM

Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets 1. At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it. a. higher than b. lower than c. the same as d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 2:58 AM DATE MODIFIED: 5/8/2018 2:07 AM 2. Which of the following are most likely to provide currency forward contracts to their customers? a. commercial banks b. international mutual funds c. brokerage firms d. insurance companies ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:00 AM DATE MODIFIED: 9/23/2016 3:02 AM 3. The Bretton Woods era was the era a. of free-floating exchange rates. b. of floating rates without boundaries, but subject to government intervention. c. in which governments maintained exchange rates within 1 percent of a specified rate. d. in which exchange rates were maintained within 10 percent of a specified rate.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:02 AM DATE MODIFIED: 9/23/2016 3:04 AM 4. A system whereby exchange rates are market determined without boundaries but subject to government intervention is called a. a dirty float. b. a free float. c. the gold standard. d. the Bretton Woods era.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:11 AM DATE MODIFIED: 9/23/2016 3:12 AM 5. A country that pegs its currency is still able to maintain complete control over its local interest rates. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:13 AM DATE MODIFIED: 9/23/2016 3:14 AM 6. If the demand for British pounds ____, the pound will ____, other things being equal. a. increases; appreciate b. decreases; appreciate c. increases; depreciate Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets d. decreases; appreciate AND increases; depreciate ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:15 AM DATE MODIFIED: 5/8/2018 2:08 AM 7. A(n) ____ in the supply of euros for sale will cause the euro to ____. a. increase; appreciate b. increase; depreciate c. decrease; depreciate d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:17 AM DATE MODIFIED: 5/8/2018 2:09 AM 8. Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries. a. income b. interest rate c. inflation d. tax ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/23/2016 3:19 AM 9/23/2016 3:21 AM

9. In reality, exchange rates do not always change as suggested by purchasing power parity. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:21 AM DATE MODIFIED: 9/23/2016 3:22 AM 10. If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:23 AM DATE MODIFIED: 9/23/2016 3:24 AM 11. When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of a. direct intervention. b. indirect intervention. c. a freely floating system. d. a pegged system.

ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:24 AM DATE MODIFIED: 9/23/2016 3:26 AM 12. Which of the following statements is incorrect? a. Central banks often consider adjusting a currency's value to influence economic conditions. b. If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar. c. A weaker dollar could cause U.S. inflation by reducing foreign competition. d. Direct intervention occurs when the central bank influences the factors that determine the dollar's value.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:27 AM DATE MODIFIED: 9/23/2016 3:29 AM 13. Direct intervention is always extremely effective. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 3:30 AM DATE MODIFIED: 9/23/2016 3:32 AM 14. If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets currencies and would place ____ pressure on the values of foreign currencies (with respect to the dollar). a. increase; upward b. increase, downward c. limit; upward d. limit; downward ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 3:34 AM DATE MODIFIED: 9/23/2016 4:25 AM 15. If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars. a. short; short b. long; short c. short; long d. long; long ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:25 AM DATE MODIFIED: 9/23/2016 4:27 AM 16. Generally, a ____ home currency can ____ domestic economic growth. a. weak; dampen b. strong; stimulate c. strong; dampen d. weak; dampen AND strong; stimulate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:28 AM DATE MODIFIED: 5/8/2018 2:10 AM 17. If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____. a. exceeds; discount b. is below; premium c. is below; discount d. exceeds; discount AND is below; premium ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:30 AM DATE MODIFIED: 5/8/2018 2:11 AM 18. ____ forecasting involves the use of historical exchange rate data to predict future values. a. Technical b. Fundamental c. Market-based d. Mixed ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:32 AM DATE MODIFIED: 9/23/2016 4:33 AM 19. Fundamental forecasting has been found to be consistently superior to the other forecasting techniques. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:33 AM DATE MODIFIED: 9/23/2016 4:35 AM 20. Which of the following is NOT a method of forecasting exchange rate volatility? a. using the volatility of historical exchange rate movements b. using a time series of volatility patterns in previous periods c. using the volatility of future exchange rate movements d. using the exchange rate's implied standard deviation ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:35 AM DATE MODIFIED: 5/8/2018 2:12 AM 21. A speculator who expects the euro to appreciate might a. purchase euros forward; when they are received, sell them in the spot market. b. sell euros forward, and then purchase them in the spot market just before fulfilling the forward obligation. c. sell futures contracts on euros, and then purchase euros in the spot market just before fulfilling the futures obligation. d. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Application 9/23/2016 4:37 AM 5/8/2018 2:13 AM

22. Which of the following statements is incorrect? a. Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date. b. The forward market is located in New York City. c. Many of the commercial banks that offer foreign exchange on a spot basis also offer forward transactions for the widely traded currencies. d. Forward contracts can hedge a corporation's risk that a currency's value may appreciate over time.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:39 AM DATE MODIFIED: 9/23/2016 4:40 AM 23. 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 ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:41 AM DATE MODIFIED: 9/23/2016 4:42 AM 24. Currency futures contracts differ from forward contracts in that they a. are an obligation. b. are not an obligation.

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Chapter 16: Foreign Exchange Derivative Markets c. are standardized. d. can specify any amount and maturity date.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:43 AM DATE MODIFIED: 9/23/2016 4:44 AM 25. If the spot rate ____ the exercise price, a currency ____ option will not be exercised. a. remains below; call b. remains below; put c. remains above; call d. remains below; call AND remains below; put ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:44 AM DATE MODIFIED: 5/8/2018 2:14 AM 26. A pegged exchange rate system is no longer used by any countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:46 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets DATE MODIFIED:

9/23/2016 4:48 AM

27. Assume that a British pound put option has a premium of $.03 per unit and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date, if at all. What is the expected per unit net gain (or loss) resulting from purchasing the put option? a. $.01 loss b. $.09 loss c. $.09 gain d. $.05 gain ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 4:48 AM DATE MODIFIED: 9/23/2016 4:49 AM 28. The speculative risk of purchasing a ____ is that the foreign currency’s value ____ over time. a. put option; increases b. put option; decreases c. call option; increases d. futures contract; increases ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:50 AM DATE MODIFIED: 9/23/2016 4:51 AM 29. According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign country will have a ____. a. higher; discount b. lower; premium c. higher; premium d. higher; discount AND lower; premium ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:51 AM DATE MODIFIED: 5/8/2018 2:14 AM 30. ____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers. a. pension funds b. international mutual funds c. insurance companies d. commercial banks e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 4:53 AM DATE MODIFIED: 5/8/2018 2:16 AM 31. In the Wall Street Journal, you observe that the British pound (£) is quoted at $1.65. The Australian dollar (A$) is quoted at $0.60. What is the value of the Australian dollar in British pounds? a. A$2.75 b. A$0.36 c. £2.75 d. £0.36 e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.10 Bloom's: Application 9/23/2016 4:55 AM 5/8/2018 2:16 AM

32. If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro. a. increase; decline; upward b. increase; decline; downward c. decrease; increase; upward d. decrease; increase; downward e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 4:57 AM DATE MODIFIED: 5/8/2018 2:19 AM 33. Assume the following information.     

Interest rate on borrowed euros is 5 percent annualized.

Interest rate on dollars loaned out is 6 percent annualized.

Spot rate is 1.10 euros per dollar (one euro = $0.909).

Expected spot rate in five days is 1.15 euros per dollar.

Fabrizio Bank can borrow 10 million euros.

If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period is: a. 2,653,597.22 euros b. 455,266.81 euros c. 452,426.04 euros d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Application 9/23/2016 5:01 AM 5/8/2018 2:21 AM

34. A country that pegs its exchange rate to another exchange rate does not have complete control over its interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:05 AM DATE MODIFIED: 9/23/2016 5:06 AM 35. The euro is presently pegged to the British pound in order to stabilize international payments between European countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:06 AM DATE MODIFIED: 9/23/2016 5:08 AM 36. Financial institutions rarely use the forward market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.10 Bloom's: Knowledge 9/23/2016 5:09 AM 9/23/2016 5:11 AM

37. If the quoted cross-exchange rate between two foreign currencies is not aligned with the two corresponding exchange rates, investors can profit from triangular arbitrage. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:11 AM DATE MODIFIED: 9/23/2016 5:12 AM 38. The indirect exchange rate specifies the value of the currency in U.S. dollars. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:12 AM DATE MODIFIED: 9/23/2016 5:14 AM 39. The forward rate premium is dictated by the national income differential of the two currencies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:20 AM DATE MODIFIED: 9/23/2016 5:21 AM 40. The potential benefits from using foreign exchange derivatives are independent of the expected exchange rate movements. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:22 AM DATE MODIFIED: 9/23/2016 5:23 AM 41. The forward rate is the exchange rate for immediate delivery. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:23 AM DATE MODIFIED: 9/23/2016 5:25 AM 42. The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:25 AM DATE MODIFIED: 9/23/2016 5:27 AM 43. The European Central Bank is responsible for setting fiscal policy for all countries in the eurozone. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:27 AM DATE MODIFIED: 9/23/2016 5:28 AM 44. Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:29 AM DATE MODIFIED: 9/23/2016 5:31 AM 45. Central bank intervention can be overwhelmed by market forces and may not always succeed in reversing exchange rate movements. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:31 AM DATE MODIFIED: 9/23/2016 5:32 AM 46. When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:32 AM DATE MODIFIED: 9/23/2016 5:34 AM 47. The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:34 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets DATE MODIFIED:

9/23/2016 5:36 AM

48. The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 9/23/2016 5:38 AM 49. A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when received, sell it in the spot market. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 9/23/2016 5:39 AM 50. The following information refers to Fresno Bank and Champaign Bank.

Fresno Bank Champaign Bank

Bid Rate on Euros $1.002 $0.997

Ask Rate on Euros $1.009 $1.000

Based on this information, locational arbitrage would be profitable. a. True b. False ANSWER: POINTS:

a 1

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Chapter 16: Foreign Exchange Derivative Markets DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 9/23/2016 5:41 AM 51. Purchasing power parity suggests that the forward rate premium (or discount) should be about equal to the differential in interest rates between the countries of concern. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 9/23/2016 5:43 AM 52. ____ are not foreign exchange derivatives. a. Forward contracts b. Currency futures contracts c. Currency swaps d. Currency options e. All of these are foreign exchange derivatives.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 5/8/2018 2:22 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets 53. Which of the following is typically used as the basis of a market-based forecast? a. the currency’s spot rate b. a time-series model showing the currency’s moving average c. the currency’s volatility index d. the currency’s forward rate e. the currency's spot rate AND the currency's forward rate ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:54 AM DATE MODIFIED: 5/8/2018 2:22 AM 54. In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.67. The Australian dollar (A$) is quoted for $0.62. What is the value of the Australian dollar in British pounds? a. A$2.69 b. £0.37 c. £2.69 d. A$0.37 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Application DATE CREATED: 9/23/2016 6:03 AM DATE MODIFIED: 5/8/2018 2:23 AM 55. In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention. a. pegged b. dirty floating c. freely floating d. Bretton Woods e. None of these are correct.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:06 AM DATE MODIFIED: 5/8/2018 2:23 AM 56. The supply and demand for a currency are influenced by all of the following, EXCEPT a. differential interest rates. b. differential inflation rates. c. direct government intervention. d. indirect government intervention. e. All of these affect the supply and demand for a currency.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:09 AM DATE MODIFIED: 5/8/2018 2:24 AM 57. If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro. a. increase; decline; upward b. increase; decline; downward c. decrease; increase; upward d. decrease; increase; downward e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.10 Bloom's: Comprehension 9/23/2016 6:11 AM 5/8/2018 2:25 AM

58. Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity. a. appreciate; 2 b. depreciate; 2 c. appreciate; 4 d. depreciate; 4 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Analysis DATE CREATED: 9/23/2016 6:13 AM DATE MODIFIED: 5/8/2018 2:26 AM 59. The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called a. triangular arbitrage. b. locational arbitrage. c. covered interest arbitrage. d. interest rate parity.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:15 AM DATE MODIFIED: 9/23/2016 6:17 AM 60. The indirect exchange rate is always the reciprocal of the direct exchange rate. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:17 AM DATE MODIFIED: 9/23/2016 6:19 AM 61. The exchange rate between two foreign (nondollar) currencies is known as a(n): a. indirect dollar rate b. forward rate c. cross-exchange rate d. derived exchange rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:19 AM DATE MODIFIED: 5/8/2018 2:26 AM 62. The devaluation of a country’s currenc a. makes foreign products more expensive for consumers in that country. b. increases foreign demand for that country’s exports. c. can lead to deflation in that country. d. makes foreign products more expensive for consumers in that country AND increases foreign demand for that country’s exports.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 Copyright Cengage Learning. Powered by Cognero.

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Chapter 16: Foreign Exchange Derivative Markets KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Comprehension 9/23/2016 6:21 AM 5/8/2018 2:27 AM

63. Currency futures contracts are standardized, whereas forward contracts are more flexible and can specify whatever amount and maturity date are desired. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:23 AM DATE MODIFIED: 9/23/2016 6:25 AM 64. When the Federal Reserve attempts to lower interest rates by increasing the U.S. money supply and has no impact on inflationary expectations, it puts upward pressure on the value of the dollar. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.16.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.10 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:25 AM DATE MODIFIED: 9/23/2016 6:28 AM

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Chapter 17: Commercial Bank Operations 1. Which of the following statements is incorrect? a. Banks have expanded their business across services over time. b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale. c. The banking industry has become less concentrated in recent years. d. All of these statements are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:30 AM DATE MODIFIED: 5/8/2018 2:31 AM 2. Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:33 AM DATE MODIFIED: 9/23/2016 5:35 AM 3. A commercial bank can be a lender or a borrower when using repurchase agreements and loans in the federal funds market. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 5:35 AM 9/23/2016 5:36 AM

4. The operations, management, and regulation of a commercial bank are the same irrespective of the types of services offered. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:36 AM DATE MODIFIED: 9/23/2016 5:38 AM 5. A financial institution is likely to call a callable CD before its maturity if interest rates have risen since the CD was issued. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:38 AM DATE MODIFIED: 5/8/2018 2:31 AM 6. A(n) ____ account provides checking and debit card services as well as interest. a. demand deposit b. negotiable order of withdrawal (NOW) c. passbook savings d. time deposit ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:40 AM DATE MODIFIED: 9/23/2016 5:42 AM 7. Protective covenants impose conditions that require the bank to provide additional loans to a borrower to protect the borrower from going bankrupt. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:42 AM DATE MODIFIED: 9/23/2016 5:44 AM 8. A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, a minimum deposit of $100,000 or more, and a secondary market. a. retail CD b. negotiable CD c. market CD d. protective CD ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:44 AM DATE MODIFIED: 9/23/2016 5:46 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations 9. A bank's sources of funds represent liabilities or equity of the bank. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:47 AM DATE MODIFIED: 9/23/2016 5:49 AM 10. Money market deposit accounts differ from conventional time deposits in that they: a. specify a maturity b. offer limited check-writing privileges c. are less liquid d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:49 AM DATE MODIFIED: 5/8/2018 2:32 AM 11. For any given bank, federal funds ____ represent a(n) ____. a. purchased; asset b. sold; liability c. purchased; liability d. purchased; asset AND sold; liability ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 5:51 AM 5/8/2018 2:33 AM

12. The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity. a. substantially above b. substantially below c. close to d. None of these are correct; the rate is much higher than the Treasury yield in some periods and much lower than the Treasury yield in other periods.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 5:53 AM DATE MODIFIED: 5/8/2018 2:33 AM 13. Obtaining funds through ____ is not a common way for banks to satisfy a temporary deficiency of funds. a. issuing bonds b. the federal funds market c. repurchase agreements d. borrowing from the Federal Reserve ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 5:55 AM DATE MODIFIED: 9/23/2016 5:57 AM 14. The Federal Reserve provides loans to banks in order to a. resolve permanent shortages of funds experienced by banks. b. resolve temporary shortages of funds experienced by banks. c. finance the shortages of funds of finance companies.

