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Eurodollars are U.S. dollars that have been deposited in

a.

foreign branches of U.S. banks
b.

foreign subsidiaries
c.

foreign banks
d.

foreign banks and foreign branches of U.S. banks

10 points

QUESTION 2

A savings and loan association is an example of which type of financial intermediary?

a.

commercial bank
b.

investment company
c.

finance company
d.

thrift institution

10 points

QUESTION 3

Finance companies obtain a significant amount of their funds by

a.

pooling funds
b.

issuing their own debt securities
c.

issuing their own equity securities
d.

accepting both demand and time deposits

10 points

QUESTION 4

When an investor purchases shares in a no-load common stock mutual fund, she is using a(n)

a.

primary intermediary
b.

broker
c.

financial intermediary
d.

over-the-counter market

10 points

QUESTION 5

In an efficient capital market, corporate diversification is ____.

a.

of great benefit
b.

inexpensive
c.

unnecessary
d.

of benefit to corporate managers

10 points

QUESTION 6

Changes in the tax code that slow down depreciation, ____ the present value of investment cash flows and, therefore, make the investment ____ desirable.

a.

increase, more
b.

increase, less
c.

decrease, less
d.

decrease, more

10 points

QUESTION 7

Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return?

a.

-6.30%
b.

14.60%
c.

8.30%
d.

2.08%

10 points

QUESTION 8

Lear purchased 100 shares of Quitcha Twitchin Anti-inch Cream stock at $30 per share last year and sold them eleven months later for $24 per share. The shares split 2 for 1 shortly after Lear purchased the stock. If the stock paid $0.25 per share in dividends last year, what is Lear's holding period return?

a.

6.17%
b.

61.67%
c.

21.67%
d.

-19.17%

10 points

QUESTION 9

All of the following are financial intermediaries EXCEPT:

a.

loan sharks
b.

commercial banks
c.

investment companies
d.

thrift institutions

10 points

QUESTION 10

Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act as agents on behalf of their clients are::

a.

Floor Brokers
b.

SEC Agents
c.

Exchange Runners
d.

Designated Market Makers

10 points

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28 Sep 2019

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Related questions

Question 1

Financial investments are made in efficient markets. The existence of these markets suggests that:

a.

Investors cannot earn superior returns.
b.

Investors cannot expect to outperform the market consistently.
c.

Security prices are random.
d.

Bearing additional risk will not increase return.

2 points

Question 2

A new issue of corporate securities sold to the general public must be:

a.

Registered with the SEC.
b.

Initially sold through brokers.
c.

Offered initially to existing stockholders.

2 points

Question 3

Money market mutual funds invest in which of the following?

Commercial paper.

Repurchase agreements.

Corporate bonds.

a.

1 and 2.
b.

1 and 3.
c.

2 and 3.
d.

All of the choices are correct.

3 points

Question 4

FDIC insures:

a.

U.S. Treasury bills.
b.

Money market mutual funds.
c.

Saving accounts.
d.

Repurchase agreements.

3 points

Question 5

Which of the following does not have default risk?

a.

Money market mutual funds.
b.

Commercial paper.
c.

Negotiable certificates of deposit.
d.

U.S. Treasury bills.

2 points

Question 6

The spread is the:

a.

Difference between the bid and ask prices.
b.

Commission charged by the broker.
c.

Difference between the purchase and sale prices.
d.

Difference between the commissions charged by full-service and discount brokers.

3 points

Question 7

Securities regulations protect investors by:

a.

Requiring disclosures of information by firms.
b.

Stopping investors from buying overpriced stock.
c.

Reducing competition among brokers.
d.

Establishing commission schedules.

3 points

Question 8

If a stock is bought on margin:

a.

The full amount of the cost of the investment is borrowed.
b.

The commissions on the investment are increased.
c.

The cost of the investment is reduced.
d.

The interest on the borrowed funds is set by the SEC.

3 points

Question 9

Sarbanes-Oxley, the latest important securities law:

a.

Reduces potential conflicts between securities analysts and investment bankers.
b.

Legalizes the sale of securities by investment brokers.
c.

Requires corporate boards of directors to own stock.
d.

Mandates that security analysts file their recommendations with the SEC.

2 points

Question 10

Which of the following are true about the present value of a dollar?

It increases as the interest rate increases.

It decreases as the interest rate increases.

It increases as the time period increases.

It decreases as the time period increases.

a.

1 and 3.
b.

1 and 4.
c.

2 and 3.
d.

