Chapter 1

Role of Financial Markets and Institutions

1. Financial markets that facilitate the flow of long-term funds with

maturities of more than one year are known as ____________.
a. money markets
b. capital markets
c. primary markets
d. secondary markets
2. Financial markets facilitating the issuance of new securities are
known as ____________.
a. money markets
b. capital markets
c. primary markets
d. secondary markets
3. ____________ are not considered capital market securities.
a. bonds
b. mortgages
c. retail CDs
stocks

d.

4. _________ are financial contracts whose values are obtained from

the values of underlying assets.
a. Bonds
b. Mortgages
c. Stocks
d. Derivatives
5. A bank's ______ quote is slightly higher than its _______ quote.
a. ask; bid
b. bid; ask
c. ask; transaction
d.
transaction; bid
6. In a(n) _________ market, all information about any securities for
sale is continuously and freely available to investors.
a. inefficient
b. efficient
c. perfect
d. imperfect
7. _________ are depository financial institutions.
a. Savings banks
b. Finance companies
c. Mutual funds
d. Securities firms
8. In aggregate, ____________ are the most dominant depository
institution.
a. credit unions
b. savings banks
c. savings and loan associations
d. commercial banks
9. ________ sell shares to surplus units and use the funds received to
purchase a portfolio of securities. They are the dominant non
depository financial institution when measured in total assets.

a. Securities firms
Pension funds

b. Mutual funds

c. Finance companies

d.

10. The main source of funds for ________________ is deposits from

households, businesses, and government agencies, while their main
use of funds is the purchase of government and corporate securities
and mortgages and other loans to households.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies
True/False:
11. The federal government commonly acts as a surplus unit. (False)
12. An investor who holds bonds has partial ownership in a corporation.
(False)
13. When security prices fully reflect all available information, the markets
for these securities are said to be efficient. (True)
14. To prevent overreactions to rumors, so-called circuit breakers are now
used to permanently halt the trading of some securities or contracts. (
)
15. Securities firms can act both as brokers and as dealers. (False)

Chapter 2
Determination of Interest Rates

1. According to the _____________________, market interest rates are

determined by factors that control the supply of and demand for
loanable funds.
a. Fisher effect
b. real interest rate
c. loanable funds theory
d. none of the above
2. From a business point of view, the opportunity cost of investing in
short-term assets is _________ when interest rates are _________.
a. higher; lower b. lower; higher c. higher; higher d. none of the above
3. _________ demand for funds is said to be interest-inelastic, or
insensitive to interest rates.
a. Household
b. Business
c. Federal government
d.
Foreign
4. The __________ interest rates are, the __________ will be the required
return to implement a project, everything else being equal.
a. higher; higher b. lower; higher c. higher; lower d. Answers b and c are
correct.
5. If the aggregate __________ for loanable funds __________ without a
corresponding increase in aggregate _________, there will be a
shortage of loanable funds.
a. supply; increases; demand
b. demand; increases; supply
c. demand; decreases; supply
d. none of the above
6. At any interest rate _______ the equilibrium interest rate, there is a
________ of loanable funds.
a. above; shortage b. below; surplus c. above; surplus d. none of the above
7. The expected impact of an increased expansion by businesses is
an ________shift in the demand schedule and __________ in the supply
schedule.
a. outward; inward
c. outward; outward

b. inward; outward
d. outward; no obvious change

8. If inflation is expected to increase, this would result in an _________

shift in the supply curve of loanable funds and an ________ shift in the
demand schedule for loanable funds.
a. inward; outward
c. outward; outward

b. outward; inward
d. inward; inward

9. If the nominal interest rate is 7%, and the expected inflation rate
is 2%, what is the real interest rate according to the Fisher effect?
a. 9%

