Chapter 1—Role of Financial Markets and Institutions
1. Financial market participants who provide funds are called
a. deficit units.
b. surplus units.
c. primary units.
d. secondary units.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
2. The main provider(s) of funds to the U.S. Treasury is (are)
a. households and businesses.
b. foreign financial institutions.
c. the Federal Reserve System.
d. foreign nonfinancial sectors.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
3. The largest deficit unit is (are)
a. households and businesses.
b. foreign financial institutions.
c. the U.S. Treasury.
d. foreign nonfinancial sectors.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
4. Those financial markets that facilitate the flow of short-term funds are known as
a. money markets.
b. capital markets.
c. primary markets.
d. secondary markets.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.02
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
5. Funds are provided to the initial issuer of securities in the
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
6. Which of the following is a capital market instrument?
a. a six-month CD
b. a three-month Treasury bill
c. a ten-year bond
d. an agreement for a bank to loan funds directly to a company for nine months
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
7. Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. mortgage
d. commercial paper
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
8. The creditors in the federal funds market are
a. households.
b. depository institutions.
c. firms.
d. government agencies.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
9. Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a
____ degree of risk.
a. higher; higher
b. lower; lower
c. lower; higher
d. higher; lower
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
10. Money market securities generally have ____. Capital market securities are typically expected to have
a ____.
a. less liquidity; higher annualized return
b. more liquidity; lower annualized return
c. less liquidity; lower annualized return
d. more liquidity; higher annualized return
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
11. If security prices fully reflect all available information, the markets for these securities are
a. efficient.
b. primary.
c. overvalued.
d. undervalued.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
12. If markets are ____, investors could use available information ignored by the market to earn
abnormally high returns.
a. perfect
b. active
c. inefficient
d. in equilibrium
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
13. If financial markets are efficient, this implies that all securities should earn the same return.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
14. The Securities Act of 1933
a. required complete disclosure of relevant financial information for publicly offered
securities in the primary market.
b. declared trading strategies to manipulate the prices of public secondary securities illegal.
c. declared misleading financial statements for public primary securities illegal.
d. required complete disclosure of relevant financial information for securities traded in the
secondary market.
e. all of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
15. The Securities Exchange Commission (SEC) was established by the
a. Federal Reserve Act.
b. McFadden Act.
c. Securities Exchange Act of 1934.
d. Glass-Steagall Act.
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
16. Common stock is an example of a(n)
a. debt security.
b. money market security.
c. equity security.
d. A and B
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
17. If financial markets were ____, all information about any securities for sale in primary and secondary
markets would be continuously and freely available to investors.
a.
b.
c.
d.
efficient
inefficient
perfect
imperfect
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
18. The typical role of a securities firm in a public offering of securities is to
a. purchase the entire issue for its own investment.
b. place the entire issue with a single large investor.
c. spread the issue across several investors until the entire issue is sold.
d. provide all large investors with loans so that they can invest in the offering.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
19. Without the participation of financial intermediaries in financial market transactions,
a. information and transaction costs would be lower.
b. transaction costs would be higher but information costs would be unchanged.
c. information costs would be higher but transaction costs would be unchanged.
d. information and transaction costs would be higher.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
20. Which of the following is most likely to be described as a depository institution?
a. finance companies
b. securities firms
c. credit unions
d. pension funds
e. insurance companies
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
21. In aggregate, ____ are the most dominant depository institution, with more total assets than other
depository institutions.
a. commercial banks
b. savings banks
c. credit unions
d. S&Ls
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
22. Which of the following is a nondepository financial institution?
a. savings banks
b. commercial banks
c. savings and loan associations
d. mutual funds
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
23. Which of the following distinguishes credit unions from commercial banks and savings institutions?
a. Credit unions are non-profit
b. Credit unions accept deposits but do not make loans
c. Credit unions make loans but do not accept deposits
d. Savings institutions restrict their business to members who share a common bond
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
24. When a securities firm acts as a broker, it
a. guarantees the issuer a specific price for newly issued securities.
b. makes a market in specific securities by adjusting its own inventory.
c. executes transactions between two parties.
d. purchases securities for its own account.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
25. When a securities firm acts as a(n) ____, it maintains a position in securities.
a. adviser
b. dealer
c. broker
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
26. ____ obtain funds by issuing securities, then lend the funds to individuals and small businesses.
a. Finance companies
b. Securities firms
c. Mutual funds
d. Insurance companies
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
27. Households with ____ are served by ____.
a. deficient funds; depository institutions and finance companies
b. deficient funds; finance companies only
c. savings; finance companies only
d. savings; pension funds and finance companies
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
28. ____ concentrate on mortgage loans.
a. Finance companies
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
b. Commercial banks
c. Savings institutions
d. Credit unions
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
29. ____ securities have a maturity of one year or less; ____ securities are generally more liquid.
a. Money market; capital market
b. Money market; money market
c. Capital market; money market
d. Capital market; capital market
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
30. Which of the following is not a major investor in stocks?
a. commercial banks
b. insurance companies
c. mutual funds
d. pension funds
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
31. Which of the following financial intermediaries commonly invests in stocks and bonds?
a. pension funds
b. insurance companies
c. mutual funds
d. all of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
32. Securities are certificates that represent a claim on the issuer.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
33. Debt securities are certificates that represent debt (borrowed funds) by the issuer.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
34. A five-year security was purchased two years ago by an investor who plans to resell it. The security
will be sold by the investor in the so-called
a.
b.
c.
d.
secondary market.
primary market.
deficit market.
surplus market.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
35. When security prices fully reflect all available information, the markets for these securities are said to
be efficient.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
36. If markets are perfect, securities buyers and sellers to not have full access to information and cannot
always break down securities to the precise size they desire.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
37. A broker executes securities transactions between two parties and charges a fee reflected in the bidask spread.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
38. The euro increased business between European countries and created a more competitive environment
in Europe.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
39. In recent years, financial institutions have consolidated to capitalize on economies of scale and on
economies of scope.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
40. Securities are certificates that represent a claim on the provider of funds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
41. Debt securities include commercial paper, Treasury bonds, and corporate bonds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
42. Common types of capital market securities include Treasury bills and commercial paper.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
43. Common types of money market securities include negotiable certificates of deposit and Treasury
bills.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
44. Money market securities are commonly issued in order to finance the purchase of assets such as
buildings, equipment, or machinery.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
45. The total asset value of savings institutions is larger than that of commercial banks.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
46. Financial markets facilitating the flow of short-term funds with maturities of less than one year are
known as
a. secondary markets.
b. capital markets.
c. primary markets.
d. money markets.
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
47. Which of the following transactions would not be considered a secondary market transaction?
a. An individual investor purchases some existing shares of stock in IBM through his broker.
b. An institutional investor sells some Disney stock through its broker.
c. A firm that was privately held engages in an offering of stock to the public.
d. All of the above are secondary market transactions.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
48. If investors speculate in the underlying asset rather than derivative contracts on the underlying asset,
they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
49. ____ maintain a larger amount of assets in aggregate than the other types of nondepository
institutions.
a. Finance companies
b. Mutual funds
c. Life insurance companies
d. Securities firms
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
50. A common use of funds for ____ is investment in stocks and businesses, while their main use of funds
is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
51. Long-term debt securities tend to have a ____ expected return and ____ risk than money market
securities.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
ANS: D
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
STA: DISC.FMAI.MADU.15.02
52. Common types of capital market securities include Treasury bills and commercial paper.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
53. Common types of money market securities include negotiable certificates of deposit and Treasury
bills.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
54. Capital market securities are commonly issued in order to finance the purchase of assets such as
buildings, equipment, or machinery.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
55. Commercial banks in aggregate have more assets than credit unions.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
56. Those participants who receive more money than they spend are referred to as
a. deficit units.
b. surplus units.
c. borrowing units.
d. government units.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
57. Equity securities
a. have a maturity.
b. pay interest on a periodic basis.
c. represent ownership in the issuer.
d. repay the principal amount at maturity.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
KEY: Bloom's: Comprehension
58. The term ____ involves decisions such as how much funding to obtain, and how to invest the
proceeds to expand operations.
a. corporate finance
b. investment management
c. financial markets and institutions
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
59. There is a ____ relationship between the risk of a security and the expected return from investing in
the security.
a. positive
b. negative
c. indeterminable
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
60. If a security is undervalued, some investors would capitalize from this by purchasing that security. As
a result, the security's price will ____, resulting in a ____ return for those investors.
a. rise; lower
b. fall; higher
c. fall; lower
d. rise; higher
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
61. The credit crisis in the 2008-2009 period was caused by weak economies in Asia.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
62. ____ are classified as a depository institution.
a. Credit unions
b. Pension funds
c. Finance companies
d. Securities firms
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
63. The main reason that depository institutions experienced financial problems during the credit crisis
was their investment in:
a. mortgages.
b. money market securities.
c. stock.
d. Treasury bonds.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
64. Those financial markets that facilitate the flow of short-term funds (with maturities of less than one
year) are known as capital markets, while those that facilitate the flow of long-term funds are known
as money markets.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
65. Treasury bonds have a maturity of one to three years.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
66. Since markets are efficient, institutional and individual investors should ignore the various investment
instruments available.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
67. Speculating with derivative contracts on an underlying asset typically results in both higher risk and
higher returns than speculating in the underlying asset itself.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
68. When security prices fully reflect all available information, the markets for these securities are said to
be perfect.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
69. Securities that are not as safe and liquid as other securities are never considered for investment by
anyone.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
70. By requiring full disclosure of information, securities laws prevent investors from making poor
investment decisions.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
71. When a depository institution offers a loan, it is acting as a creditor.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
72. Savings institutions represent a nondepository institution.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
73. Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small
businesses.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
74. Institutional investors not only provide financial support to companies but exercise some degree of
corporate control over them.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
75. Which of the following is not a reason why depository financial institutions are popular?
a. They offer deposit accounts that can accommodate the amount and liquidity characteristics
desired by most surplus units.
b. They repackage funds received from deposits to provide loans of the size and maturity
desired by deficit units.
c. They accept the risk on loans provided.
d. They use their information resources to act as a broker, executing securities transactions
between two parties.
e. They have more expertise than individual surplus units in evaluating the creditworthiness
of deficit units.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Analysis
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
76. According to your text, which of the following is not considered a money market security?
a. Treasury bills
b. Treasury notes
c. retail CD
d. banker's acceptance
e. commercial paper
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
77. ____ are not considered capital market securities.
a. Repurchase agreements
b. Municipal bonds
c. Corporate bonds
d. Equity securities
e. Mortgages
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
78. ____ are long-term debt obligations issued by corporations and government agencies to support their
operations.
a. Common stock
b. Derivative securities
c. Bonds
d. None of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
79. Equity securities should normally have a ____ expected return and ____ risk than money market
securities.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
80. If investors speculate in derivative contracts rather than the underlying asset, they will probably
achieve ____ returns, and they are exposed to relatively ____ risk.
a.
b.
c.
d.
lower; lower
lower; higher
higher; lower
higher; higher
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
81. When particular securities are perceived to be ____ by the market, their prices decrease when they are
sold by investors.
a. undervalued
b. overvalued
c. fairly priced
d. efficient
e. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
82. Which of the following are not considered depository financial institutions?
a. finance companies
b. commercial banks
c. savings institutions
d. credit unions
e. All of the above are depository financial institutions.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
83. The main source of funds for ____ is proceeds from selling securities to households and businesses,
while their main use of funds is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies
e. pension funds
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
84. Which of the following statements is incorrect?
a. Financial markets attract funds from investors and channel the funds to corporations.
b. Money markets enable corporations to borrow funds on a short-term basis so that they can
support their existing operations.
c. Financial institutions serve solely as intermediaries with the financial markets and never
serve as investors.
d. Investors seek to invest their funds in the stock of firms that are presently undervalued and
have much potential to improve.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Analysis
DIF: Moderate
OBJ: FMAI.MADU.15.01.03
STA: DISC.FMAI.MADU.15.02
85. Which of the following is not a typical money market security?
a. Treasury bills
b. Treasury bonds
c. Commercial paper
d. Negotiable certificates of deposit
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
86. Debt securities issued by a small firm may be ________, meaning that _______ investors want to
invest in those securities.
a.
a.
b.
a.
c.
a.
d.
liquid; many
liquid; not many
illiquid; not many
illiquid; many
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.01
STA: DISC.FMAI.MADU.15.02
87. Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with
specific payments at regular intervals.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
88. ____________ applies psychology to financial decisions and offers an explanation for why markets
are not always efficient.
a. Psychological marketing
a. Behavioral finance
b.
a. Inefficient markets theory
c.
a. Financial psychology
d.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
89. International integration of securities markets allows:
a. governments and corporations to have easier access to funding from creditors and
investors in other countries.
a. investors and creditors to benefit from investment opportunities in other countries.
b.
a. one’s country’s financial problems to adversely affect other countries.
c.
a. All of the above
d.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Analysis
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
90. The foreign exchange market facilitates the exchange of:
a. information between investors in different countries.
b. debt securities.
a.
a. equity securities.
c.
a. currencies.
d.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
91. Which of the following is not an example of the government’s recent increased role in financial
markets?
a. the Federal Reserve’s purchase of debt securities during the credit crisis
a. regulations changing the way that the credit risk of bonds is assessed
b.
a. regulations setting maximum rates for Treasury securities
c.
a. increased monitoring of stock trading and prosecution of those who trade on inside
d.
information
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
92. Commercial paper represents long-term debt obligations created to finance the purchase of
commercial property.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.01.02
STA: DISC.FMAI.MADU.15.02
93. The risk that financial problems could spread among financial institutions and across financial
markets, causing a collapse of the financial system, is known as:
a. systemic risk.
a. leverage risk.
b.
a. financial meltdown risk.
c.
a. credit risk.
d.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.01.04
STA: DISC.FMAI.MADU.15.02
94. Systemic risk exists because:
a. there is no government regulation of financial markets.
a. financial institutions invest in similar securities and therefore are similarly exposed to
b.
large declines in prices of those securities.
a. financial institutions borrow using long-term debt securities but lend their funds for shortc.
term periods.
a. financial institutions invest heavily in Treasury securities and therefore are exposed to the
d.
possibility that the government will default on its debts.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Analysis
DIF: Moderate
OBJ: FMAI.MADU.15.01.04
STA: DISC.FMAI.MADU.15.02
Chapter 2—Determination of Interest Rates
MULTIPLE CHOICE
1. The level of installment debt as a percentage of disposable income is generally ____ during
recessionary periods.
a. higher
b. lower
c. zero
d. negative
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
2. At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates
of interest.
a. greater; higher
b. greater; lower
c. smaller; lower
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
3. Businesses demand loanable funds to
a. finance installment debt.
b. subsidize other companies.
c. invest in fixed and short-term assets.