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Chapter 17: Commercial Bank Operations d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:24 AM DATE MODIFIED: 5/8/2018 2:34 AM 15. When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a a. federal funds loan. b. discount window loan. c. repurchase agreement. d. commercial paper transaction.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:26 AM DATE MODIFIED: 9/23/2016 6:30 AM 16. When banks need funding for just a few days, they would most likely a. issue bonds and then call them. b. issue stock and then repurchase it. c. borrow in the federal funds market. d. issue NCDs. ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Comprehension 9/23/2016 6:30 AM 9/23/2016 6:32 AM

17. Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:32 AM DATE MODIFIED: 9/23/2016 6:34 AM 18. All other things being equal, when banks issue new stock, they a. increase reported earnings per share. b. decrease their ability to absorb operating losses. c. dilute the ownership of the bank. d. increase reported earnings per share AND decrease their ability to absorb operating losses.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:34 AM DATE MODIFIED: 5/8/2018 2:34 AM 19. Cash held ____ represents the major portion of a bank's required reserves. a. at other commercial banks b. in a bank's vault c. on deposit at the federal funds window d. on deposit with the Board of Governors ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:36 AM DATE MODIFIED: 9/23/2016 6:38 AM 20. The main use of bank funds is for: a. loans b. investment securities c. fixed assets d. repurchase agreements ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:38 AM DATE MODIFIED: 5/8/2018 2:35 AM 21. ____ loans are primarily used to finance the purchase of fixed assets. a. Term b. Working capital c. Informal line of credit d. Revolving credit ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:42 AM DATE MODIFIED: 9/23/2016 6:43 AM 22. Which of the following is most appropriate for a business that may experience a sudden need for funds but does not Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations know precisely when? a. working capital loan b. direct lease loan c. term loan d. informal line of credit ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:44 AM DATE MODIFIED: 9/23/2016 6:45 AM 23. A ____ loan may be especially appropriate when a firm wishes to avoid adding more debt to its balance sheet. a. term b. bullet c. direct lease d. revolving credit ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:46 AM DATE MODIFIED: 9/23/2016 6:47 AM 24. The interest rate banks charge on business loans is known as the: a. federal funds rate b. primary credit lending rate c. prime rate d. call money rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:10 AM DATE MODIFIED: 5/8/2018 2:36 AM 25. Transaction deposits do not include: a. demand deposits. b. NCDs c. NOW accounts d. All of these are transactions deposits.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:13 AM DATE MODIFIED: 5/8/2018 2:40 AM 26. Commercial banks are not allowed to invest in: a. Treasury securities. b. Freddie Mac securities. c. Fannie Mae securities. d. All of these are correct; banks can invest in all of these securities.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:15 AM DATE MODIFIED: 5/8/2018 2:41 AM 27. Money market deposit accounts (MMDAs) a. require a maturity of six months or longer. b. allow a limited number of checks to be written against the account.

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Chapter 17: Commercial Bank Operations c. pay a higher interest rate than CDs. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:24 AM DATE MODIFIED: 5/8/2018 2:42 AM 28. Which of the following types of deposits does NOT allow any check-writing privileges? a. NOW accounts b. money market deposit accounts (MMDAs) c. retail CDs d. All of these allow checks to be written.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:26 AM DATE MODIFIED: 5/8/2018 2:43 AM 29. Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds? a. MMDAs b. federal funds c. the discount window d. retail CDs ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 7:29 AM 9/23/2016 7:31 AM

30. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:31 AM DATE MODIFIED: 9/23/2016 7:33 AM 31. Like other market interest rates, the federal funds rate moves in reaction to changes in demand or supply of funds or both. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:33 AM DATE MODIFIED: 9/23/2016 7:39 AM 32. The yield on repurchase agreements is slightly higher than the federal funds rate at any given point in time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:39 AM DATE MODIFIED: 9/23/2016 7:40 AM 33. Bank regulators are concerned that banks may maintain a higher level of capital than they should and have therefore imposed capital requirements on them. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:41 AM DATE MODIFIED: 9/23/2016 7:44 AM 34. In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:44 AM DATE MODIFIED: 9/23/2016 7:45 AM 35. Bank rates on credit card balances are usually similar to the rate charged on business loans. a. True b. False ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:45 AM DATE MODIFIED: 9/23/2016 7:48 AM 36. The most common way for U.S. commercial banks to expand internationally is by purchasing banks in other countries. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:49 AM DATE MODIFIED: 9/23/2016 7:51 AM 37. ____ is (are) not a major source of funds for commercial banks. a. deposit accounts b. borrowed funds c. commercial loans d. bank capital e. All of these are sources of funds for commercial banks.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:51 AM DATE MODIFIED: 5/8/2018 2:45 AM 38. Which of the following statements is incorrect with respect to the federal funds market?

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Chapter 17: Commercial Bank Operations a. It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions. b. Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them. c. The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed. d. All of these are correct with respect to the federal funds market.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:53 AM DATE MODIFIED: 5/8/2018 2:47 AM 39. The federal funds rate is typically ____ the primary credit lending rate. a. greater than b. less than c. equal to d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:55 AM DATE MODIFIED: 5/8/2018 2:48 AM 40. ____ are the largest bank source of funds as a percentage of total liabilities. a. Small-denomination time deposits b. Money market deposit accounts (MMDAs) c. Transaction deposits d. Borrowed funds e. Savings deposits (including MMDAs) ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:58 AM DATE MODIFIED: 9/23/2016 8:00 AM 41. With a _________, a bank agrees to purchase a firm’s __________ if the firm cannot place the issue in the market at an acceptable interest rate. a. note issuance facility; commercial paper b. note issuance facility; bonds c. paper placement commitment; commercial paper d. bond placement commitment; bonds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 8:01 AM DATE MODIFIED: 9/23/2016 8:04 AM 42. A ____ is a type of loan commitment. a. standby letter of credit (SLC) b. note issuance facility (NIF) c. forward contract d. swap contract e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:08 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DATE MODIFIED:

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43. 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 ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:11 AM DATE MODIFIED: 9/24/2016 1:12 AM 44. When banks obtain funds in the federal funds market, the providers of the funds are a. other depository institutions. b. nonfinancial corporations. c. consumers. d. the Federal Reserve.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:13 AM DATE MODIFIED: 9/24/2016 1:14 AM 45. A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____. a. just a few days; one year or more b. several weeks; one year or more c. several weeks; just a few days d. just a few days; just a few days ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:15 AM DATE MODIFIED: 9/24/2016 1:17 AM 46. The interest rate charged on loans between depository institutions is commonly referred to as the: a. federal funds rate b. discount rate c. primary credit lending rate d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:17 AM DATE MODIFIED: 5/8/2018 2:50 AM 47. The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the: a. federal funds rate b. primary credit lending rate c. repo rate d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:19 AM DATE MODIFIED: 5/8/2018 2:51 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations 48. The primary credit lending rate is determined by a. the Federal Reserve. b. Congress. c. the Treasury. d. the President of the United States.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:21 AM DATE MODIFIED: 9/24/2016 1:22 AM 49. Bank capital represents funds obtained through ____ and through ____. a. issuing stock; offering long-term CDs b. issuing repurchase agreements; issuing bonds c. issuing stock; retaining earnings d. offering long-term CDs; issuing bonds ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:23 AM DATE MODIFIED: 9/24/2016 1:24 AM 50. When a bank obtains funds through ____, households are not a common provider of the funds. a. NOW accounts b. retail CDs c. passbook savings accounts d. NCDs ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:25 AM DATE MODIFIED: 9/24/2016 1:26 AM 51. Which of the following is NOT an off-balance sheet activity? a. highly leveraged transactions (HLTs) b. standby letters of credit c. forward contracts d. swap contracts ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:27 AM DATE MODIFIED: 5/8/2018 2:53 AM 52. A bank's uses of funds represent liabilities of a bank. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:29 AM DATE MODIFIED: 9/24/2016 1:31 AM 53. States may enact _______ to set a maximum on the rate of interest that banks can charge. a. leveraged loan laws b. credit protection laws c. consumer interest laws d. usury laws Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:31 AM DATE MODIFIED: 9/24/2016 1:32 AM 54. The five largest banks in the United States account for about one-tenth of all assets in U.S. banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.03 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:33 AM DATE MODIFIED: 9/24/2016 1:34 AM 55. From a bank manager’s perspective, the differential in interest between a bank’s loans and its deposits a. must not exceed the federal funds rate. b. is called the primary credit lending rate. c. must be sufficient to cover the bank’s other expenses and generate a reasonable profit for the bank’s owners. d. must be sufficient to cover the bank’s deposit insurance premiums and its reserve requirements at the Federal Reserve.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 1:35 AM DATE MODIFIED: 5/8/2018 2:54 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations 56. In a loan participation arrangement, normally all of the participating banks are exposed to credit (default) risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:42 AM DATE MODIFIED: 9/24/2016 1:44 AM 57. Banks will not accept intangible assets, such as patents and brand names, as collateral for commercial loans. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:44 AM DATE MODIFIED: 9/24/2016 1:46 AM 58. Proprietary trading is generally less risky than a bank’s lending operations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:47 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations DATE MODIFIED:

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59. When a bank engages in proprietary trading, it a. uses its own funds to make investments. b. is not subject to regulations. c. lends the funds in the federal funds market. d. normally uses the funds to build its capital.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:48 AM DATE MODIFIED: 5/8/2018 2:58 AM 60. In a standby letter of credit, a bank agrees to a. charge a fixed interest rate for a line of credit for a specified period. b. back a customer’s obligation to a third party. c. provide a customer with funds up to a specified maximum amount over a specified period. d. service credit card loans originated by another bank.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:51 AM DATE MODIFIED: 5/8/2018 2:58 AM 61. A forward contract on currency: a. is a way to hedge credit (default) risk. b. is used to swap fixed interest payments in euros for variable interest payments in dollars. c. is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate. d. is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 17: Commercial Bank Operations POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:53 AM DATE MODIFIED: 9/24/2016 1:55 AM 62. Before establishing foreign branches, a U.S. bank must obtain the approval of the: a. U.S. Treasury b. U.S. Commerce Department. c. Federal Deposit Insurance Corporation. d. Federal Reserve ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.17.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 1:56 AM DATE MODIFIED: 9/24/2016 1:57 AM

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Chapter 18: Bank Regulation 1. Deposit insurance has a limit of: a. $10,000. b. $25,000. c. $100,000. d. $250,000.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:01 AM DATE MODIFIED: 9/24/2016 2:04 AM 2. The opening of a commercial bank in the United States a. does not require a charter. b. always requires a charter from a state government. c. always requires a charter from the federal government. d. requires a charter from a state or the federal government. e. requires a charter from both the state and federal government.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:05 AM DATE MODIFIED: 9/24/2016 2:07 AM 3. National banks are regulated by ____, and state banks are regulated by ____. a. the Comptroller of the Currency; their state agency b. the Comptroller of the Currency; the Comptroller of the Currency c. their state agency; their state agency d. their state agency; the Comptroller of the Currency ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:07 AM DATE MODIFIED: 9/24/2016 2:09 AM 4. All Fed member banks must hold a. private insurance on deposits. b. FDIC insurance on deposits. c. both FDIC and private insurance on deposits. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:09 AM DATE MODIFIED: 5/8/2018 3:06 AM 5. In making loans to a single customer, commercial banks ____ restricted to a maximum percentage of their capital, and they ____ allowed to use borrowed or deposited funds to purchase common stock. a. are; are b. are; are not c. are not; are d. are not; are not ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:11 AM DATE MODIFIED: 9/24/2016 2:12 AM 6. Banks commonly use depositor funds to invest in stocks.

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Chapter 18: Bank Regulation a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:13 AM DATE MODIFIED: 9/24/2016 2:15 AM 7. The liquidity coverage ratio, which is measured under the Basel III guidelines, is the ratio of a bank’s _________ to its ___________. a. liquid assets; projected net cash outflow b. liquid assets; retained earnings c. Tier 1 capital; liquid assets d. projected net cash outflow; Tier 1 capital ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:17 AM DATE MODIFIED: 9/24/2016 2:20 AM 8. The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own a. reserve requirements. b. capital ratios. c. interest rates on savings deposits. d. corporate loan interest rates.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/24/2016 2:20 AM 9/24/2016 2:22 AM

9. The Glass-Steagall Act of 1933 prevented a. any firm that accepts deposits from underwriting stocks and bonds of corporations. b. any firm that accepts deposits from underwriting general obligation bonds of states and municipalities. c. any firm that accepts deposits from holding any corporate bonds in its asset portfolio. d. state-chartered banks from offering commercial loans.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:23 AM DATE MODIFIED: 9/24/2016 2:24 AM 10. Which of the following was NOT achieved by the Depository Institutions Deregulation and Monetary Control Act of 1980? a. removed interest rate ceilings on deposits b. allowed banks to offer NOW accounts c. increased competition among depository institutions d. allowed interstate banking for depository institutions in most states ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:25 AM DATE MODIFIED: 5/8/2018 3:07 AM 11. The Garn-St Germain Act of 1982 a. permitted depository institutions to offer money market deposit accounts. b. prevented depository institutions from acquiring problem institutions across geographic boundaries. c. required the Fed to explicitly charge depository institutions for its services.

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Chapter 18: Bank Regulation d. allowed the Fed to provide check clearing to depository institutions at no charge.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:29 AM DATE MODIFIED: 9/24/2016 2:31 AM 12. Which of the following is NOT a specific criterion that regulators use to monitor banks? a. capital adequacy b. dollar value of fixed assets c. asset quality d. earnings e. sensitivity to financial market conditions ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:31 AM DATE MODIFIED: 5/8/2018 3:07 AM 13. The potential risk that financial problems can spread through financial institutions and the financial system is referred to as ________ risk. a. systemic b. systematic c. unsystematic d. market ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/24/2016 2:34 AM 9/24/2016 2:36 AM

14. The Basel framework recommends that banks maintain capital in proportion to their: a. mortgages b. commercial paper c. liabilities d. risk-weighted assets ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:36 AM DATE MODIFIED: 9/24/2016 2:38 AM 15. In general, a bank defines its value-at-risk as the estimated potential loss from its trading businesses that could result from adverse movements in market prices. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:38 AM DATE MODIFIED: 9/24/2016 2:40 AM 16. Which of the following is an "off-balance-sheet commitment”? a. long-term debt b. additional paid-in capital c. notes payable d. letters of credit backing commercial paper issued by firms ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:40 AM DATE MODIFIED: 9/24/2016 2:42 AM 17. The liquidity component of the CAMELS rating refers to a. how a bank's earnings would change if economic conditions change. b. how readily a bank's management would detect its financial problems. c. a bank's sensitivity to financial market conditions. d. the type of loans that a bank provides, the bank's process for deciding whether to provide loans, and the credit rating of debt securities that it purchases. e. whether a bank frequently needs to borrow from outside sources, such as the discount window.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:42 AM DATE MODIFIED: 9/24/2016 2:45 AM 18. Which of the following is NOT a corrective action that regulators may take when a bank is identified as a problem bank? a. examine the bank frequently and thoroughly b. request that the bank boost its capital level or delay its plans to expand c. require the bank to provide additional financial information that is periodically updated to allow continued monitoring d. take legal action against the bank if it does not comply with their suggested remedies e. All of these are possible corrective actions taken by bank regulators.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:45 AM DATE MODIFIED: 5/8/2018 3:09 AM 19. The fee banks pay to the FDIC for deposit insurance is now a. a fixed dollar amount for all banks. b. a fixed percentage of the bank's deposits for all banks. c. a fixed percentage of the bank's loan volume for all banks. d. based on the risk of the bank.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:48 AM DATE MODIFIED: 5/8/2018 3:10 AM 20. Generally, the failure of small banks a. causes more widespread concern about the safety of the banking system than the failure of large banks. b. causes equal concern about the safety of the banking system as the failure of large banks. c. causes less concern about the safety of the banking system than the failure of large banks. d. EITHER causes more widespread concern about the safety of the banking system than the failure of large banks OR causes equal concern about the safety of the banking system as the failure of large banks can be true, depending on the type of business cycle that exists while the failures occur.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:50 AM DATE MODIFIED: 5/8/2018 3:10 AM 21. The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:53 AM DATE MODIFIED: 9/24/2016 2:55 AM 22. The key reason for regulatory examinations (such as CAMELS ratings) is to a. rate past performance b. detect problems of a bank in time to correct them. c. check for embezzlement. d. monitor reserve requirements.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:55 AM DATE MODIFIED: 9/24/2016 2:57 AM 23. Deposit insurance now covers all bank deposits without any limit. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 2:57 AM DATE MODIFIED: 9/24/2016 2:59 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation 24. Which banking act allowed banks to cross state lines in order to acquire a failing institution? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St Germain Act ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 2:59 AM DATE MODIFIED: 9/24/2016 3:01 AM 25. Which banking act allowed for the creation of NOW accounts? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St Germain Act ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:01 AM DATE MODIFIED: 9/24/2016 3:03 AM 26. Which banking act allowed interstate banking? a. Reigle-Neal Interstate Banking and Branching Efficiency Act b. Glass-Steagall Act c. DIDMCA d. Sarbanes-Oxley Act ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:04 AM DATE MODIFIED: 9/24/2016 3:06 AM 27. Which banking act removed deposit rate ceilings? a. McFadden Act b. Glass-Steagall Act c. DIDMCA d. Garn-St Germain Act ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:07 AM DATE MODIFIED: 9/24/2016 3:07 AM 28. The argument that interstate banking would allow banks to grow and more fully achieve a reduction in operating costs per unit of output as output increases is based on: a. economies of scale b. financial leverage c. diseconomies of scale d. capital adequacy theory ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:09 AM DATE MODIFIED: 5/8/2018 3:11 AM 29. Federal deposit insurance Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation a. has existed since the 1800s. b. was created in 1933. c. was created after World War II. d. was created in 1960.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:12 AM DATE MODIFIED: 5/8/2018 3:12 AM 30. ____ is not a characteristics used by bank regulators to rate banks. a. capital adequacy b. current stock price c. asset quality d. management e. All of these are used to rate banks.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:16 AM DATE MODIFIED: 5/8/2018 3:18 AM 31. The moral hazard problem is minimized when deposit insurance premiums are a. zero (not imposed by the FDIC). b. the same percentage of deposits for all banks. c. set at a fixed percentage of deposits for large banks, and at zero for small banks. d. set at a percentage of deposits that is based on the bank's risk.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:18 AM DATE MODIFIED: 9/24/2016 3:20 AM 32. Which of the following statements is incorrect with respect to the Financial Services Modernization Act of 1999? a. It expanded the Glass-Steagall Act. b. It enabled commercial banks to more easily pursue securities and insurance activities. c. It allowed securities firms and insurance companies to acquire banks. d. It required commercial banks to have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities. e. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:21 AM DATE MODIFIED: 5/8/2018 3:19 AM 33. The ____ is the fund used to cover insured depositors. a. Deposit Insurance Fund b. Federal Deposit Insurance Corporation Fund c. Bank Depository Insurance Fund d. Financial Institution Insurance Fund e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:33 AM DATE MODIFIED: 5/8/2018 3:20 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation 34. ____ is not a rating criterion used by bank regulators. a. Capital adequacy b. Savings deposit volume c. Asset quality d. Management e. Liquidity ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:35 AM DATE MODIFIED: 9/24/2016 3:37 AM 35. The act of taking on more risk because of protection from adverse consequences due to the risk is referred to as a moral hazard problem. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:38 AM DATE MODIFIED: 9/24/2016 3:40 AM 36. The Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more transparent process for reporting on a firm’s productivity and the financial condition. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:40 AM DATE MODIFIED: 9/24/2016 3:42 AM 37. The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:43 AM DATE MODIFIED: 9/24/2016 3:45 AM 38. Publicly traded banks have incurred larger reporting expenses as a result of having to comply with the Sarbanes-Oxley Act. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:45 AM DATE MODIFIED: 9/24/2016 3:47 AM 39. The Financial Services Modernization Act of 1999 a. gave banks and other financial service firms less freedom to merge. b. allowed financial institutions to offer a diversified set of financial services. c. offered very few benefits to a financial institution's clients. d. increased the reliance of financial institutions on the demand for the single service they offer.

ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:47 AM DATE MODIFIED: 9/24/2016 3:49 AM 40. When the Federal Reserve conducts stress tests of banks, it may examine the U.S. operations of foreign-based banks as well as U.S. banks. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 3:49 AM DATE MODIFIED: 9/24/2016 3:51 AM 41. All state banks are required to be members of the Federal Reserve System. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:52 AM DATE MODIFIED: 9/24/2016 3:55 AM 42. State banks are regulated by the Comptroller of the Currency. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:55 AM DATE MODIFIED: 9/24/2016 3:57 AM 43. Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the FDIC. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 3:58 AM DATE MODIFIED: 9/24/2016 4:00 AM 44. Commercial banks are allowed to invest in junk bonds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:00 AM DATE MODIFIED: 9/24/2016 4:02 AM 45. During the credit crisis, banks argued that they should be allowed to use fair value accounting in valuing their assets for purposes of meeting capital requirements.

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Chapter 18: Bank Regulation a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:04 AM DATE MODIFIED: 9/24/2016 4:06 AM 46. The provision of a letter of credit by a bank to back commercial paper issued by a corporation is an example of an offbalance sheet commitment. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:06 AM DATE MODIFIED: 9/24/2016 4:08 AM 47. The Reigle-Neal Interstate Banking and Branching Efficiency Act allowed banks to achieve economies of scale through nationwide interstate banking. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:08 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DATE MODIFIED:

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48. Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affected by rising interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:11 AM DATE MODIFIED: 9/24/2016 4:13 AM 49. During the credit crisis, the U.S. government purchased the common stock of the largest banks in order to inject funds into the banks and cushion their losses. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:13 AM DATE MODIFIED: 9/24/2016 4:15 AM 50. Which of the following was NOT a provision of the Financial Reform Act (Dodd-Frank Act) of 2010? a. established the Financial Stability Oversight Council b. put limits on banks’ proprietary trading c. established the Consumer Financial Protection Bureau d. reestablished the separation between banking and securities activities that had existed under the Glass-Steagall Act e. required derivative securities to be traded through a clearinghouse or exchange ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:16 AM DATE MODIFIED: 5/8/2018 3:20 AM 51. A federal bank charter is issued by the: a. Comptroller of the Currency b. Securities and Exchange Commission c. U.S. Treasury d. Federal Reserve e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:26 AM DATE MODIFIED: 5/8/2018 3:21 AM 52. Bank regulations typically: a. involve a trade-off between the safety of the banking system and the efficiency of bank operations. b. impose restrictions on the types of assets in which banks can invest. c. set requirements for the minimum amount of capital that banks must hold. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:29 AM DATE MODIFIED: 5/8/2018 3:22 AM 53. When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity.

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Chapter 18: Bank Regulation a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:33 AM DATE MODIFIED: 9/24/2016 4:37 AM 54. Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:38 AM DATE MODIFIED: 9/24/2016 4:41 AM 55. A bank can increase its capital ratio by a. buying back shares of its stock from shareholders. b. selling assets. c. increasing its dividend to encourage more investors to purchase its stock. d. increasing its off-balance sheet activities.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DATE CREATED: DATE MODIFIED:

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56. The Basel III framework proposes a. lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis. b. relying on the rating agencies to assess the risk of bank assets. c. increased capital requirements and liquidity requirements for banks. d. using the gap ratio to set the capital ratio.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:44 AM DATE MODIFIED: 5/8/2018 3:23 AM 57. During the credit crisis, all of the following occurred EXCEPT: a. some securities firms were allowed to become bank holding companies. b. the Federal Reserve rescued American International Group, an insurance company. c. the Treasury injected funds into financial institutions. d. the Supreme Court ruled that the Federal Reserve had exceeded its authority by assisting Bear Stearns because Bear was a securities firm and not a commercial bank.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 4:46 AM DATE MODIFIED: 5/8/2018 3:24 AM 58. The Volcker rule, named for a former Fed chair a. is intended to increase the powers of the Fed. b. states that the U.S. government will rescue certain large banks if necessary to reduce systemic risk in the financial system. c. sets limits on banks’ proprietary trading. d. requires all banks to undergo annual stress tests.

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Chapter 18: Bank Regulation ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:48 AM DATE MODIFIED: 5/8/2018 3:24 AM 59. The Financial Reform Act (Wall Street Reform and Consumer Protection Act or Dodd-Frank Act) of 2010 a. ended the system of risk-based insurance premiums. b. set requirements for the Deposit Insurance Fund’s reserves. c. raised the limit for insured deposits to $750,000 per depositor. d. allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 4:51 AM DATE MODIFIED: 5/8/2018 3:25 AM 60. The Volcker Rule prohibits banks from sponsoring or holding an ownership interest in a hedge fund or a private equity fund. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.18.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s Knowledge DATE CREATED: 9/24/2016 4:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 18: Bank Regulation DATE MODIFIED:

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Chapter 19: Bank Management 1. Which of the following statements is incorrect? a. Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests. b. Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk. c. To prevent agency problems, some banks provide stock as compensation to managers. d. The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 6:03 AM DATE MODIFIED: 9/24/2016 6:10 AM 2. Banks can resolve cash deficiencies by: a. creating additional liabilities b. selling assets c. buying back common stock d. increasing dividend payouts e. creating additional liabilities AND selling assets ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 6:13 AM DATE MODIFIED: 5/8/2018 3:29 AM 3. As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability. a. higher; higher b. lower; lower c. higher; lower d. lower; higher ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:19 AM DATE MODIFIED: 9/28/2016 1:21 AM 4. 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 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:21 AM DATE MODIFIED: 9/28/2016 1:23 AM 5. During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets. a. increase; more rate sensitive than b. decrease; more rate sensitive than c. increase; equally rate sensitive as d. decrease; equally rate sensitive as ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:23 AM DATE MODIFIED: 9/28/2016 1:25 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 6. If a bank expects interest rates to consistently ____ over time, it will consider allocating most funds to rate-____ assets. a. decrease; sensitive b. decrease; insensitive c. increase; insensitive d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:26 AM DATE MODIFIED: 5/8/2018 3:30 AM 7. Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. Petri Bank's net interest margin is ____ percent. a. 4.0 b. 3.6 c. 6.7 d. 5.0 ANSWER: d POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 1:29 AM DATE MODIFIED: 9/28/2016 1:30 AM 8. The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called: a. gap measurement b. duration measurement c. duration ratio d. gap ratio ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:31 AM DATE MODIFIED: 5/8/2018 3:31 AM 9. A gap ratio of less than one suggests that a. rate-sensitive assets exceed rate-sensitive liabilities. b. an increase in interest rates would increase the bank's net interest margin. c. rate-sensitive liabilities exceed rate-sensitive assets. d. a decrease in interest rates would decrease the bank's net interest margin. e. an increase in interest rates would increase the bank's net interest margin AND a decrease in interest rates would decrease the bank's net interest margin.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:34 AM DATE MODIFIED: 5/8/2018 3:31 AM 10. Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:38 AM DATE MODIFIED: 9/28/2016 1:39 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 11. The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity. a. lower than b. higher than c. the same as d. lower than AND higher than, depending on the size of the coupon payment ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 1:41 AM DATE MODIFIED: 5/8/2018 3:31 AM 12. Other things being equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations. a. shorter; longer b. shorter; shorter c. longer; shorter d. longer; longer ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:47 AM DATE MODIFIED: 9/28/2016 1:49 AM 13. For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____. a. exceeds; zero b. exceeds; negative c. exceeds; positive d. is less than; negative ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 1:55 AM DATE MODIFIED: 9/28/2016 2:02 AM 14. Other things being equal, assets with ____ maturities and ____ frequent coupon payments have longer durations. a. shorter; more b. shorter; less c. longer; more d. longer; less ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 2:49 AM DATE MODIFIED: 9/28/2016 2:52 AM 15. If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's: a. credit risk would decrease b. credit risk would increase c. liquidity risk would increase d. liquidity risk would decrease e. credit risk would increase AND liquidity risk would decrease.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 2:52 AM DATE MODIFIED: 5/8/2018 3:32 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 16. Which of the following is NOT a likely method used by a bank to reduce interest rate risk? a. maturity matching b. using fixed-rate loans c. using interest rate futures contracts d. using interest rate caps ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 2:54 AM DATE MODIFIED: 5/8/2018 3:34 AM 17. Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affected by interest rate fluctuations. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 2:56 AM DATE MODIFIED: 9/28/2016 2:58 AM 18. The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses. a. sale; increases b. sale; reduces c. purchase; reduces d. sale; increases AND purchase; reduces ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:01 AM DATE MODIFIED: 5/8/2018 3:51 AM 19. Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk? a. one whose assets and liabilities are equally interest-rate sensitive b. one whose assets are more interest-rate sensitive than its liabilities c. one whose liabilities are more interest-rate sensitive than its assets d. one whose gap ratio is equal to 1.0 ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:07 AM DATE MODIFIED: 9/28/2016 3:09 AM 20. Banks increase their risk by increasing their capital as a percentage of assets a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 3:10 AM DATE MODIFIED: 9/28/2016 3:11 AM 21. Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak. a. increase; increase b. reduce; reduce c. increase; reduce Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management d. reduce; increase ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:12 AM DATE MODIFIED: 9/28/2016 3:14 AM 22. Banks tend to focus their loans in one industry so that they can specialize on that industry and reduce the credit risk of their loan portfolio. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 3:14 AM DATE MODIFIED: 9/28/2016 3:16 AM 23. Most loan sales enable the bank originating the loan to continue servicing the loan. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 3:16 AM DATE MODIFIED: 9/28/2016 3:19 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 24. ROE is defined as: a. b. c. d.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 7:18 AM DATE MODIFIED: 5/8/2018 3:52 AM 25. The greater the ____, the greater the amount of assets per dollar's worth of equity. a. leverage measure b. ratio of equity to debt c. capital ratio d. proportion of loans to securities in the asset portfolio ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 8:15 AM DATE MODIFIED: 9/28/2016 8:17 AM 26. A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity? a. 10 percent b. .2 percent c. 2 percent Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management d. 20 percent e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 8:17 AM DATE MODIFIED: 5/8/2018 3:52 AM 27. A bank has the following asset and liability portfolios. What is the gap?

Ratesensitive assets

Amount (in millions)

Floating-rate loans

$4,000

Floating-rate mortgages

1,000

Short-term Treasury securities

Rate-sensitive liabilities NOW accounts

MMDAs 1,500 $6,500

Amount (in millions) $1,750

4,500

Short-term CDs

1,000 $7,250

a. $750 million b. $750 million c. 1.12 d. .896 e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 8:24 AM DATE MODIFIED: 5/8/2018 3:53 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 28. If Bank A has a negative gap and Bank B has a positive gap, which of the following is true? a. Bank A is more favorably affected by rising interest rates. b. Bank B is more favorably affected by falling interest rates. c. Bank A is adversely affected by falling interest rates. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 8:32 AM DATE MODIFIED: 5/8/2018 3:53 AM 29. Which of the following is a measure for banks to use to assess their exposure to interest rate risk? a. capital ratio b. leverage measure c. duration measurement d. gap ratio e. duration measurement AND gap ratio ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 8:35 AM DATE MODIFIED: 5/8/2018 3:54 AM 30. If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses. a. reduces the potential adverse effect; reduces the potential favorable effect b. increases the potential adverse effect; increases the potential favorable effect c. decreases the potential adverse effect; increases the potential favorable effect d. increases the potential adverse effect; decreases the potential favorable effect ANSWER: a POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:04 AM DATE MODIFIED: 9/28/2016 10:07 AM 31. Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer ____ and more ____. a. excess reserves; Treasury bills b. Treasury bonds; corporate bonds c. loans; Treasury bills d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:07 AM DATE MODIFIED: 5/8/2018 3:54 AM 32. Banks would reduce their liquidity by restructuring their asset portfolio to contain fewer ____ and more ____. a. Treasury securities; excess reserves b. loans; Treasury securities c. corporate bonds; Treasury securities d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:10 AM DATE MODIFIED: 5/8/2018 3:55 AM 33. Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____.

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Chapter 19: Bank Management a. Treasury bonds; corporate bonds b. Treasury bonds; municipal bonds c. Treasury bonds; commercial loans d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:13 AM DATE MODIFIED: 5/8/2018 3:55 AM 34. Banks can increase their potential interest revenues by restructuring their asset portfolio to contain fewer ____ and more ____. a. Treasury bonds; commercial loans b. Treasury bonds; excess reserves c. consumer loans; Treasury bills d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:15 AM DATE MODIFIED: 5/8/2018 3:56 AM 35. If a bank desires to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ____ and use most of its funds for ____ (assuming that all loans will be repaid). a. traditional demand deposits; commercial loans b. traditional demand deposits; consumer loans c. NOW accounts; consumer loans d. NOW accounts; commercial loans ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:18 AM DATE MODIFIED: 9/28/2016 10:20 AM 36. When measuring exposure to market risk, banks commonly use the ________. a. value-at-risk method b. operating leverage measure c. matching maturity method d. forward rate method ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:20 AM DATE MODIFIED: 9/28/2016 10:22 AM 37. A bank's net interest margin is commonly defined as: a. interest revenues minus interest expenses b. (interest revenues minus interest expenses)/total assets c. (interest revenues minus interest expenses)/total liabilities d. (interest revenues minus interest expenses)/capital ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:22 AM DATE MODIFIED: 5/8/2018 3:57 AM 38. A common method for banks to reduce their credit risk is to a. specialize in loans to just one or a few particular industries in which they have expertise in assessing Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management creditworthiness. b. specialize in loans to companies whose earnings patterns are quite similar over time. c. specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness AND specialize in loans to companies whose earnings patterns are quite similar over time. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:24 AM DATE MODIFIED: 5/8/2018 3:57 AM 39. International diversification of loans can best reduce a bank's overall credit risk if a. the countries where loans are given are clustered together in a single continent. b. the countries where loans are given have economic cycles that do not move together over time. c. the countries where loans are given are clustered together in a single continent AND the countries where loans are given have economic cycles that do not move together over time. d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:27 AM DATE MODIFIED: 5/8/2018 3:58 AM 40. During a period of rising interest rates, a bank's net interest margin will likely decline if it has a large amount of a. rate-sensitive assets and no rate-sensitive liabilities. b. rate-sensitive liabilities and no rate-sensitive assets. c. loans to technology firms. d. real estate loans.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:29 AM DATE MODIFIED: 9/28/2016 10:38 AM 41. When a bank makes an international loan containing a clause that allows repayment in a foreign currency, the bank is exposed to a. loan settlement risk. b. exchange rate risk. c. global exchange risk. d. currency transaction risk.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:08 PM DATE MODIFIED: 9/28/2016 10:10 PM 42. Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is a. $1 million. b. $1 million. c. 5 percent. d. 5 percent.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:10 PM DATE MODIFIED: 9/28/2016 10:12 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 43. ____ is not a method used to assess interest rate risk. a. Efficiency analysis b. Gap analysis c. Duration analysis d. Regression analysis ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:12 PM DATE MODIFIED: 9/28/2016 10:14 PM 44. Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Durango's gap is ____, and Durango is probably more concerned about a(n) ____ in interest rates. a. $1 million; increase b. $1 million; decrease c. $1 million; increase d. $1 million; decrease e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:14 PM DATE MODIFIED: 5/8/2018 3:59 AM 45. Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Leskar's gap ratio is ____. a. 1.5 b. 0.67 c. $1 million d. None of these are correct.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:16 PM DATE MODIFIED: 5/8/2018 3:59 AM 46. ____ is (are) least likely to be used as a method of reducing interest rate risk. a. Maturity matching b. Floating-rate loans c. Stock options d. Interest rate swaps e. Interest rate caps ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:18 PM DATE MODIFIED: 9/28/2016 10:20 PM 47. Ringo Bank has a profit after taxes of $3 million, total assets of $300 million, and shareholder's equity of $30 million.

