TEST BANK for Financial Markets and Institutions 9th Edition by Frederic Mishkin, Stanley Eakins by ACADEMIAMILL

TEST BANK Financial Markets and Institutions 9th Edition by Test Bank for S. Mishkin, Stanley Eakins Frederic Financial Markets and Institutions 9th Edition by Frederic S. Mishkin (Author), Stanley Eakins Chapter 1-27 Financial Markets and Institutions, 9e (Mishkin) Chapter 1 Why Study Financial Markets and Institutions? 1.1 Multiple Choice 1) Financial markets and institutions A) involve the movement of huge quantities of money. B) affect the profits of businesses. C) affect the types of goods and services produced in an economy. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 2) Financial market activities affect A) personal wealth. B) spending decisions by individuals and business firms. C) the economy's location in the business cycle. D) all of the above. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 3) Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called A) commodity markets. B) funds markets. C) derivative exchange markets. D) financial markets. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 4) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the A) inflation rate. B) exchange rate. C) interest rate. D) aggregate price level. Answer: C 1 Copyright © 2018 Pearson Education, Inc.

Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 5) The bond markets are important because A) they are easily the most widely followed financial markets in the United States. B) they are the markets where interest rates are determined. C) they are the markets where foreign exchange rates are determined. D) all of the above. Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 6) Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 7) Typically, increasing interest rates A) discourages individuals from saving. B) discourages corporate investments. C) encourages corporate expansion. D) encourages corporate borrowing. E) none of the above. Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 8) Compared to interest rates on long-term U.S. government bonds, interest rates on ________ fluctuate more and are lower on average. A) medium-quality corporate bonds B) low-quality corporate bonds C) high-quality corporate bonds D) three-month Treasury bills E) none of the above Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition

9) Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average. A) more; lower B) less; lower C) more; higher D) less; higher Answer: A Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 10) The stock market is important because A) it is where interest rates are determined. B) it is the most widely followed financial market in the United States. C) it is where foreign exchange rates are determined. D) all of the above. Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 11) Stock prices since the 1980s have been A) relatively stable, trending upward at a steady pace. B) relatively stable, trending downward at a moderate rate. C) extremely volatile. D) unstable, trending downward at a moderate rate. Answer: C Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 12) The largest one-day drop in the history of the American stock markets occurred in A) 1929. B) 1987. C) 2000. D) 2001. Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 13) A declining stock market index due to lower share prices A) reduces people's wealth and as a result may reduce their willingness to spend. B) increases people's wealth and as a result may increase their willingness to spend. C) decreases the amount of funds that business firms can raise by selling newly issued stock. D) both A and C of the above. E) both B and C of the above. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 3 Copyright © 2018 Pearson Education, Inc.

14) Changes in stock prices A) affect people's wealth and their willingness to spend. B) affect firms' decisions to sell stock to finance investment spending. C) are characterized by considerable fluctuations. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 15) (I) Debt markets are often referred to generically as the bond market. (II) A bond is a security that is a claim on the earnings and assets of a corporation. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 16) (I) A bond is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that is a claim on the earnings and assets of a corporation. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 17) The price of one country's currency in terms of another's is called A) the foreign exchange rate. B) the interest rate. C) the Dow Jones industrial average. D) none of the above. Answer: A Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 18) A stronger dollar benefits ________ and hurts ________. A) American businesses; American consumers B) American businesses; foreign businesses C) American consumers; American businesses D) foreign businesses; American consumers Answer: C Topic: Chapter 1.1 Why Study Financial Markets 4 Copyright © 2018 Pearson Education, Inc.

Question Status: Previous Edition 19) A weaker dollar benefits ________ and hurts ________. A) American businesses; American consumers B) American businesses; foreign consumers C) American consumers; American businesses D) foreign businesses; American consumers Answer: A Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 20) From 1980 to early 1985 the dollar ________ in value, thereby benefiting American ________. A) appreciated; businesses B) appreciated; consumers C) depreciated; businesses D) depreciated; consumers Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 21) For most of 2010-2015, Three Month Treasury Bill rates were near A) 0%. B) 3%. C) 5%. D) 6%. Answer: A Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question 22) In general, from 2001 through 2013, the dollar ________ in value relative to major foreign currencies. A) appreciated B) depreciated C) remained about the same Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question 23) Between 1950 and 2016, Treasury Bill rates peaked near A) 1961. B) 1972. C) 1981. D) 1995. Answer: C Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question 5 Copyright © 2018 Pearson Education, Inc.

24) Money is defined as A) anything that is generally accepted in payment for goods and services or in the repayment of debt. B) bills of exchange. C) a riskless repository of spending power. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 25) During the Financial Crisis of 2007-2009, the Dow Jones Industrial Average fell to a low near A) 5,200. B) 6,600. C) 8,900. D) 10,500. Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question 26) From "Black Monday" on October 19, 1987 until 2000, the stock market experienced one of the great bull markets in its history, with the Dow climbing to a peak of over A) 5,000. B) 7,000. C) 9,000. D) 11,000. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question 27) Between 1970 and 2016, the value of the U.S. dollar relative to other currencies peaked near A) 1975. B) 1985. C) 1995. D) 2005. Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question 28) The organization responsible for the conduct of monetary policy in the United States is the A) Comptroller of the Currency. B) U.S. Treasury. C) Federal Reserve System. D) Bureau of Monetary Affairs. 6 Copyright © 2018 Pearson Education, Inc.

Answer: C Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 29) The central bank of the United States is A) Citicorp. B) The Fed. C) Bank of America. D) The Treasury. E) none of the above. Answer: B Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 30) Monetary policy is chiefly concerned with A) how much money businesses earn. B) the level of interest rates and the nation's money supply. C) how much money people pay in taxes. D) whether people have saved enough money for retirement. Answer: B Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 31) In the good old days, when you took cash out of the bank or wanted to check your account balance, you got to say hello to a friendly human. Nowadays, you are more likely to interact with a(n) ________ when withdrawing cash. A) automatic teller machine (ATM) B) federal reserve employee C) robot banker D) investment banker Answer: A Topic: Chapter 1.2 Why Study Financial Institutions Question Status: New Question 32) Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries A) act as middlemen, borrowing funds from those who have saved and lending these funds to others. B) produce nothing of value and are therefore a drain on society's resources. C) help promote a more efficient and dynamic economy. D) do all of the above. E) do only A and C of the above. Answer: E Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 7 Copyright © 2018 Pearson Education, Inc.

33) Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries A) act as middlemen, borrowing funds from those who have saved and lending these funds to others. B) play an important role in determining the quantity of money in the economy. C) help promote a more efficient and dynamic economy. D) do all of the above. E) do only A and C of the above. Answer: D Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 34) Banks are important to the study of money and the economy because they A) provide a channel for linking those who want to save with those who want to invest. B) have been a source of financial innovation that is expanding the alternatives available to those wanting to invest their money. C) are the only financial institution to play a role in determining the quantity of money in the economy. D) do all of the above. E) do only A and B of the above. Answer: E Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 35) Banks, savings and loan associations, mutual savings banks, and credit unions A) are no longer important players in financial intermediation. B) have been providing services only to small depositors since deregulation. C) have been adept at innovating in response to changes in the regulatory environment. D) all of the above. E) only A and C of the above. Answer: C Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 36) (I) Banks are financial intermediaries that accept deposits and make loans. (II) The term "banks" includes firms such as commercial banks, savings and loan associations, mutual savings banks, credit unions, insurance companies, and pension funds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 37) ________ was the stock market's worst one-day drop in history in the 1980s. 8 Copyright © 2018 Pearson Education, Inc.

A) Black Friday B) Black Monday C) Blackout Day D) none of the above Answer: B Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 38) The largest financial intermediaries are A) insurance companies. B) finance companies. C) banks. D) all of the above. Answer: C Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 39) In recent years A) interest rates have remained constant. B) the success of financial institutions has reached levels unprecedented since the Great Depression. C) stock markets have crashed. D) all of the above. Answer: C Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 40) A security A) is a claim or price of property that is subject to ownership. B) promises that payments will be made periodically for a specified period of time. C) is the price paid for the usage of funds. D) is a claim on the issuers future income. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 41) ________ are an example of a financial institution. A) Banks B) Insurance companies C) Finance companies D) All of the above Answer: D Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 42) Monetary policy affects A) interest rates. 9 Copyright © 2018 Pearson Education, Inc.

B) inflation. C) business cycles. D) all of the above. Answer: D Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 43) A rising stock market index due to higher share prices A) increases people's wealth and as a result may increase their willingness to spend. B) increases the amount of funds that business firms can raise by selling newly issued stock. C) decreases the amount of funds that business firms can raise by selling newly issued stock. D) both A and B of the above. Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 44) From the peak of the high-tech bubble in 2000, the stock market ________ by over ________ by late 2002. A) collapsed; 75% B) rose; 35% C) collapsed; 30% D) rose; 50% Answer: C Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 45) The Dow fell below 7,000 in 2009, only to start a bull market run, reaching new highs near ________ in 2016. A) 12,000 B) 10,000 C) 15,000 D) 18,000 Answer: D Topic: Chapter 1.1 Why Study Financial Markets Question Status: Updated from Previous Edition 1.2 True/False 1) Money is anything accepted by anyone as payment for services or goods. Answer: TRUE Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 2) Interest rates are determined in the bond markets. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 10 Copyright © 2018 Pearson Education, Inc.

3) A stock is a debt security that promises to make periodic payments for a specific period of time. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 4) Monetary policy affects interest rates but has little effect on inflation or business cycles. Answer: FALSE Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 5) The government organization responsible for the conduct of monetary policy in the United States is the U.S. Treasury. Answer: FALSE Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 6) Interest rates can be accurately described as the rental price of money. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 7) Holding everything else constant, as the dollar weakens vacations abroad become less attractive. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 8) In recent years, financial markets have become more stable and less risky. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 9) Financial innovation has provided more options to both investors and borrowers. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 10) A financial intermediary borrows funds from people who have saved. Answer: TRUE Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 11) From 2001 to 2008, the dollar depreciated substantially. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets 11 Copyright © 2018 Pearson Education, Inc.

Question Status: New Question 12) From 2007 to 2009, the U.S. economy was hit by the worst financial crisis since the Great Depression. Answer: TRUE Topic: Chapter 1.2 Why Study Financial Institutions Question Status: New Question 13) Holding everything else constant, as the dollar strengthens foreigners will buy more U.S. exports. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 14) In a bull market stock prices are rising, on average. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 15) In a bear market stock prices are rising, on average. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question 16) Financial institutions are among the largest employers in the country and frequently pay very high salaries. Answer: TRUE Topic: Chapter 1.3 Applied Managerial Perspective Question Status: Previous Edition 17) Different interest rates have a tendency to move in unison. Answer: TRUE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 18) Financial markets are what makes financial institutions work. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 19) In recent years, financial markets have become more risky. However, only a limited number of tools (such as derivatives) are available to assist in managing this risk. Answer: FALSE Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 20) Although the internet has changed many aspects of our lives, it hasn't proven very useful for 12 Copyright © 2018 Pearson Education, Inc.

collecting and/or analyzing financial and economic data. Answer: FALSE Topic: Chapter 1.4 How We Study Financial Markets and Institutions Question Status: Previous Edition 1.3 Essay 1) Have interest rates been more or less volatile in recent years? Why? Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 2) Why should consumers be concerned with movements in foreign exchange rates? Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 3) How does the value of the dollar affect the competitiveness of American businesses? Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 4) What is monetary policy and who is responsible for its implementation? Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 5) What are financial intermediaries and what do they do? Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 6) What is money? Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 7) How does a bond differ from a stock? Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 8) Why is the stock market so important to individuals, firms, and the economy? Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 9) What is the central bank and what does it do? Topic: Chapter 1.2 Why Study Financial Institutions Question Status: Previous Edition 10) If you are planning a vacation to Europe, do you prefer a strong dollar or weak dollar relative to the euro? Why? Topic: Chapter 1.1 Why Study Financial Markets Question Status: Previous Edition 13 Copyright © 2018 Pearson Education, Inc.

11) How has the stock market performed since 2000? Topic: Chapter 1.1 Why Study Financial Markets Question Status: New Question

Financial Markets and Institutions, 9e (Mishkin) Chapter 2 Overview of the Financial System 2.1 Multiple Choice 1) Every financial market performs the following function: A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. Answer: D Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 2) Securities are ________ for the person who buys them, but ________ for the individual/firm that sells them. A) assets; liabilities B) liabilities; assets C) income; liabilities D) liabilities; expenses Answer: A Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 3) Financial markets have the basic function of A) bringing together people with funds to lend and people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) both A and B of the above. E) both B and C of the above. Answer: A Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 4) Which of the following can be described as involving direct finance? A) A corporation's stock is traded in an over-the-counter market. B) People buy shares in a mutual fund. C) A pension fund manager buys commercial paper in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets. E) None of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition

5) Which of the following can be described as involving direct finance? A) A corporation's stock is traded in an over-the-counter market. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper from the issuing corporation. D) Both A and B of the above. E) Both B and C of the above. Answer: B Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 6) Which of the following can be described as involving indirect finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys commercial paper in a secondary market. D) All of the above. E) Only A and B of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 7) Which of the following can be described as involving indirect finance? A) A bank buys a U.S. Treasury bill from one of its depositors. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper in the primary market. D) Both A and C of the above. Answer: D Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 8) Financial markets improve economic welfare because A) they allow funds to move from those without productive investment opportunities to those who have such opportunities. B) they allow consumers to time their purchases better. C) they weed out inefficient firms. D) they do all of the above. E) they do A and B of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition

9) A country whose financial markets function poorly is likely to A) efficiently allocate its capital resources. B) enjoy high productivity. C) experience economic hardship and financial crises. D) increase its standard of living. Answer: C Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 10) Wealth, either financial or physical, that is employed to produce more wealth is referred to as A) assets. B) the market. C) capital. D) funding. Answer: C Topic: Chapter 2.1 Function of Financial Markets Question Status: New Question 11) Which of the following are securities? A) A certificate of deposit B) A share of Texaco common stock C) A Treasury bill D) All of the above E) Only A and B of the above Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 12) Which of the following statements about the characteristics of debt and equity are true? A) They both can be long-term financial instruments. B) They both involve a claim on the issuer's income. C) They both enable a corporation to raise funds. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 13) The money market is the market in which ________ are traded. A) new issues of securities B) previously issued securities C) short-term debt instruments D) long-term debt and equity instruments Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 17 Copyright © 2018 Pearson Education, Inc.

14) A debt instrument is called ________ if its maturity is less than a year. A) newly issued B) intermediate-term C) short-term D) long-term Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 15) A debt instrument is called ________ if its maturity is greater than 10 years. A) perpetual B) intermediate-term C) short-term D) long-term Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 16) Long-term debt and equity instruments are traded in the ________ market. A) primary B) secondary C) capital D) money Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 17) Which of the following are primary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) None of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 18) Which of the following are secondary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) All of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 18 Copyright © 2018 Pearson Education, Inc.

19) A corporation acquires new funds only when its securities are sold in the A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank. Answer: B Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 20) Equities often make periodic payments, called ________, to their holders and are considered long-term securities. A) principal B) interest C) dividends D) payouts Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 21) Which of the following statements about financial markets and securities are true? A) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 22) Which of the following statements about financial markets and securities are true? A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants. B) A debt instrument is intermediate term if its maturity is less than one year. C) A debt instrument is long term if its maturity is ten years or longer. D) The maturity of a debt instrument is the time (term) that has elapsed since it was issued. Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition

23) Security ________ link buyers and sellers by buying and selling securities at stated prices, while ________ are agents of investors who match buyers with sellers of securities. A) brokers; dealers B) brokers; agents C) agents; dealers D) dealers; brokers Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 24) Which of the following statements about financial markets and securities are true? A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid. D) All of the above are true. E) Only A and B of the above are true. Answer: B Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 25) Which of the following markets is sometimes organized as an over-the-counter market? A) The stock market B) The bond market C) The foreign exchange market D) The federal funds market E) all of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 26) At the end of 2012, the value of debt instruments in the U.S. was around ________ trillion, and the value of equities was around ________ trillion. A) $38; $19 B) $20; $10 C) $19; $38 D) $10; $20 Answer: A Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition

27) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: B Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 28) The DAX (Germany) and the FTSE 100 (London) are examples of A) foreign stock exchanges. B) foreign currencies. C) foreign stock price indexes. D) foreign mutual funds. Answer: C Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 29) Bonds that are sold in a foreign country and are denominated in that country's currency are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: A Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 30) The country whose banks are the most restricted in the range of assets they may hold is A) Japan. B) Canada. C) Germany. D) the United States. Answer: D Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition

31) Foreign bonds have been an important instrument in the international capital market for centuries. In fact, a large percentage of U.S. railroads built in the nineteenth century were financed by sales of foreign bonds in A) Japan. B) Britain. C) Canada. D) Germany. Answer: B Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: New Question 32) Foreign currencies that are deposited in banks outside the home country are known as A) foreign bonds. B) Eurobond. C) Eurocurrencies. D) Eurodollars. Answer: C Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 33) U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as A) Eurodollars. B) Eurocurrencies. C) Eurobonds. D) foreign bonds. Answer: A Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 34) After 2002, the ________ handle(s) a larger share of initial public offerings (IPOs) of stock than do/does the ________. A) New York Stock Exchange; London and Hong Kong stock exchanges B) London and Hong Kong stock exchanges; New York Stock Exchange C) FTSE and DAX exchanges; London and Hong Kong stock exchanges D) FTSE and DAX exchanges; New York Stock Exchange Answer: B Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: New Question

35) Banks providing depositors with checking accounts that enable them to pay their bills easily is known as A) liquidity services. B) asset transformation. C) risk sharing. D) transaction costs. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 36) Intermediaries who are agents of investors and match buyers with sellers of securities are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above. Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 37) Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 38) Financial intermediaries A) exist because there are substantial information and transaction costs in the economy. B) improve the lot of the small saver. C) are involved in the process of indirect finance. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition

39) The main sources of financing for businesses, in order of importance, are A) financial intermediaries, issuing bonds, issuing stocks. B) issuing bonds, issuing stocks, financial intermediaries. C) issuing stocks, issuing bonds, financial intermediaries. D) issuing stocks, financial intermediaries, issuing bonds. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 40) The presence of transaction costs in financial markets explains, in part, why A) financial intermediaries and indirect finance play such an important role in financial markets. B) equity and bond financing play such an important role in financial markets. C) corporations get more funds through equity financing than they get from financial intermediaries. D) direct financing is more important than indirect financing as a source of funds. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 41) Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of A) poorly informed consumers. B) standardization. C) economies of scale. D) their market power. Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 42) The reduction in transaction costs per dollar of transactions as the size (scale) of transactions increases is known as A) economies of scope. B) economies of scale. C) standardization. D) market power. Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: New Question 43) The purpose of diversification is to A) reduce the volatility of a portfolio's return. B) raise the volatility of a portfolio's return. C) reduce the average return on a portfolio. D) raise the average return on a portfolio. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 24 Copyright © 2018 Pearson Education, Inc.

44) An investor who puts all her funds into one asset ________ her portfolio's ________. A) increases; diversification B) decreases; diversification C) increases; average return D) decreases; average return Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 45) Through risk-sharing activities, a financial intermediary ________ its own risk and ________ the risks of its customers. A) reduces; increases B) increases; reduces C) reduces; reduces D) increases; increases Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 46) The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) noncollateralized risk B) free-riding C) asymmetric information D) costly state verification Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 47) When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition

48) When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 49) When the borrower engages in activities that make it less likely that the loan will be repaid, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 50) The concept of adverse selection helps to explain A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B) why indirect finance is more important than direct finance as a source of business finance. C) why direct finance is more important than indirect finance as a source of business finance. D) only A and B of the above. E) only A and C of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 51) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) none of the above. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition

52) When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the A) moral hazard problem. B) adverse selection problem. C) shirking problem. D) free-rider problem. E) principal-agent problem. Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 53) Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to A) moral hazard. B) adverse selection. C) bad luck. D) financial panics. Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 54) In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called A) comparative informational disadvantage. B) asymmetric information. C) variant information. D) caveat venditor. Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 55) A ________ is when one party in a financial contract has incentives to act in its own interest rather than in the interests of the other party. A) moral hazard B) risk C) conflict of interest D) financial panic Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition

56) Fire and casualty insurance companies are what type of intermediary? A) Contractual savings institution B) Depository institutions C) Investment intermediaries D) None of the above Answer: A Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 57) Which of the following financial intermediaries are depository institutions? A) A savings and loan association B) A commercial bank C) A credit union D) All of the above E) Only A and C of the above Answer: D Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 58) Which of the following is a contractual savings institution? A) A life insurance company B) A credit union C) A savings and loan association D) A mutual fund Answer: A Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 59) The largest depository institution (value of assets) at the end of 2012 was A) commercial banks. B) pension funds. C) credit unions. D) mutual funds. Answer: A Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 60) Which of the following are not investment intermediaries? A) A life insurance company B) A pension fund C) A mutual fund D) Only A and B of the above Answer: D Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition

61) An important financial institution that assists in the initial sale of securities in the primary market is the A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house. Answer: A Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 62) Which of the following are investment intermediaries? A) Finance companies B) Mutual funds C) Pension funds D) All of the above E) Only A and B of the above Answer: E Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 63) The government regulates financial markets for two main reasons: A) to ensure soundness of the financial system and to increase the information available to investors. B) to improve control of monetary policy and to increase the information available to investors. C) to ensure that financial intermediaries do not earn more than the normal rate of return and to improve control of monetary policy. D) to ensure soundness of financial intermediaries and to prevent financial intermediaries from earning less than the normal rate of return. Answer: A Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition 64) Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a A) bank holiday. B) financial panic. C) financial disintermediation. D) financial collapse. Answer: B Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition

65) Which of the following is not a regulator of part of the U.S. financial system? A) National Credit Union Administration B) Securities and Exchange Commission C) Federal Reserve System D) Federal Deposit Insurance Corporation E) All of the above are regulators. Answer: E Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition 66) Asymmetric information can lead to the widespread collapse of financial intermediaries, referred as financial A) panic. B) bubble. C) asset. D) transaction. Answer: A Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition 67) The SEC restricts trading by the largest stockholders (known as ________) in corporations issuing securities. A) insiders B) members of the board C) hedge funds D) intermediaries Answer: A Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition 68) The Federal Deposit Insurance Corporation (FDIC) insures each depositor at a commercial bank, savings and loan association, or mutual savings bank up to a loss of ________ per account. A) $100,000 B) $250,000 C) $500,000 D) $1,000,000 Answer: B Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition

69) The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject banks to restrictions on A) branching. B) lending. C) assets they may hold. D) the size they could grow to. Answer: A Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition 2.2 True/False 1) Every financial market allows loans to be made. Answer: FALSE Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 2) Most people's involvement with the financial system is through financial intermediaries rather than financial markets. Answer: TRUE Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 3) A critical function of financial markets is an efficient allocation of capital. Answer: TRUE Topic: Chapter 2.1 Function of Financial Markets Question Status: New Question 4) The New York Stock Exchange is an example of a primary market. Answer: FALSE Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 5) Equity represents an ownership interest in a firm and entitles the holder to the residual cash flows. Answer: TRUE Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 6) The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year) are traded. Answer: FALSE Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition

7) Many common stocks are traded over the counter, although a majority of the largest corporations have their shares traded at organized stock exchanges. Answer: TRUE Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 8) Many common stocks are traded at organized exchanges, although a majority of the largest corporations have their shares traded over the counter. Answer: FALSE Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 9) Corporations that issue new securities to raise capital now conduct more of this business in financial markets in Europe and Asia than in the U.S. Answer: TRUE Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 10) Currently, over 80% of the new issues in the international bond market are Eurobonds. Answer: TRUE Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 11) American investors pay attention to only the Dow Jones Industrial Average. Answer: FALSE Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 12) A bond denominated in euros and issued in a country that uses the euro as its currency is an example of a Eurobond. Answer: FALSE Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 13) An example of direct financing is if you were to lend money to your neighbor. Answer: TRUE Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 14) Liquidity services are services that make it easier for customers to conduct financial transactions. Answer: TRUE Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: New Question

15) A financial intermediary's risk-sharing activities are also referred to as asset transformation. Answer: TRUE Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 16) The process of financial intermediation is also known as direct finance. Answer: FALSE Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 17) Through economies of scale, financial intermediaries can lower the cost of information production for each service by applying one information resource to many different services. Answer: FALSE Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: New Question 18) Adverse selection refers to those with high credit risks, being most aggressive in their search for funds. Answer: TRUE Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 19) A mutual fund is not a depository institution. Answer: TRUE Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 20) A pension fund is not a contractual savings institution. Answer: FALSE Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 21) "Thrift institutions" include savings and loan associations, mutual savings banks, and credit unions. Answer: TRUE Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: New Question 22) The government agency that insures each depositor at a commercial bank, savings and loan association, or mutual savings bank up to a loss of $100,000 per account ($250,000 for individual retirement accounts) is the Securities and Exchange Commission (SEC). Answer: FALSE Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition

23) In the U.S., financial intermediaries are restricted in what they are allowed to do and what assets they can hold. Answer: TRUE Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition 24) Unlike regulations in other countries, there are very few federal regulations governing who is allowed to set up a financial intermediary. Answer: FALSE Topic: Chapter 2.6 Regulation of the Financial System Question Status: Previous Edition 2.3 Essay 1) Distinguish between direct financing and indirect financing. Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 2) Why is it so important for an economy to have fully developed financial markets? Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 3) Distinguish between primary markets and secondary markets. Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 4) Distinguish between money markets and capital markets. Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 5) Describe how over-the-counter markets work. Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 6) What are some of the differences between an organized exchange and an over-the-counter market? Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 7) Why do corporations that issue new securities to raise capital now conduct more of this business in financial markets in Europe and Asia than in the United States? Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition

8) What are some of the major foreign stock exchanges? Is following their returns important to U.S. investors? Why or why not? Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 9) Why are financial intermediaries so important to an economy? Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 10) What are adverse selection and moral hazard? Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 11) Why can a financial intermediary's risk-sharing activities be described as asset transformation? Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 12) Discuss the differences between depository institutions, contractual savings institutions, and investment intermediaries. Topic: Chapter 2.5 Types of Financial Intermediaries Question Status: Previous Edition 13) List some of the regulatory agencies of the U.S. and their primary role. Topic: Chapter 2.6 Regulation of the Financial System Question Status: New Question Financial Markets and Institutions, 9e (Mishkin) Chapter 3 What Do Interest Rates Mean and What Is Their Role in Valuation? 3.1 Multiple Choice 1) A loan that requires the borrower to make the same payment every period until the maturity date is called a A) simple loan. B) fixed-payment loan. C) discount loan. D) same-payment loan. E) none of the above. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 2) A coupon bond pays the owner of the bond A) the same amount every month until the maturity date. B) a fixed interest payment every period, plus the face value of the bond at the maturity date. C) the face value of the bond plus an interest payment once the maturity date has been reached. 35 Copyright © 2018 Pearson Education, Inc.

D) the face value at the maturity date. E) none of the above. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 3) A bond's future payments are called its A) cash flows. B) maturity values. C) discounted present values. D) yields to maturity. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 4) A credit market instrument that pays the owner the face value of the security at the maturity date and nothing prior to then is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

5) (I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 6) Which of the following are true of coupon bonds? A) The owner of a coupon bond receives a fixed interest payment every year until the maturity date, when the face or par value is repaid. B) U.S. Treasury bonds and notes are examples of coupon bonds. C) Corporate bonds are examples of coupon bonds. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 7) Which of the following are generally true of all bonds? A) The longer a bond's maturity, the lower is the rate of return that occurs as a result of the increase in the interest rate. B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C) Prices and returns for long-term bonds are more volatile than those for shorter-term bonds. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 8) (I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II) A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value) is repaid. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 37 Copyright © 2018 Pearson Education, Inc.

9) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A) $650. B) $1,300. C) $130. D) $13. E) None of the above. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 10) An $8,000 coupon bond with a $400 annual coupon payment has a coupon rate of A) 5 percent. B) 8 percent. C) 10 percent. D) 40 percent. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 11) The concept of ________ is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) present value B) future value C) interest D) deflation Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 12) Dollars received in the future are worth ________ than dollars received today. The process of calculating what dollars received in the future are worth today is called ________. A) more; discounting B) less; discounting C) more; inflating D) less; inflating Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

13) The process of calculating what dollars received in the future are worth today is called A) calculating the yield to maturity. B) discounting the future. C) compounding the future. D) compounding the present. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 14) With an interest rate of 5 percent, the present value of $100 received one year from now is approximately A) $100. B) $105. C) $95. D) $90. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 15) With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately A) $1,000. B) $2,000. C) $2,560. D) $3,000. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 16) With an interest rate of 8 percent, the present value of $100 received one year from now is approximately A) $93. B) $96. C) $100. D) $108. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

17) With an interest rate of 6 percent, the present value of $100 received one year from now is approximately A) $106. B) $100. C) $94. D) $92. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 18) The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the A) simple interest rate. B) discount rate. C) yield to maturity. D) real interest rate. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 19) The interest rate that financial economists consider to be the most accurate measure is the A) current yield. B) yield to maturity. C) yield on a discount basis. D) coupon rate. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 20) Financial economists consider the ________ to be the most accurate measure of interest rates. A) simple interest rate B) discount rate C) yield to maturity D) real interest rate Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 21) For a simple loan, the simple interest rate equals the A) real interest rate. B) nominal interest rate. C) current yield. D) yield to maturity. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 40 Copyright © 2018 Pearson Education, Inc.

22) For simple loans, the simple interest rate is ________ the yield to maturity. A) greater than B) less than C) equal to D) not comparable to Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 23) The yield to maturity of a one-year, simple loan of $500 that requires an interest payment of $40 is A) 5 percent. B) 8 percent. C) 12 percent. D) 12.5 percent. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 24) The yield to maturity of a one-year, simple loan of $400 that requires an interest payment of $50 is A) 5 percent. B) 8 percent. C) 12 percent. D) 12.5 percent. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 25) A $10,000, 8 percent coupon bond that sells for $10,000 has a yield to maturity of A) 8 percent. B) 10 percent. C) 12 percent. D) 14 percent. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 26) A $10,000, 8 percent coupon bond that sells for $10,100 has a yield to maturity A) equal to 8 percent. B) greater than 8 percent. C) less than 8 perfect. D) that cannot be calculated. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 41 Copyright © 2018 Pearson Education, Inc.

27) Which of the following $1,000 face value securities has the highest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 12 percent coupon bond selling for $1,000 D) A 12 percent coupon bond selling for $1,100 Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 28) Which of the following $1,000 face value securities has the highest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 10 percent coupon bond selling for $1,000 C) A 15 percent coupon bond selling for $1,000 D) A 15 percent coupon bond selling for $900 Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 29) Which of the following $1,000 face value securities has the lowest yield to maturity? A) A 5 percent coupon bond selling for $1,000 B) A 7 percent coupon bond selling for $1,100 C) A 15 percent coupon bond selling for $1,000 D) A 15 percent coupon bond selling for $900 Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 30) Which of the following are true for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are negatively related. C) The yield to maturity is greater than the coupon rate when the bond price is below the par value. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

31) Which of the following are true for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are negatively related. C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 32) Which of the following are true for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are positively related. C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. D) All of the above are true. E) Only A and B of the above are true. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 33) A consol bond is a bond that A) pays interest annually and its face value at maturity. B) pays interest in perpetuity and never matures. C) pays no interest but pays its face value at maturity. D) rises in value as its yield to maturity rises. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 34) The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 20 percent. E) 25 percent. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

35) The yield to maturity on a consol bond that pays $200 yearly and sells for $1,000 is A) 5 percent. B) 10 percent. C) 20 percent. D) 25 percent. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 36) A frequently used approximation for the yield to maturity on a long-term bond is the A) coupon rate. B) current yield. C) cash flow interest rate. D) real interest rate. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 37) The current yield on a coupon bond is the bond's ________ divided by its ________. A) annual coupon payment; price B) annual coupon payment; face value C) annual return; price D) annual return; face value Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 38) When a bond's price falls, its yield to maturity ________ and its current yield ________. A) falls; falls B) rises; rises C) falls; rises D) rises; falls Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 39) The yield to maturity for a one-year discount bond equals A) the increase in price over the year, divided by the initial price. B) the increase in price over the year, divided by the face value. C) the increase in price over the year, divided by the interest rate. D) none of the above. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

40) If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is A) 10 percent. B) 20 percent. C) 25 percent. D) 40 percent. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 41) If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is approximately A) 9 percent. B) 10 percent. C) 11 percent. D) 12 percent. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 42) If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 5 percent. B) 10 percent. C) 50 percent. D) 100 percent. Answer: D Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 43) If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 0 percent. B) 5 percent. C) 10 percent. D) 20 percent. Answer: A Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

44) When the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest, it is called a A) fixed-payment loan. B) discount loan. C) simple loan. D) none of the above. Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 45) A discount bond A) is also called a coupon bond. B) is also called a zero-coupon bond. C) is also called a fixed-payment bond. D) is also called a corporate bond. Answer: B Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 46) A ________ is a type of loan that has the same cash flow payment every year throughout the life of the loan. A) discount loan B) simple loan C) fixed-payment loan D) interest-free loan Answer: C Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 47) The real interest rate is actually the ex ante real interest rate because it is adjusted for ________ changes in the price level. A) actual B) expected C) nominal D) real Answer: B Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 48) An ex post real interest rate is adjusted for ________ changes in the price level. A) actual B) expected C) nominal D) real Answer: A Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 46 Copyright © 2018 Pearson Education, Inc.

49) The interest rate that is adjusted for actual changes in the price level is called the A) ex post real interest rate. B) expected interest rate. C) ex ante real interest rate. D) none of the above. Answer: A Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 50) The Fisher equation states that A) the nominal interest rate equals the real interest rate plus the expected rate of inflation. B) the real interest rate equals the nominal interest rate less the expected rate of inflation. C) the nominal interest rate equals the real interest rate less the expected rate of inflation. D) both A and B of the above are true. E) both A and C of the above are true. Answer: D Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 51) If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent. E) none of the above. Answer: D Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 52) If you expect the inflation rate to be 5 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -12 percent. B) -2 percent. C) 2 percent. D) 12 percent. Answer: C Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition

53) The nominal interest rate minus the expected rate of inflation A) defines the real interest rate. B) is a better measure of the incentives to borrow and lend than the nominal interest rate. C) is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 54) Based on Figure 3.1 in the text, the difference between the nominal rate and the estimated real rate was largest around A) 1960. B) 1970. C) 1980. D) 1990. Answer: C Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: New Question 55) From 1953 to 2016, the estimated real interest rate was negative during which periods? A) 1975-1980 B) 1985-1990 C) 2010-2015 D) All of the above are correct. E) Only A and C are correct. Answer: E Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: New Question 56) The nominal interest rate minus the expected rate of inflation A) defines the real interest rate. B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. C) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. D) defines the discount rate. Answer: A Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition

57) In which of the following situations would you prefer to be making a loan? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: B Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 58) In which of the following situations would you prefer to be borrowing? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: D Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 59) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? A) 5 percent B) 10 percent C) -5 percent D) 25 percent E) None of the above Answer: D Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 60) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later? A) 5 percent B) 10 percent C) -5 percent D) -10 percent E) None of the above Answer: C Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition

61) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is A) 5 percent. B) 10 percent. C) 14 percent. D) 15 percent. Answer: D Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 62) The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $900 one year later is A) -10 percent. B) -5 percent. C) 0 percent. D) 5 percent. Answer: C Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 63) Which of the following are generally true of all bonds? A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B) A rise in interest rates is associated with a fall in bond prices, resulting in capital losses on bonds whose term to maturities are longer than the holding period. C) The longer a bond's maturity, the greater is the price change associated with a given interest rate change. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 64) Which of the following are true concerning the distinction between interest rates and return? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the sum of the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition

65) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) A bond with one year to maturity B) A bond with five years to maturity C) A bond with ten years to maturity D) A bond with twenty years to maturity Answer: A Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 66) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding? A) 5 percent B) 10 percent C) 15 percent D) 20 percent Answer: C Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 67) (I) Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II) Prices and returns for long-term bonds are less volatile than those for short-term bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 68) (I) Prices of longer-maturity bonds respond less dramatically to changes in interest rates. (II) Prices and returns for long-term bonds are less volatile than those for shorter-term bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: D Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition

69) The riskiness of an asset's return that results from interest rate changes is called A) interest-rate risk. B) coupon-rate risk. C) reinvestment risk. D) yield-to-maturity risk. Answer: A Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 70) If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to A) interest-rate risk. B) reinvestment risk. C) bond-market risk. D) yield-to-maturity risk. Answer: B Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 71) Reinvestment risk is the risk that A) a bond's value may fall in the future. B) a bond's future coupon payments may have to be invested at a rate lower than the bond's yield to maturity. C) an investor's holding period will be short and equal in length to the maturity of the bonds he or she holds. D) a bond's issuer may fail to make the future coupon payments and the investor will have no cash to reinvest. Answer: B Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 72) (I) The average lifetime of a debt security's stream of payments is called duration. (II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition

73) The duration of a ten-year, 10 percent coupon bond when the interest rate is 10 percent is 6.76 years. What happens to the price of the bond if the interest rate falls to 8 percent? A) It rises 20 percent. B) It rises 12.3 percent. C) It falls 20 percent. D) It falls 12.3 percent. Answer: B Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 74) The change in the bond's price relative to the initial purchase price is A) the current yield. B) coupon payment. C) yield to maturity. D) rate of capital gain. Answer: D Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 75) The return on a bond is equal to the yield to maturity when A) the holding period is longer than the maturity of the bond. B) the maturity of the bond is longer than the holding period. C) the holding period and the maturity of the bond are identical. D) none of the above. Answer: C Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 76) Bonds whose term to maturity is shorter than the holding period are also subject to A) default. B) reinvestment risk. C) both of the above. D) none of the above. Answer: B Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 77) The average lifetime of a debt security's stream of payments is calculated as the debt's A) maturity date. B) effective maturity. C) duration. D) convexity. Answer: C Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: New Question

78) What is the approximate duration of a 5-year zero-coupon bond? A) 2 years B) 3 years C) 4 years D) 5 years Answer: D Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: New Question 79) The duration of a portfolio of securities is the ________ average of the durations of the individual securities. A) geometric B) weighted C) simple D) arithmetic Answer: B Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: New Question 80) Which likely has a longer duration — a 30-year 5% coupon bond or a 30-year 5% mortgage? A) The 30-year mortgage B) The 30-year bond C) Both have the same duration D) It is not possible to determine without more information Answer: B Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: New Question 3.2 True/False 1) A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount. Answer: TRUE Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 2) Discounting the future is the procedure used to find the future value of a dollar received today. Answer: FALSE Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition

3) The current yield is the best measure of an investor's return from holding a bond. Answer: FALSE Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 4) Unless a bond defaults, an investor cannot lose money investing in bonds. Answer: FALSE Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 5) The current yield is the yearly coupon payment divided by the current market price. Answer: TRUE Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 6) The current yield goes up as the price of a bond falls. Answer: TRUE Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 7) A bonds with a 5% coupon as has a yield to maturity of 5%. Answer: FALSE Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 8) The concept of present value tells you that a dollar in the future is not as valuable to you as a dollar today because you can earn interest on this dollar. Therefore, nominal interest rates can never be negative. Answer: FALSE Topic: Chapter 3.1 Measuring Interest Rates Question Status: New Question 9) The real interest rate is equal to the nominal rate minus inflation. Answer: TRUE Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 10) Because their interest and principal payments are adjusted for changes in the price level, the interest rate on TIPS provides a direct measure of a real interest rate. Answer: TRUE Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: New Question

11) The real interest rate is actually the ex ante real interest rate because it is adjusted for actual changes in the price level. Answer: FALSE Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 12) Prices for long-term bonds are more volatile than for shorter-term bonds. Answer: TRUE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 13) When the real interest rate is low, there are greater incentives to borrow and fewer incentives to lend. Answer: TRUE Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 14) The difference between the ex ante interest rate and the ex post interest rate is known as the Fisher effect. Answer: FALSE Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: New Question 15) When the real interest rate is high, there are greater incentives to borrow and fewer incentives to lend. Answer: FALSE Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 16) An indexed bond is a bonds whose interest and/or principal payments are adjusted for changes in the price level. Answer: TRUE Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 17) A long-term bond's price is less affected by interest rate movements than a short-term bond's price. Answer: FALSE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 18) Increasing duration implies that interest-rate risk has increased. Answer: TRUE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition

19) All else being equal, the greater the interest rate the greater the duration is. Answer: FALSE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 20) All else being equal, the higher the coupon rate on the bond, the shorter the bond's duration. Answer: TRUE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: New Question 21) Interest-rate risk is the uncertainty that an investor faces because the interest rate at which a bond's future coupon payments can be invested is unknown. Answer: FALSE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 22) Changes in interest rates make investments in long-term bonds risky. Answer: TRUE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 23) The duration of a portfolio of securities is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. Answer: TRUE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: New Question 24) Bonds with a maturity that is longer than the holding period have no interest-rate risk. Answer: FALSE Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 3.3 Essay 1) Distinguish between coupon rate, yield to maturity, and current yield. Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 2) Describe the cash flows received from owning a coupon bond. Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 3) What concept is used to value a bond? Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 57 Copyright © 2018 Pearson Education, Inc.

4) How is a bond's current yield calculated? Why is current yield a more accurate approximation of yield to maturity for a long-term bond than for a short-term bond? Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 5) What is the purpose of discounting cash flows? Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 6) What is the relationship between the current yield and yield to maturity for a bond? Topic: Chapter 3.1 Measuring Interest Rates Question Status: Previous Edition 7) What happened in Japan in the late-1990s to generate negative rates on the government debt? Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 8) What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? Why? Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 9) Describe how Treasury Inflation Protection Securities (TIPS) work and how they help policymakers estimate expected inflation. Topic: Chapter 3.2 Distinction Between Real and Nominal Interest Rates Question Status: Previous Edition 10) Why are long-term bonds more risky than short-term bonds? Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 11) What is interest-rate risk and how is it measured? Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 12) Why may a bond's rate of return differ from its yield to maturity? Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition 13) How does reinvestment risk differ from interest-rate risk? Topic: Chapter 3.3 Distinction Between Interest Rates and Returns Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 4 Why Do Interest Rates Change? 4.1 Multiple Choice 58 Copyright © 2018 Pearson Education, Inc.

1) As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises. A) falls; rises B) falls; falls C) rises; rises D) rises; falls Answer: A Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 2) ________ is the total resources owned by an individual, including all assets. A) Expected return B) Wealth C) Liquidity D) Risk Answer: B Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 3) A ________ prefers stock in a less risky asset than in a riskier asset. A) risk preferrer B) risk-averse person C) risk lover D) risk-favorable person Answer: B Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 4) Factors that determine the demand for an asset include changes in the A) wealth of investors. B) liquidity of bonds relative to alternative assets. C) expected returns on bonds relative to alternative assets. D) risk of bonds relative to alternative assets. E) all of the above. Answer: E Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition

5) The demand for an asset rises if ________ falls. A) risk relative to other assets B) expected return relative to other assets C) liquidity relative to other assets D) wealth Answer: A Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 6) The higher the standard deviation of returns on an asset, the ________ the asset's ________. A) greater; risk B) smaller; risk C) greater; expected return D) smaller; expected return Answer: A Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 7) In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left Answer: B Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 8) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left Answer: C Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 9) Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________. A) increase; left B) increase; right C) decrease; left D) decrease; right Answer: C Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 60 Copyright © 2018 Pearson Education, Inc.

10) Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________. A) increase; left. B) increase; right. C) decrease; left. D) decrease; right. Answer: B Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 11) The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. A) falls; supply B) falls; quantity supplied C) rises; supply D) rises; quantity supplied Answer: D Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 12) When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise Answer: C Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 13) When the price of a bond is below the equilibrium price, there is excess ________ in the bond market and the price will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise Answer: A Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition

14) When the price of a bond is ________ the equilibrium price, there is an excess supply of bonds and the price will ________. A) above; rise B) above; fall C) below; fall D) below; rise Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 15) When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and the price will ________. A) above; rise B) above; fall C) below; fall D) below; rise Answer: D Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 16) When the demand for bonds ________ or the supply of bonds ________, interest rates rise. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: D Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 17) When the demand for bonds ________ or the supply of bonds ________, interest rates fall. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 18) When the demand for bonds ________ or the supply of bonds ________, bond prices rise. A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases Answer: A Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 62 Copyright © 2018 Pearson Education, Inc.

19) When the demand for bonds ________ or the supply of bonds ________, bond prices fall. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: D Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 20) During an economic expansion, the supply of bonds ________ and the supply curve shifts to the ________. A) increases; left B) increases; right C) decreases; left D) decreases; right Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 21) During a recession, the supply of bonds ________ and the supply curve shifts to the ________. A) increases; left B) increases; right C) decreases; left D) decreases; right Answer: C Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 22) An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________. A) increase; left B) increase; right C) decrease; left D) decrease; right Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition

23) A lower level of income causes the demand for money to ________ and the interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase Answer: A Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 24) A rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________. A) decrease; right B) decrease; left C) increase; right D) increase; left Answer: C Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 25) A decline in the price level causes the demand for money to ________ and the demand curve to shift to the ________. A) decrease; right B) decrease; left C) increase; right D) increase; left Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 26) A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________. A) decrease; right B) decrease; left C) increase; right D) increase; left Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition

27) When the federal governments budget deficit increases, the ________ curve for bonds shifts to the ________. A) demand; right B) demand; left C) supply; left D) supply; right Answer: D Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 28) When the quantity of bonds demanded equals the quantity of bonds supplied, there is A) excess supply. B) excess demand. C) a market equilibrium. D) an asset market approach. Answer: C Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 29) When the federal government's budget deficit decreases, the ________ curve for bonds shifts to the ________. A) demand; right B) demand; left C) supply; left D) supply; right Answer: C Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 30) When the inflation rate is expected to increase, the expected return on bonds relative to real assets falls for any given interest rate; as a result, the ________ bonds falls and the ________ curve shifts to the left. A) demand for; demand B) demand for; supply C) supply of; demand D) supply of; supply Answer: A Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition

31) When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ________ bonds increases and the ________ curve shifts to the right. A) demand for; demand B) demand for; supply C) supply of; demand D) supply of; supply Answer: D Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 32) Factors that can cause the supply curve for bonds to shift to the right include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) a decrease in government deficits. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 33) Factors that can cause the supply curve for bonds to shift to the left include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) an increase in government deficits. D) only A and C of the above. Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 34) An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise Answer: B Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition

35) A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise Answer: C Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 36) When the interest rate on a bond is above the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 37) When the interest rate on a bond is below the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 38) When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) above; demand; fall B) above; demand; rise C) below; supply; fall D) above; supply; rise Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

39) When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) below; demand; rise B) below; demand; fall C) below; supply; rise D) above; supply; fall Answer: C Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 40) When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; falls B) right; rises C) left; falls D) left; rises Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 41) When people begin to expect a large run up in stock prices, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 42) An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets, and shift the ________ curve to the left. A) reduce; financial; demand B) reduce; real; demand C) raise; financial; supply D) raise; real; supply Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

43) A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets. A) reduce; financial B) reduce; real C) raise; financial D) raise; real Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 44) When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 45) When the expected inflation rate decreases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises Answer: C Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 46) When bond prices become more volatile, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; falls D) decreases; rises Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

47) When bond prices become less volatile, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; falls D) decreases; rises Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 48) When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 49) When stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 50) When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

51) When bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 52) Factors that cause the demand curve for bonds to shift to the left include A) an increase in the inflation rate. B) an increase in the liquidity of stocks. C) a decrease in the volatility of stock prices. D) all of the above. E) none of the above. Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 53) Factors that cause the demand curve for bonds to shift to the left include A) a decrease in the inflation rate. B) an increase in the volatility of stock prices. C) an increase in the liquidity of stocks. D) all of the above. E) only A and B of the above. Answer: C Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

Figure 4.4 54) In Figure 4.4, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is A) an increase in the price of bonds. B) a business cycle boom. C) an increase in the expected inflation rate. D) a decrease in the expected inflation rate. Answer: C Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 55) In Figure 4.4, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is a(n) ________ in the ________. A) increase; expected inflation rate B) decrease; expected inflation rate C) increase; government budget deficit D) decrease; government budget deficit Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

56) In Figure 4.4, the most likely cause of a decrease in the equilibrium interest rate from i2 to i1 is A) an increase in the expected inflation rate. B) a decrease in the expected inflation rate. C) a business cycle expansion. D) a combination of both A and C of the above. Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 57) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________. A) rise; increases B) rise; stabilizes C) rise; decreases D) fall; increases E) fall; stabilizes Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 58) When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 59) When the economy enters into a boom, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; rises D) decreases; increases; rises Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

Figure 4.2 60) In Figure 4.2, one possible explanation for the increase in the interest rate from i1 to i2 is a(n) ________ in ________. A) increase; the expected inflation rate B) decrease; the expected inflation rate C) increase; economic growth D) decrease; economic growth Answer: C Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 61) In Figure 4.2, one possible explanation for the increase in the interest rate from i1 to i2 is A) an increase in economic growth. B) an increase in government budget deficits. C) a decrease in government budget deficits. D) a decrease in economic growth. E) a decrease in the riskiness of bonds relative to other investments. Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 62) In Figure 4.2, one possible explanation for a decrease in the interest rate from i2 to i1 is A) an increase in government budget deficits. B) an increase in expected inflation. C) a decrease in economic growth. D) a decrease in the riskiness of bonds relative to other investments. Answer: C Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 74 Copyright © 2018 Pearson Education, Inc.

63) When comparing the loanable funds and liquidity preference frameworks of interest rate determination, which of the following is true? A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation. B) The loanable funds framework provides a simpler analysis of the effects of changes in income, the price level, and the supply of money. C) In most instances, the two approaches to interest rate determination yield the same predictions. D) All of the above are true. E) Only A and B of the above are true. Answer: C Topic: Chapter 4.A3 Loanable Funds Framework Question Status: Previous Edition 64) A higher level of income causes the demand for money to ________ and the interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase Answer: D Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 65) Holding everything else constant, an increase in the money supply causes A) interest rates to decline initially. B) interest rates to increase initially. C) bond prices to decline initially. D) both A and C of the above. E) both B and C of the above. Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 66) Holding everything else constant, a decrease in the money supply causes A) interest rates to decline initially. B) interest rates to increase initially. C) bond prices to increase initially. D) both A and C of the above. E) both B and C of the above. Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

Figure 4.3 67) In Figure 4.3, the factor responsible for the decline in the interest rate is A) a decline in the price level. B) a decline in income. C) an increase in the money supply. D) a decline in the expected inflation rate. Answer: C Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 68) In Figure 4.3, the decrease in the interest rate from i1 to i2 can be explained by A) a decrease in money growth. B) an increase in money growth. C) a decline in the expected price level. D) only A and B of the above. Answer: B Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 69) In Figure 4.3, an increase in the interest rate from i2 to i1 can be explained by A) a decrease in money growth. B) an increase in money growth. C) a decline in the price level. D) an increase in the expected price level. Answer: A Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition

70) Diversification benefits an investor by A) increasing wealth. B) increasing expected return. C) reducing risk. D) increasing liquidity. Answer: C Topic: Chapter 4.A1 Models of Asset Pricing Question Status: Previous Edition 71) Determining asset prices using stocks of assets rather than flow is called A) asset transformation. B) expected return. C) asset market approach. D) market equilibrium. Answer: C Topic: Chapter 4.A1 Models of Asset Pricing Question Status: Previous Edition 72) What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called? A) Econometric model B) Liquidity preference framework C) Market equilibrium D) Fisher effect Answer: A Topic: Chapter 4.A1 Models of Asset Pricing Question Status: Previous Edition 73) As expected inflation increases for the coming year, we expected the price of gold to ________ due to a rightward shift the in ________ curve. A) increase; demand B) increase; supply C) decrease; demand D) decrease; supply Answer: A Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold Question Status: Previous Edition 74) As expected inflation falls for the coming year, we expected the price of gold to ________ due to a leftward shift the in ________ curve. A) increase; demand B) increase; supply C) decrease; demand D) decrease; supply Answer: C Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold Question Status: Previous Edition 77 Copyright © 2018 Pearson Education, Inc.

75) The loanable funds framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________. A) expected inflation; bonds B) expected inflation; money C) government budget deficits; bonds D) the supply of money; bonds Answer: B Topic: Chapter 4.A3 Loanable Funds Framework Question Status: Previous Edition 76) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms: A) real assets and financial assets. B) stocks and bonds. C) money and bonds. D) money and gold. Answer: C Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 77) In his liquidity preference framework, Keynes assumed that money has a zero rate of return; thus, when interest rates ________ the expected return on money falls relative to the expected return on bonds, causing the demand for money to ________. A) rise; fall B) rise; rise C) fall; fall D) fall; rise Answer: A Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 78) If the liquidity effect is smaller than the other effects, and the adjustment of expected inflation is slow, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth. Answer: C Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 78 Copyright © 2018 Pearson Education, Inc.

79) When the growth rate of the money supply increases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect. Answer: A Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 80) When the growth rate of the money supply decreases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect. Answer: D Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 81) When the growth rate of the money supply is decreased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A) larger; rapid B) larger; slow C) smaller; slow D) smaller; rapid Answer: B Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 82) When the growth rate of the money supply is increased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A) larger; rapid B) larger; slow C) smaller; slow D) smaller; rapid Answer: D Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition

83) If the Fed wants to permanently lower interest rates, then it should lower the rate of money growth if A) there is fast adjustment of expected inflation. B) there is slow adjustment of expected inflation. C) the liquidity effect is smaller than the expected inflation effect. D) the liquidity effect is larger than the other effects. Answer: C Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 84) If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if A) there is fast adjustment of expected inflation. B) there is slow adjustment of expected inflation. C) the liquidity effect is smaller than the expected inflation effect. D) the liquidity effect is larger than the other effects. Answer: D Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 85) Milton Friedman contends that it is entirely possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation. A) fall; liquidity B) fall; risk C) rise; liquidity D) rise; risk Answer: C Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition

Figure 4.5 86) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the liquidity effect is ________ than the expected inflation effect and interest rates adjust ________ to changes in expected inflation. A) smaller; quickly B) larger; quickly C) larger; slowly D) smaller; slowly Answer: C Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition 87) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. Answer: A Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition

4.2 True/False 1) Investors make their choices of which assets to hold by comparing the expected return, liquidity, and risk of alternative assets. Answer: TRUE Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 2) A person who is risk averse prefers to hold assets that are more, not less, risky. Answer: FALSE Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 3) When interest rates decrease, the demand curve for bonds shifts to the left. Answer: FALSE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 4) When an economy grows out of a recession, normally the demand for bonds increases and the supply of bonds increases. Answer: TRUE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 5) When the federal government's budget deficit decreases, the demand curve for bonds shifts to the right. Answer: FALSE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 6) Interest rates are procyclical in that they tend to rise during business cycle expansions and fall during recessions. Answer: TRUE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 7) When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right. Answer: TRUE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 8) An increase in the inflation rate will cause the demand curve for bonds to shift to the right. Answer: FALSE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 82 Copyright © 2018 Pearson Education, Inc.

9) Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset. Answer: FALSE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 10) An increase in an asset's expected return relative to that of an alternative asset, holding everything else unchanged, raises the quantity demanded of the asset. Answer: TRUE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 11) The more liquid an asset is relative to alternative assets, holding everything else unchanged, the more desirable it is, and the greater the quantity demanded. Answer: TRUE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 12) A movement along the demand (or supply) curve occurs when the quantity demanded (or supplied) changes at each given price (or interest rate) of the bond in response to a change in some other factor besides the bond's price or interest rate. Answer: FALSE Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 13) The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on bonds. Answer: FALSE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 14) An increase in the federal government budget deficit will raise the interest rate on bonds. Answer: TRUE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 15) In a business cycle expansion with growing wealth, the demand for bonds rises and the demand curve for bonds shifts to the right. Answer: TRUE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 16) In a recession, when income and wealth are falling, the demand for bonds falls, and the demand curve shifts to the right. Answer: FALSE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 83 Copyright © 2018 Pearson Education, Inc.

17) Higher expected interest rates in the future lower the expected return for long-term bonds, decrease the demand, and shift the demand curve to the left. Answer: TRUE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 18) An increase in the expected rate of inflation lowers the expected return for bonds, causing their demand to increase and the demand curve to shift to the right. Answer: FALSE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 19) An increase in the riskiness of alternative assets causes the demand for bonds to rise and the demand curve to shift to the right. Answer: TRUE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 20) Increased liquidity of alternative assets increases the demand for bonds and shifts the demand curve to the left. Answer: FALSE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 21) In a business cycle expansion, the supply of bonds increases, and the supply curve shifts to the right. Answer: TRUE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 22) A fall in expected inflation causes the supply of bonds to increase and the supply curve to shift to the right. Answer: FALSE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question 23) Higher government deficits increase the supply of bonds and shift the supply curve to the right. Answer: TRUE Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: New Question

24) Diversification is almost always beneficial to the risk-averse investor, since it reduces risk unless returns on securities move perfectly together. Answer: TRUE Topic: Chapter 4.A1 Models of Asset Pricing Question Status: New Question 25) The marginal contribution of an asset to the risk of a portfolio depends on the risk of the asset in isolation. Answer: FALSE Topic: Chapter 4.A1 Models of Asset Pricing Question Status: New Question 26) The risk of a well diversified portfolio depends only on the systematic risk of the assets in the portfolio. Answer: TRUE Topic: Chapter 4.A1 Models of Asset Pricing Question Status: New Question 27) An asset should be priced so that is has a higher expected return when it has a greater risk in isolation. Answer: FALSE Topic: Chapter 4.A1 Models of Asset Pricing Question Status: New Question 28) The price of gold should be positively related to the expected inflation rate. Answer: TRUE Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold Question Status: New Question 29) An important feature of the loanable funds analysis is that supply and demand are always in terms of stocks of assets, not in terms of flows. Answer: TRUE Topic: Chapter 4.A3 Loanable Funds Framework Question Status: New Question 30) In the liquidity preference framework, a higher level of income causes the demand for money to increase and the demand curve to shift to the right. Answer: TRUE Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: New Question

31) In the liquidity preference framework, an increase in the money supply engineered by the Federal Reserve will shift the supply curve for money to the left. Answer: FALSE Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: New Question 4.3 Essay 1) Identify and explain the four factors that influence asset demand. Which of these factors affect total asset demand and which influence investors to demand one asset over another? Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 2) What is the expected return on a bond if the return is 9% two-thirds of the time and 3% onethird of the time? What is the standard deviation of the returns on this bond? Would you prefer this bond or one with an identical expected return and a standard deviation of 4.5? Why? Topic: Chapter 4.1 Determining Asset Demand Question Status: Previous Edition 3) Identify and describe three factors that cause the supply curve for bonds to shift. Topic: Chapter 4.2 Supply and Demand in the Bond Market Question Status: Previous Edition 4) How is the equilibrium interest rate determined in the bond market? Explain why the interest rate will move toward equilibrium if it is temporarily above or below the equilibrium rate. Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 5) Use the bond demand and supply framework to explain the Fisher effect and why it occurs. Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 6) If investors perceive greater interest rate risk, what will happen to the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework. Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 7) How will a decrease in the federal government's budget deficit affect the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework. Topic: Chapter 4.3 Changes in Equilibrium Interest Rates Question Status: Previous Edition 8) Explain why the marginal contribution of an asset to the risk of a portfolio does not depend on the risk of the asset in isolation. Topic: Chapter 4.A1 Models of Asset Pricing Question Status: Previous Edition 86 Copyright © 2018 Pearson Education, Inc.

