Question

True/False (1 Point each)
1) When bond prices decrease, their yields to maturity increase.
2) The best forms of money and financial systems enjoy the benefits of trust, belief, and stability.
3) A fundamental function of a commercial bank is to take in deposits and make loans.
4) Traditional banks operate with low margins and high leverage.
5) Rates on bonds issued by a government can be negative.
6) ) The default risk premium is the same as the credit spread.
7)The price of a financial asset is the present value of the payments to be received from owning it.
8) An “out of the money” call option has time value but not intrinsic value.
9) The yield on a bond can be viewed as the sum of the real interest rate plus an inflation factor plus the default risk premium.
10) The Federal Reserve system makes money and distributes all the profits to its owners (which are the banks in each respective district).
11) BBB-/Baa3 represents a high yield rating.
12) The FDIC insurance covers deposits at both commercial banks and shadow banks up to $250,000.

Multiple Choice (2 points each)

1) The financial system provides three services to savers and borrowers. Which of the following is the best answer?
a) Information, regulation and liquidity
b) Information, risk sharing and liquidity
c) Liquidity, risk sharing and regulation
d) Regulation, insurance and compliance

2) Derivatives are financial instruments that:
a)Always present high levels of risk and should only be used by the wealthy.
b) When used correctly can actually lower risk
c) Should only be used by people seeking high returns from low risk
d) Represents the outright purchase of a bond

3) The ways the Fed can add reserves into the banking system include:
a) An increase in the size of the Fed's balance sheet through open market purchases of securities.
b) Increasing the discount rate.
c) Making unsecured loans to non-bank corporations.
d) An increase in the size of the Fed's balance sheet through open market sales of securities.

4) Which of the following loans looks like it has the lowest risk of loss:
a) An unsecured loan to a BBB borrower
b) A loan to a single B borrower secured by real estate
c) A loan to a high yield borrower with a single-B rating that is secured by cash equivalent assets.
d) A secured loan to a BB rated borrower secured by inventory.

5) Which of the following is true about TARP?
a) TARP created the CFPB among other things
b) The US Government expected to lose $700bn but only lost $245bn so it was deemed successful
c) The US Government actually made a profit on the investment in the banks but lost money on the auto companies
d) The US Government made $250bn on the program.

6)Securitization is:
a) The act of a bank forecloses on a loan
b) The act of taking collateral on a loan or bond
c) The bundling of loans of other cash flow streams into tradable securities
d) The conversion of a convertible security into common stock

7) The highest concentration of power regarding US monetary policy rests with:
a) US Congress
b) FDIC
c) The Federal Open Market Committee
d) The President of the United States
e) SEC

8) Which of the following is a high yield rating?
a) BB
b) BBB
c) AAA
d) AA
e) None of the above
f) All of the above

9) If prices increase rapidly:
a) money's usefulness as a store of value is diminished.
b) money increases in value.
c) deflation is likely.
d) prices will decline to their normal level.

10) The M2 aggregate
a) includes M1 plus currency and checking accounts.
b) equals currency plus checking account deposits at commercial banks.
c) includes M1 plus short-term investment accounts
d) is the best definition of money purely as a medium of exchange.
e) Is always less than M1

11) Which of the following represents the equation that would be used to determine the yield to maturity of a corporate bond with a face value of $1,000, price of $1,100, annual coupon rate of 5%, and maturity in three years?
a) $1,100 = $1,150/(1 + i)3
b) $1,100 = $50/(1 + i) + $50/(1 + i)2 + 1,000/(1 + i)3
c) $1,100 = $50/(1 + i) + $50/(1 + i)2 + 1,500/(1 + i)3
d) $1,100 = $50/(1 + i) + $50/(1 + i)2 + 1,050/(1 + i)3

12) Which of the following will result in a decrease in the price of an existing corporate bond?
a) lower expectations of inflation
b) new bonds issued at a lower interest rate
c) increased default risk
d) all of the above.

13) Nominal interest rates are higher than real interest rates as long as
a) expected inflation is positive.
b) the government taxes interest income.
c) inflation is expected to decline in the future.
d) long-term interest rates are higher than short-term interest rates.

14) Using forward transactions allows
a) both buyers and sellers to reduce risks associated with price fluctuations.
b) holders of common stock to lock in future dividend payments.
c) the federal government to stabilize fluctuations in tax receipts.
d) corporations to reduce problems arising from future fluctuations in their dividend payments.

15) As an option nears its expiration date, the size of the premium approaches
a) zero
b) its intrinsic value
c) infinity
d) an amount which varies, depending on prevailing market interest rates on the expiration date

16) Which of the following factors would tend to increase the size of the premium on an options contract?
a) The option is near its expiration date.
b) The current default-risk-free interest rate is high.
c) The price volatility of the underlying asset is low.
d) The option is far away from its expiration date.

17) The causes of the 2007-2009 financial crisis include the following:
a) Speculation in housing causing a housing bubble
b) Excess leverage coupled with illiquid assets at certain investment banks
c) Excessive use of derivatives
d) Hubris
e) Irresponsible rating agencies
f) All of the above

18) Which of the following are generally regarded as risks for banks?
a) Counterparty risk
b) Changes in interest rates
c) Default risk
d) Settlement risk
e) All of the above

19) Which of the following is the most important and effective tool for the Fed to execute its monetary policy?
a) Limits on excess reserves
b) Open market operations
c) Changes in required reserves
d) Changes in the discount rate

20) the Glass-Steagall Act was designed to
a) legally separate investment banking from commercial banking
b) promote mergers in the banking industry
c) impose high capital ratios on finance companies
d) promote the interests of community banks

21) A benefit of hedge funds relative to mutual funds is
a) low management fees
b) possible higher returns
c) full disclosure of holdings
d) lower risk
e) higher risk with lower returns

22) You are convinced the stock of Apple will increase significantly over the next year. Which of the following strategies is your WORST strategy?
a) Buy the stock
b) Buy a forward on the stock
c) Buy a put on the stock
d) Sell a put on the stock

23) The Federal Reserve operates several payment systems. Which is not one of them?
a) Check clearing
b) Fed Wire
c) Zelle
d) ACH

24) Who owns the Federal Reserve Banks?
a) US Treasury Department
b) Nobody
c) OCC
d) Banks in the relevant Federal Reserve district
e) US Government

25) While the monetary base has expanded dramatically since 2007, the money supply has not grown as much because
a) The public has held more of their assets in checking accounts versus currency
b) The money supply is not impacted by changes in the monetary base
c) The Federal Reserve has raised reserve requirements to make banks safer
d) The money multiplier has declined in great part due to greater excess reserves held by banks.

26) The maturity of most corporate loans are:
a) Thirty years, just like residential mortgages
b) 10 years
c) Less than one year
d) 5 years or less
e) More than 5 years

Answer 1

1) When bond prices decrease, their yields to maturity increase.

TRUE.

Bond prices and yields to maturity are inversely proportional to each other.

2) The best forms of money and financial systems enjoy the benefits of trust, belief, and stability.

TRUE. The statement is self-explanatory.

3) A fundamental function of a commercial bank is to take in deposits and make loans.

TRUE. This is how commercial banks operate. They make money by charging more on the loans and giving less on the deposits.

4) Traditional banks operate with low margins and high leverage.

FALSE. Traditional banks operate with high margins and low leverage.

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