2 and 4.

3 points

Question 11

Time value concepts may not be used to determine:

a.

The present value of an annuity.
b.

The margin required on a stock purchase.
c.

The future value of $100 deposited in a bank.
d.

The present value of a lump sum.

2 points

Question 12

What is the marginal tax rate?

a.

The tax rate paid on investment gains from items purchased on margin.
b.

The tax rate paid on an additional dollar of taxable income.
c.

The margin required on a stock purchase.
d.

The present value of a lump sum.

2 points

Question 13

Examples of capital gains include sales of which of the following?

IRA accounts.

Stocks sold for a profit.

Real estate sold for a profit.

a.

1 and 2.
b.

1 and 3.
c.

2 and 3.
d.

All of these choices.

3 points

Question 14

With a Roth IRA, the individual:

a.

May deduct annual contributions.
b.

Earns tax-free income.
c.

Defers taxes.
d.

Avoids estate taxes.

2 points

Question 15

Sources of unsystematic risk include which of the following?

A firms financing decisions.

A firms operations.

Fluctuating market prices.

a.

1 and 2.
b.

1 and 3.
c.

2 and 3.
d.

All of these choices.

2 points

Question 16

For diversification to reduce risk:

a.

The returns on the individual securities should be highly correlated.
b.

The prices of the stocks should be stable.
c.

The returns on the individual securities should be negatively correlated.
d.

One firm should offer dividends and the other should offer capital gains.

2 points

Question 17

Which of the following are true about beta coefficients?

They are a measure of systematic risk.

They relate the return on an individual security to the return on the market.

They measure the variability of an assets return.

a.

1 and 2.
b.

1 and 3.
c.

2 and 3.
d.

All of these choices.

3 points

Question 18

Which of the following does an efficient portfolio do?

Maximizes risk for a given return.

Minimizes risk for a given return.

Maximizes return for a given level of risk.

Minimizes return for a given level of risk.

a.

1 and 3.
b.

1 and 4.
c.

2 and 3.
d.

2 and 4.

3 points

Question 19

The security market line does not:

a.

Indicate the relationship between risk and return.
b.

Relate the market return and beta to a stock's return.
c.

Identify the optimal portfolio for the investor.
d.

Use beta coefficients as a measure of risk.

3 points

Question 20

Mutual funds ____ realized capital gains and income (for example, dividends received):

a.

Retain.
b.

Reinvest.
c.

Distribute.
d.

Distribute or reinvest.

2 points

Question 21

An index fund limits its portfolio to:

a.

High quality securities.
b.

Stocks that respond to changes in the consumer price index.
c.

Stocks included in an aggregate measure of stock prices.
d.

Stocks of firms in a particular industry.

2 points

Question 22

Mutual funds with beta coefficients greater than 1.0:

a.

Have outperformed the market.
b.

Have underperformed the market.
c.

Have more systematic risk than the market.
d.

Have less systematic risk than the market.

3 points

Question 23

Which of the following will tend to cause a stock's price to fall?

The firms beta declines.

The firms beta increases.

The risk-free rate declines.

The risk-free rate increases.

a.

1 and 3.
b.

1 and 4.
c.

2 and 3.
d.

2 and 4.

2 points

Question 24

The use of P/E ratios to select stocks suggests that:

a.

High P/E stocks should be purchased.
b.

Low P/E ratio stocks are overvalued.
c.

A stock should be purchased if it is selling near its historic low P/E.
d.

A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

What does the efficient market hypothesis require?

Financial markets to be competitive.

Prices to adjust rapidly.

Prices of undervalued securities to fall.

a.

1 and 2.
b.

1 and 3.
c.

2 and 3.
d.

All of these choices.

3 points

Question 26

Which of the following does the strong form of the efficient market hypothesis suggest?

Inside information will not lead to superior investment results.

Inside information will lead to superior investment results.

Studying financial statements will not lead to superior investment results.

Studying financial statements will lead to superior investment results.

a.

1 and 3.
b.

1 and 4.
c.

2 and 3.
d.

2 and 4.

3 points

Question 27

Which of the following is the least broad-based measure of stock prices?

a.

NASDAQ market index.
b.

Dow Jones industrial average.
c.

S&P 500 stock index.
d.

AMEX market value index.

3 points

Question 28

What is dollar-cost averaging?

a.

Periodically buying a round lot of stock.
b.

Periodically investing a specified dollar amount in a stock.
c.

A means to increase the average cost basis.
d.

