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Money and Banking Quiz

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1. Which of the following is not a characteristic of money market instruments?
a. short term to maturity
b. small denominations
c. low default risk
d. high marketability
e. All of the above are characteristics of money market securities.

2. Small investors are likely to invest in the money market through ____.
a. directly; commercial paper
b. locally; their credit union
c. indirectly; negotiable CDs
d. indirectly; money market mutual funds

3. Which statement about Treasury bills is not true?
a. They have maturities less than one year.
b. Most are sold by "book-entry" method.
c. They are sold at a discount.
d. Interest on T-bills is tax-deductible for federal income tax purposes.

4. Federal Funds are typically
a. Treasury deposits.
b. Federal Reserve assets.
c. commercial bank deposits at the Federal Reserve.
d. overnight interbank loans settled in immediately available funds

5. The most common money market instrument utilized in the Fed's open market operations is
a. Federal Funds.
b. commercial paper.
c. Treasury bills.
d. Agency securities.

6. Which of the following money market instruments would typically be used in international transactions?
a. a Treasury bill
b. a banker's acceptance
c. commercial paper
d. a negotiable CD

7. Money market securities have very little
a. default risk.
b. price risk.
c. marketability risk.
d. all of the above.

8. Which of the following money market rates is studied closely for indicators of changes in Federal Reserve monetary policy?
a. Federal Funds
b. Treasury bills
c. commercial paper
d. banker's acceptances

9. The T-bill rate quoted by the Federal Reserve banks is the
a. bank discount rate.
b. the true rate.
c. effective annual rate.
d. bond equivalent rate.
e. the primary rate

10. Federal agency securities have higher yields than Treasury securities because
a. they are less marketable than Treasury securities.
b. they have higher exchange rate risk than Treasuries.
c. they are more affected by interest rate risk.
d. they are associated with mortgages that are riskier securities.
e. Federal agency securities actually have lower yields than Treasury securities.

11. Which of the following is not an example of capital market securities?
a. common stocks
b. convertible bonds
c. commercial paper
d. mortgages

12. The biggest supplier of funds in the capital markets are
e. financial institutions
f. state and local governments
g. federal government
h. households and non-profit organizations

13. A capital market financing is most likely to finance
a. new plant and equipment.
b. seasonal inventory needs.
c. a quarterly dividend payment.
d. the sale of common stock.

14. The fastest growing debt sector in the U. S. is
a. Treasury debt
b. federal agency debt
c. mortgage debt
d. corporate debt

15. Most general obligation bonds are sold through
a. direct placement.
b. negotiated bids.
c. competitive bids.
d. private placement.

16. Which of the following would be least likely to purchase a tax-exempt municipal bond?
a. commercial bank
b. casualty insurance company
c. mutual fund
d. individuals in low tax brackets

17. The largest investor in municipal bonds are
a. property and casualty insurance companies
b. commercial banks
c. households
d. mutual funds
e. pension funds

18. Privately placed securities
a. have to be registered with SEC.
b. never trade in the secondary market.
c. can only be sold to large, sophisticated investors (e.g., financial institutions).
d. cannot be originally sold to less than 35 investors.
e. both c and d.

19. Corporate bonds are less marketable than money market instruments and corporate equities because
a. they have special features (e.g., call provisions) that make them difficult to value.
b. they are long-term securities, which tend to be riskier and less marketable.
c. both a and b
d. Corporate bonds are in fact not less marketable than money market instruments and corporate equities.