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
4. The required return to implement a given business project will be ____ if interest rates are lower. This
implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.
a. greater; lower
b. lower; greater
c. lower; lower
d. greater; greater
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
5. If interest rates are ____, ____ projects will have positive NPVs.
a. higher; more
b. lower; more
c. lower; no
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
6. The demand for funds resulting from business investment in short-term assets is ____ related to the
number of projects implemented, and is therefore ____ related to the interest rate.
a. inversely; positively
b. positively; inversely
c. inversely; inversely
d. positively; positively
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
7. If economic conditions become less favorable, then:
a. expected cash flows on various projects will increase.
b. more proposed projects will have expected returns greater than the hurdle rate.
c. there would be additional acceptable business projects.
d. there would be a decreased demand by business for loanable funds.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
8. As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds,
causing an ____ shift in the demand curve.
a. decreased; inward
b. decreased; outward
c. increased; outward
d. increased; inward
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
9. The federal government demand for loanable funds is ____. If the budget deficit was expected to
increase, the federal government demand for loanable funds would ____.
a. interest elastic; decrease
b. interest elastic; increase
c. interest inelastic; increase
d. interest inelastic; decrease
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
10. Other things being equal, foreign governments and corporations would demand ____ U.S. funds if
their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates,
foreign demand for U.S. funds is ____ related to U.S. interest rates.
a. less; inversely
b. more; positively
c. less; positively
d. more; inversely
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
11. For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign
governments or firms will be ____ U.S. interest rates.
a. positively related to
b. inversely related to
c. unrelated to
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
12. The quantity of loanable funds supplied is normally
a. highly interest elastic.
b. more interest elastic than the demand for loanable funds.
c. less interest elastic than the demand for loanable funds.
d. equally interest elastic as the demand for loanable funds.
e. A and B
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
13. The ____ sector is the largest supplier of loanable funds.
a. household
b. government
c. business
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
14. If a strong economy allows for a large ____ in households income, the supply curve will shift ____.
a. decrease; outward
b. increase; inward
c. increase; outward
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
15. The equilibrium interest rate
a. equates the aggregate demand for funds with the aggregate supply of loanable funds.
b. equates the elasticity of the aggregate demand and supply for loanable funds.
c. decreases as the aggregate supply of loanable funds decreases.
d. increases as the aggregate demand for loanable funds decreases.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
16. The equilibrium interest rate should
a. fall when the aggregate supply funds exceeds aggregate demand for funds.
b. rise when the aggregate supply of funds exceeds aggregate demand for funds.
c. fall when the aggregate demand for funds exceeds aggregate supply of funds.
d. rise when aggregate demand for funds equals aggregate supply of funds.
e. B and C
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
17. Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things
being equal?
a. a decrease in savings by foreign savers
b. an increase in inflation
c. pessimistic economic projections that cause businesses to reduce expansion plans
d. a decrease in savings by U.S. households
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
18. The Fisher effect states that the
a. nominal interest rate equals the expected inflation rate plus the real rate of interest.
b. nominal interest rate equals the real rate of interest minus the expected inflation rate.
c. real rate of interest equals the nominal interest rate plus the expected inflation rate.
d. expected inflation rate equals the nominal interest rate plus the real rate of interest.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
19. If the real interest rate was negative for a period of time, then
a. inflation is expected to exceed the nominal interest rate in the future.
b. inflation is expected to be less than the nominal interest rate in the future.
c. actual inflation was less than the nominal interest rate.
d. actual inflation was greater than the nominal interest rate.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
20. If inflation is expected to decrease, then
a. savers will provide less funds at the existing equilibrium interest rate.
b. the equilibrium interest rate will increase.
c. the equilibrium interest rate will decrease.
d. borrowers will demand more funds at the existing equilibrium interest rate.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
21. If inflation turns out to be lower than expected
a. savers benefit.
b. borrowers benefit while savers are not affected.
c. savers and borrowers are equally affected.
d. savers are adversely affected but borrowers benefit.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
22. If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the
money supply there is ____ pressure on interest rates (assume that inflationary expectations are not
affected).
a. upward; upward
b. upward; downward
c. downward; upward
d. downward; downward
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
23. What is the basis of the relationship between the Fisher effect and the loanable funds theory?
a. the saver's desire to maintain the existing real rate of interest
b. the borrower's desire to achieve a positive real rate of interest
c. the saver's desire to achieve a negative real rate of interest
d. B and C
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
24. Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings
of U.S. securities and to instead increase their holdings of securities in their own countries. This
should cause the supply of loanable funds in the United States to ____ and should place ____ pressure
on U.S. interest rates.
a. decrease; upward
b. decrease; downward
c. increase; downward
d. increase; upward
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
25. Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of
U.S. securities. This should cause the supply of loanable funds in the United States to ____ and
should place ____ pressure on U.S. interest rates.
a. decrease; upward
b. decrease; downward
c. increase; downward
d. increase; upward
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
26. If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the
supply of loanable funds, and a(n) ____ in the demand for loanable funds.
a. increase; no change
b. decrease; no change
c. no change; increase
d. no change; decrease
ANS: C
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.02.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
STA: DISC.FMAI.MADU.15.02
27. If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable
funds, and a(n) ____ in the demand for loanable funds.
a. increase; no change
b. decrease; no change
c. no change; increase
d. no change; decrease
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
28. Due to expectations of higher inflation in the future, we would typically expect the supply of loanable
funds to ____ and the demand for loanable funds to ____.
a. increase; decrease
b. increase; increase
c. decrease; increase
d. decrease; decrease
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
29. Due to expectations of lower inflation in the future, we would typically expect the supply of loanable
funds to ____ and the demand for loanable funds to ____.
a. increase; decrease
b. increase; increase
c. decrease; increase
d. decrease; decrease
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
30. If the real interest rate is expected by a particular person to become negative, then the purchasing
power of his or her savings would be ____, as the inflation rate is expected to be ____ the existing
nominal interest rate.
a. decreasing; less than
b. decreasing; greater than
c. increasing; greater than
d. increasing; less than
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
31. If economic expansion is expected to increase, then demand for loanable funds should ____ and
interest rates should ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS: A
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.02.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
STA: DISC.FMAI.MADU.15.02
32. If economic expansion is expected to decrease, the demand for loanable funds should ____ and
interest rates should ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
33. If the real interest rate was stable over time, this would suggest that there is ____ relationship between
inflation and nominal interest rate movements.
a. a positive
b. an inverse
c. no
d. an uncertain (cannot be determined from information above)
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
34. If inflation and nominal interest rates move more closely together over time than they did in earlier
periods, this would ____ the volatility of the real interest rate movements over time.
a. increase
b. decrease
c. have an effect, which cannot be determined with above information, on
d. have no effect on
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
35. Canada and the U.S. are major trading partners. If Canada experiences a major increase in economic
growth, it could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest
rates.
a. upward; upward
b. upward; downward
c. downward; downward
d. downward; upward
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
36. If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds, and
places ____ pressure on interest rates.
a. increases; upward
b. increases; downward
c. decreases; downward
d. decreases; upward
ANS: B
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.02.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
STA: DISC.FMAI.MADU.15.02
37. When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most
likely effect is that the supply of loanable funds provided by Japanese investors to the United States
will ____, and the U.S. interest rates will ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
38. Which of the following will probably not result in an increase in the business demand for loanable
funds?
a. an increase in positive net present value (NPV) projects
b. a reduction in interest rates on business loans
c. a recession
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
39. If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate
supply, there will be a ____ of loanable funds.
a. increase; surplus
b. increase; shortage
c. decrease; surplus
d. decrease; shortage
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
40. A ____ federal government deficit increases the quantity of loanable funds demanded at any
prevailing interest rate, causing an ____ shift in the demand schedule.
a. higher; inward
b. higher; outward
c. lower; outward
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
41. Which of the following is not true regarding foreign interest rates?
a. The large flow of funds between countries causes interest rates in any given country to
become more susceptible to interest rate movements in other countries.
b. The expectations of a strong dollar should cause a flow of funds to the U.S.
c. An increase in a foreign country's interest rates will encourage investors in that country to
invest their funds in other countries.
d. All of the above are true regarding foreign interest rates.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
42. Which of the following is least likely to affect household demand for loanable funds?
a. a decrease in tax rates
b. an increase in interest rates
c. a reduction in positive net present value (NPV) projects available
d. All of the above are equally likely to affect household demand for loanable funds.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
43. Which of the following statements is incorrect?
a. The Fed's monetary policy is intended to control the economic conditions in the U.S.
b. The Fed's monetary policy affects the supply of loanable funds, which affects interest
rates.
c. By influencing interest rates, the Fed is able to influence the amount of money that
corporations and households are willing to borrow and spend.
d. All of the statements above are true.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
44. The ____ suggests that the market interest rate is determined by factors that control the supply of and
demand for loanable funds.
a. Fisher effect
b. loanable funds theory
c. real interest rate
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
45. Which of the following will probably not result in an increase in the business demand for loanable
funds?
a. an increase in positive net present value (NPV) projects
b. a reduction in interest rates on business loans
c. a recession
d. All of the above will result in an increase in the business demand for loanable funds.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
46. Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments
and corporations if their domestic interest rates were ____ relative to U.S. rates.
a. smaller; high
b. larger; high
c. larger; low
d. none of the above
ANS: B
PTS: 1
DIF:
Easy
OBJ: FMAI.MADU.15.02.01
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
STA: DISC.FMAI.MADU.15.02
47. The federal government demand for funds is said to be interest inelastic, or ____ to interest rates.
a. sensitive
b. insensitive
c. relatively sensitive as compared to other sectors
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
48. If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate
supply, there will be a ____ of loanable funds.
a. increase; surplus
b. increase; shortage
c. decrease; surplus
d. decrease; shortage
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
49. The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule
and ____ in the supply schedule.
a. inward; an inward shift
b. inward; an outward shift
c. outward; an inward shift
d. outward; no obvious change
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
50. Which of the following is a valid representation of the Fisher effect?
a. i = E(INF) + iR
b. iR = E(INF) + i
c. E(INF) = i + iR
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
51. The real interest rate can be forecasted by subtracting the ____ from the ____ for that period.
a. nominal interest rate; expected inflation rate
b. prime rate; nominal interest rate
c. expected inflation rate; nominal interest rate
d. prime rate; expected inflation rate
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
52. According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on
savings.
a. higher nominal interest rate
b. higher real interest rate
c. lower nominal interest rate
d. lower real interest rate
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
53. A ____ federal government deficit increases the quantity of loanable funds demanded at any
prevailing interest rate, causing an ____ shift in the demand schedule.
a. higher; inward
b. higher; outward
c. lower; outward
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
54. The federal government’s demand for funds is ________, and municipal governments’ demand for
funds is somewhat ____________.
a. interest-inelastic; interest-inelastic
b. interest-elastic; interest-elastic
c. interest-inelastic; interest-elastic
d. interest-elastic; interest-inelastic
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
55. The substantial decline in interest rates during the credit crisis is attributed to which of the following
changes in the market for loanable funds?
a. an increase in both the supply of and the demand for loanable funds
a. a decrease in both the supply of and the demand for loanable funds
b.
a. a decrease in the supply of loanable funds and an increase in the demand for loanable
c.
funds
a. an increase in the supply of loanable funds and a decrease in the demand for loanable
d.
funds
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
56. The crowding-out effect occurs when:
a. foreign investors crowd out U.S. investors in the market for loanable funds.
a. the federal government’s demand for loanable funds due to a higher budget deficit crowds
b.
out the private demand in the market for loanable funds.
a. institutional investors crowd out individual investors in the market for loanable funds.
c.
a. firms and municipal governments crowd out households in the market for loanable funds.
d.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
TRUE/FALSE
57. According to the loanable funds theory, market interest rates are determined by the factors that control
the supply of and demand for loanable funds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
58. The supply of loanable funds in the U.S. is partly determined by the monetary policy implemented by
the Federal Reserve System.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.03
STA: DISC.FMAI.MADU.15.02
59. At any point in time, households and businesses demand a greater quantity of loanable funds at lower
rates of interest.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
60. The business demand for funds resulting from short-term investments is inversely related to the
number of projects implemented and inversely related to the interest rate.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
61. Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign
governments and corporations if their domestic interest rates were high relative to U.S. rates.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
62. If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S.
funds.