Ringo's return on equity (ROE) is ____ percent. a. 1.0 b. 10.0 c. 3.0 d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:20 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DATE MODIFIED:

5/8/2018 4:00 AM

48. For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is: a. zero b. positive c. negative d. positive AND negative ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:22 PM DATE MODIFIED: 5/8/2018 4:01 AM 49. Assume a bank accepts deposits in Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank's profit margin? a. The A$ appreciates against the pound. b. The A$ is stable against the pound. c. The A$ depreciates against the pound. d. British interest rates increase. e. The A$ depreciates against the pound AND British interest rates increase.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:24 PM DATE MODIFIED: 5/8/2018 4:01 AM 50. The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is a. unaffected if euro interest rates increase and U.S. rates decrease. b. unaffected if U.S. interest rates increase and euro interest rates decrease. c. adversely affected if euro interest rates increase and U.S. rates decrease. d. adversely affected if U.S. interest rates increase and euro rates decrease.

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Chapter 19: Bank Management e. unaffected if euro interest rates increase and U.S. rates decrease AND unaffected if U.S. interest rates increase and euro interest rates decrease.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:26 PM DATE MODIFIED: 5/8/2018 4:02 AM 51. 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 is similar. c. rate sensitivity of assets and liabilities is matched for each currency. d. currency mix of assets is similar to that of liabilities AND overall rate sensitivity of assets and liabilities is similar.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:28 PM DATE MODIFIED: 5/8/2018 4:02 AM 52. The risk of a loss due to closing out a transaction is referred to as ____ risk. a. credit b. settlement c. interest rate d. exchange rate e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.07 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/28/2016 10:30 PM 5/8/2018 4:03 AM

53. The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:32 PM DATE MODIFIED: 9/28/2016 10:35 PM 54. Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:35 PM DATE MODIFIED: 9/28/2016 10:37 PM 55. A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:37 PM DATE MODIFIED: 9/28/2016 10:39 PM 56. For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:39 PM DATE MODIFIED: 9/28/2016 10:41 PM 57. Floating-rate loans completely eliminate interest rate risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:41 PM DATE MODIFIED: 9/28/2016 10:43 PM 58. A bank can usually simultaneously maximize its return on assets and minimize credit risk. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:43 PM DATE MODIFIED: 9/28/2016 10:45 PM 59. If the duration of all banks assets with a maturity of greater than one year is similar to that of its liabilities with a maturity greater than one year, interest rate risk is nonexistent. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:45 PM DATE MODIFIED: 5/8/2018 4:03 AM 60. Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million.

Macon Bank's net interest margin is a. $1 million. b. $1 million. c. 5 percent. d. 5 percent.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:47 PM DATE MODIFIED: 9/28/2016 10:49 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management 61. ____ is not a method used to assess interest rate risk. a. Gap analysis b. Ratio analysis c. Duration analysis d. Regression analysis e. All of these are methods to assess interest rate risk.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:49 PM DATE MODIFIED: 5/8/2018 4:04 AM 62. The say on pay rules require all decisions about executive compensation to be made only by outside directors. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 10:52 PM DATE MODIFIED: 9/28/2016 10:53 PM 63. Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder's equity of $10 million.

Crazer's return on equity (ROE) is ____ percent. a. 18 b. 210 c. 15 d. 20 e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/28/2016 10:53 PM DATE MODIFIED: 5/8/2018 4:05 AM 64. If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets. a. decrease; sensitive b. increase; insensitive c. increase; sensitive d. decrease; sensitive AND increase;insensitive e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 10:56 PM DATE MODIFIED: 5/8/2018 4:05 AM 65. During a period of ____ interest rates, a bank's net interest margin will likely ____ if its liabilities are more rate sensitive than its assets. a. decreasing; decrease b. increasing; increase c. decreasing; increase d. increasing; decrease e. decreasing; increase AND increasing; decrease ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DATE CREATED: DATE MODIFIED:

9/28/2016 10:58 PM 5/8/2018 4:06 AM

66. If interest rates ____, banks with ____ duration gaps will be ____ affected. a. rise; positive; positively b. rise; positive; adversely c. decrease; positive; adversely d. decrease; negative; positively e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:01 PM DATE MODIFIED: 5/8/2018 4:07 AM 67. In a regression analysis using a bank's stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank’s performance is ____ affected by ____ interest rates. a. positive; adversely; rising b. positive; favorably; declining c. negative; adversely; rising d. negative; favorably; rising ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:03 PM DATE MODIFIED: 9/28/2016 11:05 PM 68. If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration. a. negative; smaller b. positive; larger c. negative; larger d. None of these are correct.

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Chapter 19: Bank Management ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:05 PM DATE MODIFIED: 5/8/2018 4:07 AM 69. In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate. a. more; fixed; variable b. more; variable; fixed c. less; fixed; variable d. less; fixed; fixed e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:07 PM DATE MODIFIED: 5/8/2018 4:08 AM 70. Because riskier assets offer ____ returns, a bank's strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio. a. lower; increase b. lower; decrease c. higher; increase d. higher; decrease e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/28/2016 11:09 PM 5/8/2018 4:08 AM

71. When determining the appropriate interest rate to charge on a loan, a bank uses the Federal Reserve’s primary credit lending rate as a benchmark and adds a premium to this rate for less creditworthy customers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:12 PM DATE MODIFIED: 9/28/2016 11:13 PM 72. An effective way to align bank managers’ interests with shareholders’ goal of higher returns is to compensate the managers with fixed salaries without a bonus. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:13 PM DATE MODIFIED: 9/28/2016 11:15 PM 73. Which of the following is NOT a function of a bank’s board of directors? a. overseeing acquisitions b. determining a compensation system for the bank’s executives c. overseeing policies for changing the bank’s capital structure d. pursuing a proxy contest to change the bank’s dividend policy ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:15 PM DATE MODIFIED: 5/8/2018 4:09 AM 74. A(n) ____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date. a. interest rate cap b. interest rate futures contract c. interest rate swap d. maximum rate contract ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:18 PM DATE MODIFIED: 9/28/2016 11:19 PM 75. Which of the following is a method that a bank can use to reduce its credit risk? a. diversifying its loans across industries b. focusing on credit card loans c. focusing on consumer loans d. selling its holdings of Treasury securities ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.19.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:20 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 19: Bank Management DATE MODIFIED:

9/28/2016 11:21 PM

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Chapter 20: Bank Performance 1. Even if other external forces (such as interest rates) are unchanged, a commercial bank's expected cash flows can change in response to a change in its management skills. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 1:32 AM DATE MODIFIED: 9/27/2016 1:34 AM 2. Interest income generated from all a bank’s assets is called a. net interest margin. b. the spread. c. gross interest income. d. net interest income.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 1:39 AM DATE MODIFIED: 9/27/2016 1:41 AM 3. 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.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/27/2016 1:41 AM 9/27/2016 1:43 AM

4. Fees charged by a bank on various services allow the bank to generate: a. noninterest income b. components of net interest margin c. components of net interest income d. components of gross interest income ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 1:44 AM DATE MODIFIED: 9/27/2016 1:46 AM 5. The loan loss provision as a percentage of assets should increase during periods of high economic growth. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 1:46 AM DATE MODIFIED: 9/27/2016 1:48 AM 6. A bank's net interest margin represents the proportion of its investments that are financed with borrowed funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 1:48 AM DATE MODIFIED: 9/27/2016 1:50 AM 7. If a bank has short-term deposits and provides long-term fixed-rate loans, and interest rates decline over time, its net interest margin should be: a. declining over time b. rising over time c. constant over time d. consistently negative ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 1:51 AM DATE MODIFIED: 5/8/2018 4:48 AM 8. Net income measured as a percentage of assets is a. return on equity (ROE). b. return on liabilities (ROL). c. return on investment (ROI). d. return on assets (ROA).

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 1:54 AM DATE MODIFIED: 9/27/2016 1:56 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance 9. When only equity counts as capital, the leverage measure is a. equal to the capital ratio. b. equal to return on assets. c. the inverse of return on assets. d. the inverse of the capital ratio.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 1:57 AM DATE MODIFIED: 9/27/2016 1:59 AM 10. When only equity counts as capital, the higher the capital ratio, the a. lower the leverage measure. b. lower the degree of financial leverage. c. higher the leverage measure. d. lower the leverage measure AND lower the degree of financial leverage. e. lower the degree of financial leverage AND higher the leverage measure.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 2:02 AM DATE MODIFIED: 5/8/2018 4:48 AM 11. If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____. a. reduced; not affected b. reduced; reduced c. not affected; reduced d. not affected; not affected ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 2:05 AM DATE MODIFIED: 9/27/2016 2:08 AM 12. Return on assets (ROA) will usually reveal when a bank's performance is not up to par, but it does not indicate the reason for poor performance. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 2:11 AM DATE MODIFIED: 9/27/2016 2:13 AM 13. Gross interest expense is affected by a. market interest rates. b. the composition of assets held by the bank. c. fee services provided by the bank. d. market interest rates AND the composition of assets held by the bank.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 2:18 AM DATE MODIFIED: 5/8/2018 4:49 AM 14. If a bank has long-term fixed-rate assets and short-term liabilities, and interest rates increase over time, its net interest margin should: a. decrease Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance b. increase c. stay the same. d. EITHER decrease OR increase are correct, depending on whether the asset maturities exceed 10 years.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 2:21 AM DATE MODIFIED: 5/8/2018 4:50 AM 15. The sum of net interest income, noninterest income, and securities gains, minus the provision for loan losses and noninterest expenses equals a. net interest margin. b. gross interest margin. c. net income. d. income before taxes.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 2:24 AM DATE MODIFIED: 9/27/2016 2:26 AM 16. Which of the following banks would likely have the highest return on equity? a. high return on assets, high capital ratio b. high return on assets, low capital ratio c. low return on assets, low capital ratio d. low return on assets, high capital ratio ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/27/2016 2:27 AM 9/27/2016 2:29 AM

17. Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A's return on assets is ____ than Bank B's. Bank A's return on equity is ____ than Bank B's. a. higher; higher b. higher; lower c. lower; higher d. lower; lower ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 2:30 AM DATE MODIFIED: 9/27/2016 2:32 AM 18. Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital, and Bank H holds a higher level of capital. Bank G's return on equity is probably ____ volatile than that of Bank H. Bank G's risk premium is probably ____ than that of Bank H. a. less; lower b. less; higher c. more; higher d. more; lower ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 2:33 AM DATE MODIFIED: 9/27/2016 2:37 AM 19. Noninterest income is usually higher for small banks than for money center and large banks because small banks can charge higher rates on loans to small local businesses.

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Chapter 20: Bank Performance a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 2:37 AM DATE MODIFIED: 9/27/2016 2:40 AM 20. ____ result(s) from a bank's sale of securities. a. Noninterest income b. Loan loss provision c. Securities gains and losses d. Noninterest expenses e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 2:41 AM DATE MODIFIED: 5/8/2018 4:50 AM 21. A bank's ROE ____ account for its financial leverage. A bank's ROA ____ account for its financial leverage. a. does; does b. does; does not c. does not; does not d. does not; does ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/27/2016 2:43 AM 9/27/2016 2:45 AM

22. A bank's ROA ____ account for taxes on earnings. A bank's ROE ____ account for taxes on earnings. a. does; does b. does; does not c. does not; does not d. does not; does ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 2:51 AM DATE MODIFIED: 9/27/2016 2:56 AM 23. A bank's net interest margin includes: a. noninterest expenses b. noninterest income c. loan losses d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 2:57 AM DATE MODIFIED: 5/8/2018 4:51 AM 24. Banks with relatively ____ ROAs often incur ____ noninterest expenses. a. low; very low b. low; very high c. high; very high d. None of these are correct.

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Chapter 20: Bank Performance ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 3:01 AM DATE MODIFIED: 5/8/2018 4:51 AM 25. Bank T generally obtains a high percentage of its funds from negotiable certificates of deposit (NCDs). Bank V obtains most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will likely incur the highest interest expense is ____. a. Bank T b. Bank V c. Bank Z d. all banks are the same ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Application DATE CREATED: 9/27/2016 3:05 AM DATE MODIFIED: 9/27/2016 3:07 AM 26. The value of a commercial bank can be modeled as the present value of its future cash flows. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 4:21 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance DATE MODIFIED:

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27. The level of competition is an industry characteristic that will favorably affect cash flows, because a high level of competition may increase a bank's volume of business or increase the prices it can charge for its services. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 4:24 AM DATE MODIFIED: 9/27/2016 4:34 AM 28. If the risk premium on a commercial bank rises, so will the required rate of return by investors who invest in the bank. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 4:44 AM DATE MODIFIED: 9/27/2016 4:46 AM 29. Gross interest expenses of banks are normally higher in periods when market interest rates are higher. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/27/2016 6:28 AM 5/8/2018 4:52 AM

30. If banks continue to offer new services (such as insurance or securities services), their noninterest income will decrease over time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 6:35 AM DATE MODIFIED: 9/27/2016 6:37 AM 31. The loan loss provision should increase during periods when loan losses are more likely, such as during a recessionary period. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 6:38 AM DATE MODIFIED: 9/27/2016 6:41 AM 32. Any individual bank's ROA depends on the bank's policy decisions, but not on uncontrollable factors relating to the economy and government regulations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 7:03 AM DATE MODIFIED: 9/27/2016 7:05 AM 33. Access to a bank's ROA without any other information reveals when its performance is not up to par and the reasons for its poor performance. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 7:06 AM DATE MODIFIED: 9/27/2016 7:09 AM 34. During the credit crisis, the level of ____ was much higher than in other periods. a. interest income b. income expenses c. noninterest expenses d. loan loss provisions ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/27/2016 7:10 AM DATE MODIFIED: 9/27/2016 7:12 AM 35. Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control. a. economic growth b. the risk-free interest rate c. industry conditions Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance d. management abilities e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 7:12 AM DATE MODIFIED: 5/8/2018 4:52 AM 36. A bank with ____ management may account for ____ loan losses, which _____ reported earnings now. a. conservative; smaller; reduces b. conservative; larger; reduces c. aggressive; larger; increases d. aggressive; smaller; has no effect on ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 7:23 AM DATE MODIFIED: 9/27/2016 7:25 AM 37. When interest rates fall, the rates that a bank pays on deposits typically decline less than the interest rates that the bank earns on its loans and investments. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance DATE CREATED: DATE MODIFIED:

9/27/2016 7:25 AM 9/27/2016 7:27 AM

38. Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than the rates that larger banks charge on the loans they provide to large businesses. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 7:27 AM DATE MODIFIED: 9/27/2016 7:29 AM 39. Which of the following factors affecting a bank’s gross interest income is NOT influenced by the bank’s policy decisions? a. maturity and rate sensitivity of the bank’s assets b. market interest rate movements c. the bank’s loan rate d. composition of the bank’s assets ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 7:30 AM DATE MODIFIED: 5/8/2018 4:53 AM 40. A bank’s return on assets (ROA) could be lower than desired because of all of the following EXCEPT: a. the bank has experienced heavy loan losses. b. the bank was locked into fixed-rate loans prior to a rise in market interest rates. c. the bank is receiving a relatively small amount of noninterest income. d. the bank has reduced its noninterest expenses.