20. Credit-rating agency ratings are associated with which of the following investor risks?
a. interest rate risk
b. default risk
c. purchasing power risk
d. reinvestment risk
e. exchange rate risk

21. Which of the following types of mortgages would be most advantageous to have on your house if you expected the annual rate of inflation would be higher than most people thought?
a. reverse annuity mortgage
b. interest-only mortgage - no
c. adjustable-rate mortgage – no
d. fixed-rate mortgage

22. A contract designed to use the equity in a home for retirement income without any required payments is called a(n)
a. rollover mortgage
b. reverse annuity mortgage
c. adjustable-rate mortgage
d. home equity loan

23. The largest sector of the capital debt market is associated with
a. corporate bonds
b. mortgages
c. state and municipal bonds
d. U.S. Treasury debt

24. Which of the following mortgages would you prefer to hold if you were a lender and you expected inflation of uncertain magnitude?
a. reverse annuity mortgages
b. conventional fixed-rate mortgages
c. adjustable-rate mortgage loans
d. balloon payment mortgages

25. Which of the following is not a mortgage-backed security?
a. a jumbo mortgage
b. a Ginni Mae pass-through – yes
c. a collateralized mortgage obligation –yes
d. a real estate mortgage investment conduit (REMIC) – yes
e. All of the above are mortgage-backed securities.

26. A savings and loan writing ARMs and expecting mortgage interest rates to decrease in the future would want
a. an interest rate "cap" on their loans.
b. a second mortgage on the home.
c. to lengthen the "adjusting" time period.
d. no limits on the variability of the rates.

27. Which of the following is not used to adjust ARM rates?
a. Treasury security rates – yes
b. Dow Jones Mortgage Rate Index
c. S&L cost of funds index - yes
d. current fixed-rate mortgage index

28. What is most likely to happen to an ARM in a decreasing rate environment?
a. The borrower's payments will increase.
b. The maturity of the loan will be extended.
c. The principal of the loan will increase.
d. The borrower's payments will decrease.

29. Amortizing a mortgage loan means that
a. a long-term is converted to a short-term loan.
b. the equity in the house declines as the loan is paid down.
c. the loan is repaid in equal, consecutive payments.
d. interest is paid first entirely, and then the principal

30. The Tax Reform Act of 1986 increased the popularity of home equity lines of credit because
a. tax deductibility of interest for homeowners was reduced.
b. interest incurred under home equity lines was made tax deductible, but interest on other household financing was not.
c. banks and savings and loans were given tax incentives to make home equity lines of credit.
d. the law reduced the rates charged on home equity loans.

31. Which of the following is not an example of capital market securities?
a. common stocks
b. convertible bonds
c. commercial paper
d. mortgages

32. Which of the following is not associated with characteristics of common stock?
a. residual claim on income and assets
b. proxy
c. cumulative dividends (associated with preferred stock)
d. dual-class stock

33. Security exchanges provide a valuable function in that they
a. create interest in stocks.
b. increase the marketability of securities.
c. provide a legal way to gamble.
d. supply money to deficit spending units.
e. both a and d

34. The household sector is the largest surplus sector and invests in the capital market
a. directly by purchasing stocks and bonds.
b. directly by issuing assets payable in the capital market.
c. indirectly through mutual funds and pension funds
d. both a and c

35. The sale of securities to the public via an investment banker by a new corporation raising funds is called
a. a seasoned offering.
b. a secondary offering.
c. an initial public offering.
d. a best efforts offering.

36. Which of the following terms is associated with secondary equity markets?
a. seasoned equity offering
b. initial public offering
c. underwriter’s spread
d. bid-ask spread
e. shelf registration

37. Which of the following market participants functions in the primary equity markets?
a. broker
b. specialist
c. underwriter
d. dealer
e. none of the above

38. The New York Stock Exchange is a(n) ________ market.
a. auction
b. exchange
c. secondary
d. all of the above

39. Which of the following statements is true about secondary markets?
a. A buyer may incur search costs and find a seller on their own through a direct search.
b. A broker may bring buyers and sellers together, charging a commission.
c. A dealer may sell and buy securities using his inventory, therefore reducing search costs. The dealer's return is the bid/ask spread.
d. An auction market allocates the selling shares to the highest bidder.
e. All of the above statements are true.

40. The primary federal regulator of stock markets is
a. the Federal Reserve.
b. the Federal National Securities Corporation.
c. the National Association of Securities Dealers (NASD).
d. the Securities Investor Protection Corporation.
e. the Securities and Exchange Commission.