b. 5%

c. 2%

d. 7%

10. When the Fed _________ the money supply, there is ________
pressure on interest rates.
a. increases; downward b. increases; upward
c. decreases; downward
d. none of the above
11. A __________ federal government deficit _________ the quantity of
loanable funds demanded at any prevailing interest rate.
a. higher; increases
b. higher; decreases
c. lower; increases
d. none of the above
True/False:
12. The quantity of loanable funds supplied is normally expected to be more
elastic, meaning more sensitive to interest rates, than the quantity of
loanable funds demanded. (
)
13. The Fed controls the amount of reserves held by depository institutions
and can influence the amount of savings that can be converted into loanable
funds. (
)
14. The equilibrium interest rates is the rate that equates the aggregate
demand for funds with the aggregate supply of loanable funds. (
)
15. If the nominal interest rate was equal to the expected inflation rate, the
real interest rate would be zero. (
)
16. If the federal government is willing to supply as many funds as desired
by the market, this impact is known as the crowding-out effect. (
)

Chapter 3
Structure of Interest Rates
1. Which of the following statements is true with respect to debt securities?
a. Some types of debt securities always offer a higher yield than others.b.
Debt securities offer very similar yield even if they exhibit
differentcharacteristics that influence the offered yield.c. In general,
securities with favorable characteristics will offer higher yieldsto entice
investors.d. All of the above are true with respect to debt securities.2. Which
of the following is not a characteristic affecting the yields on debtsecurities?
a. default riskb. dividend yieldc. tax statusd. term to maturity3. Some
investors will __________ for a _______ degree of liquidity.
a. accept a lower return; lowb. require a higher return; highc. accept a lower
return; highd. Answers b and c are correct.4. Consider a taxable security that
offers a before-tax yield of 13 percent. If the taxrate of an investor is 30
percent, the after-tax yield on the security will be ________percent.a. 13.0b.
16.9c. 30.0d. 9.15. An investor is aware of a tax-free security that offers a
yield of 5 percent. Theinvestor is in the 20 percent tax bracket. What is the
equivalent before-tax yieldnecessary to match the after-tax yield of the taxexempt security?
a. 5.0 percentb. 6.3 percentc. 20.0 percentd. 4.0 percentd curve indicates that
Treasury securities with ______________ maturities offerhigher annualized
yields.
a. upward sloping; shorterb. upward sloping; longerc. downward sloping; longerd.
flat; longer7. A(n) _________________ allows the issuer of bonds to buy the
bonds backbefore maturity at a specified price.a. call featureb. convertibility
clausec. debentured. The bond rating helps investors to assess the
creditworthiness of thesecurity issuer.
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8. Which of the following money market securities has the highest yield?
a. commercial paperb. Treasury billsc. eurodollar depositsd. none of the
above9. The theory used to explain the term structure of interest rates which
states thatthe preference for more liquid short-term securities placed upward
pressure on theslope of the yield curve is thea. pure expectations theory.b.
liquidity premium theory.c. segmented markets theory.d. preferred habitat
theory.10. According to the pure expectations theory, if interest rates are
expected toincrease, there is __________ pressure on the yield of short-term
funds, and theyield curve should be ______________ sloping.
a. upward; upwardb. upward; downwardc. downward; upwardd. downward;
downward11. The annualized yield on a three-year security is 11 percent; the
annualized two-year interest rate is 10 percent, while the one-year interest
rate is 8 percent. Theone-year ahead forward rate is _________ percent.
a. 1.9b. 14.1c. 12.0d. none of the above12. Assume the one-year forward
rate is 12.0 percent. The annualized yield on athree-year security is 11
percent; the annualized two-year interest rate is 10percent, while the oneyear interest rate is 8 percent. Based on this information, thetwo-year ahead
forward rate is _________ percent.
a. 1.9b. 13.1c. 10.0d. none of the above13. The _________________ theory
suggests that investors and borrowers normallyconcentrate on a particular
natural maturity market.a. pure expectationsb. liquidity premiumc.
segmented marketsd. preferred habitat14. Credit risk is particularly relevant
for short-term securities.
a. Trueb. False15. Investors will require a higher yield on securities that
contain the convertibilityfeature, other things being equal.a. Trueb. False
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16. If liquidity influences the yield curve, the forward rate overestimates
themarket's expectation of the future interest rate.
a. Trueb. False17. Some analysts believe that flat or inverted yield curves
indicate a recession inthe near future.

