Professional Documents
Culture Documents
Chapter 1
True/False Questions
1. Primary markets are markets where users of funds raise cash by selling securities to funds suppliers.
2. Secondary markets are markets used by corporations to raise cash by issuing securities for a short time
period.
3. In a private placement, the issuer typically sells the entire issue to one or only a few institutional buyers.
6. Money markets are the markets for securities with an original maturity of 1 year or less.
7. Eurodollar bonds are dollar denominated bonds issued outside the United States.
9. As of 2001, the dollar amount of outstanding money market securities was substantially greater than the
dollar amount of capital market securities.
10. A transaction that involves the exchange of currencies at a specified date in the future at terms agreed
upon today is known as a forward foreign exchange transaction.
11. An individual buying an AT&T corporate bond in the secondary market is an example of a direct
finance.
12. A bank incurs credit risk when its loans have a longer maturity than its deposits.
IBM creates and sells additional stock to the investment banker, Morgan Stanley. Morgan Stanley then resells
the issue to the U.S. public.
16. As measured by total assets, the largest three private U.S. intermediaries are:
A) banks, thrifts and insurers
B) banks, insurers and investment companies
C) insurers, thrifts and pension funds
D) Securities dealers, thrifts and banks
E) Mortgage companies, investment companies and pension funds.
17. Advantages of putting your money in a bank deposit instead of directly buying capital market securities
typically include
A) Delegated monitoring
B) Better liquidity
C) Less price risk
D) All of the above
E) None of the above
19. New Age Banking (NAB) recently invested heavily in Internet technology in order to offer on line
services to corporate and individual customers. So far, only two corporate customers and very few
individuals have begun using their Internet services. In addition, NAB lost an entire corporate payroll
last month. These are examples of:
A) Credit risk and market risk
B) Country risk and insolvency risk
C) Technological risk and operational risk
D) Liquidity risk and interest rate risk
E) None of the above
20. _________ and __________ allow a financial intermediary to offer safe, liquid liabilities such as
deposits while investing the depositors money in riskier, illiquid assets.
A) Diversification ; high equity returns
B) Price risk ; collateral
C) Free riders ; regulations
D) Monitoring ; diversification
E) Primary markets ; foreign exchange markets
22. Match the intermediary with the characteristic that best describes its function.
I. Provide protection from adverse events
II. Pool funds of small savers and invest in either money or capital markets
III. Provide consumer loans and real estate loans funded by deposits
IV. Accumulate and transfer wealth from work period to retirement period
V. Underwrite and trade securities and provide brokerage services
1. Thrifts
2. Insurers
3. Pension funds
4. Securities firms and investment banks
5. Mutual funds
A) 1, 3, 2, 5, 4
B) 4, 2, 3, 5, 1
C) 2, 5, 1, 3, 4
D) 2, 4, 5, 3, 1
E) 5, 1, 3, 2, 4
23. As of 2001, in dollar terms, U.S. investors held over ___________ trillion in foreign financial assets and
foreign investors held over __________ trillion in U.S. financial assets.
A) $7.6 ; $6.5
B) $6.5 ; $7.6
C) $3.2 ; $5.2
D) $8.1 ; $5.5
E) $5.5 ; $8.1
24. Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market
security, even though the intermediary invests in risky illiquid instruments because:
A) FIs can diversify away some of their risk
B) FIs closely monitor the riskiness of their assets
C) The federal government requires them to do so
D) Both a) and b)
E) Both a) and c)
29. Many households place funds with financial intermediaries (FIs) because many FI accounts provide
A) Lower denominations than money market securities
B) Better liquidity and less price risk than direct securities
C) Shorter maturities than direct securities
D) All of the above
E) None of the above
30. In the U.S., savings institutions must concentrate their assets in __________ lending.
A) mortgage
B) commercial
C) consumer
D) government
E) money market
31. Depository institutions (DIs) play an important role in the transmission of monetary policy from the
Federal Reserve to the rest of the economy because
A) Loans to corporations are part of the money supply
B) Bank and thrift loans are tightly regulated
C) U.S. DIs compete with foreign financial institutions
D) DI deposits are a major portion of the money supply
E) Thrifts provide a large amount of credit to finance residential real estate
Chapter 2
True/False Questions
1. The real interest rate is the increment to purchasing power that the lender earns in order to induce him or
her to forego current consumption.