41. The major form of organization for commercial banks in the U.S. is the
a. partnership
b. bank holding company
c. single charter
d. branch

42. All but one of the following is a bank asset.
a. fed funds purchased
b. consumer loans
c. deposits in other banks
d. government securities

43. What balance sheet account of commercial banks is a component of M1?
a. U.S. Treasury deposits
b. deposits in other banks
c. demand deposits
d. certificates of deposit

44. The largest deposit source of funds for commercial banks is
a. time deposits.
b. demand deposits.
c. U.S. Treasury deposits.
d. interest-bearing transaction deposits.

45. Commercial banks are
a. often subsidiaries of bank holding companies – yes
b. the largest category of financial institution
c. the main transmitters of monetary policy – yes
d. all of the above

46. Banker's acceptances are not
a. foreign deposits accepted overseas by branches of American banks.
b. drafts drawn on a bank by a corporation to pay for merchandise.
c. used in international trade.
d. a source of funds for large banks.

47. Banks generate revenue from credit cards from all the following except
a. merchant discount fees
b. sale of credit cards
c. annual fees from credit card customers
d. interest from credit card balances

48. In a standby letter of credit,
a. the bank establishes a liability.
b. the bank substitutes its creditworthiness for that of its customer.
c. the bank assures a loan applicant that credit will soon be granted.
d. the bank pays a customer to guarantee the bank's obligations.

49. A bank expecting interest rates to rise in the future would prefer to make
a. fixed-rate loans
b. long-term, fixed rate loans
c. floating-rate loans adjusted infrequently
d. floating-rate loans adjusted frequently

50. A bank loan manager who is expecting declining interest rate levels over the next several years would encourage loan originators to make
a. variable rate loans.
b. loans closely tied to the prime rate.
c. fixed-rate loans.
d. very short-term loans.

51. Banks have greater liquidity needs than other types of businesses because banks have
a. a high proportion of short-term assets.
b. a low proportion of capital.
c. a high proportion of short-term liabilities and outstanding lines of credit.
d. large amounts of financial assets.

52. Banks are more subject to liquidity failures because they have
a. low capital-to-asset ratios.
b. a large proportion of short-term liabilities.
c. a large proportion of short term loans.
d. extensive short term investments.

53. Risk-based capital ratios measures are associated with which of the following bank risks?
a. interest rate risk
b. liquidity risk
c. credit risk
d. reinvestment risk

54. A bank can fail two ways: inadequate liquidity and
a. inadequate reserves.
b. inadequate liabilities to fund loans.
c. inadequate loans.
d. inadequate capital to absorb losses.

55. A major factor effecting changes in bank industry earnings is (are)
a. changes in loan interest rates.
b. competition from savings and loan associations.
c. credit losses.
d. variation in salaries paid.

56. The major sources of bank liquidity are and ; the major uses are and .
a. loans and deposits; borrowed funds and selling assets
b. borrowed funds and loans; deposits and selling assets
c. selling assets and borrowed funds; loans and deposit withdrawals
d. borrowed funds and loans; securities and deposit withdrawals.

57. Liability liquidity management assumes
a. asset management has been utilized to the fullest extent possible.
b. the bank is adequately capitalized.
c. the bank can finance in money markets at will.
d. primary and secondary reserves are sufficient for any liquidity needs.

58. A bank forecasting a recession is likely to:
a. Increase its concentration ratios.
b. expand its loans to new customers.
c. decrease its concentration ratios.
d. decrease its loan loss reserves.

59. A bank regulator reviewing a bank's risk asset level relative to equity capital is assessing
a. bank solvency.
b. bank liquidity.
c. the quality of the loan portfolio.
d. the GAP position of the bank.

60. A bank that is extremely liquid and solvent is likely to have
a. a large proportion of short-term, marketable securities.
b. a return on assets and equity well above average.
c. a high capital to asset ratio.
d. "a" and "c" above.

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