A means to ensure a positive return.

2 points

Question 29

Stock dividends cause:

a.

The price of a share of stock to rise.
b.

The price of a share of stock to fall.
c.

The value of the firm to rise.
d.

The value of the firm to fall.

2 points

Question 30

Which of the following occurs when a stock has a two-for-one split?

a.

The price of the stock doubles.
b.

The firm's assets increase.
c.

The firm's liabilities decrease.
d.

The par value of the stock is reduced.

3 points

Question 31

Dividend reinvestment plans offer which of the following advantages?

Deferment of federal income taxes.

A convenient means to accumulate shares.

Dollar-cost averaging.

a.

1 and 2.
b.

1 and 3.
c.

2 and 3.
d.

2.

3 points

Question 32

When the Federal Reserve seeks to expand the money supply, it:

a.

Sells securities.
b.

Buy securities.
c.

Runs a deficit.
d.

Runs a surplus.

2 points

Question 33

The sum of cash, currency, and demand deposits is:

a.

M1.
b.

M2.
c.

M3.
d.

M4.

3 points

Question 34

If the Federal Reserve lowers the target federal funds rate:

a.

The discount rate rises.
b.

Liquidity in the banking system is increased.
c.

Security prices fall.
d.

Required reserves are also decreased.

3 points

Question 35

The anticipation of inflation suggests that the investor should:

a.

Buy bonds.
b.

Anticipate higher interest rates.
c.

Avoid real estate investments.
d.

Sell stocks of gold companies.

3 points

Question 36

The current ratio is unaffected by:

a.

Using cash to pay a dividend.
b.

The collection of an account receivable.
c.

Selling inventory for a profit.
d.

Selling bonds and using the funds to finance inventory.

2 points

Question 37

Which of the following are true as the debt ratio increases?

Fewer assets are debt financed.

More assets are debt financed.

The ratio of debt equity increases.

The ratio of debt equity decreases.

a.

1 and 3.
b.

1 and 4.
c.

2 and 3.
d.

2 and 4.

2 points

Question 38

The technical approach suggests that future stock prices are forecasted by:

a.

Past stock rates.
b.

Financial ratios.
c.

Accounting statements.
d.

Monetary policy.

2 points

Question 39

The Dogs of the Dow strategy:

a.

Forecasts the direction of the Dow Jones averages.
b.

Suggests buying the Dow stocks with the highest dividend yields.
c.

Outperforms the S&P 500.
d.

Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

a.

Accounting and finance.
b.

Finance and psychology.
c.

Physics and finance.
d.

Finance and marketing.

Question 5

1. Which of the following does not have default risk?

a.

Money market mutual funds.

b.

Commercial paper.

c.

Negotiable certificates of deposit.

d.

U.S. Treasury bills.

2 points

Question 6

1. The spread is the:

a.

Difference between the bid and ask prices.

b.

Commission charged by the broker.

c.

Difference between the purchase and sale prices.

d.

Difference between the commissions charged by full-service and discount brokers.

3 points

Question 7

1. Securities regulations protect investors by:

a.

Requiring disclosures of information by firms.

b.

Stopping investors from buying overpriced stock.

c.

Reducing competition among brokers.

d.

Establishing commission schedules.

3 points

Question 8

1. If a stock is bought on margin:

a.

The full amount of the cost of the investment is borrowed.

b.

The commissions on the investment are increased.

c.

The cost of the investment is reduced.

d.

The interest on the borrowed funds is set by the SEC.

3 points

Question 9

1. Sarbanes-Oxley, the latest important securities law:

a.

Reduces potential conflicts between securities analysts and investment bankers.

b.

Legalizes the sale of securities by investment brokers.

c.

Requires corporate boards of directors to own stock.

d.

Mandates that security analysts file their recommendations with the SEC.

2 points

Question 10

1. Which of the following are true about the present value of a dollar?

1. It increases as the interest rate increases.

2. It decreases as the interest rate increases.

3. It increases as the time period increases.

4. It decreases as the time period increases.

a.

1 and 3.

b.

1 and 4.

c.

2 and 3.

d.

2 and 4.

3 points

Question 11

1. Time value concepts may not be used to determine:

a.

The present value of an annuity.

b.

The margin required on a stock purchase.

c.

The future value of $100 deposited in a bank.

d.

The present value of a lump sum.

2 points

Question 12

1. What is the marginal tax rate?

a.

The tax rate paid on investment gains from items purchased on margin.

b.

The tax rate paid on an additional dollar of taxable income.

c.