a. Trueb. False
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7. An investor purchases 270-day commercial paper with a par value of

$2,000,000for a price of $1,960,000. The yield is ______ percent.a. 2.76b.
2.67c. 2.72cd. none of the above8. Which of the following financial
institutions does not frequently participate inrepurchase agreements?a.
banksb. savings and loan associationsc. money market fundsd. All of the
above frequently participate in repos. d9. __________ are the most active
participants in the federal funds market.a. Savings banksb. Investment
banksc. Large corporationsd. Commercial banks10. If short-term interest
rates decline, the required rate of return on money marketsecurities will
________, and the values of money market securities will _________.a. increase;
declineb. decline; increasec. decline; declined. increase; increase d11. Which
of the following securities probably has the lowest degree of default risk?a.
Treasury billab. negotiable certificate of depositc. banker's acceptanced. all
of the above have the same degree of default risk12. _________ have the
highest degree of interest rate risk.a. Fixed-rate eurodollar CDsab. Eurodollar
floating-rate CDs (FRCDs)c. Floating-rate eurodollar loansd. All of the above
are affected equally by an increase in interest rates.13. The yield of a newly
issued Treasury bill that is held to maturity will always belower than the
Treasury bill discount.a. Trueab. False14. Commercial paper is a short-term
debt instrument issued only by well-known,credit-worthy firms and is
typically unsecured.a. True b. False15. When firms sell their commercial
paper at a lower price than projected, their costof raising funds will be higher
than they initially anticipated.a. True b. False16. There is an active secondary
market for repos.a. Trueb. False
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17. During periods of heightened uncertainty about the economy, investors

tend toshift from risky money market securities to Treasury securities.a.
True b. False
Chapter 7
Bond Markets
1. Which of the following statements is correct?a. Federal agency bonds are
issued by the Treasury.b. Municipal bonds are issued by the federal
government.c. Corporate bonds are issued by corporations.d. All of the above are
correct.2. Investors in Treasury notes and bonds receive _______ interest
payments fromthe Treasury.a. quarterlyb. semiannualc. annuald. none of the
above3. __________ bids are often used at auctions because many bidders
want topurchase more Treasury bonds than the maximum that can be
purchased otherwise.a. Competitiveb. Noncompetitivec. Averaged. none of
the above4. (Financial calculator required.) An investor can purchase a bond
with ten yearsremaining until maturity, a par value of $1,000, and a 7
percent annual coupon ratefor $1,050. The yield to maturity is _____
percent.a. 6.31b. 7.00c. 3.16d. none of the above5. The bid price for a bond
with a $100,000 par value is quoted as 110:11. Thus, thebid price for the
bond is __________.a. $110,688b. $110,344c. $111,375d. none of the above6.
Stripped securities:a. were originally created by securities firms in the early
1980s.b. are issued by the Treasury.c. have to be held until maturity.d. all of
the above
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7. Which of the following is not an issuer of federal agency bonds?a.

Government National Mortgage Association (Ginnie Mae)b. Federal Home
Loan Mortgage Association (Freddie Mac)c. Federal National Mortgage
Association (Fannie Mae)d. All of the above are issuers of federal agency
bonds.8. Payments on __________ bonds are supported by the municipal
government'sability to tax.a. general obligationb. revenuec. treasuryd.
corporate9. The requirement that a firm retire a certain amount of the bond
issue each year isthe _____________.a. indentureb. call provisionc. sinkingfund provisiond. convertibility clause10. A _________ is secured by personal
property.a. first mortgage bondb. chattel mortgage bondc. debentured.
subordinated debenture11. The popularity of junk bonds in the 1990s
declined because of:a. allegations of insider trading against some
participants in the junk bondmarket.b. financial problems in the thrift