2. At a peak in economic activity the term structure usually switches from a downward slope to flat.
3. A monthly interest rate of 1% is equivalent to a 12% annual interest rate with annual compounding.
4. In simple interest calculations the interest earned is never added to the principle.
5. Cash flows of $500 in one month, $500 in 3 months and $500 in 6 months comprise an annuity.
6. You just won a lottery that has a present value of $20 million. However, you will actually receive 20
annual installment payments over the next 20 years, beginning in one year. If the interest rate is greater
than zero you can expect each installment to be less than $1 million.
7. Everything else equal, the present value of a given future cash flow will increase if you use a higher
interest rate while the future value of a given amount of cash received today will decrease if you use a
higher interest rate.
8. Holding everything else equal, for a given N year annuity, the higher the interest rate the greater the
future value of the annuity and the lower the present value of the annuity.
9. If you buy a single payment security you will receive interest in 6 months and at maturity.
10. Everything else equal, a bond equivalent yield will be greater than an effective annual yield
12. The greater is household wealth, the greater the amount of loanable funds they demand, ceteris paribus.
13. An increase in the perceived riskiness of investments would cause a movement up along the supply
curve.
14. Ceteris paribus, a decline in the government budget deficit would tend to increase U.S. interest rates.
17. An improvement in economic conditions would likely shift the supply curve down and to the right and
shift the demand curve for funds up and to the right.
18. The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is
called default risk.
19. The nominal rate less the DRP is the real rate.
20. Default risk premiums on investment grade debt typically increase during economic slowdowns.
21. Everything else equal, the interest rate on a callable bond will be less than the interest rate on a
convertible bond.
22. The term structure of interest rates is the relationship between interest rates on bonds similar in terms
except for maturity.
23. The unbiased expectations hypothesis of the term structure posits that long term interest rates are
unrelated to expected future short term rates.
24. The traditional liquidity premium theory states that long term interest rates are greater than the average
of expected future interest rates.
25. According to the market segmentation theory short term investors will not normally switch to
intermediate or long term investments.
26. An investment pays, $950 in one year, X amount of dollars in two years and $450 in 3 years. The total
present value of all the cash flows (including X) is equal to $2000. If it is 9%, what is X?
A) $817.16
B) $749.68
C) $780.95
D) $927.86
E) $600.00
28. A 10 payment annual annuity has its first payment in 6 years. The investment has a current value today
of $50,000. What is the payment amount (to the penny) if the interest rate is 12%?
A) $15,364.55
B) $8,849.21
C) $14,490.25
D) $17,651.20
E) $15,595.33
29. You borrow $95 today for six and a half weeks. You must repay $100 at loan maturity. What is the
effective annual rate on this loan?
A) 50.73%
B) 40.00%
C) 32.33%
D) 27.95%
E) 37.93%
30. If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N = FV, the i you get will be
A) The bond equivalent yield
B) The EAR
C) The TOE
D) The EYE
E) The rate per compounding period
31. An annuity and an annuity due with the same number of payments have the same future value if r =
10%. Which one has the higher payment?
A) They both must have the same payment since the future values are the same
B) There is no way to tell which has the higher payment
C) An annuity and an annuity due cannot have the same future value
D) The annuity has the higher payment
12 Saunders, Financial Markets and Institutions, 2/e
Chapter 1 Introduction
32. You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have
decreased. The yield decreases may perhaps be explained by which one of the following:
A) A decrease in U.S. inflationary expectations
B) Newly expected decline in the value of the dollar
C) An increase in current and expected future returns of real corporate investments
D) Decreased Japanese purchases of U.S. Treasury Bills/Bonds
E) Increases in the U.S. Government budget deficit
33. To the nearest basis point what is the expected interest rate on a one year AA zero coupon bond
purchased eight years from today?