The margin required on a stock purchase.

d.

The present value of a lump sum.

2 points

Question 13

1. Examples of capital gains include sales of which of the following?

1. IRA accounts.

2. Stocks sold for a profit.

3. Real estate sold for a profit.

a.

1 and 2.

b.

1 and 3.

c.

2 and 3.

d.

All of these choices.

3 points

Question 14

1. With a Roth IRA, the individual:

a.

May deduct annual contributions.

b.

Earns tax-free income.

c.

Defers taxes.

d.

Avoids estate taxes.

2 points

Question 15

1. Sources of unsystematic risk include which of the following?

1. A firms financing decisions.

2. A firms operations.

3. Fluctuating market prices.

a.

1 and 2.

b.

1 and 3.

c.

2 and 3.

d.

All of these choices.

2 points

Question 16

1. For diversification to reduce risk:

a.

The returns on the individual securities should be highly correlated.

b.

The prices of the stocks should be stable.

c.

The returns on the individual securities should be negatively correlated.

d.

One firm should offer dividends and the other should offer capital gains.

2 points

Question 17

1. Which of the following are true about beta coefficients?

1. They are a measure of systematic risk.

2. They relate the return on an individual security to the return on the market.

3. They measure the variability of an assets return.

a.

1 and 2.

b.

1 and 3.

c.

2 and 3.

d.

All of these choices.

3 points

Question 18

1. Which of the following does an efficient portfolio do?

1. Maximizes risk for a given return.

2. Minimizes risk for a given return.

3. Maximizes return for a given level of risk.

4. Minimizes return for a given level of risk.

a.

1 and 3.

b.

1 and 4.

c.

2 and 3.

d.

2 and 4.

3 points

Question 19

1. The security market line does not:

a.

Indicate the relationship between risk and return.

b.

Relate the market return and beta to a stock's return.

c.

Identify the optimal portfolio for the investor.

d.

Use beta coefficients as a measure of risk.

3 points

Question 20

1. Mutual funds ____ realized capital gains and income (for example, dividends received):

a.

Retain.

b.

Reinvest.

c.

Distribute.

d.

Distribute or reinvest.

2 points

Question 21

1. An index fund limits its portfolio to:

a.

High quality securities.

b.

Stocks that respond to changes in the consumer price index.

c.

Stocks included in an aggregate measure of stock prices.

d.

Stocks of firms in a particular industry.

2 points

Question 22

1. Mutual funds with beta coefficients greater than 1.0:

a.

Have outperformed the market.

b.

Have underperformed the market.

c.

Have more systematic risk than the market.

d.

Have less systematic risk than the market.

3 points

Question 23

1. Which of the following will tend to cause a stock's price to fall?

1. The firms beta declines.

2. The firms beta increases.

3. The risk-free rate declines.

4. The risk-free rate increases.

a.

1 and 3.

b.

1 and 4.

c.

2 and 3.

d.

2 and 4.

2 points

Question 24

1. The use of P/E ratios to select stocks suggests that:

a.

High P/E stocks should be purchased.

b.

Low P/E ratio stocks are overvalued.

c.

A stock should be purchased if it is selling near its historic low P/E.

d.

A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

a.

1 and 2.

b.

1 and 3.

c.

2 and 3.

d.

All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

a.

1 and 3.

b.

1 and 4.

c.

2 and 3.

d.

2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

a.

NASDAQ market index.

b.

Dow Jones industrial average.

c.

S&P 500 stock index.

d.

AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

a.

Periodically buying a round lot of stock.

b.

Periodically investing a specified dollar amount in a stock.

c.

A means to increase the average cost basis.

d.

A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

a.

The price of a share of stock to rise.

b.

The price of a share of stock to fall.

c.

The value of the firm to rise.

d.

The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

a.

The price of the stock doubles.

b.

The firm's assets increase.

c.

The firm's liabilities decrease.

d.

The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

a.

1 and 2.

b.

1 and 3.

c.

2 and 3.

d.

2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

a.

Sells securities.

b.

Buy securities.

c.

Runs a deficit.

d.

Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

a.

M1.

b.

M2.

c.

M3.

d.

M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

a.

The discount rate rises.

b.

Liquidity in the banking system is increased.

c.

Security prices fall.

d.

Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

a.

Buy bonds.

b.

Anticipate higher interest rates.

c.

Avoid real estate investments.

d.

Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

a.

Using cash to pay a dividend.

b.

The collection of an account receivable.

c.