9) What is the difference between systematic and nonsystematic risk? Topic: Chapter 4.A1 Models of Asset Pricing Question Status: Previous Edition 10) Explain the difference between the Capital Asset Pricing Model and the Arbitrage Pricing Theory. Topic: Chapter 4.A1 Models of Asset Pricing Question Status: Previous Edition 11) Explain how the price of gold should be positively related to expected inflation. Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold Question Status: Previous Edition 12) Explain how the loanable funds framework and the supply and demand for bonds are related. Topic: Chapter 4.A3 Loanable Funds Framework Question Status: Previous Edition 13) Describe the factors that shift the demand and supply of money in the loanable funds framework. Topic: Chapter 4.A3 Loanable Funds Framework Question Status: Previous Edition 14) Explain the differences between the loanable funds framework and the liquidity preference framework. Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 5 How Do Risk and Term Structure Affect Interest Rates? 5.1 Multiple Choice 1) The risk structure of interest rates is A) the structure of how interest rates move over time. B) the relationship among interest rates of different bonds with the same maturity. C) the relationship among the terms to maturity of different bonds. D) the relationship among interest rates on bonds with different maturities. Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 2) Which of the following long-term bonds should have the lowest interest rate? A) Corporate Baa bonds B) U.S. Treasury bonds C) Corporate Aaa bonds 87 Copyright © 2018 Pearson Education, Inc.

D) Municipal bonds Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 3) Which of the following long-term bonds should have the highest interest rate? A) Corporate Baa bonds B) U.S. Treasury bonds C) Corporate Aaa bonds D) Municipal bonds Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 4) The risk premium on corporate bonds becomes smaller if A) the riskiness of corporate bonds increases. B) the liquidity of corporate bonds increases. C) the liquidity of corporate bonds decreases. D) the riskiness of corporate bonds decreases. E) either B or D of the above occur. Answer: E Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

5) Bonds with relatively low risk of default are called A) zero coupon bonds. B) junk bonds. C) investment-grade bonds. D) none of the above. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 6) Bonds with relatively high risk of default are called A) Brady bonds. B) junk bonds. C) zero coupon bonds. D) investment-grade bonds. Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 7) Between 1919 and 2016, when did long-term bond yields peak? A) around 1945 B) early 1980s C) around 1960 D) 1925 Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 8) Between 1919 and 1990, when did long-term bond yields reach a low point? A) around 1945 B) early 1980s C) around 1960 D) 1925 Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 9) A corporation suffering big losses might be more likely to suspend interest payments on its bonds, thereby A) raising the default risk and causing the demand for its bonds to rise. B) raising the default risk and causing the demand for its bonds to fall. C) lowering the default risk and causing the demand for its bonds to rise. D) lowering the default risk and causing the demand for its bonds to fall. Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

10) (I) If a corporation suffers big losses, the demand for its bonds will rise because of the higher interest rates the firm must pay. (II) The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 11) Holding everything else constant, if a corporation begins to suffer large losses, then the default risk on its bonds will ________ and the expected return on those bonds will ________. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 12) Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will ________ and the expected return on those bonds will ________. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 13) If a corporation begins to suffer large losses, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

14) If a corporation's earnings rise, then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 15) When the default risk on corporate bonds decreases, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. A) right; right B) right; left C) left; left D) left; right Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 16) (I) An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the right. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the left. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 17) (I) An increase in default risk on corporate bonds shifts the demand curve for corporate bonds to the left. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

18) The spread between interest rates on low-quality corporate bonds and U.S. government bonds ________ during the Great Depression. A) was reversed B) narrowed significantly C) widened significantly D) did not change Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 19) The spread between the interest rates on bonds with default risk and default-free bonds, both of the same maturity, is called the A) rate premium. B) bond premium. C) risk premium. D) market premium. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 20) As a result of the subprime collapse, the demand for low -quality corporate bonds ________, the demand for high-quality Treasury bonds ________, and the risk spread ________. A) increased; decreased; was unchanged B) decreased; increased; increased C) increased; decreased; decreased D) decreased; increased; was unchanged Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 21) Moody's and Standard and Poor's are agencies that A) help investors collect when corporations default on their bonds. B) advise municipal bond issuers on the tax exempt status of their bonds. C) produce information about the probability of default on corporate bonds. D) maintain liquid markets for corporate bonds. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

22) If Moody's or Standard and Poor's downgrades its rating on a corporate bond, the demand for the bond ________ and its yield ________. A) increases; decreases B) decreases; increases C) increases; increases D) decreases; decreases Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 23) Corporate bonds are not as liquid as government bonds because A) fewer bonds for any one corporation are traded, making them more costly to sell. B) the corporate bond rating must be calculated each time they are traded. C) corporate bonds are not callable. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 24) (I) The risk premium widens as the default risk on corporate bonds increases. (II) The risk premium widens as corporate bonds become less liquid. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 25) When the corporate bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. A) right; right B) right; left C) left; left D) left; right Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

26) When the corporate bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. A) right; right B) right; left C) left; left D) left; right Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 27) (I) If a corporate bond becomes less liquid, the demand for the bond will fall, causing the interest rate to rise. (II) If a corporate bond becomes less liquid, the demand for Treasury bonds does not change. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 28) (I) If a corporate bond becomes less liquid, the interest rate on the bond will fall. (II) If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 29) If income tax rates were lowered, then A) the interest rate on municipal bonds would fall. B) the interest rate on Treasury bonds would rise. C) the interest rate on municipal bonds would rise. D) the price of Treasury bonds would fall. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

30) If income tax rates rise, then A) the prices of municipal bonds will fall. B) the prices of Treasury bonds will rise. C) the interest rate on Treasury bonds will rise. D) the interest rate on municipal bonds will rise. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 31) ________ are investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default. A) Financial institutions B) Credit-rating agencies C) Securities companies D) none of the above Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 32) If a bond has a favorable tax treatment, its required interest rate (all else equal) A) will be higher. B) will not be affected. C) will be lower. D) all of the above could happen. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 33) Based on the expectations hypothesis, the steep upward sloping yield curve in June of 2013 indicted that short-term rates would ________ in the future. A) climb B) fall C) remain the same D) change in a random fashion Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 34) A bond with default risk will always have a ________ risk premium, and an increase in its default risk will raise the risk premium. A) positive B) negative C) unpredictable D) minimal Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 95 Copyright © 2018 Pearson Education, Inc.

35) An increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds and ________ the demand for U.S. government bonds. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 36) A decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds and ________ the demand for U.S. government bonds. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 37) Which of the following statements are true? A) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. B) An increase in tax rates will increase the demand for municipal bonds, lowering their interest rates. C) Interest rates on municipal bonds will be lower than on comparable bonds without the tax exemption. D) All of the above are true statements. E) Only A and B are true statements. Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 38) Which of the following statements are true? A) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in higher income tax brackets. B) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates. C) Interest rates on municipal bonds will be higher than on comparable bonds without the tax exemption. D) Only A and B are true statements. Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

39) When a municipal bond is given tax-free status, the demand for municipal bonds shifts ________, causing the interest rate on the bond to ________. A) leftward; rise B) leftward; fall C) rightward; rise D) rightward; fall Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 40) When a municipal bond is given tax-free status, the demand for Treasury bonds shifts ________, and the interest rate on Treasury bonds ________. A) leftward; rises B) leftward; falls C) rightward; rises D) rightward; falls Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 41) If municipal bonds were to lose their tax-free status, then the demand for Treasury bonds would shift ________, and the interest rate on Treasury bonds would ________. A) rightward; fall B) rightward; rise C) leftward; fall D) leftward; rise Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 42) The Bush tax cut passed in 2001 reduces the top income tax bracket from 39 percent to 35 percent over the next ten years. As a result of this tax cut, the demand for municipal bonds should shift to the ________ and the interest rate on municipal bonds should ________. A) right; decline B) right; increase C) left; decline D) left; increase Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

43) A bond rating of Aa or AA would mean that the quality of the bond is A) the highest. B) high. C) medium grade. D) speculative. Answer: B Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 44) What do credit-rating agencies do? A) They are investment banks that sell credit ratings for a fee. B) They are a consumer finance company that advises individuals on their FICO scores. C) They are investment advisory firms that rate the quality of corporate and municipal bonds in terms of the probability of default. D) They are a part of the Federal Reserve that rates the credit quality of U.S. banks. Answer: C Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 45) As of 2016, the debt of Microsoft and Johnson & Johnson both had ________ ratings from Standard and Poor's. A) AAA B) AA C) A D) BBB Answer: A Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 46) ________ bonds are the most liquid of all long-term bonds. A) Callable B) Municipal C) Corporate Aaa D) U.S. Treasury Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 47) ________ bonds are exempt from federal income taxes. A) Corporate Aaa B) U.S. Treasury C) Corporate Baa D) Municipal Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 98 Copyright © 2018 Pearson Education, Inc.

48) By the end of July 2007, the interest rate on Baa-rated bonds rose by 280 basis points. At the same time, the interest rate on Treasury bonds A) also rose by about 280 basis points. B) remained unchanged. C) rose as well, but only by 100 basis points. D) fell by 80 basis points. Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 49) The risk structure of interest rates is explained by A) default risk. B) liquidity. C) tax considerations. D) all of the above. Answer: D Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 50) The relationship among interest rates on bonds with identical default risk but different maturities is called the A) time-risk structure of interest rates. B) liquidity structure of interest rates. C) yield curve. D) bond demand curve. Answer: C Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 51) Yield curves can be classified as A) upward-sloping. B) downward-sloping. C) flat. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

52) Typically, yield curves are A) gently upward-sloping. B) gently downward-sloping. C) flat. D) bowl shaped. E) mound shaped. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 53) When the yield curve is inverted, the yield curve is A) upward-sloping. B) downward-sloping. C) flat. D) bowl shaped. E) mound shaped. Answer: B Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: New Question 54) As shown in the text, the yield curve in May of 2016 was A) upward-sloping. B) downward-sloping. C) flat. D) bowl shaped. E) mound shaped. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: New Question 55) When yield curves are steeply upward-sloping, A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest rates are above both short-term and long-term interest rates. E) medium-term interest rates are below both short-term and long-term interest rates. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

56) Economists' attempts to explain the term structure of interest rates A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. C) prove that the real world is a special case that tends to get short shrift in theoretical models. D) have proved entirely unsatisfactory to date. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 57) According to the expectations theory of the term structure, A) the interest rate on long-term bonds will exceed the average of expected future short-term interest rates. B) interest rates on bonds of different maturities move together over time. C) buyers of bonds prefer short-term to long-term bonds. D) all of the above. E) only A and B of the above. Answer: B Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 58) According to the expectations theory of the term structure, A) when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. B) when the yield curve is downward-sloping, short-term interest rates are expected to decline in the future. C) buyers of bonds prefer short-term to long-term bonds. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 59) According to the expectations theory of the term structure, A) when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. B) when the yield curve is downward-sloping, short-term interest rates are expected to remain relatively stable in the future. C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 101 Copyright © 2018 Pearson Education, Inc.

60) According to the expectations theory of the term structure, A) yield curves should be equally likely to slope downward as to slope upward. B) when the yield curve is steeply upward-sloping, short-term interest rates are expected to rise in the future. C) when the yield curve is downward-sloping, short-term interest rates are expected to remain relatively stable in the future. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 61) If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on the four-year bond is A) 1 percent. B) 2 percent. C) 4 percent. D) none of the above. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 62) If the expected path of one-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, then the pure expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years. E) five years. Answer: E Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 63) If the expected path of one-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, then the pure expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

64) According to the market segmentation theory of the term structure, A) the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity. B) bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time. C) investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope upward. D) all of the above. E) none of the above. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 65) According to the market segmentation theory of the term structure, A) the interest rate for bonds of one maturity is determined by the supply and demand for bonds of that maturity. B) bonds of one maturity are not substitutes for bonds of other maturities; therefore, interest rates on bonds of different maturities do not move together over time. C) investors' strong preference for short-term relative to long-term bonds explains why yield curves typically slope downward. D) only A and B of the above. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 66) The liquidity premium theory of the term structure A) indicates that today's long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond. B) assumes that bonds of different maturities are perfect substitutes. C) suggests that markets for bonds of different maturities are completely separate because people have different preferences. D) does none of the above. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 67) The liquidity premium theory of the term structure A) assumes investors tend to prefer short-term bonds because they have less interest-rate risk. B) assumes that interest rates on the long-term bond respond to demand and supply conditions for that bond. C) assumes that an average of expected short-term rates is an important component of interest rates on long-term bonds. D) assumes all of the above. E) assumes none of the above. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 103 Copyright © 2018 Pearson Education, Inc.

68) According to the liquidity premium theory of the term structure, A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a liquidity premium. B) buyers of bonds may prefer bonds of one maturity over another, yet interest rates on bonds of different maturities move together over time. C) even with a positive liquidity premium, if future short-term interest rates are expected to fall significantly, then the yield curve will be downward-sloping. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 69) According to the liquidity premium theory of the term structure, A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. C) because of the positive term premium, the yield curve cannot be downward-sloping. D) all of the above. E) only A and B of the above. Answer: B Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 70) If the yield curve slope is flat, the liquidity premium theory indicates that the market is predicting A) a mild rise in short-term interest rates in the near future and a mild decline further out in the future. B) constant short-term interest rates in the near future and further out in the future. C) a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future. D) constant short-term interest rates in the near future and a mild decline further out in the future. Answer: C Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

71) If the yield curve has a mild upward slope, the liquidity premium theory indicates that the market is predicting A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future. Answer: B Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 72) According to the liquidity premium theory of the term structure, a downward-sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 73) According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects A) short-term interest rates to rise sharply. B) short-term interest rates to drop sharply. C) short-term interest rates to stay near their current levels. D) none of the above. Answer: C Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 74) In actual practice, short-term interest rates are just as likely to fall as to rise; this is the major shortcoming of the A) market segmentation theory. B) expectations theory. C) liquidity premium theory. D) separable markets theory. Answer: B Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

75) Which theory of the term structure proposes that bonds of different maturities are not substitutes for one another? A) Market segmentation theory B) Expectations theory C) Liquidity premium theory D) Separable markets theory Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 76) The term structure of interest rates is A) the relationship among interest rates of different bonds with the same risk and maturity. B) the structure of how interest rates move over time. C) the relationship among the terms to maturity of different bonds from different issuers. D) the relationship among interest rates on bonds with different maturities but similar risk. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 77) Since yield curves are usually upward sloping, the ________ indicates that, on average, people tend to prefer holding short-term bonds to long-term bonds. A) market segmentation theory B) expectations theory C) liquidity premium theory D) both A and B of the above E) both A and C of the above Answer: E Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 78) ________ cannot explain the empirical fact that interest rates on bonds of different maturities tend to move together. A) The market segmentation theory B) The expectations theory C) The liquidity premium theory D) Both A and B of the above E) Both A and C of the above Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

79) Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that views long-term interest rates as equaling the average of future shortterm rates expected to occur over the life of the bond is the A) pure expectations theory. B) preferred habitat theory. C) liquidity premium theory. D) segmented markets theory. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 80) Of the four theories that explain how interest rates on bonds with different terms to maturity are related, the one that assumes that bonds of different maturities are not substitutes for one another is the A) expectations theory. B) segmented markets theory. C) liquidity premium theory. D) preferred habitat theory. Answer: B Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 81) A moderately upward-sloping yield curve indicates that short-term interest rates are expected to A) neither rise nor fall in the near future. B) remain relatively unchanged, but that long-term rates are expected to fall. C) neither rise nor fall, but that long-term rates are expected to rise moderately. D) rise moderately in the near future. Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 82) A steep upward-sloping yield curve indicates that short-term interest rates are expected to A) neither rise nor fall in the near future. B) remain relatively unchanged, but that long-term rates are expected to fall. C) neither rise nor fall, but that long-term rates are expected to rise moderately. D) rise moderately in the near future. Answer: D Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

83) The ________ theory is the most widely accepted theory of the term structure of interest rates because it explains the major empirical facts about the term structure so well. A) liquidity premium B) market segmentation C) expectations D) none of the above Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 84) Closely related to the ________ is the preferred habitat theory, which takes a somewhat less direct approach to modifying the expectations hypothesis but comes to a similar conclusion. A) liquidity premium theory B) expectations theory C) market segmentation theory D) supply theory Answer: A Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 5.2 True/False 1) The risk structure of interest rates describes the relationship between the interest rates of different bonds with the same maturities. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 2) Following the subprime collapse, the spread (difference) between the interest rates on Baa bonds and Treasury bonds widened. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 3) When a bond defaults, the issuer of the bond is unable or unwilling to make interest payments when promised or to pay off the face value when the bond matures. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 4) The risk premium on corporate bonds becomes smaller as the liquidity of the bonds falls. Answer: FALSE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

5) An increase in income tax rates will cause the interest rates on tax-exempt municipal bonds to fall relative to the interest rate on taxable corporate securities. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 6) Bonds with the lowest risk of default are often referred to as junk bonds. Answer: FALSE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 7) It is impossible for default-free bonds to default, so their risk has no impact on bond markets. Answer: FALSE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 8) A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise its risk premium. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: New Question 9) The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium. Answer: FALSE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 10) With the Obama tax increase that repealed the Bush tax cuts for high-income tax payers in 2013, the after-tax expected return on tax-free municipal bonds relative to Treasury bonds decreases. Answer: FALSE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 11) Risk, liquidity, and income tax rules all play a role in determining the risk structure of interest rates. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 12) An increase in the marginal tax rate would likely increase the demand for municipal bonds, and decrease the demand for U.S. government bonds. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 109 Copyright © 2018 Pearson Education, Inc.

13) Risk occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures. Answer: FALSE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 14) During the budget negotiations in Congress in 1995-1996, and then again in 2011-2013, the Republicans threatened to let Treasury bonds default, and this had an impact on the bond market. Answer: TRUE Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 15) The term structure of interest rates describes how interest rates move over time. Answer: FALSE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 16) The interest rates on bonds of different maturities tend to move together over time. Answer: TRUE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 17) The expectations theory is able to explain why yield curves are usually upward-sloping. Answer: FALSE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 18) According to the expectations theory, the interest rate on a long-term bond is the average of the short-term interest rates expected over the life of the long-term bond. Answer: TRUE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 19) The market segmentation theory is able to explain why interest rates on bonds of different maturities move together over time. Answer: FALSE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 20) A positive liquidity premium indicates that investors prefer long-term bonds over short-term bonds. Answer: FALSE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition

21) A mildly upward-sloping yield curve suggests that the market is predicting constant shortterm interest rates. Answer: TRUE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 22) When yield curves are downward-sloping, long-term interest rates are above short-term interest rates. Answer: FALSE Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 5.3 Essay 1) Why would an increase in the income tax rate reduce borrowing costs to municipalities? Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 2) What is meant by the risk structure of interest rates? Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 3) How would a severe recession affect the risk premium on corporate bonds? Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 4) Explain why a flight to quality occurred following the subprime collapse and how this affected the interest rates on lower-quality corporate bonds and Treasury bonds. Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 5) What do credit-rating agencies do and why is this work important? Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 6) In 2013, President Obama increased tax by essentially repealing the Bush tax cuts for highincome tax payers. How does this affect the after-tax expected return on tax-free municipal bonds relative to Treasury bonds? Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition 7) What effect did the Bush Tax Cut have on bond interest rates? Topic: Chapter 5.1 Risk Structure of Interest Rates Question Status: Previous Edition

8) Contrast the liquidity premium theory to the market segmentation theory of the term structure of interest rates. Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 9) Discuss what is shown by a yield curve. Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 10) Why is it unlikely that the expectations theory alone is the correct theory for explaining the yield curve? Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 11) Explain why the liquidity premium theory is so widely accepted. Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition 12) What are the differences among the expectations, market segmentation, and liquidity premium theories for the term structure of interest rates? Topic: Chapter 5.2 Term Structure of Interest Rates Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 6 Are Financial Markets Efficient? 6.1 Multiple Choice 1) How expectations are formed is important because expectations influence A) the demand for assets. B) bond prices. C) the risk structure of interest rates. D) the term structure of interest rates. E) all of the above. Answer: E Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 2) According to the efficient market hypothesis, the current price of a financial security A) is the discounted net present value of future interest payments. B) is determined by the highest successful bidder. C) fully reflects all available relevant information. D) is a result of none of the above. Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 112 Copyright © 2018 Pearson Education, Inc.

3) Current prices in a financial market will be set so that the optimal forecast of a security's return using all available information ________ the security's equilibrium return. A) is less than B) is greater than C) equals D) is unrelated to Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: New Question 4) The efficient market hypothesis A) is based on the assumption that prices of securities fully reflect all available information. B) holds that the expected return on a security equals the equilibrium return. C) both A and B. D) neither A nor B. Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition

5) If the optimal forecast of the return on a security exceeds the equilibrium return, then A) the market is inefficient. B) an unexploited profit opportunity exists. C) the market is in equilibrium. D) only A and B of the above are true. E) only B and C of the above are true. Answer: D Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 6) New information reveals that a stock's price will be $150 in one year. If the stock pays no dividends, and the required return is 10%, what does the efficient market hypothesis indicate the price will be today? A) $130.33 B) $136.36 C) $142.59 D) $145.00 Answer: B Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: New Question 7) According to the efficient market hypothesis A) one cannot expect to earn an abnormally high return by purchasing a security. B) information in newspapers and in the published reports of financial analysts is already reflected in market prices. C) unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities. D) all of the above are true. E) only A and B of the above are true. Answer: E Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 8) Another way to state the efficient market condition is that in an efficient market, A) unexploited profit opportunities will be quickly eliminated. B) unexploited profit opportunities will never exist. C) arbitrageurs guarantee that unexploited profit opportunities never exist. D) both A and C of the above occur. Answer: A Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition

9) Another way to state the efficient market hypothesis is that in an efficient market, A) unexploited profit opportunities will never exist as market participants, such as arbitrageurs, ensure that they are instantaneously dissipated. B) unexploited profit opportunities will not exist for long, as market participants will act quickly to eliminate them. C) every financial market participant must be well informed about securities. D) only A and C of the above. Answer: B Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 10) The elimination of a riskless profit opportunity in a market is called A) the efficient market hypothesis. B) random walk. C) arbitrage. D) market fundamentals. Answer: C Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 11) A situation in which the price of an asset differs from its fundamental market value is called A) an unexploited profit opportunity. B) a bubble. C) a correction. D) a mean reversion. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 12) A situation in which the price of an asset differs from its fundamental market value A) indicates that unexploited profit opportunities exist. B) indicates that unexploited profit opportunities do not exist. C) need not indicate that unexploited profit opportunities exist. D) indicates that the efficient market hypothesis is fundamentally flawed. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 13) Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period A) usually beat the market in the next time period. B) usually beat the market in the next two subsequent time periods. C) usually beat the market in the next three subsequent time periods. D) usually do not beat the market in the next time period. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 115 Copyright © 2018 Pearson Education, Inc.

14) The efficient market hypothesis suggests that allocating your funds in the financial markets on the advice of a financial analyst A) will certainly mean higher returns than if you had made selections by throwing darts at the financial page. B) will always mean lower returns than if you had made selections by throwing darts at the financial page. C) is not likely to prove superior to a strategy of making selections by throwing darts at the financial page. D) is good for the economy. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 15) Raj Rajaratnam, a successful investor in the 2000s who consistently beat the market, was able to outperform the market on a consistent basis, indicating that A) securities markets are not efficient. B) unexploited profit opportunities were abundant. C) investors can outperform the market with inside information. D) only B and C of the above. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 16) To say that stock prices follow a "random walk" is to argue that A) stock prices rise, then fall. B) stock prices rise, then fall in a predictable fashion. C) stock prices tend to follow trends. D) stock prices are, for all practical purposes, unpredictable. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 17) To say that stock prices follow a "random walk" is to argue that A) stock prices rise, then fall, then rise again. B) stock prices rise, then fall in a predictable fashion. C) stock prices tend to follow trends. D) stock prices cannot be predicted based on past trends. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition

18) Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets theory, A) a waste of time. B) profitably employed by all financial analysts. C) the most efficient rules to employ. D) consistent with the random walk hypothesis. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 19) Tests used to rate the performance of rules developed in technical analysis conclude that A) technical analysis outperforms the overall market. B) technical analysis far outperforms the overall market, suggesting that stockbrokers provide valuable services. C) technical analysis does not outperform the overall market. D) technical analysis does not outperform the overall market, suggesting that stockbrokers do not provide services of any value. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 20) Which of the following types of information will most likely enable the exploitation of a profit opportunity? A) Financial analysts' published recommendations B) Technical analysis C) Hot tips from a stockbroker D) Insider information Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 21) Which of the following types of information will most likely enable the exploitation of a profit opportunity? A) Financial analysts' published recommendations B) Technical analysis C) Hot tips from a stockbroker D) None of the above Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition

22) The advantage of a "buy and hold strategy" is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher its price will be. D) only B and C of the above are true. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 23) The efficient market hypothesis suggests that A) investors should not try to outguess the market by constantly buying and selling securities. B) investors do better on average if they adopt a "buy and hold" strategy. C) buying into a mutual fund is a sensible strategy for a small investor. D) all of the above are sensible strategies. E) only A and B of the above are sensible strategies. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 24) Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient market hypothesis. B) consistent with the efficient market hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient market hypothesis if the earnings were not as low as anticipated. D) the result of none of the above. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 25) Important implications of the efficient market hypothesis include which of the following? A) Future changes in stock prices should, for all practical purposes, be unpredictable. B) Stock prices will respond to announcements only when the information in these announcements is new. C) Sometimes a stock price declines when good news is announced. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition

26) Although the verdict is not yet in, the available evidence indicates that, for many purposes, the efficient market hypothesis is A) a good starting point for analyzing expectations. B) not a good starting point for analyzing expectations. C) too general to be a useful tool for analyzing expectations. D) none of the above. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 27) The efficient market hypothesis suggests that A) investors should purchase no-load mutual funds, which have low management fees. B) investors can use the advice of technical analysts to outperform the market. C) investors let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D) only A and B of the above are sensible strategies. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 28) The efficient market hypothesis applies to A) both the stock market and the foreign exchange market. B) the stock market but not the foreign exchange market. C) the foreign exchange market but not the stock market. D) neither the stock market nor the foreign exchange market. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 29) According to the January effect, stock prices A) experience an abnormal price rise from December to January. B) experience an abnormal price decline from December to January. C) follow a random walk during January. D) set the pattern for the entire year in January. Answer: A Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 30) The small-firm effect refers to the observation that small firms' stocks A) follow a random walk but large firms' stocks do not. B) have earned abnormally low returns given their greater risk. C) have earned abnormally high returns even taking into account their greater risk. D) sell for lower prices than do large firms' stocks. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 119 Copyright © 2018 Pearson Education, Inc.

31) The efficient markets hypothesis is weakened by evidence that A) stock prices tend to follow a random walk. B) stock prices are more volatile than fluctuations in their fundamental values can explain. C) technical analysis does not outperform the overall market. D) an investment adviser's past success or failure at picking stocks does not predict his or her future performance. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 32) Mean reversion refers to the observation that A) stock prices overact to news announcements. B) stocks prices are more volatile than fluctuations in their fundamental value would predict. C) stocks with low returns are likely to have high returns in the future. D) stocks with low returns are likely to have even lower returns in the future. Answer: C Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 33) Which of the following does not weaken the efficient markets hypothesis? A) Mean reversion B) Success of buy-and-hold strategy C) January effect D) Excessive volatility Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 34) Which of the following is empirical evidence indicating that the efficient market hypothesis may not always be generally applicable? A) Small-firm effect B) January effect C) Market overreaction D) All of the above Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 35) Evidence in favor of market efficiency includes A) performance of investment analysts and mutual funds. B) whether stock prices reflect publicly available information. C) the random-walk behavior of stock prices. D) all of the above. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 120 Copyright © 2018 Pearson Education, Inc.

36) Evidence against market efficiency does not include A) the small-firm effect. B) technical analysis. C) excessive volatility. D) mean reversion. Answer: B Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 37) Evidence in favor of market efficiency does not include A) random-walk behavior. B) technical analysis. C) performance of investment analysts and mutual funds. D) the January effect. Answer: D Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 38) Items that have a direct impact on future income streams of the securities are also known as A) rational expectations. B) momentum effects. C) market fundamentals. D) current market trends. Answer: C Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: New Question 39) According to the strong view of the efficient markets hypothesis, security prices reflect ________ and so financial markets are efficient. A) market fundamentals B) rational expectations C) momentum effects D) current market trends Answer: A Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: Previous Edition

40) Which of the following is NOT an implication of the strong view of market efficiency in an efficient market? A) One investment is as good as any other because the securities' prices are correct. B) Security prices will reflect all relevant information about a securities price: past, present, and future. C) A security's price reflects all available information about the intrinsic value of the security. D) Security prices can be used by managers of both financial and nonfinancial firms to assess their cost of capital (cost of financing their investments) accurately. Answer: B Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: New Question 41) When a market bubble occurs, A) prices of assets rise well above their fundamental values. B) a "thin layer" of trading masks true market movements. C) market fundamentals and actual security prices converge. D) prices of assets fluctuate rapidly above and below market fundamentals. Answer: A Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: Previous Edition 42) An important lesson from the Black Monday Crash of 1987 and the tech crash of 2000 is that A) factors other than market fundamentals affect stock prices. B) the strong version of the efficient market hypothesis, that stock prices reflect the true fundamental value of securities, is correct. C) market psychology has little if any effect on stock prices. D) there is no such thing as a rational bubble. Answer: A Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: Previous Edition 43) An investor gains from short selling by ________ and then later ________. A) buying a stock; selling it at a higher price B) selling a stock; buying it back at a lower price C) buying a stock; selling it at a lower price D) selling a stock; buying it back at a higher price Answer: B Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition

44) Which of the following is an insight from behavioral finance? A) The price of securities fully reflects all available information. B) Investor overconfidence leads to high trading volumes. C) The optimal forecast of a security's return equals the security's equilibrium return. D) Investment advisers cannot consistently beat the market. Answer: B Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 45) An arrangement with a broker to borrow stocks from them and then sell it in the market, with the hope that they earn a profit by buying the stock back again after it has fallen in price is called A) behavioral finance. B) short sales. C) smart money. D) random walk. Answer: B Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 6.2 True/False 1) The efficient market hypothesis states that prices of securities in financial markets fully reflect all available information. Answer: TRUE Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: New Question 2) The efficient market hypothesis views expectations as superior to optimal forecasts using all available information. Answer: FALSE Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: New Question 3) In the U.S. stock market, arbitrageurs are typically able to eliminate (profit from) unexploited profit opportunities by engaging in pure arbitrage. Answer: FALSE Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: New Question 4) Another way to state the efficient market condition is this: in an efficient market, all unexploited profit opportunities will be eliminated. Answer: TRUE Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: New Question

5) Evidence that stock prices sometimes fall when a firm announces good news contradicts the efficient market hypothesis. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 6) If the security markets are truly efficient, there is no need to pay for help selecting securities. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 7) Evidence that a mutual fund has performed extraordinarily well in the past contradicts the efficient market hypothesis. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 8) Technical analysts look at historical prices for information to project future prices. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 9) The evidence suggests technical analysts are not superior stock pickers. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 10) If the markets are efficient, the optimal investment strategy will be to buy and hold so as to minimize transaction costs. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 11) In an efficient market, abnormal returns are not possible, even using inside information. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 12) It is probably a good use of an investor's time to watch as many shows featuring technical analysts as possible. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition

13) Having performed well in the past indicates that an investment adviser or a mutual fund will perform well in the future. Answer: FALSE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 14) Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles. Answer: TRUE Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 15) The efficient market hypothesis does not have to imply that financial markets are efficient. Answer: TRUE Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: Previous Edition 16) Asset pricing bubbles, where the prices of assets rise well above their fundamental values, casts serious doubt on the stronger view that financial markets are efficient. Answer: TRUE Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: New Question 17) "Short selling" refers to the practice of buying a stock and holding it for only a short time before selling it. Answer: FALSE Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 18) Loss aversion means the unhappiness a person feels when he or she suffers a monetary loss exceeds the happiness the same person experiences from receiving a monetary gain of the same amount. Answer: TRUE Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition

6.3 Essay 1) Why are expectations important in understanding how financial instruments are valued? Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 2) How is it possible that a firm can announce a record-breaking loss, yet its stock price rises when the announcement is made? Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 3) Explain the role of arbitrage as it relates to the efficient market hypothesis. Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: New Question 4) What is the optimal investment strategy according to the efficient market hypothesis? Why? Topic: Chapter 6.1 The Efficient Market Hypothesis Question Status: Previous Edition 5) Explain what the market reaction will be in an efficient market if a firm announces a fully anticipated filing for bankruptcy. Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 6) Give evidence both for and against market efficiency. Topic: Chapter 6.2 Evidence on the Efficient Market Hypothesis Question Status: Previous Edition 7) Does the efficient market hypothesis imply that financial markets are efficient? Explain. Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: Previous Edition 8) Discuss why Black Monday, the day when the DJIA declined more than 20%, is not evidence against the efficient market hypothesis. Topic: Chapter 6.3 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets Are Efficient Question Status: Previous Edition 9) How do loss aversion, overconfidence of investors, and social contagion affect market efficiency? Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 10) What is a rational bubble? Topic: Chapter 6.4 Behavioral Finance Question Status: Previous Edition 126 Copyright © 2018 Pearson Education, Inc.

Financial Markets and Institutions, 9e (Mishkin) Chapter 7 Why Do Financial Institutions Exist? 7.1 Multiple Choice 1) Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) nonbank loans. Answer: B Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 2) Of the following sources of external finance for American nonfinancial businesses, the most important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) nonbank loans. Answer: D Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 3) Of the sources of external funds for nonfinancial businesses in the United States, bonds account for approximately ________ of the total. A) 10% B) 20% C) 30% D) 50% Answer: C Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 4) Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 10% B) 20% C) 30% D) 40% Answer: A Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition

5) With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements? A) Marketable securities account for a larger share of external business financing in the United States than in most other countries. B) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been sold directly to American households. C) The stock market accounted for the largest share of the financing of American businesses in the 1970-2000 period. D) All of the above. E) Only A and B of the above. Answer: E Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 6) With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements? A) Direct finance is used in less than 5% of the external financing of American businesses. B) Only large, well-established corporations have access to securities markets to finance their activities. C) Loans from banks and other financial intermediaries in the United States provide five times more financing of corporate activities than do stock markets. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 7) (I) In the United States, nonbank loans are the most important source of external funds for nonfinancial businesses. (II) In Germany and Japan, issuing stocks and bonds is the most important source of external for nonfinancial businesses. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition

8) Which of the following is not one of the eight basic facts about financial structure? A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets. C) Collateral is a prevalent feature of debt contracts for both households and businesses. D) New security issues is the most important source of external funds to finance businesses. Answer: D Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 9) Which of the following is not one of the eight basic facts about financial structure? A) The financial system is among the most heavily regulated sectors of the economy. B) Issuing marketable securities is the primary way businesses finance their operations. C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets. D) Financial intermediaries is the most important source of external funds to finance businesses. Answer: B Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 10) The majority of household debt in the United States consists of A) credit card debt. B) consumer installment debt. C) collateralized loans. D) unsecured loans, such as student loans. Answer: C Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 11) Commercial and farm mortgages, in which property is pledged as collateral, account for A) one-quarter of borrowing by nonfinancial businesses. B) one-half of borrowing by nonfinancial businesses. C) one-twentieth of borrowing by nonfinancial businesses. D) two-thirds of borrowing by nonfinancial businesses. Answer: A Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition

12) Which of the following best explains the recent decline in the role of financial intermediaries? A) Private production and sale of information B) Government regulation to increase information C) Improvements in information technology D) None of the above can explain the recent decline Answer: C Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 13) (I) The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction. (II) Financial intermediaries facilitate diversification when an investor has only a small sum to invest. A) (I) is true; (II) false. B) (I) is false; (II) true. C) Both (I) and (II) are true. D) Both (I) and (II) are false. Answer: B Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 14) Economies of scale A) in the financial markets does not explain why financial intermediaries developed and have become such an important part of our financial structure. B) can be used to an advantage by reducing transaction cost. C) both A and B of the above. D) neither A nor B of the above. Answer: B Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 15) Liquidity services are services that A) make it easier for customers to conduct transactions. B) conducts transactions for the customer. C) increase transaction costs. D) all of the above. Answer: A Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition

16) A financial institution can achieve cost savings by engaging in multiple activities. These are called economies of A) scope. B) scale. C) complexity. D) information. Answer: A Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 17) A financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders. This is an example of economies of A) scope. B) scale. C) complexity. D) information. Answer: B Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 18) Economies of scope refer to cost savings that arise when the A) size of financial transactions increase. B) size of financial transactions decrease. C) number of different activities undertaken increases. D) number of different activities undertaken decreases. Answer: C Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 19) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification. Answer: B Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: Previous Edition 20) If borrowers take on big risks after obtaining a loan, then lenders face the problem of A) free-riding. B) adverse selection. C) moral hazard. D) costly state verification. Answer: C Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: Previous Edition 131 Copyright © 2018 Pearson Education, Inc.

21) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification Answer: A Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: Previous Edition 22) Adverse selection A) is a problem created by asymmetrical information after the transaction. B) can be solved by eliminating asymmetrical information. C) occurs when people who do not pay for information take advantage of the information other people have to pay for. D) all of the above. Answer: B Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: Previous Edition 23) Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________. A) low; moral hazard B) low; adverse selection C) high; moral hazard D) high; adverse selection Answer: B Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 24) In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay will A) reflect the highest quality of used cars in the market. B) reflect the lowest quality of used cars in the market. C) reflect the average quality of used cars in the market. D) none of the above. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

25) A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called A) moral hazard. B) asymmetric information. C) noncollateralized risk. D) adverse selection. Answer: B Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 26) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) none of the above. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 27) Because of the adverse selection problem, A) lenders may make a disproportionate amount of loans to bad credit risks. B) lenders may refuse loans to individuals with low net worth. C) lenders are reluctant to make loans that are not secured by collateral. D) all of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 28) The ________ problem occurs when people who do not pay for information take advantage of the information that other people have paid for. A) free-rider B) moral hazard C) adverse selection D) lemons Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

29) Because of the adverse selection problem, A) good credit risks are more likely to seek loans, causing lenders to make a disproportionate amount of loans to good credit risks. B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town." C) lenders are reluctant to make loans that are not secured by collateral. D) all of the above. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 30) The problem of adverse selection helps to explain A) why banks prefer to make loans secured by collateral. B) why banks have a comparative advantage in raising funds for American businesses. C) why borrowers are willing to offer collateral to secure their promises to repay loans. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 31) The problem of adverse selection helps to explain A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. B) why collateral is an important feature of consumer, but not business, debt contracts. C) why direct finance is more important than indirect finance as a source of business finance. D) only A and B of the above. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 32) When an accounting firm conducts on independent audit, the accounting firms certify that A) the firm is adhering to standard accounting principles and disclosing accurate information about sales, assets, and earnings. B) the firm is adhering to federal regulations with regard to product safety, hiring practices, and environmental regulations. C) the firm's management is qualified to conduct the firm's business in the best interest of share holders. D) All of the above are correct answers. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 134 Copyright © 2018 Pearson Education, Inc.

33) The concept of adverse selection helps to explain A) why collateral is not a common feature of many debt contracts. B) why large, well-established corporations find it so difficult to borrow funds in securities markets. C) why financial markets are among the most heavily regulated sectors of the economy. D) all of the above. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 34) That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries A) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. B) are able to prevent potential competitors from free-riding off the information that they provide. C) have failed to solve adverse selection problems in this market because "lemons" continue to be traded. D) do all of the above. Answer: B Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 35) That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries A) provide information that is valued by consumers of used cars. B) are able to prevent others from free-riding off the information that they provide. C) can profit by becoming experts in determining whether an automobile is a good car or a lemon. D) do all of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

36) A key finding of the economic analysis of financial structure is that A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. B) while free-rider problems limit the extent to which securities markets finance some business activities, the majority of funds going to businesses are channeled through securities markets. C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. D) economists do not have a very good explanation for why securities markets are so heavily regulated. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 37) In the United States, the government agency requiring that firms, which sell securities in public markets, adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the A) Federal Corporate Securities Commission. B) Federal Trade Commission. C) Securities and Exchange Commission. D) U.S. Treasury Department. E) Federal Reserve System. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 38) An audit certifies that A) a firm's loans will be repaid. B) a firm's securities are safe investments. C) a firm abides by standard accounting principles. D) the information reported in a firm's accounting statements is correct. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

39) The authors' analysis of adverse selection indicates that financial intermediaries in general, and banks in particular (because they hold a large fraction of nontraded loans), A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than direct finance. B) play a greater role in moving funds to corporations than do securities markets as a result of their ability to overcome the free-rider problem. C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations, which rely to a greater extent on the new issues market for funds. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 40) The authors' analysis of adverse selection indicates that financial intermediaries A) overcome free-rider problems by holding nontraded loans. B) must buy securities from corporations to diversify the risk that results from holding nontradable loans. C) have not been very successful in dealing with adverse selection problems in financial markets. D) do all of the above. E) do only A and B of the above. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 41) The pecking order hypothesis predicts that the ________ a corporation is, the more likely it will be to ________. A) smaller and less well known; issue securities B) larger and more well known; borrow from financial intermediaries C) larger and more well known; issue securities D) smaller and less well known; need external financing Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

42) Financial intermediaries (banks in particular) have the ability to avoid the free-rider problem as long as they primarily A) make private loans. B) acquire a diversified portfolio of stocks. C) buy junk bonds. D) do a balanced combination of A and B of the above. Answer: A Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 43) Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called A) points. B) interest. C) collateral. D) good faith money. Answer: C Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 44) Collateral is A) property that is pledged to the lender if a borrower cannot make his or her debt payments. B) a prevalent feature of debt contracts for households. C) a prevalent feature of debt contracts for businesses. D) all of the above. E) only A and C of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 45) The free-rider problem A) occurs when people who do not pay for information take advantage of the information other people have to pay for. B) suggests that the private sale of information will only be a partial solution to the lemons problem. C) prevents the private market from producing enough information to eliminate all the asymmetric information that leads to adverse selection. D) all of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

46) Bad firms A) do not have an incentive to make themselves look good. B) will slant the information they are required to transmit to the public. C) both A and B of the above. D) neither A nor B of the above. Answer: B Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 47) A bank A) has the ability to profit from the information it produces. B) avoids the free-rider problem by primarily making private loans rather than by purchasing securities that are traded in the open market. C) becomes an expert in determining good firms from bad firms. D) all of the above. Answer: D Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 48) Net worth A) is the difference between current assets and current liabilities. B) is the difference between assets and liabilities. C) is total assets divided by total liabilities. D) is total assets plus total liabilities. Answer: B Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 49) Because information is scarce, A) equity contracts are used much more frequently to raise capital than are debt contracts. B) monitoring managers gives rise to costly state verification. C) government regulations, such as standard accounting principles, can help reduce moral hazard. D) all of the above are true. E) only B and C of the above are true. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition

50) Moral hazard is a problem associated with debt and equity contracts arising from A) the borrower's incentive to undertake highly risky investments. B) the owners' inability to ensure that managers will act in the owners' interest. C) the difficulty lenders have in sorting out good credit risks from bad credit risks. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 51) Because of the moral hazard problem, A) lenders will write debt contracts that restrict certain activities of borrowers. B) lenders will more readily lend to borrowers with high net worth. C) debt contracts are used less frequently to raise capital than equity contracts. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 52) Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer. A) principal-agent B) adverse selection C) free-rider D) debt deflation Answer: A Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 53) Because managers (________) have less incentive to maximize profits than the stockholdersowners (________) do, stockholders find it costly to monitor managers; thus, stockholders are reluctant to purchase equities. A) principals; agents B) principals; principals C) agents; agents D) agents; principals Answer: D Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition

54) The principal-agent problem A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. B) would not arise if the owners of the firm had complete information about the activities of the managers. C) in financial markets helps to explain why equity is a relatively important source of finance for American businesses. D) all of the above. E) only A and B of the above. Answer: B Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 55) Solutions to the moral hazard problem include A) high net worth. B) monitoring and enforcement of restrictive covenants. C) greater reliance on equity contracts and less on debt contracts. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 56) One financial intermediary in our financial structure that helps to reduce the moral hazard arising from the principal-agent problem is the A) venture capital firm. B) money market mutual fund. C) pawn broker. D) savings and loan association. Answer: A Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 57) A venture capital firm protects its equity investment from moral hazard through which of the following means? A) It places people on the board of directors to better monitor the borrowing firm's activities. B) It writes contracts that prohibit the sale of an equity investment to anyone but the venture capital firm. C) It prohibits the borrowing firm from replacing its management. D) It does both A and B of the above. E) It does both A and C of the above. Answer: D Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition

58) Debt contracts A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. B) have an advantage over equity contracts in that they have a lower cost of state verification. C) are used much more frequently to raise capital than equity contracts. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 59) Equity contracts account for a small fraction of external funds raised by American businesses because A) costly state verification makes the equity contract less desirable than the debt contract. B) there is greater scope for moral hazard problems under equity contracts, as compared to debt contracts. C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. D) all of the above. E) both A and B of the above. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 60) To address the moral hazard problem with equity contracts, investors can monitoring of the firm's activities. However, this remedy is often hampered by A) expensive monitoring technology. B) legal barriers. C) costly state verification. D) management intervention. Answer: C Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: New Question 61) A debt contract is said to be incentive compatible if A) the borrower's net worth reduces the probability of moral hazard. B) restrictive covenants limit the type of activities that can be undertaken by the borrower. C) both A and B of the above occur. D) neither A nor B of the above occur. Answer: A Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition

62) A debt contract is more likely to be incentive compatible if A) the company must follow standard accounting principles. B) the funds are provided by a venture capital firm. C) owners of the firm have more of their own money in the business. D) all of the above. E) only B and C. Answer: C Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 63) A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of A) a restrictive covenant. B) a collusive agreement between mortgage lenders and insurance companies. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 64) A debt contract that specifies that the company can only use the funds to finance certain activities A) is a private loan. B) contains a restrictive covenant. C) increases the problem of adverse selection. D) all of the above. E) only A and B of the above. Answer: B Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 65) Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets? A) Covenants reduce moral hazard by restricting borrowers' undesirable behavior. B) Covenants require that borrowers keep collateral in good condition. C) Covenants require periodic accounting statements and income reports. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition

66) Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that A) borrowers may find loopholes that make the covenants ineffective. B) they are costly to monitor and enforce. C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 67) The problem with monitoring as a tool to solve the ________ problem is that it can be expensive in terms of time and money, as reflected in the name economists give it,costly state verification. A) principal-agent B) adverse selection C) audit D) regulation Answer: A Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 68) Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that A) prevent lenders from foreclosing on borrowers with political clout. B) nationalize banks and direct credit to politically favored borrowers. C) make it costly to collect payments and collateral from defaulting debtors. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: Previous Edition 69) Which of the follow describes a security that is incentive compatible? A) The security creates incentives that are internally consistent and compatible with each other. B) The contract aligns the incentives of the investor with those of the issuer. C) This is just another way of stating that the security meets all SEC regulations. D) The contract aligns government and private sector incentives. Answer: B Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: New Question

70) China is in an early state of development, with a per capita income that is still less than ________, one-fifth of the per capita income in the United States. A) $5,000 B) $10,000 C) $25,000 D) $50,000 Answer: B Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: Previous Edition 71) The existence of the free-rider problem for traded securities indicates that ________ should play a greater role than ________ in financing the activities of businesses. A) banks; securities markets B) securities markets; banks C) securities markets; stocks and bonds D) stocks and bonds; securities markets Answer: A Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: New Question 72) Collateral and net worth are effective tools for solving which asymmetric information problem(s)? A) adverse selection B) moral hazard in equity contracts C) moral hazard in debt contracts D) A and C above are correct E) all of the above are correct Answer: D Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: New Question 73) Which combination of activities within a single financial institution is least likely to lead to conflicts of interest? A) Auditing and management advisory services B) Commercial banking and investment banking C) Assessment of credit quality and consulting D) Consumer lending and business lending Answer: D Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition

74) Conflicts of interest pose a problem because they A) lower the quality of information. B) increase problems of asymmetric information. C) make the financial system less efficient. D) do all of the above. Answer: D Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 75) An advantage of providing multiple financial services within one financial institution is that it A) lowers information costs. B) develops broader long-term relationships with customers. C) both A and B of the above. D) none of the above. Answer: C Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 76) A conflict of interest occurs when A) a financial firm sells a service to its customers for a price that exceeds the cost of producing the service. B) lenders prefer higher interest rates and borrowers prefer lower interest rates. C) riskier borrowers are the ones who are more likely to apply for loans. D) people expected to provide reliable information to the public have incentives not to do so. Answer: D Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 77) A conflict of interest between providing impartial research about companies issuing securities and selling those same securities arises in A) investment banking. B) commercial banking. C) accounting firms. D) mutual funds. Answer: A Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition

78) If potential revenues from underwriting greatly exceed brokerage commissions, there is ________ incentive for investment bank analysts to report ________ information about firms issuing securities. A) stronger; unbiased B) stronger; favorable C) weaker; unbiased D) weaker; favorable Answer: B Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 79) Spinning is the practice of A) investment banks allowing executives of potential client companies to buy underpriced initial public offerings of other companies' securities. B) investment bank analysts providing misleading information about a company to encourage more investors to purchase the company's securities. C) accounting firms encouraging its audit clients to also purchase its management advisory services. D) credit rating agencies providing higher ratings on a company's securities in order to develop a long-term relationship with the company. Answer: A Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 80) Investment banks are guilty of conflict of interest when they A) pressure their analysts to produce research favorable to their client firms. B) permit executives of client firms to alter analysts' research on their firms. C) prohibit analysts from making negative or controversial comments about client firms. D) all of the above. Answer: D Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 81) Investment banks serve two client groups, A) home buyers and mortgage lenders. B) people saving for retirement and pension funds. C) issuers of securities and investors in those securities. D) mutual funds and investors with relatively small amounts to invest. Answer: C Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition

82) Auditors attempt to reduce information asymmetry between a firm's managers and its A) customers. B) owners. C) employees. D) competitors. Answer: B Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 83) Conflicts of interest in the Arthur Andersen accounting firm intensified when ________ became the firm's largest source of profits and large clients pressured ________ office managers to give favorable audits. A) consulting; regional B) consulting; national C) auditing; regional D) auditing; national Answer: A Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 84) The potential conflict of interest when a single accounting firm provides both auditing and consulting services is that the firm can A) charge higher fees to its audit clients and lower fees for its consulting services so it can expand its consulting business. B) charge higher fees to its consulting clients and lower fees for its audit services so it can expand its auditing business. C) provide unjustifiably favorable audit reviews for firms that are large clients for its consulting services. D) pressure its clients into paying high fees for both auditing and consulting services. Answer: C Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 85) The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________. A) security issuers; downward B) security issuers; upward C) investors; downward D) regulators; upward Answer: B Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition

86) During the 2007-2009 financial crisis, housing prices began to fall and subprime mortgages began to default. Which of the following statements is true about the rating of subprime mortgage products? A) The rating agencies were way ahead of the market, giving many of the subprime products junk ratings from the start. B) Rating agencies were not involved. Subprime mortgages could not be structured, by law. C) Many AAA-rated subprime products had to be downgraded over and over again until they reached junk status. D) None of the above are true. Answer: C Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 87) Since firms issuing new securities pay to have these securities rated, the credit-rating agencies have incentive to ________ to attract more business. A) give favorable ratings B) give impartial ratings C) lower the fees they charge D) practice spinning Answer: A Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 88) The Sarbanes-Oxley Act of 2002 dealt with conflicts of interest in A) investment banks. B) accounting firms. C) credit-rating agencies. D) all of the above. Answer: B Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 89) The Global Legal Settlement of 2002 dealt with conflicts of interest in A) accounting firms. B) investment banks. C) credit-rating agencies. D) all of the above. Answer: B Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition

90) Which of the following provisions of legislation to deal with conflicts of interest does not increase the flow of information in financial markets? A) Requiring a firm's chief officers to certify its financial statements and other disclosures B) Requiring investment banks to make their analysts' recommendations public C) Requiring disclosure of off-balance-sheet transactions D) Increasing resources available to the Securities and Exchange Commission to supervise financial markets Answer: D Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 91) The Global Legal Settlement includes what key element? A) It directly reduces conflicts of interest. B) It provides incentives for investment banks to not exploit conflicts of interest. C) It has measures to improve the quality for information in financial markets. D) All of the above. Answer: D Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 7.2 True/False 1) American businesses get more funds from direct financing than from indirect financing. Answer: FALSE Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 2) American businesses use stock to finance about 11 percent of their external financing. Answer: TRUE Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Updated from Previous Edition 3) Nonfinancial businesses in Germany and Japan are more likely to use bank loans over all other sources of external financing. Answer: TRUE Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: New Question 4) Issuing marketable securities is the primary way businesses finance their operations. Answer: FALSE Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 5) Collateralized debt is also called secured debt. Answer: TRUE Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 150 Copyright © 2018 Pearson Education, Inc.

6) Partly due to transaction costs, only around 50% of American households own any securities. Answer: TRUE Topic: Chapter 7.2 Transaction Costs Question Status: New Question 7) Economies of scale means that the percentage return on a financial transaction rises as the size of the transaction rises. Answer: FALSE Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 8) An important outcome of a financial intermediary's low transaction costs is the ability to provide its customers with liquidity services. Answer: TRUE Topic: Chapter 7.2 Transaction Costs Question Status: New Question 9) Adverse selection is an asymmetric information problem that occurs before the transaction, while moral hazard arises after the transaction occurs. Answer: TRUE Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: New Question 10) One reason why indirect financing is used is to minimize adverse selection problems. Answer: TRUE Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: Previous Edition 11) Agency theory focuses on how government agencies regulate financial intermediaries and markets. Answer: FALSE Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: Previous Edition 12) Because of the adverse selection problem, lenders may refuse loans to individuals with low net worth. Answer: TRUE Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

13) The concept of adverse selection helps to explain why indirect finance is more important than direct finance as a source of business finance. Answer: TRUE Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 14) The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance. Answer: FALSE Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 15) The concept of adverse selection helps explain why collateral is an important feature of many debt contracts. Answer: TRUE Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 16) The financial system is one of the most heavily regulated sectors of the economy. Answer: TRUE Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 17) Net worth is the difference between a firm's assets and its liabilities. Answer: TRUE Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 18) The principal-agent problem is an example of the adverse selection problem that can result from asymmetric information. Answer: FALSE Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 19) Equity contracts are subject to a particular type of moral hazard called the principal-agent problem. Answer: TRUE Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: New Question

20) Most legal work in the U.S. involves the writing and enforcement of contracts, not ambulance chasing, criminal law, and frivolous lawsuits. Answer: TRUE Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: Previous Edition 21) China is in an early state of development, with a per capita income that is still less than $10,000, one-fifth of the per capita income in the United States. Answer: TRUE Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: Previous Edition 22) State-owned banks in developing countries have little incentive to allocate their capital to the most productive uses. Answer: TRUE Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: New Question 23) One way of describing the solution that high net worth provides to the moral hazard problem is to say that it makes debt contracts incentive compatible. Answer: TRUE Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 24) The Sarbanes-Oxley Act of 2002 was passed in response to scandals in the investment banking industry. Answer: FALSE Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 25) The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets. Answer: FALSE Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 26) The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope. Answer: TRUE Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 27) The Global Legal Settlement of 2002 arose out of a lawsuit brought by New York Attorney General Eliot Spitzer against the ten largest investment banks. Answer: TRUE Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 153 Copyright © 2018 Pearson Education, Inc.

28) The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality. Answer: TRUE Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 29) Due to criticisms of rating agencies following the default of many subprime products, the SEC prohibited credit rating agencies from structuring the same products that they rate. Answer: TRUE Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 7.3 Essay 1) How does the U.S. differ from other countries with respect to the source of funding for nonfinancial business? Topic: Chapter 7.1 Basic Facts About Financial Structure Throughout the World Question Status: Previous Edition 2) What are economies of scale in financial transactions? How can financial intermediaries achieve these economies? Topic: Chapter 7.2 Transaction Costs Question Status: Previous Edition 3) Distinguish between adverse selection and moral hazard. Topic: Chapter 7.3 Asymmetric Information: Adverse Selection and Moral Hazard Question Status: Previous Edition 4) Explain how the "lemons" problem could cause financial markets to fail. Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 5) What facts about financial structure can be explained by adverse selection? Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition 6) What factors usually cause an increase in adverse selection? Topic: Chapter 7.4 The Lemons Problem: How Adverse Selection Influences Financial Structure Question Status: Previous Edition

7) What is the principal-agent problem? Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 8) What is the free-rider problem? Describe some situations that this problem creates. Topic: Chapter 7.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts Question Status: Previous Edition 9) What facts about financial structure can be explained by moral hazard? Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: Previous Edition 10) What factors usually cause an increase in moral hazard? Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: Previous Edition 11) Why is the use of collateral to obtain a loan difficult for the poor in developing countries? Topic: Chapter 7.6 How Moral Hazard Influences Financial Structure in Debt Markets Question Status: New Question 12) Why should we be concerned about conflicts of interest in the financial services industry? Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 13) What conflicts of interest can arise in investment banking? Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 14) What conflicts of interest can arise in accounting firms? Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 15) What conflicts of interest can arise in credit-rating agencies? Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 16) Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems. Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition 17) What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets? Topic: Chapter 7.7 Conflicts of Interest Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) 155 Copyright © 2018 Pearson Education, Inc.