ANSWER: d POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/27/2016 8:00 AM DATE MODIFIED: 5/8/2018 4:55 AM 41. The accounting process used by banks to determine their earnings is still based on subjective decisions, so the earnings of a bank are partially influenced by the accounting decisions regarding loan losses. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/27/2016 8:02 AM DATE MODIFIED: 9/27/2016 8:04 AM 42. Some banks that are experiencing serious financial problems may prefer to overstate their earnings in order to allow more time to correct their operations before the regulators force them to close. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/27/2016 8:04 AM DATE MODIFIED: 9/27/2016 8:06 AM 43. Banks increase their loan loss reserves in order to boost their reported earnings. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 20: Bank Performance b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.20.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom’s: Knowledge DATE CREATED: 9/27/2016 8:06 AM DATE MODIFIED: 9/27/2016 8:08 AM

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Chapter 21: Thrift Operations 1. ____ savings institutions hold the most assets in aggregate. a. Stock-owned b. Mutual c. Closely held d. Privatized ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:36 AM DATE MODIFIED: 9/23/2016 6:38 AM 2. Which of the following statements is incorrect? a. A mutual-to-stock conversion allows savings institutions to obtain additional capital by issuing stock. b. Because of their ownership structure, mutual savings institutions are more susceptible to unfriendly takeovers. c. When a mutual savings institution is involved in an acquisition, it first converts to a stock-owned savings institution. d. Consolidation and acquisitions have caused the number of mutual and stock savings institutions to decline consistently over the years.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:38 AM DATE MODIFIED: 9/23/2016 6:40 AM 3. Federally chartered savings institutions are regulated by the a. Securities and Exchange Commission (SEC). b. National Credit Union Administration. c. Comptroller of the Currency and the Federal Reserve. d. U.S. Treasury.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:40 AM DATE MODIFIED: 9/23/2016 6:42 AM 4. Savings institutions obtain most of their funds from: a. savings and time deposits b. loans c. mortgages d. repurchase agreements ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:42 AM DATE MODIFIED: 5/8/2018 5:00 AM 5. When savings institutions are unable to attract sufficient deposits, they can a. borrow in the federal funds market. b. borrow from the Federal Reserve. c. borrow through a repurchase agreement. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:44 AM DATE MODIFIED: 5/8/2018 5:02 AM 6. The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.

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Chapter 21: Thrift Operations a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:06 AM DATE MODIFIED: 9/23/2016 7:08 AM 7. If depositors move money from their checking accounts to short-term CDs, this would ____ the rate sensitivity of the savings institution's liabilities to interest rate movements. a. increase b. have no effect on c. decrease d. increase AND decrease are correct, depending on the size of the savings institution ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:08 AM DATE MODIFIED: 5/8/2018 5:03 AM 8. ____ are the primary asset of savings institutions. a. Mortgages b. Cash balances c. Investment securities d. Business loans ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/23/2016 7:10 AM 9/23/2016 7:11 AM

9. ____ do not represent an asset of credit unions. a. Mortgage-backed securities b. Home equity loans c. Automobile loans d. Stocks ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:11 AM DATE MODIFIED: 9/23/2016 7:13 AM 10. Which of the following is NOT an asset of savings institutions? a. loans b. mortgages c. NOW accounts d. mortgage-backed securities ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:13 AM DATE MODIFIED: 5/8/2018 5:03 AM 11. Most mortgages originated by savings institutions are for: a. commercial buildings b. land for commercial purposes c. single-family homes or multifamily dwellings d. None of these are correct.

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Chapter 21: Thrift Operations ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:15 AM DATE MODIFIED: 5/8/2018 5:05 AM 12. If a savings institution’s assets have a considerably longer duration than its liabilities, it can reduce its exposure to interest rate risk by a. reducing its proportion of assets in the short duration categories. b. increasing its proportion of liabilities in the short duration categories. c. increasing its proportion of liabilities in the long duration category. d. reducing its proportion of assets in the short duration categories AND increasing its proportion of liabilities in the short duration categories.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:17 AM DATE MODIFIED: 5/8/2018 5:05 AM 13. Adjustable-rate mortgages ____ the adverse impact of rising interest rates on a typical savings institution's spread.

They ____ the favorable impact of declining interest rates on the spread. a. reduce; reduce b. reduce; increase c. increase; increase d. increase; reduce ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/23/2016 7:21 AM 9/23/2016 7:22 AM

14. To measure ____ risk, some savings institutions measure the duration of their respective assets and liabilities. a. credit b. interest rate c. liquidity d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:23 AM DATE MODIFIED: 5/8/2018 5:06 AM 15. A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n): a. interest rate futures contract b. interest rate swap contract c. interest cap contract d. security swap contract ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:24 AM DATE MODIFIED: 5/8/2018 5:07 AM 16. An interest rate swap reduces the favorable impact of declining interest rates. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:28 PM DATE MODIFIED: 9/28/2016 11:30 PM 17. A savings institution owned by its depositors is a ____ savings institution. a. mutual b. stock c. credit d. closed-end ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:30 PM DATE MODIFIED: 9/28/2016 11:32 PM 18. Which of the following was NOT a major reason for the savings institution crisis in the late 1980s? a. large losses on real estate loans b. large losses on loans to less-developed countries c. fraud d. illiquidity e. increased interest expenses ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:32 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations DATE MODIFIED:

5/8/2018 5:08 AM

19. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited savings institutions from: a. merging b. offering mortgage loans c. investing in junk bonds d. making loans to foreign governments ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:34 PM DATE MODIFIED: 5/8/2018 5:11 AM 20. The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk. a. credit (default) b. interest rate c. liquidity d. exchange rate e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:36 PM DATE MODIFIED: 5/8/2018 5:11 AM 21. Money market deposit accounts (MMDAs) are a. trust accounts managed by savings institutions. b. checking accounts that do not pay interest. c. accounts offered primarily by money market funds. d. deposit accounts offering limited checking and close-to-market interest rates.

ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:39 PM DATE MODIFIED: 9/28/2016 11:47 PM 22. Savings institutions commonly ____ to reduce their risk. a. purchase futures contracts on stock indexes b. purchase futures contracts on Treasury bonds c. sell futures contracts on stock indexes d. sell futures contracts on Treasury bonds ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:47 PM DATE MODIFIED: 9/28/2016 11:49 PM 23. Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions ____ susceptible to unfriendly takeovers. a. are; are not b. are; are c. are not; are d. are not; are not ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:50 PM Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations DATE MODIFIED:

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24. Savings institutions can obtain capital by: a. issuing stock. b. repurchasing stock. c. borrowing from the Federal Reserve. d. borrowing in the federal funds market.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:52 PM DATE MODIFIED: 9/28/2016 11:56 PM 25. To obtain short-term funds, savings institutions commonly borrow funds in the ____ market. a. stock b. bond c. mortgage d. federal funds e. futures ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:56 PM DATE MODIFIED: 9/28/2016 11:58 PM 26. ____ risk is probably the least concern for savings institutions. a. Liquidity b. Exchange rate c. Credit d. Interest rate ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:59 PM DATE MODIFIED: 9/29/2016 12:00 AM 27. Which of the following is NOT an advantage of credit unions? a. They can offer attractive rates to their member savers and borrowers because they are nonprofit and therefore are not taxed. b. Their noninterest expenses are relatively low, because their labor, office, and furniture are often donated or provided at a very low cost through the affiliation of their members. c. Their large membership allows them to effectively diversify geographically. d. All of these are advantages of credit unions.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:06 AM DATE MODIFIED: 5/8/2018 5:14 AM 28. A savings institution's cash flows are ____ related to interest rate movements. a. positively related to b. inversely related to c. unrelated to d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:08 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations DATE MODIFIED:

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29. The primary use of credit union funds is a. loans to credit union members. b. the purchase of government securities. c. the purchase of agency securities. d. the purchase of corporate bonds. e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:19 AM DATE MODIFIED: 5/8/2018 5:16 AM 30. ____ are nonprofit organizations composed of members with a common bond. a. Credit unions b. Savings banks c. Savings and loan associations d. Commercial banks ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:21 AM DATE MODIFIED: 9/29/2016 12:23 AM 31. Because credit unions ____ stock, they are technically owned by the ____. a. issue; depositors b. do not issue; depositors c. issue; stockholders d. do not issue; management ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:23 AM DATE MODIFIED: 9/29/2016 12:25 AM 32. Credit unions obtain most of their funds from: a. issuing common stock b. retained earnings c. share deposits by members d. issuing long-term bonds ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:25 AM DATE MODIFIED: 5/8/2018 5:16 AM 33. Interest-paying checkable accounts offered by credit unions are called a. NOW accounts. b. money market deposit accounts. c. share certificates. d. share drafts.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:27 AM DATE MODIFIED: 9/29/2016 12:36 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations 34. The ____ acts as a temporary lender to credit unions. a. World Bank b. Central Liquidity Facility c. Federal Home Loan Bank d. National Credit Union Administration ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:37 AM DATE MODIFIED: 5/8/2018 5:17 AM 35. The sensitivity of the cost of funds to interest rate movements has generally been a. greater for credit unions than for savings institutions. b. greater for credit unions than for commercial banks. c. lower for credit unions than for savings institutions or commercial banks. d. similar for credit unions as for savings institutions and commercial banks.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:39 AM DATE MODIFIED: 9/29/2016 12:41 AM 36. Credit unions use the majority of their funds to a. purchase investment securities. b. provide commercial real estate loans. c. provide small business loans to members. d. provide consumer loans to members.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:41 AM DATE MODIFIED: 9/29/2016 12:43 AM 37. If credit union members have a particular affiliation with their employers and large layoffs occur, the credit union's exposure to ____ risk may increase. a. settlement b. interest rate c. credit d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:43 AM DATE MODIFIED: 5/8/2018 5:18 AM 38. The maximum insurance per depositor provided by the National Credit Union Share Insurance Fund is a. $250,000. b. $50,000. c. $40,000. d. $25,000.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:08 AM DATE MODIFIED: 9/29/2016 1:10 AM 39. Comparing credit unions with commercial banks and savings institutions a. credit unions are less able to quickly generate additional deposits.

Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations b. savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions cannot. c. savings institutions and commercial banks are less able to quickly generate additional deposits. d. credit unions have less exposure to liquidity risk.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:11 AM DATE MODIFIED: 9/29/2016 1:12 AM 40. The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements. a. long; insensitive b. short or medium; sensitive c. long; sensitive d. short or medium; insensitive ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:13 AM DATE MODIFIED: 9/29/2016 1:15 AM 41. Because credit unions' sources and uses of funds are generally interest rate ____, movements in interest revenues and interest expenses of credit unions are ____. a. sensitive; negatively correlated b. insensitive; highly correlated c. sensitive; uncorrelated d. sensitive; highly correlated e. insensitive; uncorrelated ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:15 AM DATE MODIFIED: 9/29/2016 1:17 AM 42. Deposits at credit unions are called a. NOW accounts. b. money market deposit accounts. c. shares. d. credit union deposit accounts.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:18 AM DATE MODIFIED: 9/29/2016 1:20 AM 43. 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 can make. d. size of residential mortgage loans they can make.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:20 AM DATE MODIFIED: 9/29/2016 1:22 AM 44. The National Credit Union Share Insurance Fund (NCUSIF) requires all Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations a. federally chartered credit unions to obtain insurance from the NCUSIF. b. state-chartered credit unions to obtain insurance from the NCUSIF. c. credit unions to pay a supplemental insurance premium each year. d. depository institutions to pay a supplemental insurance premium each year.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:22 AM DATE MODIFIED: 9/29/2016 1:24 AM 45. According to your text, about ____ percent of credit unions are insured by the National Credit Union Share Insurance Fund. a. 20 b. 40 c. 60 d. 90 ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:25 AM DATE MODIFIED: 9/29/2016 1:26 AM 46. In general, savings institutions are larger than commercial banks. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/29/2016 1:30 AM 9/29/2016 1:44 AM

47. Today, savings institutions are not permitted to invest in junk bonds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:45 AM DATE MODIFIED: 9/29/2016 1:46 AM 48. Because savings institutions commonly use long-term liabilities to finance short-term assets, they depend on additional deposits to accommodate withdrawal requests. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:47 AM DATE MODIFIED: 9/29/2016 1:48 AM 49. Savings institutions commonly measure the gap between their rate-sensitive assets and rate-sensitive liabilities in order to determine their exposure to credit risk. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:49 AM DATE MODIFIED: 9/29/2016 1:51 AM 50. Savings institutions do not really know the actual maturity of the mortgages they hold and cannot perfectly match the interest rate sensitivity of their assets and liabilities. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:51 AM DATE MODIFIED: 9/29/2016 1:53 AM 51. In general, when interest rates fall, a savings institution's cost of obtaining funds declines more than the decline in the interest earned on its loans and investments. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:53 AM DATE MODIFIED: 9/29/2016 1:55 AM 52. High economic growth results in more risk for a savings institution, since its consumer loans, mortgage loans, and investments in debt securities are more likely to default. a. True b. False ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:55 AM DATE MODIFIED: 9/29/2016 1:57 AM 53. Because credit unions do not issue stock, they are technically sole proprietorships. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:58 AM DATE MODIFIED: 9/29/2016 1:59 AM 54. Because credit unions are for-profit organizations, their income is taxable. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:00 AM DATE MODIFIED: 9/29/2016 2:02 AM 55. Credit unions obtain most of their funds by borrowing from the U.S. government. a. True b. False Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:02 AM DATE MODIFIED: 9/29/2016 2:04 AM 56. Credit unions use the majority of their funds to invest in the stock market. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:08 AM DATE MODIFIED: 9/29/2016 2:12 AM 57. The National Credit Union Administration (NCUA) is responsible for regulating savings institutions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:20 AM DATE MODIFIED: 9/29/2016 2:21 AM 58. Credit unions are unregulated as to the types of services they offer. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:22 AM DATE MODIFIED: 9/29/2016 2:24 AM 59. All federally chartered credit unions are required to obtain insurance from the National Credit Union Share Insurance Fund (NCUSIF). a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:24 AM DATE MODIFIED: 9/29/2016 2:26 AM 60. 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 these are objectives of credit unions.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:26 AM Copyright Cengage Learning. Powered by Cognero.

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61. ____ is (are) not a main source of funds for savings institutions. a. Deposits b. Borrowed funds c. Capital d. Mortgages ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:29 AM DATE MODIFIED: 9/29/2016 2:31 AM 62. Which of the following is NOT a deposit source of funds for savings institutions? a. passbook savings b. retail CDs c. money market deposit accounts d. negotiable order of withdrawal (NOW) accounts e. All of these are deposit sources of funds for savings institutions.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:32 AM DATE MODIFIED: 5/8/2018 5:19 AM 63. ____ is (are) not a main use of funds for savings institutions. a. Capital b. Mortgages c. Consumer and commercial loans d. Mortgage-backed securities ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:35 AM DATE MODIFIED: 9/29/2016 2:37 AM 64. To manage interest rate risk, a savings institution could use a. fixed-rate mortgages. b. currency options. c. interest rate futures contracts. d. letters of credit.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:37 AM DATE MODIFIED: 9/29/2016 2:44 AM 65. Under the Financial Reform Act (Dodd-Frank Act) of 2010, all federally chartered savings institutions are to be regulated by the Federal Reserve, so these savings institutions no longer have an incentive to go regulator shopping. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:45 AM DATE MODIFIED: 9/29/2016 2:47 AM 66. During the credit crisis of 2008–2009, some credit unions suffered losses on second mortgages and home-equity loans Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations that they had provided, and some credit unions experienced losses on mortgage-backed securities in which they had invested. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:47 AM DATE MODIFIED: 9/29/2016 2:49 AM 67. During the credit crisis of 2008–2009, savings institutions experienced all of the following EXCEPT a. high default rates on loans to finance leveraged buyouts. b. a decline in the level of mortgage originations. c. high default rates on subprime mortgages. d. losses on investments in mortgage-backed securities.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:49 AM DATE MODIFIED: 5/8/2018 5:21 AM 68. The Financial Reform Act of 2010 did all of the following EXCEPT a. strengthened the standards required to obtain a mortgage. b. required more disclosures by financial institutions regarding the quality of the underlying assets when they sell mortgage-backed securities. c. required savings institutions to sell off any holdings of junk bonds and prohibited them from investing in junk bonds in the future. d. established the Consumer Financial Protection Bureau.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 21: Thrift Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.21.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:51 AM DATE MODIFIED: 5/8/2018 5:22 AM

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Chapter 22: Finance Company Operations 1. ____ finance companies concentrate on purchasing credit contracts from retailers and dealers. a. Consumer b. Sales c. Commercial d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:15 AM DATE MODIFIED: 5/8/2018 5:28 AM 2. Finance companies differ from commercial banks, savings institutions, and credit unions in that they a. do not rely heavily on deposits as a source of funds. b. focus on financing acquisitions by companies. c. focus on providing residential mortgages. d. use most of their funds to purchase stocks ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:18 AM DATE MODIFIED: 9/23/2016 6:20 AM 3. Which of the following is NOT a main source of funds for finance companies? a. bank loans b. commercial paper issues c. bonds d. borrowing from the Federal Reserve ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:20 AM DATE MODIFIED: 5/8/2018 5:29 AM 4. Unlike loans made by commercial banks, loans made by finance companies cannot be securitized (bundled together and sold as securities to investors). a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:23 AM DATE MODIFIED: 9/23/2016 6:25 AM 5. The ________ is the federal agency responsible for regulating consumer finance products and services that may be offered by finance companies. a. Consumer Financial Safety Commission b. Securities and Exchange Commission c. Consumer Financial Protection Bureau d. Federal Trade Commission ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:25 AM DATE MODIFIED: 9/23/2016 6:27 AM 6. Finance companies would prefer to increase their long-term debt when interest rates a. are relatively low and are expected to increase. b. have increased.