a. True
b. False
ANS: T
PTS: 1
DIF:
Easy
OBJ: FMAI.MADU.15.02.01
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
STA: DISC.FMAI.MADU.15.02
63. Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate
sectors, and since most of these sectors are likely to demand a larger quantity of funds at lower
interest rates (other things being equal), the aggregate demand for loanable funds is positively related
to interest rates at any point in time.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
64. In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
65. If the aggregate demand for loanable funds increases without a corresponding increase in aggregate
supply, there will be a surplus of loanable funds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.01
STA: DISC.FMAI.MADU.15.02
66. The relationship between interest rates and expected inflation is often referred to as the loanable funds
theory.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
67. According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal
to the expected inflation rate.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
68. To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be
forecasted by subtracting the expected inflation rate over that period from the nominal interest rate
quoted for that period.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
69. According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is
relatively low.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.02.02
STA: DISC.FMAI.MADU.15.02
70. Forecasters should consider future plans for corporate expansion and the future state of the economy
when forecasting business demand for loanable funds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.02.03
STA: DISC.FMAI.MADU.15.02
Chapter 4—Functions of the Fed
1. Which of the following is not a major component of the Federal Reserve System?
a. member banks
b. Federal Open Market Committee
c. Securities and Exchange Commission
d. Board of Governors
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
2. As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial
products and services.
a. Federal Advisory Committee
b. Federal Open Market Committee
c. Consumer Financial Protection Bureau
d. Board of Governors
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
3. Which of the following is not an activity of Fed district banks?
a. clearing checks
b. replacing old currency
c. providing loans to depository institutions
d. acting as an intermediary to match up lenders and borrowers in the stock market
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
4. All ____ are required to be members of the Federal Reserve System.
a. state banks
b. national banks
c. savings and loan associations
d. finance companies
e. A and B
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
5. The ____ is made up of seven individual members, and each member is appointed by the president of
the U.S.
a. Board of Governors
b. Federal Reserve district bank
c. Federal Open Market Committee (FOMC)
d. Securities and Exchange Commission
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
6. Which of the following is currently a main role of the Federal Reserve's Board of Governors?
a. regulating commercial banks
b. regulating foreign trade
c. controlling monetary policy
d. A and C
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
7. Members of the Board of Governors serve 14-year nonrenewable terms.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
8. With regard to monetary policy, which of the following is under direct control of the Federal
Reserve's Board of Governors?
a. revise reserve requirements for depository institutions
b. authorize changes in the amount of borrowing by the Treasury
c. monitor the stock market for insider trading
d. monitor the derivatives market for illegal trading strategies
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
9. The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.
a. federal funds
b. prime
c. primary credit lending
d. real
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
10. Which of the following is an action that the Fed uses to increase or decrease the money supply?
a. buying or selling Treasury securities in the secondary market
b. adjusting the tax rate imposed on income earned on Treasury securities
c. adjusting the coupon rate on Treasury bonds
d. selling Treasury securities in the primary market
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
11. The Policy Directive is provided by Board of Governors to the FOMC.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
12. Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the
Fed.
a. increase; purchased
b. increase; sold
c. decrease; purchased
d. A and B
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
13. The purchase of government securities by someone other than the Fed results in
a. an overall increase in funds among commercial banks.
b. an overall decrease in funds among commercial banks.
c. offsetting changes in funds at commercial banks.
d. an increase in securities maintained by the Fed.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
14. As the supply of funds in the banking system ____, the federal funds rate ____.
a. increases; declines
b. increases; increases
c. declines, declines
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
15. Repurchase agreements are purchased by the Fed to
a.
b.
c.
d.
temporarily decrease the aggregate level of bank funds.
permanently increase the aggregate level of bank funds.
permanently decrease the aggregate level of bank funds.
temporarily increase the aggregate level of bank funds.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
16. When open market operations are used to ____ bank funds, the yield on debt instruments ____.
a. reduce; decreases
b. reduce; increases
c. increase; increases
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
17. ____ open market operations offset the impact of other conditions that affect the level of funds.
a. Active
b. Passive
c. Dynamic
d. Defensive
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
18. The main monetary policy goal of most central banks is to stabilize the value of the local currency
against foreign currencies.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.05
STA: DISC.FMAI.MADU.15.02
19. The primary credit lending rate changes in accordance with changes in the federal funds rate.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
20. ____ credit may be used for any purpose and is available only to depository institutions that meet
specific requirements for financial soundness.
a. Primary
b. Secondary
c. Tertiary
d. None of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
21. To decrease money supply, the Fed could ____ the reserve requirement ratio.
a. increase
b. stabilize
c. reduce
d. eliminate
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
22. The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money
supply.
a. lower; less
b. lower; greater
c. greater; less
d. B and C
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
23. The ____ is directly responsible for controlling money supply growth.
a. Federal Advisory Council
b. FOMC
c. Board of Governors
d. President of the United States
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
24. Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in
a maximum change in the money supply of
a. $150 million.
b. $1 billion.
c. $1 million.
d. $22.5 million.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
25. The form of money consisting of currency held by the public and checkable deposits at depository
institutions is called
a. M1.
b. M2.
c. M3.
d. MMDA.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
26. The Monetary Control Act of 1980 subjected
a. only member banks to the reserve requirements set by the Fed.
b. only S&Ls to the reserve requirements set by the Fed.
c. all depository institutions to the reserve requirements set by the Fed.
d. only national banks to reserve requirements set by the Fed.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
27. The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for
member commercial banks.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
28. The voting members of the Federal Open Market Committee consist of the Board of Governors plus
the
a. President of the United States.
b. Presidents of the 12 Fed district banks.
c. Presidents of 5 Fed district banks.
d. Federal Advisory Council.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
29. The Board of Governors is composed of
a. seven members appointed by the President of the United States.
b. the 12 presidents of Fed district banks.
c. the Federal Open Market Committee, plus the Federal Advisory Council.
d. the Federal Open Market Committee, plus the President of the United States.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
30. The ____ is directly responsible for setting reserve requirements.
a. Federal Advisory Council
b. FOMC
c. Board of Governors
d. President of the United States
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
31. The ____ is directly responsible for conducting monetary policy.
a. Federal Advisory Council
b. FOMC
c. Senate
d. President of the United States
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
KEY: Bloom's: Knowledge
32. Based on a 2003 policy, the primary credit lending rate is set
a. lower than the federal funds rate.
b. lower than the prevailing Treasury bill rate.
c. lower than the expected inflation rate.
d. above the federal funds rate.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
33. A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. A and C
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
34. The ____ consists of seven members, each of whom is appointed by the President of the United
States.
a. Federal Open Market Committee (FOMC)
b. Federal Advisory Council
c. Board of Governors
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
35. Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations
by buying $200 million worth of Treasury securities. Assuming that banks use all funds except
required reserves to make loans and that the public does not store any cash, the money supply should
____ by about ____.
a. increase; $200 million
b. increase; $1.67 billion
c. decrease; $200 million
d. decrease; $1.67 billion
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
36. The federal funds rate is the rate at which the Fed lends money directly to member banks.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
37. When the Fed purchases securities, the total funds of commercial banks ____ by the market value of
securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as
a(n) ____ of money supply growth.
a. increase; loosening
b. decrease; tightening
c. decrease; loosening
d. increase; tightening
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
38. The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will
____ the federal funds rate to a new targeted level set by the FOMC.
a. buy; decrease
b. sell; increase
c. buy; increase
d. sell; decrease
e. A and B
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
39. Which of the following statements is incorrect with respect to a single European monetary policy?
a. It allows for more consistent economic conditions across the countries.
b. It prevents any participating European country from solving local economic problems with
its own unique monetary policy.
c. A policy used in a particular period may not affect the participating countries equally,
since they all have the same currency.
d. Each participating country will still be able to apply its own fiscal policy (tax and
government expenditure decisions).
e. All of the above are true with respect to a single European monetary policy.
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.05
STA: DISC.FMAI.MADU.15.02
40. Since 2003, the Fed's rate on short-term loans to depository institutions is referred to as the
a. discount rate.
b. primary credit lending rate.
c. Federal funds rate.
d. prime rate
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
41. ____ credit extended by the Fed to financial institutions may be used for any purpose and is available
only to depository institutions that satisfy specific criteria reflecting financial soundness.
a. Primary
b. Secondary
c. Tertiary
d. None of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
42. Most of the Fed's income is transferred to the U.S. Department of Justice.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
43. All commercial banks are required to be members of the Fed.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
44. Each member of the Board of Governors is appointed by the president of the United States and serves
a nonrenewable 14-year term.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
45. Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these
reports are consolidated to compose the Beige Book.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
46. When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in
the banking system. Consequently, the federal funds rate decreases along with other interest rates.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
47. Adjustment of the primary credit lending rate is the most common means by which the Fed controls
the money supply.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
48. To increase the money supply, the Trading Desk would be instructed to sell government securities.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
49. To increase the money supply, the Fed may increase the reserve requirement ratio.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
50. Which of the following is not true with respect to the Federal Reserve Act of 1913?
a. It established reserve requirements for member commercial banks.
b. It specified fourteen districts across the United States as well as a city in each district
where a Federal Reserve district bank was to be established.
c. Each district focused on its particular district, without much concern for other districts.
d. All of the above are true.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
51. ____ is (are) not a component of the Fed as it exists today.
a. The Federal Advisory Council
b. The Board of Governors
c. National banks
d. The U.S. Department of Commerce
e. All of the above are components of the Fed.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
52. The advisory committee making recommendations to the Fed about economic and banking related
issues is the
a. Consumer Advisory Council.
b. Thrift Institutions Advisory Council.
c. Federal Advisory Council.
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
53. The advisory committee offering views on issues related to credit unions is the
a. Consumer Advisory Council.
b. Thrift Institutions Advisory Council.
c. Federal Advisory Council.
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
54. If the Fed desires to ____ the money supply using open market operations, it would instruct the
trading desk to ____ government securities.
a. increase; purchase
b. increase; sell
c. decrease; purchase
d. Answers B and C are correct.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
55. When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure
on their prices and ____ pressure on their yields.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
56. To increase the money supply growth, the Fed could
a. sell government securities in the secondary market.
b. increase the primary credit lending rate.
c. increase the reserve requirement ratio.
d. all of the above
e. none of the above
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
57. When the Fed sells securities, the total funds of commercial banks ____ by the market value of
securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a
____ of money supply growth.
a. increase; loosening
b. decrease; loosening
c. increase; tightening
d. decrease; tightening
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
58. ____ includes only currency held by the public and checking deposits as well as savings accounts and
small time deposits, money market deposit accounts, and some other items.
a. M1
b. M2
c. M3
d. None of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.03
STA: DISC.FMAI.MADU.15.02
59. The ____ consists of seven members, each of whom is appointed by the president of the United
States.
a. Federal Open Market Committee (FOMC)
b. Federal Advisory Council
c. Board of Governors
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
60. The Fed’s primary goal has historically been to add liquidity to the mortgage market by continuously
purchasing mortgage-backed securities.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.02
STA: DISC.FMAI.MADU.15.02
61. When the Fed purchases _______, it is attempting to directly stimulate the housing market.
a. commercial paper
b. short-term Treasury securities
c. mortgage-backed securities
d. consumer loans
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.04.04
STA: DISC.FMAI.MADU.15.02
62. The Fed’s purchases of long-term Treasury securities in recent years were intended to:
a. reduce long-term interest rates.
b. reduce interest rates on credit cards and consumer loans.
c. increase the federal funds rate.
d. restore confidence in the market for these securities.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.04
STA: DISC.FMAI.MADU.15.02
63. A criticism of the Fed’s actions during the credit crisis is that it:
a. did not attempt to increase the liquidity of the debt markets.
b. focused too much on financial institutions.
c. allowed Bear Stearns to fail and file for bankruptcy.
d. periodically raised the primary credit rate.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.04.04
STA: DISC.FMAI.MADU.15.02
64. Which of the following did the Fed not do during the credit crisis?
a. purchase mortgage-backed securities
b. purchase commercial paper
c. reduce the targeted federal funds rate
d. prevent depository institutions from obtaining funding through the discount window
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.04.04
STA: DISC.FMAI.MADU.15.02
Chapter 5—Monetary Policy
1. The Fed can affect the interaction between the demand for money and the supply of money to
influence interest rates, the aggregate level of spending, and therefore economic growth.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
2. The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money
supply.
a. increase; decreasing
b. decrease; increasing
c. decrease; decreasing
d. increase; increasing
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.04
STA: DISC.FMAI.MADU.15.02
3. A credit crunch occurs when:
a. interest rates decline.
b. interest rates rise.
c. creditors restrict the amount of loans they are willing to provide.
d. the economy is strong.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
4. According to the theory of rational expectations, higher inflationary expectations encourage
businesses and households to reduce their demand for loanable funds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
5. A passive monetary policy adjusts money supply automatically in response to economic conditions.
a. True
b. False
ANS: F
PTS: 1
DIF:
Easy
OBJ: FMAI.MADU.15.05.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
STA: DISC.FMAI.MADU.15.02
6. If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated
substantially from the Fed's target inflation rate, the Fed could lose credibility.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
7. In general, there is:
a. a positive relationship between unemployment and inflation.
b. an inverse relationship between unemployment and inflation.
c. an inverse relationship between GNP and inflation.
d. a positive relationship between GNP and unemployment.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
8. A ____-money policy can reduce unemployment, and a ____-money policy can reduce inflation.
a. tight; loose
b. loose; tight
c. tight; tight
d. loose; loose
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
9. A loose money policy tends to ____ economic growth and ____ the inflation rate.
a. stimulate; place downward pressure on
b. stimulate; place upward pressure on
c. dampen; place upward pressure on
d. dampen; place downward pressure on
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
10. When both inflation and unemployment are relatively high, there is more disagreement among FOMC
members about the proper monetary policy to implement.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
11. ____ serves as the most direct indicator of economic growth in the United States.