Chapter 8 Why Do Financial Crises Occur and Why Are They So Damaging to the Economy? 8.1 Multiple Choice 1) Financial crises A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. B) occur when adverse selection and moral hazard problems in financial markets become more significant. C) frequently lead to sharp contractions in economic activity. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 8.1 What Is a Financial Crisis? Question Status: Previous Edition 2) Financial crises A) cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers. B) are a recent phenomenon that occur only in developing countries. C) invariably lead to debt deflation. D) all of the above. E) none of the above. Answer: E Topic: Chapter 8.1 What Is a Financial Crisis? Question Status: Previous Edition 3) In an advanced economy, a financial crisis can begin in several ways, including A) mismanagement of financial liberalization or innovation. B) asset pricing booms and busts. C) an increase in uncertainty caused by failure of financial institutions. D) all of the above. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 4) What is a credit boom? A) An explosion in a credit cycle, which can increase or decrease lending in the short-run B) Essentially a lending spree on the part of banks and other financial institutions C) When credit card receivables rise due to low initial interest rates D) The signal of the end of a credit spree, with credit contracting rapidly Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 5) The process of deleveraging refers to 156 Copyright © 2018 Pearson Education, Inc.

A) cutbacks in lending by financial institutions. B) a reduction in debt owed by banks. C) both A and B. D) none of the above. Answer: A Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 6) When asset prices fall following a boom, A) moral hazard may increase in companies that have lost net worth in the bust. B) financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging. C) both A and B are correct. D) none of the above are correct. Answer: C Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 7) During the 1800s, many U.S. financial crises were precipitated by an increase in ________, often originating in London. A) interest rates B) housing prices C) gasoline prices D) heating oil prices Answer: A Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 8) Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis. A) currency B) stock market C) banking D) commodities Answer: C Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 9) Stage Three of a financial crisis in an advanced economy features A) a general increase in inflation. B) debt deflation. C) an increase in general price levels. D) a full-fledged financial crisis. Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 10) Debt deflation refers to 157 Copyright © 2018 Pearson Education, Inc.

A) an increase in net worth, leading to a relative fall in general debt levels. B) a decline in general debt levels due to deleveraging. C) a decline in bond prices as default rates rise. D) a decline in net worth as price levels fall while debt burden remains unchanged. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 11) Factors that lead to worsening conditions in financial markets include A) increases in interest rates. B) declining stock prices. C) increasing uncertainty in financial markets. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 12) Factors that lead to worsening conditions in financial markets include A) declining interest rates. B) anticipated increases in the price level. C) bank panics. D) only A and C of the above. E) only B and C of the above. Answer: C Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 13) In 1928 and the first half of 1929, prices ________ in the U.S. stock market. A) doubled B) dropped by 50% C) fell 15% D) tripled Answer: A Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 14) From its peak in 1929 to the trough in December 1932, the Dow Jones Industrial Average fell how much? A) 80% B) 90% C) 70% D) 60% Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 158 Copyright © 2018 Pearson Education, Inc.

15) The Baa-U.S. Treasury spread was about 2% at the beginning of 1929. By December 1932, the Dow Jones Industrial Average reached a low, and the spread had increased to how much? A) 4% B) 6% C) 8% D) 10% Answer: C Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 16) Most financial crises in the United States have begun with A) a steep stock market decline. B) an increase in uncertainty resulting from the failure of a major firm. C) a steep decline in interest rates. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 17) In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firms' and households' interest payments, thereby ________ their cash flow. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 18) Adverse selection and moral hazard problems increased in magnitude during the early years of the Great Depression as A) stock prices declined to 10 percent of their levels in 1929. B) banks failed. C) the aggregate price level declined. D) a result of all of the above. E) a result of A and B of the above. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition

19) Stock market declines preceded a full-blown financial crisis A) in the United States in 1987. B) in the United States in 2000. C) in the United States in 1929. D) in all of the above. E) in none of the above. Answer: C Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 20) Which of the following factors led up to the Greece debt crisis in 2009-2010? A) Speculative attacks on the euro and a rise in actual and expected inflation B) A decline in tax revenues resulting from a contraction in economic activity C) A double-digit budget deficit D) All of the above E) only B and C of the above Answer: E Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 21) What is a collateralized debt obligation? A) A tranche of an SPV that has been setup based on default risk B) An agreement to exchange interest payments when one party defaults C) A type of insurance against defaults D) A contract between credit rating agencies Answer: A Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 22) Which of the following led to the U.S. financial crisis of 2007-2009? A) Financial innovation in mortgage markets B) Agency problems in mortgage markets C) An increase in moral hazard at credit rating agencies D) All of the above E) only A and B of the above Answer: E Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 23) Approximately how large was the U.S. subprime mortgage market in 2007? A) $100 million B) $100 billion C) $500 billion D) $1 trillion Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 160 Copyright © 2018 Pearson Education, Inc.

24) Leading up to the 2007-2009 Financial Crisis, the ________ process, along with computer technology, enabled the bundling of smaller loans (like mortgages) into standard debt securities. A) liberalization B) securitization C) easing D) investment banking Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 25) Leading up to the 2007-2009 Financial Crisis, companies like AIG developed financial products divisions which wrote billions of dollars worth of financial insurance contracts, called ________, which later bankrupted the company. A) REMICs B) CDOs C) credit default swaps D) call options Answer: C Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 26) From the peak of the housing bubble in Q2 of 2006, to the trough in Q1 of 2009, the CaseShiller housing price index fell by just over A) 15%. B) 20%. C) 25%. D) 30%. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 27) When we refer to the shadow banking system, what are we talking about? A) Hedge funds, investment banks, and other nonbank financial firms that supply liquidity B) The "underground" banking system used for illegal activities C) The subsidiaries of depository institutions D) None of the above Answer: A Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition

28) U.S. Stock prices (as proxied by the DJIA) fell by ________ from October 2007 to March 2009. A) 45% B) 50% C) 55% D) 60% Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 29) The impact of the 2007-2009 financial crisis was widespread, including A) the first major bank failure in the UK in over 100 years. B) the failure of Bear Stearns, the fifth-largest U.S. investment bank. C) the bailout of Fannie Mae and Freddie Mac by the U.S. Treasury. D) all of the above. E) only B and C of the above. Answer: D Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 30) Despite austerity measures to dramatically cut government spending and raise taxes, interest rates on Greek debt soared, eventually rising to nearly ________, and the debt-to-GDP ratio climbed to ________ of GDP in 2012. A) 40%; 125% B) 40%; 160% C) 15%; 120% D) 25%; 100% Answer: B Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 8.2 True/False 1) A financial crisis occurs when information flows in financial markets experience a particularly large disruption. Answer: TRUE Topic: Chapter 8.1 What Is a Financial Crisis? Question Status: Previous Edition 2) A credit spread is the difference between the interest rate on loans to businesses and the interest rate on completely safe assets that are sure to be paid back. Answer: TRUE Topic: Chapter 8.1 What Is a Financial Crisis? Question Status: New Question

3) Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms. Answer: TRUE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 4) During a bank panic, many banks fail in a very short time period. Answer: TRUE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 5) The failure of Ohio Life Insurance and Trust in 1857 did not signal the start of a recession due to prompt actions by the Fed. Answer: FALSE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 6) Bank failures have been a feature of all U.S. financial crises from 1800 to 1944. Answer: TRUE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 7) Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults. Answer: FALSE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 8) The Internet stock market bubble of the late 1990s led to one of the worst financial crises in U.S. history. Banks lost billions of dollars as Internet companies went bankrupt. Answer: FALSE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 9) An unusual feature of the "Great Recession" in the U.S. from 2007-2009 was that the crisis did not spread to European nations. Answer: FALSE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 10) Housing prices boomed from 2002 to 2006, fueling the market for subprime mortgages and forming an asset-price bubble. Housing prices began declining in 2006, falling by more than 30%, which led to defaults by subprime mortgage holders. Answer: TRUE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: New Question 163 Copyright © 2018 Pearson Education, Inc.

11) In Europe, Greece was the first nation to face a debt crisis. Answer: TRUE Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 8.3 Essay 1) Explain the relationship between agency theory and a financial crisis. Topic: Chapter 8.1 What Is a Financial Crisis? Question Status: Previous Edition 2) Describe the sequence of events in a financial crisis in an advanced economy and explain why they can cause economic activity to decline. Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 3) What is the problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis? Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 4) Discuss why some view the Fed as a culprit in the U.S. housing bubble during the 2000s. Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 5) Describe a special purpose vehicle. How are they related to the creation of collateralized debt obligations? Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 6) Discuss some of the financial innovations in mortgage markets that led to the U.S. financial crisis in 2007. Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 7) Why was the shadow banking system important during the 2007-2009 U.S. financial crisis? Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition 8) Describe how the European debt crisis evolved. Topic: Chapter 8.2 Dynamics of Financial Crises in Advanced Economies Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 9 Central Banks and the Federal Reserve System 9.1 Multiple Choice 164 Copyright © 2018 Pearson Education, Inc.

1) Americans' fear of centralized power and their distrust of moneyed interests explain why the U.S. did not have a central bank until the A) 17th century. B) 18th century. C) 19th century. D) 20th century. Answer: D Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 2) Bank panics in 1819, 1837, 1857, 1873, 1884, 1893, and 1907 convinced many that A) the Federal Reserve needed greater control over the banking system. B) the Federal Reserve needed greater authority to deal with problem banks. C) a central bank was needed to prevent future financial panics. D) both A and B of the above. Answer: C Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 3) The unusual structure of the Federal Reserve System is perhaps best explained by A) Americans' fear of centralized power. B) the traditional American distrust of moneyed interests. C) Americans' desire to remove control of the money supply from the U.S. Treasury. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 4) The traditional American distrust of moneyed interests and the fear of centralized power help to explain A) the failures of the first two experiments in central banking in the United States. B) the decentralized structure of the Federal Reserve System. C) why the Board of Governors of the Federal Reserve System is not located in New York. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition

5) The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that A) the First Bank of the United States had failed to serve as a lender of last resort. B) the Second Bank of the United States had failed to serve as a lender of last resort. C) the Federal Reserve System had failed to serve as a lender of last resort. D) a central bank was needed to prevent future panics. Answer: D Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 6) Nationwide financial panics in 1873, 1884, 1893, and 1907 might have been avoided had A) the First Bank of the United States served its intended role of lender of last resort. B) the Second Bank of the United States not been abolished in 1836 by President Andrew Jackson. C) the Second Bank of the United States served its intended role of lender of last resort. D) the Federal Reserve served its intended role of lender of last resort. Answer: B Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 7) The many regional Federal Reserve banks resulted from a compromise between parties favoring A) the establishment of a central bank and those opposed to its establishment. B) a private central bank and those favoring a government institution. C) the establishment of the Board of Governors in Washington, D.C., and those preferring its establishment in New York City. D) none of the above. Answer: B Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 8) Which of the following is an element of the Federal Reserve System? A) The Federal Reserve banks B) The Board of Governors C) The FDIC D) All of the above E) Only A and B of the above Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition

9) Which of the following is an element of the Federal Reserve System? A) The Federal Reserve banks B) The Board of Governors C) The FOMC D) All of the above Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 10) Which of the following is not an entity of the Federal Reserve System? A) Federal Reserve banks B) The FDIC C) The Board of Governors D) The Federal Advisory Council E) Member commercial banks Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 11) Which of the following functions are not performed by any of the twelve regional Federal Reserve banks? A) Check clearing B) Conducting economic research C) Setting interest rates payable on time deposits D) Issuing new currency Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 12) Which Federal Reserve Bank president always has a vote in the Federal Open Market Committee? A) Philadelphia B) New York C) Boston D) San Francisco Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition

13) Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input. A) three; ten B) five; ten C) three; twelve D) five; twelve Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 14) The ________ Fed bank, with about 25 percent of the system's assets, is the most important of the Federal Reserve banks. A) Chicago B) Los Angeles C) Miami D) New York E) Washington, D.C. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 15) The three largest Federal Reserve banks in terms of assets are those of New York, Chicago, and San Francisco — combined they hold more than ________ of the assets (discount loans, securities, and other holdings) of the Federal Reserve System. A) 35% B) 40% C) 45% D) 50% Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: New Question 16) Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited to A) four percent annually. B) five percent annually. C) six percent annually. D) eight percent annually. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition

17) All ________ are required to be members of the Fed. A) state-chartered banks B) nationally chartered banks C) banks with more than $100 million in assets D) banks with more than $500 million in assets Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 18) Which of the following banks are required to be members of the Federal Reserve System? A) State-chartered banks B) Insured banks C) Banks having over $500 million in assets D) None of the above Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 19) Of all commercial banks, about ________ percent belong to the Federal Reserve System. A) 10 B) 25 C) 38 D) 50 Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Updated from Previous Edition 20) Currently about 38% of the commercial banks in the United States are members of the Federal Reserve System, having declined from a peak figure of ________ in 1947. A) 42% B) 49% C) 55% D) 63% Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: New Question 21) Banks subject to reserve requirements set by the Federal Reserve System include A) only state-chartered banks. B) only nationally chartered banks. C) only banks with less than $100 million in assets. D) only banks with less than $500 million in assets. E) all banks whether or not they are members of the Federal Reserve System. Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 169 Copyright © 2018 Pearson Education, Inc.

22) The Fed's support of the Depository Institutions Deregulation and Monetary Control Act of 1980 stemmed in part from its A) concern over declining Fed membership. B) belief that all banking regulations should be eliminated. C) belief that interest rate ceilings were too low. D) belief that depositors had to become more knowledgeable about banking operations. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 23) Which of the following are duties of the Board of Governors of the Federal Reserve System? A) Setting margin requirements, the fraction of the purchase price of securities that has to be paid for with cash. B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. C) Regulating credit with the approval of the President under the Credit Control Act of 1969. D) None of the above has been a duty of the Board since the mid-1980s. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 24) The Board of Governors of the Federal Reserve System A) appoint three directors to each Federal Reserve Bank. B) elect six members to member commercial banks. C) both of the above. D) none of the above. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 25) The Federal Advisory Council has ________ member(s) from each district. A) one B) two C) three D) can have any number of Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition

26) The three largest Federal Reserve banks in terms of assets are those of New York, Chicago, and A) Atlanta. B) Los Angeles. C) Baltimore. D) San Francisco. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 27) The directors of a district bank are classified into three categories: A, B, and C. The three B directors are A) professional bankers. B) prominent leaders from industry, labor, agriculture, or the consumer sector. C) elected by the board of governors to represent the public interest. D) all of the above. Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 28) The 12 Federal Reserve banks are involved in monetary policy in which of the following ways? A) Their directors establish the discount rate. B) They decide which banks can obtain discount loans from the Federal Reserve Bank. C) Their directors select one commercial banker from each bank's district to serve on the Federal Advisory Council. D) all of the above. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 29) The ________ of the Board of Governors is the spokesperson for the Fed. A) chairman B) president C) either of the above can be the spokesperson D) neither of the above Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition

30) Which of the following are not duties of the Board of Governors of the Federal Reserve System? A) Setting margin requirements, the fraction of the purchase price of securities that has to be paid for with cash. B) Setting the maximum interest rates payable on certain types of time deposits under Regulation Q. C) Approving the discount rate "established" by the Federal Reserve banks. D) Representing the United States in negotiations with foreign governments on economic matters. Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 31) The chairman of the Board of Governors of the Federal Reserve System exercises a high degree of control over the board A) through his ability to set the agenda of the Board and the FOMC. B) through his role as spokesperson for the Fed with the President and before Congress. C) because he can veto decisions made by a majority of the other Board members. D) because of all of the above. E) because of only A and B of the above. Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 32) Members of the Board of Governors are A) chosen by the Federal Reserve Bank presidents. B) appointed by the newly elected president of the United States, as are cabinet positions. C) appointed by the president of the United States and confirmed by the Senate as members resign. D) never allowed to serve more than seven-year terms. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 33) Each member of the seven-member Board of Governors is appointed by the president and confirmed by the Senate to serve A) 4-year terms. B) 6-year terms. C) 14-year terms. D) as long as the appointing president remains in office. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition

34) The Board of Governors A) establishes, within limits, reserve requirements. B) effectively sets the discount rate. C) sets margin requirements. D) does all of the above. E) does only A and B of the above. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 35) Although neither ________ nor the ________ is officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee. A) margin requirements; discount rate B) margin requirements; federal funds rate C) reserve requirements; discount rate D) reserve requirements; federal funds rate Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 36) Although the Federal Open Market Committee does not have formal authority to set ________ and the ________, it does possess the authority in practice. A) margin requirements; discount rate B) margin requirements; federal funds rate C) reserve requirements; discount rate D) reserve requirements; federal funds rate Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 37) Which of the following are true statements? A) The FOMC usually meets every six weeks to set monetary policy. B) The FOMC issues directives to the trading desk at the New York Fed. C) Designers of the Federal Reserve Act did not envision the use of open market operations as a monetary policy tool. D) All of the above are true statements. E) Only A and B of the above are true statements. Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition

38) The Federal Open Market Committee consists of A) the five senior members of the seven-member Board of Governors. B) the seven members of the Board of Governors and seven presidents of the regional Fed banks. C) the seven members of the Board of Governors and five presidents of the regional Fed banks. D) the twelve regional Fed bank presidents and the chairman of the Board of Governors. Answer: C Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 39) The Federal Reserve entity that determines monetary policy strategy is the A) Board of Governors. B) Federal Open Market Committee. C) Chairman of the Board of Governors. D) Shadow Open Market Committee. Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 40) Which of the following are true statements? A) The FOMC usually meets every six weeks to set monetary policy. B) The FOMC issues directives to the trading desk at the New York Fed. C) Designers of the Federal Reserve Act did not envision the use of discount lending as a monetary policy tool. D) All of the above are true statements. E) Only A and B of the above are true statements. Answer: E Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 41) The designers of the Federal Reserve Act meant to create a central bank characterized by its A) system of checks and balances and decentralization of power. B) strong concentration of power in the hands of a few people. C) inability to function as a lender of last resort. D) responsiveness to the electorate. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 42) The power within the Federal Reserve was effectively transferred to the Board of Governors by A) the banking legislation of the Great Depression. B) Supreme Court decisions in the 1950s. C) the Depository Institutions Deregulation and Monetary Control Act of 1980. D) the Treasury-Federal Reserve Accord of 1951. Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 174 Copyright © 2018 Pearson Education, Inc.

43) Up until 2010, a detailed national forecast for the next three years was placed between ________ covers and was thus known as the "________ book." A) green B) blue C) teal D) beige Answer: A Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: New Question 44) Up until 2010, projections for the monetary aggregates prepared by the Monetary Affairs Division of the Board of Governors, along with typically three alternative scenarios for monetary policy decisions (labeled A, B, and C), were contained in the "________ book." A) green B) blue C) teal D) beige Answer: B Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: New Question 45) The "________ book" is produced by the Federal Reserve banks and details evidence on the state of the economy in each of the Federal Reserve districts. A) green B) blue C) teal D) beige Answer: D Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: New Question 46) Factors that provide the Federal Reserve with a high degree of independence include A) 14-year terms for members of the Board of Governors. B) a four-year term for the chairman of the Board of Governors that is not coincident with the president's term of office. C) constitutional independence from Congress and the president. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition

47) Federal Reserve independence is thought to A) introduce a short-term bias to monetary policymaking. B) lead to better fiscal and monetary policy coordination. C) introduce longer-run considerations to monetary policymaking. D) do both A and B of the above. Answer: C Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 48) Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to A) withhold appropriations from the Board of Governors. B) withhold appropriations from the Federal Open Market Committee. C) propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies. D) do all of the above. Answer: C Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 49) Although it enjoys a high degree of autonomy, the Fed is still subject to the influence of Congress because A) Congress can pass legislation that would restrict the Fed's independence. B) Congress can withhold the Fed's budget requests. C) Congress can remove members of the Board of Governors whose views on policy differ from those of key members of Congress. D) All of the above. Answer: A Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 50) According to the textbook authors, the Fed is A) remarkably free of the political pressures that influence other government agencies. B) more responsive to the political pressures that influence other government agencies. C) probably somewhat constrained in its policymaking by the congressional threat to reduce Fed independence. D) both A and C of the above. Answer: D Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition

51) According to the textbook authors, A) the Fed appears to be remarkably free of the political pressures that influence other government agencies. B) since the president can protect the Fed from Congress, the Fed may be responsive to the president's policy preferences. C) the Fed appears to be more responsive to the political pressures that influence other government agencies. D) both A and B of the above. E) both B and C of the above. Answer: D Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 52) Instrument independence means the central bank is free from A) political pressure regarding how it uses the tools of monetary policy. B) political pressure regarding the goals it pursues. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 53) Suppose legislation requiring the Fed to keep the inflation rate between 1.5% and 2.5% per year is passed by Congress. This law restricts the Fed's A) instrument independence. B) goal independence. C) both A and B of the above. D) neither A nor B of the above. Answer: B Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 54) Cross-country evidence suggests that an increase in central bank independence results in a ________ inflation rate and ________ unemployment. A) lower; higher B) lower; no worse C) higher; lower D) higher; higher Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition

55) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize A) the public's welfare. B) its own welfare. C) profits. D) conflict between the executive and legislative branches of government. Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 56) The theory of bureaucratic behavior suggests that the Federal Reserve will A) try to avoid a conflict with the president and Congress over increases in interest rates. B) try to gain regulatory power over more banks. C) devise clever strategies in an effort to avoid blame for poor economic performance. D) do all of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 57) According to the theory of bureaucratic behavior, the objective of bureaucracy is A) to maximize its own welfare, meaning that it seeks additional power and prestige. B) to maximize consumers' surplus, meaning that it seeks additional regulatory powers. C) to protect the industry it regulates, meaning that it seeks additional regulatory powers. D) none of the above. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 58) According to the theory of bureaucratic behavior, A) the objective of a bureaucracy is to maximize its own welfare, meaning that it seeks additional power and prestige. B) the bureaucracy will fight vigorously to preserve its autonomy; thus, it will attempt to avoid conflict with the president and Congress. C) the bureaucracy will support legislation that gives it additional regulatory power. D) all of the above describe bureaucratic behavior. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition

59) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed A) resists so vigorously congressional attempts to limit the central bank's autonomy. B) is secretive about the conduct of future monetary policy. C) sought less control over banks in the 1980s. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 60) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed A) is supportive of congressional attempts to limit the central bank's autonomy. B) is secretive about the conduct of future monetary policy. C) sought less control over banks in the 1980s. D) is willing to take on powerful groups that may threaten its autonomy. Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 61) The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart A) an inflationary bias to monetary policy. B) a deflationary bias to monetary policy. C) a disinflationary bias to monetary policy. D) a countercyclical bias to monetary policy. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 62) Politicians in a democratic society may be shortsighted because of their desire to win reelection; thus, the political process can A) impart an inflationary bias to monetary policy. B) impart a deflationary bias to monetary policy. C) generate a political business cycle in which, just before an election, expansionary policies are pursued to lower unemployment and interest rates. D) cause both A and C of the above to occur. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition

63) The case for Federal Reserve independence includes the idea that A) political pressure would impart an inflationary bias to monetary policy. B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. C) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. D) all of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 64) The case for Federal Reserve independence includes the idea that A) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. B) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. C) the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day. D) only A and B of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 65) The case for Federal Reserve independence does not include the idea that A) political pressure would impart an inflationary bias to monetary policy. B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. C) policy is always performed better by an elite group such as the Fed. D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. Answer: C Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 66) The case for Federal Reserve independence does not include the idea that A) political pressure would impart an inflationary bias to monetary policy. B) the principal-agent problem is perhaps worse for the Fed than for congressmen since the former does not answer to the voters on election day. C) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. Answer: B Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition

67) Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would A) impart an inflationary bias to monetary policy. B) force monetary authorities to sacrifice the long-run objective of price stability. C) make the so-called political business cycle even more pronounced. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 68) Advocates of Fed independence fear that subjecting the Fed to direct presidential or congressional control would A) impart an inflationary bias to monetary policy. B) force monetary authorities to sacrifice the long-run objective of price stability. C) make the so-called political business cycle less pronounced. D) do all of the above. E) do only A and B of the above. Answer: E Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 69) Supporters of the current system of Fed independence believe that a less autonomous Fed would A) adopt a long-run bias toward policymaking. B) pursue overly expansionary monetary policies. C) be more likely to create a political business cycle. D) do only B and C of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 70) Critics of the current system of Fed independence contend that A) the current system is undemocratic. B) voters have too much say about monetary policy. C) the president has too much control over monetary policy on a day-to-day basis. D) all of the above are true. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition

71) Critics of Fed independence argue A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no one. B) that an independent Fed conducts monetary policy with a consistent inflationary bias. C) that the Fed, since it does not face a binding budget constraint, spends too much of its earnings. D) only A and B of the above. Answer: A Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 72) Critics of Fed independence argue A) that it is undemocratic to have monetary policy controlled by an elite group responsible to no one. B) that independence seemingly does little to guarantee good monetary policy. C) that its independence may encourage the Fed to pursue a course of narrow self-interest rather than the public interest. D) all of the above. Answer: D Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 73) The newest central bank, which began operations in January 1999, is the A) European Central Bank. B) Bank of Argentina. C) Bank of Korea. D) Bank of New Zealand. Answer: A Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Previous Edition 74) Which of the following central banks has the greatest degree of independence? A) Bank of England B) European Central Bank C) Bank of Japan D) Federal Reserve System Answer: B Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Previous Edition

75) Currently, there are ________ countries that are members of the European Monetary Union. A) 10 B) 17 C) 15 D) 20 Answer: B Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Previous Edition 76) The oldest central bank, founded in 1694, is the A) Bank of England. B) Deutsche Bundesbank. C) Bank of Japan. D) Federal Reserve System. Answer: A Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: Previous Edition 77) The youngest central bank discussed in the text, founded in 1934, is the A) Bank of England. B) Deutsche Bundesbank. C) Bank of Japan. D) Bank of Canada. Answer: D Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: New Question 78) Until 1997, the ________ was the least independent of the central banks examined in this chapter because the decision to raise or lower interest rates resided not within the central bank. A) Bank of England B) Deutsche Bundesbank C) Bank of Japan D) Bank of Canada Answer: A Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: New Question 79) A trend in recent years is that more and more governments A) have been granting greater independence to their central banks. B) have been reducing the independence of their central banks to make them more accountable for poor economic performance. C) have mandated that their central banks give up multiple policy goals to focus strictly on inflation. D) have required their central banks to coordinate policies with their ministers of finance. Answer: A Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: Previous Edition 183 Copyright © 2018 Pearson Education, Inc.

9.2 True/False 1) The unusual structure of the Federal Reserve System is best explained by Americans' fear of centralized power. Answer: TRUE Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 2) Rapid money supply growth and uncontrollable inflation were among the factors which motivated the creation of the Federal Reserve System. Answer: FALSE Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 3) The Washington, D.C. Fed bank, with over 30 percent of the system's assets, is the most important Federal Reserve Bank. Answer: FALSE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 4) The FOMC is an element of the Federal Reserve System. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 5) All nationally chartered banks are required to be members of the Fed. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 6) Each member of the seven-member Board is appointed by the president and confirmed by the Senate to serve 14-year terms. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 7) The Board of Governors sets reserve requirements. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 8) Monetary policy is set by the Board of Governors. Answer: FALSE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 184 Copyright © 2018 Pearson Education, Inc.

9) Federal Reserve monetary policy decisions must be approved by the Secretary of the Treasury before they may be implemented. Answer: FALSE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 10) The FOMC issues directives to the trading desk at the New York Fed. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 11) Announcing the FOMC's policy decision immediately after the FOMC meeting is an example of how Fed policymaking has become more transparent. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 12) The Federal Reserve banks act as liaisons between the business community and the Federal Reserve System. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 13) The FOMC does not actually carry out securities purchases or sales. Answer: TRUE Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 14) The Fed has goal independence but not instrument independence. Answer: FALSE Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 15) The strongest argument for an independent Fed rests on the view that subjecting it to more political pressures would impart an inflationary bias to monetary policy. Answer: TRUE Topic: Chapter 9.3 How Independent Is the Fed? Question Status: New Question 16) Critics of the current system of Fed independence contend that the president has too much control over monetary policy on a day-to-day basis. Answer: FALSE Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition

17) In the ECB, the Governing Council has the right to vote, and this right is taken very seriously, with all important matters decided by a majority vote. Answer: FALSE Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Previous Edition 18) The Maastricht Treaty, which established the Eurosystem and the ECB, made the ECB the most independent central bank in the world. Answer: TRUE Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: New Question 19) The monetary operations of the Eurosystem are conducted by the National Central Banks in each country, so monetary operations are not centralized as they are in the Federal Reserve System. Answer: TRUE Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: New Question 20) Countries with more independent central banks have lower inflation rates, but these have come at the expense of greater output fluctuations. Answer: FALSE Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: Previous Edition 9.3 Essay 1) How did the current Federal Reserve System evolve? What aspects of the American experience with a central bank were important in shaping the current structure of the Fed? Topic: Chapter 9.1 Origins of the Federal Reserve System Question Status: Previous Edition 2) Former Congressman Jack Kemp reportedly once said that he wanted to become the most powerful man in Washington, D.C.—the chairman of the Board of Governors of the Federal Reserve System. What does Representative Kemp's comment imply about the power of the chairman of the Federal Reserve? Do you think he may have been exaggerating? Explain. Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 3) In recent years, has Fed policymaking become more or less transparent? Why? Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 4) Describe the structure and responsibility for policy tools in The Federal Reserve System. Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 186 Copyright © 2018 Pearson Education, Inc.

5) Discuss similarities and differences between Ben Bernanke and Alan Greenspan in their respective roles as chairman of the Federal Reserve Board. Topic: Chapter 9.2 Structure of the Federal Reserve System Question Status: Previous Edition 6) Former Board of Governors chairman Paul Volcker reportedly once said that the Federal Reserve is free to pursue any policy it desires, as long as it convinces Congress that such a policy is reasonable. What does Volcker's comment suggest about the independence of the Fed? Explain. Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 7) What are the factors that promote the independence of the Federal Reserve? Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 8) What factors limit the independence of the Federal Reserve? Topic: Chapter 9.3 How Independent Is the Fed? Question Status: Previous Edition 9) What are the arguments for and against an independent Fed? Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 10) What is the theory of bureaucratic behavior? What types of behavior does it predict the Fed might undertake? Topic: Chapter 9.4 Should the Fed Be Independent? Question Status: Previous Edition 11) Describe similarities and differences between the ECB and the US Fed. Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: Previous Edition 12) Why is the ECB described as the most independent central bank in the world? Topic: Chapter 9.5 Structure and Independence of the European Central Bank Question Status: New Question 13) Contrast the central banks of Canada, England, and Japan. Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: New Question 14) Are central banks in other nations moving toward more or less independence? Why? Topic: Chapter 9.6 Structure and Independence of Other Foreign Central Banks Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 10 Conduct of Monetary Policy 187 Copyright © 2018 Pearson Education, Inc.

10.1 Multiple Choice 1) Assets on the Fed's balance sheet include A) government securities and currency in circulation. B) discount loans and reserves. C) government securities and discount loans. D) currency in circulation and reserves. Answer: C Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition 2) An open market purchase of securities by the Fed will A) increase assets of the nonbank public and increase assets of the banking system. B) decrease assets of the nonbank public and increase assets of the Fed. C) decrease assets of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase assets of the Fed. E) increase assets of the banking system and decrease assets of the Fed. Answer: D Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition 3) An open market sale of securities by the Fed will A) decrease liabilities of the Fed and not affect assets of the banking system. B) decrease assets of the nonbank public and decrease assets of the Fed. C) increase liabilities of the banking system and increase assets of the Fed. D) have no effect on assets of the nonbank public but increase liabilities of the Fed. E) decrease assets of the banking system and increase assets of the Fed. Answer: A Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition 4) If the Federal Reserve wants to expand reserves in the banking system, it will A) purchase government securities. B) raise the discount rate. C) sell government securities. D) raise reserve requirements. Answer: A Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition

5) If the Federal Reserve wants to lower the monetary base and the money supply, it will A) increase bank reserves. B) lower the discount rate. C) sell government securities. D) lower reserve requirements. Answer: C Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition 6) A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase Answer: D Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition 7) When a bank repays a discount loan to the Fed, there is a(n) ________ in reserves in the banking system and a(n) ________ in the monetary base. A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase Answer: B Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition 8) The federal funds rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government. Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition

9) The discount rate is A) the interest rate on loans from the Fed to a bank. B) the price the Fed pays for government securities. C) the interest rate on loans of reserves from one bank to another. D) the price banks pay the Fed for government securities. E) the interest rate on loans from a bank to the federal government. Answer: A Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 10) Holding everything else constant, if the federal funds rate rises, then the demand for A) excess reserves rises because they have a higher return. B) excess reserves falls because they have a higher cost. C) required reserves falls because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves. Answer: B Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 11) Holding everything else constant, if the federal funds rate falls, then the demand for A) excess reserves falls because they have a lower return. B) excess reserves rises because they have a lower cost. C) required reserves rises because the cost of borrowing from the Fed is relatively higher. D) required reserves rises because the cost of borrowing from the Fed is relatively lower. E) reserves will not change because the Fed sets the level of required reserves. Answer: B Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 12) Bank reserves can be categorized as A) vault cash and deposits at the Fed. B) required reserves and excess reserves. C) borrowed reserves and nonborrowed reserves. D) all of the above. Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 13) An open market purchase A) shifts the supply curve for reserves to the right and causes the federal funds rate to fall. B) shifts the demand curve for reserves to the right and causes the federal funds rate to rise. C) shifts the supply curve for reserves to the left and causes the federal funds rate to rise. D) shifts the demand curve for reserves to the left and causes the federal funds rate to fall. Answer: A Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 190 Copyright © 2018 Pearson Education, Inc.

14) The supply curve for reserves is ________ when the federal funds rate is below the discount rate and ________ when the federal funds rate is above the discount rate. A) upward sloping; horizontal B) upward sloping; vertical C) vertical; horizontal D) vertical; downward sloping Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 15) The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed A) raises reserves requirements. B) does an open market purchase. C) does an open market sale. D) raises the discount rate. Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 16) The demand curve for reserves shifts to the left and the federal funds rate falls when the Fed A) decreases reserve requirements or does an open market purchase. B) lowers the discount rate. C) lowers the discount rate or does an open market purchase. D) decreases reserves requirements. E) does an open market sale. Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 17) Under usual circumstances, an increase in the discount rate causes A) the federal funds rate to fall. B) the federal funds rate to rise. C) no change in the federal funds rate. D) the supply of reserves to increase. E) the supply of reserves to decrease. Answer: C Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition

18) If the Fed increases reserve requirements, the demand for reserves ________ and the equilibrium federal funds rate ________. A) increases; drops B) decreases; rises C) decreases; drops D) increases; rises Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 19) An open market ________ leads to a(n) ________ of reserves and deposits in the banking system and hence to a(n) ________ of the monetary base and the money supply. A) sale; expansion; contraction B) purchase; expansion; contraction C) sale; expansion; expansion D) purchase; expansion; expansion Answer: D Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 20) The actual execution of open market operations is done at A) the Board of Governors in Washington, D.C. B) the Federal Reserve Bank of New York. C) the Federal Reserve Bank of Philadelphia. D) the Federal Reserve Bank of Boston. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 21) The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) Chicago. B) Boston. C) New York. D) San Francisco. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 22) An open market transaction intended to change the level of bank reserves is a A) repurchase agreement. B) reverse repo. C) dynamic operation. D) defensive operation. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 192 Copyright © 2018 Pearson Education, Inc.

23) If the Federal Reserve wants to drain reserves from the banking system, it will A) purchase government securities. B) lower the discount rate. C) sell government securities. D) raise reserve requirements. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 24) The Federal Reserve will engage in an outright purchase if it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: A Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 25) If the Fed wants to temporarily drain reserves from the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a "pump" agreement. D) none of the above. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 26) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 27) Discount loans to banks experiencing severe liquidity problems are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 193 Copyright © 2018 Pearson Education, Inc.

28) Discount loans to healthy banks, who may borrow as much as they wish from the Fed, are called A) primary credit. B) secondary credit. C) seasonal credit. D) lender-of-last-resort credit. Answer: A Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 29) When the Federal Reserve was created, its most important role was intended to be A) a storage facility for the nation's gold. B) a lender of last resort. C) a regulator of bank holding companies. D) none of the above. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 30) At its inception, the Federal Reserve was intended to be A) the Treasury's banker. B) the issuer of government debt. C) a lender of last resort. D) a regulator of bank holding companies. Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 31) Which type of open market operation is intended to change the level of reserves? A) Defensive open market operations B) Reserve requirements C) Dynamic open market operations D) Market equilibrium Answer: C Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 32) The type of open market operation intended to offset movements in other factors that affect reserves and the monetary base is A) the dynamic open market operations. B) the defensive open market operations. C) the reserve requirements. D) market equilibrium. Answer: B Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 194 Copyright © 2018 Pearson Education, Inc.

33) Disadvantages of using reserve requirements to control the money supply include A) their overly-powerful impact on the money supply. B) creating potential liquidity problems for banks with high levels of excess reserves. C) their overly-powerful impact on the monetary base. D) all of the above. Answer: A Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 34) The Fed is reluctant to use reserve requirements to control the money supply because A) of their overly-powerful impact on the money supply. B) they have the potential to create liquidity problems for banks with low excess reserves. C) frequent changes in reserve requirements complicate liquidity management for banks. D) of all of the above. E) of only A and B of the above. Answer: D Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 35) Which of the following statements is true regarding the Fed's procedures for operating the discount window? A) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate. B) The Fed's operating procedures and paying interest on reserves creates more fluctuation in the federal funds rate than if they simply didn't pay interest on reserves. C) The Fed's operating procedures and paying interest on reserves has no impact on the fluctuation of the federal funds rate. D) None of the above is correct. Answer: A Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 36) Banks' holding of deposits in accounts with the Fed, plus currency that is physically held in banks are called A) the monetary base. B) government securities. C) open market operations. D) reserves. Answer: D Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition

37) Regulations making it obligatory for depository institutions to keep a certain fraction of their deposits in accounts with the Fed are A) open market operations. B) federal funds rate. C) required reserve ratio. D) reserve requirements. Answer: D Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 38) During 2007 as the global financial crisis started, the Fed implemented several new lending programs to increase liquidity, including A) expansion of the discount window. B) setting up the Term Auction Facility, making loans through competitive auctions. C) lending to investment banks. D) only A and B above. E) A, B, and C, are all correct. Answer: E Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 39) During QE1, the Fed purchased A) $1.25 trillion in mortgage-backed securities. B) $600 billion in long-term Treasury securities. C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start). D) $500 billion in U.S. corporate debt. Answer: A Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 40) During QE2, the Fed purchased A) $1.25 trillion in mortgage-backed securities. B) $600 billion in long-term Treasury securities. C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start). D) $500 billion in U.S. corporate debt. Answer: B Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 41) During QE3, the Fed purchased A) $1.25 trillion in mortgage-backed securities. B) $600 billion in long-term Treasury securities. C) $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries (to start). D) $500 billion in U.S. corporate debt. Answer: C Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 196 Copyright © 2018 Pearson Education, Inc.

42) During the 2007-2009 financial crisis, what actions did the Fed take to limit the scope of the crisis? A) The Fed lowered the spread on the discount rate to 50 basis points, and then to 25. B) The Fed set up the Term Auction Facility to provide further liquidity to banks. C) The Fed purchased assets of Bear Stearns to facilitate the purchase of Bear Stearns by J.P. Morgan. D) all of the above. Answer: D Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 43) The European Central Bank uses open market operations as its primary tool for conducting monetary policy. ________ are the predominant form of open market operations. A) Main refinancing operations B) Direct bank loans C) Longer-term refinancing operations D) Dynamic reserve requirements Answer: A Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank Question Status: New Question 44) The European Central Bank uses all of the following tools to implement its monetary policy, expect A) open market operations. B) lending to banks. C) reserve requirements. D) None of the above. Answer: D Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank Question Status: New Question 45) Price stability is desirable because A) inflation creates uncertainty, making it difficult to plan for the future. B) everyone is better off when prices are stable. C) price stability increases the profitability of the Fed. D) it guarantees full employment. Answer: A Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor Question Status: Previous Edition

46) The Federal Reserve desires interest rate stability because A) it allows for less uncertainty about future planning. B) interest rate volatility often leads to demands to curtail the Fed's power. C) it guarantees full employment. D) both A and B of the above. Answer: D Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 47) When workers voluntarily quit a job or decline a job offer so they can search for a better one, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment. Answer: B Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 48) When there is a mismatch between job requirements and the skills of available workers, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment. Answer: A Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 49) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) frictional rate of unemployment. B) structural rate of unemployment. C) natural rate of unemployment. D) ideal rate of unemployment. Answer: C Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition

50) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest. B) encouraging people to save. C) both A and B of the above. D) neither A nor B of the above. Answer: C Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 51) Although the goals of high employment and economic growth are closely related, policies can be specifically aimed at encouraging economic growth by A) encouraging firms to invest and people to save. B) encouraging firms to limit their price increases. C) encouraging people to consume. D) all of the above. E) only A and C of the above. Answer: A Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 52) What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy? A) High unemployment B) Instability in foreign exchange markets C) Interest-rate stability D) All of the above Answer: C Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 53) Which of the following statements is correct, concerning price stability as a monetary goal? A) In the long run, no inconsistency exists between the price stability goal and the other goals, such as high unemployment. B) In the short run price stability often conflicts with the goals of high employment and interestrate stability. C) Neither A nor B is true. D) Both A and B are correct. Answer: D Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition

54) Which of the following statements is correct, concerning price stability as a monetary goal? A) In the long run, inconsistencies exists between the price stability goal and the other goals, such as high unemployment. B) In the short run price stability does not conflict with the goals of high employment and interest-rate stability. C) Neither A nor B is true. D) Both A and B are correct. Answer: C Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 55) The Bank of England, as well as the ECB, put price stability first among all goals. This is known as a A) hierarchical mandate. B) dual mandate. C) singular mandate. D) ubiquitous mandate. Answer: A Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 56) The Fed puts price stability along with maximum employment as its primary goals. This is known as a A) hierarchical mandate. B) dual mandate. C) singular mandate. D) ubiquitous mandate. Answer: B Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 57) Hierarchical mandates can cause a problem that Mervyn King, Governor of the Bank of England, refers to as an "inflation nutter," that can lead to large A) inflation spikes. B) output fluctuations. C) unemployment rates. D) economic growth. Answer: B Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition

58) The first country to mandate that its central bank adopt inflation targeting was A) the United States. B) the United Kingdom. C) Canada. D) New Zealand. Answer: D Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 59) Inflation targeting involves A) a public announcement of medium-term numerical targets for inflation. B) increased accountability of the central bank for attaining its inflation objectives. C) an information-inclusive approach in which many variables are used in making decisions about monetary policy. D) all of the above. Answer: A Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 60) Which of the following statements is true? A) Credit-driven asset bubbles are particularly dangerous. When asset prices fall, the deleveraging of credit markets reduces economic activity. B) Bubbles driven solely by irrational exuberance lead to a failure of financial institutions. C) Both A and B are correct. D) Neither A nor B is correct. Answer: A Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: Previous Edition 61) If the Fed wants to "prick" an asset-pricing bubble driven by a credit boom, what is the primary tool for accomplishing this? A) Raising interest rates B) Lowering interest rates C) Increasing reserve requirements D) Taking a short position in the overpriced asset Answer: A Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: Previous Edition

62) In response to an asset-price bubble, macroprudential regulation appears to be the right tool. What is macroprudential regulation? A) Increasing the federal funds rate across the macroeconomy B) The use of tax incentives to capture some of the gains from bubbles C) Regulatory policy to affect what is happening in credit markets in the aggregate D) None of the above is correct. Answer: C Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: Previous Edition 63) As of June 2013, the consolidated balance sheet of the Federal Reserve System included about ________ in assets. A) $3.5 trillion B) $2.0 trillion C) $1.5 trillion D) $500 billion Answer: A Topic: Chapter 10.A1 The Fed's Balance Sheet and the Monetary Base Question Status: Previous Edition 10.2 True/False 1) Open market purchases by the Fed increase the supply of nonborrowed reserves. Answer: TRUE Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: Previous Edition 2) A discount loan by the Fed leads to an expansion of reserves, which can be lent out, thereby leading to an expansion of liquidity in the banking system. Answer: TRUE Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: New Question 3) Open market purchases by the Fed cause the federal funds rate to rise. Answer: FALSE Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 4) The Fed's operating procedures and paying interest on reserves contains the federal funds rate between the interest rate paid on reserves and the discount rate. Answer: TRUE Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition

5) An open market sale leads to an expansion of reserves and deposits in the banking system and hence to a decline in the monetary base and the money supply. Answer: FALSE Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 6) Dynamic open market operations are intended to change the level of reserves and the monetary base, and defensive open market operations are intended to offset movements in other factors that affect reserves and the monetary base. Answer: TRUE Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: New Question 7) Open market operations were the primary monetary policy tool used by the Fed to set interest rates during the Global Financial Crisis of 2007-2009. Answer: FALSE Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: New Question 8) Quantitative easing and credit easing are essentially the same thing. Answer: FALSE Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 9) During the Global Financial Crisis of 2007-2009, conventional monetary policy actions proved sufficient to heal the U.S. financial markets and contain the financial crisis. Answer: FALSE Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: New Question 10) The European Central Bank uses main refinancing operations as the predominant form of open market operations, which are similar to the Fed's repo transactions. Answer: TRUE Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank Question Status: New Question 11) The European Central Bank uses the marginal lending facility where banks can borrow overnight loans from the national central banks at the marginal lending rate. Answer: TRUE Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank Question Status: New Question 12) Unlike the United States, Canada, and Australia, the European Central Bank does not have a facility where banks are paid interest on reserves. Answer: FALSE Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank Question Status: New Question 203 Copyright © 2018 Pearson Education, Inc.

13) The European Central Bank does imposes reserve requirement on its member banks. Answer: TRUE Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank Question Status: New Question 14) Price stability is defined by central bankers as low and stable inflation. Answer: TRUE Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor Question Status: New Question 15) In addressing the goal of price stability, central bankers must deal with the timeinconsistency problem, in which monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes. Answer: TRUE Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor Question Status: New Question 16) An objective of the Federal Reserve in its conduct of monetary policy is high employment. Answer: TRUE Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 17) When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called frictional unemployment. Answer: TRUE Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 18) In the long run, the price stability goal is inconsistent with other goals, such as economics growth, stability of financial markets, etc. Answer: FALSE Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 19) The natural rate of unemployment is not lowered by high inflation, so higher inflation cannot produce lower unemployment or more employment in the long run. Answer: TRUE Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 20) In the short run, price stability often conflicts with the goals of high employment and interest-rate stability. Answer: TRUE Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 204 Copyright © 2018 Pearson Education, Inc.

21) Inflation targeting makes the central bank less accountable. Answer: FALSE Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 22) Decreased transparency of the monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers is an element of inflation targeting. Answer: FALSE Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 23) An important lesson from the global financial crisis is that central banks and other regulators should have a laissez-faire attitude and let credit-driven bubbles proceed without any reaction. Intervention is always a mistake. Answer: FALSE Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: Previous Edition 10.3 Essay 1) Explain how the Fed's uses open market operations and discount lending to affect reserves in the banking system. Topic: Chapter 10. 1 How Fed Actions Affect Reserves in the Banking System Question Status: New Question 2) Explain how the Fed's use of its three tools of monetary policy affect supply and demand in the market for reserves and the equilibrium federal funds interest rate. Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: Previous Edition 3) Explain how the Fed's current procedures for operating the discount window and paying interest on reserves limit fluctuations in the federal funds rate. Topic: Chapter 10. 2 The Market for Reserves and the Federal Funds Rate Question Status: New Question 4) Distinguish between the three types of Fed discount loans: primary credit, secondary credit, and seasonal credit. Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 5) Can the Fed control the money supply? Has it done so? What evidence can you provide to support your answer to each question? Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 205 Copyright © 2018 Pearson Education, Inc.

6) Discuss how altering the composition of the Fed's balance sheet can stimulate the economy. Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 7) Why does the Fed use open market operations to a greater extent than reserve requirements in its conduct of monetary policy? Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 8) What is the argument for the Fed paying interest to banks on required reserves? Are there good arguments for not doing this? Topic: Chapter 10. 3 Conventional Monetary Policy Tools Question Status: Previous Edition 9) Discuss the role of the Fed as a lender of last resort during the 2007-2009 financial crisis. Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 10) Discuss the differences between quantitative easing and credit easing. Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 11) Discuss the unconventional liquidity provisions implemented by the Fed in 2007. Topic: Chapter 10. 4 Nonconventional Monetary Policy Tools and Quantitative Easing Question Status: Previous Edition 12) Discuss how the monetary policy of the European Central Bank is similar to the U.S. How are they different? Topic: Chapter 10. 5 Monetary Policy Tools of the European Central Bank Question Status: Previous Edition 13) Discuss why policy makers have become more concerned with maintaining a stable price level as a goal of economic policy. Topic: Chapter 10. 6 The Price Stability Goal and the Nominal Anchor Question Status: New Question 14) Describe the goals of the Federal Reserve. What happens when these goals come into conflict? How would one decide if lower inflation is more important than lower unemployment? Explain. Topic: Chapter 10. 7 Other Goals of Monetary Policy Question Status: Previous Edition 15) Distinguish between a hierarchical mandate and a dual mandate, with regard to central bank goals. Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 206 Copyright © 2018 Pearson Education, Inc.

16) Discuss some of the issues central banks will face maintaining price stability as a short-run goal? Topic: Chapter 10. 8 Should Price Stability Be the Primary Goal of Monetary Policy? Question Status: Previous Edition 17) Explain why the use of an interest rate targeting strategy may result in procyclical monetary growth. Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 18) "The interest rate targeting strategy employed by the Fed in the 1960s and 1970s led to procyclical money growth." True, false, or uncertain? Why? Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 19) If inflation and unemployment are of direct concern to Fed officials, why do they make such a big issue about money growth and interest rates? Why don't they just target the unemployment rate and the inflation rate directly? Explain. Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 20) Describe and discuss Chairman Bernanke's views on inflation targeting and transparency in central banking. Topic: Chapter 10. 9 Inflation Targeting Question Status: Previous Edition 21) Describe an asset-price bubble. Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: Previous Edition 22) What are the arguments for and against central bank intervention during asset-price bubbles? Topic: Chapter 10.10 Should Central Banks Respond to Asset-Price Bubbles? Lessons from the Global Financial Crisis Question Status: Previous Edition 23) List and describe the various assets and liabilities making up the consolidated balance sheet of the Federal Reserve System. Topic: Chapter 10.A1 The Fed's Balance Sheet and the Monetary Base Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 11 The Money Markets 11.1 Multiple Choice 1) Activity in money markets increased significantly in the late 1970s and early 1980s because of 207 Copyright © 2018 Pearson Education, Inc.

A) rising short-term interest rates. B) regulations that limited what banks could pay for deposits. C) both A and B of the above. D) neither A nor B of the above. Answer: C Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 2) Money market securities have all the following characteristics except they are not A) short term. B) money. C) low risk. D) very liquid. Answer: B Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 3) Money market instruments A) are usually sold in large denominations. B) have low default risk. C) mature in one year or less. D) are characterized by all of the above. E) are characterized by only A and B of the above. Answer: D Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 4) The banking industry A) should have an efficiency advantage in gathering information that would eliminate the need for the money markets. B) exists primarily to mediate the asymmetric information problem between saver-lenders and borrower-spenders. C) is subject to more regulations and governmental costs than the money markets. D) all of the above are true. E) only A and B of the above are true. Answer: D Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition

5) In situations where asymmetric information problems are not severe, A) the money markets have a distinct cost advantage over banks in providing short-term funds. B) the money markets have a distinct cost advantage over banks in providing long-term funds. C) banks have a distinct cost advantage over the money markets in providing short-term funds. D) the money markets cannot allocate short-term funds as efficiently as banks can. Answer: A Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 6) Brokerage firms that offered money market security accounts in the 1970s had a cost advantage over banks in attracting funds because the brokerage firms A) were not subject to deposit reserve requirements. B) were not subject to the deposit interest rate ceilings. C) were not limited in how much they could borrow from depositors. D) had the advantage of all the above. E) had the advantage of only A and B of the above. Answer: E Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 7) Why do corporations and the U.S. government sometimes need to get their hands on funds quickly? A) Cash inflows and outflows are rarely synchronized. B) Poor financial planning puts many corporations and government entities in situations where they cannot pay currency bills. C) The timing of many expenses is difficult to estimate. D) Most of their funds are held in highly illiquid investment. Answer: A Topic: Chapter 11.2 The Purpose of the Money Markets Question Status: New Question 8) Which of the following money market instruments has the lowest rate? A) The prime rate B) Eurodollars C) 4-week Treasury bills D) 1-month CDs Answer: C Topic: Chapter 11.2 The Purpose of the Money Markets Question Status: New Question

9) Which of the following statements about the money markets are true? A) Not all commercial banks deal for their customers in the secondary market. B) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds. C) The single most influential participant in the U.S. money market is the U.S. Treasury Department. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 10) Which of the following statements about the money markets are true? A) Most money market securities do not pay interest. Instead, the investor pays less for the security than it will be worth when it matures. B) Pension funds invest a portion of their assets in the money market to have sufficient liquidity to meet their obligations. C) Unlike most participants in the money market, the U.S. Treasury Department is always a demander of money market funds and never a supplier. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 11) Which of the following are true statements about participants in the money markets? A) Large banks participate in the money markets by selling large negotiable CDs. B) The U.S. government and corporations borrow in the money markets because cash inflows and outflows are rarely synchronized. C) The Federal Reserve is the single most influential participant in the U.S. money market. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 12) The most influential participant(s) in the U.S. money market A) is the Federal Reserve. B) is the U.S. Treasury Department. C) are the large money center banks. D) are the investment banks that underwrite securities. Answer: A Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition

13) What is the primary role of individuals as participants in the money market? A) Individuals do not participate in the money market. B) Many individuals issue money market instruments to lend excess cash. C) Individuals often use money market instruments to finance home and auto purchases. D) Individuals purchase money market instruments via money market mutual funds. Answer: D Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 14) The Fed is an active participant in money markets mainly because of its responsibility to A) lower borrowing costs to encourage capital investment. B) control the money supply. C) increase the interest income of retirees holding money market instruments. D) assist the Securities and Exchange Commission in regulating the behavior of other money market participants. Answer: B Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 15) Commercial banks are large holders of ________ and are the major issuer of ________. A) negotiable certificates of deposit; U.S. government securities B) U.S. government securities; negotiable certificates of deposit C) commercial paper; Eurodollars D) Eurodollars; commercial paper Answer: B Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 16) The primary function of large diversified brokerage firms in the money market is to A) sell money market securities to the Federal Reserve for its open market operations. B) make a market for money market securities by maintaining an inventory from which to buy or sell. C) buy money market securities from corporations that need liquidity. D) buy T-bills from the U.S. Treasury Department. Answer: B Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 17) Finance companies raise funds in the money market by selling A) commercial paper. B) federal funds. C) negotiable certificates of deposit. D) Eurodollars. Answer: A Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 211 Copyright © 2018 Pearson Education, Inc.