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Chapter 22: Finance Company Operations c. have been stable for several years. d. are projected to decrease.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:27 AM DATE MODIFIED: 9/23/2016 6:29 AM 7. When a finance company purchases a firm's receivables at a discount and becomes responsible for processing and collecting the balances of these accounts, it acts as a a. leasing agent. b. lessor. c. lessee. d. factor.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:29 AM DATE MODIFIED: 9/23/2016 6:31 AM 8. Finance companies are exempt from state regulations. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations DATE CREATED: DATE MODIFIED:

9/23/2016 6:31 AM 9/23/2016 6:33 AM

9. Finance companies are not subject to state regulations on intrastate business. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:34 AM DATE MODIFIED: 9/23/2016 6:35 AM 10. Finance companies are subject to: a. disclosure requirements and truth in lending rules. b. ceiling interest rates on loans provided. c. a maximum length on loan maturity. d. regulations on intrastate business. e. All of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:36 AM DATE MODIFIED: 5/8/2018 5:30 AM 11. If finance companies have liabilities that are more rate sensitive than their assets and want to reduce interest rate risk, they could a. shorten their average asset life. b. lengthen their average asset life. c. shorten the maturity of debt that they issue. d. make greater use of fixed-rate loans.

ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:38 AM DATE MODIFIED: 9/23/2016 6:40 AM 12. Overall, the liquidity risk of finance companies is higher than that of other financial institutions. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:42 AM DATE MODIFIED: 9/23/2016 6:44 AM 13. A wholly owned subsidiary whose primary purpose is to finance sales of the parent company's products and services, provide wholesale financing to distributors of the parent company's products, and purchase receivables of the parent company is a a. captive finance subsidiary. b. factor. c. leasing agent. d. captive factoring agent.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:45 AM DATE MODIFIED: 9/23/2016 6:46 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations 14. Which of the following is NOT a use of finance company funds? a. consumer loans b. business loans c. commercial paper d. real estate loans e. All of the above are uses of finance company funds.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 6:46 AM DATE MODIFIED: 5/8/2018 5:31 AM 15. Finance companies commonly act as ____ for accounts receivable; that is, they purchase a firm's receivables at a discount and are responsible for processing and collecting the balances of these accounts. a. brokers b. dealers c. market makers d. factors e. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 6:49 AM DATE MODIFIED: 5/8/2018 5:32 AM 16. A finance company’s cash flows are _____ related to changes in economic growth and may be ____ related to changes in the risk-free rate. a. positively; inversely b. inversely; positively c. inversely; inversely d. positively; positively ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:08 AM DATE MODIFIED: 9/23/2016 7:09 AM 17. Finance companies participate in the ____ market to reduce interest rate risk. a. money b. bond c. options d. swap ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:09 AM DATE MODIFIED: 9/23/2016 7:11 AM 18. Many consumer finance companies provide personal loans directly to individuals to finance purchases of large household items. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:11 AM DATE MODIFIED: 9/23/2016 7:13 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations 19. Business finance companies focus on loans to very large businesses. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:13 AM DATE MODIFIED: 9/23/2016 7:15 AM 20. Consumer finance companies sometimes provide mortgage loans to individuals. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:15 AM DATE MODIFIED: 9/23/2016 7:16 AM 21. Although commercial paper is available only for short-term financing, finance companies can continually roll over their issues to create a permanent source of funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:17 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations DATE MODIFIED:

9/23/2016 7:18 AM

22. When interest rates increase, finance companies tend to use more long-term debt to lock in their cost of funds over an extended period of time. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/23/2016 7:19 AM DATE MODIFIED: 9/23/2016 7:20 AM 23. Some finance companies offer credit card loans through a particular retailer. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/23/2016 7:20 AM DATE MODIFIED: 9/23/2016 7:22 AM 24. The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/23/2016 7:22 AM 9/23/2016 7:24 AM

25. The value of a finance company can be modeled as the present value of its future cash flows. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 5:39 AM DATE MODIFIED: 9/24/2016 5:40 AM 26. The most important risk for finance companies is ____ risk. a. settlement b. accounting c. credit d. exchange rate ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 5:41 AM DATE MODIFIED: 9/24/2016 5:42 AM 27. Finance companies can accumulate capital by doing all of the following EXCEPT a. retaining earnings. b. issuing stock. c. issuing commercial paper. d. Finance companies can build their capital base by doing all of these.

ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 22: Finance Company Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 5:42 AM DATE MODIFIED: 5/8/2018 5:34 AM 28. Consumer finance companies primarily focus on: a. consumer loans. b. consumer advising. c. consumer regulation. d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/24/2016 5:53 AM DATE MODIFIED: 5/8/2018 5:35 AM 29. Finance companies are regulated by the states and are not subject to regulation by any agency of the federal government. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.22.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/24/2016 5:55 AM DATE MODIFIED: 9/24/2016 5:57 AM

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Chapter 23: Mutual Fund Operations 1. Which of the following statements is incorrect? a. Mutual funds serve as a key financial intermediary. b. Managers of mutual funds do not analyze economic and industry trends. c. Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace. d. Some mutual funds offer check-writing privileges.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:45 PM DATE MODIFIED: 9/28/2016 11:49 PM 2. To cover managerial and other expenses, mutual funds typically charge a. management fees of less than 2 percent of total assets per year. b. commissions of typically 8 to 10 percent on purchases or sales of securities. c. management fees of typically more than 10 percent of total assets per year. d. a one-time load of 5% upon the initial investment in the mutual fund.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:50 PM DATE MODIFIED: 9/28/2016 11:51 PM 3. Mutual funds that are willing to repurchase their shares from investors at any time are referred to as a. closed-end funds. b. load mutual funds. c. no-load mutual funds. d. open-end mutual funds.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:51 PM DATE MODIFIED: 9/28/2016 11:53 PM 4. Most closed-end funds invest in a. stock and bonds. b. money market securities. c. gold. d. derivatives.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:53 PM DATE MODIFIED: 9/28/2016 11:55 PM 5. Exchange-traded funds (ETFs)? a. are traded on an exchange, and their share price changes throughout the day b. represent only bonds c. are actively managed d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:55 PM DATE MODIFIED: 5/8/2018 5:43 AM 6. Shares of open-end mutual funds are purchased and sold on exchanges. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:57 PM DATE MODIFIED: 9/28/2016 11:58 PM 7. Mutual funds a. are unregulated. b. are required to disclose the names of their portfolio managers in the prospectus. c. are not required to disclose any information about their past performance. d. are exempt from all taxes.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:59 PM DATE MODIFIED: 9/29/2016 12:00 AM 8. Which of the following is NOT disclosed in a mutual fund prospectus? a. the minimum amount of investment required b. the investment objective of the mutual fund c. the fees incurred by the mutual fund d. All of the above are disclosed.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DATE CREATED: DATE MODIFIED:

9/29/2016 12:01 AM 5/8/2018 5:44 AM

9. The net asset value of a mutual fund is estimated once every week. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:03 AM DATE MODIFIED: 9/29/2016 12:05 AM 10. Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective. a. lower; underperform b. higher; outperform c. lower; outperform d. lower; underperform AND higher; outperform ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:05 AM DATE MODIFIED: 5/8/2018 5:44 AM 11. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/29/2016 12:07 AM 9/29/2016 12:09 AM

12. Money market funds invest mostly in: a. stocks b. long-term bonds c. real estate d. short-term securities ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:09 AM DATE MODIFIED: 5/8/2018 5:45 AM 13. If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called a. share price appreciation. b. capital gains distribution. c. dividends. d. split net asset value.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:11 AM DATE MODIFIED: 9/29/2016 12:13 AM 14. Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called a. income funds. b. capital appreciation funds. c. specialty funds.

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Chapter 23: Mutual Fund Operations d. dividend funds.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:13 AM DATE MODIFIED: 9/29/2016 12:14 AM 15. Mutual funds composed of bonds that offer periodic coupon payments are a. income funds. b. specialty funds. c. dividend funds d. growth funds.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:15 AM DATE MODIFIED: 9/29/2016 12:16 AM 16. Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations. a. longer; less b. shorter; less c. shorter; more d. longer; less AND shorter; more ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DATE CREATED: DATE MODIFIED:

9/29/2016 12:17 AM 5/8/2018 5:46 AM

17. Mutual funds that include both non-U.S. stocks and U.S. stocks are called ____ funds. a. global b. foreign c. combined d. mixed ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:20 AM DATE MODIFIED: 9/29/2016 12:23 AM 18. A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund. a. specialty b. growth c. capital appreciation d. growth and income ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:23 AM DATE MODIFIED: 9/29/2016 12:26 AM 19. 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 ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:26 AM DATE MODIFIED: 5/8/2018 5:47 AM 20. If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders. a. 25 b. 50 c. 75 d. 90 ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:28 AM DATE MODIFIED: 9/29/2016 12:30 AM 21. Money market fund assets include all of the following, EXCEPT a. stocks. b. repurchase agreements. c. Treasury bills. d. CDs. ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:30 AM DATE MODIFIED: 5/8/2018 5:51 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations 22. If money market fund managers expect interest rates to increase, they will ____ their average asset maturity. a. not adjust b. shorten c. lengthen d. shorten (if the expected change is small) or lengthen (if the expected change is large) ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:32 AM DATE MODIFIED: 9/29/2016 12:34 AM 23. Money market funds are normally perceived to have ____ interest rate risk and ____ credit risk. a. low; high b. high; high c. high; low d. low; low ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:34 AM DATE MODIFIED: 9/29/2016 12:37 AM 24. Equity real estate investment trusts invest a. in mortgage and construction loans. b. directly in properties. c. in common stocks issued by construction companies. d. in common stocks issued by real estate brokerage firms.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:37 AM DATE MODIFIED: 9/29/2016 12:39 AM 25. When interest rates decline, investors who want to earn a high return may ____ their investments in stock mutual funds and ____ their deposits in depository institutions. a. reduce; reduce b. reduce; increase c. increase; reduce d. increase; increase ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:39 AM DATE MODIFIED: 9/29/2016 12:42 AM 26. The composition of asset allocation funds a. is focused completely on one type of security as specified by the particular mutual fund. b. is fixed and not altered by the mutual fund managers. c. is focused completely on one type of security as specified by the particular mutual fund AND is fixed and not altered by the mutual fund managers. d. None of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:42 AM DATE MODIFIED: 5/8/2018 5:52 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations 27. A mutual fund prospectus is not required to disclose the a. minimum amount of investment required. b. return on the fund since its inception in comparison to the returns of other funds in its category. c. investment objective of the mutual fund. d. exposure of the mutual fund to various types of risk. e. fees incurred by the mutual fund and passed on to investors.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:52 AM DATE MODIFIED: 9/29/2016 12:55 AM 28. The ____ of a mutual fund indicates the value per share. a. net asset value b. gross asset value c. net stock value d. net bond value e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:56 AM DATE MODIFIED: 5/8/2018 5:52 AM 29. _______ are promoted strictly by the mutual fund of concern and do not involve a sales charge. a. Closed-end funds b. Load mutual funds c. No-load mutual funds d. Open-end mutual funds.

ANSWER: c POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:59 AM DATE MODIFIED: 9/29/2016 1:01 AM 30. Mutual funds composed of _____ bonds with high credit ratings allow investors in high tax brackets to avoid taxes while maintaining a low degree of ______. a. Treasury; liquidity risk b. municipal; credit risk c. high-yield; credit risk d. international; exchange rate risk ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:01 AM DATE MODIFIED: 5/8/2018 5:54 AM 31. Which of the following are most likely to invest in mortgages? a. stock mutual funds b. real estate investment trusts c. load funds d. money market funds ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:04 AM DATE MODIFIED: 9/29/2016 1:05 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations 32. Hedge funds that exceed a specified size must register with the a. Securities and Exchange Commission (SEC). b. Federal Reserve. c. Office of Thrift Supervision. d. Federal Mutual Fund Board.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:06 AM DATE MODIFIED: 9/29/2016 1:08 AM 33. A mutual fund’s expense ratio represents the ____ divided by the fund's ____. a. annual fees charged to investors; 12b-1 fees b. annual fees charged to investors; net asset value c. initial sales charge (load); 12b-1 fees d. initial sales charge (load); net asset value ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:08 AM DATE MODIFIED: 9/29/2016 1:10 AM 34. The majority of closed-end funds invest in: a. derivatives b. bonds and other debt securities c. money market securities d. international equity securities ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:10 AM DATE MODIFIED: 5/8/2018 5:55 AM 35. ____ are beneficial for investors who want to invest in tax-exempt securities. a. Municipal bond funds b. Growth and income funds c. International and global funds d. Money market funds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:12 AM DATE MODIFIED: 9/29/2016 1:14 AM 36. Which of the following statements is incorrect? a. Commercial paper is commonly purchased by money market funds. b. From an investor's perspective, money market funds usually have a low level of credit risk. c. Money market funds tend to have low interest rate risk compared to bond funds. d. If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities today to purchase new securities with shorter maturities.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:15 AM DATE MODIFIED: 9/29/2016 1:17 AM 37. The number of exchange-traded funds has declined over the last several years because the cost of managing them was excessive.

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Chapter 23: Mutual Fund Operations a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:17 AM DATE MODIFIED: 9/29/2016 1:19 AM 38. Exchange-traded funds can be purchased on margin. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:22 AM DATE MODIFIED: 9/29/2016 1:24 AM 39. Investors can sell exchange-traded funds short. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:25 AM DATE MODIFIED: 9/29/2016 1:26 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations 40. Mutual fund managers seek securities that are very liquid so that they can easily sell them in the secondary market at any time. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:27 AM DATE MODIFIED: 9/29/2016 1:28 AM 41. Closed-end funds are closed to new investment but allow redemptions by shareholders. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:29 AM DATE MODIFIED: 9/29/2016 1:30 AM 42. Closed-end fund managers must hold more cash than open-end mutual fund managers. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:30 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DATE MODIFIED:

9/29/2016 1:32 AM

43. Index mutual funds are not traded throughout the day, while exchange-traded funds are. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:33 AM DATE MODIFIED: 9/29/2016 1:34 AM 44. Venture capital funds typically invest in stocks of publicly traded companies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:35 AM DATE MODIFIED: 9/29/2016 1:36 AM 45. Many businesses that go public are partially backed by venture capital before the IPO. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DATE CREATED: DATE MODIFIED:

9/29/2016 1:37 AM 9/29/2016 1:38 AM

46. Private equity funds use most of their money to invest in stocks of publicly traded companies. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:38 AM DATE MODIFIED: 9/29/2016 1:40 AM 47. _____ funds contain both stocks and bonds, with the proportions changing automatically as the investor ages. a. Alternative strategy b. Automatic allocation c. Target date d. Age-in-place ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:40 AM DATE MODIFIED: 9/29/2016 1:42 AM 48. Hedge funds commonly engage in short selling. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/29/2016 1:42 AM 9/29/2016 1:44 AM

49. Which of the following statements is incorrect? a. ETFs are like index mutual funds in that the share price adjusts over time in response to changes in the index level. b. ETFs normally do not have capital gains and losses that must be distributed to shareholders. c. The portfolio management of both ETFs and index mutual funds is very complex. d. ETFs can be traded throughout the day.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:44 AM DATE MODIFIED: 9/29/2016 1:46 AM 50. Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as: a. index mutual funds b. exchange-traded funds c. money market fund d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:46 AM DATE MODIFIED: 5/8/2018 5:58 AM 51. Exchange-traded funds can be: a. traded throughout the day b. purchased on margin Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations c. sold short d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:49 AM DATE MODIFIED: 5/8/2018 5:58 AM 52. ____ trade at one-tenth of the S&P 500 value. a. Spiders b. Cubes c. Diamonds d. World Equity Benchmark Shares ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:51 AM DATE MODIFIED: 9/29/2016 1:53 AM 53. Mutual funds must register with the U.S. Treasury and provide interested investors with a prospectus that discloses details about the components of the funds and the risks involved. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DATE CREATED: DATE MODIFIED:

9/29/2016 1:53 AM 9/29/2016 1:55 AM

54. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:55 AM DATE MODIFIED: 9/29/2016 1:57 AM 55. Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:57 AM DATE MODIFIED: 9/29/2016 1:59 AM 56. The expenses incurred by a mutual fund are billed separately to investors and are not included in the calculation of the fund's net asset value (NAV). a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/29/2016 1:59 AM 9/29/2016 2:01 AM

57. The Securities and Exchange Commission’s Regulation FD allows a firm to provide advance information about its earnings exclusively to hedge funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:03 AM DATE MODIFIED: 9/29/2016 2:05 AM 58. Large mutual funds can exert some control over the management of firms because they commonly are the largest shareholders. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: DISC.FMAI.MADU.15.02 DATE CREATED: 9/29/2016 2:05 AM DATE MODIFIED: 9/29/2016 2:08 AM 59. Investors who feel capable of making their own investment decisions often prefer to invest in load funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:09 AM DATE MODIFIED: 9/29/2016 2:11 AM 60. The term "mutual funds" is normally used to refer to closed-end funds and does not include open-end funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:14 AM DATE MODIFIED: 9/29/2016 2:16 AM 61. Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of each day. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:16 AM DATE MODIFIED: 9/29/2016 2:18 AM 62. Capital appreciation funds are suited to investors who are more willing to risk a possible loss in value. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:18 AM DATE MODIFIED: 9/29/2016 2:20 AM 63. The returns on international stock mutual funds are affected only by foreign companies' stock prices and are independent of currency movements. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:20 AM DATE MODIFIED: 9/29/2016 2:22 AM 64. Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform indexes. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:22 AM DATE MODIFIED: 9/29/2016 2:24 AM 65. A mutual fund's performance is usually unrelated to market conditions. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:24 AM DATE MODIFIED: 9/29/2016 2:26 AM 66. Hedge funds try to obtain an information advantage by using expert networks, whereby they hire consultants with expertise in specific industries. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:26 AM DATE MODIFIED: 9/29/2016 2:28 AM 67. Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall investment. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:28 AM DATE MODIFIED: 9/29/2016 2:30 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations 68. Closed-end funds may sometimes engage in a stock repurchase, in which they purchase shares on the exchange where the shares are listed. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:30 AM DATE MODIFIED: 9/29/2016 2:32 AM 69. Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:32 AM DATE MODIFIED: 9/29/2016 2:34 AM 70. Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with inflation. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Comprehension 9/29/2016 2:34 AM 9/29/2016 2:41 AM

71. Equity REITs essentially represent fixed-income portfolios, so their market values are heavily influenced by interest rate movements. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:42 AM DATE MODIFIED: 9/29/2016 2:44 AM 72. Hedge funds are more heavily regulated than mutual funds. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:44 AM DATE MODIFIED: 9/29/2016 2:47 AM 73. Which of the following is NOT true regarding mutual funds? a. They are a key financial intermediary. b. They provide an important service to individual investors seeking to invest funds. c. Most mutual funds use experienced portfolio managers, so investors do not have to manage the portfolio themselves. d. They provide a way for individual investors to diversify, but most individual investors are unable to afford the purchase of mutual fund shares.