A) 9.47%
B) 10.15%
C) 9.41%
D) 10.56%
E) 0.12%
37. Upon graduating from college this year you expect to earn $25,000 per year. If you get your MBA, in
one year you can expect to start at $35,000 per year. Over the year, inflation is expected to be 5%. In
today's dollars, how much additional (less) money will you make from getting your MBA (to the
nearest dollar) in your first year?
A) -$2,462
B) $8,333
C) $8,750
D) $9,524
E) $10,000
39. If a $10,000 par T-Bill has a 9.5% discount and a 180 day maturity, what is the price of the T-Bill?
14 Saunders, Financial Markets and Institutions, 2/e
Chapter 1 Introduction
A) $9,050
B) $9,525
C) $9,532
D) $9,675
E) None of the above
40. A 90 day T-Bill is selling for $9,825. The par is $10,000. The EAR on the T-Bill is
A) 7.00%
B) 7.22%
C) 7.29%
D) 7.42%
E) 7.54%
41. Suppose that $10 million face value commercial paper with a 270 day maturity is selling for $9.5
million. What is the EAR on the paper?
A) 5.26%
B) 7.11%
C) 7.32%
D) 9.45%
E) None of the above
43. An investor wants to be able to buy 4% more goods and services in the future in order to induce her to
invest today. During the investment period prices are expected to rise by 2%. Which statement(s)
below is/are true.
I. 4% is the desired real rate of interest
II. 6% is the approximate nominal rate of interest required
III. 2% is the expected inflation rate over the period
A) I only
B) II only
C) III only
D) I and II only
E) I, II and III are true
44. Classify each of the following in terms of their effect on interest rates (increase or decrease):
I. Perceived risk of financial securities increases
II. Near term spending needs decrease
III. Future profitability of real investments increases
A) I increases, II increases, III increases
B) I increases, II decreases, III decreases
C) I decreases, II increases, III increases
D) I decreases, II decreases, III decreases
E) None of the above
45. Classify each of the following in terms of their effect on interest rates (increase or decrease):
I. Covenants on borrowing become more restrictive
II. The Federal Reserve increases the money supply
III. Total household wealth increases
A) I increases, II increases, III increases
B) I increases, II decreases, III decreases
C) I decreases, II increases, III increases
D) I decreases, II decreases, III decreases
E) None of the above
46. Inflation causes the demand curve for loanable funds to shift to the _____ and causes the supply curve to
shift to the _____.
A) Right; right
B) Right; left
C) Left; left
D) Left; right
47. An individual desires to earn a real return of 3%. Prices are expected to rise over the investment period
by 4%. The investor has a federal tax rate of 28% and state and local tax rate of 6%, what is the
investor's expected after tax rate of return?
A) 7.006%
B) 10.61%
C) 5.04%
D) 4.62%
E) 6.58%
Chapter 3
True/False Questions
1. If interest rates increase, the value of a fixed income contract decreases and vice versa.
2. At equilibrium a security's required rate of return will be less than its expected rate of return.
Saunders, Financial Markets and Institutions, 2/e 17
Answer: False Page: 63-64 Level: Easy
3. If a security's realized return is negative it must have been true that the expected return was greater than
the required return.
4. If the present value of a security's cash flows is below its current market price the security is
undervalued.
5. The required rate of return is the interest rate that equates the current market price of the bond with the
present value of all future cash flows received.