Selling inventory for a profit.

d.

Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

a.

1 and 3.

b.

1 and 4.

c.

2 and 3.

d.

2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

a.

Past stock rates.

b.

Financial ratios.

c.

Accounting statements.

d.

Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

a.

Forecasts the direction of the Dow Jones averages.

b.

Suggests buying the Dow stocks with the highest dividend yields.

c.

Outperforms the S&P 500.

d.

Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

a.

Accounting and finance.

b.

Finance and psychology.

c.

Physics and finance.

d.

Finance and marketing.

1. Different financial institutions have different levels of service. What is the main reason for this?

a. The Federal regulations relating to the institutions make them provide the services at different levels.

b. Levels of financial service are determined in part by the ownership structure of the financial institution, and different financial institutions have different ownership structures.

c. Financial services require specific expertise and the design of financial institutions favors one type of institution over the other.

d. None of these explain the difference between levels of service at different institutions.

2. Which of the following is not an example of a financial intermediary?

a. Savings and Loans.

b. Commercial banks.

c. Pension funds.

d. Stock markets.

e. All of these are examples of financial intermediaries.

3. Which of the following branches of the Federal Reserve Bank has a permanent seat on the Federal Open Market Committee?

a. New York

b. Cleveland

c. St. Louis

d. Boston

e. None of these.

4. Who owns the Federal Reserve Banking system?

a. No one, it owns itself.

b. The member banks.

c. The US Government.

d. The Chinese Government.

e. The shareholders of the Federal Reserve Corporation.

5. Who is the most important member of the Federal Open Market Committee and often thought of as the second most powerful person in the United States?

a. The President of the United States

b. The Treasury Secretary.

c. The Chairman of the Federal Reserve Bank.

d. The President of the Federal Reserve Bank of New York.

e. None of these.

6. Which of the following markets is the most stable?

a. The market for corporate bonds.

b. The real estate market.

c. The market for Treasury bonds.

d. The New York Stock Exchange.

e. The Chicago Mercantile Exchange.

7. All of the following show interactions between markets except:

a. Purchase of a mortgage issued by Freddie Mac by the Federal Reserve Bank.

b. Sale of stock to raise equity for a new company to an insurance provider.

c. Increase in short term target rates by the Fed on the bond market resulting in stock market increases when announced in the press.

d. Restrictions in bank lending as the result of increasing capital requirements resulting in lower real estate prices and fewer sales on the real estate market.

e. All of these are examples of market interactions.

8. Which of the following acts was repealed by the Gramm-Leach-Bliley Act of 1999:

a. The Depository Institutions Deregulation and Monetary Control Act of 1980.

b. The Banking Act of 1933.

c. The Garn-St Germain Depositary Institutions Act of 1982.

d. The Civil Rights Act of 1964

e. None of these.

9. Which of the following problems was a reason for bank panics prior to the establishment of the Federal Reserve bank:

a. Currency was not uniform in value.

b. Currency was not backed by the full faith and credit of the United States Government.

c. Currency could become worthless if the issuing bank went bankrupt.

d. Lack of regulation of the financial markets often led to bank runs.

e. All of these were elements of the bank panics that occurred prior to the establishment of the Federal Reserve system.

10. Why is the Federal Reserve Bank considered to be relatively but not completely free of political influence in the United States?

a. The Federal Reserve Chairman must be appointed by the President and confirmed by the Senate.

b. The Federal Reserve is not owned by the US Government.

c. The Federal Reserve System is designed to divide power among member banks from different regions of the country.

d. The Federal Reserve appointments are for sufficient length of time that it takes at least 8 years for a majority of members to be appointed by one President.

e. All of these are important in defining the degree of independence of the Federal Reserve from political influence.

11. Which of the following examples is an illustration of interest rate risk?

a. A consumer buys a house with a fixed mortgage that will not change for 30 years.

b. A consumer buys a car with a fixed rate loan at 5.99% for five years.

c. A bank borrows funds from the Federal Reserve discount window for 0.25% and lends that money to a consumer for a car or auto loan of longer duration.

d. A consumer opens a passbook savings account.

e. None of these illustrate interest rate risk

12. If the yield curve is said to be steep, this means:

a. Banks will make a lot of money lending at long term rates that are higher than the short term rates at which they borrow money.

b. The bond market expects inflation to increase in the future.

c. The bond market expects that the economy will grow in the immediate future.

d. None of these are conclusions that can be reached from a steep yield curve.

e. a, b and c are all conclusions that can be reached when the yield curve is steep.