18) Finance companies play a unique role in money markets by A) giving consumers indirect access to money markets. B) combining consumers' investments to purchase money market securities on their behalf. C) borrowing in capital markets to finance purchases of money market securities. D) assisting the government in its sales of U.S. Treasury securities. Answer: A Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 19) When inflation rose in the late 1970s, A) consumers moved money out of money market mutual funds because their returns did not keep pace with inflation. B) banks solidified their advantage over money markets by offering higher deposit rates. C) brokerage houses introduced highly popular money market mutual funds, which drew significant amounts of money out of bank deposits. D) consumers were unable to take advantage of higher rates in money markets because of the requirement of large transaction sizes. Answer: C Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 20) Which of the following is the largest borrower in the money markets? A) Commercial banks B) Large corporations C) The U.S. Treasury D) U.S. firms engaged in foreign trade Answer: C Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 21) Money market instruments issued by the U.S. Treasury are called A) Treasury bills. B) Treasury notes. C) Treasury bonds. D) Treasury strips. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition

22) Which of the following statements are true of Treasury bills? A) The market for Treasury bills is extremely deep and liquid. B) Occasionally, investors find that earnings on T-bills do not compensate them for changes in purchasing power due to inflation. C) By volume, most Treasury bills are sold to individuals who submit noncompetitive bids. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 23) Suppose that you purchase a 91-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 24) Suppose that you purchase a 182-day Treasury bill for $9,850 that is worth $10,000 when it matures. The security's annualized yield if held to maturity is about A) 1.5%. B) 2%. C) 3%. D) 6%. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 25) The market for Treasury bills is A) deep. B) liquid. C) A and B are correct. D) None of the above is correct. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: New Question

26) Treasury bills do not A) pay interest. B) have a maturity date. C) have a face amount. D) have an active secondary market. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 27) If your competitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a noncompetitive bid. B) probably pay more than if you had submitted a noncompetitive bid. C) pay the average of prices offered in other successful competitive bids. D) pay the same as other successful competitive bidders. Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 28) If your noncompetitive bid for a Treasury bill is successful, then you will A) certainly pay less than if you had submitted a competitive bid. B) certainly pay more than if you had submitted a competitive bid. C) pay the average of prices offered in other noncompetitive bids. D) pay the same as other successful noncompetitive bidders. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 29) In 1976 the Treasury switched the entire marketable portion of the federal debt over to book entry securities, which means that A) ownership of Treasury securities is now only stored in a computer system. B) interest paid on Treasury securities is better tracked for tax purposes. C) engraves Treasury certificates are now stored in the Treasury's book vault. D) the accounting for Treasury securities is now handled by government accountants using standard accounting books. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: New Question

30) As shown in the text, the relationship between T-bill interest rates and the U.S. inflation rate can be described best by which of the following statements? A) Inflation rates often exceed T-bill rates, but not always. B) T-bill rates have no relationship with the U.S. inflation rate. C) T-bills rates are typically slightly above the inflation rate, but the inflation rate sometimes is higher. D) T-bill rates are, by definition, always higher the the U.S. inflation rate. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: New Question 31) Federal funds A) are short-term funds transferred between financial institutions, usually for a period of one day. B) actually have nothing to do with the federal government. C) provide banks with an immediate infusion of reserves. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 32) Federal funds are A) usually overnight investments. B) borrowed by banks that have a deficit of reserves. C) lent by banks that have an excess of reserves. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 33) The Fed can influence the federal funds interest rate by adjusting the level of reserves available to banks. The Fed can A) lower the federal funds interest rate by adding reserves. B) raise the federal funds interest rate by removing reserves. C) remove reserves by selling securities. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition

34) The Federal Reserve can influence the federal funds interest rate by buying securities, which ________ reserves, thereby ________ the federal funds rate. A) adds; raising B) removes; lowering C) adds; lowering D) removes; raising Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 35) The Fed can lower the federal funds interest rate by ________ securities, thereby ________ reserves. A) selling; adding B) selling; lowering C) buying; adding D) buying; lowering Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 36) If the Fed wants to lower the federal funds interest rate, it will ________ the banking system by ________ securities. A) add reserves to; selling B) add reserves to; buying C) remove reserves from; selling D) remove reserves from; buying Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 37) If the Fed wants to raise the federal funds interest rate, it will ________ securities to ________ the banking system. A) sell; add reserves to B) sell; remove reserves from C) buy; add reserves to D) buy; remove reserves from Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition

38) Government securities dealers frequently engage in repos to A) manage liquidity. B) take advantage of anticipated changes in interest rates. C) lend or borrow for a day or two with what is essentially a collateralized loan. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 39) As shown in the text, the relationship between T-bill interest rates and the Federal Funds rate can be described best by which of the following statements? A) The Federal Funds rate is usually several percentage points higher than T-Bills rates. B) T-bill rates have no relationship with the Federal Funds rate. C) T-bills rates and the Federal Funds rate are nearly the same, with the Federal Funds rate slightly higher. D) T-bill rates are, by definition, always higher the the Federal Funds rate. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: New Question 40) Repos are A) usually low-risk loans. B) usually collateralized with Treasury securities. C) low interest rate loans. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 41) A negotiable certificate of deposit A) is a term security because it has a specified maturity date. B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest. C) can be bought and sold until maturity. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition

42) Negotiable certificates of deposit A) are bearer instruments because their holders earn the interest and principal at maturity. B) typically have a maturity of one to four months. C) are usually denominated at $100,000. D) are all of the above. E) are only A and B of the above. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 43) Commercial paper securities A) are issued only by the largest and most creditworthy corporations, as they are unsecured. B) carry an interest rate that varies according to the firm's level of risk. C) never have a term to maturity that exceeds 270 days. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 44) The volume of outstanding commercial paper peaked around 2007, just prior to the 20072009 Financial Crisis, with about ________ outstanding. A) $500 billion B) $1.0 trillion C) $1.5 trillion D) $2 trillion Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: New Question 45) Unlike most money market securities, commercial paper A) is not generally traded in a secondary market. B) usually has a term to maturity that is longer than a year. C) is not popular with most money market investors because of the high default risk. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition

46) As shown in the text, the relationship between the Prime rate and the return on commercial paper can be described best by which of the following statements? A) The Prime rate is usually several percentage points higher than the return on commercial paper, and both move up/down in a similar fashion. B) The Prime rate has no relationship with the return on commercial paper. C) The Prime rate and the return on commercial paper are nearly the same, with the return on commercial paper slightly higher. D) Because commercial paper is riskier, returns on commercial paper always exceed the Prime rate, usually by 2% or so. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: New Question 47) A banker's acceptance is A) used to finance goods that have not yet been transferred from the seller to the buyer. B) an order to pay a specified amount of money to the bearer on a given date. C) a relatively new money market security that arose in the 1960s as international trade expanded. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 48) Banker's acceptances A) can be bought and sold until they mature. B) are issued only by large money center banks. C) carry low interest rates because of the very low default risk. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 49) Eurodollars A) are time deposits with fixed maturities and are, therefore, somewhat illiquid. B) may offer the borrower a lower interest rate than can be received in the domestic market. C) are limited to London banks. D) are all of the above. E) are only A and B of the above. Answer: E Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition

50) Which of the following statements about money market securities are true? A) The interest rates on all money market instruments move very closely together over time. B) The secondary market for Treasury bills is extensive and well developed. C) There is no well-developed secondary market for commercial paper. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 51) Money market transactions A) do not take place in any one particular location or building. B) are usually arranged purchases and sales between participants over the phone by traders and completed electronically. C) are both A and B of the above. D) are none the the above. Answer: C Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 52) Two important characteristics of any financial market are flexibility and A) risk. B) innovation. C) tolerance. D) capital. Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 53) The main role of investment companies in the money market is to A) trade on behalf of commercial accounts. B) mediate the symmetric information problem between server-lender and borrower-spenders. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 54) In a direct placement A) the issuer bypasses the dealer and sells indirectly to the end investor. B) the dealer sells directly to the end investor. C) the issuer bypasses the dealer and sells directly to the end investor. D) none of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 220 Copyright © 2018 Pearson Education, Inc.

55) The advantage of mutual funds is that they A) require no cash up front. B) give investors with relatively small amounts of cash to invest access to large-denomination securities. C) always yield the highest returns. D) both A and B of the above. Answer: B Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 56) Asset-backed commercial paper differs from conventional commercial paper in that A) it is backed (secured) by some bundle of assets. B) its maturity usually extends well beyond 1 year. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 57) Among the following money market securities, which one has the poorest secondary market? A) repurchase agreements B) commercial paper C) banker's acceptances D) Treasury bills Answer: B Topic: Chapter 11.5 Comparing Money Market Securities Question Status: New Question 58) The usual maturity range for commercial paper is A) 1 to 270 days. B) 1 to 15 days. C) 4, 13, and 26 weeks. D) 1 to 7 days. Answer: A Topic: Chapter 11.5 Comparing Money Market Securities Question Status: Previous Edition 59) The usual maturity range for fed funds is A) 1 to 270 days. B) 1 to 15 days. C) 4, 13, and 26 weeks. D) 1 to 7 days. Answer: D Topic: Chapter 11.5 Comparing Money Market Securities Question Status: Previous Edition

11.2 True/False 1) Money market securities are short-term instruments with an original maturity of less than one year. Answer: TRUE Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 2) The term money market is actually a misnomer, because liquid securities are traded in these markets rather than money. Answer: TRUE Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 3) Money markets are referred to as retail markets because small individual investors are the primary buyers of money market securities. Answer: FALSE Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 4) The main purpose of federal funds is to provide banks with an immediate infusion of reserves should they be short. Answer: TRUE Topic: Chapter 11.2 The Purpose of the Money Markets Question Status: Previous Edition 5) The U.S. Treasury Department is the single most influential participant in the U.S. money market. Answer: FALSE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 6) The U.S. Treasury Department is the single largest borrower in the U.S. money market. Answer: TRUE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 7) Banks are unusual participants in the money market because they buy, but do not sell, money market instruments. Answer: FALSE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition

8) Money markets are used extensively by businesses both to warehouse surplus funds and to raise short-term funds. Answer: TRUE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 9) Not all commercial banks deal in the secondary money market for their customers. Answer: TRUE Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 10) Money market securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker's acceptances, and Eurodollars. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 11) The market for U.S. Treasury bills is a shallow market because so few individual investors buy T-bills. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 12) The T-bill is not an investment to be used for anything but temporary storage of excess funds because it barely keeps up with inflation. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 13) The Fed can influence the federal funds rate by adjusting the level of reserves in the banking system. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 14) Commercial paper securities are unsecured promissory notes, issued by corporations, that mature in no more than 270 days. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 15) A banker's acceptance is an order to pay a specified amount of money to the bearer on a given date. Banker's acceptances have been used since the twelfth century. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 223 Copyright © 2018 Pearson Education, Inc.

16) Interest rates on banker's acceptances are low because the risk of default is very low. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 17) The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion. Answer: TRUE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 18) In general, money market instruments are low-risk, high-yield securities. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 19) Commercial paper has been used in various forms since the 1930s. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 20) The Treasury accepts noncompetitive bids in ascending order of yield until the accepted bids reach the offering amount. Answer: FALSE Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 21) Many money market investors are looking for liquidity intervention - an intermediary to provide liquidity where it did not previously exist. Answer: TRUE Topic: Chapter 11.5 Comparing Money Market Securities Question Status: New Question 11.3 Essay 1) Explain why banks, which would seem to have a comparative advantage in gathering information, have not eliminated the need for the money markets. Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 2) Explain how the Federal Reserve can influence the federal funds interest rate. Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 3) Explain why the money markets are referred to as wholesale markets. Topic: Chapter 11.1 The Money Markets Defined Question Status: Previous Edition 224 Copyright © 2018 Pearson Education, Inc.

4) Explain why money markets are an ideal place for warehousing surplus funds. Topic: Chapter 11.2 The Purpose of the Money Markets Question Status: New Question 5) What are the major types of securities and who are the major participants in the money markets? Topic: Chapter 11.3 Who Participates in the Money Markets? Question Status: Previous Edition 6) How are Treasury bills sold? How do competitive and noncompetitive bids differ? Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 7) What are the main characteristics of money market securities? Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 8) Explain how and why repurchase agreements would be used. Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 9) The size of the asset-backed commercial paper market nearly doubled between 2004 and 2007 to about $1 trillion. Discuss how the subprime meltdown and collapse of the ABCP market almost led to the collapse of the money market mutual fund market as well. Topic: Chapter 11.4 Money Market Instruments Question Status: Previous Edition 10) Explain why money market interest rates move so closely together over time. Topic: Chapter 11.5 Comparing Money Market Securities Question Status: Previous Edition 11) Why would we expect rates on money market securities to move together? Topic: Chapter 11.5 Comparing Money Market Securities Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 12 The Bond Market 12.1 Multiple Choice 1) Compared to money market securities, capital market securities have A) more liquidity. B) longer maturities. C) lower yields. D) less risk. Answer: B 225 Copyright © 2018 Pearson Education, Inc.

Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 2) (I) Securities that have an original maturity greater than one year are traded in capital markets. (II) The best known capital market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 3) (I) Securities that have an original maturity greater than one year are traded in money markets. (II) The best known money market securities are stocks and bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: D Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 4) (I) Firms and individuals use the capital markets for long-term investments. (II) Capital markets provide an alternative to investment in assets such as real estate and gold. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition

5) The primary reason that individuals and firms choose to borrow long-term is to reduce the risk that interest rates will ________ before they pay off their debt. A) rise B) fall C) become more volatile D) become more stable Answer: A Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 6) The primary reason that individuals and firms choose to borrow long-term is to A) reduce the risk that interest rates will fall before they pay off their debt. B) reduce the risk that interest rates will rise before they pay off their debt. C) reduce monthly interest payments, as interest rates tend to be higher on short-term than longterm debt instruments. D) reduce total interest payments over the life of the debt. Answer: B Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 7) A firm will borrow long-term A) if the extra interest cost of borrowing long-term is less than the expected cost of rising interest rates before it retires its debt. B) if the extra interest cost of borrowing short-term due to rising interest rates does not exceed the expected premium that is paid for borrowing long-term. C) if short-term interest rates are expected to decline during the term of the debt. D) if long-term interest rates are expected to decline during the term of the debt. Answer: A Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 8) Corporations may enter the capital markets because A) they do not have sufficient capital to fund their investment opportunities. B) they want to preserve their capital to protect against expected needs. C) it is required by the Securities and Exchange Commission (SEC). D) none of the above. Answer: A Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition

9) The primary issuers of capital market securities include A) the federal and local governments. B) the federal and local governments, and corporations. C) the federal and local governments, corporations, and financial institutions. D) local governments and corporations. Answer: B Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 10) Governments never issue stock because A) they cannot sell ownership claims. B) the Constitution expressly forbids it. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 11) (I) The primary issuers of capital market securities are federal and local governments, and corporations. (II) Governments never issue stock because they cannot sell ownership claims. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 12) (I) The primary issuers of capital market securities are financial institutions. (II) The largest purchasers of capital market securities are corporations. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: D Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 13) The distribution of a firm's capital between debt and equity is its A) current ratio. B) liability structure. C) acid ratio. D) capital structure. Answer: D Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 228 Copyright © 2018 Pearson Education, Inc.

14) The largest purchasers of capital market securities are A) households. B) corporations. C) governments. D) central banks. Answer: A Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 15) Individuals and households frequently purchase capital market securities through financial institutions such as A) mutual funds. B) pension funds. C) money market mutual funds. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 16) (I) There are two types of exchanges in the secondary market for capital securities: organized exchanges and over-the-counter exchanges. (II) When firms sell securities for the very first time, the issue is an initial public offering. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 3 Capital Market Trading Question Status: Previous Edition 17) Capital market trading occurs in A) the primary market. B) the secondary market. C) both A and B of the above. D) none of the above. Answer: C Topic: Chapter 12. 3 Capital Market Trading Question Status: Previous Edition

18) Bonds A) are securities that represent a debt owed by the issuer to the investor. B) obligate the issuer to pay a specified amount at a given date, generally without periodic interest payments. C) both A and B of the above. D) none of the above. Answer: A Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 19) (I) Capital market securities fall into two categories: bonds and stocks. (II) Long-term bonds include government bonds and long-term notes, municipal bonds, and corporate bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 20) The ________ value of a bond is the amount that the issuer must pay at maturity. A) market B) present C) discounted D) face Answer: D Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 21) The ________ rate is the rate of interest that the issuer must pay. A) market B) coupon C) discount D) funds Answer: B Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition

22) (I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 23) (I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 12. 4 Types of Bonds Question Status: Previous Edition 24) Treasury bonds are subject to ________ risk but are essentially free of ________ risk. A) default; interest-rate B) default; underwriting C) interest-rate; default D) interest-rate; underwriting Answer: C Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Updated from Previous Edition 25) The prices of Treasury notes, bonds, and bills are quoted A) as a percentage of the coupon rate. B) as a percentage of the previous day's closing value. C) as a percentage of $100 face value. D) as a multiple of the annual interest paid. Answer: C Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition

26) The security with the longest maturity is a Treasury A) note. B) bond. C) acceptance. D) bill. Answer: B Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 27) Most of the time, the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk. A) above; interest-rate B) above; default C) below; interest-rate D) below; default Answer: A Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 28) (I) In most years, the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 29) (I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities. (II) A Treasury STRIP separates the periodic interest payments from the final principal repayment. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition

30) Which of the following statements about Treasury inflation-indexed bonds is not true? A) The principal amount used to compute the interest payment varies with the consumer price index. B) The interest payment rises when inflation occurs. C) The interest rate rises when inflation occurs. D) At maturity, the securities pay the greater of face value or inflation-adjusted principal. Answer: A Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 31) By the time the subprime financial crisis hit in force, Fannie and Freddie had ________ subprime and Alt-A assets on their books. A) over $1 trillion of B) very few C) been prohibited from holding D) none of the above Answer: A Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 32) STRIPS (Separate Trading of Registered Interest and Principal Securities) are also called A) interest-based securities. B) zero-coupon securities. C) leveraged securities. D) covenant securities. Answer: B Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 33) The risk on an agency bond is A) high. B) zero. C) moderate. D) low. Answer: D Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition

34) (I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 35) Between 1984 and 2015, the annual volume of municipal bonds, in general, increased. Volume peaked in 2010, with the total issuance of revenue and general obligation municipal bonds around A) $50 billion B) $250 billion C) $450 billion D) $650 billion Answer: C Topic: Chapter 12. 6 Municipal Bonds Question Status: New Question 36) (I) Most corporate bonds have a face value of $1,000, pay interest semiannually, and can be redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 37) The bond contract that states the lender's rights and privileges and the borrower's obligations is called the A) bond syndicate. B) restrictive covenant. C) bond covenant. D) bond indenture. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition

38) The relationship between the AAA-yield and BBB-yield for corporate bonds can best be described as which of the following? A) The AAA-yield is always lower than the BBB-yield. B) The AAA-yield is usually higher than the BBB-yield, but that relationship has changed at times. C) There is no obvious relationship between the AAA-yield and the BBB-yield. D) The AAA-yield is always higher than the BBB-yield. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: New Question 39) Policies that limit the discretion of managers as a way of protecting bondholders' interests are called A) restrictive covenants. B) debentures. C) sinking funds. D) bond indentures. Answer: A Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 40) Typically, the interest rate on corporate bonds will be ________ the more restrictions are placed on management through restrictive covenants, because ________. A) higher; corporate earnings will be limited by the restrictions B) higher; the bonds will be considered safer by bondholders C) lower; the bonds will be considered safer by buyers D) lower; corporate earnings will be higher with more restrictions in place Answer: C Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 41) Restrictive covenants can A) limit the amount of dividends the firm can pay. B) limit the ability of the firm to issue additional debt. C) restrict the ability of the firm to enter into a merger agreement. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition

42) (I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders. (II) Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 43) Call provisions will be exercised when interest rates ________ and bond values ________. A) rise; rise B) fall; rise C) rise; fall D) fall; fall Answer: B Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 44) A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called A) a sinking fund. B) a call provision. C) a restrictive covenant. D) a shelf registration. Answer: A Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 45) (I) Callable bonds usually have a higher yield than comparable noncallable bonds. (II) Convertible bonds are attractive to bondholders and sell for a higher price than comparable nonconvertible bonds. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition

46) Long-term unsecured bonds that are backed only by the general creditworthiness of the issuer are called A) junk bonds. B) callable bonds. C) convertible bonds. D) debentures. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 47) Corporate bonds are less risky if they are ________ bonds and municipal bonds are less risky if they are ________ bonds. A) secured; revenue B) secured; general obligation C) unsecured; revenue D) unsecured; general obligation Answer: B Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 48) A secured bond is backed by A) the general creditworthiness of the borrower. B) an insurance company's financial guarantee. C) the expected future earnings of the borrower. D) specific collateral. Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 49) A corporate bond rated ________ has defaulted on an interest or principal payment. A) NR B) CCC C) CC D) D Answer: D Topic: Chapter 12. 7 Corporate Bonds Question Status: New Question 50) Financial guarantees A) are insurance policies to back bond issues. B) are purchased by financially weaker security issuers. C) lower the risk of the bonds covered by the guarantee. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 237 Copyright © 2018 Pearson Education, Inc.

51) In its simplest form, a credit default swap provides A) insurance against default in the principle and interest payments of a credit instrument. B) an alternative method for bond issuers to pay principle and interest payments via a swap. C) bond investors with a method to swap interest payments for principle payments during a "credit event." D) the government with a guarantee that certain bond issues will not run into credit problems. Answer: A Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 52) Which of the following are true concerning the mission of the TRACE system? A) TRACE established rules that say which bond transactions must be publicly reported. B) TRACE established a trading platform that makes transaction data readily available to the public. C) TRACE established liquidity guidelines for bond traders. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 12. 9 Oversight of the Bond Market Question Status: New Question 53) Which of the following are true for the current yield? A) The current yield is defined as the yearly coupon payment divided by the price of the security. B) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. C) The current yield is always a poor approximation for the yield to maturity. D) All of the above are true. E) Only A and B of the above are true. Answer: A Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition 54) The nearer a bond's price is to its par value and the longer the maturity of the bond, the more closely the ________ approximates the ________. A) current yield; yield to maturity B) current yield; coupon rate C) yield to maturity; current yield D) yield to maturity; coupon rate Answer: A Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition

55) Which of the following are true for the current yield? A) The current yield is defined as the yearly coupon payment divided by the price of the security. B) The current yield and the yield to maturity always move together. C) The formula for the current yield is identical to the formula describing the yield to maturity for a discount bond. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition 56) The current yield is a less accurate approximation of the yield to maturity the ________ the time to maturity of the bond and the ________ the price is from/to the par value. A) shorter; closer B) shorter; farther C) longer; closer D) longer; farther Answer: B Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition 57) The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is A) 5%. B) 10%. C) 12%. D) 15%. Answer: C Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition 58) The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is A) 5%. B) 8%. C) 10%. D) 20%. E) none of the above. Answer: C Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition

59) When an old bond's market value is above its par value, the bond is selling at a ________. This occurs because the old bond's coupon rate is ________ the coupon rates of new bonds with similar risk. A) premium; below B) premium; above C) discount; below D) discount; above Answer: B Topic: Chapter 12.11 Finding the Value of Coupon Bonds Question Status: Previous Edition 60) (I) To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 12.11 Finding the Value of Coupon Bonds Question Status: Previous Edition 61) The first step in finding the value of a bond is to A) discount back the cash flows using an interest rate that represents the yield available on other bonds of like risk and maturity. B) identify the cash flows the holder of the bond will receive. C) contact the holder of the bond. D) none of the above. Answer: B Topic: Chapter 12.11 Finding the Value of Coupon Bonds Question Status: Previous Edition 62) A change in the current yield ________ signals a change in the same direction of the yield to maturity. A) never B) rarely C) always D) often Answer: C Topic: Chapter 12.11 Finding the Value of Coupon Bonds Question Status: Previous Edition

63) To sell an old bond when interest rates have ________, the holder will have to ________ the price of the bond until the yield to the buyer is the same as the market rate. A) risen; lower B) risen; raise C) fallen; lower D) risen; inflate Answer: A Topic: Chapter 12.11 Finding the Value of Coupon Bonds Question Status: Previous Edition 64) From 1983 to 2015, total bond issuances peaked in 2006, at nearly A) $2.6 trillion. B) $3.5 trillion. C) $4.1 trillion. D) $5.0 trillion. Answer: A Topic: Chapter 12.12 Investing in Bonds Question Status: New Question 65) Although high-grade bonds seldom default, bond investors do face fluctuations in the price of the bond, primarily due to A) market interest-rate movements in the economy. B) changes in the credit quality of the firm. C) the general volatility of the bond market. D) changes in Fed policy regarding inflation targets. Answer: A Topic: Chapter 12.12 Investing in Bonds Question Status: New Question 12.2 True/False 1) Firms and individuals use the money markets primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds arises. Answer: TRUE Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 2) The primary issuers of capital market securities are local governments and corporations. Answer: FALSE Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 3) Governments never issue stock because they cannot sell ownership claims. Answer: TRUE Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 241 Copyright © 2018 Pearson Education, Inc.

4) The secondary market is where new issues of stocks and bonds are introduced. Answer: FALSE Topic: Chapter 12. 3 Capital Market Trading Question Status: Previous Edition 5) The coupon rate is the rate of interest that the investors require, which can be different from the periodic interest payment made by the bond issuer, often called the coupon payment. Answer: FALSE Topic: Chapter 12. 4 Types of Bonds Question Status: New Question 6) Most of the time, the interest rate on Treasury notes is below that on money market securities because of their low default risk. Answer: FALSE Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 7) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. Answer: TRUE Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 8) Most municipal bonds are revenue bonds rather than general obligation bonds. Answer: TRUE Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 9) General obligation bonds have specific assets pledged as security or specific sources of revenue allocated for their repayment. Answer: FALSE Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 10) Most corporate bonds have a face value of $1,000, are sold at a discount, and can only be redeemed at the maturity date. Answer: FALSE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 11) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons. Answer: FALSE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition

12) A sinking fund is a requirement in the bond indenture that the firm pay off a portion of the bond issue each year. Answer: TRUE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 13) In a leveraged buy-out, a firm greatly increases its debt level by issuing junk bonds to finance the purchase of another firm's stock. Answer: TRUE Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 14) Debentures are long-term unsecured bonds that are backed only by the general creditworthiness of the issuer. Answer: TRUE Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 15) A financial guarantee ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults. Answer: TRUE Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 16) The Commodity Futures Modernization Act (2000) removed derivative securities, such as credit default swaps, from regulatory oversight. Answer: TRUE Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 17) Bonds typically sell in public markets where bid and ask prices are readily available and transparent. By contrast, stocks typically trade over the counter, where transaction details can be hidden from the public. Answer: FALSE Topic: Chapter 12. 9 Oversight of the Bond Market Question Status: New Question 18) The current yield on a bond is a good approximation of the bond's yield to maturity when the bond matures in five years or less and its price differs from its par value by a large amount. Answer: FALSE Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition

19) To sell an old bond when rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. Answer: TRUE Topic: Chapter 12.11 Finding the Value of Coupon Bonds Question Status: Previous Edition 20) Capital market securities are less liquid and have longer maturities than money market securities. Answer: TRUE Topic: Chapter 12.12 Investing in Bonds Question Status: Previous Edition 12.3 Essay 1) What is the purpose of the capital market? How do capital market securities differ from money market securities in their general characteristics? Topic: Chapter 12. 1 Purpose of the Capital Market Question Status: Previous Edition 2) Why don't federal, state, and local governments issue equity claims? Topic: Chapter 12. 2 Capital Market Participants Question Status: Previous Edition 3) What is the difference between the primary market and secondary market? Where does most of the trading occur for bonds? Topic: Chapter 12. 3 Capital Market Trading Question Status: New Question 4) What are the various features of bonds (par value, coupon rate, etc.)? Topic: Chapter 12. 4 Types of Bonds Question Status: New Question 5) What are Treasury STRIPS? Topic: Chapter 12. 5 Treasury Notes and Bonds Question Status: Previous Edition 6) What is the difference between a general obligation bond and a revenue bond? Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 7) Distinguish between general obligation and revenue municipal bonds. Topic: Chapter 12. 6 Municipal Bonds Question Status: Previous Edition 8) What is a bond indenture? Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 244 Copyright © 2018 Pearson Education, Inc.

9) What role do restrictive covenants play in bond markets? Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 10) What is a convertible bond? How does the convertibility feature affect the bond's price and interest rate? Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 11) Explain the different types of corporate bonds. Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 12) What is a callable bond? How does the callability feature affect the bond's price and interest rate? Topic: Chapter 12. 7 Corporate Bonds Question Status: Previous Edition 13) The Commodity Futures Modernization Act (2000) removed derivative securities, such as CDSs, from regulatory oversight. This change opened the door for speculators to bet on the health of a company or pool of assets, and was certainly a culprit in the 2007-2009 financial crisis. Why did Congress pass such legislation? Topic: Chapter 12. 8 Financial Guarantees for Bonds Question Status: Previous Edition 14) What is the purpose of the TRACE system? Topic: Chapter 12. 9 Oversight of the Bond Market Question Status: New Question 15) What is a bond's current yield? How does the current yield differ from the yield to maturity and what determines how close the two values are? Topic: Chapter 12.10 Current Yield Calculation Question Status: Previous Edition 16) What types of risks should bondholders be aware of and how do these affect bond prices and yields? Topic: Chapter 12.11 Finding the Value of Coupon Bonds Question Status: Previous Edition 17) Discuss the differences in volume between bond and stock issuances? Why do stock issuances typically get more press? Topic: Chapter 12.12 Investing in Bonds Question Status: New Question Financial Markets and Institutions, 9e (Mishkin) Chapter 13 The Stock Market 245 Copyright © 2018 Pearson Education, Inc.

13.1 Multiple Choice 1) (I) A share of common stock in a firm represents an ownership interest in that firm. (II) A share of preferred stock is as much like a bond as it is like common stock. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 2) Preferred stockholders hold a claim on assets that has priority over the claims of A) both common stockholders and bondholders. B) neither common stockholders nor bondholders. C) common stockholders, but after that of bondholders. D) bondholders, but after that of common stockholders. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 3) (I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II) Firms issue preferred stock in far greater amounts than common stock. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 4) (I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II) Bondholders hold a claim on assets that has priority over the claims of preferred stockholders. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition

5) (I) Firms issue common stock in far greater amounts than preferred stock. (II) In a given year, the total volume of stock issued is much less than the volume of bonds issued. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 6) The riskiest capital market security is A) preferred stock. B) common stock. C) corporate bonds. D) Treasury bonds. Answer: B Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 7) (I) The largest of the organized stock exchanges in the United States is the New York Stock Exchange. (II) To be listed on the NYSE, a firm must have a minimum of $100 million in market value or $10 million in revenues. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 8) To list on the NYSE, a firm must A) have earnings of at least $10 million per year. B) have at least $500 million in outstanding debt. C) have a total of $100 million in market value. D) meet all of the above requirements. E) meet A and C of the above requirements. Answer: E Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition

9) A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to A) vote. B) receive dividends. C) receive interest payments. D) only A and B of the above. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 10) Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by A) buying stocks for inventory when investors want to sell. B) selling stocks from inventory when investors want to buy. C) doing both of the above. D) doing neither of the above. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 11) The most active stock exchange in the world is the A) Nikkei Stock Exchange. B) London Stock Exchange. C) Shanghai Stock Exchange. D) New York Stock Exchange. Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 12) Which of the following statements about trading operations in an organized exchange is correct? A) Floor traders all deal in a wide variety of stocks. B) In most trades, specialists match buy and sell orders. C) In most trades, specialists buy for or sell from their own inventories. D) The SuperDOT system is used to expedite large trades of over 100,000 shares. Answer: B Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition

13) Which of the following is not an advantage of Electronic Communications Networks (ECNs)? A) All unfilled orders are available for review by ECN traders. B) Transactions costs are lower for ECN trades. C) Trades are made and confirmed faster. D) ECNs work well for thinly traded stocks. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 14) Which of the following statements is false regarding Electronic Communications Networks (ECNs)? A) Archipelago and Instinet are two examples of ECNs. B) Competition from ECNs has forced NASDAQ to cut its fees. C) Traders benefit from lower trading costs and faster service. D) ECNs allow institutional investors, but not individuals, to trade after hours. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 15) What is the primary disadvantage of an ETF? A) ETFs tend to have lower management fees than comparable index mutual bonds. B) ETFs usually have no minimum investment amount. C) Investors have to pay a broker commission each time they buy or sell shares. D) None of the above are disadvantages of an ETF. Answer: C Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 16) In 2013, the NYSE traded ________ shares on an average trading day. A) 4 billion B) 7 billion C) 10 billion D) 12 billion Answer: A Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 17) Exchange traded funds (ETFs) have which of the following features? A) They are listed and traded as individual stocks on a stock exchange. B) They are indexed rather than actively managed. C) Their value is based on the underlying net asset value of the stocks held in the index basket. D) All of the above. Answer: D Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 249 Copyright © 2018 Pearson Education, Inc.

18) A basic principle of finance is that the value of any investment is A) the present value of all future net cash flows generated by the investment. B) the undiscounted sum of all future net cash flows generated by the investment. C) unrelated to the future net cash flows generated by the investment. D) unrelated to the degree of risk associated with the future net cash flows generated by the investment. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 19) A high price earnings ratio (PE) gives what interpretation? A) The market expects earnings to fall in the future. B) The market feels the firm's earnings are very high risk and are willing to pay a premium for them. C) The market expects the earnings to rise in the future. D) The firm is not paying a dividend. Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 20) A ________ PE may indicate that the market feels the firm's earnings are very ________ risk and is therefore willing to pay a ________ for them. A) high; low; premium B) high; high; discount C) low; low; discount D) high; high; premium Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 21) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments? A) $30.24 B) $26.30 C) $26.09 D) $27.74 Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition

22) A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments? A) $38 B) $33.50 C) $34.50 D) $33.93 Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 23) In the one-period valuation model, a stock's value will be higher A) the higher its expected future price is. B) the lower its dividend is. C) the higher the required return on investments in equity is. D) all of the above. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 24) In the one-period valuation model, a stock's value falls if the ________ rises. A) dividend B) expected future price C) required return on equity D) current price Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 25) In the generalized dividend valuation model, a stock's value depends only on A) its future dividend payments and its future price. B) its future dividend payments and the required return on equity. C) its future price and the required return on investments on equity. D) its future dividend payments. Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 26) Which of the following is not an element of the Gordon growth model of stock valuation? A) The stock's most recent dividend paid B) The expected constant growth rate of dividends C) The required return on investments in equity D) The stock's expected future price Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 251 Copyright © 2018 Pearson Education, Inc.

27) According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 11 percent? A) $110 B) $100 C) $11 D) $10 E) $5.24 Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 28) According to the Gordon growth model, what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 15 percent? A) $20 B) $11 C) $22 D) $7.33 E) $4.40 Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 29) Holding other things constant, a stock's value will be highest if its dividend growth rate is A) 15%. B) 10%. C) 5%. D) 2%. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 30) Holding other things constant, a stock's value will be highest if its most recent dividend is A) $2.00. B) $5.00. C) $0.50. D) $1.00. Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition

31) Holding other things constant, a stock's value will be highest if the investor's required return on investments in equity is A) 20%. B) 15%. C) 10%. D) 5%. Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 32) Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of Auto Zone stock if the retailer's earnings per share is projected to be $1.85? A) $21.85 B) $37 C) $10.81 D) $9.25 Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 33) Which of the following is true regarding the Gordon growth model? A) Dividends are assumed to grow at a constant rate forever. B) The dividend growth rate is assumed to be greater than the required return on equity. C) Both A and B of the above. D) Neither A nor B of the above. Answer: A Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 34) The PE ratio approach to valuing stock is especially useful for valuing A) privately held firms. B) firms that don't pay dividends. C) both A and B of the above. D) neither A nor B of the above. Answer: C Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 35) The PE ratio approach to valuing stock is especially useful for valuing A) publicly held corporations. B) firms that regularly pay dividends. C) both A and B of the above. D) neither A nor B of the above. Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 253 Copyright © 2018 Pearson Education, Inc.

36) A weakness of the PE approach to valuing stock is that it is A) difficult to estimate the constant growth rate of a firm's dividends. B) difficult to estimate the required return on equity. C) difficult to predict how much a firm will pay in dividends. D) based on industry averages rather than firm-specific factors. Answer: D Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 37) (I) The market price of a security at a given time is the highest value any investor puts on the security. (II) Superior information about a security increases its value by reducing its risk. A) (I) is true, (II) is false. B) (I) is false, (II) is true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 38) The main cause of fluctuations in stock prices is changes in A) tax laws. B) errors in technical stock analysis. C) daily trading volume in stock markets. D) information available to investors. E) total household wealth in the economy. Answer: D Topic: Chapter 13.3 How the Market Sets Security Prices Question Status: Previous Edition 39) Security prices are set by active market participants. Which of the following is NOT a consequence of this fact? A) The price is set by the buyer willing to pay the highest price. B) The market price will be set by the buyer who can take best advantage of the asset. C) Market participants have a strong incentive to reveal private information about a security. D) Superior information about an asset can increase its value by reducing its risk. Answer: C Topic: Chapter 13.3 How the Market Sets Security Prices Question Status: New Question

40) Stock values computed by valuation models may differ from actual market prices because it is difficult to A) estimate future dividend growth rates. B) estimate the risk of a stock. C) forecast a stock's future dividends. D) all of the above are true. Answer: D Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 41) The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend growth to ________, investors' required return on equity to ________, and stock prices to ________. A) decrease; increase; decrease B) decrease; increase; increase C) increase; decrease; decrease D) increase; decrease; increase Answer: A Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 42) The subprime financial crisis led to one of the worst bear markets in the last 50 years. Stock prices likely fell due to A) an increase in required returns on equity investments. B) a decline in growth prospects for U.S. companies. C) Both A and B are likely reasons. D) None of the above are correct. Answer: A Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 43) Which of the following is not an objective of the Securities and Exchange Commission? A) Maintain integrity of the securities markets B) Advise investors about which particular stocks are good buys C) Require firms to provide specific information to investors D) Regulate major participants in securities markets Answer: B Topic: Chapter 13.7 Regulation of the Stock Market Question Status: Previous Edition

44) The most commonly quoted index is the Dow Jones Industrial Average (DJIA), an index based on the performance of the stocks of ________ large companies. A) 25 B) 30 C) 35 D) 40 Answer: B Topic: Chapter 13.5 Stock Market Indexes Question Status: New Question 45) From 2014 to 2015, the Dow Jones Industrial Average has fluctuated between A) 7,500 and 10,000. B) 12,500 and 15,000. C) 16,000 and 19,000. D) 20,000 and 22,000. Answer: C Topic: Chapter 13.5 Stock Market Indexes Question Status: New Question 46) The problem with buying foreign stocks is that most foreign companies are not listed on any of the U.S. stock exchanges, so the purchase of shares is difficult. Intermediaries have found a way to solve this problem by selling A) ADRs. B) foreign stock indexes. C) ETFs that include foreign stocks. D) stock in U.S. companies with international sales. Answer: A Topic: Chapter 13.6 Buying Foreign Stocks Question Status: New Question 47) The Securities Acts of 1933 and 1934 established the S.E.C. to enforce which of the follow laws? A) Require firms to tell the public the truth about their businesses. B) Require brokers, dealers, and exchanges to treat investors fairly. C) To ensure that no investment ever loses money. D) All of the above are laws the S.E.C. enforces. E) A and B above are laws the S.E.C. enforces. Answer: E Topic: Chapter 13.7 Regulation of the Stock Market Question Status: Previous Edition

48) Which of the following is not a division of the S.E.C.? A) The Division of Fraud Investigation B) The Division of Corporate Finance C) The Division of Market Regulation D) The Division of Investment Management E) The Division of Enforcement Answer: A Topic: Chapter 13.7 Regulation of the Stock Market Question Status: Previous Edition 13.2 True/False 1) More stock trading in the U.S. occurs in over-the-counter markets rather than on organized exchanges. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 2) In over-the-counter markets, dealers increase the liquidity of thinly traded securities. Answer: TRUE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 3) Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 4) All stocks pay dividends, as that is the only way an investor can profit from holding stock. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 5) Common stock is the riskiest corporate security, followed by preferred stock and then bonds. Answer: TRUE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 6) About half of new equity issues are preferred stock. Answer: FALSE Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition

7) On the NYSE, in about 90% of trades, the specialist matches buyers with sellers. In the other 10%, the specialists may intervene by taking ownership of the stock themselves or by selling stock from inventory. Answer: TRUE Topic: Chapter 13.1 Investing in Stocks Question Status: Updated from Previous Edition 8) A stock's market value will be higher the higher its expected dividend stream is, all else being equal. Answer: TRUE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 9) The Gordon growth model assumes that a stock's dividend grows at a constant rate forever. Answer: TRUE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 10) Even if a stock does not pay a dividend, the Gordon growth model is still useful for computing the stock's price. Answer: FALSE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: New Question 11) A stock's market value will be higher the higher the investor's required rate of return is, all else being equal. Answer: FALSE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 12) A lower than average PE may mean that the market expects earnings to rise in the future. Answer: FALSE Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 13) Since market participants set security prices, the price of a stock is generally the highest price the asset could fetch. Answer: FALSE Topic: Chapter 13.3 How the Market Sets Security Prices Question Status: New Question 14) The Enron financial scandal increased uncertainty about the quality of accounting information and as a result, increased required return on investment in stocks. Answer: TRUE Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 258 Copyright © 2018 Pearson Education, Inc.

15) The Dow Jones Industrial Average is the broadest and best indicator of the stock market's day-to-day performance. Answer: FALSE Topic: Chapter 13.5 Stock Market Indexes Question Status: Previous Edition 16) Unfortunately, due to current SEC regulations, U.S. investors cannot buy foreign stocks on U.S. stock exchanges. Answer: FALSE Topic: Chapter 13.6 Buying Foreign Stocks Question Status: New Question 17) The Securities and Exchange Commission requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information. Answer: TRUE Topic: Chapter 13.7 Regulation of the Stock Market Question Status: Previous Edition 18) The Securities and Exchange Commission Division of Fraud Investigation was credited with uncovering the Enron and Madoff scandals. Answer: FALSE Topic: Chapter 13.7 Regulation of the Stock Market Question Status: New Question 13.3 Essay 1) How do corporate stocks differ from bonds? Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 2) How do common stocks differ from preferred stocks? Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 3) How do over-the-counter markets differ from organized exchanges? Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 4) What is the role of specialists on a stock exchange? Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 5) What are the advantages and disadvantages of Electronic Communications Networks (ECNs) for trading stocks? Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 259 Copyright © 2018 Pearson Education, Inc.

6) What are the advantages and disadvantages of exchange traded funds (ETFs) fro trading stocks? Topic: Chapter 13.1 Investing in Stocks Question Status: Previous Edition 7) What is the role of the required return on equity investments in stock valuation models? Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 8) Using the Gordon growth model, explain why the 2001 terrorist attacks and the Enron financial scandal caused stock prices to decline. Topic: Chapter 13.2 Computing the Price of Common Stock Question Status: Previous Edition 9) Discuss several of the important factors that go into the determination of a security price by the markets. Topic: Chapter 13.3 How the Market Sets Security Prices Question Status: New Question 10) Why would a crisis in the subprime mortgage market lead to declining prices in the U.S. equity markets? Topic: Chapter 13.4 Errors in Valuation Question Status: Previous Edition 11) Why do we have (and follow) the various stock market indexes? Topic: Chapter 13.5 Stock Market Indexes Question Status: New Question 12) What are American Depository Receipts (ADRs)? Topic: Chapter 13.6 Buying Foreign Stocks Question Status: Previous Edition 13) What are the objectives of the Securities and Exchange Commission? Topic: Chapter 13.7 Regulation of the Stock Market Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 14 The Mortgage Markets 14.1 Multiple Choice 1) As of 2016, the price of an average house is around A) $208,000. B) $220,500. C) $232,500. D) $249,990. Answer: C 260 Copyright © 2018 Pearson Education, Inc.

Topic: Chapter 14.1 What Are Mortgages? Question Status: New Question 2) Which of the following are important ways in which mortgage markets differ from the stock and bond markets? A) The usual borrowers in the capital markets are government entities and businesses, whereas the usual borrowers in the mortgage markets are individuals. B) Most mortgages are secured by real estate, whereas the majority of capital market borrowing is unsecured. C) Because mortgages are made for different amounts and different maturities, developing a secondary market has been more difficult. D) All of the above are important differences. E) Only A and B of the above are important differences. Answer: D Topic: Chapter 14.1 What Are Mortgages? Question Status: Previous Edition 3) Which of the following are important ways in which mortgage markets differ from stock and bond markets? A) The usual borrowers in capital markets are government entities, whereas the usual borrowers in mortgage markets are small businesses. B) The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses. C) The usual borrowers in capital markets are government entities and large businesses, whereas the usual borrowers in mortgage markets are small businesses and individuals. D) The usual borrowers in capital markets are businesses and government entities, whereas the usual borrowers in mortgage markets are individuals. Answer: D Topic: Chapter 14.1 What Are Mortgages? Question Status: Previous Edition

4) Which of the following are true of mortgages? A) A mortgage is a long-term loan secured by real estate. B) A borrower pays off a mortgage in a combination of principal and interest payments that result in full payment of the debt by maturity. C) Over 72 percent of mortgage loans finance residential home purchases. D) All of the above are true of mortgages. E) Only A and B of the above are true of mortgages. Answer: D Topic: Chapter 14.1 What Are Mortgages? Question Status: Updated from Previous Edition 5) Which of the following are true of mortgages? A) A mortgage is a long-term loan secured by real estate. B) Borrowers pay off mortgages over time in some combination of principal and interest payments that result in full payment of the debt by maturity. C) Less than 65 percent of mortgage loans finance residential home purchases. D) All of the above are true of mortgages. E) Only A and B of the above are true of mortgages. Answer: E Topic: Chapter 14.1 What Are Mortgages? Question Status: Previous Edition 6) Which of the following are true of mortgages? A) More than 72 percent of mortgage loans finance residential home purchases. B) The National Banking Act of 1863 rewarded banks that increased mortgage lending. C) Most mortgages during the 1920s and 1930s were balloon loans. D) All of the above are true. E) Only A and C of the above are true. Answer: E Topic: Chapter 14.1 What Are Mortgages? Question Status: Updated from Previous Edition 7) Which of the following is not a characteristic of a balloon loan? A) Prior to maturity, the borrower only pays interest (usually monthly). B) The loan is typically 10 - 15 years in maturity. C) At maturity, the entire loan amount is due. D) All of the above are true. E) Only A and C of the above are true. Answer: B Topic: Chapter 14.1 What Are Mortgages? Question Status: New Question

8) Which of the following is a characteristic of a balloon loan? A) Prior to maturity, the borrower only pays interest (usually monthly). B) The loan is typically 10 - 15 years in maturity. C) At maturity, the entire loan amount is due. D) All of the above are true. E) Only A and C of the above are true. Answer: E Topic: Chapter 14.1 What Are Mortgages? Question Status: New Question 9) Which of the following are true of mortgage interest rates? A) Interest rates on mortgage loans are determined by three factors: current long-term market rates, the term of the mortgage, and the number of discount points paid. B) Mortgage interest rates tend to track along with Treasury bond rates. C) The interest rate on 15-year mortgages is lower than the rate on 30-year mortgages, all else the same. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 10) Which of the following is true of mortgage interest rates? A) Longer-term mortgages have lower interest rates than shorter-term mortgages. B) Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest rates. C) In exchange for points, lenders reduce interest rates on mortgage loans. D) All of the above are true. E) Only A and B of the above are true. Answer: C Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 11) Typically, discount points should not be paid if the borrower will pay off the loan in ________ years or less. A) 5 B) 10 C) 15 D) 20 Answer: A Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition

12) Which of the following is true of mortgage interest rates? A) Longer-term mortgages have higher interest rates than shorter-term mortgages. B) In exchange for points, lenders reduce interest rates on mortgage loans. C) Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest payments. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 13) Which of the following reduces moral hazard for the mortgage borrower? A) Collateral B) Down payments C) Private mortgage insurance D) Borrower qualifications Answer: B Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 14) Which of the following protects the mortgage lender's right to sell property if the underlying loan defaults? A) A lien B) A down payment C) Private mortgage insurance D) Borrower qualification E) Amortization Answer: A Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 15) Which of the following is true of mortgage interest rates? A) Mortgage rates are closely tied to Treasury bond rates, but mortgage rates tend to stay below Treasury rates because mortgages are secured with collateral. B) Longer-term mortgages have higher interest rates than shorter-term mortgages. C) Interest rates are higher on mortgage loans on which lenders charge points. D) All of the above are true. E) Only A and B of the above are true. Answer: B Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition

16) During the early years of an amortizing mortgage loan, the lender applies A) most of the monthly payment to the outstanding principal balance. B) all of the monthly payment to the outstanding principal balance. C) most of the monthly payment to interest on the loan. D) all of the monthly payment to interest on the loan. E) the monthly payment equally to interest on the loan and the outstanding principal balance. Answer: C Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 17) During the last years of an amortizing mortgage loan, the lender applies A) most of the monthly payment to the outstanding principal balance. B) all of the monthly payment to the outstanding principal balance. C) most of the monthly payment to interest on the loan. D) all of the monthly payment to interest on the loan. E) the monthly payment equally to interest on the loan and the outstanding principal balance. Answer: A Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 18) During the last years of a balloon mortgage loan, the lender applies A) most of the monthly payment to the outstanding principal balance. B) all of the monthly payment to the outstanding principal balance. C) most of the monthly payment to interest on the loan. D) all of the monthly payment to interest on the loan. E) the monthly payment equally to interest on the loan and the outstanding principal balance. Answer: D Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 19) During the early years of a balloon mortgage loan, the lender applies A) most of the monthly payment to the outstanding principal balance. B) all of the monthly payment to the outstanding principal balance. C) most of the monthly payment to interest on the loan. D) all of the monthly payment to interest on the loan. E) the monthly payment equally to interest on the loan and the outstanding principal balance. Answer: D Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition

20) The interest rate borrowers pay on their mortgages is determined by A) current long-term market rates. B) the term. C) the number of discount points. D) all of the above. Answer: D Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 21) The percentage of the total loan paid back immediately when a mortgage loan is obtained, which lowers the annual interest rate on the debt, is called A) discount points. B) loan terms. C) collateral. D) down payment. Answer: A Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 22) Which of the following terms are found in mortgage loan contracts to protect the lender from financial loss? A) Collateral B) Down payment C) Private mortgage insurance D) All of the above Answer: D Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 23) What factors are used in determining a person's FICO score? A) Past payment history B) Outstanding debt C) Length of credit history D) All of the above Answer: D Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 24) A borrower who qualifies for an FHA or VA loan enjoys the advantage that A) the mortgage payment is much lower. B) only a very low or zero down payment is required. C) the cost of private mortgage insurance is lower. D) the government holds the lien on the property. Answer: B Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 266 Copyright © 2018 Pearson Education, Inc.

25) (I) Conventional mortgages are originated by private lending institutions, and FHA or VA loans are originated by the government. (II) Conventional mortgages are insured by private companies, and FHA or VA loans are insured by the government. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 26) Borrowers tend to prefer ________ to ________, whereas lenders prefer ________. A) fixed-rate loans; ARMs; fixed-rate loans B) ARMs; fixed-rate loans; fixed-rate loans C) fixed-rate loans; ARMs; ARMs D) ARMs; fixed-rate loans; ARMs Answer: C Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 27) (I) ARMs offer lower initial rates and the rate may fall during the life of the loan. (II) Conventional mortgages do not allow a borrower to take advantage of falling interest rates. A) (I) is true, (II) is false. B) (I) is false, (II) is true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 28) Growing-equity mortgages (GEMs) A) help the borrower pay off the loan in a shorter time. B) have such low payments in the first few years that the principal balance increases. C) offer borrowers payments that are initially lower than the payments on a conventional mortgage. D) do all of the above. E) do only A and B of the above. Answer: A Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition

29) A borrower with a 30-year loan can create a GEM by A) simply increasing the monthly payments beyond what is required and designating that the excess be applied entirely to the principal. B) converting his ARM into a conventional mortgage. C) converting his conventional mortgage into an ARM. D) converting his conventional mortgage into a GPM. Answer: A Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 30) Which of the following are useful for home buyers who expect their income to rise in the future? A) GPMs B) RAMs C) GEMs D) Only A and B are useful. E) Only A and C are useful. Answer: E Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 31) The Federal Housing Administration (FHA) A) was set up to buy mortgages from thrifts so that these institutions could make more loans. B) funds purchases of mortgages by selling bonds to the public. C) provides insurance for certain mortgage contracts. D) does all of the above. E) does only A and B of the above. Answer: C Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 32) Which of the following are useful for home buyers who expect their income to fall in the future? A) GPMs B) RAMs C) GEMs D) Only A and B are useful. E) Only A and C are useful. Answer: B Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition

33) Retired people can live on the equity they have in their homes by using a A) GEM. B) GPM. C) SAM. D) RAM. Answer: D Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 34) Second mortgages serve the following purposes: A) they give borrowers a way to use the equity they have in their homes as security for another loan. B) they allow borrowers to get a tax deduction on loans secured by their primary residence or vacation home. C) they allow borrowers to convert their conventional mortgages into GEMs. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 35) Which of the following is a disadvantage of a second mortgage compared to credit card debt? A) The loans are secured by the borrower's home. B) The borrower gives up the tax deduction on the primary mortgage. C) The borrower must pay points to get a second mortgage loan. D) The borrower will find it more difficult to qualify for a second mortgage loan. Answer: A Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 36) The share of the mortgage market held by life insurance companies is A) over 50 percent. B) approximately 40 percent. C) approximately 20 percent. D) less than 5 percent. Answer: D Topic: Chapter 14.4 Mortgage-Lending Institutions Question Status: Updated from Previous Edition 37) The share of the mortgage market held by depository institutions (banks) is approximately A) 50 percent. B) 30 percent. C) 15 percent. D) 5 percent. Answer: B Topic: Chapter 14.4 Mortgage-Lending Institutions Question Status: Updated from Previous Edition 269 Copyright © 2018 Pearson Education, Inc.

38) A loan-servicing agent will A) package the loan for an investor. B) hold the loan in their investment portfolio. C) collect payments from the borrower. D) do both A and C of the above. E) do both B and C of the above. Answer: C Topic: Chapter 14.5 Loan Servicing Question Status: Previous Edition 39) The mortgage market is well suited to providing online service for several reasons, including A) that the mortgage market is information-based and no products have to be shipped or inventoried. B) that mortgages tend to be the same across all lenders. C) that borrowers obtain mortgages quite often, and are loyal to local lenders. D) both A and B of the above. E) both B and C of the above. Answer: D Topic: Chapter 14.5 Loan Servicing Question Status: New Question 40) Distinct elements of a mortgage loan include A) origination. B) investment. C) servicing. D) all of the above. E) only B and C of the above. Answer: D Topic: Chapter 14.6 Secondary Mortgage Market Question Status: Previous Edition 41) Distinct elements of a mortgage loan include A) packaging. B) investment. C) servicing. D) all of the above. E) only B and C of the above. Answer: E Topic: Chapter 14.6 Secondary Mortgage Market Question Status: New Question

42) The Federal National Mortgage Association (Fannie Mae) A) was set up to buy mortgages from thrifts so that these institutions could make more loans. B) funds purchases of mortgages by selling bonds to the public. C) provides insurance for certain mortgage contracts. D) does all of the above. E) does only A and B of the above. Answer: E Topic: Chapter 14.6 Secondary Mortgage Market Question Status: Previous Edition 43) ________ issues participation certificates, and ________ provides federal insurance for participation certificates. A) Freddie Mac; Freddie Mac B) Freddie Mac; Ginnie Mae C) Ginnie Mae; Freddie Mac D) Ginnie Mae; Ginnie Mae E) Freddie Mac; no one Answer: E Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 44) The most common type of mortgage-backed security is the A) mortgage pass-through. B) REMIC. C) CDO. D) collateralized mortgage obligations. Answer: A Topic: Chapter 14.7 Securitization of Mortgages Question Status: New Question 45) The possibility that mortgages will prepay and force investors to seek alternative investments, usually with lower expected returns, is called A) interest-rate risk. B) extension risk. C) prepayment risk. D) default risk. Answer: C Topic: Chapter 14.7 Securitization of Mortgages Question Status: New Question

46) REMICs are most like A) Freddie Mac pass-through securities. B) Ginnie Mae pass-through securities. C) participation certificates. D) collateralized mortgage obligations. Answer: D Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 47) Ginnie Mae A) insures qualifying mortgages. B) insures pass-through certificates. C) insures collateralized mortgage obligations. D) does only A and B of the above. E) does only B and C of the above. Answer: B Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 48) Mortgage-backed securities A) have been growing in popularity in recent years as institutional investors look for attractive investment opportunities. B) are securities collateralized by a pool of mortgages. C) are securities collateralized by both insured and uninsured mortgages. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 49) The most common type of mortgage-backed security is A) the mortgage pass-through, a security that has the borrower's mortgage payments pass through the trustee before being disbursed to the investors. B) collateralized mortgage obligations, a security which reduces prepayment risk. C) the participation certificate, a security which passes the borrower's mortgage payments equally among all the owners of the certificates. D) the securitized mortgage, a security which increases the liquidity of otherwise illiquid mortgages. Answer: A Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition

50) A loan for borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income is A) a subprime mortgage. B) a securitized mortgage. C) an insured mortgage. D) a graduated-payment mortgage. Answer: A Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 51) Between 2000 and 2005, home prices increased an average of ________ per year. A) 2% B) 4% C) 8% D) 12% Answer: C Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 52) From 2000 to 2005, housing prices increased, on average, by over 40%. This run up in prices was caused by A) speculators. B) an increase in subprime loans, which increased demand for new and existing houses. C) both A and B. D) None of the above are correct. Answer: C Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 14.2 True/False 1) In 2015, the price of the average house was about $232,500. Answer: TRUE Topic: Chapter 14.1 What Are Mortgages? Question Status: New Question 2) In 2015, mortgage loans to farms represented the largest proportion of mortgage lending in the U.S. Answer: FALSE Topic: Chapter 14.1 What Are Mortgages? Question Status: Updated from Previous Edition 3) Down payments are designed to reduce the likelihood of default on mortgage loans. Answer: TRUE Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 273 Copyright © 2018 Pearson Education, Inc.