6. A bond with an 8% coupon and a 10% required return will sell at a premium to par.
7. A bond with a 10% coupon and an 8% required return will sell at a discount from par.
9. The duration of a four year maturity 10% coupon bond is less than four years.
10. The longer the time to maturity the lower the security's price sensitivity to an interest rate change, ceteris
paribus.
11. The greater a security's coupon the lower the security's price sensitivity to an interest rate change.
12. For a given interest rate change, a 20 year bond's price change will be twice that of a 10 year bond's
price change.
13. Any security that returns a greater percentage of the price sooner is less price volatile.
15. A coupon bond with a 3.5 year duration has the same price volatility as a 3.5 year maturity zero coupon
bond.
17. The interest rate used to find the fair present value of a financial security is the
A) Expected rate of return
B) Required rate of return
C) Realized rate of return
D) Realized yield to maturity
E) Current yield
18. A security has an expected return greater than its required return. This security is
A) Selling at a premium to par
B) Selling at a discount to par
C) Selling for more than its FPV
D) Selling for less than its FPV
E) A zero coupon bond
19. A bond that you held to maturity had a realized return of 8%, but when you bought it, it had an expected
return of 6%. If no default occurred, which one of the following must be true?
A) The bond was purchased at a premium to par
B) The coupon rate was 8%
C) The required return was greater than 6%
D) The coupons were reinvested at a higher rate than expected
E) The bond must have been a zero coupon bond
20. You would want to purchase a security if P _____ FPV or Err _____ rrr.
A) ,
B) ,
C) ,
D) ,
21. A 6 year annual payment corporate bond has a market price of $1050. It pays annual interest of $100
and its required rate of return is 9%. By how much is the bond mispriced?
A) $0.00
B) Overpriced by $5.14
C) Underpriced by $5.14
D) Overpriced by $11.32
E) Underpriced by $11.32
22. A 10 year corporate bond pays $75 interest semiannually. What is the bond's price if the required return
is 7%?
A) $1175.32
B) $1181.47
C) $1035.53
D) $1052.97
E) $1222.18
23. A corporate bond has a coupon rate of 10% and a required return of 10%. This bond's price is
A) $924.18
B) $1000.00
C) $879.68
D) $1124.83
E) Not possible to determine from the information given
25. An 8 year annual payment corporate bond has a required return of 10% and a 9% coupon. Its market
value is $15 over its FPV. What is the bond's Err?
A) 10.11%
B) 9.85%
C) 9.71%
D) 10.23%
E) 8.73%
26. Corporate Bond A returns 5% of its cost in PV terms in each of the first five years and 75% of its value
in the sixth year. Corporate Bond B returns 8% of its cost in PV terms in each of the first five years and
60% of its cost in the sixth year. If A and B have the same required return, which of the following is/are
true?
I. Bond A has a bigger coupon than Bond B
II. Bond A has a longer duration than Bond B
III. Bond A is less price volatile than Bond B
IV. Bond B has a higher FPV than Bond A.
A) III only
B) I, III and IV only
C) I, II and IV only
D) II and IV only
E) I, II, II and IV are all true
27. A corporate bond returns 6% of its cost (in PV terms) in the first year, 5% in the second year, 4% in the
third year and the remainder in the fourth year. What is the bond's duration in years?
A) 3.68 years
B) 2.50 years
C) 4.00 years
D) 3.75 years
E) 3.88 years
28. If an N year security recovered the same percentage of its cost in PV terms each year the duration would
be
A) N
B) 0
C) N/2
D) N!/N2
E) None of the above
29. The _____ the coupon and the _____ the maturity; the _____ the duration of a bond, ceteris paribus.
A) Larger, longer, longer
B) Larger, longer, shorter
C) Smaller, shorter, longer
D) Smaller, shorter, shorter
E) None of the above
30. A 4 year maturity 12% coupon annual payment corporate bond with a required rate of return of 12% has
a duration of (years):
A) 3.05
B) 2.97
C) 3.22
D) 3.71
E) 3.40
32. A 10 year maturity coupon bond has a 6 year duration. An equivalent 20 year bond with the same
coupon has a duration
A) Equal to 12 years
B) Less than 6 years
C) Less than 12 years
D) Equal to 6 years
E) Greater than 20 years
33. A six year maturity bond has a five year duration. Over the next year maturity will decline by 1 year
and duration will decline by
A) Less than one year
B) More than one year
C) 1 year
D) N years
E) N/(N-1) years
34. A bond has a 6% required return. Interest rates are projected to rise 25 basis points. The bond's
duration is 5 years. What is the predicted price change?