a. Gross domestic product (GDP)
b. National income
c. The unemployment rate
d. The industrial production index
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
12. Which of the following is not an indicator of inflation?
a. housing price indexes
b. wage rates
c. oil prices
d. consumer confidence surveys
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
13. The ____ indicators tend to occur before a business cycle.
a. leading
b. lagging
c. coincident
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
14. The ____ indicators tend to occur after a business cycle.
a. leading
b. lagging
c. coincident
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
15. The ____ indicators tend to occur before a business cycle.
a. leading
b. lagging
c. coincident
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
16. The time lag between when an economic problem arises and when it is reported in economic statistics
is the
a. recognition lag.
b. implementation lag.
c. impact lag.
d. open-market lag.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
17. The time between when an economic problem is realized and when the Fed tries to correct it with its
policies is the
a. recognition lag.
b. implementation lag.
c. impact lag.
d. open-market lag.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
18. The time between when the Fed adjusts the money supply and when interest rates change reflects the
a. recognition lag.
b. implementation lag.
c. impact lag.
d. open-market lag.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
19. If the Fed attempts to reduce inflation, it would likely increase money supply growth.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
20. Which of the following best describes the relationship between the Fed and the Administration?
a. The Fed must receive approval by the Administration before conducting monetary policy.
b. The Fed must implement a monetary policy specifically to the support the
Administration's policy.
c. The Administration must receive approval from the Fed before implementing fiscal policy.
d. A and C
e. none of the above
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
21. A high budget deficit tends to place ____ pressure on interest rates; the Fed's tightening of the money
supply tends to place ____ pressure on interest rates.
a. upward; upward
b. upward; downward
c. downward; downward
d. downward; upward
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
22. The Fed is usually more willing to monetize the debt when inflation is relatively high.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.04
STA: DISC.FMAI.MADU.15.02
23. International flows of funds can affect the Fed's monetary policy. For example, if there is downward
pressure on U.S. interest rates that can be offset by foreign ____ of funds, the Fed may not feel
compelled to use a ____ monetary policy.
a. inflows; loose
b. inflows; tight
c. outflows; loose
d. outflows; tight
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.05.05
STA: DISC.FMAI.MADU.15.02
24. Costner National, a commercial bank, obtains short-term deposits and makes long-term fixed-rate
loans. It should be adversely affected when the Fed:
a. monetizes the debt.
b. maintains a stable money supply.
c. uses a tight-money policy.
d. uses a loose-money policy.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
25. The ____ lag represents the time from when an economic problem exists until it is recognized.
a. recognition
b. adjustment
c. implementation
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
26. A ____ dollar tends to exert inflationary pressure in the U.S.
a. stable
b. strong
c. weak
d. both A and B
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.05
STA: DISC.FMAI.MADU.15.02
27. According to the theory of rational expectations, ____ inflationary expectations encourage businesses
and households to ____ their demand for loanable funds in order to borrow and make planned
expenditures increase.
a. higher; reduce
b. higher; increase
c. lower; reduce
d. lower; increase
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
28. Historical evidence has shown that, when the Fed significantly increases money supply, U.S. inflation
tends to ____ shortly thereafter which in turn places ____ pressure on U.S. interest rates.
a. increase; upward
b. increase; downward
c. decrease; downward
d. decrease; upward
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
29. If the Fed uses a passive monetary policy during weak economic conditions,
a. it increases money supply substantially.
b. it reduces money supply substantially.
c. it allows the economy to fix itself.
d. it focuses on monetizing the debt.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
30. Which of the following is true?
a. Federal deficits require that the Fed purchase government securities.
b. Federal deficits will always result in an increase in money supply.
c. The Federal Reserve monetizes debt by selling securities which ultimately increases
money supply.
d. An agreement between the Fed and the Treasury exists whereby the Fed is directly
responsible for monetizing the debt whenever the deficit increases.
e. None of the above.
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
31. Inflation is commonly the result of a
a. large budget deficit.
b. high level of interest rates.
c. high level of unemployment.
d. high level of aggregate demand.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
32. According to the theory of rational expectations, if the Fed uses open market operations in order to
increase the supply of loanable funds, the ultimate effect on interest rates is definitely
a. a reduction in interest rates.
b. an increase in interest rates.
c. no effect on the interest rates.
d. the impact on interest rates cannot be determined.
ANS: D
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.05.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
STA: DISC.FMAI.MADU.15.02
33. The Federal Reserve would be most inclined to use a stimulative monetary policy to cure a recession
if oil prices are
a. low and steady.
b. low, but rising.
c. very high, but declining slightly.
d. very high and rising.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
34. Global crowding out is described in the text to mean the impact of
a. excessive U.S. population growth on interest rates.
b. excessive global population growth on interest rates.
c. an excessive budget deficit in one country on interest rates of another country.
d. an excessive budget deficit in one country on exchange rates.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.05
STA: DISC.FMAI.MADU.15.02
35. If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the
private sector is not, this reflects
a. the crowding-out effect.
b. dynamic open market operations.
c. defensive open market operations.
d. monetizing the debt.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.05
STA: DISC.FMAI.MADU.15.02
36. When the Fed uses open market operations by purchasing Treasury securities from various financial
institutions in the U.S., there will be
a. an outward shift in the supply schedule of loanable funds.
b. an inward shift in the supply schedule of loanable funds.
c. no shift in the supply schedule of loanable funds.
d. an inward shift in the demand schedule for loanable funds.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
37. When the Fed uses open market operations by selling some of its Treasury securities to investors in
the U.S., there will be
a. an outward shift in the supply schedule of loanable funds.
b. an inward shift in the supply schedule of loanable funds.
c. no shift in the supply schedule of loanable funds.
d. an outward shift in the demand schedule for loanable funds.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
38. Which of the following is not a disadvantage of inflation targeting?
a. If the U.S. inflation rate deviates substantially from the Fed's target inflation rate, the Fed
could lose credibility.
b. The Fed's complete focus on inflation could result in a much higher unemployment level.
c. The Fed's complete focus on inflation could result in much higher interest rates, which
would discourage economic growth.
d. All of the above are disadvantages of inflation targeting.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
39. Financial institutions such as commercial banks, bond mutual funds, insurance companies, and
pension funds maintain large portfolios of bonds, so their portfolio is ____ affected when the Fed
____ interest rates.
a. unfavorably; decreases
b. unfavorably; increases
c. favorably; increases
d. Answer A and C are correct.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.04
STA: DISC.FMAI.MADU.15.02
40. According to the theory of rational expectations, higher inflationary expectations encourage
businesses and households to reduce their demand for loanable funds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
41. A passive monetary policy adjusts money supply automatically in response to economic conditions.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
42. If the Fed implemented a policy of inflation targeting, and if the U.S. inflation rate deviated
substantially from the Fed's target inflation rate, the Fed could lose credibility.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
43. If the Fed attempts to reduce inflation, it would likely increase money supply growth.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
44. The relationship between the interest rate on loanable funds and the level of business investment is
positive.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
45. The supply schedule of loanable funds indicates the quantity of funds that would be demanded at
various possible interest rates.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
46. To correct excessive inflation, the Fed could use open market operations by buying Treasury
securities in the secondary market.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
47. One of the disadvantages of inflation targeting is that the Fed could lose credibility is the U.S.
inflation rate deviates substantially from the Fed's target inflation rate.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
48. Economists who work at the Fed recognize that a stimulative monetary policy will not always cure a
high unemployment rate and could even ignite inflation.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
49. An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a
limited effect if long-term interest rates remain unaffected.
a. True
b. False
ANS: T
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.05.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
STA: DISC.FMAI.MADU.15.02
50. The Fed needs the approval of the presidential administration to make decisions.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
51. The Fed is more likely to use a stimulative policy during a strong-dollar period.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.05
STA: DISC.FMAI.MADU.15.02
52. A purchase of Treasury securities by the Fed leads to a(n) ____ in interest rates and a(n) ____ in the
level of business investment.
a. increase; decrease
b. decrease; decrease
c. increase; increase
d. decrease; increase
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
53. Which of the following is probably not a goal the Fed is trying to achieve consistently?
a. low inflation
b. high interest rates
c. steady GNP growth
d. low unemployment
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
54. The ____ is not an indicator of economic growth.
a. producer price index
b. gross domestic product
c. national income
d. unemployment rate
e. All of the above are indicators of economic growth.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
55. Which of the following is not true with respect to inflation targeting?
a. The Fed could lose credibility is the inflation rate deviates substantially from the Fed's
target inflation rate.
b. A complete focus on inflation could result in a much higher unemployment rate.
c. Inflation targeting may not only satisfy the inflation goal, but could also achieve the
employment stabilization goal in the long run.
d. If unemployment is slightly higher than normal, while inflation is at the peak of the target
range, and inflation targeting approach would like advocate a loose monetary policy.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.03
STA: DISC.FMAI.MADU.15.02
56. A ____ economic indicator tends to rise or fall a few months after business-cycle expansions and
contractions.
a. leading
b. coincident
c. lagging
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
57. A weak dollar would stimulate ____, discourage ____, and ____ the U.S. economy.
a. U.S. exports; U.S. imports; weaken
b. U.S. exports; U.S. imports; stimulate
c. U.S. imports; U.S. exports; stimulate
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.05
STA: DISC.FMAI.MADU.15.02
58. The interest rate that the Fed targets for its monetary policy is the:
a. commercial paper rate.
b. federal funds rate.
c. Treasury bond coupon rate.
d. 1-year certificate of deposit rate.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
59. When the Fed purchases Treasury securities, the account balances of the investors who sell their
securities to the Fed _________, and there are _________ in the account balances of other financial
institutions.
a. increase; offsetting decreases
b. increase; no offsetting decreases
c. decrease; offsetting increases
d. decrease; no offsetting increases
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
60. The Fed’s monetary policy is commonly intended to alter the supply of funds in the banking system in
order to achieve a specific targeted:
a. discount rate.
b. required reserve requirement.
c. federal funds rate.
d. prime rate.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
61. If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm
will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury
security rate to 6 percent, the cost of borrowing for the firm will be ________.
a. 7 percent; 10 percent
b. 4 percent; 6 percent
c. 7 percent; 9 percent
d. 1 percent; 3 percent
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.05.01
STA: DISC.FMAI.MADU.15.02
62. In the “operation twist” strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and
used the proceeds to purchase ________ Treasury securities.
a. long-term; short-term
b. short-term; long-term
c. short-term; long-term
d. long-term; short-term
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
63. The intent of the Fed’s operation twist strategy in 2011 and 2012 was to:.
a. increase long-term interest rates.
b. require corporations to issue more commercial paper.
c. require bond rating agencies to impose higher standards on their ratings.
d. reduce long-term interest rates.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
64. Which of the following is not a reason that a stimulative monetary policy may be ineffective?
a. The effects of a stimulative policy may be disrupted by expectations of inflation.
b. Retirees who rely on interest income may restrict their spending
c. Lending institutions may increase their standards for borrowers, so some potential
borrowers may not qualify for loans.
d. Higher interest rates encourage individuals to increase their savings.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
65.
DIF: Moderate
OBJ: FMAI.MADU.15.05.02
STA: DISC.FMAI.MADU.15.02
In 2012, the Fed stated that it would continue to purchase Treasury bonds in the financial markets
until GDP growth increased to a target level.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.04
STA: DISC.FMAI.MADU.15.02
66. Which of the following was not true of the eurozone during the Greek crisis?
a. Fear of a financial crisis throughout Europe discouraged investors and firms from moving
funds into Europe.
b. By using a more stimulative monetary policy than it desired, the European Central Bank
aroused concerns about potential inflation in the eurozone.
c. There was concern that the austerity conditions could weaken the country’s economy
further.
d. Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to
stimulate their economies.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.05.05
STA: DISC.FMAI.MADU.15.02
Chapter 6—Money Markets
1. Securities with maturities of one year or less are classified as
a. capital market instruments.
b. money market instruments.
c. preferred stock.
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
2. Which of the following is not a money market security?
a. Treasury bill
b. negotiable certificate of deposit
c. common stock
d. federal funds
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
3. ____ are sold at an auction at a discount from par value.
a. Treasury bills
b. Repurchase agreements
c. Banker's acceptances
d. Commercial paper
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
4. Jarrod King, a private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One
hundred days later, Jarrod sells the T-bill for $9,719. What is Jarrod's expected annualized yield from
this transaction?
a. 13.43 percent
b.
c.
d.
e.
2.78 percent
10.55 percent
2.80 percent
none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
5. If an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to
maturity, what is the annualized yield?
a. about 13.4 percent
b. about 12.5 percent
c. about 11.3 percent
d. about 11.6 percent
e. about 10.7 percent
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
6. An investor buys a T-bill with 180 days to maturity and $250,000 par value for $242,000. He plans to
sell it after 60 days, and forecasts a selling price of $247,000 at that time. What is the annualized yield
based on this expectation?
a. about 10.1 percent
b. about 12.6 percent
c. about 11.4 percent
d. about 13.5 percent
e. about 14.3 percent
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
7. Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of
$10,000. The price investors would be willing to pay is $____.
a. 10,000
b. 9,524
c. 9,756
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
8. A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is
the discount?
a. 10.26 percent
b. 0.26 percent
c. $2,500
d. 10.00 percent
e. 11.00 percent
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
9. Large corporations typically make ____ bids for T-bills so they can purchase larger amounts.
a. competitive
b. noncompetitive
c. very small
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
10. At any given time, the yield on commercial paper is ____ the yield on a T-bill with the same maturity.
a. slightly less than
b. slightly higher than
c. equal to
d. A and B both occur with about equal frequency
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
11. T-bills and commercial paper are sold
a. with a stated coupon rate.
b. at a discount from par value.
c. at a premium about par value.
d. A and C
e. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
12. ____ is a short-term debt instrument issued only be well-known, creditworthy firms and is normally
issued to provide liquidity or finance a firm's investment in inventory and accounts receivable.
a. A banker's acceptance
b. A repurchase agreement
c. Commercial paper
d. A Treasury bill
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
13. Commercial paper has a maximum maturity of ____ days.
a. 45
b. 270
c. 360
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
14. An investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and
the investor holds it to maturity. What is the annualized yield?
a. 8.62 percent
b.
c.
d.
e.