4) Discount points (or simply points) are interest payments made at the beginning of a loan. Answer: TRUE Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 5) A point on a mortgage loan refers to one monthly payment of principal and interest. Answer: FALSE Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 6) Closing for a mortgage loan refers to the moment the loan is paid off. Answer: FALSE Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 7) Private mortgage insurance is a policy that guarantees to make up any discrepancy between the value of the property and the loan amount, should a default occur. Answer: TRUE Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 8) During the early years of a mortgage loan, the lender applies most of the payment to the principal on the loan. Answer: FALSE Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 9) A FICO score below 660 is considered good while a score above 720 is likely to cause problems in obtaining a loan. Answer: FALSE Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 10) One important advantage to a borrower who qualifies for an FHA or VA loan is the very low interest rate on the mortgage. Answer: FALSE Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 11) Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate mortgages. Answer: TRUE Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition

12) Mortgage interest rates loosely track interest rates on three-month Treasury bills. Answer: FALSE Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 13) An advantage of a graduated-payment mortgage is that borrowers will qualify for a larger loan than if they requested a conventional mortgage. Answer: TRUE Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 14) Nearly half the funds for mortgage lending comes from mortgage pools and trusts. Answer: FALSE Topic: Chapter 14.4 Mortgage-Lending Institutions Question Status: Previous Edition 15) Many institutions that make mortgage loans do not want to hold large portfolios of long-term securities, because it would subject them to unacceptably high interest-rate risk. Answer: TRUE Topic: Chapter 14.4 Mortgage-Lending Institutions Question Status: Previous Edition 16) As of 2015, depository institutions (banks) held the largest share of the mortgage market. Answer: FALSE Topic: Chapter 14.4 Mortgage-Lending Institutions Question Status: Previous Edition 17) Fannie Mae and Freddie Mac together either own or insure the risk on nearly one-fourth of America's residential mortgages. Answer: FALSE Topic: Chapter 14.4 Mortgage-Lending Institutions Question Status: Previous Edition 18) Mortgage reserve accounts, or escrow accounts, are established for most mortgage loans to permit the lender to make tax and insurance payments for the borrower. Answer: TRUE Topic: Chapter 14.5 Loan Servicing Question Status: New Question 19) One reason the mortgage market is well suited to providing online service is because it is information-based and no products have to be shipped or inventoried. Answer: TRUE Topic: Chapter 14.5 Loan Servicing Question Status: New Question

20) A problem that initially hindered the marketability of mortgages in a secondary market was that they were not standardized. Answer: TRUE Topic: Chapter 14.6 Secondary Mortgage Market Question Status: Previous Edition 21) Mortgage-backed securities have declined in popularity in recent years as institutional investors have sought higher returns in other markets. Answer: FALSE Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 22) Mortgage-backed securities are marketable securities collateralized by a pool of mortgages. Answer: TRUE Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 23) Subprime loans are those made to borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income. Answer: TRUE Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 14.3 Essay 1) How has the modern mortgage market changed over recent years? Topic: Chapter 14.1 What Are Mortgages? Question Status: Previous Edition 2) Explain the features of mortgage loans that are designed to reduce the likelihood of default. Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 3) What are points? What is their purpose? Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 4) How does an amortizing mortgage loan differ from a balloon mortgage loan? Topic: Chapter 14.2 Characteristics of the Residential Mortgage Question Status: Previous Edition 5) Evaluate the advantages and disadvantages, from both the lender's and borrower's perspectives, of fixed-rate and adjustable-rate mortgages. Topic: Chapter 14.3 Types of Mortgages Question Status: Previous Edition 276 Copyright © 2018 Pearson Education, Inc.

6) Why has the online lending market developed in recent years and what are the advantages and disadvantages of this development? Topic: Chapter 14.4 Mortgage-Lending Institutions Question Status: Previous Edition 7) Prior to 1980, many S&Ls originated, held, and serviced mortgages. Now, an entire industry has developed for servicing mortgages. Why did this happen? Topic: Chapter 14.5 Loan Servicing Question Status: Previous Edition 8) What is the secondary market for mortgages? Why did it develop? Topic: Chapter 14.6 Secondary Mortgage Market Question Status: Previous Edition 9) What are the benefits and side effects of securitized mortgages? Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 10) Why may Fannie Mae and Freddie Mac pose a threat to the health of the financial system? Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 11) What are mortgage-backed securities, why were they developed, what types of mortgagebacked securities are there, and how do they work? Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition 12) Discuss the pros and cons of a subprime market for residential mortgages in the U.S. Topic: Chapter 14.7 Securitization of Mortgages Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 15 The Foreign Exchange Market 15.1 Multiple Choice 1) American firms became less competitive compared to foreign firms during the 1980s because A) the quality and productivity of American workers declined. B) foreign firms were younger than American firms and as a result had more modern facilities that made use of the latest technology. C) the U.S. dollar became worth more in terms of foreign currencies. D) the U.S. dollar became worth less in terms of foreign currencies. Answer: C Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 2) A spot transaction in the foreign exchange market involves the 277 Copyright © 2018 Pearson Education, Inc.

A) exchange of exports and imports at a specified future date. B) exchange of bank deposits at a specified future date. C) immediate (within two days) exchange of exports and imports. D) immediate (within two days) exchange of bank deposits. Answer: D Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 3) Forward exchange rates A) involve the immediate exchange of bank deposits. B) involve the exchange of bank deposits at some specified future date. C) involve the immediate exchange of imports and exports. D) none of the above. Answer: B Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 4) When the value of the British pound changes from $1.50 to $1.25, the pound has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition

5) When the value of the dollar changes from £0.50 to £0.75, the pound has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 6) When the exchange rate changes from 1.0 euros to the dollar to 1.2 euros to the dollar, the euro has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 7) When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar, the euro has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: C Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 8) If the dollar ________ from 1.2 euros per dollar to 0.8 euros per dollar, the euro ________ from 0.83 dollars to 1.25 dollars per euro. A) appreciates; appreciates B) appreciates; depreciates C) depreciates; depreciates D) depreciates; appreciates Answer: D Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition

9) If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro depreciates from ________ dollars to ________ dollars per euro. A) 1.25; 0.83 B) 0.83; 1.25 C) 0.67; 1.50 D) 1.50; 0.67 Answer: A Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 10) If the dollar depreciates relative to the Swiss franc, A) Swiss chocolate will become more expensive in the United States. B) American computers will become less expensive in Switzerland. C) Swiss chocolate will become cheaper in the United States. D) both A and B of the above will happen. Answer: D Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 11) If the dollar appreciates relative to the Swiss franc, A) Swiss chocolate will become more expensive in the United States. B) American computers will become less expensive in Switzerland. C) Swiss chocolate will become cheaper in the United States. D) both A and B of the above will happen. Answer: C Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 12) When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B) appreciated and German cars sold in the United States become less expensive. C) depreciated and American wheat sold in Germany becomes more expensive. D) depreciated and American wheat sold in Germany becomes less expensive. Answer: A Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 13) When the exchange rate for the euro changes from $1.20 to $1.00, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B) appreciated and German cars sold in the United States become less expensive. C) depreciated and American wheat sold in Germany becomes more expensive. D) depreciated and American wheat sold in Germany becomes less expensive. Answer: C Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 280 Copyright © 2018 Pearson Education, Inc.

14) The foreign exchange market A) is organized as an over-the-counter market in which several hundred dealers stand ready to buy and sell deposits denominated in foreign currencies. B) is very competitive. C) functions no differently from a centralized market. D) all of the above. Answer: D Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 15) Trades in the foreign exchange market consist of transactions in excess of A) $500,000. B) $1 million. C) $5 million. D) $10 million. Answer: B Topic: Chapter 15.1 The Foreign Exchange Market Question Status: New Question 16) If a U.S. traveler needs foreign currency for a trip abroad, she would buy the currency in the ________ market from a dealer such as American Express. A) dollar B) foreign exchange C) retail D) bankers Answer: C Topic: Chapter 15.1 The Foreign Exchange Market Question Status: New Question 17) Evidence from the United States during the period 1973-2016 indicates the correspondence between nominal interest rates and exchange rate movements is A) much closer than that between real interest rates and exchange rate movements. B) not nearly as close as that between government spending and exchange rate movements. C) not nearly as close as that between government deficits and exchange rate movements. D) not nearly as close as that between real interest rates and exchange rate movements. Answer: D Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Updated from Previous Edition

18) The purchasing power parity theory A) has significant predictive power in the short run. B) is the starting point for understanding how exchange rates are determined. C) does not take into account that many goods and services are not traded across borders. D) is none of the above. Answer: C Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 19) In the long run, ________ affect the exchange rate. A) relative price levels B) tariffs and quotas C) productivity D) all of the above. Answer: D Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 20) The starting point for understanding how exchange rates are determined is a simple idea called ________, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. A) Gresham's law B) the law of one price C) purchasing power parity D) arbitrage Answer: B Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 21) The theory of purchasing power parity is a theory of how exchange rates are determined in A) the long run. B) the short run. C) both A and B of the above. D) none of the above. Answer: A Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 22) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money Answer: A Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 282 Copyright © 2018 Pearson Education, Inc.

23) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries. Answer: D Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 24) In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a rise in the country's relative productivity causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate Answer: C Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 25) If the 2015 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2015, the value of the British pound in terms of U.S. dollars will A) rise by 10 percent. B) rise by 2 percent. C) fall by 10 percent. D) fall by 2 percent. E) do none of the above. Answer: D Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Updated from Previous Edition 26) The theory of purchasing power parity cannot fully explain exchange rate movements because A) not all goods are identical in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) both A and C of the above. E) both B and C of the above. Answer: D Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition

27) From 1973 through 2016, the rise in the British price level relative to the U.S. price level is ________ with a rise in the value of the dollar. Over shorter periods, the PPP relationship ________ appear to hold. A) associated; does not B) not associated; also does not C) associated; also does D) not associated; does Answer: A Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: New Question 28) The theory of purchasing power parity cannot fully explain exchange rate movements because A) all goods are identical even if produced in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) fiscal policy differs across countries. Answer: C Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 29) An increase in which factor will cause domestic currency depreciation? A) trade barriers B) export demand C) import demand D) relative productivity Answer: C Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: New Question 30) In the short run, the quantity of dollars supplied (deposits, bonds, equities) is A) fixed with respect to the exchange rate. B) quite volatile and difficult to model in a supply-demand framework. C) typically following the business cycle (procyclical). D) is best represented with a horizontal supply curve. Answer: A Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition

31) Increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports Answer: C Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 32) Foreign exchange transactions in the United States each year are well over ________ times greater than the amount of U.S. exports and imports. A) 5 B) 15 C) 25 D) 35 Answer: C Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: New Question 33) If the demand for ________ goods decreases relative to ________ goods, the domestic currency will depreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign Answer: D Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 34) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign deposits is A) the level of trade and capital flows. B) the expected return on these assets relative to one another. C) the liquidity of these assets relative to one another. D) the riskiness of these assets relative to one another. Answer: B Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition

35) Over short periods, the ________ has a much greater role in exchange rate determination than does ________. A) the price of foreign assets; the liquidity of foreign assets B) decision to hold domestic or foreign assets; the demand for exports and imports C) the liquidity of foreign assets; the price of foreign assets D) the demand for exports and imports; decision to hold domestic or foreign assets Answer: B Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: New Question 36) When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits. A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign Answer: B Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 37) When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits, there is a ________ demand for dollar deposits and a correspondingly ________ demand for foreign deposits. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 38) As the relative expected return on dollar deposits increases, foreigners will want to hold more ________ deposits and less ________ deposits. A) foreign; foreign B) foreign; dollar C) dollar; foreign D) dollar; dollar Answer: C Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition

39) As the relative expected return on dollar deposits increases, A) foreigners will want to hold fewer dollar deposits and more foreign deposits. B) Americans will want to hold more dollar deposits and less foreign deposits. C) Americans will want to hold fewer dollar deposits and more foreign deposits. D) Americans and foreigners will be indifferent toward holding dollar deposits or foreign deposits. Answer: B Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 40) The more modern asset market approach to exchange rate determination A) emphasizes the role of import and export demand. B) emphasizes stocks of assets. C) emphasizes both of the above. D) emphasizes neither of the above. Answer: B Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 41) Quotas A) are restrictions placed on the quality of foreign goods that can be imported. B) are fees placed on imported goods. C) are restrictions placed on the quantity of foreign goods that can be exported. D) are none of the above. Answer: D Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 42) With the start of the subprime financial crisis in August 2007, the dollar ________ in value against the euro as the Fed lowered interest rates. By December of 2008, with the financial crisis spreading throughout Europe, foreign central banks cut their interest rates, leading to a ________ in the value of the dollar relative to the euro. A) rose; further increase B) rose; decline C) declined; rise D) declined; further decline Answer: C Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition

43) An increase in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left Answer: C Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 44) A decrease in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left Answer: D Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 45) A rise in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left Answer: D Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 46) A fall in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left Answer: C Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition

47) An increase in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left Answer: A Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 48) A decrease in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left Answer: B Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 49) Which of the following causes a depreciation of the domestic currency? A) A lower domestic interest rate due to a lower expected inflation rate. B) A decline in the domestic real interest rate. C) A decrease in the domestic money supply. D) All of the above. Answer: B Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 50) Which of the following causes an appreciation of the domestic currency? A) A lower domestic interest rate due to a lower expected inflation rate. B) A decline in the domestic real interest rate. C) An increase in the domestic money supply. D) All of the above. Answer: A Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition

51) When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, ________ shifts out more than ________, and the exchange rate declines. A) RF; RD B) RF; RF C) RD; RD D) RD; RF Answer: A Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 52) The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in A) real interest rates, but not nominal interest rates. B) nominal interest rates, but not real interest rates. C) relative price levels, but not real interest rates. D) none of the above. Answer: A Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 53) Higher tariffs and quotas cause a country's currency to ________ in the ________ run. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long Answer: D Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 54) Lower tariffs and quotas cause a country's currency to ________ in the ________ run. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long Answer: C Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition

55) If the inflation rate in the United States is higher than that in Germany and productivity is growing at a slower rate in the United States than it is in Germany, in the long run, A) the euro should appreciate relative to the dollar. B) the euro should depreciate relative to the dollar. C) there should be no change in the euro price of dollars. D) it is not clear what will happen to the euro price of dollars. Answer: A Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 56) If the French demand for American exports rises at the same time that U.S. productivity rises relative to French productivity, then, in the long run, A) the euro should appreciate relative to the dollar. B) the dollar should depreciate relative to the euro. C) the dollar should appreciate relative to the euro. D) it is not clear whether the euro should appreciate or depreciate relative to the dollar. Answer: C Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 57) When François the Foreigner considers the expected return on dollar deposits in terms of foreign currency, the expected return must be adjusted for A) any expected appreciation or depreciation of the dollar. B) the interest rates on foreign deposits. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 58) The expected return on dollar deposits in terms of foreign currency is the ________ the interest rate on dollar deposits and the expected appreciation of the dollar. A) product of B) ratio of C) sum of D) difference in Answer: C Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition

59) If the interest rate on foreign deposits increases, holding everything else constant, A) the expected return on these deposits must also increase. B) the expected return on domestic deposits must decrease. C) the expected return on domestic deposits must increase. D) both A and B of the above. E) both A and C of the above. Answer: A Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 60) If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. E) 24 percent. Answer: D Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 61) If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and if the dollar is expected to appreciate at a 4 percent rate, A) euro deposits have a higher expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 11 percent. C) the expected return on dollar deposits in terms of euros is 1 percent. D) the expected return on euro deposits in terms of dollars is 3 percent. E) the expected return on dollar deposits equals the expected return on euro deposits. Answer: D Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 62) If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits, and if the euro is expected to appreciate at a 4 percent rate relative to the dollar, then A) euro deposits have a lower expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 9 percent. C) the expected return on dollar deposits in terms of euros is 19 percent. D) both A and B of the above will occur. E) none of the above will occur. Answer: E Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition

63) The expected return on dollar deposits in terms of dollars, RD, is A) always the interest rate on dollar deposits, iD, for any exchange rate. B) the interest rate on dollar deposits, iD, only when Et >

C) the interest rate on dollar deposits, iD, only when Et <

D) the interest rate on dollar deposits, iD, only when Et =

Answer: A Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 64) The condition which states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called A) the purchasing power parity condition. B) the interest parity condition. C) money neutrality. D) the theory of foreign capital mobility. Answer: B Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 65) In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the A) interest parity condition. B) purchasing power parity condition. C) exchange rate parity condition. D) foreign asset parity condition. Answer: A Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 66) According to the interest parity condition, the domestic interest rate is equal to the foreign interest rate A) plus the expected appreciation of the domestic currency. B) less the expected appreciation of the domestic currency. C) less the expected depreciation of the domestic currency. D) less the expected depreciation of the domestic currency weighted by the domestic interest rate. Answer: B Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition

67) According to the interest parity condition, if the domestic interest rate is ________ the foreign interest rate, then ________. A) above; there is expected appreciation of the foreign currency B) above; there is expected depreciation of the foreign currency C) below; there is expected appreciation of the foreign currency D) below; the interest parity condition is violated Answer: A Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 68) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4 Answer: B Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 69) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4 Answer: C Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 70) We currently live in a world in which there is capital mobility, meaning that A) foreigners can easily purchase American assets, and Americans can easily purchase foreign assets. B) both Americans and foreigners prefer dollar assets, regardless of expected returns. C) both Americans and foreigners prefer euro assets, regardless of expected returns. D) Americans can easily purchase foreign assets, while foreigners have a difficult time purchasing American assets. Answer: A Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition

71) The interest parity condition states that A) the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency. B) the domestic interest rate equals the foreign interest rate plus the expected appreciation of the foreign currency. C) Neither A nor B is correct. D) Both A and B are correct. Answer: D Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 15.2 True/False 1) The foreign exchange market is organized as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold. Answer: TRUE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 2) When the value of the dollar changes from 0.50 pounds to 0.75 pounds, the pound has appreciated and the dollar has depreciated. Answer: FALSE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 3) When the exchange rate for the euro changes from $0.90 to $0.85, then holding everything else constant, the euro has depreciated and American wheat sold in Germany becomes more expensive. Answer: TRUE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 4) If the dollar depreciates relative to the British pound, British sweaters will become more expensive in the United States. Answer: TRUE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 5) If the dollar appreciates relative to the Swiss franc, Swiss chocolate will become cheaper in the United States. Answer: TRUE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition

6) If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5 francs per dollar, the franc depreciates and the dollar appreciates. Answer: FALSE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 7) Depreciation of a currency makes it easier for domestic manufacturers to sell their goods abroad and makes foreign goods less competitive in domestic markets. Answer: TRUE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 8) There are two kinds of exchange rate transactions: spot transactions and forward transactions. Answer: TRUE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: Previous Edition 9) The purchase of $50,000 worth of euros is an example of a foreign exchange transaction. Answer: FALSE Topic: Chapter 15.1 The Foreign Exchange Market Question Status: New Question 10) The theory of purchasing power parity cannot fully explain exchange rate movements because fiscal policy differs across countries. Answer: FALSE Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 11) An increase in tariffs and quotas on imports causes a country's currency to appreciate. Answer: TRUE Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 12) From 1973 through 2016, the rise in the British price level relative to the U.S. price level is associated with a rise in the value of the dollar, as PPP predicts. Answer: TRUE Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: New Question 13) Increased demand for a country's exports causes its currency to depreciate. Answer: FALSE Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition

14) In the short run, the quantity of dollars supplied is relatively fixed, and is best represented with a vertical supply curve. Answer: TRUE Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 15) A fall in the expected future exchange rate shifts the expected return schedule for domestic deposits to the right and causes the domestic currency to depreciate. Answer: FALSE Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 16) As the relative expected return on dollar deposits increases, Americans will want to hold fewer dollar deposits and more foreign deposits. Answer: FALSE Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 17) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected appreciation of the foreign currency must be 2 percent. Answer: TRUE Topic: Chapter 15.A1 The Interest Parity Condition Question Status: Previous Edition 15.3 Essay 1) Explain why exchange rates are important, even to average citizens. Topic: Chapter 15.1 The Foreign Exchange Market Question Status: New Question 2) What is the difference between spot exchange rates and forward exchange rates? Topic: Chapter 15.1 The Foreign Exchange Market Question Status: New Question 3) Explain the logic underlying the law of one price and the theory of purchasing power parity. Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 4) Explain the theory of purchasing power parity. Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 5) What are some of the long-run determinants of the exchange rate? Topic: Chapter 15.2 Exchange Rates in the Long Run Question Status: Previous Edition 297 Copyright © 2018 Pearson Education, Inc.

6) Explain graphically how a change in the domestic price level will affect exchange rates, holding everything else constant. Topic: Chapter 15.3 Exchange Rates in the Short Run: A Supply and Demand Analysis Question Status: Previous Edition 7) Explain graphically how a change in the foreign interest rate will affect exchange rates. Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 8) Discuss the relationship between changes in domestic real and nominal interest rates and exchange rates. Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition 9) With the start of the financial crisis in August 2007, the dollar began an accelerated decline in value, falling by 9% against the euro. At that point, the financial crisis appeared to be a U.S. problem. However, by mid-2008, the crisis spread to Europe. Discuss the reaction of the dollar to actions taken by European central banks in late 2008 to deal with the widening financial crisis. Topic: Chapter 15.4 Explaining Changes in Exchange Rates Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 16 The International Financial System 16.1 Multiple Choice 1) A central bank sale of ________ to purchase ________ in the foreign exchange market results in an equal rise in its international reserves and the monetary base. A) foreign assets; domestic currency B) foreign assets; foreign currency C) domestic currency; foreign assets D) domestic currency; domestic currency Answer: C Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 2) A central bank sale of ________ to purchase ________ in the foreign exchange market results in an equal decline in its international reserves and the monetary base. A) foreign assets; domestic currency B) foreign assets; foreign currency C) domestic currency; foreign assets D) domestic currency; domestic currency Answer: A Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 3) A central bank ________ of domestic currency and corresponding ________ of foreign assets 298 Copyright © 2018 Pearson Education, Inc.

in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base. A) sale; purchase; decline B) sale; sale; increase C) purchase; sale; increase D) purchase; sale; decline Answer: D Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 4) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base. A) sale; purchase; increase B) sale; sale; decline C) purchase; sale; increase D) purchase; purchase; decline Answer: A Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 5) When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called A) a sterilized foreign exchange intervention. B) an unsterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money-neutral foreign exchange intervention. Answer: B Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 6) A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money-neutral foreign exchange intervention. Answer: B Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 7) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to A) a gain in international reserves. B) an increase in the money supply. C) an appreciation in the domestic currency. D) all of the above. 299 Copyright © 2018 Pearson Education, Inc.

E) only A and B of the above. Answer: E Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 8) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to A) a gain in international reserves. B) a decrease in the money supply. C) an appreciation in the domestic currency. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition

9) A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply. A) sale; decrease B) purchase; decrease C) sale; increase D) purchase; increase Answer: D Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 10) A Federal Reserve decision to purchase dollars by selling foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply. A) sale; decrease B) purchase; decrease C) sale; increase D) purchase; increase Answer: A Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 11) Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention A) causes the exchange rate to overshoot in the short run. B) causes the exchange rate to undershoot in the short run. C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate in the long run. D) has no effect on the exchange rate. Answer: D Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 12) Because sterilized interventions mean offsetting open market operations, A) there is no impact on the monetary base. B) there is no impact on the money supply. C) there is no effect on the exchange rate. D) all of the above occur. E) only A and B of the above occur. Answer: D Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition

13) The difference between merchandise exports and imports is called the A) current account balance. B) capital account balance. C) balance of payments. D) trade balance. Answer: D Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 14) A current account ________ indicates that the United States is ________ its claims on foreign wealth. A) surplus; increasing B) surplus; decreasing C) deficit; increasing D) balance; decreasing Answer: A Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 15) A current account ________ indicates that the United States is ________ its claims on foreign wealth. A) deficit; decreasing B) deficit; increasing C) surplus; decreasing D) balance; increasing Answer: A Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 16) The United States exports more services than it imports, by $262 billion. Net exports has a deficit of $500 billion, versus a merchandise trade ________ of ________ billion. A) deficit; $238 B) deficit; $762 C) surplus; $762 D) surplus; $238 Answer: B Topic: Chapter 16.2 Balance of Payments Question Status: New Question

17) Holding other factors constant, which of the following would decrease the size of the U.S. current account deficit? A) An increase in the amount of services purchased from foreigners B) An increase in the amount of goods purchases from foreigners C) An increase in the amount of goods sold to foreigners D) Only A and B of the above Answer: C Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 18) Holding other factors constant, which of the following would increase the size of the U.S. current account deficit? A) Sales of U.S. farm products in Europe B) Visits by European tourists to the United States C) Increasing travel by American college students in Europe D) Both A and B of the above Answer: C Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 19) The current account balance plus the capital account balance equals A) the amount of unsterilized exchange market intervention. B) the trade balance. C) the net change in government international reserves. D) both A and C of the above. Answer: C Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 20) If the current account balance shows a surplus, and capital account receipts exceed capital account payments, then the net change in government international reserves must be ________, indicating a(n) ________ in U.S. international reserves. A) positive; increase B) negative; increase C) negative; decrease D) positive; decrease Answer: A Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition

21) Which of the following statements is correct? A) Current account balance = capital account balance B) Current account balance = capital account balance + net change in government international reserves C) Current account balance + capital account balance = net change in government international reserves D) Current account balance + net change in government international reserves = capital account balance Answer: C Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 22) For which of the following reasons does the current account deficit worry economists? A) It indicates that foreigners' demand for U.S. exports is far less than Americans' demand for imports. B) It means that foreigners' claims on U.S. assets are shrinking. C) Americans greater preference for dollar assets relative to foreigners results in the movement of American wealth to foreigners, which could increase the demand for dollar assets over time. D) All of the above are reasons that worry economists. Answer: A Topic: Chapter 16.2 Balance of Payments Question Status: New Question 23) A balance of payments ________ is associated with a ________ of international reserves. A) deficit; loss B) deficit; gain C) surplus; loss D) balance; gain Answer: A Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 24) A balance of payments ________ is associated with a ________ of international reserves. A) surplus; loss B) surplus; gain C) deficit; gain D) balance; loss Answer: B Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition

25) The official reserve transactions balance A) equals the current account balance plus the items in the capital account. B) tells us the net amount of international reserves that must move between central banks in order to finance international transactions. C) has an important impact on the money supply. D) is all of the above. Answer: D Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 26) Because other countries hold dollars as international reserves, a U.S. official reserve transactions deficit can be financed by A) an increase in U.S. international reserves. B) an increase in foreign holdings of dollars. C) a decrease in foreign holdings of dollars. D) only A and B of the above. Answer: B Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 27) When a reserve currency country runs a balance of payments deficit and a nonreserve currency country buys the reserve currency to finance the reserve country's deficits, the monetary base in the nonreserve country ________ and the monetary base in the reserve country ________. A) increases; decreases B) increases; does not change C) decreases; does not change D) decreases; increases Answer: B Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 28) The Bretton Woods system was one in which central banks A) agreed to limit domestic money growth to the average of the seven largest industrial nations. B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I. C) agreed to limit domestic money growth to the average of the five largest industrial nations. D) bought and sold their own currencies to keep their exchange rates fixed. Answer: D Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

29) The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties. A) IMF B) World Bank C) Central Settlements Bank D) Bank of International Settlements E) European Exchange Rate Mechanism (ERM) Answer: A Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 30) The Bretton Woods agreement set up the ________, which currently provides long-term loans to assist developing countries to build dams, roads, and other physical capital that contributes to economic development. A) International Monetary Fund B) World Bank C) Central Settlements Bank D) Bank of International Settlements E) European Exchange Rate Mechanism (ERM) Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 31) What kind of exchange rate system did the Bretton Woods agreement establish? A) Floating B) Managed float C) Dirty float D) Fixed Answer: D Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 32) In the Bretton Woods system, the anchor currency was the A) euro. B) British pound. C) German mark. D) U.S. dollar. Answer: D Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

33) Which of the following are true statements about the Bretton Woods system? A) The Bretton Woods system was a fixed exchange rate regime, in which central banks bought and sold their own currencies to keep their exchange rates fixed. B) To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the IMF would loan deficit countries international reserves contributed by other members. C) The German mark was called a reserve currency because it was used to denominate the securities central banks held as international reserves. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 34) Which of the following are true statements about the Bretton Woods system? A) The Bretton Woods system was a flexible exchange rate regime, in which central banks allowed their currencies to float within a wide trading band. B) The U.S. dollar was called a reserve currency because it was used to denominate the securities central banks held as international reserves. C) The Bretton Woods agreement broke down in 1945. D) Only A and B of the above are true. Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 35) A dirty float is A) when the value of a currency is pegged relative to the value of one other currency. B) when the value of a currency is allowed to fluctuate against all other currencies. C) when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets. D) when the value of a currency is pegged relative to an anchor currency. Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 36) Seigniorage is A) when a country abandons its currency altogether and adopts that of another country. B) when a country loses the revenue that it received by issuing money. C) when the par exchange rate is reset at a lower level. D) when the domestic currency is backed 100% by a foreign currency. Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

37) Under a fixed exchange rate regime, when the domestic currency is undervalued, the central bank must ________ the domestic currency to keep the exchange rate fixed; as a result, it ________ international reserves. A) purchase; gains B) sell; gains C) purchase; loses D) sell; loses Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 38) Under a fixed exchange rate regime, when the domestic currency is overvalued, the central bank must ________ the domestic currency to keep the exchange rate fixed; as a result, it ________ international reserves. A) purchase; loses B) sell; loses C) purchase; gains D) sell; gains Answer: A Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 39) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 40) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is ________ par, the central bank must intervene to buy the domestic currency by selling foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

41) If the domestic currency is initially undervalued, that is below par, the central bank must intervene to sell the ________ currency by purchasing ________ assets. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 42) If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 43) If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 44) If a country's central bank eventually runs out of international reserves, it cannot keep its currency from ________ and a ________ must occur in which the par exchange value is reset at a ________ level. A) appreciating; revaluation; higher B) depreciating; revaluation; higher C) depreciating; devaluation; lower D) appreciating; devaluation; lower Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

45) Depreciation of a currency occurs when A) a floating exchange rate adjusts upward. B) a floating exchange rate adjusts downward. C) a fixed exchange rate is adjusted upward. D) a fixed exchange rate is adjusted downward. Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 46) Policymakers may not want to see their country's currency appreciate because A) this would hurt consumers in their country by making foreign goods more expensive. B) this would hurt domestic businesses by making foreign goods cheaper in their country. C) this would increase inflation in their country. D) this would decrease the wealth of the country. Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 47) Under a managed float exchange rate regime, policymakers frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and contributes to inflation. A) foreign; foreign B) foreign; domestic C) domestic; foreign D) domestic; domestic Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 48) Revaluation of a currency's value occurs when A) a floating exchange rate adjusts upward. B) a floating exchange rate adjusts downward. C) a fixed exchange rate is adjusted upward. D) a fixed exchange rate is adjusted downward. Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 49) Which of the following policies is not part of the "policy trilemma"? A) Dollarization B) Free capital mobility C) Fixed exchange rate D) Independent monetary policy Answer: A Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 310 Copyright © 2018 Pearson Education, Inc.

50) Leading up to the foreign exchange crisis of September 1992, the Bank of England wanted to pursue a(n) ________ monetary policy and the German Bundesbank wanted to pursue a(n) ________ monetary policy. A) expansionary, expansionary B) expansionary; contractionary C) contractionary; expansionary D) contractionary; contractionary Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 51) When the Bundesbank lowered German mark interest rates in September 1992, A) there was a massive sell-off of German marks, requiring intervention to support the value of the mark. B) there was a massive sell-off of British pounds, requiring intervention to support the value of the pound. C) there was a gradual sell-off of German marks, which avoided the need for intervention to support the value of the mark. D) there was a gradual sell-off of British pounds, which avoided the need for intervention to support the value of the pound. Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 52) In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the A) appreciation of the mark. B) depreciation of the mark. C) revaluation of the dollar. D) the end of the Exchange Rate Mechanism. Answer: A Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 53) Under the Bretton Woods system, when a nonreserve-currency country was running a balance of payments deficit, A) it gained international reserves. B) it lost international reserves. C) it was necessary for the policymakers to implement a contractionary monetary policy. D) both A and C of the above occurred. E) both B and C of the above occurred. Answer: E Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

54) Under a fixed exchange rate system, A) an anchor country loses control over its monetary policy. B) a country that ties its currency to that of another country gains control of the other country's monetary policy. C) a country that ties its currency to that of another country loses control over its monetary policy. D) a country that ties its currency to that of another country acquires greater control over its monetary policy. Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 55) The euro is unlikely to seriously challenge the dollar as a reserve currency as long as A) the European Union's share of world GDP remains significantly smaller than that of the United States. B) the European Union's share of world exports remains significantly smaller than that of the United States. C) Europe neglects to integrate its financial markets. D) the European Union is unable to function as a cohesive political entity. Answer: D Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 56) Under dollarization, a country A) backs its currency 100 percent with foreign reserves. B) earns seigniorage because it no longer bears the cost of issuing its own currency. C) abandons its own currency and adopts the money of another country. D) must worry about a speculative attack on its currency. Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 57) A disadvantage of dollarization is that it A) prevents a central bank from creating inflation. B) avoids the possibility of a speculative attack on the domestic currency. C) does not allow a country to pursue its own independent monetary policy. D) is a strong commitment to exchange rate stability. Answer: C Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

58) (I) Controls on capital outflows may increase capital flight by weakening confidence in the government. (II) Controls on capital outflows are an inadequate substitute for financial reform to deal with currency crises. A) (I) is true; (II) false. B) (I) is false; (II) true. C) Both are true. D) Both are false. Answer: C Topic: Chapter 16.4 Capital Controls Question Status: Previous Edition 59) The most effective way to deal with currency crises is to A) impose controls on capital inflows. B) impose controls on capital outflows. C) impose controls on both capital inflows and outflows. D) improve bank regulation and supervision. Answer: D Topic: Chapter 16.4 Capital Controls Question Status: Previous Edition 60) The capital account describes the flow of capital between the United States and other countries. Capital inflows are A) American purchases of foreign assets. B) foreign purchases of American assets. C) both A and B of the above. D) neither A nor B of the above. Answer: B Topic: Chapter 16.4 Capital Controls Question Status: Previous Edition 61) Which of the following appears in the capital account part of the balance of payments? A) A gift to an American from his English aunt B) A purchase by the Honda corporation of a U.S. Treasury bill C) A purchase by the Bank of England of a U.S. Treasury bill D) Income earned by the Honda corporation on its automobile plant in Ohio Answer: B Topic: Chapter 16.4 Capital Controls Question Status: Previous Edition

62) Given the size of the statistical discrepancy needed to balance the balance of payments account, one can infer that A) hidden capital flows into the U.S. are inconsequential. B) items in the balance of payments are measured quite accurately. C) many international transactions go unrecorded. D) all of the above occur. Answer: C Topic: Chapter 16.4 Capital Controls Question Status: Previous Edition 63) According to the policy trilemma, a country cannot pursue the following three policies at the same time: A) (1) capital controls, (2) a floating exchange rate, and (3) a cross-dependent monetary policy. B) (1) free capital mobility, (2) a fixed exchange rate, and (3) an independent monetary policy. C) (1) capital controls, (2) a fixed exchange rate, and (3) an independent monetary policy. D) (1) free capital mobility, (2) a floating exchange rate, and (3) an independent monetary policy. Answer: B Topic: Chapter 16.4 Capital Controls Question Status: New Question 64) Many believe that the statistical discrepancy is primarily the result of A) large hidden capital flows into the United States. B) large hidden capital flows out of the United States. C) measurement errors due to exchange rate calculations. D) none of the above. Answer: A Topic: Chapter 16.4 Capital Controls Question Status: Previous Edition 65) An argument that supports the view that the world needs an international lender of last resort such as the IMF is that A) central banks in emerging-market countries lack credibility as inflation fighters. B) an international lender of last resort creates a safety net that protects bank depositors. C) the IMF is slow to lend, which ultimately reduces the amount that must be borrowed. D) the IMF imposes requirements that borrowing countries must enact microeconomic policies to reform their financial systems. Answer: A Topic: Chapter 16.5 The Role of the IMF Question Status: Previous Edition

66) The current account shows A) international transactions that involve currently produced goods and services. B) the flow of capital between the U.S. and other countries. C) payments between the U.S. and other countries. D) current IOUs of the U.S. Answer: A Topic: Chapter 16.A1 The Balance of Payments Account Question Status: Previous Edition 67) ________ is when the domestic currency is backed 100% by a foreign currency and in which the note-issuing authority establishes a fixed exchange rate to this foreign currency and stands ready to exchange domestic currency for the foreign currency at this rate whenever the public requests it. A) dollarization B) currency board C) devaluation D) revaluation Answer: B Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 68) Capital controls are rarely effective during a crisis because A) the private sector finds ingenious ways to evade them. B) capital flight has shown to increase after controls are put into place. C) controls on capital outflows often lead to corruption. D) All of the above are reasons capital controls are rarely effective. Answer: D Topic: Chapter 16.4 Capital Controls Question Status: New Question 69) The capital account describes A) international transactions that involve currently produced goods and services. B) the flow of capital between the U.S. and other countries. C) payments between the U.S. and other countries. D) current IOUs of the U.S. Answer: B Topic: Chapter 16.A1 The Balance of Payments Account Question Status: Previous Edition 70) What shows international transactions that involve currently produced goods and services? A) Current account B) Balance of payments C) Trade balance D) Capital account Answer: A Topic: Chapter 16.A1 The Balance of Payments Account Question Status: Previous Edition 315 Copyright © 2018 Pearson Education, Inc.

71) What is the bookkeeping system for recording all receipts and payments that have a direct bearing on the movement of funds between a nation and foreign countries? A) Current account B) Capital account C) Balance of payments D) Trade balance Answer: C Topic: Chapter 16.A1 The Balance of Payments Account Question Status: Previous Edition 72) The official reserve transactions balance is referred to as A) the capital account. B) the current account. C) the trade balance. D) the net change in government international reserves. Answer: D Topic: Chapter 16.A1 The Balance of Payments Account Question Status: Previous Edition 16.2 True/False 1) A Fed purchase of dollars and corresponding sale of foreign assets in the foreign exchange market leads to an equal decline in reserves (banks' deposits at the Fed) and in its international reserves. Answer: TRUE Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: New Question 2) An unsterilized intervention in which domestic currency is sold to purchase foreign assets leads to a gain in international reserves. Answer: TRUE Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 3) An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a rise in international reserves, a decrease in the money supply, and an appreciation of the domestic currency. Answer: FALSE Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 4) A sterilized intervention leaves the money supply changed and has a direct way of affecting interest rates or the expected future exchange rate. Answer: FALSE Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 316 Copyright © 2018 Pearson Education, Inc.

5) The difference between merchandise exports and imports is called the current account balance. Answer: FALSE Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 6) The current account shows international transactions that involve current flows of funds into and out of a country. Answer: TRUE Topic: Chapter 16.2 Balance of Payments Question Status: New Question 7) The current account balance plus the capital account balance equals the net change in government international reserves. Answer: TRUE Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 8) A central bank's international reserves are its holdings of assets denominated in foreign currencies. Answer: TRUE Topic: Chapter 16.2 Balance of Payments Question Status: Previous Edition 9) After World War II, the victors set up a fixed exchange rate system that became known as the Bretton Woods system, which remains in effect to this day. Answer: FALSE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: New Question 10) An anchor currency provides the base for a floating exchange rate system. Answer: FALSE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 11) In a fixed exchange rate system, a country whose currency is undervalued will lose international reserves. Answer: FALSE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 12) The Bretton Woods system was a fixed exchange rate regime in which central banks bought and sold their own currencies to keep their exchange rates fixed. Answer: TRUE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 317 Copyright © 2018 Pearson Education, Inc.

13) If a country's central bank eventually runs out of international reserves, it cannot keep its currency from depreciating and a devaluation must occur. Answer: TRUE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 14) A managed float regime is when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by buying and selling foreign assets. Answer: TRUE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 15) By the end of 2012, China had accumulated more than $3 trillion of international reserves. Answer: TRUE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 16) A country can't pursue the following three policies at the same time:(1) free capital mobility, (2) a floating exchange rate, and (3) an independent monetary policy. Answer: FALSE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: New Question 17) By the end of 2016, China had accumulated more than $3 trillion of international reserves. Answer: TRUE Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: New Question 18) Capital controls are seldom effective during a crisis because the private sector finds ingenious ways to evade them and has little difficulty moving funds out of the country. Answer: TRUE Topic: Chapter 16.4 Capital Controls Question Status: New Question 19) Although controls on capital outflows are often ineffective, controls on capital inflows generally work well. Answer: FALSE Topic: Chapter 16.4 Capital Controls Question Status: New Question 20) When it acts as a lender of last resort, the IMF may increase the likelihood that financial institutions take excessive risks and thus increase moral hazard. Answer: TRUE Topic: Chapter 16.5 The Role of the IMF Question Status: Previous Edition 318 Copyright © 2018 Pearson Education, Inc.

21) In contrast to other countries' currencies, the Japanese yen and yen-denominated assets are the major component of international reserves held by countries. Answer: FALSE Topic: Chapter 16.A1 The Balance of Payments Account Question Status: Previous Edition 16.3 Essay 1) How does a sterilized foreign exchange intervention differ from an unsterilized one in terms of its effects on the exchange rate, international reserves, and the monetary base? Topic: Chapter 16.1 Intervention if the Foreign Exchange Market Question Status: Previous Edition 2) What is the purpose of the balance of payments system? Topic: Chapter 16.2 Balance of Payments Question Status: New Question 3) How does a fixed exchange rate regime differ from a system of floating exchange rates? Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 4) Briefly explain what it means to be a "reserve-currency" country. What are the advantages? Can you think of any disadvantages? Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 5) What was the European Monetary System? How did its exchange rate mechanism work? Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 6) Explain graphically how a country must intervene in the foreign exchange market under a fixed exchange rate regime if its currency is undervalued. Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 7) Explain graphically the speculative attacks that occurred against the British pound in 1992, the Mexican peso in 1994, the Thai baht in 1997, the Brazilian real in 1999, and the Argentine peso in 2002. Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 8) By the end of 2012, China had accumulated more than $3 trillion of international reserves. How did China accomplish this? Is the policy sustainable? Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition

9) What is the policy trilemma as it relates to capital mobility, fixed/floating exchange rates, and monetary policy? Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 10) What features of the European Monetary Union caused problems during the global financial crisis? Topic: Chapter 16.3 Exchange Rate Regimes in the International Financial System Question Status: Previous Edition 11) Describe the pros and cons for controls on capital inflows and outflows. Topic: Chapter 16.4 Capital Controls Question Status: Previous Edition 12) What are the arguments for and against the IMF acting as an international lender of last resort? Topic: Chapter 16.5 The Role of the IMF Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 17 Banking and the Management of Financial Institutions 17.1 Multiple Choice 1) Which of the following statements is true? A) A bank's assets are its sources of funds. B) A bank's liabilities are its uses of funds. C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. D) All of the above are true. Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 2) Which of the following statements is true? A) A bank's assets are its uses of funds. B) A bank's assets are its sources of funds. C) A bank's liabilities are its uses of funds. D) Only B and C of the above are true. Answer: A Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 3) Which of the following statements is false? A) A bank's assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) A bank's assets provide the bank with income. D) Bank capital is an asset on the bank balance sheet. 320 Copyright © 2018 Pearson Education, Inc.

Answer: D Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 4) A bank's balance sheet A) shows that total assets equal total liabilities plus equity capital. B) lists sources and uses of bank funds. C) indicates whether or not the bank is profitable. D) does all of the above. E) does only A and B of the above. Answer: E Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition

5) Which of the following are reported as liabilities on a bank's balance sheet? A) Reserves B) Checkable deposits C) Loans D) Deposits with other banks Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 6) Which of the following are reported as liabilities on a bank's balance sheet? A) Discount loans B) Cash items in the process of collection C) State government securities D) All of the above E) Only B and C of the above Answer: A Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 7) The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960. Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 8) Checkable deposits and money market deposit accounts are A) payable on demand. B) liabilities of the banks. C) assets of the banks. D) only A and B of the above. E) only A and C of the above. Answer: D Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 9) Which of the following statements is false? A) Checkable deposits are usually the lowest-cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts. Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 322 Copyright © 2018 Pearson Education, Inc.

10) Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower Answer: D Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 11) Because passbook savings are ________ liquid for the depositor than checking accounts, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower Answer: A Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 12) Which of the following is checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Money market deposit accounts D) Certificates of deposit Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 13) Which of the following are not checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) All of the above E) Only A and B of the above Answer: E Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 14) Which of the following are checkable deposits? A) Savings accounts B) Small-denomination time deposits C) Negotiable order of withdrawal accounts D) Certificates of deposit Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 323 Copyright © 2018 Pearson Education, Inc.

15) Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 16) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 17) Which of the following would substitute for discount loans? A) Loans to businesses B) Repurchase agreements C) Investing in Eurodollars D) Loans to bank holding companies E) Reverse repurchase agreements Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 18) Which of the following are reported as assets on a bank's balance sheet? A) Discount loans from the Fed B) Loans C) Borrowings D) Only A and B of the above Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition

19) Which of the following are reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) Checkable deposits D) Bank capital E) Only A and B of the above Answer: E Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 20) Which of the following are reported as assets on a bank's balance sheet? A) Borrowings B) Reserves C) Savings deposits D) Bank capital E) Only A and B of the above Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 21) Which of the following are not reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Deposits with other banks C) U.S. Treasury securities D) Checkable deposits Answer: D Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 22) Which of the following are not reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Borrowings C) U.S. Treasury securities D) Reserves Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 23) Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 325 Copyright © 2018 Pearson Education, Inc.

24) Secondary reserves A) can be converted into cash with low transaction costs. B) are not easily converted into cash and are, therefore, of secondary importance to banks. C) count toward meeting required reserves, but only at a rate of $0.50 per dollar of secondary reserves. D) of none of the above. Answer: A Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 25) The most important category of assets on a bank's balance sheet is A) discount loans. B) securities. C) loans. D) cash items in the process of collection. Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 26) Which of the following bank assets are the least liquid? A) Reserves B) Mortgage loans C) Cash items in process of collection D) Deposits with other banks Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 27) Which of the following bank assets are the most liquid? A) Consumer loans B) Reserves C) Cash items in process of collection D) U.S. government securities Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 28) Loans A) are the largest category of bank assets. B) provide most of the bank's revenues. C) earn the highest return of all bank assets. D) do all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 326 Copyright © 2018 Pearson Education, Inc.

29) A bank's largest source of funds is its A) nontransaction deposits. B) checking deposits. C) borrowing from the Fed. D) federal funds. Answer: A Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 30) ________ were once the most common type of nontransaction deposit. A) Checking accounts B) Time deposits C) Savings accounts D) none of the above Answer: C Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 31) Discount loans are also known as ________. A) interest-free loans B) advances C) credits D) market loans Answer: B Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 32) Bank capital A) is raised by selling new equity. B) is a cushion against a drop in the value of its assets. C) comes from retained earnings. D) is all of the above. Answer: D Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 33) A bank A) obtains funds by borrowing and by issuing liabilities. B) makes profits by charging an interest rate on their asset holdings of securities and loans that is lower than the interest and other expenses on their liabilities. C) does both A and B of the above. D) does neither A nor B of the above. Answer: A Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 327 Copyright © 2018 Pearson Education, Inc.

34) Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities Answer: C Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 35) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free Answer: B Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 36) When you deposit $50 in the First National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves increase by $50. D) only B and C of the above occur. Answer: D Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 37) When you deposit $50 in the First National Bank, A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) only B and C of the above occur. Answer: B Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 38) When you deposit $50 in currency at the Old National Bank, A) its assets increase by $50. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities decrease by $50. D) only A and B of the above occur. Answer: A Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition

39) When you deposit $50 in currency at the Old National Bank, A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) only A and B of the above occur. Answer: C Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 40) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of the Second National Bank decrease by $10. D) the assets of Second National Bank decrease by $10. Answer: A Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 41) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the liabilities of the Second National Bank increase by $10. C) the reserves of the First National Bank increase by $10. D) all of the above occur. E) only A and B of the above occur. Answer: E Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 42) Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets increase by the amount of the check. C) bank liabilities decrease by the amount of the check. D) all of the above occur. Answer: A Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition

43) Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets remain unchanged. C) bank liabilities decrease by the amount of the check. D) all of the above occur. E) only A and B of the above occur. Answer: E Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 44) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $200,000. B) the liabilities of the bank increase by $200,000. C) reserves increase by $200,000. D) all of the above occur. Answer: C Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 45) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000. Answer: B Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 46) If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and $300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow of A) $50,000. B) $75,000. C) $150,000. D) either A or B of the above. Answer: D Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition

47) If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000. Answer: B Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 48) If a bank has $200,000 of deposits, a required reserve ratio of 20 percent, and $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000. Answer: A Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 49) If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) either A or B of the above. Answer: A Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 50) A bank manager has which of the following concerns? A) To acquire funds at low cost B) To minimize risk by diversifying asset holdings C) To have enough ready cash to meet deposit outflows D) All of the above Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition

51) Which of the following are primary concerns of a bank manager? A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) Extending loans to borrowers who will pay high interest rates, but who are also good credit risks C) Acquiring funds at a relatively low cost, so that profitable lending opportunities can be realized D) All of the above Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 52) Bankers' concern regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) managing interest-rate risk. D) none of the above. Answer: B Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 53) Banks can protect themselves from the disruption caused by deposit outflows by A) holding excess reserves. B) selling securities. C) "calling in" loans. D) doing all of the above. E) doing only A and B of the above. Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 54) In general, banks would prefer to meet deposit outflows by ________ rather than ________. A) selling loans; selling securities B) selling loans; borrowing from the Fed C) borrowing from the Fed; selling loans D) "calling in" loans; selling securities Answer: C Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition

55) Which of the following do banks hold as insurance against the high cost of deposit outflows? A) Excess reserves B) Secondary reserves C) Bank equity capital D) All of the above E) Only A and B of the above Answer: A Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 56) Which is the least costly way for a bank to handle deposit outflows? A) Hold excess reserves. B) Borrow from other banks. C) Sell securities. D) Call in loans. Answer: A Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 57) The ________ the costs associated with deposit outflows are, the ________ excess reserves banks will want to hold. A) lower; more B) higher; less C) higher; more D) none of the above, since deposit outflows cannot be anticipated Answer: C Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 58) A bank can reduce its total amount of loans outstanding by A) "calling in" loans; that is, by not renewing some loans when they come due. B) selling loans to other banks. C) selling loans to the Federal Reserve. D) doing all of the above. E) doing only A and B of the above. Answer: E Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition

59) Which of the following statements is an accurate description of modern liability management? A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans. B) New financial instruments enable banks to acquire funds quickly. C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans. D) All of the above have occurred since 1960. E) Only A and B of the above have occurred since 1960. Answer: E Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 60) Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) assets; liabilities D) income; expenses Answer: C Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 61) A bank fails when the value of its ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) securities; deposit liabilities D) assets; liabilities Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 62) Bank failure is less likely to occur when a bank A) holds less in U.S. government securities. B) suffers large deposit outflows. C) holds more excess reserves. D) has less bank capital. Answer: C Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition

63) A bank failure is more likely to occur when A) a bank holds less in U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds less equity capital. D) all of the above occur. E) only A and B of the above occur. Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 64) The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier. E) return on equity. Answer: C Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 65) For a given return on assets, the lower the bank capital is, A) the lower the return for the owners of the bank will be. B) the higher the return for the owners of the bank will be. C) the lower the credit risk for the owners of the bank will be. D) both A and C of the above will happen. Answer: B Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 66) In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital, increasing the return on equity. D) none of the above. Answer: C Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 67) An argument that supports a regulated minimum capital requirement is that banks that hold too little capital A) are unprofitable. B) impose costs on other banks because they are more likely to fail. C) have an unfair competitive advantage over savings and loans. D) includes all of the above. Answer: B Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 335 Copyright © 2018 Pearson Education, Inc.

68) Before the 1960s, A) over half of the sources of bank funds were obtained through checkable deposits that by law could not pay any interest. B) banks mostly borrowed from other banks to meet their reserve needs. C) both A and B occurred. D) neither A nor B occurred. Answer: A Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 69) With large banks beginning to explore ways in which the liabilities on their balance sheets could provide them with reserves and liquidity, this led to A) the expansion of overnight loan markets. B) the development of negotiable CDs. C) the ability of money center banks to acquire funds quickly. D) all of the above occurring. Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 70) In the late 1960s, A) money market banks no longer needed to depend on checkable deposits as the primary source of bank funds. B) banks aggressively set target goals for their asset growth. C) the new management of liabilities created more flexibility. D) all of the above. Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 71) As a source of bank funds, checkable deposits have decreased in importance, from 61% of bank liabilities in 1960 to ________ in 2016. A) 45% B) 39% C) 23% D) 10% Answer: D Topic: Chapter 17.3 General Principles of Bank Management Question Status: New Question

72) As a source of bank funds, negotiable CDs and bank borrowings have greatly increased in importance, rising from 2% of bank liabilities in 1960 to ________ in 2016. A) 45% B) 39% C) 23% D) 10% Answer: C Topic: Chapter 17.3 General Principles of Bank Management Question Status: New Question 73) Examples of off-balance-sheet activities include A) loan sales. B) foreign exchange market transactions. C) trading in financial futures. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition 74) Examples of off-balance-sheet activities include A) loan sales. B) extending loans to depositors. C) borrowing from other banks. D) all of the above. Answer: A Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition 75) The danger of banks engaging in activities such as trading in financial futures and interestrate swaps is that these activities allow banks to A) increase profits. B) decrease risks. C) avoid bank regulations. D) engage in speculation. Answer: D Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition

76) When a bank sells all or part of the cash stream from a specific loan, A) it removes the loan from its balance sheet. B) it usually does so at a loss. C) it usually does so at a profit. D) both A and B of the above occur. E) both A and C of the above occur. Answer: E Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition 77) In 2009 provisions for loan losses reached a peak of ________ of total operating expenses. A) 60% B) 50% C) 33% D) 13% Answer: C Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 78) In 2015, provisions for loan losses were ________ of total operating expenses for all federally insured commercial banks. A) 12% B) 10% C) 3.3% D) 7.4% Answer: D Topic: Chapter 17.5 Measuring Bank Performance Question Status: New Question 79) In 2015, operating income totalled ________ for all federally insured commercial banks. A) $5.6 billion B) $231 billion C) $50 billion D) $1.2 trillion Answer: B Topic: Chapter 17.5 Measuring Bank Performance Question Status: New Question 80) A bank has an ROA of 1% and an ROE of 9%. What is the equity multiplier for the bank? A) 9 B) 8% C) 9% D) 8 Answer: A Topic: Chapter 17.5 Measuring Bank Performance Question Status: New Question 338 Copyright © 2018 Pearson Education, Inc.

81) A bank has an ROA of 1% and an equity multiplier of 9. What is the ROE for the bank? A) 9 B) 8% C) 9% D) 8 Answer: C Topic: Chapter 17.5 Measuring Bank Performance Question Status: New Question 82) The largest source of bank income is A) interest on loans. B) interest on securities. C) service charges on deposit accounts. D) noninterest income. Answer: A Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 83) The largest operating expense for a bank is A) salaries and employee benefits. B) interest paid on discount loans. C) interest paid on federal funds borrowed from other banks. D) interest paid on deposits. Answer: D Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 84) On a bank's income statement, the provision for loan losses is an ________ item and represents the amount of ________ in the bank's loan loss reserves. A) income; decrease B) income; increase C) expense; decrease D) expense; increase Answer: D Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 85) On a bank's income statement, the amount available to keep as retained earnings or pay to the stockholders in dividends is the bank's A) net income. B) net operating income. C) net extraordinary items. D) net interest margin. Answer: A Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 339 Copyright © 2018 Pearson Education, Inc.

86) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on assets. B) return after taxes. C) return on equity. D) equity multiplier. Answer: C Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 87) Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return after taxes. Answer: A Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 88) In 2003, the average ROE for all federally insured institutions was nearly 15%. As of the end of 2015, the average ROE was closer to A) 9%. B) 12%. C) 18%. D) 21%. Answer: A Topic: Chapter 17.5 Measuring Bank Performance Question Status: New Question 17.2 True/False 1) Since their introduction in 1961, negotiable CDs have become an important source of bank funds. Answer: TRUE Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 2) Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves. Answer: FALSE Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 3) When a bank receives additional deposits, it gains an equal amount of reserves; when it loses deposits, it loses an equal amount of reserves. Answer: TRUE Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 340 Copyright © 2018 Pearson Education, Inc.

4) Loan loss reserves are an asset on a bank's balance sheet. Answer: FALSE Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 5) Nontransaction deposits are the primary source of bank funds. Answer: TRUE Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 6) Owners cannot write checks on nontransaction deposits, but the interest rate paid on these deposits are usually higher than those on checkable deposits. Answer: TRUE Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 7) The process by which banks make profits by selling liabilities with one set of characteristics and using the proceeds to buy assets with a different set of characteristics is referred to as asset transformation. Answer: TRUE Topic: Chapter 17.2 Basic Banking Question Status: New Question 8) When a bank receives additional deposits, it loses an equal amount of reserves. Answer: FALSE Topic: Chapter 17.2 Basic Banking Question Status: New Question 9) To keep enough cash on hand to meet depositors' demand for withdrawals, banks must engage in liquidity management. Answer: TRUE Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 10) If a bank has ample excess reserves, a deposit outflow does not necessitate changes other parts of its balance sheet. Answer: TRUE Topic: Chapter 17.3 General Principles of Bank Management Question Status: New Question 11) Required reserves are insurance against the costs associated with deposit outflows. The higher the costs associated with deposit outflows, the more required reserves banks will want to hold. Answer: FALSE Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 341 Copyright © 2018 Pearson Education, Inc.

12) A bank maintains bank capital to lessen the chance that it will become insolvent. Answer: TRUE Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 13) A basic measure of bank profitability is the equity multiplier. Answer: FALSE Topic: Chapter 17.3 General Principles of Bank Management Question Status: New Question 14) Given the return on assets, the lower the bank capital, the higher the return for the owners of the bank. Answer: TRUE Topic: Chapter 17.3 General Principles of Bank Management Question Status: New Question 15) Off-balance-sheet activities consist of trading financial instruments and generating income from fees and loan sales, all of which affect bank profits but are not visible on bank balance sheets. Answer: TRUE Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition 16) A loan commitment is an agreement to provide a loan up to a certain dollar amount if a customer requests the loan during a specific time period. Answer: TRUE Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition 17) The share of bank operating income earned from off-balance-sheet activities has increased over the past two decades. Answer: TRUE Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition 18) Given a bank's return on assets, the higher the bank capital, the higher the return for the owners of the bank. Answer: FALSE Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 19) The value-at-risk method for estimating a bank's risk exposure measures the losses a bank could incur under a worst-case scenario. Answer: FALSE Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 342 Copyright © 2018 Pearson Education, Inc.