ANSWER: d POINTS: 1 DIFFICULTY: Challenging Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:47 AM DATE MODIFIED: 5/8/2018 6:00 AM 74. Which of the following statements is incorrect? a. Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and are traded on a stock exchange. b. ETFs have very high expense ratios. c. ETFs differ from most open-end and closed-end funds in that they are not actively managed. d. One disadvantage of ETFs is that each purchase of additional shares must be done through the exchange where they are traded.

ANSWER: b POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:49 AM DATE MODIFIED: 9/29/2016 2:51 AM 75. Hedge funds a. are typically organized as limited partnerships. b. hedge funds were accused of making market conditions worse during the credit crisis because they commonly took short positions in the stock of financial institutions that held subprime mortgages. c. commonly rely heavily on financial leverage. d. generally charge both a management fee and an incentive fee. e. All of these are correct.

ANSWER: e POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DATE CREATED: DATE MODIFIED:

9/29/2016 2:52 AM 5/8/2018 6:01 AM

76. The ____ of a mutual fund represents the price at which shares can be purchased from a mutual fund. a. gross asset value b. net asset value c. net stock value d. net bond value ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:56 AM DATE MODIFIED: 9/29/2016 2:58 AM 77. Which of the following is incorrect about money market funds (MMFs)? a. The credit risk of MMFs is normally perceived to be lower than that of corporate bonds. b. MMFs have higher interest rate risk than bond funds. c. MMFs normally generate positive returns over time. d. All of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:59 AM DATE MODIFIED: 5/8/2018 6:02 AM 78. Most studies that assess mutual fund performance find that mutual funds almost always outperform a benchmark market index. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 3:02 AM DATE MODIFIED: 9/29/2016 3:04 AM 79. Which of the following is NOT a way in which mutual funds generate returns for their shareholders? a. They can pass on any earned income as dividend payments to shareholders. b. They distribute the capital gains resulting from the sale of securities within the fund. c. The mutual fund price appreciates. d. All of these are ways in which a mutual fund generates returns to its shareholders.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 3:04 AM DATE MODIFIED: 5/8/2018 6:03 AM 80. A(n) ____ fund contains a sales charge. a. Load b. no-load c. closed-end d. open-end e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 3:07 AM DATE MODIFIED: 5/8/2018 6:03 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations 81. Based on the market value of total assets, which is the dominant type of mutual fund? a. hi-yield (junk) bond funds b. hybrid funds c. stock funds d. taxable bond funds e. municipal bond funds ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 3:09 AM DATE MODIFIED: 9/29/2016 3:11 AM 82. Which of the following statements is incorrect? a. Investors can purchase shares directly from an open-end fund at any time. b. The number of shares of an open-end fund is always changing. c. Open-end funds typically maintain some cash on hand in case investments exceed redemptions. d. There are many different categories of open-end mutual funds.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 3:11 AM DATE MODIFIED: 9/29/2016 3:13 AM 83. ____ funds focus on a group of companies sharing a particular characteristic. a. Specialty b. Growth and income c. Closed-end d. Capital appreciation e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 3:14 AM DATE MODIFIED: 5/8/2018 6:05 AM 84. When at least two-thirds of a bond mutual fund’s portfolio consists of bonds rated below Baa by Moody's or BBB by Standard and Poor's, the fund is called a ____ fund. a. Growth b. capital appreciation c. junk bond d. leveraged bond e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 3:16 AM DATE MODIFIED: 5/8/2018 6:05 AM 85. Which of the following statements is incorrect? a. A mutual fund is usually run by an investment company. b. Mutual funds with lower expense ratios tend to outperform other funds with a similar investment objective. c. For each mutual fund, all expenses charged and reflected in the expense ratio are always valid. d. The SEC requires that a majority of the directors of a mutual fund board be independent.

ANSWER: c POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 3:18 AM DATE MODIFIED: 9/29/2016 3:20 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations 86. Money market funds commonly invest in: a. stocks b. real estate c. commercial paper d. U.S. Treasury bonds e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 3:20 AM DATE MODIFIED: 5/8/2018 6:06 AM 87. Which of the following is NOT true with respect to venture capital funds? a. They typically invest in young, growing firms that need equity funding but are not ready or willing to go public. b. More than half of all VC investing is in businesses that are being created. c. Venture capital funds tend to focus on technology firms, which have the potential for high returns but also exhibit a high level of risk. d. Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail. e. All of these are correct with respect to venture capital funds.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 5:42 AM DATE MODIFIED: 5/8/2018 6:07 AM 88. ____ funds sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securities. a. Growth b. Open-end c. Capital appreciation d. Hedge Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations e. Specialty ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:02 AM DATE MODIFIED: 9/29/2016 6:04 AM 89. Compared to open-end mutual funds, exchange-traded funds generate much more capital gain income that must

be distributed to their shareholders, who must pay tax on the gains. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:05 AM DATE MODIFIED: 9/29/2016 6:06 AM 90. Shares of exchange-traded funds can be sold _________, and shares of open-end mutual funds can be sold

_________. a. at any time during trading hours; at any time via private trading networks b. only at the end of the day; at any time during trading hours c. at any time via private trading networks; at any time during trading hours d. at any time during trading hours; only at the end of the day ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

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91. The average annual fee on actively managed exchange-traded funds is ________. a. zero b. lower than the typical annual fee on open-end mutual funds c. higher than the typical annual fee on open-end mutual funds d. the same as the typical annual fee on open-end mutual funds ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 6:08 AM DATE MODIFIED: 5/8/2018 6:08 AM 92. An investor who believes that technology stocks will perform well but does not want to select individual

technology stocks might invest in: a. Spiders b. WEBs c. Cubes d. Diamonds ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:10 AM DATE MODIFIED: 5/8/2018 6:09 AM 93. If interest rates are expected to ________, mortgage real investment trusts (REITs) ___________. a. decline; become less attractive b. rise; become less attractive c. rise; are not affected Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations d. decline; are not affected ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 6:12 AM DATE MODIFIED: 9/29/2016 6:14 AM 94. Investors who invest in a hedge fund of funds essentially pay two layers of management fees. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:14 AM DATE MODIFIED: 9/29/2016 6:15 AM 95. Hedge funds commonly use financial leverage, which can a. magnify their returns and magnify their losses. b. magnify their returns and limit their losses. c. reduce their risk and limit their losses. d. magnify their returns and not affect their risk.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.23.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 6:15 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 23: Mutual Fund Operations DATE MODIFIED:

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Chapter 24: Securities Operations 1. Which of the following is NOT a service that is commonly performed by a securities firm? a. setting regulatory rules for stock exchanges b. origination c. underwriting d. distribution ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:32 AM DATE MODIFIED: 5/8/2018 6:16 AM 2. The ____ regulates the issuance of securities. a. Securities and Exchange Commission b. National Association of Securities Dealers c. Federal Reserve Board d. Securities Investor Protection Corporation ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:34 AM DATE MODIFIED: 9/28/2016 11:35 AM 3. When an IPO is planned, all information relevant to the security, as well as the agreement between the issuer and the securities firm, must be included in the ___________ that is submitted to the Securities and Exchange Commission. a. origination b. registration statement c. best-efforts agreement d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:36 AM DATE MODIFIED: 5/8/2018 6:17 AM 4. When a stock offering is based on a firm commitment, this means that the securities firm does not guarantee a price to the issuing corporation. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:37 AM DATE MODIFIED: 9/28/2016 11:39 AM 5. Research indicates that securities firms tend to: a. overprice IPOs b. underprice IPOs c. price IPOs correctly d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:39 AM DATE MODIFIED: 5/8/2018 6:18 AM 6. The one-day return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors who purchase the shares a day after the IPO are generally ____. a. high; high Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations b. high; low c. low; high d. low; low ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:40 AM DATE MODIFIED: 9/28/2016 11:42 AM 7. The ____ determines margin requirements on securities purchased. a. Securities and Exchange Commission b. Financial Industry Regulatory Authority c. Federal Reserve Board d. Securities Investor Protection Corporation ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:42 AM DATE MODIFIED: 9/28/2016 11:43 AM 8. The ____ can liquidate failing brokerage firms. a. Securities and Exchange Commission b. Financial Industry Regulatory Authority c. Federal Reserve Board d. Securities Investor Protection Corporation ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/28/2016 11:44 AM 9/28/2016 11:45 AM

9. When securities firms help corporations issue bonds, their primary role is as a(n): a. intermediary b. lender (creditor) c. investor d. lendor (creditor) AND investor ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:45 AM DATE MODIFIED: 5/8/2018 6:19 AM 10. The price of newly issued stock should be ____ the market price of the firm's outstanding stock. a. about the same as b. much more than c. much less than d. much more than AND much less than, depending on the amount of stock to be issued ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:47 AM DATE MODIFIED: 5/8/2018 6:20 AM 11. Under SEC Rule 144A, firms may engage in private placements of stock without filing the extensive registration statement that is required for public placements. a. True b. False ANSWER: a Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/28/2016 11:48 AM DATE MODIFIED: 9/28/2016 11:50 AM 12. Flotation costs as a percentage of the value of securities issued are ____ for ____ issues. a. lower; small b. lower; large c. higher; large d. lower; small AND higher; large ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:50 AM DATE MODIFIED: 5/8/2018 6:21 AM 13. Competitive bidding by securities firms for underwriting the issue of new bonds is primarily used for: a. federal government bonds b. bonds issued by banks c. public utility bonds d. bonds issued by nonbanking financial institution ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:16 AM DATE MODIFIED: 5/8/2018 6:21 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations 14. In a ____ of stock, all of the shares issued may be held by a small number of institutional investors. a. market placement b. public placement c. shelf placement d. private placement ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:18 AM DATE MODIFIED: 9/29/2016 12:20 AM 15. After a target firm is acquired, the acquirer may sell off divisions of the target that are not compatible with the acquirer’s business. This process is known as: a. bridging b. asset stripping c. greenmail d. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:43 AM DATE MODIFIED: 5/8/2018 6:22 AM 16. When a firm spins off a unit, it creates new shares representing the unit and distributes them to existing shareholders. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:44 AM DATE MODIFIED: 5/8/2018 6:23 AM 17. The ____ is not involved in the regulation of the securities industry. a. Deposit Insurance Fund b. Financial Industry Regulatory Authority c. Securities and Exchange Commission d. Federal Reserve Board e. All of these are involved in the regulation of the securities industry.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:46 AM DATE MODIFIED: 5/8/2018 6:24 AM 18. Which of the following is NOT an SEC rule? a. Analysts at a securities firm underwriting an IPO cannot promote the new stock for the first 40 days after the IPO. b. An analyst's compensation should be directly aligned with the amount of business that the analyst brings to the securities firm. c. Analysts cannot be supervised by the investment banking department within the securities firm. d. When rating a security, an analyst must divulge any recent investment banking business provided by the analyst’s securities firm to the firm that issued the security.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:48 AM DATE MODIFIED: 5/8/2018 6:24 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations 19. The value of a securities firm is typically ____ related to interest rate movements. a. positively b. not c. inversely d. positively AND not ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:51 AM DATE MODIFIED: 5/8/2018 6:25 AM 20. ____ is not a service that a securities firm provides in placing bonds. a. Origination b. Underwriting c. Distribution d. Advising e. All of these are services that securities firms provide in placing bonds ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:53 AM DATE MODIFIED: 5/8/2018 6:26 AM 21. When facilitating a secondary stock offering, a securities firm commonly performs all of the following functions EXCEPT _____ . a. origination b. underwriting the stock c. distribution of the stock d. its own purchase of at least 20 percent of the offering ANSWER: d POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 12:55 AM DATE MODIFIED: 5/8/2018 6:27 AM 22. Asset stripping refers to a. acquiring shares in a firm and then causing the firm to repurchase the shares at a premium to prevent a takeover. b. financing provided by securities firms to help support an acquisition. c. investing in the shares of a firm that is expected to experience a leveraged buyout (LBO). d. selling off individual divisions of an acquired firm that are not compatible with the acquirer’s business.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:56 AM DATE MODIFIED: 9/29/2016 12:58 AM 23. A bridge loan provided by a securities firm would most likely be made to a. a corporation until the corporation raises funds in other ways. b. a commercial bank in the federal funds market. c. a mutual fund that needs to cover share redemptions. d. an investor who has received a margin call and needs to add cash to his margin account.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 12:58 AM DATE MODIFIED: 9/29/2016 12:59 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations 24. Securities firms commonly engage in all of the following functions EXCEPT a. proprietary trading. b. underwriting stock. c. operating mutual funds. d. providing brokerage services. e. operating credit unions.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:00 AM DATE MODIFIED: 5/8/2018 6:28 AM 25. ____ are not included in flotation costs. a. Issue costs b. Fees paid to the underwriters c. Taxes paid on income earned from the stock offering d. Registration expenses ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:02 AM DATE MODIFIED: 5/8/2018 6:28 AM 26. Institutional investors that are willing to hold stock for only a very short period of time are prime candidates for participating in a private placement. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:04 AM DATE MODIFIED: 5/8/2018 6:29 AM 27. 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 ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:20 AM DATE MODIFIED: 9/29/2016 1:22 AM 28. Unlike the standardized provisions of a publicly placed issue, the provisions of a privately placed bond issue can be tailored to the desires of the purchaser. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:22 AM DATE MODIFIED: 5/8/2018 6:30 AM 29. The ____ offers insurance on cash and securities deposited at brokerage firms. a. Federal Reserve b. New York Stock Exchange c. Securities Investor Protection Corporation (SIPC) d. Securities and Exchange Commission (SEC) Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:24 AM DATE MODIFIED: 9/29/2016 1:25 AM 30. Securities firms serve as an intermediary for each of the following, EXCEPT a. stock offerings. b. debt offerings. c. IPOs. d. They serve as intermediary for all of these.

ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:26 AM DATE MODIFIED: 5/8/2018 6:32 AM 31. As a result of the Financial Services Modernization Act a. securities firms had to search for loopholes to expand into other types of financial services. b. firms that formed a special finance holding company were regulated by the SEC. c. banking, securities activities, and insurance services could be consolidated in a single financial institution. d. securities firms were prohibited from expanding into other types of financial services.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 1:29 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations DATE MODIFIED:

9/29/2016 1:31 AM

32. One of the main functions of securities firms is helping corporations and governments raise funds. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:31 AM DATE MODIFIED: 9/29/2016 1:33 AM 33. When securities firms facilitate initial public offerings, they attempt to price the stock high enough to satisfy the issuing firm. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 1:33 AM DATE MODIFIED: 9/29/2016 1:35 AM 34. The compensation paid to securities firms for helping a firm raise funds is typically in the form of interest income. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/29/2016 2:19 AM 9/29/2016 2:20 AM

35. The Securities and Exchange Commission’s approval of a registration statement guarantees the quality and safety of the securities to be issued. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:20 AM DATE MODIFIED: 9/29/2016 2:22 AM 36. One reason for the financial problems of securities firms during the credit crisis was that they used a high degree of financial leverage. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:22 AM DATE MODIFIED: 9/29/2016 2:23 AM 37. Securities firms engage in proprietary trading, which means that they serve as an intermediary by trading shares of stock requested by proprietorships. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:24 AM DATE MODIFIED: 9/29/2016 2:25 AM 38. The Financial Reform Act created the Financial Stability Oversight Council, which is responsible for identifying risks to financial stability in the United States. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:25 AM DATE MODIFIED: 9/29/2016 2:27 AM 39. During the credit crisis, many commercial banks were forced to convert to securities firms. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:27 AM DATE MODIFIED: 9/29/2016 2:28 AM 40. During the credit crisis, some large securities firms were either acquired by commercial banks or converted into bank holding companies. a. True b. False ANSWER: a POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:28 AM DATE MODIFIED: 9/29/2016 2:30 AM 41. The Federal Reserve intervened to help securities firms during the credit crisis in order to reduce the potential adverse effects of systemic risk. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:30 AM DATE MODIFIED: 9/29/2016 2:31 AM 42. Securities firms avoided exposure to mortgages during the credit crisis because they sold their mortgage holdings before the crisis began. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:32 AM DATE MODIFIED: 9/29/2016 2:33 AM 43. If securities firms are subject to systemic risk, this means that their main source of risk is a rise in interest rates, which may cause the value of their bond holdings to decline. a. True Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:33 AM DATE MODIFIED: 9/29/2016 2:34 AM 44. When securities firms facilitate an IPO, they attempt to price the stock a. at a level that will enable institutional investors who invest in the IPO to earn reasonable returns. b. high enough to satisfy the issuing firm. c. at a level that will enable the securities firms to place the entire issue. d. All of these are correct.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:35 AM DATE MODIFIED: 5/8/2018 6:33 AM 45. Which of the following is NOT an example of a securities firm that experienced financial problems as a result of taking on excessive risk when engaging in proprietary trading? a. Washington Mutual b. Société Générale c. Bear Stearns d. Barings Bank ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/29/2016 2:37 AM 5/8/2018 6:34 AM

46. Which of the following is NOT a way that a securities firm might advise a corporation to restructure its operations? a. a stock pass-through b. a spin-off of a unit c. a carve-out d. divestiture ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:39 AM DATE MODIFIED: 5/8/2018 6:35 AM 47. Many of the fees that securities firms charge for advising clients on a possible merger are typically dependent on whether the merger takes place. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/29/2016 2:41 AM DATE MODIFIED: 9/29/2016 2:42 AM 48. Which of the following does NOT play a role in regulating securities trading? a. Financial Industry Regulatory Authority b. Resolution Trust Corporation c. New York Stock Exchange d. Federal Reserve ANSWER: b POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:42 AM DATE MODIFIED: 5/8/2018 6:36 AM 49. The SEC’s Regulation Fair Disclosure (FD) a. requires firms to disclose any significant information to the SEC before making public announcements. b. requires firms to disclose any significant information to the Federal Reserve before releasing it to the public. c. requires firms to disclose any significant information simultaneously to all market participants. d. prohibits insiders at firms from trading on significant inside information.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:44 AM DATE MODIFIED: 5/8/2018 6:36 AM 50. Securities firms that converted to bank holding companies during the credit crisis a. gained more flexibility to obtain financing from the Federal Reserve. b. had to give up their traditional securities function of underwriting. c. came under greater regulatory oversight by the Securities Investor Protection Corporation. d. were prohibited from investing in or selling mortgage-backed securities.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.24.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/29/2016 2:46 AM DATE MODIFIED: 5/8/2018 6:37 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 24: Securities Operations

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Chapter 25: Insurance Operations 1. Which of the following statements is incorrect? a. Insurance provides a payment to the insured under conditions specified by the insurance policy contract. b. Individuals who are less exposed to specific conditions that cause financial damage are more likely to purchase insurance against those conditions. c. Insurance can cause the insured to take more risks because they are protected. d. Insurance companies employ underwriters to calculate the risk of specific insurance policies.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:24 AM DATE MODIFIED: 9/21/2016 7:25 AM 2. Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity. a. less; less b. more; more c. less; more d. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:26 AM DATE MODIFIED: 5/8/2018 6:51 AM 3. A ____ life insurance company is owned by its policyholders; most life insurance companies are ____. a. stock-owned; mutual b. mutual; mutual c. stock-owned; stock-owned d. mutual; stock-owned ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:29 AM DATE MODIFIED: 9/21/2016 7:30 AM 4. ____ insurance provides insurance for a policyholder only over a specified period. a. Term b. Whole life c. Universal d. Term AND Universal ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:31 AM DATE MODIFIED: 5/8/2018 6:52 AM 5. Which type of life insurance policy does NOT build a cash value for policyholders? a. whole life b. term c. universal life d. All of these build a cash value.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:33 AM DATE MODIFIED: 5/8/2018 6:53 AM 6. Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?

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Chapter 25: Insurance Operations a. whole life b. term c. decreasing term d. universal life ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:35 AM DATE MODIFIED: 9/21/2016 7:36 AM 7. Which type of life insurance policy can offer flexibility on the size and timing of premium payments? a. whole life b. term c. universal life d. decreasing term ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:37 AM DATE MODIFIED: 9/21/2016 7:38 AM 8. Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy. a. whole life insurance b. term insurance c. variable life insurance d. universal life insurance ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:39 AM DATE MODIFIED: 9/21/2016 7:40 AM 9. ____ is(are) not a typical source of funds for life insurance companies. a. Deposit insurance premiums b. Annuity plans c. Investment income d. Life and health insurance premiums ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:41 AM DATE MODIFIED: 9/21/2016 7:42 AM 10. ____ are the most popular assets of life insurance companies. a. Corporate stocks and corporate debt securities b. Treasury securities c. Mortgages and mortgage-backed securities d. State and local bonds ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:44 AM DATE MODIFIED: 9/21/2016 7:44 AM 11. Which of the following is NOT a characteristic commonly assessed by insurance regulators to detect any problems in an insurance company? a. liquidity of the asset portfolio Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations b. relative size of operating expenses c. return on investment d. All of these are assessed by regulators.

ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:45 AM DATE MODIFIED: 5/8/2018 6:55 AM 12. The ratio of an insurance company's net profit to policyholders' surplus is called a. liquidity ratio. b. return on net worth. c. net underwriting margin. d. return on assets.

ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.05 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:48 AM DATE MODIFIED: 9/21/2016 7:48 AM 13. Life insurance companies can attempt to reduce their exposure to interest rate risk by a. increasing their proportion of long-term assets. b. diversifying the age distribution of their customer base. c. increasing their proportion of short-term assets. d. concentrating on an older age distribution of their customer base.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Knowledge 9/21/2016 7:49 AM 9/21/2016 7:50 AM

14. Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies? a. Property and casualty policies are longer term. b. The type of policies offered by life insurance companies are less focused. c. Future compensation amounts paid on property and casualty policies are more difficult to forecast. d. Life insurance companies need to maintain a more liquid asset portfolio.

ANSWER: c POINTS: 1 DIFFICULTY: Challenging QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:51 AM DATE MODIFIED: 9/21/2016 7:52 AM 15. The most common use of funds for property and casualty insurance companies is for: a. corporate bonds and municipal securities b. Treasury bills c. corporate stock d. commercial paper ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:53 AM DATE MODIFIED: 5/8/2018 6:56 AM 16. ____ effectively reallocates a portion of an insurance company's return and risk to other insurance companies. a. Reinsurance b. Cash flow underwriting c. Factor insurance Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations d. Universal insurance ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 7:58 AM DATE MODIFIED: 9/21/2016 7:59 AM 17. Individuals who are insured under a managed health care plan can usually choose any provider of health care services. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:01 AM DATE MODIFIED: 9/21/2016 8:01 AM 18. ____ insurance covers losses due to dishonest employees. a. Key employee b. Credit line c. Malpractice d. Fidelity bond ANSWER: d POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:02 AM DATE MODIFIED: 9/21/2016 8:04 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations 19. ____ insurance covers losses due to a contract not being fulfilled. a. Fidelity bond b. Credit line c. Surety bond d. Business interruption ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:05 AM DATE MODIFIED: 9/21/2016 8:06 AM 20. Which of the following is NOT involved in the regulation of the insurance industry? a. the National Association of Insurance Commissioners (NAIC) b. the Insurance Regulatory Information System (IRIS) c. the Federal Deposit Insurance Corporation (FDIC) d. All of these are involved in the regulation of the insurance industry.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:08 AM DATE MODIFIED: 5/8/2018 6:57 AM 21. With a(n) ____ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ, depending on the assets backing the policy. a. universal life b. whole life c. variable life d. group life e. None of these are correct.

ANSWER: c POINTS: 1 Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:10 AM DATE MODIFIED: 5/8/2018 6:58 AM 22. The most common type of mortgage held by life insurance companies are ____ mortgages. a. commercial b. residential c. farm d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:12 AM DATE MODIFIED: 5/8/2018 6:58 AM 23. The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern. a. Securities and Exchange Commission b. Federal Deposit Insurance Corporation c. National Association of Insurance Commissioners d. National Association of Securities Dealers e. None of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:15 AM DATE MODIFIED: 5/8/2018 6:59 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations 24. 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 ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:17 AM DATE MODIFIED: 9/21/2016 8:18 AM 25. The moral hazard problem as related to the insurance industry means that some people take more risks once they are insured. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:20 AM DATE MODIFIED: 9/21/2016 8:22 AM 26. Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 8:33 AM 9/21/2016 8:33 AM

27. Group insurance policies are very popular for employers and employees. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:34 AM DATE MODIFIED: 9/21/2016 8:34 AM 28. Real estate values usually have little impact on the market value of a life insurance company's asset portfolio and only affect property and casualty insurance companies. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:36 AM DATE MODIFIED: 9/21/2016 8:36 AM 29. Property and casualty insurance and life insurance are similar in terms of the predictability of payouts to cover claims. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS: DATE CREATED: DATE MODIFIED:

United States - BUSPROG.FMAI.MADU.15.03 United States - OH - DISC.FMAI.MADU.15.02 Bloom's: Comprehension 9/21/2016 8:38 AM 9/21/2016 8:38 AM

30. _____ insurance provides a financial payout if specified employees of a business become disabled or die. a. Best person b. Employment liability c. Key employee d. Credit line ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.01 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:40 AM DATE MODIFIED: 9/21/2016 8:41 AM 31. Bond insurance is available only for corporate bonds and not for municipal securities. a. True b. False ANSWER: False POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:43 AM DATE MODIFIED: 9/21/2016 8:43 AM 32. An insurance company’s liquidity is measured as a. net profit minus losses. b. premium income minus policy expenses. c. invested assets divided by loss reserves and unearned premium reserves. d. None of these are correct.

ANSWER: c Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:45 AM DATE MODIFIED: 5/8/2018 7:00 AM 33. The primary source of funds for a life insurance company income is: a. life insurance premiums b. annuity plans c. health insurance premiums d. investment income e. None of these are correct.

ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.02 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:47 AM DATE MODIFIED: 5/8/2018 7:01 AM 34. Property and casualty (PC) insurance companies may use cash flow underwriting, in which they tend to lower their premium prices as interest rates rise. a. True b. False ANSWER: True POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: True / False HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:49 AM DATE MODIFIED: 9/21/2016 8:50 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 25: Insurance Operations 35. The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising premiums when interest rates decline is called: a. cyclical rate adjusting b. collateralizing premiums c. cash flow underwriting d. reinsurance ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:51 AM DATE MODIFIED: 5/8/2018 7:02 AM 36. Mortgage insurance protects a. homeowners against damage to their home such as from storms or fire. b. homeowners in the event that they cannot make their mortgage payments. c. the lender who provided the mortgage in the event that the homeowner defaults on the mortgage. d. All of these are correct.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.03 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/28/2016 11:29 AM DATE MODIFIED: 5/8/2018 7:03 AM

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Chapter 26: Pension Fund Operations 1. Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans. a. defined-benefit b. defined-contribution c. beneficiary d. guarantor-insured ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:37 AM DATE MODIFIED: 9/21/2016 6:38 AM 2. A pension plan that provides benefits that are determined by the accumulated contributions and return on the fund's investment performance is called a ____ plan. a. defined-benefit b. defined-contribution c. beneficiary d. guarantor-insured ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:38 AM DATE MODIFIED: 9/21/2016 6:39 AM 3. A ____ plan allows a firm to know with certainty the amount of funds to contribute. The ____ plan allows a firm to know with certainty the amount of benefits that must be provided. a. defined-benefit; defined-benefit b. defined-contribution; defined-contribution c. defined-contribution; defined-benefit d. defined-benefit; defined-contribution ANSWER: c POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:41 AM DATE MODIFIED: 9/21/2016 6:42 AM 4. If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matched funding and projective funding, ____ is more flexible for portfolio managers. a. matched funding; matched funding b. projective funding; matched funding c. projective funding; projective funding d. matched funding; projective funding ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 6:43 AM DATE MODIFIED: 9/21/2016 6:44 AM 5. Pension funds managed by life insurance companies are normally referred to as: a. trust portfolios b. insured plans c. matched plans d. projective plans ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:45 AM DATE MODIFIED: 5/8/2018 7:04 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations 6. The asset composition of private pension portfolios is most heavily concentrated in: a. corporate bonds b. mortgages c. common stock d. money market securities ANSWER: c POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 6:46 AM DATE MODIFIED: 5/8/2018 7:05 AM 7. Investing in a bond index portfolio is an example of a(n) ____ approach. Investing in an equity portfolio that mirrors the stock market is an example of a(n) ____ approach. a. passive; active b. active; active c. active; passive d. passive; passive ANSWER: d POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 7:58 AM DATE MODIFIED: 9/21/2016 8:03 AM 8. Pension funds managed by life insurance companies concentrate on: a. common stock b. bonds and mortgages c. preferred stock d. money market instruments ANSWER: b POINTS: 1 DIFFICULTY: Moderate Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:04 AM DATE MODIFIED: 5/8/2018 7:06 AM 9. To reduce interest rate risk, pension fund managers can a. shift from variable-rate to fixed-rate bonds. b. increase the average maturity on fixed-rate bonds. c. sell bond futures contracts. d. reduce the investment in money market securities.

ANSWER: c POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.04 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:11 AM DATE MODIFIED: 9/21/2016 8:13 AM 10. Most pension fund contributions are contributed by the: a. employer b. employee c. state government d. federal government e. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:13 AM DATE MODIFIED: 5/8/2018 7:07 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations 11. Public pension funds can be classified by the manner in which contributions are received and benefits are paid. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:19 AM DATE MODIFIED: 9/21/2016 8:21 AM 12. A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:22 AM DATE MODIFIED: 9/21/2016 8:24 AM 13. In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:25 AM Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations DATE MODIFIED:

9/21/2016 8:27 AM

14. Projective funding limits the manager's discretion, allowing only investments that match future payouts. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:27 AM DATE MODIFIED: 9/21/2016 8:29 AM 15. Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:30 AM DATE MODIFIED: 9/21/2016 8:32 AM 16. The composition of the stocks in a pension fund's portfolio is determined by the fund's portfolio managers. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.08 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations KEYWORDS: DATE CREATED: DATE MODIFIED:

Bloom's: Knowledge 9/21/2016 8:32 AM 9/21/2016 8:35 AM

17. With a ____ funding strategy, investment decisions are made with the objective of generating cash flows that match planned outflow payments. a. matched b. mixed c. projective d. None of these are correct.

ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:35 AM DATE MODIFIED: 5/8/2018 7:08 AM 18. Underfunded pensions are primarily a problem with defined-contribution pension plans. a. True b. False ANSWER: b POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Comprehension DATE CREATED: 9/21/2016 8:37 AM DATE MODIFIED: 9/21/2016 8:39 AM 19. The government agency that guarantees that participants in defined-benefit plans will receive their benefits upon retirement is the: a. Federal Pension Insurance Corporation b. Pension Benefit Guaranty Corporation c. Office of Pension Insurance d. Employee Pension Protection Bureau ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 26: Pension Fund Operations POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.06 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:39 AM DATE MODIFIED: 5/8/2018 7:08 AM 20. A pension fund manager might hedge against interest rate movements by selling bond futures contracts. a. True b. False ANSWER: a POINTS: 1 DIFFICULTY: Moderate QUESTION TYPE: Multiple Choice HAS VARIABLES: False LEARNING OBJECTIVES: FMAI.MADU.15.25.07 NATIONAL STANDARDS: United States - BUSPROG.FMAI.MADU.15.03 STATE STANDARDS: United States - OH - DISC.FMAI.MADU.15.02 KEYWORDS: Bloom's: Knowledge DATE CREATED: 9/21/2016 8:43 AM DATE MODIFIED: 9/21/2016 8:46 AM

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