8.78 percent
8.90 percent
9.14 percent
9.00 percent
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
15. A firm plans to issue 30-day commercial paper for $9,900,000. Par value is $10,000,000. What is the
firm's cost of borrowing?
a. 12.12 percent
b. 11.11 percent
c. 13.00 percent
d. 14.08 percent
e. 15.25 percent
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
16. When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is
____ than projected.
a. higher; higher
b. lower; lower
c. A and B
d. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
17. Which of the following is not a money market instrument?
a. banker's acceptance
b. commercial paper
c. negotiable CDs
d. repurchase agreements
e. all of the above are money market instruments
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.02
STA: DISC.FMAI.MADU.15.02
18. A repurchase agreement calls for an investor to buy securities for $4,925,000 and sell them back in 60
days for $5,000,000. What is the yield?
a. 9.43 percent
b. 9.28 percent
c. 9.14 percent
d. 9.00 percent
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
19. The federal funds market allows depository institutions to borrow
a. short-term funds from each other.
b.
c.
d.
e.
short-term funds from the Treasury.
long-term funds from each other.
long-term funds from the Federal Reserve.
B and D
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
20. When a bank guarantees a future payment to a firm, the financial instrument used is called
a. a repurchase agreement.
b. a negotiable CD.
c. a banker's acceptance.
d. commercial paper.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
21. Which of the following instruments has a highly active secondary market?
a. banker's acceptances
b. commercial paper
c. federal funds
d. repurchase agreements
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
22. Which of the following is true of money market instruments?
a. Their yields are highly correlated over time.
b. They typically sell for par value when they are initially issued (especially T-bills and
commercial paper).
c. Treasury bills have the highest yield.
d. They all make periodic coupon (interest) payments.
e. A and B
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
23. An investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today
and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this
investment is
a. 2.0 percent.
b. 5.10 percent.
c. 5.00 percent.
d. 2.04 percent.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
24. An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them
back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.
a. 3.10
b. 0.77
c. 1.00
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
25. The rate at which depository institutions effectively lend or borrow funds from each other is the ____.
a. federal funds rate
b. discount rate
c. prime rate
d. repo rate
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
26. ____ are the most active participants in the federal funds market.
a. Savings and loan associations
b. Securities firms
c. Credit unions
d. Commercial banks
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
27. Eurodollar deposits
a. are U.S. dollars deposited in the U.S. by European investors.
b. are subject to interest rate ceilings.
c. have a relatively large spread between deposit and loan rates (compared to the spread
between deposits and loans in the United States).
d. are not subject to reserve requirements.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
28. Which money market transaction is most likely to represent a loan from one commercial bank to
another?
a. banker's acceptance
b. negotiable CD
c. federal funds
d. commercial paper
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
29. The rate on Eurodollar floating rate CDs is based on
a. a weighted average of European prime rates.
b. the London Interbank Offer Rate.
c. the U.S. prime rate.
d. a weighted average of European discount rates.
ANS: B
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.06.04
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
STA: DISC.FMAI.MADU.15.02
30. Treasury bills
a. have a maturity of up to five years.
b. have an active secondary market.
c. are commonly sold at par value.
d. commonly offer coupon payments.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
31. The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The
difference between their yields would be especially large during a ____ period.
a. greater than; recessionary
b. greater than; boom economy
c. less than; boom economy
d. less than; recessionary
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
32. The yield on NCDs is ____ the yield of Treasury bills of the same maturity. The difference between
their yields would be especially large during a ____ period.
a. greater than; recessionary
b. greater than; boom economy
c. less than; boom economy
d. less than; recessionary
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
33. Which of the following is sometimes issued in the primary market by nonfinancial firms to borrow
funds?
a. NCDs
b. retail CDs
c. commercial paper
d. federal funds
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
34. The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be
a. eliminated.
b. reduced.
c. increased.
d. unchanged (there is no effect).
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.03
STA: DISC.FMAI.MADU.15.02
35. The effective yield of a foreign money market security is ____ when the foreign currency strengthens
against the dollar.
a. increased
b. reduced
c. always negative
d. unaffected
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
36. The effective yield of a foreign money market security is ____ when the foreign currency weakens
against the dollar.
a. increased
b. reduced
c. always negative
d. unaffected
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
37. Treasury bills are sold through ____ when initially issued.
a. insurance companies
b. commercial paper dealers
c. auction
d. finance companies
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
38. At a given point in time, the actual price paid for a three-month Treasury bill is
a. usually equal to the par value.
b. more than the price paid for a six-month Treasury bill.
c. equal to the price paid for a six-month Treasury bill.
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
39. The minimum denomination of commercial paper is
a. $25,000.
b. $100,000.
c. $150,000.
d. $200,000.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
40. Commercial paper is
a. always directly placed with investors.
b. always placed with the help of commercial paper dealers.
c. placed either directly or with the help of commercial paper dealers.
d. always placed by bank holding companies.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
41. An investor, purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700. If the
Treasury bill is held to maturity, the annualized yield is ____ percent.
a. 6.02
b. 1.54
c. 1.50
d. 6.20
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
42. When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the
Treasury bill discount is ____ percent.
a. 5.93
b. 6.12
c. 6.20
d. 6.02
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
43. Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins
invested in a one-year Mexican money market security that provided a yield of 25 percent. At the end
of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.12
to $.11. What is the effective yield earned by Robbins?
a. 25.00 percent
b. 35.41 percent
c. 14.59 percent
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
44. An aggregate purchase by investors of low-yield instruments in favor of high-yield instruments places
____ pressure on the yields of low-yield securities and ____ on the yields of high-yield securities.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
45. Which of the following statements is incorrect with respect to the federal funds rate?
a. It is the rate charged by financial institutions on loans they extend to each other.
b. It is not influenced by the supply and demand for funds in the federal funds market.
c. The federal funds rate is closely monitored by all types of firms.
d. Many market participants view changes in the federal funds rate to be an indicator of
potential changes in other money market rates.
e. The Federal Reserve adjusts the amount of funds in depository institutions in order to
influence the federal funds rate.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
46. Buser Corp. purchases certain securities for $4,921,349, with an agreement to sell them back at a
price of $4,950,000 at the end of a 30-day period. The repo rate is ____ percent.
a. 7.08
b. 6.95
c. 6.99
d. 7.04
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
47. Commercial paper is subject to:
a. interest rate risk.
b. default risk.
c. A and B.
d. none of the above.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
48. If economic conditions cause investors to sell stocks because they want to invest in safer securities
with much liquidity, this should cause a ____ demand for money market securities, which placed
____ pressure on the yields of money market securities.
a. weak; downward
b. weak; upward
c. strong; upward
d. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.03
STA: DISC.FMAI.MADU.15.02
49. In general the money markets are widely perceived to be efficient in the sense that the prices reflect
all available public information.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.03
STA: DISC.FMAI.MADU.15.02
50. Money market securities are must have a maturity of three months or less.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
51. Money market securities are issued in the primary market through a telecommunications network by
the Treasury, corporations, and financial intermediaries that wish to obtain short-term financing.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
52. An international interbank market facilitates the transfer of funds from banks with excess funds to
those with deficient funds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
53. The interest rate charged for a short-term loan from a bank to a corporation is referred to as the
London interbank offer rate (LIBOR).
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
54. Money markets are used to facilitate the transfer of short-term funds from individuals, corporations,
or governments with excess funds to those with deficient funds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
55. Because money market securities have a short-term maturity and typically cannot be sold easily, they
provide investors with a low degree of liquidity.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
56. There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill
auction.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
57. T-bills do not offer coupon payments but are sold at a discount from par value.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
58. Junk commercial paper is commercial paper that is not rated or rated low.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
59. A line of credit provided by a commercial bank allows a company the right (but not the obligation) to
borrow a specified maximum amount of funds over a specified period of time.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
60. T-bills must offer a premium above the negotiable certificate of deposit (NCD) to compensate for less
liquidity and safety.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
61. Most repo transactions use government securities.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
62. Exporters can hold a banker's acceptance until the date at which payment is to be made, yet they
frequently sell the acceptance before then at a discount to obtain cash immediately.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
63. Money market security values are less sensitive to interest rate movements than bonds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.03
STA: DISC.FMAI.MADU.15.02
64. During periods of uncertainty about the economy, there is a shift from risky money market securities
to Treasury securities.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.03
STA: DISC.FMAI.MADU.15.02
65. The price O bidders will pay at a Treasury bill auction is the
a. highest price entered by a competitive bidder.
b. highest price entered by a noncompetitive bidder.
c. weighted average price paid by all competitive bidders whose bids were accepted.
d. equally weighted average price paid by all competitive bidders whose bids were accepted.
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
66. Bill Yates, a private investor, purchases a six-month (182-day) T-bill with a $10,000 par value for
$9,700. If Bill holds the Treasury bill to maturity, his annualized yield is ____ percent.
a. 6.02
b. 1.54
c. 1.50
d. 6.20
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
67. You purchase a six-month (182-day) T-bill with a $10,000 par value for $9,700. The Treasury bill
discount is ____ percent.
a. 5.93
b. 6.12
c. 6.20
d. 6.02
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
68. A ____ is not a money market security.
a. Treasury bill
b. negotiable certificate of deposit
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
c. bond
d. banker's acceptance
e. All of the above are money market securities.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
69. Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of
$3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost
of borrowing is estimated to be ____ percent.
a. 14.39
b. 14.13
c. 14.59
d. 14.33
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
70. When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will
be ____ than what they initially anticipated.
a. higher; higher
b. lower; lower
c. higher; lower
d. lower; higher
e. Answers C and D are correct.
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
71. Which of the following securities is most likely to be used in a repo transaction?
a. commercial paper
b. certificate of deposit
c. Treasury bill
d. common stock
e. All of the above are equally likely to be used in a repo transaction.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
72. A major drawback to investing in Treasury bills is that they cannot easily be liquidated.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
73. At each T-bill auction, the prices paid for three-month T-bills are significantly lower than the prices
paid for six-month bills.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
74. Ignoring transaction costs, the cost of borrowing with commercial paper is equal to:
a. the yield on T-bills of the same maturity.
b. the yield earned by investors holding the paper until maturity.
c. the federal funds rate.
d. the par value of the paper.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
75. LIBOR is:
a. the interest rate charged on international interbank loans.
b. the average rate charged on commercial loans in Europe.
c. the rate charged by the Federal Reserve for loans to banks.
d. the rate charged by the European Central Bank for loans to banks.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
76. The LIBOR scandal in 2012 involved:
a. banks reporting inflated earnings from their loans.
b. hackers breaking into the loan documentation files.
c. banks falsely reporting the interest rates they offered in the interbank market.
d. collusion among the banks when setting the commercial paper.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
77. Credit guarantees for commercial paper:
a. ensures that the issuer of commercial paper will use the funds obtained to provide credit.
b. are issued by the Federal Reserve Bank of New York.
c. are only as good as the credit of the guarantor.
d. A and C
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.06.01
STA: DISC.FMAI.MADU.15.02
78. The money market interest rate paid by corporations that borrow short-term funds in a particular
country is typically:
a. equal to the rate paid by that country’s government.
b. slightly higher than the rate paid by that country’s government.
c. mostly influenced by the demand for and supply of long-term funds in that country.
d. set by the country’s central bank.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.06.04
STA: DISC.FMAI.MADU.15.02
Chapter 7—Bond Markets
1. ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive
coupon payments.
a. Bearer
b. Registered
c. Treasury
d. Corporate
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
2. The yield to maturity is the annualized discount rate that equates the future coupon and principal
payments to the initial proceeds received from the bond offering.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
3. Note maturities are usually ____, while bond maturities are ____.
a. less than 10 years; 10 years or more
b. 10 years or more; less than 10 years
c. less than 5 years; 5 years or more
d. 5 years or more; less than 5 years
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
4. Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
a. annual
b. semiannual
c. quarterly
d. monthly
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
5. The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.
a. 50
b. 70
c. 10
d. 5
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
6. Interest earned from Treasury bonds is
a. exempt from all income tax.
b. exempt from federal income tax.