20) Since a bank's assets exceed its equity capital, the return on assets always exceeds the return on equity. Answer: FALSE Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition 17.3 Essay 1) Distinguish between a bank's reserves, required reserves, excess reserves, and secondary reserves. Topic: Chapter 17.1 The Bank Balance Sheet Question Status: Previous Edition 2) List various items on a commercial bank balance sheet. Topic: Chapter 17.1 The Bank Balance Sheet Question Status: New Question 3) What are a bank's major sources and uses of funds? Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 4) What costs do banks hope to avoid by holding excess reserves? Topic: Chapter 17.2 Basic Banking Question Status: Previous Edition 5) What is the major focus of each of the following bank management concerns: asset management, liability management, liquidity management, and capital adequacy management? Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 6) How did liability management change during the 1960s? Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 7) Explain how a capital crunch can lead to a credit crunch in our economy. Topic: Chapter 17.3 General Principles of Bank Management Question Status: Previous Edition 8) Explain the off-balance-sheet activities banks engage in, the risks they face from undertaking these activities, and the controls they put in place to restrict bank employees from taking on too much risk. Topic: Chapter 17.4 Off-Balance-Sheet Activities Question Status: Previous Edition

9) Discuss the recent trends in bank performance measures. Topic: Chapter 17.5 Measuring Bank Performance Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 18 Financial Regulation 18.1 Multiple Choice 1) During the boom years of the 1920s, bank failures were quite A) uncommon, averaging less than 30 per year. B) uncommon, averaging less than 100 per year. C) common, averaging about 600 per year. D) common, averaging about 2,000 per year. Answer: C Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 2) When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) precontractual opportunism. Answer: A Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 3) Moral hazard is an important consequence of insurance arrangements because the existence of insurance A) provides increased incentives for risk taking. B) impedes efficient risk taking. C) causes the private cost of the insured activity to increase. D) does both A and B of the above. E) does both B and C of the above. Answer: A Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 4) The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A) are likely to take on greater risks than they otherwise would. B) are likely to be too conservative, reducing the probability of turning a profit. C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. D) are placed at a competitive disadvantage in acquiring funds. Answer: A 344 Copyright © 2018 Pearson Education, Inc.

Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition

5) Although the FDIC was created to prevent bank failures, its existence encourages banks to A) take too much risk. B) hold too much capital. C) open too many branches. D) buy too much stock. Answer: A Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 6) Research at the World Bank has found that, on average, the adoption of explicit government deposit insurance is associated with ________ banking sector stability and a ________ incidence of banking crises. A) less; higher B) higher; lower C) less; lower D) higher; higher Answer: A Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: New Question 7) When bad drivers line up to purchase collision insurance, automobile insurers are subject to the A) moral hazard problem. B) adverse selection problem. C) assigned risk problem. D) ill queue problem. Answer: B Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 8) Just prior to the global financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan? A) A loan issued by a Japanese bank, thus avoiding U.S. regulation. B) A loan document originated by a mortgage banker named Bruce Lee. C) A loan issued to borrowers with no income, employment, nor assets to speak of. D) A loan issued with a "martial arts" clause. Answer: C Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition

9) Deposit insurance A) attracts risk-prone entrepreneurs to the banking industry. B) encourages bank managers to take on greater risks than they otherwise would. C) reduces the incentives of depositors to monitor the riskiness of their banks' asset portfolios. D) does all of the above. E) does only A and B of the above. Answer: D Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 10) The possibility that the failure of one bank can hasten the failure of other banks is called the A) bank run effect. B) moral hazard effect. C) contagion effect. D) adverse selection effect. Answer: C Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 11) If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no Answer: D Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 12) If the FDIC uses the purchase and assumption method to handle a failed bank, A) all deposits will suffer losses. B) small deposits will be paid in full but deposits over the insurance limit will not. C) all deposits will be paid in full. D) none of the above will occur. Answer: C Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 13) One problem of the too-big-to-fail policy is that it ________ the incentives for ________ by big banks. A) reduces; moral hazard by big banks B) increases; moral hazard by big banks C) reduces; adverse selection by big banks D) increases; adverse selection by big banks Answer: B Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 347 Copyright © 2018 Pearson Education, Inc.

14) The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. A) small; fewer B) small; greater C) large; fewer D) large; greater Answer: D Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 15) The too-big-to-fail policy A) exacerbates moral hazard problems. B) puts large banks at a competitive disadvantage in attracting large deposits. C) treats large depositors of small banks inequitably when compared to depositors of large banks. D) does only A and C of the above. Answer: D Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 16) The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. C) is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) does both A and B of the above. E) does both B and C of the above. Answer: B Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition

17) The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC A) guarantees all deposits, not just those under the $250,000 limit, when it uses the "payoff" method. B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. C) is less likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) does both A and B of the above. E) does both B and C of the above. Answer: E Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 18) Regulators attempt to reduce the riskiness of banks' asset portfolios by A) limiting the amount of loans in particular categories or to individual borrowers. B) prohibiting banks from holding risky assets such as common stocks. C) establishing a minimum interest rate floor that banks can earn on certain assets. D) doing all of the above. E) doing only A and B of the above. Answer: E Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 19) One way for bank regulators to assure depositors that a bank is not taking on too much risk is to require the bank to A) diversify its loan portfolio. B) reduce its equity capital. C) reduce the size of its loan portfolio. D) do both A and B of the above. E) do both B and C of the above. Answer: A Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 20) Banks do not want to hold too much capital because A) they do not bear fully the costs of bank failures. B) higher returns on equity are earned when bank capital is smaller, all else equal. C) higher capital levels attract the scrutiny of regulators. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition

21) When regulators engage in microprudential regulation, they focus on A) the safety and soundness of individual financial institutions. B) the credit standards of individual loans. C) the safety and soundness of each customer of a financial institution. D) the safety and soundness of each asset the financial institution holds. Answer: A Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 22) When regulators engage in macroprudential regulation, they focus on A) the safety and soundness of the entire financial institution. B) the credit standards of all loans held by the financial institution. C) the safety and soundness of the financial system in aggregate. D) the safety and soundness of each liability of the financial institution. Answer: C Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 23) The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to A) standardize bank capital requirements internationally. B) reduce, across the board, bank capital requirements in all countries. C) sever the link between risk and capital requirements. D) do all of the above. Answer: A Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 24) Under the Basel plan, A) assets and off-balance sheet activities are assigned to various categories to reflect the degree of credit risk. B) a bank's total capital must equal or exceed 8 percent of total risk-weighted assets. C) both of the above occur. D) none of the above occur. Answer: C Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 25) Of the following assets, the one which has the highest capital requirement under the Basel Accord is A) municipal bonds. B) residential mortgages. C) commercial paper. D) securities issued by industrialized countries' governments. Answer: C Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 350 Copyright © 2018 Pearson Education, Inc.

26) An SIV, or structured investment vehicle, is an off-balance-sheet entity that shields a sponsoring institution from risk. What happened to some of these SIVs when they ran into financial problems? A) The SIV sued the sponsoring institution to pay, in full, all liabilities of the SIV. B) The SIV still remained off-balance-sheet, but investors did sue sponsoring institutions. C) Nothing! The SIV status as off-balance-sheet remained, a nice example of a financial structure that worked during the financial crisis. D) Troubled SIVs became an asset of the sponsoring institution — the off-balance-sheet status was meaningless. Answer: D Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 27) What role did the credit-rating agencies play leading up to the start of the financial crisis in 2007? A) Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout the financial system. B) The credit-rating agencies were the first to see signs of trouble, and they developed more stringent standards as the housing bubble evolved. C) Solid ratings provided by credit-rating agencies helped limit risk taking throughout the financial system. D) The credit-rating agencies were largely uninvolved with the financial crisis. Answer: A Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 28) Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord? A) It attempts to link capital requirements more closely to actual risk by expanding the number of risk categories. B) It focuses on assessing the quality of risk management in banking institutions. C) It attempts to improve market discipline by requiring increased disclosure of pertinent information about banks. D) It has been well received by banks and national regulatory agencies. Answer: D Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition

29) Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include A) a chartering process designed to prevent crooks from getting control of a bank. B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. C) high bank capital requirements to increase the cost of bank failure to the owners. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 30) The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard Answer: B Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 31) The chartering process is especially designed to deal with the ________ problem, and restrictions on asset holdings help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard Answer: B Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 32) Regular bank examinations and restrictions on asset holdings indirectly help to reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry. A) moral hazard B) adverse selection C) ex post shirking D) post-contractual opportunism Answer: B Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition

33) Regular bank examinations and restrictions on asset holdings indirectly help to ________ the adverse selection problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be ________ from entering the banking industry. A) increase; encouraged B) increase; discouraged C) reduce; encouraged D) reduce; discouraged Answer: D Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 34) The legislation that separated commercial banking from the securities industry is known as the A) National Bank Act. B) Federal Reserve Act. C) Glass-Steagall Act. D) McFadden Act. Answer: C Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 35) The Depository Institutions Deregulation and Monetary Control Act of 1980 A) approved NOW accounts nationwide. B) restricted the use of ATS accounts. C) imposed interest rate ceilings on bank loans. D) did all of the above. Answer: A Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 36) The Depository Institutions Deregulation and Monetary Control Act of 1980 A) approved NOW accounts nationwide. B) imposed uniform reserve requirements. C) mandated the phase out of interest-rate ceilings on deposits. D) did all of the above. E) did only A and B of the above. Answer: D Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition

37) As a way of stemming the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed A) money market certificates. B) money market mutual funds. C) money market deposit accounts. D) negotiable order of withdrawal accounts. Answer: C Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 38) An impact of the Garn-St. Germain Act of 1982 has been to A) put savings and loans at a competitive disadvantage. B) make the banking system more competitive. C) give money market mutual funds a competitive advantage. D) do both A and B of the above. E) do both A and C of the above. Answer: B Topic: Chapter 18.2 Types of Financial Regulation Question Status: Previous Edition 39) Although banking crisis throughout the world are similar, one big difference between other countries and the U.S. is that ________ did not play a large role. A) credit B) risk-taking C) deposit insurance D) financial liberalization Answer: C Topic: Chapter 18.3 Banking Crises Throughout the World in Recent Years Question Status: New Question 40) The cost of rescuing banks in Indonesia tops the list in terms of cost as a percentage of GDP. Rescuing banks following the crisis in 1997-2001 cost ________ of Indonesia's GDP. A) 30% B) 57% C) 75% D) 110% Answer: B Topic: Chapter 18.3 Banking Crises Throughout the World in Recent Years Question Status: New Question

41) A common element to all the banking crisis in countries discussed is the existence of A) strict capital requirements. B) some type of deposit insurance. C) strong government regulation. D) a government safety net. Answer: D Topic: Chapter 18.3 Banking Crises Throughout the World in Recent Years Question Status: New Question 42) Which of the following categories is not part of the Dodd-Frank legislation of 2010? A) capital requirements B) consumer protection C) "Volcker Rule" D) derivatives Answer: A Topic: Chapter 18.4 The Dodd-Frank Bill, Wall Street Reform and Consumer Protection Act of 2010 Question Status: Previous Edition 43) In an effort to control the use of derivatives by financial institutions, the Dodd-Frank legislation of 2010 requires A) standardized derivatives products. B) over-the-counter trading (instead of exchange trading) of derivatives products. C) an increase in counterparty risk. D) all of the above. Answer: A Topic: Chapter 18.4 The Dodd-Frank Bill, Wall Street Reform and Consumer Protection Act of 2010 Question Status: Previous Edition 44) If a financial firm is deemed ________, it poses a risk to the overall financial system because its failure would cause widespread damage. A) financially important B) systematic C) systemic D) too-big Answer: C Topic: Chapter 18.4 The Dodd-Frank Bill, Wall Street Reform and Consumer Protection Act of 2010 Question Status: New Question

45) The Dodd-Frank bill requires many standardized derivative products ________ to reduce the risk of losses. A) to be held off-balance-sheet B) to be banned C) to be sold monthly D) to be traded on exchanges and cleared through clearinghouses Answer: D Topic: Chapter 18.4 The Dodd-Frank Bill, Wall Street Reform and Consumer Protection Act of 2010 Question Status: New Question 46) Which of the following is least likely to accompany financial consolidation and the development of large, complex banking organizations? A) More financial institutions will be considered too big to fail. B) The government safety net will be extended to include nonbanking activities. C) Moral hazard problems will become less important. D) Banks will have greater incentives and opportunities to take on more risk. Answer: C Topic: Chapter 18.5 Too-big-to-fail and Future Regulation Question Status: Previous Edition 47) Which of the following solutions have been proposed to solve the too-big-to-fail problem? A) Break up large, systemically important financial institutions. B) Impose higher capital requirements on large, systemically important financial institutions. C) Do nothing, since Dodd-Frank effectively eliminated the problem. D) All of the above have been proposed. Answer: D Topic: Chapter 18.5 Too-big-to-fail and Future Regulation Question Status: Previous Edition 48) Some view that Dodd-Frank eliminated the too-big-to-fail problem. How did it achieve this? A) By making it harder for the Federal Reserve to bail out financial institutions B) By eliminating the Volcker rule C) By reducing the regulation of SIFIs D) All of the above. Answer: A Topic: Chapter 18.5 Too-big-to-fail and Future Regulation Question Status: Previous Edition

49) World Bank research on the effects of deposit insurance concludes that A) adoption of deposit insurance will promote stability and efficiency in the banking systems of emerging-market economies. B) adoption of explicit government deposit insurance is associated with a higher incidence of banking crises. C) adoption of deposit insurance has the greatest benefits in countries that have weaker institutional environments. D) none of the above are true. Answer: B Topic: Chapter 18.A1 Banking Crises Throughout the World Question Status: Previous Edition 50) What accounts for the problems facing China's four largest banks? A) Large loans to inefficient, state-owned enterprises B) Closing of unprofitable branches and laying off unproductive employees C) Selling shares in the bank overseas to raise capital D) All of the above Answer: A Topic: Chapter 18.A1 Banking Crises Throughout the World Question Status: Previous Edition 18.2 True/False 1) To understand banking regulation in the United States, it is helpful to understand the concepts of asymmetric information, adverse selection, and moral hazard. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 2) Because asymmetric information problems in the banking industry are a fact of life throughout the world, bank regulation in other countries is similar to that in the United States. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 3) The failure of one bank can hasten the failure of others in what is referred to as a contagion effect. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 4) To be classified as a well-capitalized bank, a bank's leverage ratio must exceed 8 percent. Answer: FALSE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition

5) Once a bank has been chartered, it is required to file periodic call reports that reveal the bank's assets and liabilities, income, ownership, and other details. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 6) "Truth in lending" was mandated under the Consumer Protection Act of 1969 and requires all lenders to reveal the annual percentage rate, or APR, on loans. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 7) Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 8) According to some economists, Congress made a mistake when it passed the FDICIA of not requiring the FDIC to assess risk-based insurance premiums. Answer: FALSE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 9) The "too-big-to-fail" policy reduces the adverse selection problem in bank regulation. Answer: FALSE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 10) A better capitalized bank has more to lose when it fails and is less likely to take less risk. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 11) When the payoff method is used to resolve a failed bank, both large and small depositors are protected from suffering losses. Answer: FALSE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 12) In the years just prior to the global financial crisis, mortgage loans were issued to borrowers with no income or employment. Answer: TRUE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition

13) Bank failures in the U.S. have spiked only twice: in the 1930s and around 2010. Answer: FALSE Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: New Question 14) In the absence of a government safety net, financial institutions have little incentive to take on too much risk. Answer: FALSE Topic: Chapter 18.2 Types of Financial Regulation Question Status: New Question 15) Limitations of the Basel Accord became apparent because the regulatory measure of bank risk as stipulated by the risk weights differed substantially from the actual risk the bank faced. Answer: TRUE Topic: Chapter 18.2 Types of Financial Regulation Question Status: New Question 16) Rescuing Indonesia from a banking crisis tops the list in term of costs relative to GDP at 57%. Answer: TRUE Topic: Chapter 18.3 Banking Crises Throughout the World in Recent Years Question Status: New Question 17) The Dodd-Frank legislation of 2010 finally resolved the status of GSEs such as Freddie Mac. Answer: FALSE Topic: Chapter 18.4 The Dodd-Frank Bill, Wall Street Reform and Consumer Protection Act of 2010 Question Status: Previous Edition 18) Prior to the global financial crisis, inaccurate ratings provided by credit rating agencies helped promote risk taking throughout the financial system. Answer: TRUE Topic: Chapter 18.5 Too-big-to-fail and Future Regulation Question Status: Previous Edition 18.3 Essay 1) What is the asymmetric information problem and how does it contribute to our understanding of the structure of bank regulation in the United States and other countries? Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 2) Why does the safety net created by deposit insurance increase the adverse selection and moral hazard problems in banking? How do bank regulations attempt to overcome these problems? Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 359 Copyright © 2018 Pearson Education, Inc.

3) How can we change the way the credit-rating system works to avoid the problems encountered with ratings prior to the Global Financial Crisis? Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 4) Describe the difference between macroprudential and microprudential regulation. Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 5) Discuss some of the problems of Basel 2 that the global financial crisis revealed. Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 6) Discuss the role of mark-to-market accounting during the global financial crisis. Did it help or hurt credit markets and bank lending? Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 7) Discuss the role of NINJA loans in the global financial crisis. Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 8) Why is international financial regulation becoming more important in recent years? Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 9) Describe the CAMELS rating system used by bank examiners. Topic: Chapter 18.1 Asymmetric Information as a Rationale for Financial Regulation Question Status: Previous Edition 10) Discuss the various types of financial regulation and how they are implemented. Topic: Chapter 18.2 Types of Financial Regulation Question Status: New Question 11) What do we learn about the causes of banking crises by comparing crises throughout the world to those that have occurred in the United States? Topic: Chapter 18.3 Banking Crises Throughout the World in Recent Years Question Status: Previous Edition 12) Describe 2 of the 5 different categories of regulation found in the Dodd-Frank legislation of 2010. Topic: Chapter 18.4 The Dodd-Frank Bill, Wall Street Reform and Consumer Protection Act of 2010 Question Status: Previous Edition

13) One way to avoid the too-big-to-fail problem with banks is to break-up large, systemically important financial institutions. What are the downsides to this solution? Topic: Chapter 18.5 Too-big-to-fail and Future Regulation Question Status: Previous Edition 14) How does Dodd-Frank claim to eliminate the too-big-to-fail problem? Topic: Chapter 18.5 Too-big-to-fail and Future Regulation Question Status: Previous Edition 15) Discuss some of the recent banking crises throughout the world. Topic: Chapter 18.A1 Banking Crises Throughout the World Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 19 Banking Industry: Structure and Competition 19.1 Multiple Choice 1) The modern commercial banking system began in America when the A) Bank of the United States was chartered in New York in 1801. B) Bank of North America was chartered in Philadelphia in 1782. C) Bank of the United States was chartered in Philadelphia in 1801. D) Bank of North America was chartered in New York in 1782. Answer: B Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 2) A major controversy involving the U.S. banking industry in its early years was A) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. B) whether the federal government or the states should charter banks. C) what percent of deposits banks should hold as fractional reserves. D) whether banks should be allowed to issue their own bank notes. Answer: B Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 3) The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the A) central bank. B) commercial bank. C) bank of settlement. D) Treasury Department. Answer: A Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 361 Copyright © 2018 Pearson Education, Inc.

4) Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the A) First Bank of the United States in 1812. B) Bank of North America in 1814. C) Second Bank of the United States in 1816. D) Federal Reserve System in 1813. Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition

5) The Second Bank of the United States was denied a new charter by A) President Andrew Jackson. B) Vice President John Calhoun. C) President Benjamin Harrison. D) President John Q. Adams. Answer: A Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 6) Before 1863, A) federally chartered banks had regulatory advantages not granted to state-chartered banks. B) the number of federally chartered banks grew at a much faster rate than at any other time since the end of the Civil War. C) banks acquired funds by issuing banknotes. D) the Federal Reserve System regulated only federally chartered banks. E) the Comptroller of the Currency regulated both state and federally chartered banks. Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 7) Before 1863, A) the Federal Reserve System regulated only federally chartered banks. B) the Comptroller of the Currency regulated both state and federally chartered banks. C) the number of federally chartered banks grew at a much faster rate than at any other time since the end of the Civil War. D) none of the above occurred. Answer: D Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 8) Although federal banking legislation in the 1860s attempted to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, these banks have been able to stay in business by A) issuing credit cards. B) ignoring the regulations. C) issuing deposits. D) branching into other states. Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition

9) The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of A) the National Bank Charter Amendments of 1918. B) the Glass-St. Germain Act of 1982. C) the National Bank Act of 1863. D) none of the above. Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 10) To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________. A) National Banking Act of 1863; Office of the Comptroller of the Currency B) Federal Reserve Act of 1863; Office of the Comptroller of the Currency C) National Banking Act of 1863; Office of Thrift Supervision D) Federal Reserve Act of 1863; Office of Thrift Supervision Answer: A Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 11) The National Banking Act of 1863, and subsequent amendments to it, A) created a banking system of federally chartered banks. B) established the Office of the Comptroller of the Currency. C) broadened the regulatory powers of the Federal Reserve. D) did all of the above. E) did only A and B of the above. Answer: E Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 12) The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a A) bilateral regulatory system. B) tiered regulatory system. C) two-tiered regulatory system. D) dual banking system. Answer: D Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition

13) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; municipalities B) state governments; municipalities C) federal government; states D) municipalities; states Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 14) The Federal Reserve Act of 1913 required that A) state banks be subject to the same regulations as national banks. B) national banks establish branches in the cities containing Federal Reserve banks. C) national banks join the Federal Reserve System. D) all of the above be done. Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 15) The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system. A) state; national B) state; municipal C) national; state D) national; municipal Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 16) With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while nonmember commercial banks ________ to buy deposit insurance. A) could choose; were required B) could choose; were given the option C) were required; could choose D) were required; were required Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition

17) With the creation of the Federal Deposit Insurance Corporation, A) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while nonmember commercial banks were required to buy deposit insurance. B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while nonmember commercial banks could choose to buy deposit insurance. C) both member and nonmember banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors. D) both member and nonmember banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors. Answer: B Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 18) Investment banking activities of the commercial banks were blamed for many bank failures. This led to A) the passage of the National Bank Charter Amendments Act of 1918. B) the passage of the Garn-St. Germain Act of 1982. C) the passage of the National Bank Act of 1863. D) the passage of the Glass-Steagall Act of 1933. E) the establishment of the Federal Deposit Insurance Corporation in 1933. Answer: D Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 19) The Glass-Steagall Act prohibited commercial banks from A) issuing equity to finance bank expansion. B) engaging in underwriting of and dealing in corporate securities. C) selling new issues of government securities. D) purchasing any debt securities. Answer: B Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 20) Which bank regulatory agency has the sole regulatory authority over bank holding companies? A) The Federal Deposit Insurance Corporation B) The Comptroller of the Currency C) The Federal Bank Holding Company Agency D) The Federal Reserve System Answer: D Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition

21) State banks that are not members of the Federal Reserve System are most likely to be examined by the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Federal Home Loan Bank System. D) Comptroller of the Currency. Answer: B Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 22) Which regulatory body charters national banks? A) The Federal Reserve B) The Federal Deposit Insurance Corporation C) The Comptroller of the Currency D) None of the above Answer: C Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 23) Which of the following statements concerning bank regulation in the United States is true? A) The Office of the Comptroller of the Currency has the primary responsibility for national banks. B) The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System. C) The Fed has sole regulatory responsibility over bank holding companies. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 24) Which of the following statements concerning bank regulation in the United States are true? A) The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System. B) The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System. C) The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies. D) All of the above are true. E) Only A and B of the above are true. Answer: B Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition

25) Which of the following are important factors in determining the degree and timing of financial innovation? A) Changes in technology B) Changes in financial market conditions C) Changes in regulation D) All of the above E) Only A and B of the above Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 26) New computer technology has A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 27) Rising interest-rate risk ________ the ________ financial innovation. A) increased; cost of B) increased; demand for C) reduced; cost of D) reduced; demand for Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 28) Large fluctuations in interest rates lead to A) substantial capital gains and losses to owners of securities. B) greater uncertainty about returns on investments. C) greater interest-rate risk. D) all of the above. Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

29) In the 1950s, the interest rate on three-month Treasury bills fluctuated between 1.0% and 3.5%. In the 1980s, the three-month Treasury bill rate ranged from 5% to over 15%. From this, one could predict that in the 1980s interest-rate risk was ________ and the demand for financial innovation was ________. A) greater; lower B) greater; greater C) lower; lower D) lower; greater Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 30) The most significant change in the economic environment that changed the demand for financial products since 1970 has been A) the aging of the baby-boomer generation. B) the dramatic increase in the volatility of interest rates. C) the dramatic increase in competition from foreign banks. D) the deregulation of financial institutions. Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 31) Adjustable-rate mortgages A) protect households against higher mortgage payments when interest rates rise. B) keep financial institutions' earnings high even when interest rates are falling. C) have many attractive attributes, explaining why so few households now seek fixed-rate mortgages. D) do only A and B of the above. E) do none of the above. Answer: E Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 32) Adjustable-rate mortgages A) benefit homeowners when interest rates are falling. B) reduce financial institutions' interest-rate risk. C) reduce households' risk of having to pay higher mortgage payments when interest rates rise. D) do only A and B of the above. Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

33) The most important source of the changes in supply conditions that stimulate financial innovation has been the A) aging of the baby-boomer generation. B) dramatic increase in the volatility of interest rates. C) improvement in information technology. D) dramatic increase in competition from foreign banks. E) deregulation of financial institutions. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 34) Examples of financial services that became practical realities as the result of new computer technology include A) credit cards. B) electronic banking facilities. C) checking accounts. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 35) Credit cards date back to A) prior to World War II. B) just after World War II. C) the early 1950s. D) the late 1950s. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 36) A firm issuing credit cards earns income from A) loans it makes to credit card holders. B) payments made to it by stores on credit card purchases. C) payments made to it by manufacturers of the products sold in stores on credit card purchases. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

37) The entry of Sears, AT&T, and GM into the credit card business is an indication of A) government's efforts to deregulate the provision of financial services. B) the rising profitability of credit card operations. C) the reduction in costs of credit card operations since 1990. D) the sale of unprofitable operations by Bank of America and Citicorp. Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 38) A smart card is a form of A) stored-value card. B) credit card. C) debit card. D) e-cash card. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 39) Which of the following is not a financial innovation stimulated by information technology? A) Credit card B) Debit card C) Adjustable-rate mortgage D) Electronic banking Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 40) Which of the following is an example of a financial innovation introduced to avoid regulations? A) Securitization B) Junk bond C) Debit card D) Sweep account Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 41) Unlike traditional banking, where the process of asset transformation involves ________, securitization is a process of asset transformation that involves ________. A) loan origination; bundling B) bundling; loan origination C) one entity; a number of different financial institutions D) a number of different financial institutions; one entity Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: New Question 371 Copyright © 2018 Pearson Education, Inc.

42) The securitization process involves the following four steps, in the sequence listed: A) Loan origination, bundling, servicing, distribution B) Loan origination, servicing, bundling, distribution C) Loan origination, distribution, bundling, servicing D) Loan origination, bundling, distribution, servicing Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: New Question 43) "Stripping" a Treasury bond A) means selling each of its future payments as a separate zero-coupon bond. B) decreases the total present discounted value of future payments. C) both A and B. D) none of the above. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 44) So-called fallen angels differ from junk bonds in that A) junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa. B) fallen angels refer to newly issued bonds with low credit ratings. C) junk bonds refer to newly issued bonds with low credit ratings. D) they are both A and B of the above. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 45) So-called fallen angels differ from junk bonds in that A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds which have had their credit ratings fall below Baa. B) junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings. C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C. D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

46) High-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as A) municipal bonds. B) Yankee bonds. C) "fallen angels." D) junk bonds. Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 47) In 1977, ________ pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status. A) Michael Milken B) Roger Milliken C) Ivan Boskey D) Carl Ichan Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 48) The practice of creating marketable debt instruments that are backed by otherwise illiquid assets is known as A) standardization. B) homogenization. C) securitization. D) adverse selection. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 49) The driving force behind the securitization of mortgages and automobile loans has been A) the rising regulatory constraints on substitute financial instruments. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in computer technology. D) the relaxation of regulatory restrictions on credit card operations. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

50) The bundling of mortgages into a saleable security (usually for large institutional investors) is called ________. A) disintermediation B) quasi-intermediation C) futures bundling D) hedge optioning E) securitization Answer: E Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 51) In the usual GNMA pass-through security, the ________ has direct ownership of a pro-rata share of the portfolio of mortgage loans. A) seller B) buyer C) financial institution issuing the mortgage loan D) financial institution securitizing the mortgage loan Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 52) Bank managers look on reserve requirements as a A) tax on deposits. B) subsidy on deposits. C) subsidy on loans. D) tax on loans. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 53) Checking accounts that earn interest (such as NOW accounts) were not available until A) 1962. B) 1972. C) 1982. D) 1992. Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 54) Burdensome regulations, along with inflation and rising interest rates, help to explain A) the rapid pace of financial innovations in banking in the 1960s and 1970s. B) the low rate of bank failures in the 1980s. C) both A and B of the above. D) neither A nor B of the above. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 374 Copyright © 2018 Pearson Education, Inc.

55) The Federal Reserve's Regulation Q A) set maximum interest rates banks could pay on deposits. B) set minimum interest rates banks could pay on deposits. C) set maximum interest rates banks could charge on loans. D) discouraged disintermediation. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 56) When disintermediation occurs, the banking system ________ deposits and bank lending ________. A) gains; increases B) gains; decreases C) loses; increases D) loses; decreases Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 57) Which of the following is not a reason for the disappointing revenue growth and profits of Internet-only banks? A) High cost per transaction B) Security concerns C) Customer preferences D) Technical problems Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 58) It now appears that the predominant delivery system for banking services in the future will be A) Internet-only banks. B) traditional banks. C) traditional banks supplemented with online services. D) none of the above. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 59) The growing use and proliferation of ATMs has been stimulated by A) lower transaction costs. B) greater customer convenience. C) declining cost of the ATM equipment. D) all of the above. Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 375 Copyright © 2018 Pearson Education, Inc.

60) Since 1974, commercial banks' importance as a source of funds for borrowers has shrunk dramatically, from around ________ percent of total credit advanced to near ________ percent by 2016. A) 60; 30 B) 40; 30 C) 20; 2.5 D) 30; 15 Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Updated from Previous Edition 61) Since the 1970s, the importance of thrift institutions as a source of funds for borrowers has shrunk dramatically, from around ________ percent of total credit advanced to near ________ percent by 2016. A) 60; 30 B) 40; 30 C) 20; 2.5 D) 30; 15 Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: New Question 62) The traditional financial intermediation role of banking has been to make ________-term loans and to fund them with ________-term deposits. A) short; long B) long; short C) short; short D) long; long Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 63) Bank failures and mergers have caused the number of commercial banks in the U.S. to decline from around ________ in the 1970s to below ________ today. A) 25,000; 10,000 B) 15,000; 6,000 C) 25,000; 20,000 D) 15,000; 5,000 Answer: B Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Updated from Previous Edition

64) The process in which people seeking higher interest rates take their money out of financial institutions is called A) capital mobility. B) loophole mining. C) disintermediation. D) deposit jumping. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 65) One factor contributing to the decline in cost advantages that banks once had is the decline in the importance of checkable deposits from over ________ percent of banks' source of funds to ________ percent today. A) 70; 30 B) 60; 10 C) 50; 20 D) 40; 15 Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Updated from Previous Edition 66) The most important developments that have reduced banks' cost advantages in the past twenty years include A) the elimination of Regulation Q ceilings. B) the competition from money market mutual funds. C) the growth of securitization. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 67) The most important developments that have reduced banks' cost advantages in the past twenty years include A) the growth of the junk bond market. B) the competition from money market mutual funds. C) the growth of securitization. D) all of the above. E) only A and B of the above. Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

68) The most important developments that have reduced banks' income advantages in the past twenty years include A) the growth of the commercial paper market. B) the growth of the junk bond market. C) the growth of securitization. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 69) The most important developments that have reduced banks' income advantages in the past twenty years include A) the growth of the commercial paper market. B) the growth of the junk bond market. C) the elimination of Regulation Q ceilings. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 70) One factor contributing to the decline in income advantages that banks once had is the increased competition from the commercial paper market, which has grown in size to over ________ outstanding at the end of 2015. A) $500 billion B) $1 trillion C) $2.5 trillion D) $3 trillion Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Updated from Previous Edition 71) Rising market interest rates in the 1960s and the 1970s, combined with regulated deposit rate ceilings, A) worked in the short-run to give mortgage-issuing institutions a source of low-cost funds. B) led eventually to an outflow of deposits from depository institutions. C) led to financial innovations that worked to avoid these regulations. D) did all of the above. E) did only A and C of the above. Answer: D Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

72) In 1975, financial institutions developed financial derivatives that included A) adjustable-rate mortgages. B) futures contracts. C) financial engineering. D) virtual banks. Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 73) An electronic machine that allows customers to make deposits, get cash, transfer funds from one account to another, and check balances is A) an automated banking machine. B) the virtual bank. C) an automated teller machine. D) a smart card. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 74) A form of electronic money used on the Internet to pay for goods and services is A) e-money. B) e-cash. C) a smart card. D) a virtual bank. Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 75) A financial innovation that enables banks to avoid the "tax" from reserve requirements by taking any balances above a certain amount in a corporation's checking account at the end of the business day and investing them in overnight securities that pay interest is called a A) money market mutual fund. B) deposit rate ceiling. C) sweep account. D) disintermediation. Answer: C Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

76) Regulations restricting branching have promoted the development of what two financial innovations? A) Bank consolidation and nationwide banking B) Bank holding companies and automated teller machines C) Money market mutual funds and sweep accounts D) Reserve requirements and restrictions on interest paid on deposits Answer: B Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 77) In September of 2008, the money market mutual fund Reserve Primary Fund had a price of less than $1.00 for a dollar invested. How did this happen? A) The fund invested in debt of Lehman Brothers, which was worthless when Lehman went broke. B) The fund invested in high-yield junk bonds, which defaulted. C) The fund invested in Treasuries, which yielded less than 0% returns. D) This actually didn't happen. It cannot happen since the fund only invested in low-risk debt. Answer: A Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 78) The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong preference for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) regulations that restrict the ability of banks to open branches. D) all of the above. Answer: C Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: Previous Edition 79) The McFadden Act of 1927 A) effectively prohibited banks from branching across state lines. B) required that banks maintain bank capital equal to at least 6 percent of their assets. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) did all of the above. Answer: A Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: Previous Edition

80) The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations of the state in which they reside is the A) McFadden Act. B) National Banking Act. C) Glass-Steagall Act. D) Garn-St. Germain Act. Answer: A Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: Previous Edition 81) Which of the following is an advantage of forming a bank holding company? A) It allows ownership of several banks where branching is prohibited. B) It allows owners to engage in activities related to banking that are prohibited to banks. C) Both A and B of the above. D) None of the above. Answer: C Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: Previous Edition 82) Which of the following are true statements concerning bank holding companies? A) Bank holding companies own almost all large banks. B) Bank holding companies have experienced dramatic growth in the past twenty-five years. C) Through a loophole in the McFadden Act, bank holding companies have successfully evaded interstate branching restrictions. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: Previous Edition 83) As a result of shared electronic banking facilities, A) barriers to branching have become less burdensome. B) banking has become less competitive. C) both of the above have occurred. D) neither of the above has occurred. Answer: A Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: Previous Edition

84) The McFadden Act's prohibition against interstate branching A) was weakened by the introduction of shared electronic banking facilities that provide banking services nationwide. B) was weakened by regional compacts that allowed banks to own banks in other states in their region. C) impeded banks' ability to diversify their loans and take advantage of economies of scale. D) did all of the above. Answer: D Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: Previous Edition 85) A bank with a large credit-card customer base can market other financial products to these customers at a low cost. This is an example of A) economies of scale. B) economies of scope. C) becoming a superregional bank. D) none of the above. Answer: B Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 86) As a result of restrictive banking regulations, the United States A) has too few banks when compared to other industrialized countries. B) has banks that are quite large relative to those in other countries. C) has too many banks when compared to other industrialized countries. D) has both A and B of the above. Answer: C Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 87) Which of the following is not expected to result from bank consolidation in the U.S.? A) The disappearance of small community banks. B) The acceleration of the decline in the number of banks. C) Banks will be more efficient. D) Banks will be less likely to fail. Answer: A Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 88) The legislation that separated investment banking from commercial banking was the A) National Bank Act. B) Federal Reserve Act. C) Glass-Steagall Act. D) McFadden Act. Answer: C Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 382 Copyright © 2018 Pearson Education, Inc.

89) The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by the A) Gramm-Leach-Bliley Financial Services Modernization Act. B) Competitive Equality in Banking Act. C) Depositary Institution Deregulation and Monetary Control Act. D) Glass-Steagall Act. Answer: A Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 90) The Riegle-Neal Act of 1994 A) required all banks to become universal banks. B) removed ceilings on bank deposit interest rates. C) allowed banks to underwrite insurance and securities and engage in real estate activities. D) overturned prohibitions on interstate banking and branching. Answer: D Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 91) There are approximately how many commercial banks in the United States currently? A) 5,000 B) 6,000 C) 1,000 D) 1,250 Answer: B Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Updated from Previous Edition 92) In recent years, commercial banks have been allowed to A) invest in real estate. B) enter certain insurance markets. C) underwrite stocks. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition 93) In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) British-style universal C) barrier-free D) seamless Answer: A Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition 383 Copyright © 2018 Pearson Education, Inc.

94) In a ________ banking system, commercial banks engage in securities underwriting, but separate subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. A) universal B) British-style universal C) divided D) compartmentalized E) severable Answer: B Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition 95) A major difference between the United States and Japanese banking systems is that A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot. B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. C) bank holding companies are illegal in the United States. D) both A and C of the above E) both B and C of the above Answer: B Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition 96) Major differences between the United States and Japanese banking systems include: A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot. B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. C) bank holding companies are illegal in Japan. D) both A and C of the above. E) both B and C of the above. Answer: E Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition

97) Thrift institutions' importance as a source of funds for borrowers A) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent today. B) has shrunk from over 20 percent of total credit advanced in the late 1970s to below 2.5 percent today. C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent today. D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent today. Answer: B Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: Updated from Previous Edition 98) Since the late 1970s, thrift institutions' importance as a source of funds for borrowers has shrunk markedly, from above ________ percent of total credit advanced to below ________ percent today. A) 30; 20 B) 30; 15 C) 40; 5 D) 20; 2.5 Answer: D Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: Updated from Previous Edition 99) What is the key difference between an S&L and a mutual savings bank? A) Mutual savings banks are jointly owned by depositors, whereas S&Ls aren't. B) The FDIC insures an S&L's deposits, but not those of mutual savings banks. C) Both A and B are correct. D) Neither A nor B is correct. Answer: A Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: Previous Edition 100) Because their members share a common bond, credit unions are typically quite small; most hold less than ________ of assets. A) $500,000 B) $10 million C) $100 million D) $1 billion Answer: B Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: Previous Edition

101) Which of the following is a reason for the rapid expansion of international banking? A) The rapid growth in international trade B) The growth of multinational corporations C) The desire of U.S. banks to expand D) All of the above Answer: D Topic: Chapter 19.7 International Banking Question Status: Previous Edition 102) Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks has been A) reduced. B) mildly expanded. C) completely eliminated. D) greatly expanded. Answer: A Topic: Chapter 19.7 International Banking Question Status: Previous Edition 103) A special subsidiary of a U.S. bank that is engaged in international banking is called A) an international banking facility. B) an agency office. C) an Edge Act corporation. D) a foreign bank subsidiary. Answer: C Topic: Chapter 19.7 International Banking Question Status: Previous Edition 104) U.S. banks have most of their foreign branches in A) Latin America, the Far East, the Caribbean, and London. B) Latin America, the Middle East, the Caribbean, and London. C) Mexico, the Middle East, the Caribbean, and London. D) South America, the Middle East, the Caribbean, and Canada. Answer: A Topic: Chapter 19.7 International Banking Question Status: Previous Edition 105) Eurodollars are A) dollar-denominated deposits held in banks outside the United States. B) deposits held by U.S. banks in Europe. C) deposits held by U.S. banks in foreign countries. D) dollar-denominated deposits held in U.S. banks by Europeans. Answer: A Topic: Chapter 19.7 International Banking Question Status: Previous Edition

106) Deposits in European banks denominated in dollars for the purpose of international transactions are known as A) Eurodollars. B) European Currency Units. C) euros. D) International Monetary Units. Answer: A Topic: Chapter 19.7 International Banking Question Status: Previous Edition 107) The main center of the Eurodollar market is A) London. B) Basel. C) Paris. D) New York. Answer: A Topic: Chapter 19.7 International Banking Question Status: Previous Edition 19.2 True/False 1) Today, the United States has a dual banking system in which banks supervised by the federal government and banks supervised by the states operate side by side. Answer: TRUE Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 2) Bank holding companies are regulated by the FDIC. Answer: FALSE Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 3) Even when an ATM is owned by a bank, states typically have special provisions that allow wider establishment of ATMs than is permissible for traditional "brick and mortar" branches. Answer: TRUE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 4) Financial innovation has widened the cost advantages that banks have in acquiring funds, helping to explain why bank profitability has soared in recent years. Answer: FALSE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

5) Americans are the biggest users of checks in the world but nonetheless are ahead of Europeans in the proportion of noncash payments that are made by electronic means. Answer: FALSE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 6) Securitization is the process of transforming illiquid financial assets such as residential mortgages into marketable securities. Answer: TRUE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 7) Disintermediation occurs when funds are deposited into banks and lent to borrowers. Answer: FALSE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 8) The principle underlying Treasury strips is that an investor will earn a higher interest rate when reinvestment risk is eliminated. Answer: TRUE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 9) Checkable deposits, a traditional source of low-cost funds for banks, have declined dramatically in importance, falling from over 60 percent of bank liabilities to less than 10 percent today. Answer: TRUE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 10) A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable. Answer: TRUE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 11) Reserve requirements that force banks to keep a certain fraction of their deposits as reserves and restrictions on the interest rates that can be paid on deposits have been the major forces behind financial innovation. Answer: TRUE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

12) A subprime mortgage is a new class of residential mortgages to borrowers with stellar credit records, offering mortgage rates below the prime rate. Answer: FALSE Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: New Question 13) As of 2016, the ten largest banks in the U.S. hold about 50% of all bank assets. Answer: TRUE Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: New Question 14) As of 2016, over half of all FDIC-insured banking institutions have assets between $100 million and $1 billion. Answer: TRUE Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: New Question 15) The existence of large numbers of banks in the United States indicates the presence of vigorous competition. Answer: FALSE Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 16) Bank holding companies that have begun to rival the money center banks in size but whose headquarters are not based in one of the money center cities are called superregional banks. Answer: TRUE Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 17) The future structure of the U.S. banking industry is likely to be characterized by many more smaller banks, as customers demand neighborhood banks operated by people they know personally. Answer: FALSE Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 18) Economies of scope come from increasing the size of a given financial activity and economies of scale come from combining different activities to lower their costs. Answer: FALSE Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 19) Restrictions on commercial banks' securities and insurance activities put American banks at a competitive disadvantage relative to foreign banks. Answer: TRUE Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition 389 Copyright © 2018 Pearson Education, Inc.

20) Unlike commercial banks, S&Ls can only be chartered by the federal government. Answer: FALSE Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: Previous Edition 21) Mutual savings banks are similar to S&Ls, but are jointly owned by the depositors. Answer: TRUE Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: New Question 22) Because their members share a common bond, credit unions are typically quite small; most hold less than $10 million of assets. Answer: TRUE Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: New Question 23) Eurodollars are created when deposits in accounts in the United States are transferred to a bank outside the country and are kept in the form of dollars. Answer: TRUE Topic: Chapter 19.7 International Banking Question Status: Previous Edition 24) An alternative corporate structure for U.S. banks that operate overseas is the Edge Act corporation, a special subsidiary engaged primarily in international banking. Answer: TRUE Topic: Chapter 19.7 International Banking Question Status: Previous Edition 25) Among the five largest banks in the world (as of 2015), four are from the U.S., including Bank of America and Wells Fargo. Answer: FALSE Topic: Chapter 19.7 International Banking Question Status: New Question 19.3 Essay 1) Discuss some of the major milestones in the development of the U.S. banking system. Topic: Chapter 19.1 Historical Development of the Banking System Question Status: Previous Edition 2) What financial innovations are best explained as attempts to avoid regulations? Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition

3) What new forms of banking have been spawned by the advances in information technology of the past two decades? Is it likely that traditional banks will disappear as a result of these innovations? Why? Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 4) What new forms of making payments have been spawned by the advances in information technology of the past two decades? Is it likely that ours will become a cashless society anytime soon as a result of these innovations? Why? Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 5) What are Treasury strips? What roles have reinvestment risk and information technology played in the development of this financial product? Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 6) What are the reasons for the decline of traditional banking? Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 7) Explain the innovations that have been created to lower interest-rate risk. Topic: Chapter 19.2 Financial Innovation and the Growth of the Shadow Banking System Question Status: Previous Edition 8) How are banks distributed in the U.S., in term of the number of banks by size and assets held? Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: New Question 9) Why does the U.S. banking industry restrict branching, and how has the industry responded? Topic: Chapter 19.3 Structure of the U.S. Commercial Banking Industry Question Status: New Question 10) Is the large number of banking firms in the United States an indication of a competitive banking industry? Explain why or why not. Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 11) Are bank consolidations and nationwide banking good things? Why? Topic: Chapter 19.4 Bank Consolidation and Nationwide Banking Question Status: Previous Edition 12) When and why was the Glass-Steagall Act passed? When and why was it repealed? Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition

13) Explain what happened to the large, free-standing investment banks as a result of the Global Financial Crisis. Topic: Chapter 19.5 Separation of the Banking and Other Financial Services Industries Question Status: Previous Edition 14) Discuss the role, structure, and regulation of the thrift industry. Topic: Chapter 19.6 Thrift Industry: Regulation and Structure Question Status: New Question 15) Describe Edge Act corporations, international banking facilities, and the structure of foreign banks in the United States. Topic: Chapter 19.7 International Banking Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 20 The Mutual Fund Industry 20.1 Multiple Choice 1) At the beginning of 2013, ________ of mutual fund shares were owned by households. This is a tremendous increase — in 1980, only 5.7% of households held mutual fund shares. A) 30% B) 50% C) 10% D) 75% Answer: D Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Updated from Previous Edition 2) The origins of mutual funds can be traced back to the mid to late 1800s in A) England and Scotland. B) New York City. C) Boston. D) Germany. Answer: A Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Previous Edition 3) At the end of 2012 there were over ________ separate mutual funds with total assets over ________. A) 800; $10 trillion B) 7,500; $13 trillion C) 10,000; $10 trillion D) 1,000; $7 trillion Answer: B Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Previous Edition 392 Copyright © 2018 Pearson Education, Inc.

4) Household ownership of mutual funds grew steadily from 1980, where about 5% of households owned mutual fund shares, to 2000, when about ________ of households held mutual fund shares. A) 30% B) 40% C) 50% D) 60% Answer: C Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: New Question

5) Household ownership of mutual funds ________ from 2000 through 2015. A) grew steadily B) declined dramatically C) remained constant at about 50% D) fluctuated dramatically from year to year Answer: C Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: New Question 6) Relative to people in their 20s, the average asset allocation across all 401(k) plans for people in their 60s is higher for which of the following asset classes? A) equity funds B) target date funds C) Both A and B are correct. D) None of the above is correct. Answer: A Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: New Question 7) ________ intermediation means that small investors can pool their funds with other investors to purchase high face value securities. A) Liquidity B) Financial C) Denomination D) Share Answer: C Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 8) The majority of mutual fund assets are now owned by A) individual investors. B) institutional investors. C) fiduciaries. D) business organizations. E) retirees. Answer: A Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 9) Mutual funds offer investors all of the following except A) greater-than-average returns. B) diversified portfolios. C) lower transaction costs. D) professional investment management. Answer: A Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 394 Copyright © 2018 Pearson Education, Inc.

10) Mutual funds A) pool the resources of many small investors by selling these investors shares and using the proceeds to buy securities. B) allow small investors to obtain the benefits of lower transaction costs in purchasing securities. C) provide small investors a diversified portfolio that reduces risk. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 11) ________ enables mutual funds to consistently outperform a randomly selected group of stocks. A) Managerial expertise B) Diversification C) Denomination intermediation D) None of the above Answer: D Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 12) ________ means the investors can convert their investment into cash quickly at a low cost. A) Liquidity intermediation B) Denomination intermediation C) Diversification D) Managerial expertise Answer: A Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 13) At the start of 2014, one share of Berkshire Hathaway's A-shares was trading at over $150,000. ________ in an mutual fund gives a small investor access to these shares. A) Liquidity intermediation B) Denomination intermediation C) Diversification D) Managerial expertise Answer: B Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition

14) Most mutual funds are structured in two ways. The most common structure is a(n) ________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. A(n) ________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market. A) closed-end; open-end B) open-end; closed-end C) no-load; closed-end D) no-load; load E) load; no-load Answer: B Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 15) Which of the following is an advantage to investors of an open-end mutual fund? A) Once all the shares have been sold, the investor does not have to put in more money. B) The investors can sell their shares in the over-the-counter market with low transaction fees. C) The fund agrees to redeem shares at any time. D) The market value of the fund's shares may be higher than the value of the assets held by the fund. Answer: C Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 16) The net asset value of a mutual fund is A) determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding. B) determined by calculating the net price of the assets owned by the fund. C) calculated every 15 minutes and used for transactions occurring during the next 15-minute interval. D) calculated as the difference between the fund's assets and its liabilities. Answer: A Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 17) Suppose a mutual fund has 10 million shares outstanding, assets with a total value of $30 million, of which $500,000 is cash, and fund liabilities of $500,000. What is the current NAV per share? A) $2.90 B) $2.95 C) $3.00 D) $3.05 Answer: B Topic: Chapter 20.3 Mutual Fund Structure Question Status: New Question

18) ________ funds are the simplest type of investment funds to manage. A) Balanced B) Global equity C) Growth D) Index Answer: D Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 19) Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds. A) large, established companies that pay dividends regularly; more B) large, established companies that pay dividends regularly; less C) companies expected to grow rapidly; more D) companies expected to grow rapidly; less Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 20) From largest to smallest in terms of total assets, the four classes of mutual funds are A) equity funds, bond funds, money market funds, hybrid funds. B) equity funds, money market funds, bond funds, hybrid funds. C) money market funds, equity funds, hybrid funds, bond funds. D) bond funds, money market funds, equity funds, hybrid funds. Answer: A Topic: Chapter 20.4 Investment Objective Classes Question Status: Updated from Previous Edition 21) Among the four classes of mutual funds, equity mutual funds have the largest total assets, at around A) $8 trillion. B) $6 trillion. C) $10 trillion. D) $4 trillion. Answer: A Topic: Chapter 20.4 Investment Objective Classes Question Status: New Question 22) Measured by assets, the most popular type of bond fund is the ________ bond fund. A) state municipal B) investment grade C) government D) high-yield Answer: B Topic: Chapter 20.4 Investment Objective Classes Question Status: Updated from Previous Edition 397 Copyright © 2018 Pearson Education, Inc.

23) People who take their money out of insured bank deposits to invest in uninsured money market mutual funds have ________ risk because money market funds invest in ________ assets. A) high; long-term B) low; short-term C) high; short-term D) low; long-term Answer: B Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 24) The largest share of assets held by money market mutual funds is A) Treasury bills. B) certificates of deposit. C) U.S. agency issues. D) repurchase agreements. Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Updated from Previous Edition 25) Which of the following is a feature of index funds? A) They have lower fees. B) They select and hold stocks to match the performance of a stock index. C) They do not require managers to select stocks and decide when to buy and sell. D) All of the above. Answer: D Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 26) Mutual fund companies frequently offer a number of separate mutual funds called A) indexes. B) complexes. C) components. D) actuaries. Answer: B Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 27) Equity funds can be placed in which class according to the Investment Company Institute? A) Capital appreciation funds B) World funds C) Total return funds D) All of the above Answer: D Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 398 Copyright © 2018 Pearson Education, Inc.

28) Government bonds are essentially default risk-free, ________ returns. A) and will yield high B) and will yield the highest C) but will have relatively low D) none of the above Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 29) ________ bonds combine stocks into one fund. A) Hybrid B) Money market C) Municipal D) Equity Answer: A Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 30) All ________ are open-end investment funds that invest only in money market securities. A) stock funds B) bond funds C) money market mutual funds D) all of the above Answer: C Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 31) A deferred-load mutual fund charges a commission A) when shares are purchased. B) when shares are sold. C) both when shares are purchased and when they are sold. D) when shares are redeemed. Answer: D Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 32) Over the past twenty years, mutual fund fees have ________, largely because ________. A) fallen; SEC fee disclosure rules have led to greater competition B) risen; investors have learned that funds with high fees provide better performance C) risen; there has been collusion between large mutual fund companies D) fallen; advances in information technology have lowered transaction costs Answer: A Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition

33) Which of the following is most likely to be a no-load fund? A) Value funds B) Hedge funds C) Growth funds D) Index funds Answer: D Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 34) When investors switch between funds within the same fund family, mutual funds may charge A) a contingent deferred sales charge. B) a redemption fee. C) an exchange fee. D) 12b-1 fees. Answer: C Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 35) Mutual funds may charge a 12b-1 fee, which is A) a contingent deferred sales charge. B) a redemption fee. C) a fee used to pay marketing expenses and sales commissions. D) a fee used to compensate the mutual fund's managers. Answer: C Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: New Question 36) The Securities Acts of 1933 and 1934 did not A) regulate the activities of investment funds. B) require funds to register with the SEC. C) include antifraud rules covering the purchase and sale of fund shares. D) apply to investment funds. Answer: B Topic: Chapter 20.6 Regulation of Mutual Funds Question Status: Previous Edition 37) The largest share of total investment in mutual funds is in A) stock funds. B) hybrid funds. C) bond funds. D) money market funds. Answer: A Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition

38) Over ________ of the total daily volume in stocks is due to institutions initiating trades. A) 70% B) 50% C) 25% D) 90% Answer: A Topic: Chapter 20.6 Regulation of Mutual Funds Question Status: Previous Edition 39) Investment funds are run by brokerage houses and by institutional investors, who now control over ________ of the outstanding stock in the United States. A) 70% B) 50% C) 25% D) 90% Answer: B Topic: Chapter 20.6 Regulation of Mutual Funds Question Status: New Question 40) Hedge funds are A) low risk because they are market-neutral. B) low risk if they buy Treasury bonds. C) low risk because they hedge their investments. D) high risk because they are market-neutral. E) high risk, even though they may be market-neutral. Answer: E Topic: Chapter 20.7 Hedge Funds Question Status: Previous Edition 41) The near collapse of Long Term Capital Management was caused by A) the high management fees charged by the fund's two Nobel Prize winners. B) the fund's high leverage ratio of 20 to 1. C) a sharp decrease in the spread between corporate bonds and Treasury bonds. D) a sharp increase in the spread between corporate bonds and Treasury bonds. E) the fund's shift away from a market-neutral investment strategy. Answer: D Topic: Chapter 20.7 Hedge Funds Question Status: Previous Edition

42) An example of a strategy used by hedge funds is a "convergence bet," where the hedge fund manager searches for A) two firms that are about to merge, or "converge." B) markets where indexes are moving in random fashions. C) related securities that move in lockstep, hoping they will divert in the near future. D) related securities that historically move in lockstep but have temporarily diverted. Answer: D Topic: Chapter 20.7 Hedge Funds Question Status: New Question 43) Conflicts arise in the mutual funds industry because ________ cannot effectively monitor ________. A) investment advisers; directors B) directors; shareholders C) shareholders; investment advisers D) investment advisers; stocks that will outperform the overall market Answer: C Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 44) Late trading is the practice of allowing orders received ________ to trade at the ________ net asset value. A) before 4:00 PM; 4:00 PM B) after 4:00 PM; 4:00 PM C) after 4:00 PM; next day's D) before 4:00 PM; previous day's Answer: B Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 45) Market timing A) takes advantage of time differences between the east and west coasts of the United States. B) takes advantage of arbitrage opportunities in foreign stocks. C) takes advantage of the time lag between the receipt and execution of orders. D) is discouraged by the stiff fees mutual funds charge every investor for buying and then selling shares on the same day. Answer: B Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition

46) Late trading and market timing A) allow large, favored investors in a mutual fund to profit at the expense of other investors in the fund. B) hurt ordinary investors by increasing the number of fund shares and diluting the fund's net asset value. C) are both A and B of the above. D) are none of the above. Answer: C Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 47) Which of the following is not a proposal to deal with abuses in the mutual fund industry? A) Strictly enforce the 4:00 PM net asset value rule. B) Make redemption fees mandatory. C) Disclose compensation arrangements for investment advisers. D) Increase the number of dependent directors. Answer: D Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 48) In research conducted as part of an investigation into mutual fund abuses, the SEC found that ________ of broker-dealers were allowed to make illegal late trades. A) nearly 100% B) 50% C) 10% D) 25% Answer: D Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: New Question 20.2 True/False 1) The larger the number of shares traded in a stock transaction, the lower the transaction costs per share. Answer: TRUE Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 2) The increase in the number of defined contribution pension funds has slowed the growth of mutual funds. Answer: FALSE Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Previous Edition

3) Mutual funds accounted for $5.3 trillion, or 27%, of the $19.5 trillion U.S. retirement market at the beginning of 2013. Answer: TRUE Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 4) Among the investors in mutual funds, only about 25% cite preparing for retirement as one of their main reasons for holding shares. Answer: FALSE Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 5) Open-end mutual funds are more common than closed-end funds. Answer: TRUE Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 6) The net asset value of a mutual fund is the average market price of the stocks, bonds, and other assets the fund owns. Answer: FALSE Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 7) A mutual fund's board of directors picks the securities that will be held and makes buy and sell decisions. Answer: FALSE Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 8) Money market mutual funds originated when the brokerage firm Merrill Lynch offered its customers an account from which funds could be taken to purchase securities and into which funds could be deposited when securities were sold. Answer: TRUE Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 9) A deferred load is a fee charged when shares in a mutual fund are redeemed. Answer: TRUE Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 10) Several academic research studies show that investors earn higher returns by investing in mutual funds that charge higher fees. Answer: FALSE Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 404 Copyright © 2018 Pearson Education, Inc.

