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Home  Courses  _FINA2330_BCD_2020  General  In-term Exam MCQ Part
Started on Monday, 3 May 2021, 1:32 PM
State Finished
Completed on Monday, 3 May 2021, 2:32 PM
Time taken 1 hour
Question 1
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Bank Run Example
Time T = 0, the balance sheet of Bank 1 and Bank 2 is as follows:
Time T = 1, Bank 1 and Bank 2 write-off the MBS portfolio
Refer to Bank Run Example above. Which of the following statements is correct?
Select one:
A. If Bank 1 and Bank 2 receive emergency loans from the central bank, they can survive and continue
their operations.
B. For a troubled bank, borrowing from the central bank’s discount window can make it harder for the
bank to borrow from the market.
C. Adverse selection problems emerge when deposit insurance lowers depositors’ incentive to monitor
banks’ financial health.
D. Higher capital requirements can lower the probability of bank failures but will encourage banks to take
risks.
Question 2
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Which of the following statements is correct?
Select one:
A. The recession following the 2008 Financial Crisis was because the Fed and the government did not
provide enough support for the financial system.
B. During the Covid-19 pandemic, the Fed didn’t have to support non-bank financial institutions as they
did in the 2008 Financial Crisis.
C. Compare with the 2008 Financial Crisis, the US government has been more active in using fiscal
policies to support the economy during the Covid-19 pandemic.
D. Compare with the 2008 Financial Crisis, the Covid-19 pandemic has slower impacts on the US
economy and the financial system.
Question 3
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Which of the following statements is correct?
Select one:
A. When inflation is expected to increase, the market value of coupon bonds will be affected less than
that of zero-coupon bonds.
B. The yield curve is more upward-sloped reflecting the greater default risk of long-term bonds.
C. The spread between corporate bond yield and Treasury bond yield of the same maturity and payment
schedule reflects corporate bonds’ greater sensitivity to interest rate risk.
D. When default risk is unchanged and interest rate risk is lower, the market value of long-term bonds
will increase relative to that of short-term bonds.
E. Both A and B are correct statements.
F. Both A and D are correct statements.
G. Both B and C are correct statements.
H. Both B and D are correct statements.
I. Both C and D are correct statements.
Question 4
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Which of the following statements is correct?
Select one:
A. For health insurance policies, co-payments can lessen moral hazard problems.
B. Deposit insurance can lessen adverse selection in the banking sector.
C. For insurance companies, raising insurance premiums is one solution for adverse selection problems.
D. Too-big-to-fail financial institutions are an example of adverse selection problems.
E. Both A and B are correct statements.
F. Both B and C are correct statements.
G. Both A and C are correct statements.
H. Both A and D are correct statements.
Question 5
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Figure 1. Return on Commercial Paper and the Prime Rate, January 1990–January 2013
On the money market:
Select one:
A. money market mutual funds can compete with traditional banks because their liquidity risk is lower
than that of traditional banks.
B. money market securities are considered safe investments because of their short maturity and high
liquidity.
C. money market mutual funds can compete with traditional banks because in a normal market
condition, investors believe that money market accounts are safer than deposit accounts.
D. Figure 1 above indicates that in a normal market condition, it is generally safer to borrow through the
non-bank channel than through the bank channel.
E. Both A and B are correct statements.
F. Both B and C are correct statements.
Question 6
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In the Shadow Banking, Version #1, Securitization with Repo Finance, which of the following statements is
correct?
Select one:
A. Securitization allows traditional banks to take advantage of the spread between long-term interest
rates and short-term interest rates.
B. After the securitization, the traditional bank is undercapitalized meaning its capital is not proportional
to the riskiness of its asset holdings.
C. The traditional bank essentially sold the loan portfolio to new investors and liquidity risk lies with the
new investors.
D. Money market mutual funds cannot fully invest the funds provided by their investors.
Question 7
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In the Shadow Banking, Version #2, Securitization with Asset-Backed Commercial Papers (ABCP):
Select one:
A. In a normal market condition, the liquidity guarantee is offset by the excess spread.
B. In a normal market condition, ABCPs may be considered safer than conventional commercial papers.
C. In a normal market condition, the liquidity guarantee is reported on the asset side of the money
market mutual fund’s balance sheet.
D. The liquidity guarantee ensures that the money market mutual fund is not exposed to the counterparty risk.
Question 8
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Bank Run Example
Time T = 0, the balance sheet of Bank 1 and Bank 2 is as follows:
Time T = 1, Bank 1 and Bank 2 write-off the MBS portfolio
Refer to Bank Run Example above. Which of the following statements is correct?
Select one:
A. A bank with a large balance of excess reserves will unlikely face a panic run.
B. If Bank 2 is dependent on other fund sources (e.g. commercial papers, repo borrowing, etc.) rather
than deposits, the bank will not face a panic run.
C. If Bank 1 can creditably communicate its financial position to the market, the bank can survive without
changing its capital structure.
D. The panic run of depositors leads to an insolvency risk at Bank 2.
Question 9
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Which of the following statements is correct?
Select one:
A. Either party in a CDS contract can use the transaction to speculate on the underlining securities.
B. The main concern of a derivative market with a central counterparty (CCP) is the high concentration
of market risks at the CCP.