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
c. exempt from state and local taxes.
d. subject to all income taxes.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
7. Treasury bond auctions are normally conducted only at the beginning of each year.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
8. ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of
securities to be purchased.
a. Competitive
b. Noncompetitive
c. Negotiable
d. Non-negotiable
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
9. Treasury bond dealers
a. quote an ask price for customers who want to sell existing Treasury bonds to the dealers.
b. profit from a very wide spread between bid and ask prices in the Treasury securities
market.
c. may trade Treasury bonds among themselves.
d. make a primary market for Treasury bonds.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
10. Under the STRIP program created by the Treasury, stripped securities are created and sold by the
Treasury.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
11. A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During
the first six months since the bond was issued, the inflation rate was 2 percent. Based on this
information, the coupon payment after six months will be $____.
a. 250
b. 255
c. 500
d. 510
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
DIF: Moderate
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
KEY: Bloom's: Application
12. Bonds issued by ____ are backed by the federal government.
a. the Treasury
b. AAA-rated corporations
c. state governments
d. city governments
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
13. Municipal general obligation bonds are ____. Municipal revenue bonds are ____.
a. supported by the municipal government's ability to tax; supported by the municipal
government's ability to tax
b. supported by the municipal government's ability to tax; supported by revenue generated
from the project
c. always subject to federal taxes; always exempt from state and local taxes
d. typically zero-coupon bonds; typically zero-coupon bonds
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.03
STA: DISC.FMAI.MADU.15.02
14. In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will
____.
a. remain unchanged
b. fall
c. rise
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.03
STA: DISC.FMAI.MADU.15.02
15. Which of the following statements is not true regarding zero-coupon bonds?
a. They are issued at a deep discount from par value.
b. Investors are taxed on the total amount of interest earned at maturity.
c. The issuing firm is permitted to deduct the amortized discount as interest expense for
federal income tax purposes, even though it does not pay interest until maturity.
d. Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as
pension funds and individual retirement accounts.
e. All of the above are true.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
16. A variable rate bond allows
a. investors to benefit from declining rates over time.
b. issuers to benefit from rising market interest rates over time.
c. investors to benefit from rising market interest rates over time.
d. none of the above.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
KEY: Bloom's: Knowledge
17. Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____
yields.
a. higher; lower
b. lower; lower
c. higher; higher
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
18. A private bond placement has to be registered with the SEC.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
19. Which of the following institutions is most likely to purchase a private bond placement?
a. commercial bank
b. mutual fund
c. insurance company
d. savings institution
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
20. A protective covenant may
a. specify all the rights and obligations of the issuing firm and the bondholders.
b. require the firm to retire a certain amount of the bond issue each year.
c. restrict the amount of additional debt the firm can issue.
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
21. A call provision on bonds normally
a. allows the firm to sell new bonds at par value.
b. gives the firm to sell new bonds above market value.
c. allows the firm to sell bonds to the Treasury.
d. allows the firm to buy back bonds that it previously issued.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
22. When would a firm most likely call bonds?
a. after interest rates have declined
b. if interest rates do not change
c. after interest rates increase
d. just before the time at which interest rates are expected to decline
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
23. Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German
subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the
bonds in
a. dollars.
b. euros and making payments from U.S. headquarters.
c. euros and making payments from its German subsidiary.
d. dollars and making payments from its German subsidiary.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.05
STA: DISC.FMAI.MADU.15.02
24. Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund
requirements and a lower price if the bonds are called for any other reason.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
25. Bonds that are not secured by specific property are called
a. a chattel mortgage.
b. open-end mortgage bonds.
c. debentures.
d. blanket mortgage bonds.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
26. Bonds that are secured by personal property are called
a. chattel mortgage bonds.
b. first mortgage bonds.
c. second mortgage bonds.
d. debentures.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
27. The coupon rate of most variable-rate bonds is tied to
a. the prime rate.
b. the discount rate.
c. LIBOR.
d. the federal funds rate.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
28. Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it
is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your
bonds will likely ____ as a result.
a. rise
b. decline
c. be zero
d. be unaffected
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
29. During weak economic periods, newly issued junk bonds require lower risk premiums than in strong
economic periods.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
30. ____ bonds have the most active secondary market.
a. Treasury
b. Zero-coupon corporate
c. Junk
d. Municipal
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
31. Some bonds are "stripped," which means that
a. they have defaulted.
b. the call provision has been eliminated.
c. they are transferred into principal-only and interest-only securities.
d. their maturities have been reduced.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
32. ____ are not primary purchasers of bonds.
a. Insurance companies
b. Finance companies
c. Mutual funds
d. Pension funds
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
33. Leveraged buyouts are commonly financed by the issuance of:
a. money market securities.
b. Treasury bonds.
c. corporate bonds.
d. municipal bonds.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
34. When firms issue ____, the amount of interest and principal to be paid is based on specified market
conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a
stock index.
a. auction-rate securities
b. structured notes
c. leveraged notes
d. stripped securities
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.06
STA: DISC.FMAI.MADU.15.02
35. Which of the following statements is true regarding STRIPS?
a. they are issued by the Treasury
b. they are created and sold by various financial institutions
c. they are not backed by the U.S. government
d. they have to be held until maturity
e. all of the above are true regarding STRIPS
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
36. (Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of
$1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent.
a. 9.33
b. 7.84
c. 9.00
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
37. (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds
for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years
remaining until maturity. Erin's yield to maturity is ____ percent.
a. 9.96
b. 10.00
c. 10.33
d. 10.24
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
38. Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9
percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____
percent.
a. 12
b. 9
c. 10.5
d. more information is needed to answer this question
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
39. Which of the following is not true regarding zero-coupon bonds?
a. They are issued at a deep discount from par value.
b. Investors are taxed annually on the amount of interest earned, even though the interest will
not be received until maturity.
c. The issuing firm is permitted to deduct the amortized discount as interest expense for
federal income tax purposes, even though it does not pay interest.
d. Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as
pension funds and individual retirement accounts.
e. all of the above are true
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
40. Which of the following is not true regarding the call provision?
a. It typically requires a firm to pay a price above par value when it calls its bonds.
b. The difference between the market value of the bond and the par value is called the call
premium.
c. A principal use of the call provision is to lower future interest payments.
d. A principal use of the call provision is to retire bonds as required by a sinking-fund
provision.
e. A call provision is normally viewed as a disadvantage to bondholders.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
41. If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be
called.
a. decline; more
b. decline; less
c. increase; more
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
42. Which of the following would not be a likely example of a protective covenant provision?
a. a limit on the amount of dividends a firm can pay
b. a limit on the corporate officers' salaries a firm can pay
c. the amount of additional debt a firm can issue
d. a call feature
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
43. Bonds are issued in the primary market through a telecommunications network.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
44. Corporate bonds can be placed with investors through a public offering or a private placement.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
45. When a corporation issues bonds, it normally hires a securities firm that targets large institutional
investors such as pension funds, bond mutual funds, and insurance companies.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
46. Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other
securities) with each other without requiring that the firms that issued the securities to register them
with the SEC.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
47. Rule 144A creates liquidity for securities that are privately placed.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
48. Corporate bonds are more standardized than stocks.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
49. Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is
based on specified market conditions.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.06
STA: DISC.FMAI.MADU.15.02
50. Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold
these bonds until maturity.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
51. The bond market is served by bond dealers, who can play a broker role by matching up buyers and
sellers.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
52. Bond dealers do not have an inventory of bonds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
53. Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to
trade bonds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
54. Many bonds are listed on the New York Stock Exchange (NYSE).
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
55. The primary investors in bond markets are institutional investors such as commercial banks, bond
mutual funds, pension funds, and insurance companies.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
56. The key difference between a note and a bond is that note maturities are usually less than one year,
while bond maturities are one year or more.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
57. Treasury bonds are issued by state and local governments.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
58. Stripped bonds are bonds whose cash flows have been transformed into a security representing the
principal payment only and a security representing interest payments only.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
59. Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on
their investments keep up with the increase in prices over time.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
60. Savings bonds are bonds issued by the Federal Reserve.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
61. Corporate bonds usually pay interest on an annual basis.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
62. The bond debenture is a legal document specifying the rights and obligations of both the issuing firm
and the bondholders.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
63. A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond
issue each year.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
64. Subordinated indentures are debentures that have claims against the firm's assets that are junior to the
claims of both mortgage bonds and regular debentures.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
65. High-risk bonds are called trash bonds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
66. Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
67. If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be
called.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
68. Which of the following statements is not true regarding STRIPS?
a. They are not issued by the Treasury.
b. They are created and sold by various financial institutions.
c. They are backed by the U.S. government.
d. They have to be held until maturity.
e. All of the above are true regarding STRIPS.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.02
STA: DISC.FMAI.MADU.15.02
69. (Financial calculator required.) Paul can purchase bonds with 15 years remaining until maturity, a par
value of $1,000, and a 9 percent annual coupon rate for $1,100. Paul's yield to maturity is ____
percent.
a. 9.33
b. 7.84
c. 9.00
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
70. (Financial calculator required.) Steven, a private investor, can purchase $1,000 par value bonds for
$980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining
until maturity. Steven's yield to maturity is ____ percent.
a. 9.96
b. 10.00
c. 10.33
d. 10.24
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
71. Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity.
Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
a. 12.00
b. 9.00
c. 10.50
d. More information is needed to answer this question.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.07.01
STA: DISC.FMAI.MADU.15.02
72. Which of the following is not an example of a municipal bond?
a. general obligation bond
b. revenue bond
c. Treasury bond
d. All of the above are examples of municipal bonds.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.03
STA: DISC.FMAI.MADU.15.02
73. Which of the following statements is incorrect?
a. The municipal bond must pay a risk premium to compensate for the possibility of default
risk.
b. The Treasury bond must pay a slight premium to compensate for being less liquid than
municipal bonds.
c. The income earned from municipal bonds is exempt from federal taxes.
d. All of the above are true.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.03
STA: DISC.FMAI.MADU.15.02
74. Which of the following is not mentioned in your text as a protective covenant?
a. a limit on the amount of dividends a firm can pay
b. a limit on the corporate officers' salaries a firm can pay
c. the amount of additional debt a firm can issue
d. the appointment of a trustee in all bond indentures
e. All of the above are mentioned in the text as protective covenants.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
75. Everything else being equal, which of the following bond ratings is associated with the highest yield?
a. Baa
b. A
c. Aa
d. Aaa
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
76. A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's
assets that are junior to the claims of mortgage bonds and regular debentures.
a. first mortgage bond; second mortgage bond
b. first mortgage bond; debenture
c. first mortgage bond; subordinated debenture
d. chattel mortgage bond; subordinated debenture
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
77. If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider
using ____ debt and ____ equity, which implies a ____ degree of financial leverage.
a. more; less; lower
b. more; less; higher
c. less; more; higher
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
78. The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually
free from credit (default) risk.
a. True
b. False
ANS: T
PTS: 1
DIF:
Easy
OBJ: FMAI.MADU.15.07.02
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
STA: DISC.FMAI.MADU.15.02
79. The issuance of municipal securities is regulated by:
a. the Securities and Exchange Commission.
b. the Consumer Financial Protection Bureau.
c. their respective state governments.
d. the Federal Reserve.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.03
STA: DISC.FMAI.MADU.15.02
80. For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds
will be sold at a specified price.
a. specific value
b. fixed proceeds
c. best efforts
d. firm commitment
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
81. For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a
specified price but makes no guarantee to the issuer.
a. floating value
b. variable proceeds
c. best efforts
d. firm commitment
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
82. Which of the following eurozone countries has not recently experienced debt repayment problems?
a. Finland
b. Greece
c. Portugal
d. Spain
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.05
STA: DISC.FMAI.MADU.15.02
83. The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating
agencies.
a. Federal Ratings Bureau
b. Office of Credit Ratings
c. Office of Agency Supervision
d. Ratings Oversight Commission
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
84. A credit rating agency is paid by:
a. the purchasers of the bonds that the agency rates.
b. the issuers of the bonds that the agency rates.
c. the taxpayers, because the rating agencies are government agencies.
d. the New York Stock Exchange or the over-the-counter market where the bonds are listed.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.03
STA: DISC.FMAI.MADU.15.02
85. All of the bonds issued by a particular company will have the same maturity, price, and credit rating.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
86. When purchasing bonds, individual investors can use a ________ to specify the maximum price they
are willing to pay for a bond.
a. limit order
b. market order
c. stop order
d. price order
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
87. Online bond brokerage services offer several advantages including:
a. pricing is more transparent because investors can easily compare bid and ask spreads.
b. some services charge commissions, which may be more easily understood than bid and
ask spreads.
c. some brokers have narrowed their spreads so that they do not lose business to competitors.
d. all of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.07.04
STA: DISC.FMAI.MADU.15.02
Chapter 8—Bond Valuation and Risk
1. The appropriate discount rate for valuing any bond is the
a. bond's coupon rate.
b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond.
c. Treasury bill rate with an adjustment to include a risk premium if one exists.
d. yield that could be earned on alternative investments with similar risk and maturity.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
2. The valuation of bonds is generally perceived to be ____ the valuation of equity securities.
a. more difficult than
b. easier than
c. just as difficult as
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
3. A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and
annual coupon payments are made at the end of each year. Present annual yields on similar bonds are
6 percent. What should be the current price?
a. $1,069.31
b. $1,000.00
c. $9712
d. $927.66
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
4. A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The
bond has three years to maturity. The investors' required rate of return is 12 percent. What is the
present value of the bond?
a. $1,021
b. $1,000
c. $981
d. $951
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
5. A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a
par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is
$____.
a. 1,302
b. 763
c. 761
d. 1,299
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
6. From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are
denominated in a currency that ____ over the investment horizon.
a. high yield; appreciates
b. high yield; remains stable
c. low yield; appreciates
d. low yield; depreciates
ANS: A
PTS: 1
DIF:
Moderate
OBJ: FMAI.MADU.15.08.05
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
STA: DISC.FMAI.MADU.15.01
7. The value of ____-risk securities will be relatively ____.
a. high; high
b. high; low
c. low; low
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
8. The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par
value.
a. discount rate; required rate of return; discount
b. required rate of return; discount rate; discount
c. required rate of return; discount rate; premium
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
9. If the coupon rate equals the required rate of return, the price of the bond
a. should be above its par value.
b. should be below its par value.
c. should be equal to its par value.
d. is negligible.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
10. When financial institutions expect interest rates to ____, they may ____.
a. increase; sell bonds and buy short-term securities
b. increase; sell short-term securities and buy bonds
c. decrease; sell bonds and buy short-term securities
d. B and C
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
11. For a given par value of a bond, the higher the investor's required rate of return is above the coupon
rate, the
a. greater is the premium on the price.
b. greater is the discount on the price.
c. smaller is the premium on the price.
d. smaller is the discount on the price.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
12. Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of
return of 9 percent. What is the current price?
a. $363,212
b. $385,500
c. $422,400
d. $424,100
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
13. If the coupon rate ____ the required rate of return, the price of a bond ____ par value.
a. equals; equals
b. exceeds; is less than
c. is less than; is greater than
d. B and C
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
14. As interest rates increase, long-term bond prices
a. increase by a greater degree than short-term bond prices.
b. increase by an equal degree as short-term bond prices.
c. decrease by a greater degree than short-term bond prices.
d. decrease by an equal degree as short-term bond prices.
e. decrease by a smaller degree than short-term bond prices.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
15. The prices of bonds with ____ are most sensitive to interest rate movements.
a. high coupon payments
b. zero coupon payments
c. small coupon payments
d. none of the above (The size of the coupon payment does not affect sensitivity of bond
prices to interest rate movements.)