11) Hedge funds have a minimum investment requirement of between $100,000 and $20 million, with the typical minimum investment being $1 million. Answer: TRUE Topic: Chapter 20.7 Hedge Funds Question Status: Previous Edition 12) Because the Fed had to contribute nearly $3.6 billion to avert the collapse of the hedge fund Long Term Capital Management, hedge fund have been banned as a U.S. investment vehicle. However, hedge funds are not illegal outside of the U.S., and many now operate in countries like the Bahamas. Answer: FALSE Topic: Chapter 20.7 Hedge Funds Question Status: New Question 13) SEC research suggests that about three-fourths of mutual funds let privileged shareholders engage in market timing. Answer: TRUE Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 14) One factor explaining the rapid growth in mutual funds is that they are financial intermediaries that are not regulated by the federal government. Answer: FALSE Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Previous Edition 15) Whether a fund is organized as a closed- or an open-end fund, is will have the same basic organizational structure. Answer: TRUE Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 16) The primary purpose of loads is to provide compensation for sales brokers. Answer: TRUE Topic: Chapter 20.5 Fee Structure of Investment Funds Question Status: Previous Edition 17) Mutual funds are regulated under four federal laws designed to protect investors. Answer: TRUE Topic: Chapter 20.6 Regulation of Mutual Funds Question Status: Previous Edition

20.3 Essay 1) What benefits do mutual funds offer investors? Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 2) How is a mutual fund's net asset value calculated? Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 3) How did money market mutual funds originate and why did they become especially popular in the late 1970s and early 1980s? Topic: Chapter 20.1 The Growth of Mutual Funds Question Status: Previous Edition 4) How does the governance structure of mutual funds lead to asymmetric information and conflicts of interest? Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 5) Describe the practices of late trading and market timing and explain how these practices harm a mutual fund's shareholders. Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 6) Discuss the proposals that have been made to reduce the conflict of interest abuses in the mutual funds industry. Topic: Chapter 20.8 Conflicts of Interest in the Mutual Fund Industry Question Status: Previous Edition 7) How is an index fund different from the other four primary investment objective classes for mutual funds? Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 8) Discuss the four primary classes of mutual funds available to investors. Topic: Chapter 20.4 Investment Objective Classes Question Status: Previous Edition 9) What are the five benefits of mutual funds? Topic: Chapter 20.2 Benefits of Mutual Funds Question Status: Previous Edition 10) What is the difference between an open-end and a closed-end mutual fund? Topic: Chapter 20.3 Mutual Fund Structure Question Status: Previous Edition 406 Copyright © 2018 Pearson Education, Inc.

11) What are two key differences between a traditional mutual fund and a hedge fund? Topic: Chapter 20.7 Hedge Funds Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 21 Insurance Companies and Pension Funds 21.1 Multiple Choice 1) The certainty equivalent for risk-averse people who buy insurance is the A) maximum loss they may sustain. B) expected loss they may sustain. C) insurance premium they pay. D) profit the insurance company earns. Answer: C Topic: Chapter 21.1 Insurance Companies Question Status: Previous Edition 2) Since 1960, the number of persons employed in the U.S. insurance industry has A) risen steadily, to about 2.5 million in 2015. B) remained fairly constant, at about 1.0 million each year. C) shrunk each year, now down to about 500,000. D) grown and shrunk dramatically over the last 55 years. Answer: A Topic: Chapter 21.1 Insurance Companies Question Status: New Question 3) The problem of ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most. A) asymmetric information B) moral hazard C) adverse selection D) fraudulent behavior Answer: C Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 4) When those most likely to produce the outcome insured against are the ones who purchase insurance, insurance companies are said to face the problem of A) fraudulent claims. B) moral hazard. C) adverse selection. D) pecuniary purchases. Answer: C Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 407 Copyright © 2018 Pearson Education, Inc.

5) To prevent adverse selection, health and life insurance companies may do all the following except A) charge higher premiums to people with certain preexisting health conditions. B) require potential policyholders to submit medical records. C) refuse to sell policies to people with certain pre-existing health conditions. D) charge the same premiums to all policyholders. Answer: D Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 6) In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff. A) moral hazard B) opportunism C) adverse selection D) shirking Answer: A Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 7) Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of A) fraudulent claims. B) moral hazard. C) adverse selection. D) pecuniary purchases. Answer: B Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 8) In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most. A) moral hazard; insurance market discrimination B) moral hazard; insurance segregation C) moral hazard; adverse selection D) adverse selection; moral hazard Answer: C Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition

9) All insurance is subject to several basic principles, including all of the following except that A) the insured must provide full and accurate information to the insurance company. B) the insured is to profit as a result of insurance coverage. C) the loss must be quantifiable. D) there must be a relationship between the insured and the beneficiary. Answer: B Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 10) To prevent the moral hazard problem, health and life insurance companies may write policies A) for which premiums increase dramatically once the policyholder is discovered to have contracted an illness. B) containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses. C) limiting the amount the companies will pay in the event that claims are submitted by policyholders. D) with all of the above provisions. E) with only A and B of the above provisions. Answer: D Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 11) To prevent the moral hazard problem, health and life insurance companies may write policies A) that increase benefits dramatically once the policyholder is discovered to have contracted an illness so that the patient can recover sooner. B) containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses. C) boosting the amount the companies will pay health providers in the event that claims are submitted by policyholders. D) with only A and B of the above provisions. Answer: B Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 12) Insurance management tools that give policyholders incentives to avoid accidents insured against include A) deductibles. B) risk-based premiums. C) coinsurance. D) all of the above. Answer: D Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition

13) Which is not a management practice for reducing the problems of adverse selection and moral hazard in insurance? A) Deductibles B) Restrictive provisions C) Coinsurance D) Reinsurance Answer: D Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 14) Insurance companies employ underwriters A) as an alternative to higher deductibles. B) to control the risky behavior of their policyholders. C) to control the risk incurred on their behalf by agents. D) to encourage the loyalty of exclusive agents. E) to maintain the independence of independent agents. Answer: C Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 15) From 1950 through 2015, the number of life insurance companies in the U.S. has A) steadily risen. B) steadily fallen. C) remained fairly constant. D) risen, and then fallen. Answer: D Topic: Chapter 21.3 Growth and Organization of Insurance Companies Question Status: New Question 16) From 1950 through 2015, the number of life insurance companies in the U.S. peaked in the late 1980s, at about ________ companies. A) 3,000 B) 2,500 C) 1,750 D) 1,500 Answer: B Topic: Chapter 21.3 Growth and Organization of Insurance Companies Question Status: New Question

17) ________ companies get a tax advantage; most new insurance companies organize as ________ companies. A) Mutual insurance; mutual insurance B) Mutual insurance; stock C) Stock; stock D) Stock; mutual insurance Answer: B Topic: Chapter 21.3 Growth and Organization of Insurance Companies Question Status: Previous Edition 18) (I) A majority of life insurance companies are organized as mutual companies. (II) State governments have the major responsibility for regulating insurance companies. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: B Topic: Chapter 21.3 Growth and Organization of Insurance Companies Question Status: Previous Edition 19) Which of the following do not help people during their retirement? A) Term life insurance B) Annuity C) Whole life insurance D) Universal life insurance Answer: A Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 20) The earliest form of insurance was ________ insurance. A) life B) health C) automobile D) property and casualty Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 21) A term life insurance policy provides A) insurance benefits only. B) savings benefits only. C) both insurance and savings benefits. D) none of the above. Answer: A Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 411 Copyright © 2018 Pearson Education, Inc.

22) In the United States, the life expectancy of females exceeds that of males by, at most, ________ years. A) 10 B) 7 C) 5 D) 2 Answer: C Topic: Chapter 21.4 Types of Insurance Question Status: New Question 23) Which of the following types of life insurance provides no savings element? A) Term B) Whole C) Universal D) None of the above Answer: A Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 24) Which of the following is true of life insurance companies? A) They primarily hold long-term assets that are not particularly liquid. B) They primarily hold short-term liquid assets. C) Payouts to policyholders are relatively predictable. D) Both A and C of the above are true. Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 25) The law of large numbers says that when many people are insured, the probability distribution of the losses will assume a normal probability distribution, a distribution that A) hinders accurate predictions. B) complicates pricing in life insurance. C) allows accurate predictions. D) is difficult to work with. Answer: C Topic: Chapter 21.4 Types of Insurance Question Status: New Question 26) Of the following financial intermediaries, which holds the least liquid assets? A) Property and casualty insurance companies B) Life insurance companies C) Money market mutual funds D) Commercial banks Answer: B Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 412 Copyright © 2018 Pearson Education, Inc.

27) Relative to life insurance companies, property and casualty insurance companies hold A) more liquid assets. B) more long-term government bonds. C) more commercial mortgages. D) fewer municipal bonds. Answer: A Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 28) The largest share of life insurance companies' assets are A) corporate stock. B) corporate bonds. C) government securities. D) cash reserves. Answer: B Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 29) The share of life insurance companies' assets, in order from largest to smallest, is A) bonds, stocks, miscellaneous, and loans/mortgages. B) stocks, bonds, miscellaneous, and loans/mortgages. C) stocks, bonds, loans/mortgages, and miscellaneous. D) bonds, stocks, loans/mortgages, and miscellaneous. Answer: B Topic: Chapter 21.4 Types of Insurance Question Status: New Question 30) from 1970 to present, the share of life insurance companies' assets held in mortgages has, in general, A) fluctuated substantially from year to year. B) remained constant. C) risen. D) fallen. Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: New Question 31) As shown in the text, the typical annual premium for a term policy A) decreases with age. B) increases with age. C) remains constant across all ages. D) is independent of age. Answer: B Topic: Chapter 21.4 Types of Insurance Question Status: New Question

32) The federal regulatory agency responsible for regulating the activities of life insurance companies is A) the Federal Deposit Insurance Corporation. B) the Federal Reserve. C) the Federal Life Insurance Board. D) none of the above; there is no such federal regulatory agency. Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 33) Which of the following is not a feature of the Terrorism Risk Insurance Act of 2002? A) Losses that exceed $100 billion are not covered. B) The law does not apply to acts of international terrorism when losses are less than $5 million. C) Government pays 50 percent of losses in excess of $100 billion. D) Government pays 90 percent of the losses. Answer: C Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 34) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) Risk-assessment screening B) Risk-based premiums C) Restrictive provisions D) All of the above E) Only A and B of the above Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 35) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) Requiring collateral for policies B) Risk-based premiums C) Compensating balances D) All of the above E) Only A and B of the above Answer: B Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition

36) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) Gender-neutral premiums B) Flat-rate premiums C) Restrictive provisions D) All of the above E) Only A and B of the above Answer: C Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 37) A basic product of life insurance companies is A) disability insurance. B) annuities. C) health insurance. D) all of the above. Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 38) ________ is an insurance product that will help if you live longer than you expect. For an initial fixed sum or stream of payments, the insurance company agrees to pay you a fixed amount for as long as you live. A) Life insurance proper B) Disability insurance C) An annuity D) Health insurance Answer: C Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 39) The broad categories of life insurance products including which of the following? A) Term B) Whole life C) Universal life D) All of the above Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition

40) Which life insurance policy usually requires the insured to pay a level premium for the duration of the policy, and the overpayment accumulates as a cash value that can be borrowed by the insured at reasonable rates? A) Whole life B) Term C) Universal life D) None of the above Answer: A Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 41) What insurance protects against liability for harm the insured may cause to others as a result of product failure or accidents? A) Property insurance B) Health insurance C) Life insurance D) Casualty insurance Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 42) A credit default swap, or CDS, is essentially A) insurance against default on a financial instrument. B) a method for swapping credit agreements between banks. C) a method for companies in default to swap credit ratings. D) insurance against the default of a party in a swap agreement. Answer: A Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 43) During the global financial crisis, state and local governments now found their interest costs rising. Which of the following were causes of this? A) Lower tax revenues because of the weaker economy B) Weaker value of monoline insurance guarantees on their debt C) Both A and B D) None of the above Answer: C Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition

44) Between 1995 and 2009, the amount of credit default swaps (CDSs) exploded, along with the marketing of securitized mortgages. By their peak in 2008, there were about ________ of CDSs outstanding. A) $62 million B) $62 billion C) $6.2 trillion D) $62 trillion Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 45) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) Collection of information and screening of potential policyholders B) Risk-based premiums C) Cancellation of insurance D) All of the above Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 46) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices? A) Collection of information and screening of potential policyholders B) Risk-based premiums C) Deductibles and coinsurance D) All of the above E) Only A and B of the above Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 47) If automobile insurance companies were prevented from charging risk-based premiums, but could selectively screen potential policyholders, the likely effect would be to A) increase the number of young men obtaining insurance coverage relative to young women. B) decrease the number of young women obtaining insurance coverage relative to young men. C) decrease the number of young men obtaining insurance coverage relative to young women. D) do both A and B of the above. Answer: C Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition

48) The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of A) risk-based premiums. B) an attempt to minimize adverse selection. C) coinsurance. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 49) Insurance management tools that give policyholders incentives to avoid accidents insured against include A) deductibles. B) risk-based premiums. C) coinsurance. D) all of the above. Answer: D Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 50) Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide are an example of a A) restrictive provision. B) restrictive covenant. C) anti-fraud exclusion. D) risk-based deductible. Answer: A Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 51) The fastest growing financial intermediary is A) commercial banks. B) pension plans. C) life insurance companies. D) mutual funds. Answer: B Topic: Chapter 21.5 Pensions Question Status: Previous Edition

52) Which of the following has not contributed to the growth of pension plans? A) Privatization of Social Security B) Urbanization C) Retirement at earlier ages D) Increases in life expectancy Answer: A Topic: Chapter 21.5 Pensions Question Status: Previous Edition 53) A company's pension plan promises employees an annual payment equal to 2% of their final years' income, times the years of service. This is an example of a ________ pension plan. A) defined-benefit B) defined-contribution C) underfunded D) government Answer: A Topic: Chapter 21.6 Types of Pensions Question Status: New Question 54) The majority of private pension plan assets are held in A) corporate bonds. B) cash. C) stocks. D) government securities. Answer: C Topic: Chapter 21.6 Types of Pensions Question Status: New Question 55) A company's pension plan promises employees a specific amount of income when they retire. However, the plan does not have the assets to meet these future obligations to employees. This plan represents a defined-________ plan that is ________. A) benefit; underfunded B) benefit; overfunded C) contribution; underfunded D) contribution; overfunded Answer: A Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 56) Social Security is a A) fully funded pension plan. B) federally insured private pension plan. C) government sponsored private pension plan. D) "pay-as-you-go" system. Answer: D Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 419 Copyright © 2018 Pearson Education, Inc.

57) Since 1985, Social Security fund assets have A) fallen each year. B) remained relatively constant. C) fluctuated up-and-down several times. D) grown dramatically. Answer: D Topic: Chapter 21.6 Types of Pensions Question Status: New Question 58) The Social Security system is an example of a public pension plan that is A) underfunded. B) fully funded. C) overfunded. D) none of the above. Answer: A Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 59) According to the the Social Security Administration, the fund assets are expected to be fully depleated by A) 2040. B) 2034. C) 2028. D) 2022. Answer: B Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 60) Which of the following statements regarding the funding of Social Security is false? A) In 2010, workers contributed 6.2% of their wages up to a maximum of $106,800. B) Employers contribute an amount equal to the workers' contributions. C) Interest, dividend, rent, and royalty income are also taxed to provide supplemental funds for Social Security. D) Contributions exceeding the amounts paid to current Social Security recipients are invested in Treasury bonds to build up a Social Security trust fund. Answer: C Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition

61) Private pension plan assets are invested mainly in A) government securities. B) corporate bonds. C) stock. D) certificates of deposit. Answer: C Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 62) Which of the following pensions does not promise employees a specific retirement benefit? A) Defined-benefit plan B) Defined-contribution plan C) Overfunded plan D) Underfunded plan Answer: B Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 63) Which of the following is not a proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees? A) Raise the maximum income cap on which workers and employers are taxed. B) Provide more generous annual cost of living increases. C) Raise the minimum age for receiving benefits. D) Reduce the amount of future benefits. Answer: B Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 64) Which proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees does the AARP find least objectionable? A) Raise the maximum income cap on which workers and employers are taxed. B) Provide more generous annual cost of living increases. C) Privatize Social Security. D) Lower immigration restrictions to increase the number of workers paying into the Social Security system. Answer: A Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition

65) Privatization of Social Security A) would transform the program from an unfunded pay-as-you-go system to a fully funded pension plan. B) would mean that workers' current contributions to Social Security would no longer be available to pay benefits to current retirees. C) receives less public support when the stock market declines. D) all of the above E) none of the above Answer: D Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 66) Fraudulent practices and other abuses of private pension funds led Congress to enact the A) Federal Deposit Insurance Corporation Act. B) Employee Retirement Income Security Act. C) Federal Reserve Act. D) Social Security Act. Answer: B Topic: Chapter 21.7 Regulation of Pensions Plans Question Status: Previous Edition 67) Keogh plans and IRAs are A) individual pension plans. B) government pension plans. C) corporate pension plans. D) public pension plans. Answer: A Topic: Chapter 21.7 Regulation of Pensions Plans Question Status: Previous Edition 68) The Pension Benefit Guarantee Corporation, a government agency that performs a role similar to that of the FDIC, insures pension benefits A) up to $27,000 per person. B) up to $57,000 per person. C) up to $127,000 per person. D) up to $257,000 per person. Answer: B Topic: Chapter 21.7 Regulation of Pensions Plans Question Status: New Question

69) Which of the following is not what can we expect in the future regarding pension funds? A) Pension funds will help create more stable financial markets. B) Pension funds will continue their growth and popularity. C) Pension fund variety will continue to expand. D) Pension funds will gain increased control over corporations as they invest in the equity of these companies. Answer: A Topic: Chapter 21.8 The Future of Pension Funds Question Status: Previous Edition 21.2 True/False 1) Adverse selection occurs when those most likely to get insurance payoffs are the ones who want to purchase the insurance the most. Answer: TRUE Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 2) The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of coinsurance. Answer: FALSE Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 3) When a life-long chain smoker attempts to purchase a life insurance policy, the insurance company faces the problem of adverse selection. Answer: TRUE Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 4) The higher the insurance coverage, the more the policyholder can gain from risky activities that make an insurance payoff less likely. Answer: FALSE Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 5) Vesting refers to the length of time that a person must be enrolled in a pension plan before being entitled to receive benefits. Answer: TRUE Topic: Chapter 21.7 Regulation of Pensions Plans Question Status: Previous Edition 6) A defined-contribution plan promises employees a specific amount of retirement income. Answer: FALSE Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 423 Copyright © 2018 Pearson Education, Inc.

7) The Pension Benefit Guarantee Corporation performs a role similar to that of the Office of Thrift Supervision. Answer: FALSE Topic: Chapter 21.7 Regulation of Pensions Plans Question Status: Previous Edition 8) Social Security is a "pay-as-you-go" system. Answer: TRUE Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 9) The Social Security system is an example of a pension plan that is fully funded. Answer: FALSE Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 10) Demographic trends and changes in retirement patterns suggest that Social Security funding problems will ease over the next few decades. Answer: FALSE Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 11) A whole life insurance policy pays a death benefit if the policyholder dies. Answer: TRUE Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 12) Most private pension plans are insured by the Penny Benny, which pays benefits when a plan's sponsor goes bankrupt. Answer: TRUE Topic: Chapter 21.7 Regulation of Pensions Plans Question Status: Previous Edition 13) Property and casualty insurance protects against losses from fire, theft, storm, explosion, and even neglect. Answer: TRUE Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 14) Health maintenance organizations (HMOs) shift the risk from the provider to the insurance company. Answer: FALSE Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition

15) Casualty insurance can be provided in either named-peril policies or open-peril policies. Answer: FALSE Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 16) A monoline insurance company is an insurance company which specialize in credit insurance alone. Answer: TRUE Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 21.3 Essay 1) Who has the strongest incentive to monitor the performance of individual pension plans such as Keoghs and IRAs? Explain. Topic: Chapter 21.7 Regulation of Pensions Plans Question Status: Previous Edition 2) Why do life insurance companies and pension plans invest heavily in long-term assets? Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 3) Why must insurance companies screen applicants so carefully? Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 4) Distinguish between different types of life insurance. Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 5) What are the major differences between life insurance and property and casualty insurance? Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 6) Why will Social Security funding problems rise in the coming decades? Identify and evaluate the proposals that have been suggested to ease or reverse these problems. Topic: Chapter 21.6 Types of Pensions Question Status: Previous Edition 7) Describe how insurance companies try to reduce adverse selection and moral hazards. Topic: Chapter 21.2 Fundamentals of Insurance Question Status: Previous Edition 8) How did AIG, a trillion-dollar insurance giant, find itself on the brink of bankruptcy in 2008? Topic: Chapter 21.4 Types of Insurance Question Status: Previous Edition 425 Copyright © 2018 Pearson Education, Inc.

9) In the future, do the authors expect pension funds to continue to grow in popularity? Topic: Chapter 21.8 The Future of Pension Funds Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 22 Investment Banks, Security Brokers and Dealers, and Venture Capital Firms 22.1 Multiple Choice 1) An investment bank is a financial institution that A) bundles small deposits into larger loans. B) helps corporations raise funds. C) holds most of its assets in commercial paper. D) does all of the above. E) does only A and B of the above. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 2) In a ________, new issues of a security are sold to buyers by the corporation or government agency ultimately using the funds. A) primary market B) secondary market C) capital market D) money market Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 3) Most firms ________ issue capital market securities frequently. ________ of corporate expansion is financed using profits retained from prior-period earnings. A) do not ; Over 80% B) do not ; Less than 40% C) do; Less than 40% D) do; Over 80% Answer: A Topic: Chapter 22.1 Investment Banks Question Status: New Question 4) In a ________, a security is sold between investors, and does not (necessarily) involve the corporation or government agency ultimately using the funds. A) primary market B) secondary market C) capital market D) money market Answer: B Topic: Chapter 22.1 Investment Banks 426 Copyright © 2018 Pearson Education, Inc.

Question Status: Previous Edition

5) The Glass-Steagall Act A) separated commercial and investment banking. B) made it illegal for a commercial bank to buy or sell securities on behalf of its customers. C) made it illegal for investment banks to engage in the underwriting of corporate securities. D) did all of the above. E) did only A and B of the above. Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 6) During the Depression, about ________ banks failed (about 40% of all commercial banks). A) 500 B) 1,000 C) 5,000 D) 10,000 Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 7) Investment banks sell ________ securities to the public, and brokerage firms sell ________ securities to the public. A) new; existing B) new and existing; existing C) existing; new D) existing; new and existing Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 8) The primary function of investment banks is A) the bundling of deposits into loans. B) extending long-term credit to other financial institutions. C) helping corporations raise funds. D) providing credit to firms engaged in international trade. Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 9) The primary function of investment banks is to A) extend credit to stock brokers and dealers. B) extend credit to investors. C) extend credit to corporations. D) help corporations issue new securities. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 428 Copyright © 2018 Pearson Education, Inc.

10) Which is not an activity of investment banks? A) Underwriting new issues of corporate stocks and bonds B) Acting as deal makers in mergers C) Acting as intermediaries in the buying and selling of businesses or parts of businesses D) Underwriting new issues of federal government bonds Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 11) Tasks that investment bankers perform when acting as underwriters to sell securities to the public include A) pricing the security. B) preparing the filings required by the Securities and Exchange Commission. C) arranging for the security to be rated. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 12) Investment banks find it less difficult to price securities if the firm has prior issues currently selling in the market, called A) secondary issues. B) seasoned issues. C) outstanding issues. D) experienced issues. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 13) The process of underwriting a stock or bond issue requires that the investment bank A) assure investors that the issue will provide them a high return. B) purchase the entire issue at a predetermined price if the quantity demanded by consumers is insufficient at the predetermined price. C) purchase the entire issue at a predetermined price and then resell it in the market. D) do both A and B of the above. Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition

14) The registration statement the securities underwriter files with the SEC contains information about A) the firm's financial condition, management, competition, industry, and experience. B) how the funds will be used. C) management's assessment of the risk of the securities. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 15) SEC registration is A) required for all securities. B) required if less than $1.5 million in securities are issued per year. C) not required for securities that are sold through a private placement. D) required if the securities mature in less than one year. E) not required if securities are underwritten by a reputable investment bank. Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 16) By law, investors must be given a portion of the registration statement before they can invest in a new security. This document is called a A) prospectus. B) proxy statement. C) fiduciary warrant. D) debenture. Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 17) Investment banks advertise upcoming securities offerings with block ads in the Wall Street Journal. Such an ad is called a A) tombstone. B) marker. C) prospectus. D) registration statement. Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition

18) Most investment banks are attached to A) large commercial banks. B) large brokerage houses. C) finance companies. D) large nonfinancial corporations. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 19) From an investment banker's perspective, the best outcome occurs when a new issue is A) undersubscribed. B) fully subscribed. C) oversubscribed. D) syndicated. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 20) Investment banks may lose ________ if new securities issues are ________. A) large amounts of money; oversubscribed B) large amounts of money; fully subscribed C) future business; oversubscribed D) future business; undersubscribed Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 21) The largest U.S. underwriter of global debt and equity issues, as of 2016, was A) Merrill Lynch. B) J.P. Morgan. C) Morgan Stanley. D) Goldman Sachs. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Updated from Previous Edition 22) The ten largest U.S. underwriter of global debt and equity issues account for what percent of the total market for such underwriting? A) 20% B) 25% C) 41% D) 53% Answer: D Topic: Chapter 22.1 Investment Banks Question Status: New Question

23) Often investment bankers will form a group, each one buying only a portion of the new securities to be issued. Such a group is called an underwriting A) alliance. B) syndicate. C) association. D) guild. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 24) In a ________ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive, but agrees to sell the securities on a commission basis. A) best efforts B) brokered C) private-placement D) jump-start Answer: A Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 25) Under best efforts underwriting, the underwriter A) pays for the entire security issue. B) sells the security on a commission basis. C) spreads the risk among different brokerage houses. D) makes a special appeal to the Securities and Exchange Commission to delay the issue. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 26) Private placements A) do not require the services of investment bankers. B) need not be registered with the SEC. C) are more common in the sale of stocks than for bonds. D) all of the above. E) are only A and B of the above. Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 27) The most active investment banking firm in the private placement market is A) Merrill Lynch. B) Lehman Brothers. C) Goldman Sachs. D) Morgan Stanley. Answer: C Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 432 Copyright © 2018 Pearson Education, Inc.

28) The buyers of private placement issues are most likely to be A) insurance companies. B) pension funds. C) investment banks. D) all of the above. E) only A and B of the above Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 29) The buyers of private placement securities are most likely to be A) insurance companies. B) pension funds and mutual funds. C) commercial banks. D) all of the above E) only A and B of the above Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 30) Which of the following statements about private placements are true? A) Private placements are more common for the sale of bonds than for stocks. B) Investment bankers, though not required for a private placement, often facilitate the transaction. C) Investment bankers help the issuing firm file the paperwork required by the SEC. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 31) Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included A) helping firms that want to acquire another firm locate a firm to pursue. B) helping would-be acquirers solicit shareholders through a tender offer. C) helping target firms ward off undesired takeover attempts. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition

32) Which of the following is not a step in the process by which an investment bank assists in the sale of a company or corporate division? A) Preparation of a confidential memorandum B) Negotiation of a letter of intent C) Preparation of a definitive agreement D) Forming a syndicate of purchasers Answer: D Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 33) The best known investment banker involved in mergers and acquisitions, credited with inventing the junk bond market, is A) Ivan Boesky. B) Michael Milken. C) James Garner. D) Michael Douglas. Answer: B Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 34) ________ perform their main function in the primary market for securities and ________ perform their main function in the secondary market. A) Investment banks; securities brokers and dealers B) Securities brokers and dealers; investment banks C) Securities brokers; securities dealers D) Securities dealers; securities brokers Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 35) The securities sales, the ________ price is the price that the broker pays for securities they buy for their inventory. A) bid B) ask C) midpoint D) transaction Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition

36) The securities sales, the ________ price is the price that the broker receive when they sell the securities. A) bid B) ask C) midpoint D) transaction Answer: B Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 37) In a primary market, ________ sell new issues of securities; in a secondary market, ________ assist in trading previously issued securities. A) securities dealers; securities brokers B) securities brokers; securities dealers C) investment banks; securities brokers and dealers D) securities brokers and dealers; investment banks Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 38) Which of the following best explains the difference between brokers and dealers? A) Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices. B) Dealers are pure middlemen; brokers make markets by standing ready to buy and sell at given prices. C) Dealers link up buyers and sellers, but do not stand ready to buy and sell from their inventories of securities; brokers stand ready to buy and sell from their inventories of securities. D) There is no difference between brokers and dealers. Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 39) Securities dealers A) hold inventories of securities, which they sell to customers who want to buy. B) hold securities that they have purchased from customers who wanted to sell. C) are called market takers, as they have significantly cut into the market that brokers used to dominate. D) do all of the above. E) do only A and B of the above. Answer: E Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition

40) Securities dealers A) sell securities out of their inventories to customers who want to buy. B) buy securities, which they add to their inventories, from customers who want to sell. C) are largely responsible for the health and growth of small businesses in the United States. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 41) By making a market in thinly traded stocks, securities dealers solve the ________ trading problem, which is of particular benefit to ________ businesses. A) synchronous; large B) synchronous; small C) nonsynchronous; large D) nonsynchronous; small Answer: D Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 42) Which of the following is not a service securities brokers offer their clients? A) Holding customers' stock for safekeeping B) Providing insurance against loss of the securities C) Providing insurance against loss of value of the securities D) Extending margin credit Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 43) An instruction to a securities agent to buy or sell the security at the current market price is called a A) limit order. B) market order. C) stop loss order. D) margin order. Answer: B Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 44) An instruction to a securities agent to sell a stock when it reaches a specific price is a A) short sell. B) market order. C) limit order. D) stop loss order. Answer: D Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 436 Copyright © 2018 Pearson Education, Inc.

45) An instruction to a securities agent to purchase a stock as long as its price does not exceed a specified level is a A) short sell. B) market order. C) limit order. D) stop loss order. Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 46) ________ credit refers to loans advanced by the brokerage house to help investors buy securities. A) Long B) Market C) Margin D) Stop loss Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: New Question 47) To take advantage of anticipated stock price decreases, an investor would use A) a market order. B) a limit order. C) a short sell. D) margin credit. Answer: C Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 48) Which of the following statements about cash management accounts (CMAs) are true? A) The cash management account was developed in 1977 by Merrill Lynch. B) The advantage of brokerage-based cash management accounts is that they make it easier to buy and sell securities. C) As a result of CMAs, the distinction between banking activities and the activities of nonbank financial institutions has become more clearly defined. D) All of the above are true. E) Only A and B of the above are true. Answer: E Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition

49) The largest full-service broker is ________ with about 17,000 financial advisors and $2.2 trillion in client assets. A) Bank of America Merrill Lynch B) Charles Schwab Corp. C) Ameritrade D) Smith Barney Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 50) A full-service broker offers its clients all of the following except A) execution of trades on request. B) low transaction fees. C) research and investment advice. D) development of long-term customer relationships. Answer: B Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 51) A securities dealer stands ready to make a market in the security at any time. For this reason, dealers are also called A) market makers. B) "brokers and dealers." C) liquidity traders. D) demand dealers. Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 52) If an investment is liquid, it can be sold A) quickly. B) anonymously. C) only on "rainy" days. D) through a full-service broker. Answer: A Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 53) An investment pool is formed to A) manipulate the market by spreading false rumors. B) lower brokerage fees by combining security purchases. C) share investment advice among member investors. D) take advantage of tax breaks introduced by the 1933 and 1934 securities acts. Answer: A Topic: Chapter 22.3 Regulation of Securities Firms Question Status: Previous Edition 438 Copyright © 2018 Pearson Education, Inc.

54) ________ information is unpublicized facts known only to the management of a corporation. In the U.S., the SEC restricts brokers and dealers from trading on such information. A) Management B) Insider C) Proxy D) Global Answer: B Topic: Chapter 22.3 Regulation of Securities Firms Question Status: New Question 55) A ________ is a specialized firm that finances young, start-up companies. A) venture capital firm B) finance company C) small-business finance company D) capital-creation company Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 56) Which of the following provides funds to companies not yet ready to sell securities to the public? A) Investment banks B) Securities brokers and dealers C) Venture capital firms D) None of the above Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 57) The first true venture capital firm was ________, established in 1946 by MIT president Karl Compton and local business leaders. A) American Research & Development (ARD) B) Charles River Development C) Redsocks Capital D) the MIT Fund Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 58) Which of the following is the first phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C. Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 439 Copyright © 2018 Pearson Education, Inc.

59) Which of the following is the second phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C. Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 60) Which of the following is the third and final phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C. Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 61) Venture capital firms are usually organized as A) closed-end mutual funds. B) limited partnerships. C) corporations. D) nonprofit businesses. Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 62) Which of the following is not a characteristic feature of venture capital firms? A) Funding just one or a small number of firms B) Holding equity in the firms that are funded C) Having a long-term investment horizon D) Providing advice and assistance to the firms that are funded Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 63) Which of the following is a characteristic feature of venture capital firms? A) Developing a portfolio of companies B) Holding debt in the firms that are funded C) Allowing firms to use the funds as they see fit D) Having a short-term investment horizon Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition

64) The sources of venture capital funding have A) shifted from wealthy individuals to pension funds and corporations. B) shifted from pension funds and corporations to wealthy individuals. C) decreased since 1990. D) done none of the above. Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 65) A typical venture capital firm has a ________ number of investors who each contribute a ________ amount of money to the fund. A) large; small B) small; large C) large; large D) small; small Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 66) Which of the following statements about venture capital funding is not correct? A) Exiting an investment can occur through an initial public offering or by merger or acquisition. B) Venture capital investing is highly risky. C) Venture capital firms may focus on a limited geographic area or on specific industries to facilitate monitoring their investments. D) Firms hope to exit a start-up firm in 3-5 years. Answer: D Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 67) The 20-year average return of venture capital firms has been about A) 56%. B) 8%. C) 24%. D) 102%. Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 68) Since the stock market decline in 2000, the number of companies funded and the total funds invested by venture capital firms have A) held steady. B) declined. C) increased slightly. D) increased sharply. Answer: B Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 441 Copyright © 2018 Pearson Education, Inc.

69) The ________ of the volume handled by brokers and dealers is in the publicly held securities. A) vast majority B) low percentage C) total amount D) none of the above Answer: A Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 70) With private investing, A) capital is raised by selling securities to the public. B) capital is raised by issuing new shares of stock. C) a limited partnership is formed that raises money from a small number of high-wealth investors. D) all of the above occur Answer: C Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 71) Which of the following is an advantage to a private equity buyout? A) They are subject to the controversial regulations included in the 2002 Sarbanes-Oxley Act. B) The CEOs frequently have more time and flexibility to enact changes need to turn around subpar companies. C) Both A and B. D) Neither A nor B. Answer: B Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 72) In a private equity buyout, a ________ company goes ________. A) private; public B) public; private C) Both A and B. D) Neither A nor B. Answer: B Topic: Chapter 22.6 Private Equity Buyouts Question Status: New Question

73) When taking a particular course of action for a private equity firm, the CEO of a privately held company needs to convince ________ that it is a good decision. A) the shareholders B) the managing partners C) no one D) both A and B Answer: B Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 74) There are ________ risk and ________ returns to investors in private equity buyouts. A) high; low B) low; high C) high; high D) low; low Answer: C Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 75) Which of the following is a description of a public firm acquired by a private equity investment? A) Public shares are retired. B) A public company goes private. C) The firm is no longer subject to controls and oversight required of publicly held companies. D) All of the above are correct. Answer: D Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 76) How do investors in a private equity buyout firm earn their return? A) By making a small investment that is traded on an exchange such as the NYSE. B) When the public company goes private, shares in the private firm are then easily sold for a profit. C) When the private firm is sold to another firm or is taken public, the investor then earns a return. D) Investors in private equity buyout firms are unlikely to ever make a return. Answer: C Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition

22.2 True/False 1) The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities on behalf of its customers. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 2) When a firm issues stock for the first time in an initial public offering, it is difficult for an investment bank to determine what the correct price should be. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 3) To help raise the money to finance railroad expansions, J. P. Morgan's father resided in London and sold Morgan railroad securities to European investors. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 4) An undersubscribed issue occurs when sales agents have been unable to generate sufficient interest among their customers to sell all the securities by the issue date. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 5) Investment banks form syndicates to reduce the risk involved in selling new securities. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 6) Resisted takeovers are called hostile. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 7) Private placements are more common for the sale of stocks than for bonds. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 8) Investment bankers perform a number of tasks required to sell securities to the public, among them pricing the security, preparing the filings required by the SEC, arranging for the security to be rated, and marketing the security through their contacts with brokerage houses. Answer: TRUE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 444 Copyright © 2018 Pearson Education, Inc.

9) One disadvantage of the private placement of securities issues is the high cost of registering the issue. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 10) Junk bonds are high-risk, high-return equity securities that were used primarily to finance takeover attempts. Answer: FALSE Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 11) The Federal Reserve sets the percentage of the stock purchase price that brokerage houses can lend (margin credit). Answer: TRUE Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: New Question 12) The Securities Acts Amendment of 1975 abolished fixed commissions. Answer: TRUE Topic: Chapter 22.3 Regulation of Securities Firms Question Status: Previous Edition 13) An investment pool is formed to manipulate the market for a stock by spreading false rumors about the health of the firm. Answer: TRUE Topic: Chapter 22.3 Regulation of Securities Firms Question Status: Previous Edition 14) Venture capital firms reduce risk by investing in only a few companies which can be carefully monitored and nurtured. Answer: FALSE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 15) Although venture capitalists backed many successful high-technology companies during the 1980s and 1990s, several tech firms started without any venture backing, including Apple Computer, Cisco Systems, and Microsoft. Answer: FALSE Topic: Chapter 22.5 Private Equity Investment Question Status: New Question 16) Investors in venture capital firms expect to profit quickly from their investment. Answer: FALSE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 445 Copyright © 2018 Pearson Education, Inc.

17) An additional perk of a private equity firm is that the profits for both CEOs and the partners are taxed at the 15% capital gains rate rather than the 35% rate they would suffer if the income was received as income. Answer: TRUE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 18) Within the broad universe of private equity sectors, the two most common are venture funds and capital buyouts. Answer: TRUE Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 19) In a typical private equity buyout, a partnership is formed and private equity investors are contacted to pledge participation. Answer: TRUE Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 20) In a private equity buyout, instead of a private company going public, a public company goes private. Answer: TRUE Topic: Chapter 22.6 Private Equity Buyouts Question Status: New Question 21) In a private equity buyout, even though the public shares are then retired, the firm remains subject to the controls and oversight required of publicly held companies, since it was once public. Answer: FALSE Topic: Chapter 22.6 Private Equity Buyouts Question Status: New Question 22.3 Essay 1) Explain how rulings by the courts and regulators have made the markets served by both commercial and investment banks more competitive. Topic: Chapter 22.4 Relationship Between Securities Firms and Commercial Banks Question Status: Previous Edition 2) Discuss the difference between full-service and discount brokers. Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 3) What services do investment bankers provide for firms that are issuing new securities? Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 446 Copyright © 2018 Pearson Education, Inc.

4) What is underwriting? Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 5) How do best efforts agreements and private placements differ from the usual process of underwriting new securities issues? Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 6) Explain why private placements of securities are an attractive way of raising funds for some firms. Topic: Chapter 22.1 Investment Banks Question Status: Previous Edition 7) Describe the differences between securities brokers and securities dealers. Topic: Chapter 22.2 Securities Brokers and Dealers Question Status: Previous Edition 8) What niche in the financial system do venture capital firms fill? Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 9) Discuss some of the abuses in the market prior to the passage of the securities acts in 1933 and 1934. Topic: Chapter 22.3 Regulation of Securities Firms Question Status: Previous Edition 10) How do venture capital firms overcome the problem of information asymmetries that accompany start-up firms? Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 11) What is the difference between a venture fund and a capital buyout? Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 12) Discuss the several ways in which venture capitalists reduce asymmetric information. Topic: Chapter 22.5 Private Equity Investment Question Status: Previous Edition 13) Discuss the advantages of a private equity buyout. Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition

14) Discuss the life cycle of a equity buyout. Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition 15) What ultimately happened to Webvan, the Internet grocer that received more than $1 billion in venture financing. Topic: Chapter 22.6 Private Equity Buyouts Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 23 Risk Management in Financial Institutions 23.1 Multiple Choice 1) Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) adverse selection B) moral hazard C) moral suasion D) intentional fraud Answer: A Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 2) If borrowers with the most risky investment projects are more likely to seek bank loans than borrowers with the safest investment projects, banks face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) conflict of interest. Answer: B Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 3) Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) adverse selection problem. B) lemon problem. C) adverse credit risk problem. D) moral hazard problem. Answer: D Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 4) Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as A) screening and monitoring of loan applicants. 448 Copyright © 2018 Pearson Education, Inc.

B) collateral and compensating balances. C) credit rationing. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition

5) To be profitable, financial institutions must overcome the adverse selection and moral hazard problems that make loan defaults A) more likely. B) certain. C) unlikely. D) impossible. Answer: A Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 6) In one sense, ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; diversifying B) specialization in lending; rationing C) credit rationing; diversifying D) screening; rationing Answer: A Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 7) From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection Answer: D Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 8) Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called A) proscription bonds. B) collateral clauses. C) restrictive covenants. D) liens. Answer: C Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition

9) Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults. To do this, banks A) specialize in lending to certain industries or regions. B) write restrictive covenants into loan contracts. C) expend resources to acquire accurate credit histories of their potential loan customers. D) do all of the above. Answer: D Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 10) A bank's commitment (for a specified future period of time) to provide a firm with loans up to a given amount at an interest rate that is tied to a market interest rate is called A) credit rationing. B) a line of credit. C) continuous dealings. D) none of the above. Answer: B Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 11) Lines of credit and long-term relationships between banks and their customers A) reduce the costs of information collection. B) make it easier for banks to screen good risks from bad. C) enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 12) Compensating balances A) are a particular form of collateral commonly required on commercial loans. B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank. C) allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions. D) are all of the above. Answer: D Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition

13) Compensating balances A) cannot legally be taken my a lending bank if the borrower defaults. B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank. C) allow banks to monitor firms' savings practices, which can yield information about their borrowers' financial conditions. D) are all of the above. Answer: B Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 14) A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to A) place a bank officer on their board of directors. B) place a corporate officer on the bank's board of directors. C) keep compensating balances in a checking account at the bank. D) do all of the above. E) do only A and B of the above. Answer: C Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 15) Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the requirement that A) firms keep compensating balances at the banks from which they obtain their loans. B) firms place on their board of directors an officer from the bank. C) loan contracts include restrictive covenants. D) individuals provide detailed credit histories to bank loan officers. Answer: B Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 16) When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, it is said to engage in A) constrained lending. B) strategic refusal. C) credit rationing. D) collusive behavior. Answer: C Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition

17) When a lender refuses to make a loan, even though borrowers are willing to pay the stated interest rate or even a higher rate, it is said to engage in A) specialized lending. B) strategic refusal. C) diversified lending. D) coercive behavior. E) none of the above. Answer: E Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 18) Credit rationing occurs when a bank A) refuses to make a loan of any amount to a borrower, even when she is willing to pay a higher interest rate. B) restricts the amount of a loan to less than the borrower would like. C) does either A or B of the above. D) does neither A nor B of the above. Answer: C Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 19) Credit rationing occurs when a bank A) makes a loan to a borrower, but charges an interest rate rate higher than should be required. B) restricts the amount of a loan to less than the borrower would like. C) does either A or B of the above. D) does neither A nor B of the above. Answer: B Topic: Chapter 23.1 Managing Credit Risk Question Status: New Question 20) Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans, banks A) ration credit, granting borrowers smaller loans than they have requested. B) ration credit, charging higher interest rates to borrowers who want large loans than to those who want small loans. C) ration credit, charging higher fees as a percentage of the loan to borrowers who want large loans than to those who want small loans. D) do none of the above. Answer: A Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition

21) One form of credit rationing involves granting borrowers smaller loans than they have requested. Why does this reduce moral hazard? A) Smaller loans will force the borrower to seek additional financing from other banks, spreading out the moral hazard problem. B) Smaller loans will force the borrower to bypass the project, eliminating any moral hazard. C) Larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans. D) None of the above is correct. Answer: C Topic: Chapter 23.1 Managing Credit Risk Question Status: New Question 22) When banks offer borrowers smaller loans than they have requested, banks are said to A) shave credit. B) discount the loan. C) raze credit. D) ration credit. Answer: D Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 23) Which of the following are not generally rate-sensitive assets? A) Securities with a maturity of less than one year B) Variable-rate mortgages C) Fixed-rate mortgages D) All of the above are rate-sensitive assets E) None of the above are rate-sensitive assets Answer: C Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 24) Liabilities that are partially, but not fully, rate-sensitive include A) checkable deposits. B) federal funds. C) non-negotiable CDs. D) fixed-rate mortgages. E) money market deposit accounts. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

25) If a bank has more rate-sensitive liabilities than rate-sensitive assets, then a(n) ________ in interest rates will ________ bank profits. A) increase; increase B) increase; reduce C) decline; reduce D) decline; not affect Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 26) If a bank has more rate-sensitive assets than rate-sensitive liabilities, then a(n) ________ in interest rates will ________ bank profits. A) increase; increase B) increase; reduce C) decline; increase D) decline; not affect Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 27) If a bank has ________ rate-sensitive assets than rate-sensitive liabilities, then a(n) ________ in interest rates will increase bank profits. A) more; decline B) more; increase C) less; increase D) both A and C Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 28) The difference between rate-sensitive liabilities and rate-sensitive assets is known as the A) duration. B) interest-sensitivity index. C) interest-rate risk index. D) gap. Answer: D Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

First National Bank

Table 23.1 29) Referring to Table 23.1, First National Bank has a gap of A) -30. B) +30. C) 60. D) 0. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 30) Referring to Table 23.1, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis) will A) decline by $0.5 million. B) decline by $1.5 million. C) decline by $2.5 million. D) increase by $1.5 million. Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 31) Refer to Table 23.1. Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, a rise in interest rates from 5% to 10% will cause the net worth of First National to ________ by ________ of the total original asset value. A) increase; 11% B) decline; 11% C) increase; 10% D) decline; 5% Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

First National Bank

Table 23.2 32) Referring to Table 23.2, First National Bank has a gap of A) -10. B) 10. C) 20. D) 0. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 33) Referring to Table 23.2, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis) will A) decline by $0.5 million. B) decline by $1.5 million. C) decline by $2.5 million. D) increase by $2.0 million. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 34) Refer to Table 23.2. Assuming that the average duration of the bank's assets is four years, while the average duration of its liabilities is three years, a rise in interest rates from 5 percent to 10 percent will cause the net worth of First National to ________ by ________ of the total original asset value. A) decline; 5% B) decline; 1.3% C) decline; 6.2% D) increase; 5% Answer: C Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

35) If First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will cause profits to A) increase by $10 million. B) increase by $1.0 million. C) decline by $10 million. D) decline by $1.0 million. Answer: D Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 36) If First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $15 million. B) increase by $1.5 million. C) decline by $15 million. D) decline by $1.5 million. Answer: D Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 37) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A) basic duration analysis. B) basic gap analysis. C) interest-exposure analysis. D) gap-exposure analysis. Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 38) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called A) basic gap analysis. B) the segmented maturity approach to gap analysis. C) the maturity bucket approach to gap analysis. D) the segmented maturity approach to interest-exposure analysis. E) none of the above. Answer: C Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

39) Duration gap analysis A) is a refinement of basic gap analysis that accounts for interest-rate changes over a multiyear period. B) is a refinement of basic gap analysis that accounts for how long a gap will last. C) is a complement to basic gap analysis that accounts for the effect of interest rate changes on market value. D) is a complement to basic gap analysis that accounts for the influence of partially rate-sensitive assets. Answer: C Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 40) Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A) securities portfolio; nondeposit liabilities B) loan portfolio; nondeposit liabilities C) loan portfolio; rate-sensitive liabilities D) rate-sensitive assets; rate-sensitive liabilities E) assets; liabilities Answer: E Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 41) To use the concept of duration to analyze the effect of changes in interest rates on the market value of an asset, a bank manager would multiply A) the negative of the duration of the asset by the change in the interest rate, Δi. B) the negative of the duration of the asset by Δi /(1 + i). C) the duration of the asset by the change in the interest rate, Δi. D) the duration of the asset by Δi /(1 + i). Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 42) If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9 percent will lead to A) a rise in the market value of its net worth of 5.66 percent. B) a rise in net interest income of 5.66 percent. C) a fall in the market value of its net worth of 5.66 percent. D) a fall in net interest income of 5.66 percent. E) an unknown change. Answer: C Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

43) If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3 percent will lead to A) a rise in the market value of its net worth of 5.66 percent. B) a fall in the market value of its net worth of 5.66 percent. C) a rise in net interest income of 5.66 percent. D) a fall in net interest income of 5.66 percent. E) an unknown change. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 44) If a decline in interest rates causes the market value of a bank's net worth to rise, then the bank must have a A) negative duration gap. B) positive duration gap. C) negative gap. D) positive gap. Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 45) If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have a A) negative duration gap. B) positive duration gap. C) negative gap. D) positive gap. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 46) One problem with duration gap analysis is that it A) is calculated assuming that the yield curve is flat. B) is calculated assuming that the yield curve does not change. C) does not measure the sensitivity of net worth to interest rate changes. D) does not measure the sensitivity of income to interest rate changes. E) applies only to financial institutions. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

47) One problem with basic gap analysis is that it A) is calculated assuming interest rates on all maturities are equal. B) is calculated assuming interest rates on all maturities change by equal amounts. C) measures the sensitivity of net worth to interest rate changes. D) does not measure the sensitivity of income to interest rate changes. E) applies only to financial institutions. Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 48) A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities. A) increase; increase B) decrease; increase C) decrease; decrease D) increase; decrease Answer: D Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 49) A bank manager concerned about interest income who expects interest rates to fall and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities. A) increase; increase B) decrease; increase C) decrease; decrease D) increase; decrease Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 50) In theory, a bank manager can immunize the market value of the bank's net worth from interest-rate risk by adjusting assets and liabilities so that the duration gap is equal to A) one. B) zero. C) a positive value. D) a negative value. Answer: B Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question

51) A bank manager is trying to shorten the duration of the bank's assets to increase their rate sensitivity. Which of the following actions will accomplish this? A) Purchasing assets of shorter maturity. B) Converting fixed-rate loans into adjustable-rate loans. C) Both A and B. D) None of the above. Answer: C Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 52) A bank manager is trying to shorten the duration of the bank's assets to increase their rate sensitivity. Which of the following actions will accomplish this? A) Purchasing assets of shorter maturity. B) Converting adjustable-rate loans into fixed-rate loans. C) Both A and B. D) None of the above. Answer: A Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 23.2 True/False 1) If a bank has more rate-sensitive liabilities than assets, then an increase in interest rates will reduce bank profits. Answer: TRUE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 2) If a bank has more rate-sensitive assets than liabilities, then an increase in interest rates will reduce bank profits. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 3) The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 4) If a bank has a negative gap, then a decrease in interest rates will increase income. Answer: TRUE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

5) If a bank has a positive gap, then a decrease in interest rates will increase income. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 6) Banks face the problem of adverse selection in loan markets because bad credit risks are the ones most likely to seek bank loans. Answer: TRUE Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 7) Effective screening and information collection together form an important principle of credit risk management. Answer: TRUE Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 8) Deciding on how good a risk you is entirely scientific, based on your credit score. Answer: FALSE Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 9) Credit rationing reduces adverse selection problems. Answer: TRUE Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 10) Credit rationing occurs when lenders charge higher interest rates on the loans they make to riskier borrowers. Answer: FALSE Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 11) Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers. Answer: TRUE Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 12) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition

13) If interest rates rise by 5 percentage points, then bank profits (measured using gap analysis) will increase regardless of the income gap. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 14) Income gap analysis and duration gap analysis are basically the same thing, so hedging against one gap automatically hedges against the other. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 15) If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have a negative duration gap. Answer: TRUE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 16) If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have a positive duration gap. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 17) Income gap analysis and duration gap analysis are tools useful only for financial institutions. Answer: FALSE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 18) A problem with income gap analysis is that the financial institution manager must make estimates of the proportion of fixed-rate assets and liabilities that may be rate-sensitive. Answer: TRUE Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: New Question 23.3 Essay 1) What is the difference between credit risk and interest-rate risk? Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 2) How is credit risk related to the concepts of adverse selection and moral hazard? Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition

3) What steps do banks take to reduce their exposure to credit risk? Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 4) How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt? Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 5) What is gap analysis and why is it important to a bank? Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 6) What is duration gap analysis and why is it important to a bank? Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 7) Explain how banks benefit from long-term customer relationships. Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 8) Explain how banks benefit from specialization in lending. Topic: Chapter 23.1 Managing Credit Risk Question Status: Previous Edition 9) What special assumptions do income and duration gap analyses make about interest rate changes and the yield curve? Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 10) What is the difference between income gap analysis and duration gap analysis? Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition 11) Discuss some of the problems in using income gap and duration gap analysis to manage interest rate risk in a financial institution. Topic: Chapter 23.2 Managing Interest-Rate Risk Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 24 Hedging with Financial Derivatives 24.1 Multiple Choice 1) A contract that calls for the investor to (possibly) buy securities on a future date is called a A) short contract. B) long contract. 465 Copyright © 2018 Pearson Education, Inc.

C) hedge. D) cross. Answer: B Topic: Chapter 24.1 Hedging Question Status: Previous Edition 2) A contract that calls for the investor to (possibly) sell securities on a future date is called a A) short contract. B) long contract. C) hedge. D) micro hedge. Answer: A Topic: Chapter 24.1 Hedging Question Status: Previous Edition 3) Hedging risk involves engaging in a financial transaction that offsets a long position by taking an additional ________ position, or offsets a short position by taking an additional ________ position. A) long; long B) long; short C) short; long D) short; short Answer: C Topic: Chapter 24.1 Hedging Question Status: New Question 4) With a long contract, the investor (may) A) sell securities in the future. B) buy securities in the future. C) hedge in the future. D) close out his position in the future. Answer: B Topic: Chapter 24.1 Hedging Question Status: Previous Edition

5) With a short contract, the investor (may) A) sell securities in the future. B) buy securities in the future. C) hedge in the future. D) close out his position in the future. Answer: A Topic: Chapter 24.1 Hedging Question Status: Previous Edition 6) Which is not a problem of forward contracts? A) A lack of liquidity B) A lack of flexibility C) The difficulty of finding a counterparty D) Default risk Answer: B Topic: Chapter 24.2 Forward Markets Question Status: Previous Edition 7) An interest-rate forward contracts that involves the future sale of a debt instrument would specify which of the following? A) the actual debt instrument that will be delivered B) the amount that will be delivered C) the price D) the date E) All of the above would be specified Answer: E Topic: Chapter 24.2 Forward Markets Question Status: New Question 8) Financial derivatives include A) stocks. B) bonds. C) forward contracts. D) both A and B. Answer: C Topic: Chapter 24.2 Forward Markets Question Status: Previous Edition 9) By selling short a futures contract of $100,000 at a price of 115, you are agreeing to deliver ________ face value securities for ________. A) $100,000; $115,000 B) $115,000; $110,000 C) $100,000; $100,000 D) $115,000; $115,000 Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 467 Copyright © 2018 Pearson Education, Inc.

10) The development of financial futures contracts by the Chicago Board of Trade happened in A) 1955. B) 1965. C) 1975. D) 1985. Answer: C Topic: Chapter 24.3 Financial Futures Markets Question Status: New Question 11) By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver ________ face value securities for ________. A) $100,000; $104,167 B) $96,000; $100,000 C) $100,000; $96,000 D) $100,000; $100,000 Answer: C Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 12) By buying a long $100,000 futures contract for 115, you agree to pay ________ for ________ face value securities. A) $100,000; $115,000 B) $115,000; $100,000 C) $86,956; $100,000 D) $86,956; $115,000 Answer: B Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 13) Financial derivatives include A) stocks. B) bonds. C) futures. D) none of the above. Answer: C Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 14) If you sell a short contract on financial futures, you hope interest rates will A) rise. B) fall. C) not change. D) fluctuate. Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 468 Copyright © 2018 Pearson Education, Inc.

15) If you buy a long contract on financial futures, you hope interest rates will A) rise. B) fall. C) not change. D) fluctuate. Answer: B Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 16) If you sell a short futures contract, you hope that bond prices will A) rise. B) fall. C) not change. D) fluctuate. Answer: B Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 17) The elimination of riskless profit opportunities in the futures market is referred to as A) speculation. B) hedging. C) arbitrage. D) open interest. E) mark to market. Answer: C Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 18) Futures contracts are regularly traded on the A) Chicago Board of Trade. B) New York Stock Exchange. C) American Stock Exchange. D) Chicago Board Options Exchange. Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 19) Financial futures are regularly traded on all of the following except the A) Chicago Board of Trade. B) Chicago Mercantile Exchange. C) New York Futures Exchange. D) Chicago Commodity Markets Board. Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 469 Copyright © 2018 Pearson Education, Inc.

20) The agency responsible for regulation of the futures exchanges and trading in financial futures is the A) Commodity Futures Trading Commission. B) Securities and Exchange Commission. C) Federal Trade Commission. D) Futures Exchange Commission. Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 21) The purpose of the Commodity Futures Trading Commission is to do all of the following except A) oversee futures trading. B) see that prices are not manipulated. C) approve proposed futures contracts. D) establish minimum prices for futures contracts. Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 22) The number of contracts outstanding in a particular financial future is the A) demand coefficient. B) open interest. C) index level. D) outstanding balance. Answer: B Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 23) The futures markets have grown rapidly in recent years because A) interest rate volatility has increased. B) financial managers are more risk averse. C) of both A and B. D) of neither A nor B. Answer: C Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 24) The advantage of forward contracts over futures contracts is that forward contracts A) are standardized. B) have lower default risk. C) are more liquid. D) are none of the above. Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 470 Copyright © 2018 Pearson Education, Inc.