industry.c. increased regulation.d. all of the above.12. Callable bonds are

_______ likely to be called when interest rates _________.a. less; declineb.
more; declinec. more; increased. none of the above13. Registered bonds
require the owner to clip coupons attached to the bonds andsend them to
the issuer to receive coupon payments.a. Trueb. False14. Treasury bonds are
registered over-the-counter, but the secondary markettrading occurs at the
New York Stock Exchange.a. Trueb. False15. Common purchasers of
corporate bonds include many financial and somenonfinancial institutions, as
well as individuals.a. Trueb. False16. Investors in zero-coupon bonds are
taxed annually on the amount of interestearned, even though much or all of
the interest will not be received until maturity.a. Trueb. False
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11. __________ is the simultaneous buying and selling of a portfolio of

differentstocks that are in the S&P 500 index and have an aggregate value of
more than $1million.a. Short sellingb. Margin tradingc. Program trading d. none
of the above12. When collars are imposed, program trading that reflects a
buy order is allowedonly when the last movement in the stock's price was:a.
zero.b. an uptick. c. a downtick.d. program trading is always allowed when
collars are imposed.13. The SEC's Division of Market Regulation:a. reviews
the registration statement files when a firm goes public.b. requires the
orderly disclosure of securities trades by various organizationsthat facilitate
the trading of securities.cc. assesses possible violations of the SEC's
regulations and can take actionagainst offenders.d. none of the above14.
True or False? A direct access broker is a broker that facilitates trades for his
orher customers.a. True.b. False.15. True or False? Circuit breakers are
restrictions on trading when stock prices or astock index reaches a specified
threshold level.a. True. b. False.
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Chapter 13
Financial Futures Markets
1. The Commodity Futures Trading Commission (CFTC):a. established and
enforces rules for the trading of financial futures contracts.b. provide an
organized marketplace where futures contracts can be traded.c. clear, settle,
and guarantee all transactions that occur on any exchange.d. approves
futures contracts before they can be listed by futures exchanges. 2. _________
execute orders for their customers.a. Commission brokersb. Floor tradersc.
Localsd. none of the above3. ________ take positions to reduce their exposure
to future movements in interestrates or stock prices.a. Speculatorsb.
Hedgersc. Day tradersd. Position traders4. If there are more traders with ______
offers than ______ offers for a particularcontract, the futures price will _______
until this imbalance is removed.a. sell; buy; riseb. buy; sell; fallc. buy; sell;
rised. none of the above5. An unexpected increase in the consumer price
index tends to create expectationsof higher interest rates and places ________
pressure on bond prices and ________pressure on Treasury bond futures
prices.a. downward; upwardb. downward; downwardc. upward; upwardd. upward;
downward6. An increase in the government deficit would result in a(n)
________ in interestrates and a(n) ________ in Treasury bond futures prices.a.
increase; decreaseb. decrease; increasec. increase; increased. decrease;
decrease7. In July, Jerry McGuire expects that interest rates will increase over
the nextmonth. Thus, Bolder calls a broker and sells a Treasury bill futures
contract for101.00. Assume that the price of T-bills as of the September
settlement date is99.00. What is the nominal profit or loss (in dollars) from
Jerry's speculativestrategy?a. $20,000 gainb. $20,000 lossc. $2,000 gaind.
$2,000 loss
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8. Refer to question 7. Assume instead that interest rates had decreased

from July toSeptember, and that the price of T-bills as of the September
settlement date is102.00. Jerry's gain or loss would be _________.a. a $10,000
gainb. a $10,000 lossc. a $1,000 gaind. a $1,000 loss9. Two months ago, a
private investor purchased a futures contract on Treasurybonds at a price of
101-08. The investor just closed out the position by sellingTreasury bond
futures. Currently, these futures contracts trade at 102-17. Theinvestor's
nominal profit is $________. (Hint: The par value of the futures contract
is$100,000.)a. 1,090.00 profitb. 1,090.00 lossc. 1,528.75 profitd. 1,528.75