A) 1.18%
B) 4.71%
C) 1.25%
D) 1.25%
E) 1.18%
37. For large interest rate increases, duration _____ the fall in security prices and for large interest rate
decreases, duration _____ the rise in security prices.
A) Overpredicts, overpredicts
B) Overpredicts, underpredicts
C) Underpredicts, overpredicts
D) Underpredicts, underpredicts
E) None of the above
Chapter 4
True/False Questions
1. Federal Reserve interest rate decisions can be vetoed by the U.S. President or the Congress.
2. The FOMC is responsible for supervising and regulating depository institutions and foreign exchange
traders.
4. The discount rate is usually set about 50 basis points above the target Fed Funds rate.
5. There are 10 Federal Reserve Districts throughout the U.S., each one headed by a Federal Reserve Bank.
6. The major asset of the Federal Reserve is currency outside banks, and the major liability is U.S.
Treasury securities.
7. All nationally charted banks are required to join the Federal Reserve System, state chartered banks may
choose to join the Federal Reserve or not.
8. Federal Reserve Board members are appointed by the U.S. President and confirmed by the Senate for a
non-renewable 14 year term.
9. If the FOMC wished to generate faster economic growth, they could issue a policy directive to the
Federal Reserve Board Trading desk to purchase U.S. government securities.
10. Open market operations are the purchase and sale of U.S. government and federal agency securities.
11. The primary policy tool used by the Fed to meet its monetary policy goals is:
A) Changing the discount rate
26 Saunders, Financial Markets and Institutions, 2/e
Chapter 1 Introduction
14. The _____________ is a network linking over 6000 banks with the Federal Reserve that is used to
transfer deposits and make loan payments between participants.
A) Fedwire
B) ACH
C) CHIPS
D) NASDAQ
E) SWIFT
15. Ceteris paribus, if the Fed was targeting the quantity of money supplied and money demand dropped the
Fed would likely ______________. If the Fed was instead targeting interest rates and money demand
dropped the Fed would likely _______________.
A) increase the money supply, do nothing.
B) do nothing, decrease the money supply.
C) decrease the money supply, do nothing.
D) do nothing, increase the money supply.
E) increase the money supply, decrease the money supply.
16. Which of the following is the major monetary policy making body of the U.S. FRS?
A) FOMC
B) OCC
C) FRB bank presidents
D) U.S. Congress
E) Group of ten
19. Given the current economic conditions in Japan, the Bank of Japan is likely to engage in
A) Contractionary monetary policy
B) Expansionsary monetary policy
C) Zero inflation monetary policy
D) Fiscal spending to improve the economy
E) Cutting the government budget deficit.
22. The Fed has traditionally offered three types of discount window loans. _____ credit is offered to small
institutions with demonstrable patterns of financing needs, _____ credit is offered for short term
temporary funds outflows, and _____ credit may be offered to institutions with more severe liquidity
problems.
A) Seasonal; extended; adjustment
B) Extended; adjustment; seasonal
C) Adjustment; extended; seasonal
D) Adjustment; seasonal; extended
E) Seasonal; adjustment; extended
25. Bank A has an increase in deposits of $10 million dollars and reserve requirements are 10%. Bank A
loans out 90% of the increase. This amount winds up deposited in Bank B. Bank B lends out 90%, and
this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these
three banks?
