Finaance quiz - Copy of Quizzes PDF

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True or False? The financial system is a close network of independent markets. (False) True or False? Asymmetric information occurs when one party knows more about an economic transaction or asset than the other party does. (True) Financial markets can be categorized or grouped by: (d. all of the above) a. issuance (primary vs. secondary markets) b. type of instrument (stock, bond, derivative) c. market organization (exchange or OTC). d. all of the above True or False? Financial instruments can be grouped by time to maturity (money vs. capital) or type of obligation (stock, bond, derivative). (True) True or False? Borrowers want to obtain funds as expensive as possible and on repayment terms as flexible as possible. (False) How is the supply of gold described? (b. inelastic) a. elastic b. inelastic True or False? One dollar today is worth more than one dollar tomorrow. ( True)

What is the currency of Switzerland? (b. Swiss franc) a. euro b. Swiss franc c. Swiss pound d. Swiss dollar What is the role of a finance company? (c. make loans) a. depose money b. offer saving plans c. make loans d. offer life insurance What is liquidity risk? (d. risk due to a sudden surge in liability withdrawals) a. risk due to changes in interest rates b. risk due to exchange rates c. risk to technological investments d. risk due to a sudden surge in liability withdrawals True or False? Bonds are priced by calculating the sum of the promised payments. (False) A $100 bond payable in a year sells for $97.56. What is the yield to maturity? (d. none of the above)

a. 2.10%

b. 2.12%

c. 2.39%

d. none of the above

True or False? In normal circumstances, Yield to Maturity is always positive. (True)

True or False? Bonds with longer periods to maturity have more volatile prices. (True) According to the Fisher Equation, (d. both a & b are correct) a. nominal interest equals real interest plus inflation b. real interest equals nominal interest minus inflation c. none of the above d. both a & b are correct True or False? Wealth, returns, and liquidity are negatively related to demand; risk is inversely related to demand. (False) Deficits cause governments to: (a. issue bonds) a. issue bonds b. issue bonds with 10-year maturity c. issue bonds with 2-year maturity True or False? The three major risks are default, liquidity, and after-tax return. (True) Sam promises to pay Joe $1,904 in a year if Joe gives him $1,498 today. What interest rate is Sam paying? (b. 27.11%) a. 29.11%

b. 27.11%

c. 25.41%

d. 23.41%

True or False? Markets may be classified as weak-form efficiency, semi-strong efficiency, or strong-form efficiency. (True) The efficient-market hypothesis was developed by: (c. Eugene Fama) a. John Maynard Keynes b. Adam Smith c. Eugene Fama True or False? In weak-form efficiency, future prices can be predicted by analyzing prices from the past. (False) True or False? In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. (True) Which of the following explains why most external finance is channeled through intermediaries? (d. All of the above) a. Transaction Costs b. Asymmetric Information c. Free-rider problem d. All of the above True or False? Asymmetric information increases the efficiency of financial markets. (False)

True or False? Transaction costs are the only reason why institutional intermediaries dominate external finance. (False)

What should be the price of a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? (d. $43.75) a. $22.86

b. $28.00

c. $42.00

d. $43.75

What constant growth rate in dividends is expected for a stock valued at $37.82 if a $4.00 dividend has just been paid and the discount rate is 15%? ( b. 4.00%) a. 4.42%

b. 4.00%

c. 7.50%

d. 8.00%

If the next year's dividend is forecast to be $5.00, the constant growth rate is 4%, and the discount rate is 16%, then the current stock price should be: (c. $41.67) a. $31.25

b. $40.00

c. $41.67 d. $43.33

True or False? Banks issue short term liabilities but buy long term assets. (True) Banks have sufficient net worth or equity capital to maintain a cushion against bankruptcy or regulatory attention but not so much that the banks are unprofitable . This trade-off is called: (b. Capital adequacy management) a. Liquidity management b. Capital adequacy management c. Asset management True or False?