C. Both traditional insurance policies and CDS contracts require the buyers to be the owners of the
underlining assets.
D. Collaterals in the form of margin accounts can be used to lower the market risk for each party.
Question 10
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In a financial market with severe moral hazard problems,
Select one:
A. lower creditworthiness borrowers are more likely to apply for loans at all interest rates.
B. banks may require higher down payments for new mortgages.
C. banks can resolve the problems by carefully examining applications for new loans.
D. raising interest rates is one solution for the problems.
Question 11
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Which of the following statements is correct?
Select one:
A. Expecting higher inflation, bond investors sell bonds and drive down the equilibrium bond yields on
the market.
B. Higher government deficit will likely increase the supply for bonds and drive down the equilibrium
bond yields.
C. When bond yields increase relative to stock returns, the demand for bonds increase relative to the
demand for stocks.
D. Higher expected interest will likely increase the reinvestment risk of bonds.
Question 12
Complete
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Which of the following statements is correct?
Select one:
A. During the 2008 Financial Crisis, the more explicit backing of the US government helped Fannie and
Freddie attract new private capital.
B. After the 2008 Financial Crisis, the US economy recovered partly because weaker US dollars
encouraged the exports of goods and services.
C. One goal of Quantitative Easing (QE) is to lower the borrowing costs of long-term loans such as
mortgages.
D. The goal of the Troubled Asset Relief Program (TARP) was to attract new private capital to troubled
financial institutions.
Question 13
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Which of the following statements is correct?
Select one:
A. A government’s bailout can save an economic sector and unlikely change the moral hazard and
adverse selection problems.
B. The Fed expanded its Lender of Last Resort authority to investment banks to address the solvency
problem of these institutions.
C. Arranging an acquisition of a failing financial institution is the least favoured policy choice of the Fed.
D. The policies of the Fed and the US government during the 2008 Crisis would encourage financial
institutions to grow bigger.
Question 14
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Which of the following statements is correct?
Select one:
A. When a bank manager expects interest rates to fall in the near future, he/she would want on the
bank’s balance sheet to have more mortgage loans than holding of money market securities.
B. When corporate bonds are riskier relative to Treasure bonds, the yields of Treasure bonds would rise
relative to the yields of corporate bonds.
C. Inverted yield curve implies lower reinvestment risk.
D. Higher inflation expectation encourage households to save more and corporations to invest more.
Question 15
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Which of the following statements is correct?
Select one:
A. OTC derivative contracts provide involved parties with very limited ability to customize the terms of
the contracts.
B. Counterparty risk is higher in OTC derivative contracts because collaterals (e.g. margin account) are
rarely used in these contracts.
C. The aggregated market risk of a central counterparty can be positive.
D. A central counterparty will enable established financial institutions to take large one-side bets based
on their predictions about market movements.
Question 16
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Which of the following statements is incorrect?
Select one:
A. Bank stress tests aim to mitigate asymmetric information problems.
B. At the height of the 2008 Financial Crisis, cash-rich investors such as Warren Buffett may not be able
to tell which banks were financially healthy and which banks were in trouble.
C. The decisive actions of the Federal Reserve and the US government to stabilize financial markets in
2008 were well received by the public.
D. New regulations enacted after the 2008 Financial Crisis make financial institutions better capitalized.
Question 17
Complete
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Which of the following statements is incorrect?
Select one:
A. One factor leading to the 2008 Financial Crisis was the low interest rates in the preceding years.
B. One factor leading to the 2008 Financial Crisis was the fragmentation of the financial system that
prevented efficient risk management.
C. One factor leading to the 2008 Financial Crisis was because in the preceding years, the government’s
policies inadvertently encouraged subprime mortgages.
D. One factor leading to the 2008 Financial Crisis was the belief among policy-makers that the Fed and
the government can manage a soft-landing for the economy.
Question 18
Complete
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Which of the following statements is incorrect?
Select one:
A. In a market with significant adverse selection problems, banks are better than money market lenders
(e.g. money market mutual funds) in making short-term loans.
B. Insuring money market accounts, as the Fed and Treasury did during the 2008 Financial Crisis,
increases moral hazard problems on the market.
C. A Credit Default Swap (CDS) is similar to an insurance policy because the buyer will receive a
payment when the underlining bond defaults.
D. An interest-rate swap compensate the floating payer when the interest rate on the underlying asset
increases.
Question 19
Complete
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Which of the following statements is correct?
Select one:
A. A central counterparty (CCP) can lower counterparty risk in the economy but does not change market
risk.
B. Compared with a CCP, an OTC derivative market make it harder to concentrate risk in some market
participants.
C. Compared with a CCP, an OTC derivative market is equally likely to result in Too-Big-to-Fail
problems.
D. Compared with a CCP derivative market, an OTC market provides participants with about the same
level of information about their counterparties.
Question 20
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When the Fed increase money supply,
Select one:
A. the reserves balance that the banking system has with the Fed will likely decrease.
B. the asset side of the Fed’s balance sheet will likely decrease.
C. Fed fund rates will likely decrease when the initial equilibrium fed fund rates are lower than the
discount rate.
D. banks invest more in money market securities than lending to households and corporations.
E. Both A and B are correct statements.
F. Both B and C are correct statements.
G. Both A and C are correct statements.
H. Both C and D are correct statements.