Multiple Choice Answers

All other factors held constant, an investment: (Points : 2)
With more risk should offer a lower return and sell for a higher price
With less risk should sell for a lower price and offer a higher return
With more risk should sell for a lower price and offer a higher return
With less risk should sell for a lower price and offer a lower return

The bond demand curve slopes downward because:
(Points : 2)
At lower prices the reward for holding the bond increases
As bond prices fall so do yields
As bond prices fall bonds are less attractive
As bond prices rise yields increase
If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices:
(Points : 2)
Would rise and yields would fall
Would fall and yields would rise
Would rise but yields will remain constant
Would fall and yields would fall

Commercial paper refers to:
(Points : 2)
The financial publications read by the CEOs of public corporations
Any debt security with a maturity exceeding one year
Short-term collateralized securities issued only by corporations
Unsecured short-term debt issued by corporations and governments

The fact that common stockholders are residual claimants means: (Points : 2)
The stockholders have a claim against the revenue that remains after everyone else is paid
The stockholders are paid before the bondholders but after any taxes are paid
The stockholders receive their dividends before any other residuals are paid
The stockholders are paid any past due dividends before other claims are paid

In a derivative transaction:
(Points : 2)
The dollar amount of the transaction increases as the contract date approaches.
The risk is less than if actually purchasing the underlying asset.
There is always a futures contract.
What one person gains is what the other person loses.

A country’s capital account:
(Points : 2)
Is synonymous with the current account
Will be in a surplus position if the current account is in a deficit position
Will be in a deficit position when the current account is in a deficit
Reflects the sum of exports minus imports

Regulators require a bank to hold some of its assets as reserves mainly to address:
(Points : 2)
Operational risk
Credit risk
Liquidity risk
Trading risk

Which of the following statements is true?
(Points : 2)
Both American and European options can be sold prior to expiration.
Call options can be sold prior to expiration but put options cannot.
Put options can be sold prior to expiration but call options cannot.
No option can be sold prior to expiration.

Which of the following tradeoffs impact the likelihood of a bank’s failure? (Points : 2)
The more competitive the banking environment, the more liquid the bank will be
The greater the regulation from government the more likely the bank will fail
The more profitable the bank, the less liquid the bank will be and the more likely it will fail
The larger the bank in asset size the more likely it will fail

The financial system is inherently more unstable than most other industries due to the fact that: (Points : 2)
While in most other industries customers disappear at a faster rate, in banking they disappear slowly so the damage is done before the real problem is identified
Banks deal in paper profits, not in real profits
A single firm failing in banking can bring down the entire system; this isn’t true in most other industries
There is less competition than in other industries

If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be:
(Points : 2)
Reserved only for those banks that are most deserving
Used on a limited basis
Credible, with banks knowing they can get loans quickly
Only available during economic downturns

One problem for the Federal Reserve regarding setting policy stems from the fact that:
(Points : 2)
There are multiple goals that may be inconsistent with each other
There are more policy instruments than goals
The membership of its governing board changes so often
Congress sets very tight goal ranges that the central bankers must hit

If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in what change in loans?
(Points : 2)
No change
An increase of $10 million
A decrease of $1 million
An increase of $1 million

Discount lending today is primarily used for: (Points : 2)

Controlling reserves

Providing short-term financial stability and preventing bank panics

Preventing bank panics

Providing short-term financial stability