13. According to the expectations theory of interest rates:

a. The total interest rate is equal to the sum of the real interest rate and the expected inflation rate.

b. The total interest rate is equal to the sum of the real interest rate, the expected inflation rate, and a series of additional premiums based on the risks taken in the instrument of interest.

c. The Fed sets interest rates, which cannot be changed by the market.

d. The interest rate in the economy is a balance between the supply and demand of funds.

e. None of these are true.

14. If the real interest rate in the economy is 3% and the expected inflation is 2% per year over a five year period, assuming the maturity risk premium is 0, what is the interest rate that the expectations theory would predict for a five year Treasury note?

a. 10%

b. 3%

c. 2%

d. 6%

e. 5%

15. What is the most important economic function of the money markets?

a. To provide an efficient means of liquidity adjustment for businesses, individuals and governments.

b. To provide a place where buyers and sellers can negotiate a price of funds.

c. To provide a social interaction between borrowers and sellers of funds, allowing for easier relationship-based transactions in the future.

d. To provide a place where stocks and bonds can be sold.

e. None of these are important economic functions of the money markets.

16. The ideal instrument sold in a money market has all of the following characteristics except:

a. High liquidity

b. Low Default Risk

c. Are long term obligations

d. Are short term obligations

e. None of these are characteristics of an ideal money market instrument.

17. What is the reason for the 35% rule in the bid process for Treasury securities?

a. It prevents a single entity from controlling the interest rate in the market.

b. It allows regular consumers access to the treasury market through non-competitive bids.

c. It prevents the government from controlling and regulating banks.

d. It prevents the Chinese from buying too many treasury bills.

e. None of these are reasons for the establishment of the 35% rule.

18. What is the name for the risk that a financial institution might not receive promised cash flows in the form of interest and principal payments from its borrowers?

a. Interest Rate Risk

b. Financial Payment and Principal Risk

c. Market Risk

d. Credit Risk

e. None of these are the correct term.

19. The risk that a financial institution might have to sell a lot of assets in a short period of time at below market prices to pay obligations demanded by its creditors is called:

a. Liquidity Risk

b. Market Risk

c. Credit Risk

d. Interest Rate Risk

e. None of these

20. What is the main difference between firm-specific and systemic credit risk?

a. Firm specific risk can be managed by proper underwriting and diversification in a loan portfolio.

b. Systemic risk affects all borrowers.

c. Firm-specific risk is determined by the individual circumstances of the firm involved.

d. Derivitives can be used to manage systemic risk

e. The Federal Reserve Bank of New York uses open market operations to manage firm-specific risk.

21. A credit crisis in the financial markets can improve bank efficiency by:

a. Focusing the bank underwriting department on firm-specific risk factors associated with default.

b. Forcing banks to reduce staffing needs by eliminating wasteful or unnecessary functions.

c. Marking banks compete more rigorously for customers in a tougher market.

d. None of these are reasons that a recession helps improve bank efficiency.

e. Items a, b and c are all reasons that a bank improves efficiency during a recession.

22. A mutual fund that invests only in Treasury funds has which of the following risk exposures?

a. Interest Rate Risk

b. Liquidity Risk

c. Default Risk

d. Treasury’s are risk free, so a mutual fund that invests in them is also risk free.

e. Credit risk

23. Foreign Stocks carry additional risks beyond those of US companies for US investors. Which of the following risks is not an additional risk that a US investor in foreign stocks faces?

a. Interest Rate Risk

b. Foreign Currency Risk

c. Sovereignty Risk

d. Both a and b are additional risks faced by these investors.

e. All of these risks (a, b and c) are faced by investors in domestic and foreign stocks.

24. According to the theory of Purchasing Power Parity, if the price of a widget in the US is $3.00 and the Euro is worth $1.50, the price of the widget in Germany would be:

a. €5.00

b. €3.00

c. €4.50

d. €7.00

e. €10.00

25. For many years, the current account of the United States has been in deep deficit. In theory, this should lead to a weak dollar. What factors could counteract the effect of the current account deficit on the strength of the dollar?

a. Foreigners use dollars as stores of value

b. When inflation is expected to be low in the USA and interest rates are high, foreigners want to invest here, driving up the price of the dollar.

c. The Dollar is king in the world currency markets

d. Dollars are backed by the full faith and credit of the US Government and therefore maintain a constant value on the market.

e. None of these explains the relative strength of the dollar in the global currency market.

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