loss10. An insurance company is concerned that interest rates will decline

over the nexttwo months. However, the insurance company would like to
invest $5 million inTreasury bonds in two months. To hedge against the
potential decrease in interestrates, the company should _______ Treasury
bond futures contracts.a. sell 50b. buy 50c. sell 500d. buy 50011. In crosshedging, when the futures contract is highly correlated with the
portfoliobeing hedged, the value of the futures contract changes by:a. a
higher percentage than the portfolio's market value.b. a lower percentage
than the portfolio's market value.c. the same percentage as the portfolio's
market value.d. either a higher percentage, a lower percentage, or the same
percentage asthe portfolio's market value.12. John Doe would like to
purchase S&P 500 index futures contracts. The S&P 500 iscurrently at a level
of 1,200. What is the value of the S&P 500 index futurescontract?a. $1,200b.
$120,000c. $240,000d. $300,00013. A private investor would like to invest in
the stock market via S&P 500 futurescontracts. The investor purchases
futures when the S&P 500 index is at 1,150. At thesettlement date, the S&P
500 index is at 1,210. The investor's profit or loss is$_______.a. 15,000
profit b. 15,000 lossc. 6,000 profitd. 6,000 loss
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8. Using indirect intervention, the Fed could attempt to ________ interest rates
byreducing the money supply to place _______ pressure on the dollar's
value.a. increase; upwardb. increase; downwardc. decrease; upwardd.
decrease; downward9. Time-series models that examine moving averages,
and thus allow forecasters todevelop some rule, are most useful in which
type of forecasting?a. technicalb. fundamentalc. market-basedd. none of the
above10. Which of the following method(s) is (are) not used for forecasting
exchange ratevolatility?a. the volatility of historical exchange rate
movements as a forecast for thefutureb. time series of volatility patterns in
previous periodsc. deriving the exchange rate's implied standard deviationd.
All of these are methods for forecasting exchange rate volatility.11. To
speculate on an anticipated depreciation of a foreign currency, an
investorwould take a _______ position in dollars and a ______ position in the
foreigncurrency.a. short; shortb. long; longc. short; longd. long; short12.
Currency __________ are standardized contracts that specify an amount of
aparticular currency to be exchanged on a specified date and at a specified
exchangerate.a. forward contractsb. futures contractsc. swapsd. options
contracts13. A system with no boundaries in which exchange rates are

market determined butare still subject to government intervention is called a

dirty float.a. True.b. False.14. Central bank intervention may not always
succeed in reversing exchange ratemovements.a. True.b. False.15. The
forward market is a visible location.a. True.b. False.
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Chapter 17
Commercial Bank Operations
1. Which of the following is not a source of funds for commercial banks?a.
transaction depositsb. bonds issued by the bankc. investment in securitiesd.
eurodollar borrowings2. ______ deposits are deposits that cannot be
withdrawn until a specified maturitydate.a. Transactionb. Savingsc. Money
marketd. Time 3. _________ is not a time deposit.a. Negotiable order of
withdrawal (NOW) accountb. Certificate of deposit (CD)c. Bull-market CDd.
Callable CD4. The ________ the demand by banks to borrow federal funds
relative to a smallsupply of excess funds available at other banks, the _______
the federal funds rate.a. higher; higherb. lower; higherc. higher; lowerd. none
of the above5. ___________ represent the sale of securities by one party to
another with anagreement to repurchase the securities at a specified date
and price.a. Federal funds borrowedb. Eurodollar borrowingc. Repurchase
agreements d. none of the above6. A bank's reported earnings per share are
_________ when additional shares of stock are issued, unless earnings
increase by a _________ proportion than theincrease in outstanding shares.a.
reduced; smallerb. reduced; greaterc. increased; smallerd. increased;
greater7. A _________ loan is a self-liquidating loan designed to support
ongoing businessoperations.a. termb. bulletc. working capital d. direct lease
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8. The interest rate charged by banks on loans to their most creditworthy