A) $10.00 million
B) $19.00 million
C) $22.33 million
D) $27.10 million
E) $30.00 million
26. The Fed changes reserve requirements from 10% to 8%, thereby creating $450 million in excess
reserves. The total change in deposits (with no drains) would be
A) $486 million
B) $5.625 billion
C) $0.489 billion
D) $3.795 billion
E) None of the above
29. If the Federal Reserve were to buy dollars by selling yen the result would be to _____ the supply of U.S.
dollars and _____ the exchange rate in terms of the number of yen per U.S. dollar.
A) Increase, lower
B) Increase, raise
C) Decrease, lower
D) Decrease; raise
30. From October 1983 to July 1993 the Federal Reserve targeted
A) Fed funds rate
B) Borrowed reserves
C) Nonborrowed reserves
D) M1
E) M3
Chapter 5
True/False Questions
1. The money market is necessary because for most entities cash inflows do not occur in the same pattern
as cash expenses.
2. Money markets exist to help reduce the opportunity cost of holding cash balances.
3. The majority of money market securities are low denomination, low risk investments designed to appeal
to individual investors with excess cash.
5. Commercial paper, negotiable certificates of deposit and bankers acceptance rates are all quoted as
discount yields.
7. T-Bills have no default risk and virtually no liquidity risk, so their rate of return is the riskless time value
of money.
9. The largest secondary money market in the U.S. is the secondary market for T-Bills.
10. The bond equivalent yield of a T-bill will be greater than its discount yield.
11. Money market securities must have which of the following characteristics?
I. Low trading costs
II. Little price risk
III. High rate of return
IV. Life greater than one year
A) I and III
B) II and IV
C) III and IV
D) I and II
E) I, II and III
15. A time draft payable to seller of goods, with payment guaranteed by a bank is
A) Commercial paper
B) T-Bills
C) Repurchase agreement
D) Negotiable CD
E) Banker's acceptance
16. In the T-Bill auction process the competitive bidder is guaranteed a _____ and a noncompetitive bidder
is guaranteed a _____.
A) Minimum price; maximum price
B) Maximum price; minimum price
C) Maximum price; given quantity
D) Minimum price; maximum quantity
E) None of the above
19. The discount yield on a T-Bill differs from a bond equivalent yield (BEY) because
A) The discount yield is a percentage of face value instead of price
B) A 360 day year is used on the discount yield instead of 365 days
C) The discount yield is without compounding, the BEY is with compounding
D) Both A and B
E) A, B and C are all reasons for the difference
20. The typical spread on prime quality commercial paper and medium grade commercial paper has been
about ______ basis points.
A) 200
B) 22
C) 33
D) 86
E) 12
22. All but which one of the following statements about commercial paper is true? Commercial paper
A) Is an unsecured short term promissory note
B) Has a maximum maturity of 270 days
C) Is virtually always rated by at least one ratings agency
D) Has no secondary market
E) Carries above prime interest rates
23. A negotiable CD
A) Is a bank issued transactions deposit
B) Is a registered instrument
C) Is a bank issued time deposit
D) Has denominations ranging from $50,000 to $10 million
E) Pays discount interest
24. A 90 day $1 million CD has a 4% annual rate quote. If you buy the CD, how much will you collect in 90
days?
A) $1,040,000
B) $1,009,863
C) $1,000,000
D) $1,015,012
E) $1,010,000
29. LIBOR is generally _____ the Fed funds rate because foreign bank deposits are generally _____ than
domestic bank deposits
A) Greater than; less risky
B) Less than; more risky
C) The same as; equally risk
D) Greater than; more risky
E) Less than; less risky
30. A U.S. exporter sells $50,000 of furniture to a Latin American importer. The exporter requires the
importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 90 day
note at a 6% discount. What is the exporter's true effective annual financing cost (EAR)?
A) 6.00%
B) 6.18%
C) 6.32%
D) 6.24%
E) 6.45%