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
16. A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.
a. increase; upward
b. increase; downward
c. decrease; downward
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
17. Other things held constant, bond prices should increase when inflationary expectations rise.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
18. An expected ____ in economic growth places ____ pressure on bond prices.
a. increase; downward
b. increase; upward
c. decrease; downward
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
19. Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the
required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent,
what is the price elasticity of the bond?
a. −.980
b. +.980
c. −.494
d. +.494
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
20. If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.
a. high coupon bonds; more favorably affected by declining interest rates
b. zero or low coupon bonds; more favorably affected by declining interest rates
c. zero or low coupon bonds; more favorably affected by rising interest rates
d. high coupon bonds; completely insulated from rising interest rates
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
21. The prices of ____-coupon and ____ maturities are most sensitive to changes in the required rate of
return.
a. low; short
b. low; long
c. high; short
d. high; long
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
22. An insurance company purchases corporate bonds in the secondary market with six years to maturity.
Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the
expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be
then?
a. $52,115,093
b. $55,341,216
c. $55,000,000
d. $56,935,022
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
23. A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments
are $90. What is the yield to maturity?
a. 13 percent
b. 12 percent
c. 11 percent
d. 10 percent
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
24. A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent,
and the bonds pay annual payments. The bonds mature in four years. The bank wants to sell them in
two years, and estimates the required rate of return in two years will be 8 percent. What will the
market value of the bonds be in two years?
a. $24,113,418
b. $24,667,230
c. $25,000,000
d. $25,891,632
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
25. The price of short-term bonds are commonly ____ those of long-term bonds.
a. more volatile than
b. equally volatile as
c. less volatile than
d. A and C occur with about equal frequency
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
26. Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are ____
than liability portfolio durations, then the market value of assets are ____ interest-rate sensitive than
the market value of liabilities.
a. greater; more
b. greater; equally
c. greater; less
d. less; equally
e. B and D
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
27. As interest rates consistently rise over a specific period, the market price of a bond you own would
likely ____ over this period. (Assume no major change in the bond's default risk.)
a. consistently increase
b. consistently decrease
c. remain unchanged
d. change in a direction that cannot be determined with the above information
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
28. As interest rates consistently decline over a specific period, the market price of a bond you own would
likely ____ over this period. (Assume no major change in the bond's default risk.)
a. consistently increase
b. consistently decrease
c. remain unchanged
d. change in a direction that cannot be determined with the above information
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
29. If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds
will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to
____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
30. If analysts expect that the demand for loanable funds will decrease, and the supply of loanable funds
will increase, they would most likely expect interest rates to ____ and prices of existing bonds to
____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
31. Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now
than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing
interest rates, and the present value of the bonds will be ____ its par value.
a. above; above
b. above; below
c. below; below
d. below; above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
KEY: Bloom's: Comprehension
32. Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now
than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing
interest rates, and the present value of the bonds will be ____ its par value.
a. above; above
b. above; below
c. below; below
d. below; above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
33. If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their
holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
34. If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their
holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
35. Which of the following will most likely cause bond prices to increase? (Assume no possibility of
higher inflation in the future.)
a. reduced Treasury borrowing along with anticipation that money supply growth will
decrease
b. reduced Treasury borrowing along with anticipation that money supply growth will
increase
c. an anticipated drop in money supply growth along with increasing Treasury borrowing
d. higher levels of Treasury borrowing and corporate borrowing
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
36. If the United States announces that it will borrow an additional $10 billion, this announcement will
normally cause the bond traders to expect
a. higher interest rates in the future, and will buy bonds now.
b. higher interest rates in the future, and will sell bonds now.
c. stable interest rates in the future, and will buy bonds now.
d. lower interest rates in the future, and will buy bonds now.
e. lower interest rates in the future, and will sell bonds now.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
37. The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates
fall, the market value of long-term bonds ____.
a. slightly; rises
b. very; rises
c. very; declines
d. slightly; declines
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
38. The bonds that are most sensitive to interest rate movements have
a. no coupon and a short-term maturity.
b. high coupons and a short-term maturity.
c. high coupons and a long-term maturity.
d. no coupon and a long-term maturity.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
39. When two securities have the same expected cash flows, the value of the ____ security will be higher
than the value of the ____ security.
a. high-risk; low-risk
b. low-risk; high-risk
c. high-risk; high-risk
d. low-risk; low-risk
e. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
40. Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year
in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on
other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?
a. $1,000.00
b. $1,147.20
c. $856.80
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
41. Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In
one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth
$101 million. What is the forecasted return of this bond portfolio?
a. 10 percent
b. 8.82 percent
c. 4.32 percent
d. 13.86 percent
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.08.APP
STA: DISC.FMAI.MADU.15.01
42. Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11
million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If
Bullock intends to sell the bonds in two years and expects investors' required rate of return at that time
on similar investments to be 14 percent at that time, what is the expected market value of the bonds in
two years?
a. $9.33 million
b. $11.00 million
c. $10.64 million
d. $9.82 million
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
43. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to
maturity, and a 10 percent yield to maturity. The duration of this bond is
a. 1.90 years.
b. 1.50 years.
c. 1.92 years.
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
44. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to
maturity, and a 10 percent yield to maturity. The modified duration of this bond is
a. 1.73 years.
b. 1.71 years.
c. 1.90 years.
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
45. The relationship reflecting the actual response of a bond's price to a change in bond yields is
a. concave.
b. convex.
c. linear.
d. quadratic.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
46. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____
pressure on the required rate of return on bonds.
a. increase; upward; downward
b.
c.
d.
e.
decrease; upward; downward
decrease; upward; upward
increase; downward; upward
increase; upward; upward
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
47. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different
maturity classes.
a. matching
b. laddered
c. barbell
d. interest rate
e. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.04
STA: DISC.FMAI.MADU.15.01
48. With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a
long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return
and other funds to covering liquidity needs.
a. matching
b. laddered
c. barbell
d. interest rate
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.04
STA: DISC.FMAI.MADU.15.01
49. Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?
a. short-term, high-coupon
b. short-term, low-coupon
c. long-term, high-coupon
d. long-term, zero-coupon
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
50. Which of the following is most likely to cause a decrease in bond prices?
a. a decrease in money supply growth and an increase in the demand for loanable funds
b. a forecast of decreasing oil prices
c. a forecast of a stronger dollar
d. an increase in money supply growth and no change in the demand for loanable funds
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
51. If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on
bond prices, and ____ on yields to be earned by investors that purchase bonds and plan to hold them
to maturity.
a. downward pressure; downward pressure
b. downward pressure; upward pressure
c. upward pressure; upward pressure
d. upward pressure; downward pressure
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
52. Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to
____, they would shift toward ____.
a. increase; long-maturity bonds with zero-coupon rates
b. decrease; short-maturity bonds with high-coupon rates
c. increase; high-coupon bonds with long maturities
d. decrease; long-maturity bonds with zero-coupon rates
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
53. The market price of a bond is partly determined by the timing of the payments made to bondholders.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
54. The appropriate price of a bond is simply the sum of the cash flows to be received.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
55. The valuation of bonds is generally perceived to be more difficult than the valuation of equity
securities.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
56. Bonds that sell below their par value are called premium bonds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
57. A zero-coupon bond makes no coupon payments.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
58. If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should
be below its par value.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
59. An increase in either the risk-free rate or the general level of the risk premium on bonds results in a
higher required rate of return and therefore causes bond prices to increase.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
60. The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the
money supply, and the budget deficit.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
61. If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on
the required rate of return on bonds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
62. Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the
coupon payments will convert to less of their home currency.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
63. Any announcement that signals stronger than expected economic growth tends to increase bond
prices.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
64. Bond price elasticity is the percentage change in bond prices divided by the percentage change in the
required rate of return.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
65. As interest rates increase, prices of short-term bonds will decline by a greater degree than prices on
long-term bonds.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
66. Duration is a measure of bond price sensitivity.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
67. A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by
declining interest rates than a bond portfolio containing no zero-coupon bonds.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
68. International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's
interest rate movements.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.05
STA: DISC.FMAI.MADU.15.01
69. In a laddered strategy, investors create a bond portfolio that will generate periodic income that can
match their expected periodic expenses.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.04
STA: DISC.FMAI.MADU.15.01
70. Which of the following formulas best describes the value of a bond?
a.
b.
c.
d.
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
71. Stephanie would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each
year in coupon payments, and has ten years remaining until maturity. If the prevailing annualized
yield on other bonds with similar characteristics is 6 percent, how much will Stephanie pay for the
bond?
a. $1,000.00
b. $1,147.20
c. $856.80
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
72. Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty
years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How
much did Julia pay for the bond?
a. $1,063.40
b. $1,000
c. $939.25
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Challenging OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
73. To determine the present value of a bond that pays semiannual interest, which of the following
adjustments should not be made to compute the price of the bond?
a. The annualized coupon should be split in half.
b. The annual discount rate should be divided by 2.
c. The number of annual periods should be doubled.
d. The par value should be split in half.
e. All of the above adjustments have to be made.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
74. A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years
remaining to maturity should sell for
a. $1,000.00.
b. $1,081.11.
c. $798.70.
d. $880.22.
e. none of the above.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.01
STA: DISC.FMAI.MADU.15.01
75. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____
pressure on the required rate of return on bonds.
a. increase; upward; downward
b. decrease; upward; downward
c. decrease; upward; upward
d. increase; upward; upward
e. increase; downward; upward
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
76. An economic announcement signaling ____ economic growth in the future will probably cause bond
prices to ____.
a. weak; decrease
b. strong; increase
c. weak; increase
d. strong; decrease
e. Answers C and D are correct.
ANS: E
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
77. Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a
zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is
a. 0.77.
b. −0.77.
c. −0.90.
d. −1.06.
e. none of the above.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
78. The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price
of the bond to change from $900 to $1,100. The bond price elasticity of this bond is
a.
b.
c.
d.
e.
−0.36.
−0.44.
−0.55.
−0.67.
0.67.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Easy
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
79. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to
maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years.
a. 1.92
b. 1.50
c. 1.90
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
80. A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to
maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.
a. 1.33
b. 1.27
c. 3.24
d. 1.31
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Application
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
81. If investors rely strictly on modified duration to estimate the percentage change in the price of a bond,
they will tend to ____ the price decline associated with an increase in rates and ____ the price
increase associated with a decrease in rates.
a. underestimate; underestimate
b. overestimate; overestimate
c. underestimate; overestimate
d. overestimate; underestimate
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.03
STA: DISC.FMAI.MADU.15.01
82. In the ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long
term to maturity.
a. matching
b. laddered
c. barbell
d. interest rate
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.04
STA: DISC.FMAI.MADU.15.01
83. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different
maturity classes.
a. matching
b. laddered
c. barbell
d. interest rate
e. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.04
STA: DISC.FMAI.MADU.15.01
84. Which of the following is not a factor affecting the market price of a foreign bond held by a U.S.
investor?
a. foreign interest rate movements
b. credit risk
c. exchange rate fluctuations
d. All of the above are factors affecting the market price of a foreign bond.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.05
STA: DISC.FMAI.MADU.15.01
85. When holding other factors constant, increased borrowing by the Treasury can result in a _______
required return and therefore _______ prices on existing bonds.
a. higher; lower
b. higher; higher
c. lower; higher
d. lower; lower
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
86. Holding other factors constant, a higher budget deficit leads to ______ interest rates, and higher
inflationary expectations lead to _______ interest rates.
a. higher; lower
b. higher; higher
c. lower; higher
d. lower; lower
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
87. The credit risk premium tends to be larger for bonds that have longer terms to maturity.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
88. The ____________ was recently established to identify risks in the U.S. financial system and make
regulatory recommendations that could reduce such risks.
a. Financial Risk Assessment Commission
b. Financial Markets Protection Agency
c. Financial Stability Oversight Council
d. Federal Bureau of Financial Markets
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.02
STA: DISC.FMAI.MADU.15.01
89. When the European Central Bank provides credit to a country that is experiencing debt repayment
problems, the ECB commonly:
a. allows the country’s government to conduct its own monetary policy.
b. recommends that the country withdraw from the eurozone.
c. urges the country’s government to increase spending and lower taxes to stimulate the
economy.
d. imposes austerity conditions to enable the government to reduce its budget deficit.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.08.05
STA: DISC.FMAI.MADU.15.01
90. Although the European debt crisis has had substantial effects on European financial markets, the crisis
has been contained and has not affected markets and financial institutions outside Europe.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Bloom's: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.08.05
STA: DISC.FMAI.MADU.15.01
Chapter 12—Market Microstructure and Strategies
1. A ____ order to buy or sell a stock means to execute the transaction at the best possible price.
a. market
b. limit
c. stop-loss
d. stop-buy
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
2. With a ____ order, the investor specifies a purchase price that is above the current market price.
a. market
b. limit
c. stop-loss
d. stop-buy
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
3. When investors buy stock with borrowed funds, this is sometimes referred to as
a. use of proxy.