customersis known as the ______ rate.a. federal fundsb. prime c. discountd.
none of the above9. Which of the following types of securities do banks not
invest in?a. treasury securitiesb. federal agency securitiesc. investmentgrade securitiesd. Banks invest in all of the above.10. All types of loans make
up between ________ of bank assets.a. 20 and 30 percentb. 30 and 40 percentc.
40 and 50 percentd. 50 and 70 percent11. ________ are an obligation by a bank
to provide a specified loan amount to aparticular firm upon the firm's
request.a. Consumer loansb. Standby letters of creditc. Loan commitmentsd.
Forward contracts12. Banks commonly borrow in the federal funds market
rather than through thediscount window, even though the federal funds rate
is typically higher than thediscount rate.a. True.b. False.13. Highly leveraged
transactions (HLTs) are typically used to support initial publicofferings
(IPOs).a. True.b. False.14. In an interest rate swap, two parties agree to
periodically exchange interestpayments on a specified notional amount of
principal.a. True.b. False.
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9. ________ funds focus on a group of companies sharing a particular

characteristic.a. Growthb. Indexc. Specialtyd. Growth and income10. A(n)
_________ fund invests in a portfolio of different mutual funds.a. multifundb.
incomec. tax-freed. Internet11. _____________ is(are) clearly the dominant
asset maintained by mutual funds.a. Preferred stockb. Common stockc.
Corporate bondsd. Treasury bonds12. Most studies that assess mutual fund
performance find that mutual funds:a. outperform the market.b. perform the
same as the market.c. underperform the market.d. none of the above.13.
From an investor's viewpoint, money market funds have a _____ level of
creditrisk and a ______ level of interest rate risk.a. high; highb. low; lowc. low;
highd. high; low14. Investors share the gains or losses generated by a
mutual fund.a. True.b. False.15. The net asset value (NAV) computation
ignores dividends.a. True.b. False.16. A mutual fund's performance is usually
closely related to market conditions.a. True.b. False.17. Equity REITs invest in
mortgage and construction loans.a. True.b. False.
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Chapter 25
Securities Operations
1. Investment banking firms (IBFs):a. originate common stock.b. underwrite
stock issues.c. advise firms through the origination stage.d. IBFs do all of the
above.2. The __________ discloses relevant financial data about a firm and
provisionsapplicable to the security.a. registration statementb. prospectusc.
best-efforts agreementd. none of the above3. Flotation costs as a percentage
of the value of securities issued are _____ for ______ issues.a. lower; largerb.
lower; smallerc. higher; largerd. none of the above4. When arbitrage firms
accumulate shares of targets with the expectation that thetarget would be
willing to buy their shares back at a premium, this tactic is knownas:a. asset
stripping.b. a leveraged buyout.c. greenmail.d. a bridge loan.5. Requests by
customers to purchase or sell securities at the market price existingwhen the
order reaches the exchange floor are called _______ orders.a. marketb. limitc.
stop-lossd. none of the above6. The ________ regulates the issuance of
securities and specifies disclosure rulesfor the issuers.a. National Association
of Securities Dealers (NASD)b. Securities and Exchange Commission (SEC)c.
Federal Reserve Boardd. New York Stock Exchange7. Securities firms are subject
to _______ risk.a. marketb. interest ratec. creditd. all of the above
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8. The market value of bonds held as investments by securities firms ________

asinterest rates _______.a. increases; declineb. increases; increasec.
decreases; increased. Answers a and c are correct.9. Some __________ were
organized by securities firms.a. commercial banksb. insurance companiesc.
mutual fundsd. pension funds10. IBFs do not participate in the _______
market.a. moneyb. bondc. mortgaged. IBFs participate in all of the above.11.
Leveraged buyouts are typically financed using:a. common stock.b. money
market securities.c. junk bonds.d. preferred stock.12. The private placement of
bonds avoids the underwriting fee.a. True.b. False.13. A common form of
arbitrage is asset stripping.a. True.b. False.14. Investors can speculate on

expectations of an increase in securities prices byshort selling.a. True.b.

False.15. An advantage of a private placement is that the demand is stronger
than for apublicly placed issue.a. True.b. False.4. While the primary market
provides ________ for spenders, the secondary marketprovides ________ for
investors.
a. funds; liquidityb. a place for investing; liquidityc. funds; low risk
d. securities; funds