25) The advantage of forward contracts over futures contracts is that forward contracts A) are standardized. B) have lower default risk. C) are more flexible. D) both A and B are true. Answer: C Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 26) Futures markets have grown rapidly because futures contracts A) are standardized. B) have lower default risk. C) are liquid. D) are all of the above. Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 27) Futures differ from forwards because they are A) used to hedge portfolios. B) used to hedge individual securities. C) used in both financial and foreign exchange markets. D) standardized contracts. Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 28) Futures differ from forwards because they are A) used to hedge portfolios. B) used to hedge individual securities. C) used in both financial and foreign exchange markets. D) marked to market daily. Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 29) Which of the following features of Treasury bond futures contracts were not designed to increase liquidity? A) standardized contracts B) traded up until maturity C) not tied to one specific type of bond D) marked to market daily Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition

30) Which of the following features of Treasury bond futures contracts were not designed to increase liquidity? A) standardized contracts B) traded up until maturity C) not tied to one specific type of bond D) can be closed with offsetting trade Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 31) The concept of ________ guarantees that the price of a futures contract at expiration equals the price of the underlying asset to be delivered. A) supply B) demand C) profit D) arbitrage Answer: D Topic: Chapter 24.3 Financial Futures Markets Question Status: New Question 32) When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a A) macro hedge. B) micro hedge. C) cross hedge. D) futures hedge. Answer: B Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 33) When a financial institution is hedging interest-rate risk on its overall portfolio, the hedge is a A) macro hedge. B) micro hedge. C) cross hedge. D) futures hedge. Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition

34) Which of the following interest-rate futures contracts was the most widely traded (in terms of open interest) in May of 2016. A) Eurodollar B) Treasury bonds C) Treasury notes D) Two-year Treasury notes Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: New Question 35) Futures contacts are marked to market every day. What does that mean? A) At the end of every trading day, the change in the value of the futures contract is added to or subtracted from the margin account. B) At the end of every trading day, all contracts are closed and positions are fully settled in cash. C) At the end of every trading day, the price of the contract is quoted. D) At the end of every trading day, all contracts that have lost money are closed to avoid possible defaults. Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: New Question 36) The risk that occurs because stock prices fluctuate is called A) stock market risk. B) reinvestment risk. C) interest-rate risk. D) default risk. Answer: A Topic: Chapter 24.4 Stock Index Futures Question Status: Previous Edition 37) Stock index futures were developed in ________ to help manage stock market risk. A) 1962 B) 1982 C) 1872 D) 1992 Answer: B Topic: Chapter 24.4 Stock Index Futures Question Status: New Question 38) The most widely traded stock index future is on the A) Dow Jones 1000 index. B) S&P 500 index. C) NASDAQ index. D) Dow Jones 30 index. Answer: B Topic: Chapter 24.4 Stock Index Futures Question Status: Previous Edition 473 Copyright © 2018 Pearson Education, Inc.

39) Stock index futures contracts are settled with ________ rather than settled with ________. A) delivery of an S&P 500 ETF; a cash delivery B) delivery of a security; a cash delivery C) either a cash or security delivery; cash only D) a cash delivery; delivery of a security Answer: D Topic: Chapter 24.4 Stock Index Futures Question Status: New Question 40) Who would be most likely to buy a long stock index future? A) A mutual fund manager who believes the market will rise B) A mutual fund manager who believes the market will fall C) A mutual fund manager who believes the market will be stable D) None of the above would be likely to purchase a futures contract Answer: A Topic: Chapter 24.4 Stock Index Futures Question Status: Previous Edition 41) On the final settlement date of an S&P 500 Index futures contract, the index is at 1500. What is the value of the contract? A) $0 B) $125,000 C) $250,000 D) $375,000 Answer: D Topic: Chapter 24.4 Stock Index Futures Question Status: New Question 42) If you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will A) lose $12,500. B) gain $12,500. C) lose $50. D) gain $50. Answer: B Topic: Chapter 24.4 Stock Index Futures Question Status: Previous Edition

43) If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will A) lose $12,500. B) gain $12,500. C) lose $50. D) gain $50. Answer: A Topic: Chapter 24.4 Stock Index Futures Question Status: Previous Edition 44) Which of the following is a likely reason for a portfolio manager to sell a stock index future short? A) He believes the market will rise. B) He wants to lock in current prices. C) He wants to reduce stock market risk. D) Both B and C are correct. Answer: D Topic: Chapter 24.4 Stock Index Futures Question Status: Previous Edition 45) If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future, then he should A) sell stock index futures short. B) buy stock index futures long. C) stay out of the futures market. D) borrow and buy securities now. Answer: A Topic: Chapter 24.4 Stock Index Futures Question Status: Previous Edition 46) If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the firm should A) sell foreign exchange futures short. B) buy foreign exchange futures long. C) stay out of the exchange futures market. D) do none of the above. Answer: A Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition

47) If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk by A) selling foreign exchange futures short. B) buying foreign exchange futures long. C) staying out of the exchange futures market. D) doing none of the above. Answer: B Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 48) Options are contracts that give the purchasers the A) opportunity to buy or sell an underlying asset. B) the obligation to buy or sell an underlying asset. C) the right to hold an underlying asset. D) the right to switch payment streams. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 49) The price specified in an option contract at which the holder can buy or sell the underlying asset is called the A) premium. B) call. C) strike price. D) put. Answer: C Topic: Chapter 24.5 Options Question Status: Previous Edition 50) The price specified in an option contract at which the holder can buy or sell the underlying asset is called the A) premium. B) strike price. C) exercise price. D) both B and C of the above. Answer: D Topic: Chapter 24.5 Options Question Status: Previous Edition 51) The seller of an option has the A) right to buy or sell the underlying asset. B) the obligation to buy or sell the underlying asset. C) ability to reduce transaction risk. D) right to exchange one payment stream for another. Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 476 Copyright © 2018 Pearson Education, Inc.

52) The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset. A) obligation; right B) right; obligation C) obligation; obligation D) right; right Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 53) An option that can be exercised at any time up to maturity is called a(n) A) swap. B) stock option. C) European option. D) American option. Answer: D Topic: Chapter 24.5 Options Question Status: Previous Edition 54) An option that can be exercised only at maturity is called a(n) A) swap. B) stock option. C) European option. D) American option. Answer: C Topic: Chapter 24.5 Options Question Status: Previous Edition 55) Options on individual stocks are referred to as A) stock options. B) futures options. C) American options. D) individual options. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 56) Options on futures contracts are referred to as A) stock options. B) futures options. C) American options. D) individual options Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 477 Copyright © 2018 Pearson Education, Inc.

57) The agency which regulates stock options is the A) Securities and Exchange Commission. B) Commodities Futures Trading Commission. C) Federal Trade Commission. D) Both A and B are true. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 58) The agency which regulates futures options is the A) Securities and Exchange Commission. B) Commodities Futures Trading Commission. C) Federal Trade Commission. D) Both A and B are true. Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 59) An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a(n) A) call option. B) put option. C) American option. D) European option. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 60) An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a(n) A) call option. B) put option. C) American option. D) European option. Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 61) Which of the following is not a financial derivative? A) Stocks B) Futures C) Options D) Forward contracts Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 478 Copyright © 2018 Pearson Education, Inc.

62) A call option gives the owner the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy Answer: C Topic: Chapter 24.5 Options Question Status: Previous Edition 63) A put option gives the owner the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 64) A call option gives the seller the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 65) A put option gives the seller the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy Answer: D Topic: Chapter 24.5 Options Question Status: Previous Edition 66) If you buy an option to buy Treasury futures at 115, and at expiration the market price is 110, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised. Answer: C Topic: Chapter 24.5 Options Question Status: Previous Edition

67) If you buy an option to sell Treasury futures at 115, and at expiration the market price is 110, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised. Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 68) If you buy an option to buy Treasury futures at 110, and at expiration the market price is 115, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 69) If you buy an option to sell Treasury futures at 110, and at expiration the market price is 115, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised. Answer: D Topic: Chapter 24.5 Options Question Status: Previous Edition 70) The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is A) controlled while preserving the possibility of gains. B) controlled while removing the possibility of losses. C) not controlled but the possibility of gains is preserved. D) not controlled but the possibility of gains is lost. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 71) The main reason to buy an option on a futures contract rather than the futures contract itself is A) to reduce transaction cost. B) to preserve the possibility for gains. C) to limit losses. D) to remove the possibility for gains. Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 480 Copyright © 2018 Pearson Education, Inc.

72) The main disadvantage of futures contracts as compared to options on futures contracts is that futures A) remove the possibility of gains. B) increase the transactions cost. C) are not as effective a hedge. D) do not remove the possibility of losses. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 73) All other things held constant, premiums on put options will increase when the A) exercise price increases. B) volatility of the underlying asset falls. C) term to maturity increases. D) A and C are both true. Answer: D Topic: Chapter 24.5 Options Question Status: Previous Edition 74) All other things held constant, premiums on put options will increase when the A) exercise price increases. B) volatility of the underlying asset increases. C) term to maturity increases. D) A and C are both true. E) All of the above are true. Answer: E Topic: Chapter 24.5 Options Question Status: New Question 75) All other things held constant, premiums on call options will increase when the A) exercise price falls. B) volatility of the underlying asset falls. C) term to maturity decreases. D) futures price increases. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 76) All other things held constant, premiums on both put and call options will increase when the A) exercise price increases. B) volatility of the underlying asset increases. C) term to maturity decreases. D) futures price increases. Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 481 Copyright © 2018 Pearson Education, Inc.

77) An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium. A) increase B) decrease C) not affect D) Not enough information is given. Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 78) An increase in the exercise price, all other things held constant, will ________ the premium on call options. A) increase B) decrease C) not affect D) Not enough information is given. Answer: B Topic: Chapter 24.5 Options Question Status: Previous Edition 79) If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could ________ options on financial futures. A) buy put B) buy call C) sell put D) sell call Answer: A Topic: Chapter 24.5 Options Question Status: Previous Edition 80) A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a A) cross hedge. B) cross call option. C) cross put option. D) swap. Answer: D Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition

81) A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is a(n) A) interest-rate swap. B) currency swap. C) swaption. D) notional swap. Answer: B Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 82) A swap that involves the exchange of one set of interest payments for another set of interest payments is called a(n) A) interest-rate swap. B) currency swap. C) swaption. D) notional swap. Answer: A Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 83) An interest-rate swap involves the exchange of one set of interest payments for another set of interest payments, and typically specifies all of the following, except A) the interest rate on the payments that are being exchanged B) the type of interest payments C) the strike, or exercise, price D) the notional principal Answer: C Topic: Chapter 24.6 Interest-Rate Swaps Question Status: New Question 84) If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interest-rate risk with a swap which requires Second National to A) pay a fixed rate while receiving a floating rate. B) receive a fixed rate while paying a floating rate. C) both receive and pay a fixed rate. D) both receive and pay a floating rate. Answer: B Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition

85) If Second National Bank has more rate-sensitive liabilities than rate-sensitive assets, it can reduce interest-rate risk with a swap which requires Second National to A) pay a fixed rate while receiving a floating rate. B) receive a fixed rate while paying a floating rate. C) both receive and pay a fixed rate. D) both receive and pay a floating rate. Answer: A Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 86) If a bank has a gap of -$10 million, it can reduce its interest-rate risk by A) paying a fixed rate on $10 million and receiving a floating rate on $10 million. B) paying a floating rate on $10 million and receiving a fixed rate on $10 million. C) selling $20 million fixed-rate assets. D) buying $20 million fixed-rate assets. Answer: A Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 87) One advantage of using swaps to eliminate interest-rate risk is that swaps A) are less costly than futures. B) are less costly than rearranging balance sheets. C) are more liquid than futures. D) have better accounting treatment than options. Answer: B Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 88) The disadvantage of swaps is that A) they lack liquidity. B) it is difficult to arrange for a counterparty. C) they suffer from default risk. D) they are all of the above. Answer: D Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 89) As compared to a default on the notional principle, a default on a swap A) is more costly. B) is about as costly. C) is less costly. D) may cost more or less than default on the notional principle. Answer: C Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition

90) Intermediaries are active in the swap markets because A) they increase liquidity. B) they reduce default risk. C) they reduce search cost. D) all of the above are true. Answer: D Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 91) A valid concern about financial derivatives is that A) they allow financial institutions to increase their leverage. B) they are too sophisticated because they are so complicated. C) the notional amounts can greatly exceed a financial institution's capital. D) all of the above are valid concerns. E) none of the above are valid concerns. Answer: A Topic: Chapter 24.7 Credit Derivatives Question Status: Previous Edition 92) The biggest danger of financial derivatives occurs A) when notional amounts exceed a bank's capital. B) when financial market prices and rates are highly volatile. C) in the trading activities of financial institutions. D) in the large amount of credit exposure. Answer: C Topic: Chapter 24.7 Credit Derivatives Question Status: Previous Edition 93) The use of financial derivatives by financial institutions to hedge can decrease risk. However, they can also increase risk. Which of the following examples illustrates this? A) Financial derivatives allow financial institutions to increase their leverage. B) Some institutions such huge amounts of derivatives that the amounts exceed capital. C) All of the above are valid examples. D) None of the above are valid examples. Answer: C Topic: Chapter 24.A1 More on Hedging with Financial Derivatives Question Status: Previous Edition 94) Future options are particularly useful for offsetting risk created when a bank A) extends option-like commitments to bank customers. B) has the right to borrow at a fixed-rate in the future. C) has a loan portfolio of primarily fixed-rate loan products. D) is involved in gold and other inflation-hedging instruments. Answer: A Topic: Chapter 24.A1 More on Hedging with Financial Derivatives Question Status: Previous Edition 485 Copyright © 2018 Pearson Education, Inc.

95) If a financial institution uses stock index futures to completely hedge the systematic component of its stock portfolio, the resulting portfolio will have a beta close to A) 0.00. B) 1.00. C) 2.00. D) 0.50. Answer: A Topic: Chapter 24.A1 More on Hedging with Financial Derivatives Question Status: Previous Edition 24.2 True/False 1) A long contract obligates the holder to sell securities in the future. Answer: FALSE Topic: Chapter 24.1 Hedging Question Status: Previous Edition 2) A short contract obligates the holder to sell securities in the future. Answer: TRUE Topic: Chapter 24.1 Hedging Question Status: Previous Edition 3) A forward contract is more flexible than a futures contract. Answer: TRUE Topic: Chapter 24.2 Forward Markets Question Status: Previous Edition 4) Hedging risk involves engaging in a financial transaction that offsets a long position by taking an additional long position. Answer: FALSE Topic: Chapter 24.1 Hedging Question Status: New Question 5) Futures contracts are standardized. Answer: TRUE Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 6) One problem with a futures contract is finding a counterparty. Answer: FALSE Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 7) Futures contracts are subject to default risk. Answer: FALSE Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 486 Copyright © 2018 Pearson Education, Inc.

8) Futures trading is regulated by the Commodity Futures Trading Commission. Answer: TRUE Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 9) At the expiration date of a futures contract, the price of the contract converges to the price of the underlying asset to be delivered. Answer: TRUE Topic: Chapter 24.3 Financial Futures Markets Question Status: New Question 10) Open interest allows investors to change the interest rate on futures contracts. Answer: FALSE Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 11) To reduce the interest-rate risk of holding a portfolio of bonds, Treasury bond futures contracts should be bought. Answer: FALSE Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 12) To reduce foreign exchange risk from selling goods to a foreign country, futures contracts should be sold. Answer: TRUE Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 13) An option that gives the holder the right to buy an asset in the future is a put. Answer: FALSE Topic: Chapter 24.5 Options Question Status: Previous Edition 14) Option premiums increase as the term to maturity increases. Answer: TRUE Topic: Chapter 24.5 Options Question Status: Previous Edition 15) Option premiums fall as the volatility of the underlying asset falls. Answer: TRUE Topic: Chapter 24.5 Options Question Status: Previous Edition

16) Using options to control interest-rate risk reduces the chance of a loss but increases the chance of a gain. Answer: FALSE Topic: Chapter 24.5 Options Question Status: Previous Edition 17) One advantage of using options to hedge is that the accounting transaction will never require the firm to show large unrecognized losses. Answer: TRUE Topic: Chapter 24.5 Options Question Status: Previous Edition 18) Interest-rate swaps involve the exchange of a set of payments in one currency for a set of payments in another. Answer: FALSE Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 19) Currency swaps involve the exchange of a set of payments on one currency for a set of payments in another. Answer: TRUE Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 20) If Friendly Finance Company has more rate-sensitive assets than rate-sensitive liabilities, it may reduce risk with a swap. Answer: TRUE Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 21) Interest-rate swaps are more liquid than futures contracts. Answer: FALSE Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 22) Intermediaries add value to the swap markets by reducing default risk. Answer: TRUE Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 23) The global financial crisis illustrates that derivatives cannot be used to hedge — financial institutions should be barred from using them in any form. Answer: TRUE Topic: Chapter 24.7 Credit Derivatives Question Status: Previous Edition

24) Credit derivatives offer payoffs linked to previously issued securities that lack credit risk. Answer: FALSE Topic: Chapter 24.7 Credit Derivatives Question Status: New Question 24.3 Essay 1) Distinguish between forward and futures contracts. Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 2) Why have the futures markets grown so rapidly in recent years? Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 3) Explain how a short hedge could be used to hedge a Treasury portfolio against interest-rate risk. Topic: Chapter 24.1 Hedging Question Status: Previous Edition 4) Explain how a long hedge could be used to protect a bank from the risk that interest rates could rise before a loan is funded. Topic: Chapter 24.1 Hedging Question Status: Previous Edition 5) How would a firm use exchange rate futures to lock in current exchange rates? Topic: Chapter 24.3 Financial Futures Markets Question Status: Previous Edition 6) Explain how a swap could be used to reduce interest-rate risk for a bank with more ratesensitive assets than rate-sensitive liabilities. Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 7) Define and distinguish between call options and put options. Topic: Chapter 24.5 Options Question Status: Previous Edition 8) Explain how option contracts could be used to protect against losses in portfolio value that may occur as interest rates increase. Topic: Chapter 24.5 Options Question Status: Previous Edition 9) Explain the advantages of protecting against interest-rate risk using options rather than futures contracts. Topic: Chapter 24.5 Options Question Status: Previous Edition 489 Copyright © 2018 Pearson Education, Inc.

10) Discuss the advantages of using swaps to protect against interest-rate risk rather than restructuring the balance sheet. Topic: Chapter 24.6 Interest-Rate Swaps Question Status: Previous Edition 11) Discuss the challenges regulators face in controlling the use of derivatives by financial institutions. Topic: Chapter 24.A1 More on Hedging with Financial Derivatives Question Status: Previous Edition 12) Explain the difference between a macro hedge and a micro hedge for a financial institution. Topic: Chapter 24.A1 More on Hedging with Financial Derivatives Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 25 Financial Crises In Emerging Market Economies 25.1 Multiple Choice 1) Financial crises A) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. B) occur when adverse selection and moral hazard problems in financial markets become more significant. C) frequently lead to sharp contractions in economic activity. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 2) Financial crises A) cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers. B) are a recent phenomenon that occur only in developing countries. C) invariably lead to debt deflation. D) all of the above. E) none of the above. Answer: E Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 3) In an emerging market economy, a financial crisis generally begins with A) mismanagement of financial liberalization or innovation. B) asset pricing booms and busts. C) an increase in uncertainty caused by failure of financial institutions. 490 Copyright © 2018 Pearson Education, Inc.

D) all of the above. Answer: A Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 4) When asset prices fall following a boom, A) moral hazard may increase in companies that have lost net worth in the bust. B) financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging. C) both A and B are correct. D) none of the above are correct. Answer: C Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 5) Stage Two of a financial crisis in an emerging market economy usually involves a ________ crisis. A) currency B) stock market C) banking D) commodities Answer: A Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 6) Stage Three of a financial crisis in an emerging market economy features A) a general increase in inflation. B) debt deflation. C) an increase in general price levels. D) a full-fledged financial crisis. Answer: D Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 7) In Stage Three of a financial crisis in an emerging market economy, the currency mismatch refers to A) the mismatch between size of the actual notes and the high price levels need to buy basic goods. B) the difference in the currency FX markets over time. C) the mismatch between the currency of the stock and bond markets. D) the fact that most debt in emerging market economies is denominated in U.S. dollars. Answer: D Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 8) In South Korea, the primary force leading to their financial crisis in 1997 was A) financial liberalization. 491 Copyright © 2018 Pearson Education, Inc.

B) fiscal mismanagement on the part of the government. C) fraud in financial markets. D) all of the above. E) only B and C of the above. Answer: A Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition

9) In the year prior to the financial crisis in South Korea, inflation hovered around 5%. During the crisis, inflation jumped to A) 10%. B) 15%. C) 20%. D) 25%. Answer: A Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 10) Real GDP growth in South Korea was close to an annual rate of 7% before the crisis of 1997-1998. During the crisis, GDP declined at about a ________ rate. A) 3% B) 6% C) 9% D) 12% Answer: B Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 11) Prior to the 1997-1998 crisis in Korea, the unemployment rate was below 3%. During the crisis, unemployment jumped to A) 25%. B) 15%. C) 7%. D) 100%. Answer: C Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 12) The 1997-1998 crisis in Korea had a significant impact on the stock market of South Korea. From 1995 to 1998, the market fell by over A) 25%. B) 15%. C) 75%. D) 50%. Answer: D Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question

13) In Argentina, the primary force leading to their financial crisis in 2001 was A) fiscal mismanagement on the part of the government. B) financial liberalization. C) fraud in financial markets. D) all of the above. E) only B and C of the above. Answer: A Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 14) Real GDP growth in Argentina was close to an annual rate of 5%-7% before the crisis of 2001-2002. During the crisis, GDP declined at over a ________ rate. A) 3% B) 6% C) 10% D) 15% Answer: C Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 15) Prior to the 2001-2002 crisis in Argentina, the unemployment rate was around 13%-15%. During the crisis, unemployment jumped to above A) 20%. B) 15%. C) 7%. D) 100%. Answer: A Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 16) Prior to the 2001-2002 crisis in Argentina, interest rates were around 10%. During the crisis, interest rates jumped to nearly A) 20%. B) 15%. C) 7%. D) 100%. Answer: D Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question

17) The experience with financial crises in emerging market economies suggests a number of government policies that can help make financial crises in emerging market countries less likely, including A) beefing up prudential regulation and supervision of banks. B) better bank risk disclosure. C) limiting the currency mismatch. D) all of the above. E) only B and C of the above. Answer: D Topic: Chapter 25.2 Preventing Emerging Market Financial Crises Question Status: Previous Edition 18) The experience with financial crises in emerging market economies suggests a number of government policies that can help make financial crises in emerging market countries less likely, including A) rapid financial liberalization. B) better bank risk disclosure. C) limiting the currency mismatch. D) all of the above. E) only B and C of the above. Answer: E Topic: Chapter 25.2 Preventing Emerging Market Financial Crises Question Status: Previous Edition 25.2 True/False 1) Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms. Answer: TRUE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 2) During a bank panic, many banks fail in a very short time period. Answer: TRUE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 3) For both emerging market economies and advanced economies, Stage Two of a financial crisis is the same — a banking crisis. Answer: FALSE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition

4) A speculative attack on the currency of a country is the focus of Stage Two of a financial crisis in an emerging market economy. Answer: TRUE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 5) In an emerging market economy, a currency crisis can be triggered by two things: a deterioration of bank balance sheets and severe fiscal imbalances. Answer: TRUE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 6) In contrast to most advanced economies that typically denominate debt in domestic currency, emerging market economies denominate many debt contracts in foreign currency. Answer: TRUE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 7) During the financial crisis in South Korea from 1997-1998, the Korean won lost nearly half of its value, relative to the USD. Answer: TRUE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 8) During the financial crisis in South Korea from 1997-1998, market interest rates soared to over 50%. Answer: FALSE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 9) During the financial crisis in Argentina from 2001-2002, inflation surged to over 40%. Answer: TRUE Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: New Question 25.3 Essay 1) Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline. Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 2) Contrast the stages of a financial crisis between an advanced economy and an emerging market economy. Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 496 Copyright © 2018 Pearson Education, Inc.

3) What is the problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis? Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 4) Discuss the difference in Stage Two of a financial crisis between an advanced economy and an emerging market economy. Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 5) Describe the differences in the evolution of the financial crises in South Korea (1997-1998) and Argentina (2001-2002). Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 6) Why did the financial crisis in Iceland (2008) resemble a crisis in an emerging market economy as opposed to an advanced market economy? Topic: Chapter 25.1 Dynamics of Financial Crises in Emerging Market Economies Question Status: Previous Edition 7) What are some of the steps that emerging market economies can take to avoid a financial crisis? Topic: Chapter 25.2 Preventing Emerging Market Financial Crises Question Status: Previous Edition Financial Markets and Institutions, 9e (Mishkin) Chapter 26 Savings Associations and Credit Unions 26.1 Multiple Choice 1) Which of the following statements about mutual savings banks are true? A) There are currently under 200 mutual savings banks in the United States. B) Most mutual savings banks are federally chartered. C) Both A and B of the above are true. D) None of the above are true. Answer: D Topic: Chapter 26.1 Mutual Savings Banks Question Status: Previous Edition 2) Which of the following statements concerning the mutual form of ownership of savings banks are true? A) The mutual form of ownership accentuates the principal-agent problem that exists in corporations. B) More capital is available, contributing to the safety of mutual savings banks compared to other banking organizations. C) Managers of mutual savings banks are more risk averse than in the corporate form, because the value of their ownership does not increase if the firm does well. 497 Copyright © 2018 Pearson Education, Inc.

D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 26.1 Mutual Savings Banks Question Status: Previous Edition 3) Mutual savings banks are concentrated in the ________ United States. A) northeastern B) southeastern C) western D) all of the above Answer: A Topic: Chapter 26.1 Mutual Savings Banks Question Status: Previous Edition 4) Mutual savings banks A) are heavily concentrated in mortgages. B) have more flexibility in their investing practices. C) are both A and B of the above. D) are neither A nor B of the above. Answer: B Topic: Chapter 26.1 Mutual Savings Banks Question Status: Previous Edition

5) Savings and loan associations A) were established by Congress to encourage home ownership. B) initially were not permitted to accept demand deposits. C) held about 85 percent of their assets in the form of mortgages prior to the Great Depression. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 26.2 Savings and Loan Associations Question Status: Previous Edition 6) As of 2015, savings and loan associations held most of their assets as mortgages, which represented about ________ of their assets. A) 12% B) 55% C) 22% D) 41% Answer: D Topic: Chapter 26.2 Savings and Loan Associations Question Status: New Question 7) Savings and loans associations A) initially were allowed to attract funds by offering savings accounts that paid a slightly higher interest rate than that offered by commercial banks. B) held about 85 percent of their total assets as mortgages prior to the Great Depression. C) did not weather the Great Depression well, as thousands of S&Ls failed in the 1930s. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 26.2 Savings and Loan Associations Question Status: Previous Edition 8) Thrifts A) fueled the home-building boom from 1934-1978. B) suffered in the 1970s as inflation rose above deposit interest rate ceilings. C) have grown in importance in attracting deposits relative to commercial banks since 1980. D) are all of the above. E) are only A and B of the above. Answer: E Topic: Chapter 26.2 Savings and Loan Associations Question Status: Previous Edition

9) Savings banks A) were first established in Scotland and England. B) were established to encourage saving by the poor. C) were very conservative with their funds, placing most of them in commercial banks. D) are all of the above. E) are only A and B of the above. Answer: D Topic: Chapter 26.2 Savings and Loan Associations Question Status: Previous Edition 10) Thrifts suffered problems in the 1970s as A) market interest rates rose above the rates thrifts could pay on deposits and savings accounts. B) thrift customers moved their funds from thrifts to money market mutual funds. C) government regulators severely limited the scope of activities that thrifts could undertake to grow their way out of trouble. D) all of the above occurred. E) only A and B of the above occurred. Answer: E Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 11) In the early stages of the banking crisis in the 1980s, financial institutions were especially hurt by A) the sharp increases in interest rates from late 1979 until 1981. B) the severe recession in 1981-82. C) the sharp decline in the price level from mid-1980 to early 1983. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 12) In the early stages of the banking crisis in the 1980s, financial institutions were especially harmed by A) declining interest rates from late 1979 until 1981. B) the severe recession in 1981-82. C) the disinflation from mid-1980 to early 1983. D) all of the above. Answer: B Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition

13) Savings and loans lost a total of $10 billion in 1981-1982 due to a combination of rising interest rates in 1979-1981 and A) the recession of 1981-1982 that reduced real estate prices enough to cause significant loan defaults. B) the regulatory restrictions enacted by Congress in 1981 and 1982. C) the loss of market share to commercial banks that were allowed to compete directly with thrifts in the real estate market. D) the acceleration of inflation in 1981-1982 that caused thrifts to lose additional funds to money market mutual funds. Answer: A Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 14) In the 1980s, thrift institutions, which had been almost entirely restricted to making loans for home mortgages only, were allowed by regulators to A) finance acquisitions in commercial real estate. B) extend consumer loans. C) purchase junk bonds. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 15) The government granted thrifts greater powers in the early 1980s in hopes of turning the industry's problems around. These powers A) required greater expertise in managing risk than many thrift managers possessed. B) encouraged thrifts to expand lending rapidly in real estate, increasing their exposure to risk. C) expanded the scope and complexity of thrift lending activities that went beyond what regulators could effectively monitor, given their limited resources. D) did all of the above. E) did only A and B of the above. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 16) When nearly half of the S&Ls in the United States had a negative net worth and were thus insolvent by the end of 1982, regulators adopted a policy of ________, which amounted to ________ capital requirements. A) regulatory forbearance; raising B) regulatory forbearance; lowering C) regulatory stringency; raising D) regulatory stringency; lowering Answer: B Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 501 Copyright © 2018 Pearson Education, Inc.

17) The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency. A) regulatory forbearance; moral hazard B) regulatory forbearance; adverse selection C) regulatory stringency; moral hazard D) regulatory stringency; adverse selection Answer: A Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 18) Which of the following reasons explain why federal regulators adopted a policy of regulatory forbearance toward insolvent financial institutions in the early 1980s? A) The FSLIC lacked sufficient funds to cover insured deposits in the insolvent S&Ls. B) The regulators were reluctant to close the firms that justified their regulatory existence. C) The Federal Home Loan Bank Board and the FSLIC were reluctant to admit that they were in over their heads with problems. D) All of the above are reasons. E) Only A and B of the above are reasons. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 19) The policy of regulatory forbearance A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. B) benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions. C) contributed to declining profitability in the S&L industry and an increase in the number of "zombie S&Ls." D) did all of the above. E) did only A and B of the above. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 20) The policy of regulatory forbearance A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. B) benefited "zombie S&Ls" at the expense of healthy S&Ls, as healthy institutions lost deposits to insolvent institutions. C) had the advantage of benefiting healthy S&Ls by giving them the opportunity to attract deposits that began to leave the "zombie S&Ls." D) did both A and B of the above. E) did both A and C of the above. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition

21) Which of the following are reasons that explain why regulators pursued a policy of regulatory forbearance toward thrifts in the early 1980s? A) Regulators knew that the FSLIC did not have sufficient funds to close insolvent S&Ls and pay off their depositors. B) Regulators were probably too close to the people they were supposed to be regulating to close down thrifts and put them out of business. C) Regulators preferred to sweep the problems that thrifts were suffering under the rug in the hope that they would go away as the economy improved. D) All of the above explain regulatory forbearance. E) Only A and B of the above explain regulatory forbearance. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 22) Examples of the huge risks that "zombie S&Ls" undertook include A) building shopping centers in the desert. B) buying manufacturing plants to convert manure to methane. C) purchasing billions of dollars of junk bonds. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 23) "Zombie S&Ls" A) paid above market interest rates to attract deposits to fuel their lending boom. B) offered loans at below market interest rates to expand their lending. C) drove down the profitability of solvent S&Ls, threatening to turn them into "zombies" too. D) did all of the above. E) did only A and B of the above. Answer: D Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 24) According to the text, the Competitive Equality in Banking Act of 1987 A) turned the thrift industry around by providing the necessary funds to close the "zombie S&Ls." B) lowered the cost of bailing out the S&Ls by quickly closing "zombie S&Ls" before they could cause other thrifts to fail. C) failed to provide the funds necessary to close ailing S&Ls, and actually encouraged regulators to continue to pursue regulatory forbearance. D) did both A and B of the above. Answer: C Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition

25) The Competitive Equality in Banking Act of 1987 A) discouraged regulators from pursuing regulatory forbearance. B) directed regulators to close "zombie S&Ls" as quickly as administratively possible. C) encouraged regulators to continue their policy of regulatory forbearance. D) did both A and B of the above. Answer: C Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 26) The Competitive Equality in Banking Act of 1987 A) provided insufficient funds to the FSLIC to close down insolvent S&Ls. B) actually directed S&L regulators to continue to pursue regulatory forbearance, further delaying the closing of insolvent S&Ls. C) created a new agency, the Resolution Trust Corporation, to manage insolvent thrifts. D) did all of the above. E) did only A and B of the above. Answer: E Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 27) The major provisions of the Competitive Equality in Banking Act of 1987 included A) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system. B) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. D) all of the above. E) only A and B of the above. Answer: C Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 28) The major provisions of the Competitive Equality in Banking Act of 1987 included A) abolishing the Federal Home Loan Bank Board and the FSLIC. B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department. C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. D) all of the above. E) none of the above. Answer: E Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition

29) An analysis of the political economy of the savings and loan crisis helps one to understand A) why politicians hampered the efforts of thrift regulators, cutting regulatory appropriations and encouraging regulatory forbearance. B) why thrift regulators were reluctant to admit that any problem even existed in the thrift industry. C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 30) An analysis of the political economy of the savings and loan crisis helps one to understand A) why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging the closing of insolvent thrifts. B) why thrift regulators were quick to inform Congress of the problems that existed in the thrift industry. C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress. D) all of the above. Answer: C Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 31) The political economy of the S&L crisis shows that the principal-agent problem occurs in politics. In this instance, the agent-regulators did not act to protect the principal-taxpayers because A) regulators wanted to escape blame, hoping the situation would improve before others discovered the problem. B) regulators responded to pressure to pursue regulatory forbearance from politicians who had accepted campaign donations from owners of S&Ls. C) Congress was unwilling to allocate the necessary funds regulators needed to close insolvent S&Ls. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition

32) That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This poor performance is explained by A) regulators' desire to escape blame for poor performance, leading to a perverse strategy of "regulatory gambling." B) regulators' incentives to accede to pressures imposed by politicians, who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. C) Congress's unwillingness to appropriate sufficient funds to permit regulators to examine the many thrift institutions that needed monitoring. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 33) That taxpayers were poorly served by thrift regulators in the 1980s is now quite clear. This poor performance cannot be explained by A) regulators' desire to escape blame for poor performance, leading to a perverse strategy of "regulatory gambling." B) regulators' incentives to accede to pressures imposed by politicians, who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. C) Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nation's savings and loans. D) any of the above. Answer: C Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 34) That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by A) Congress's unwillingness to allocate the necessary funds to thrift regulators. B) regulators' reluctance to find the specific problem thrifts that they knew existed. C) prohibitions against onerous regulatory restrictions against S&Ls as mandated in the Competitive Equality in Banking Act. D) all of the above. E) only A and B of the above. Answer: A Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition

35) "Bureaucratic gambling" refers to A) the belief of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of the regulators. B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. D) none of the above. Answer: C Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 36) Charles Keating A) was allowed to acquire Lincoln Savings and Loan of Irvine, California, even though he had been accused of fraud by the SEC only four-and-a-half years earlier. B) fired Lincoln's conservative lending officers and internal auditors, even though he had promised regulators he would keep them. C) enlisted the help of five senators to delay the seizure of Lincoln's assets. D) did all of the above. Answer: D Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 37) Examiners from the Federal Home Loan Bank Board of San Francisco recommended that Lincoln Savings and Loan be seized when they discovered that A) officials at the thrift had attempted to mislead them. B) it had exceeded the 10 percent limit on equity investments by $600 million. C) its owner, Charles Keating, had been convicted of embezzlement ten years before he purchased the thrift. D) all of the above occurred. E) only A and B of the above occurred. Answer: E Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 38) To act in the taxpayer's interest and lower costs to the deposit insurance agency, regulators must A) set tight restrictions on holding assets that are too risky. B) impose high capital requirements. C) not adopt a stance of regulatory forbearance. D) do all of the above. Answer: D Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition

39) Politicians have ________ incentives to act in their own interests rather than in the interests of taxpayers. A) no B) strong C) weak D) low Answer: B Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 40) The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because A) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. B) politicians who received generous campaign contributions from the savings and loan industry, like regulators, hoped that the problems in the industry would ease over time. C) Congress encouraged, and thrift regulators acceded to, a policy of regulatory forbearance. D) of all of the above. E) of only A and B of the above. Answer: D Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 41) The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because A) regulators initially attempted to downplay the seriousness of problems within the thrift industry. B) politicians who received generous campaign contributions from the savings and loan industry hoped that the problems in the industry would ease over time. C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. D) of all of the above. E) of only A and B of the above. Answer: E Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 42) Prior to August 1989, the agency that regulated the nation's savings and loan associations was the A) Federal Home Loan Bank Board. B) Office of Thrift Supervision. C) Resolution Trust Corporation. D) Comptroller of the Currency. Answer: A Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 508 Copyright © 2018 Pearson Education, Inc.

43) The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the A) Competitive Equality in Banking Act of 1987. B) Financial Institutions Reform, Recovery, and Enforcement Act of 1989. C) Office of Thrift Supervision. D) Office of the Comptroller of the Currency. Answer: B Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 44) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 included A) abolishing the Federal Home Loan Bank Board and the FSLIC. B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department. C) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 45) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 included A) abolishing the Federal Home Loan Bank Board and the FSLIC. B) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department. C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition

46) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 included A) transferring the regulatory role of the Federal Home Loan Bank Board to the Office of Thrift Supervision, a bureau within the U.S. Treasury Department. B) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system. C) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. D) all of the above. E) only A and B of the above. Answer: D Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 47) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 included A) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system. B) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. D) all of the above. E) only A and B of the above. Answer: E Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 48) The major provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 included A) reducing the regulatory responsibilities of the FDIC. B) establishing the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. D) all of the above. E) only A and B of the above. Answer: B Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition

49) In the early 1990s, to replenish the reserves of the Savings Association Insurance Fund, insurance premiums for S&Ls were increased from ________ cents per $100 of deposits to ________ cents and can rise as high as 32.5 cents. A) 12.5; 17.5 B) 17.5; 20.5 C) 20.8; 23.0 D) 23.0; 27.8 Answer: C Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 50) Since 1993, the number of savings and loan associations has A) held steady. B) risen sharply. C) risen slightly. D) declined substantially. Answer: D Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 51) Since 1993, the number of savings and loan associations has declined substantially, from about 2,300 S&Ls in 1993 to fewer than ________ today. A) 1,800 B) 2,000 C) 1,400 D) 1,000 Answer: D Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: New Question 52) Since 1980, the total assets held by the savings and loan association industry has A) held steady. B) risen sharply. C) risen slightly. D) risen and fallen a few times. Answer: D Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: New Question

53) Since 1980, the total assets held by the savings and loan association industry peaked in 2006 at around A) $700 million. B) $1.5 billion. C) $2 billion. D) $3 billion. Answer: C Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: New Question 54) Since 1984, the average total assets held by a savings and loan association industry peaked in 2006 at around A) $700 million. B) $1.6 billion. C) $2 billion. D) $3 billion. Answer: B Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: New Question 55) The largest asset held by S&Ls is A) consumer loans. B) securities. C) mortgage loans. D) consumer savings. Answer: C Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 56) According to the 2015 Consolidated Balance Sheet for all S&Ls, S&Ls collectively held $118 billion in equity, representing about ________ of their $1,074 billion in total assets. A) 21% B) 16% C) 11% D) 6% Answer: C Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: New Question

57) (I) S&Ls' net worth ratio is about the same as that of commercial banks. (II) Goodwill accounts for a majority of S&Ls' capital. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. Answer: A Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 58) Since the early 1990s, the number of savings and loan associations has ________ and the average size (in assets) has ________. A) risen; declined B) declined; risen C) risen; risen D) declined; declined Answer: B Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 59) The main source of funds at savings and loan associations is A) borrowing in the money market. B) borrowing in the capital market. C) deposits. D) equity capital. Answer: C Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 60) Since the early 1990s, the net income of savings and loan associations has A) risen. B) fallen slightly. C) fallen sharply. D) held steady. Answer: A Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition

61) Since 1984, the net income of savings and loan associations has risen and fallen several times. During the financial crisis of 2007-2009, net income reached an all-time low, with the industry losing around A) $11 billion. B) $5 billion. C) $21 billion. D) $2 billion. Answer: A Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: New Question 62) The capital of financial institutions is often measured by the ________ ratio. A) current B) net worth C) asset turnover D) liquidity Answer: B Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 63) From 1993 through 2015, the average ROE for S&Ls was around ________ (except for the years around the financial crisis of 2007-2009). A) 25% B) 10% C) 5% D) 20% Answer: B Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: New Question 64) The purpose of reserve requirements A) is to limit the expansion of the money supply. B) is to ensure adequate liquidity for the institutions. C) is both A and B of the above. D) is neither A nor B of the above. Answer: C Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition

65) Credit unions are characterized by A) mutual ownership. B) common bond membership. C) nonprofit, tax-exempt status. D) all of the above. E) none of the above. Answer: D Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 66) At the end of 2015, the largest credit union (by assets) was the ________ Credit Union, with around $63 billion in assets. A) Schools First B) Pentagon C) Alliant D) Navy Answer: D Topic: Chapter 26.7 Credit Unions Question Status: New Question 67) The common bond membership requirement makes it difficult for ________ to diversify their loans. A) savings and loan associations B) credit unions C) banks D) mutual savings banks Answer: B Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 68) The smallest average-sized depository institution is A) credit unions. B) savings and loan associations. C) commercial banks. D) money market mutual funds. Answer: A Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition

69) Between 1933 and 2015, the number of credit unions peaked in 1970, with around ________ credit unions in the United States. A) 25,000 B) 20,000 C) 15,000 D) 10,000 Answer: A Topic: Chapter 26.7 Credit Unions Question Status: New Question 70) Which of the following is a lender of last resort for credit unions? A) National Credit Union Administration B) U.S. Central Credit Union C) State central credit unions D) The Central Liquidity Facility Answer: D Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 71) The day-to-day liquidity needs of credit unions are met by the A) National Credit Union Administration. B) Federal Reserve System. C) state central credit unions. D) Central Liquidity Facility. Answer: C Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 72) Since 1980, the number of credit unions has A) declined substantially. B) remained steady. C) increased substantially. D) increased slightly. Answer: A Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 73) Since 1990, the number of credit union members has A) increased substantially. B) increased slightly. C) decreased substantially. D) decreased slightly. Answer: A Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition

74) Since the inception of credit unions in 1933, the number of credit union members has increased substantially, to over ________ million union members in 2015. A) 100 B) 75 C) 50 D) 25 Answer: A Topic: Chapter 26.7 Credit Unions Question Status: New Question 75) Credit unions' main source of funds is A) regular share accounts. B) share certificates. C) share draft accounts. D) money market accounts. Answer: A Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 76) As of 2015, Credit unions' main source of funds is regular share accounts, representing about ________ of the share distribution. A) 35% B) 30% C) 25% D) 20% Answer: A Topic: Chapter 26.7 Credit Unions Question Status: New Question 77) Credit unions' main type of loans is A) mortgages. B) automobile. C) credit cards. D) nonresidential real estate. Answer: A Topic: Chapter 26.7 Credit Unions Question Status: Updated from Previous Edition

78) Credit unions' main type of loans is the first mortgage loan, representing 41% of loans. In second place is new and used auto loans, which make up about ________ of the total loans volume. A) one-third B) a quarter C) 20% D) 15% Answer: A Topic: Chapter 26.7 Credit Unions Question Status: New Question 79) ________ view credit unions as unfair competitors due to government support they receive in the form of tax advantages. A) Regulators B) The Federal Reserve C) Commercial banks D) none of the above Answer: C Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 26.2 True/False 1) The mutual form of ownership accentuates the principal-agent problem that exists in corporations. Answer: TRUE Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 2) Savings and loans are not as heavily concentrated in mortgages and have had more flexibility in their investing practices than mutual savings banks. Answer: FALSE Topic: Chapter 26.2 Savings and Loan Associations Question Status: Previous Edition 3) The congressionally imposed cap on the interest rate that S&Ls could pay on savings accounts became a serious problem for them in the 1970s when inflation rose. Answer: TRUE Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 4) Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take fewer risks than healthy S&Ls that can take risks and still remain solvent. Answer: FALSE Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 518 Copyright © 2018 Pearson Education, Inc.

5) The Competitive Equality in Banking Act of 1987 allowed the FSLIC to borrow all the funds it needed to close insolvent S&Ls and pay off depositors. Answer: FALSE Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 6) In the 1980s, regulators engaged in bureaucratic gambling when they allowed insolvent S&Ls to continue operating. Answer: TRUE Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 7) FIRREA imposed new restrictions on thrift activities that, in essence, re-regulated the S&L industry to the asset choices it had before 1982. Answer: TRUE Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 8) Most credit unions today have federal charters. Answer: TRUE Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 9) Credit unions are owned by stockholders. Answer: FALSE Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 10) Federal legislation allows credit unions representing groups with different common bonds to merge into a single credit union. Answer: TRUE Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 11) Credit unions view commercial banks as government-supported and hence unfair competitors due to their tax advantages. Answer: FALSE Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 12) Mutual savings banks are the only financial institutions that are tax-exempt. Answer: FALSE Topic: Chapter 26.2 Savings and Loan Associations Question Status: Previous Edition

13) The second major liability of savings and loans is borrowings. Answer: TRUE Topic: Chapter 26.6 The Savings and Loan Industry Today Question Status: Previous Edition 14) Listing large amounts of goodwill as an asset is another way that savings and loans are able to hide the fact that they are insolvent. Answer: TRUE Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 26.3 Essay 1) What factors contributed to creating the thrift crisis? Topic: Chapter 26.3 Savings and Loans in Trouble: The Thrift Crisis Question Status: Previous Edition 2) Explain why thrift regulators engaged in regulatory forbearance in the 1980s. Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 3) Explain how the Lincoln Savings and Loan scandal is an application of the principal-agent problem. Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 4) Why did the Competitive Equality in Banking Act of 1987 fail to solve the problems in the thrift industry? Topic: Chapter 26.4 Political Economy of the Savings and Loan Crisis Question Status: Previous Edition 5) How has the thrift industry been transformed since FIRREA? Topic: Chapter 26.5 Savings and Loan Bailout: FIRREA of 1989 Question Status: Previous Edition 6) Why have commercial banks gone to court in an effort to limit the activities of credit unions? Topic: Chapter 26.7 Credit Unions Question Status: Previous Edition 7) Discuss the background of mutual savings banks and how this lead to the creation of S&Ls. Topic: Chapter 26.1 Mutual Savings Banks Question Status: Previous Edition 8) Explain the advantages and disadvantages between mutual savings banks and savings and loans. Topic: Chapter 26.2 Savings and Loan Associations Question Status: Previous Edition 520 Copyright © 2018 Pearson Education, Inc.

Financial Markets and Institutions, 9e (Mishkin) Chapter 27 Finance Companies 27.1 Multiple Choice 1) The earliest examples of finance companies date back to the beginning of the ________ when retailers offered installment credit to customers. A) 1800s B) 1900s C) 1950s D) 1980s Answer: A Topic: Chapter 27.1 History of Finance Companies Question Status: Previous Edition 2) A balloon loan requires A) multiple payments at odd, random intervals. B) periodic payments of principle and interest. C) a single large payment at the loan's maturity to retire the debt. D) a steadily increasing payment (floating balloon) to retire the debt. Answer: C Topic: Chapter 27.1 History of Finance Companies Question Status: Previous Edition 3) In the early 1900s, banks did not offer loans to purchase automobiles. This is because A) banks could not make a profit on car loans. B) only finance companies were permitted to offer car loans. C) banks could not repossess a car if the loan defaulted. D) banks did not view a car as a productive asset. Answer: D Topic: Chapter 27.1 History of Finance Companies Question Status: Previous Edition 4) By the end of 2015, banks held $1,271 billion in consumer loans, compared to ________ by finance companies. A) $225 billion B) $440 billion C) $895 billion D) $1,333 billion Answer: C Topic: Chapter 27.1 History of Finance Companies Question Status: New Question

5) Finance companies are ________ market intermediaries. A) stock B) bond C) FX D) money Answer: D Topic: Chapter 27.2 Purpose of Finance Companies Question Status: Previous Edition 6) How do consumer loans differ between those issued by finance companies and those issued by banks? A) Loans made by finance companies are often riskier than those issued by banks. B) Consumer finance companies are typically owned by the manufacturer whose products are being financed. C) Both A and B of the above are correct. D) None of the above are correct. Answer: C Topic: Chapter 27.2 Purpose of Finance Companies Question Status: Previous Edition 7) Which of the following factors prevent consumers and small businesses from being able to take advantage of the low interest rates available on money market securities? A) Most securities that trade in the money market have a minimum investment of $100,000. B) Consumers and small companies lack the credit standing necessary to borrow in the money markets. C) Both A and B of the above are correct. D) None of the above are correct. Answer: C Topic: Chapter 27.2 Purpose of Finance Companies Question Status: New Question 8) What is liquidity risk? A) A problem that arises when a firm runs short of cash. B) The risk of asset prices rising too high. C) The chance that the borrower will fail to repay a loan. D) The risk associated with longer-term contracts. Answer: A Topic: Chapter 27.3 Risk in Finance Companies Question Status: Previous Edition

9) What is default risk? A) A problem that arises when a firm runs short of cash. B) The risk of asset prices rising too high. C) The chance that the borrower will fail to repay a loan. D) The risk associated with longer-term contracts. Answer: C Topic: Chapter 27.3 Risk in Finance Companies Question Status: Previous Edition 10) What are the three main types of finance companies? A) Sales, lease, and buyback B) Business, sales, and consumer C) Factor, lease, and floor plan D) None of the above are correct. Answer: B Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 11) In 2015, the largest portion of loans made by finance companies was ________, representing 63% of the loans. A) consumer loans B) factoring loans C) business loans D) real estate Answer: A Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 12) In 2015, the smallest portion of loans made by finance companies was ________, representing only 8% of the loans. A) consumer loans B) factoring loans C) business loans D) real estate Answer: D Topic: Chapter 27.4 Types of Finance Companies Question Status: New Question 13) In factoring, a finance company makes a loan and A) purchases the firm's accounts receivables at a premium. B) purchases the firm's accounts payables at a premium. C) purchases the firm's accounts receivables at a discount. D) purchases the firm's accounts payables at a discount. Answer: C Topic: Chapter 27.4 Types of Finance Companies Question Status: Updated from Previous Edition 523 Copyright © 2018 Pearson Education, Inc.

14) In which industry is factoring a common practice? A) Automobile B) Tech services C) Entertainment D) Apparel Answer: D Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 15) In which industry is factoring a common practice? A) Automobile B) Tech services C) Entertainment D) Apparel Answer: D Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 16) Which of the following is not an advantage of a lease financing arrangement? A) Companies with losses can still depreciate equipment if leased from a finance company. B) Repossession is easier in a lease-finance arrangement because the finance company already owns the equipment. C) Finance companies are in a good position to sell a repossessed asset, especially if they are a subsidiary of the equipment manufacturer. D) The lessee often does not have to make as large of an upfront payment, relative to a straight loan. Answer: A Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 17) In which industry is a floor plan common practice? A) Automobile B) Tech services C) Entertainment D) Apparel Answer: A Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 18) Consumer finance companies typically make loans to consumers who A) prefer to avoid the regulatory environment at a bank. B) cannot obtain credit otherwise due to low income or poor credit. C) Both A and B of the above are correct. D) Neither A nor B of the above are correct. Answer: B Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 524 Copyright © 2018 Pearson Education, Inc.

19) Two growth areas for consumer finance companies are A) first mortgages and vacation financing. B) marine vessel loans and auto loans. C) home equity loans and educational loans. D) home equity loans and "private label" retail credit cards. Answer: D Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 20) Sales finance companies make loans to consumers to purchase items A) on the Internet. B) from any retailer. C) from a particular retailer. D) for a specific use. Answer: C Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 21) From 1994 through 2015, total finance company business loans peaked in 2008, with about ________ billion in business loans outstanding. A) $200 B) $400 C) $600 D) $800 Answer: C Topic: Chapter 27.4 Types of Finance Companies Question Status: New Question 22) Suppose that the interest rate on a home equity loan is 6% and that the marginal tax for the borrower is 28%. What is the effective after-tax cost of the loan, assuming the loan interest is tax deductible? A) 3.51% B) 4.32% C) 5.76% D) 6.55% Answer: B Topic: Chapter 27.4 Types of Finance Companies Question Status: New Question

23) Although finance companies are largely unregulated, they do face some regulations aimed primarily at A) protecting unsophisticated customers. B) the government deposit insurance. C) large corporate customers. D) protecting the finance companies from failure. Answer: A Topic: Chapter 27.5 Regulation in Finance Companies Question Status: Previous Edition 24) The level of interest rates that finance companies can charge customers is limited by A) usury statutes. B) Regulation Z. C) FIRREA. D) "means tests." Answer: A Topic: Chapter 27.5 Regulation in Finance Companies Question Status: New Question 25) As presented in the Consolidated Finance Company Balance Sheet, the largest asset of finance companies is consumer loans, representing ________ of assets. A) 10% B) 22% C) 25% D) 49% Answer: D Topic: Chapter 27.6 Finance Company Balance Sheet Question Status: Updated from Previous Edition 26) By 2015, finance companies held about 900 billion in consumer loans, which represented about ________ of their total assets. A) 42% B) 49% C) 58% D) 75% Answer: B Topic: Chapter 27.6 Finance Company Balance Sheet Question Status: New Question

27) Commercial paper is an important source of funding for finance companies. As presented in the Consolidated Finance Company Balance Sheet, commercial paper represents about ________ of their liabilities. A) 3.9% B) 5.8% C) 12.5% D) 20.0% Answer: A Topic: Chapter 27.6 Finance Company Balance Sheet Question Status: Previous Edition 28) On average, finance companies have a capital-to-total-asset ratio that is ________ than that of banks and savings and loans. A) lower B) the same as C) higher D) None of the above are correct. Finance companies do not have a capital-to-total-asset ratio. Answer: C Topic: Chapter 27.6 Finance Company Balance Sheet Question Status: Previous Edition 29) Finance company assets peaked around 2008, with total assets just over A) $500 billion. B) $1 trillion. C) $2 trillion. D) $3 trillion. Answer: C Topic: Chapter 27.6 Finance Company Balance Sheet Question Status: New Question 27.2 True/False 1) Installment credit is a loan that requires the borrower to make a series of equal payments over some fixed length of time. Answer: TRUE Topic: Chapter 27.1 History of Finance Companies Question Status: Previous Edition 2) A balloon loan requires periodic payments of principle and interest. Answer: FALSE Topic: Chapter 27.1 History of Finance Companies Question Status: Previous Edition

3) Many retailers established finance companies to provide financing for their customers. Although these finance subsidiaries did increase sales, the subsidiary was typically unprofitable. Answer: FALSE Topic: Chapter 27.1 History of Finance Companies Question Status: Previous Edition 4) Finance companies essentially sell commercial paper and use the proceeds to make loans. Answer: TRUE Topic: Chapter 27.2 Purpose of Finance Companies Question Status: Previous Edition 5) In 2016, business loans represented the largest type of loan made by finance companies, followed by consumer loans and then real estate loans. Answer: FALSE Topic: Chapter 27.4 Types of Finance Companies Question Status: New Question 6) At the end of 2016, motor vehicle loans represented 37% of the types of business loans made by finance companies. This was the largest type of business loan, followed by equipment loans at 28%. Answer: TRUE Topic: Chapter 27.4 Types of Finance Companies Question Status: New Question 7) The total amount outstanding of finance company business loans increased steadily from 1994 through the end of 2015. Answer: FALSE Topic: Chapter 27.4 Types of Finance Companies Question Status: New Question 8) Finance companies face much stricter regulations than commercial banks. Answer: FALSE Topic: Chapter 27.5 Regulation in Finance Companies Question Status: Previous Edition 9) Lease financing is an example of a business financing need not served by most banks. Answer: TRUE Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 10) Much like banking institutions, interest-rate risk is a big concern for finance companies. Answer: FALSE Topic: Chapter 27.3 Risk in Finance Companies Question Status: Previous Edition

11) Factoring refers to purchasing a firm's accounts receivables at a premium. Answer: FALSE Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 12) In a lease financing arrangement, a finance company will purchase equipment, which it then leases to a company for a set period. Answer: TRUE Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 13) Consumer finance companies make loans to borrowers who would not qualify for bank loans due to low income or poor credit. Answer: TRUE Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 14) A sales finance company differs from a captive finance company primarily in regulations and other restrictions. Answer: FALSE Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 15) Usury statutes limit the level of interest rates that finance companies can charge their customers. Answer: TRUE Topic: Chapter 27.5 Regulation in Finance Companies Question Status: Previous Edition 16) Like the consumer finance market, finance companies face many regulations in the business loan market. Answer: FALSE Topic: Chapter 27.5 Regulation in Finance Companies Question Status: Previous Edition 17) According to the Consolidated Finance Company Balance Sheet for 2015, the total assets of all finance companies was around $1.8 trillion. Answer: TRUE Topic: Chapter 27.6 Finance Company Balance Sheet Question Status: New Question

27.3 Essay 1) What factors explain the existence of finance companies, given that banks already provide loans, credit, and so forth? Topic: Chapter 27.2 Purpose of Finance Companies Question Status: Previous Edition 2) Discuss the regulatory environment for finance companies relative to commercial banks. Topic: Chapter 27.5 Regulation in Finance Companies Question Status: Previous Edition 3) Discuss the types of risk faced by finance companies. Are these risks similar to banks? Topic: Chapter 27.3 Risk in Finance Companies Question Status: Previous Edition 4) What are the various types of finance companies? Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 5) Describe the process of factoring? When and why is it used? Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition 6) Describe how floor plans work in the automobile industry. Why can finance companies offer these arrangements at a lower cost than banks? Topic: Chapter 27.4 Types of Finance Companies Question Status: Previous Edition