b. purchasing stock on margin.
c. a margin call.
d. a margin residual claim.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
4. The maintenance margin is the minimum amount of the margin that investors must maintain as a
percentage of the stock's initial purchase price.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
5. Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to
pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if
the investor sells the stock for $55 at the end of one year?
a. 50 percent
b. 30 percent
c. 10 percent
d. 16 percent
e. 8 percent
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
6. When a brokerage firm demands more collateral from investors who have borrowed from the
brokerage firm to buy stocks, it is making a
a. margin call.
b. short sale.
c. proxy fight.
d. hedge.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
7. Which of the following statements is incorrect?
a. In a short sale, investors place an order to sell a stock that they do not own.
b. Investors sell a stock short when they anticipate that its price will rise.
c. When investors sell short, they will ultimately have to provide the stock back to the
investor from whom they borrowed it.
d. Short-sellers must make payments to the investor from whom the stock was borrowed to
cover the dividend payments that the investor would have received of the stock had not
been borrowed.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
8. Program trading
a. is commonly used to reduce the susceptibility of a stock portfolio to stock market
movements.
b. may involve the purchase of stocks that become "underpriced."
c. may involve the sale of stocks that become "overpriced."
d. can be combined with the trading of individual bonds to create portfolio insurance.
e. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
9. You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the
stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would
have been
a. positive.
b. more negative than if you had covered the entire investment with cash.
c. negative, but more favorable than if you had covered the entire investment with cash.
d. zero.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
10. Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after
one year. If Mark does not borrow any money from his brokerage firm, what is the estimated return
on the stock?
a. 30.00 percent
b. −42.86 percent
c. −30.00 percent
d. 42.86 percent
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
11. Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in
the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of
the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the
remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his
brokerage firm, his estimated return on the stock would be ____ percent.
a. 42.86
b. 85.71
c. 73.71
d. 30.00
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
12. Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a
brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells
the stock after one year at a price of $50, what is the return on the stock?
a. 27.60 percent
b. 82.61 percent
c. 76.09 percent
d. 58.70 percent
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
13. The present margin requirement is that at least ____ percent of an investor's invested funds must be
paid in cash.
a. 20
b. 30
c. 40
d. 50
e. none of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
14. An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per
share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the
transaction, she could place a
a. stop-loss order with a specified selling price of $55 per share.
b. stop-buy order with a specified purchase price of $55 per share.
c. stop-loss order with a specified selling price of $45 per share.
d. stop-buy order with a specified purchase price of $45 per share.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
15. The short interest ratio is commonly measured as the number of shares shorted divided by the number
of shares that the firm has repurchased in the last quarter.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
16. Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the
stock.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
17. A short seller
a. anticipates that the price of the stock sold short will increase.
b. earns the difference between what they initially paid for the stock versus what they later
sell the stock for.
c. makes a profit equal to the difference between the original sell price and the price paid for
the stock, after subtracting any dividend payments made.
d. is essentially lending the stock to another investor and will ultimately receive that stock
back from that investor.
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
18. ____ are enforced to restrict the amount of credit extended to customers by stockbrokers.
a. Limit orders
b. Margin requirements
c. Maintenance margins
d. Initial margins
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
19. Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor
purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage
firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the
return on the stock is
a. 60 percent.
b. 44 percent.
c. 30 percent.
d. 69 percent.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
20. Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor
purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after
one year, the stock is sold at a price of $65.25 per share, the return on the stock is
a. 26.5 percent.
b. 28.5 percent.
c. 30.5 percent.
d. 34.5 percent.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
21. The risk of a short sale is that the stock price
a. may decrease over time.
b. will remain the same.
c. may increase over time.
d. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
22. ____ facilitate stock transactions by taking positions in specific stocks.
a. Board members
b. Capstone members
c. Market makers
d. None of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
23. ____ facilitate transactions on a stock exchange by executing stock transactions for their clients.
a. Board members
b. Capstone members
c. Floor brokers
d. None of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
24. The short interest represents the amount of interest that borrowers owe on loans used to purchase
stock.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
25. Which of the following statements is incorrect?
a. Market-makers take positions to capitalize on the discrepancy between the prevailing
stock price and their own valuation of a stock.
b. Market-makers may take the opposite position of uninformed investors and therefore stand
to benefit if their expectations are correct.
c. Market makers are required to purchase the stocks they are assigned for a price existing
when the market opened on any given day.
d. The spread quoted for a given stock may vary among market-makers.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
26. A short-interest ratio of 20 or more indicates that many investors
a. believe that the stock price is currently overvalued.
b. believe that the stock price is currently undervalued.
c. are selling the stock short.
d. both A and C
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
27. Lisa would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in
the coming year. She can either put up the entire amount and purchase the stock, or borrow $35 from
her brokerage firm at an annual interest rate of 12 percent and put up the remainder. She thinks she
can sell the stock for $100 after one year. If she borrows from her brokerage firm, her estimated return
on the stock would be ____ percent.
a. 42.86
b. 85.71
c. 73.71
d. 30.00
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
28. Short-selling a stock refers to
a. poor performance from purchasing an overvalued stock.
b. the new issuance of low-priced stocks by firms.
c. the new issuance of stocks by financially weak firms.
d. the borrowing of stock owned by someone else and selling it in the market.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
29. Trading halts are imposed by
a. the SEC.
b. brokers.
c. stock exchanges.
d. the Treasury.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
30. The size of the spread on stocks that have relatively little trading is
a. smaller to reflect the lower degree of uncertainty.
b. the same as that of stocks with higher volumes of trading.
c. wider to reflect the higher degree of uncertainty.
d. not affected by trading volume.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
31. The ____ the trading volume of a stock, the ____ the spread.
a. higher; wider
b. higher; narrower
c. lower; narrower
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
32. Electronic communications networks are primarily intended to prevent executives from using inside
information when trading stocks.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
33. A ____ is a trading platform on a computer web site that allows investors to trade stocks without the
use of a broker.
a. direct access broker
b. program trader
c. market maker
d. communication network
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
34. The NYSE defines ____as the simultaneous buying and selling of a portfolio of at least 15 different
stocks that are valued at more than $1 million.
a. direct access brokering
b. electronic communication networking
c. program trading
d. regulation of stock trading
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
35. Trading halts are intended to ensure that the market has complete information before trading on news.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
36. The Division of ____ of the SEC regulates the fair and orderly disclosure trading by ensuring honest
practices by various organizations that facilitate the trading of securities.
a. Corporate Finance
b. Enforcement
c. Administration
d. Market Regulation
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
37. The Division of ____ of the SEC assesses possible violations of regulations imposed by the SEC, and
can take action against individuals or firms.
a. Corporate Finance
b. Enforcement
c. Administration
d. Market Regulation
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
38. Until recently, international trading of stocks was limited by
a. transaction costs.
b. information costs.
c. exchange rate risk.
d. all of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.04
STA: DISC.FMAI.MADU.15.02
39. The transaction costs associated with international trading of stocks have been reduced by
a. the consolidation of stock exchanges.
b. extensive computerization.
c. the Eurolist system.
d. all of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.04
STA: DISC.FMAI.MADU.15.02
40. The exchange rate risk associated with international trading of stock has been reduced by
a. information available on the Internet.
b. extensive computerization of stock exchanges.
c. the conversion of many European countries to a single currency.
d. the Eurolist system.
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.04
STA: DISC.FMAI.MADU.15.02
41. A market order is an order to buy or sell a stock at the best possible price.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
42. A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that
is below the current market price of the stock.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
43. When investors place a limit order, they can place it for the day only.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
44. The initial margin is the minimum amount of margin that investors must maintain as a percentage of
the stock's value without receiving a margin call.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
45. A margin call from a broker means that the investor is required to provide more collateral (cash or
stocks) or sell the stock.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
46. When investors sell short, they are essentially lending the stock to another investor and will ultimately
receive that stock back from the investor to whom they lent it.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
47. A relatively high percentage (such as 3 percent) of the ratio of the number of shares sold short divided
by the total number of shares outstanding suggests a large amount of short positions in the market,
which implies that a relatively large number of investors expect the stock's price to decline.
a. True
b. False
ANS: T
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
48. Trading halts are intended to prevent insider trading.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
49. A trading halt prevents a stock from experiencing a loss in response to news.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
50. The SEC's Division of Market Regulation assesses possible violations of the SEC's regulations and
can take action against individuals or firms.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
KEY: Knowledge
51. Regulation Fair Disclosure (FD) requires firms to disclose relevant information first to their most
important clients.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
52. ____ offer advice to customers on stocks to buy or sell.
a. Full-service brokers
b. Discount brokers
c. Floor brokers
d. Specialists
e. Market-makers
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
53. Which of the following statements is incorrect with respect to Regulation Fair Disclosure (FD)?
a. It required firms to disclose relevant information broadly to investors at the same time.
b. It restricts firms from providing analysts with information that they could use before the
market is aware of the information.
c. It requires firms to announce a change in expected earnings to all investors and other
interested parties at the same time.
d. It prohibits firms from communicating with analysts after a news announcement is made
to all investors.
e. All of the above are correct with respect to Regulation FD.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
54. A(n) ____ from a broker requires the investor to put up additional collateral.
a. maintenance margin
b. initial margin
c. margin call
d. trading halt
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
55. The short-interest ratio is the shares sold short divided by the
a. average shares purchased over a recent period.
b. average daily trading volume over a recent period.
c. interest rate paid on the short sale.
d. average daily trading volume on other stocks from the same industry.
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
56. A short seller
a. anticipates that the price of the stock sold short will increase.
b. earns the difference between what he initially paid for the stock versus what he later sell
the stock for.
c. makes a profit equal to the difference between the original selling price and the price paid
for the stock, after subtracting any dividend payments made.
d. is essentially lending the stock to another investor and will ultimately receive that stock
back from that investor.
e. none of the above
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
57. The bid-ask spread is negatively related to
a. order costs.
b. inventory costs.
c. risk
d. trading volume.
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
58. Marziano Co. stock is quoted by a broker as bid $21.20, ask $21.40. The bid-ask spread is ____
percent.
a. 0.94
b. 0.93
c. 0.20
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Application
DIF: Moderate
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
59. Which of the following statements is incorrect with respect to the structure of the SEC?
a. It is composed of seven commissioners appointed by the president of the United States.
b. The president selects one commissioner to chair the commission.
c. Each commissioner serves a five-year term.
d. Commissioners' terms are staggered.
e. Commissioners meet to assess whether existing regulations are successfully preventing
abuses and to revise the regulations as needed.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
60. The SEC's ____ requires the orderly disclosure of securities trades by various organizations that
facilitate the trading of securities.
a. Division of Corporate Finance
b. Division of Market Regulation
c. Division of Enforcement
d. none of the above
ANS: B
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
DIF: Easy
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
KEY: Knowledge
61. The SEC's ____ reviews the registration statement files when a firm goes public, corporate filings for
annual and quarterly reports, and proxy statements that involve voting for board members or other
corporate issues.
a. Division of Corporate Finance
b. Division of Market Regulation
c. Division of Enforcement
d. none of the above
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
62. Under the SEC’s uptick rule, speculators are prohibited from taking a short position in stocks that
have experienced a decline of at least 10 percent for the day, unless the most recent trade resulted in a
decrease in the stock price
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
63. In naked short selling, short-sellers sell a stock short that they presently own.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
64.
DIF: Easy
OBJ: FMAI.MADU.15.12.01
STA: DISC.FMAI.MADU.15.02
Dark pools:
a. are private stock markets used by institutional investors.
b. are stocks issued by firms that have disclosed very limited financial information.
c. are stock option contracts that cover positions in stocks.
d. are contracts used to bet against the default of a debt instrument.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
65. It is not illegal for investors to take positions in a stock based on inside information that they received
from an insider at the company, although it would be illegal for the insider to take a position based on
that information.
a. True
b. False
ANS: F
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
66. When the price of a company’s stock increases or decreases significantly in advance of a public
announcement of an event affecting the company, there are suspicions
that __________ may have occurred.
a.
b.
c.
d.
bid rigging
default inversion
insider trading
an increase in margin requirements
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
67. An advantage of trading in dark pools is that:
a. the bid or ask prices offered can be more favorable than those available in the public stock
exchanges.
b. an investor can accumulate a large number of shares of a particular stock without putting
excessive upward pressure on the stock price.
c. they are convenient for high-frequency traders using computer algorithms to catch price
discrepancies.
d. all of the above
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Comprehension
DIF: Moderate
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
68. A criticism of dark pools is that they:
a. reduce transparency.
b. are more expensive than the public stock exchanges.
c. are not accessible to institutional investors.
d. cannot be used to trade large blocks of stock.
ANS: A
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Easy
OBJ: FMAI.MADU.15.12.02
STA: DISC.FMAI.MADU.15.02
69. Expert networks consisting of managers or executives of a publicly traded company who are hired as
consultants (“experts”) by a hedge fund to provide insight about the company:
a. are illegal under Regulation FD.
b. are legitimate if the consultants divulge only information that is already public.
c. have raised concerns that the consultants provide inside information.
d. B and C
ANS: D
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02
70. To prosecute defendants connected with the Galleon Fund for __________, the government
effectively used wiretap evidence.
a. dark pool trading
b. naked short selling
c. insider trading
d. accounting fraud
ANS: C
PTS: 1
NAT: BUSPROG.FMAI.MADU.15.03
KEY: Knowledge
DIF: Moderate
OBJ: FMAI.MADU.15.12.03
STA: DISC.FMAI.MADU.15.02