Credit risk is the chance that a borrower will default on a loan by not fully meeting stipulated payments on time. (True) Which of the following is correct? (c. Assets = Liabilities + Equity a. Assets=Liabilities - Equity b. Liability= Assets + Equity c. Assets = Liabilities + Equity If interest rates increase 3% and the average duration of a bank's $100 million in assets is 4 years, the value of those assets will fall by: (d. $12.000.000) a. $3.000.000

b. $4.000.000

c. $1.000.000

d. $12.000.000

True or False? A basic interest rate risk reduction strategy when interest rates are expected to fall is to keep the duration of liabilities long and the duration of assets short. (False) True or False? Off-balance sheet activities help banks manage their interest rate risk. (True) True or False? Lobbying is a type of innovation where bankers and other financiers try to change regulations. (True)

Duration gap is used by banks to: (d. measure their risk due to changes in the interest rates) a. measure the credit risk b. measure the technology risk c. measure their risk due to changes in the inflation d. measure their risk due to changes in the interest rates

Federal Reserve Banks generate money income from: a. interest earned on government securities

a. interest earned on government securities b. mortgages c. real estate True or False? Federal Reserve banks operate as profit organizations. False The Federal Reserve System is divided into c. 12 Federal Reserve districts a. 16 Federal Reserve districts b. 50 Federal Reserve districts c. 12 Federal Reserve districts True or False? According to the Public Interest Model, government tries to enact laws, regulations, and policies that benefit the public. True What is the Leverage Ratio if Assets are $1000 and Capital is $150? c. 15% a. 11%

b. 12%

c. 15%

True or False? The most highly leveraged investors suffer most. True True or False? Central bank independence is a measure of how free from government influence central bankers are. True

City Bank currently has $400 million in transaction deposits on its balance sheet. The current reserve requirement is 10%. What are the reserve assets that City Bank should has? b. $40 million a. $36 million

b. $40 million c. $4 million

True or False? Central banks are responsible for the collection and the replacement of currency from circulation. True True or False? The Federal Reserve does not hold Treasury Gold. False True or False? Money supply is determined by the Federal Reserve. False True or False? By purchasing bonds the Federal Reserve increases the monetary base. True True or False? The simple deposit multiplier assumes that banks hold no excess reserves and that the public holds no currency. True True or False? M2 is always greater than M1. False True or False? Central Banks cannot influence MB via loans to banks and Open Market Operations. False

The Taylor Rule is: b. an equation a. a commitment b. an equation c. a FED directive What is the Over the Counter market? b. a decentralized market not listed in an exchange a. a stock exchanges b. a decentralized market not listed in an exchange c. FEDs foreign exchange market What is PPP? a. the one price law in all economies a. the one price law in all economies b. the rule under which every country determines its own price True or False? In the short run exchange rates are determined by Purchasing Power Parity. False Money base is: a. currency in circulation plus reserves a. currency in circulation plus reserves b. currency in circulation c. reserves True or False? To keep exchange rates fixed, the central bank must either restrict capital flows or give up its control over the domestic money supply, interest rates, and price level. True

True or False? There are three major types of fixed exchange rate regimes . False When central banks buy international reserves, MB: a. Increases a. Increases b. Decreases c. Is neutral Friedman's modern quantity theory proved itself superior to Keynes's liquidity preference theory because: c. is more complex a. Friedman was a better economist b. is simplest c. is more complex True or False? The IS curve shows the points at which the quantity of goods supplied equals those demanded. True True or False? The LM curve traces the equilibrium points for equal interest rates where the quantity of money demanded equals the quantity of money supplied. False True or False? The IS-LM model's biggest drawback is that it doesn't consider changes in the investment level. False

the LM curve shifts right when the money supply: a. Increases a. Increases b. decreases c. remains stable True or False? The AD curve represents IS-LM equilibrium points, that is, equilibrium in the market for both goods and money. True True or False? Central banks influence the FX rate via unsterilized foreign exchange interventions. True True or False? The aggregate demand (AD) curve is the total quantity of final goods and services demanded at same price levels. False The AD curve is negatively related to: d. T a. MS

b. C

c. I

d. T

True or False? Supply shocks, both positive and negative, shift the AS curve. True True or False? The ASL is the amount of output that is obtainable in the short run given the available labor, technology, and physical capital set. False

True or False? The aggregate supply (AS) curve is the total quantity of final goods and services supplied at different price levels. True True or False? The growth diamond is a model of economic growth being developed by economic historians at the Harvard Business School. False True or False? Financial shocks and crises affect the real economy by decreasing asymmetric information. False How can central bankers increase their credibility? a. make their central banks more independent

a. make their central banks more independent b. induce the government to increase budget deficits True or False? The monetarists showed that there is a strong correlation between changes in the MS and changes in Y and also proffered timing, statistical, and historical evidence of a causal link. True True or False? The new Keynesian model is more pessimistic about curbing inflation. True The LM curve shifts right when the money supply: a. Increases a. Increases b. decreases c. remains stable...