FIN4303 Financial Markets and Institutions

Quiz 1

 

 

Question 1

7.69 / 7.69 pts

Bonds that are sold in a foreign country and are denominated in that country’s currency are known as

Foreign bonds.

Eurobonds.

Eurocurrencies.

Eurodollars.

 

 

Question 3

7.69 / 7.69 pts

Which of the following are secondary markets?

The New York Stock Exchange

The U.S. government bond market

The over-the-counter stock market

The options markets

All of the above

 

 

Question 4

7.69 / 7.69 pts

Loans

are the largest category of bank assets.

provide most of the bank’s revenues.

earn a good return of all bank assets.

do each of the above.

do only A and B of the above.

 

 

Question 5

7.69 / 7.69 pts

Because checking accounts are _________ liquid for the depositor than saving accounts, they earn _________ interest rates.

less; higher

less; lower

more; higher

more; lower

 

 

Question 6

7.69 / 7.69 pts

When a $10 check written on the First National Bank is deposited in an account at the Second
National Bank, then

the liabilities of the First National Bank decrease by $10.

the reserves of the First National Bank increase by $10.

the liabilities of Second National Bank decrease by $10.

the assets of Second National Bank decrease by $10.

 

 

Question 7

7.69 / 7.69 pts

The stock market is important because

it is where interest rates are determined.

it is the most widely followed financial market in the United States.

it is where foreign exchange rates are determined.

all of the above.

 

 

Question 8

7.69 / 7.69 pts

Which of the following can be described as involving direct finance?

A corporation’s stock is traded in an over-the-counter market.

A corporation buys commercial paper issued by another corporation.

A pension fund manager buys commercial paper from the issuing corporation.

Both A and B of the above.

Both B and C of the above.

 

 

Question 9

7.69 / 7.69 pts

If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of

$1.2 million.

$1.1 million.

$1 million.

either A or B of the above.

 

 

Question 10

7.69 / 7.69 pts

A rising stock market index due to higher share prices

increases people’s wealth and as a result may increase their willingness to spend.

increases the amount of funds that business firms can raise by selling newly issued stock.

decreases the amount of funds that business firms can raise by selling newly issued stock.

both A and B of the above.

 

 

Question 11

7.69 / 7.69 pts

Financial markets and institutions

involve the movement of huge quantities of money.

affect the profits of businesses.

promote a more efficient and dynamic economy.

do all of the above.

do only A and B of the above.

 

 

Question 12

7.69 / 7.69 pts

A country whose financial markets function poorly is likely to

efficiently allocate its capital resources.

enjoy high productivity.

experience economic hardship and financial crises.

increase its standard of living.

 

 

Question 13

7.72 / 7.72 pts

Which of the following are reported as assets on a bank’s balance sheet?

Cash items in the process of collection

Deposits with other banks

Checkable deposits

Bank capital

Only A and B of the above

 

 

Quiz 2

 

 

 

Question 1

8.33 / 8.33 pts

Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of

fraudulent claims.

moral hazard.

adverse selection.

pecuniary purchases.

 

 

Question 2

8.33 / 8.33 pts

Market timing

takes advantage of time differences between the east and west coasts of the United States.

takes advantage of arbitrage opportunities in foreign stocks.

takes advantage of the time lag between the receipt and execution of orders.

is discouraged by the stiff fees mutual funds charge every investor for buying and then selling shares on the same day.

 

 

Question 3

8.33 / 8.33 pts

The largest share of life insurance companies’ assets are

corporate stock.

corporate bonds.

government securities.

cash reserves.

 

 

Question 4

8.33 / 8.33 pts

Late trading is the practice of allowing orders received _________ to trade at the _________ net asset value.

before 4:00 pm; 4:00 pm

after 4:00 pm; 4:00 pm

after 4:00 pm; next day’s

before 4:00 pm; previous day’s

 

 

Question 5

8.33 / 8.33 pts

Stock 3 announces record earnings, and the price of stock 3 jumps to $32.44 in after-market trading. If the fund (illegally) allows investors to buy at the current NAV, how many shares will $25,000 buy? If the fund waits until the price adjusts, how many shares can be purchased? What is the gain to such illegal trades? Assume 5,000 shares are outstanding.

On January 1st, the shares and prices for a mutual fund at 4:00 pm are: 

128.034 shares, 126.813 shares, $234.20.

150.234 shares, 135.333 shares, $500.00.

200.000 shares, 180.000 shares, $700.00.

232.242 shares, 211.136 shares, $326.32.

 

 

Question 6

8.33 / 8.33 pts

The problem of _________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.

asymmetric information

moral hazard

adverse selection

fraudulent behavior

 

 

Question 8

8.33 / 8.33 pts

Insurance management tools that give policyholders incentives to avoid accidents insured against include

deductibles.

risk-based premiums.

coinsurance.

all of the above.

 

 

Question 9

8.33 / 8.33 pts

The net asset value of a mutual fund is

determined by subtracting the fund’s liabilities from its assets and dividing by the number of shares outstanding.

determined by calculating the net price of the assets owned by the fund.

calculated every 15 minutes and used for transactions occurring during the next 15-minute interval.

calculated as the difference between the fund’s assets and its liabilities.

 

 

Question 10

8.33 / 8.33 pts

Most mutual funds are structured in two ways. The most common structure is a(n) _________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. A(n) _________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market.

closed-end; open-end

open-end; closed-end

no-load; closed-end

no-load; load

load; no-load

 

 

Question 11

8.33 / 8.33 pts

Which of the following is a feature of index funds?

They have lower fees.

They select and hold stocks to match the performance of a stock index.

They do not require managers to select stocks and decide when to buy and sell.

All of the above.

 

 

Question 12

8.37 / 8.37 pts

Which of the following is true of life insurance companies?

They primarily hold long-term assets that are not particularly liquid.

They primarily hold short-term liquid assets.

Payouts to policyholders are relatively predictable.

Both A and C of the above.

 

 

Quiz 3

 

 

 

Question 1

10 / 10 pts

A 10-year, 7% coupon bond with a face value of $1,000 is currently selling for $871.65. Compute your rate of return if you sell the bond next year for $880.10.

R=0.09 or 9%

R=0.08 or 8%

R=0.06 or 6%

R=0.05 or 5%

 

 

Question 2

10 / 10 pts

Which of the following $1,000 face value securities has the highest yield to maturity?

A 5 percent coupon bond selling for $1,000

A 10 percent coupon bond selling for $1,000

A 12 percent coupon bond selling for $1,000

A 12 percent coupon bond selling for $1,100

 

 

Question 3

10 / 10 pts

Which of the following are generally true of all bonds?

The longer a bond’s maturity, the lower is the rate of return that occurs as a result of the increase in an interest rate.

Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise.

Prices and returns for long-term bonds are more volatile than those for shorter-term bonds.

All of the above are true.

Only A and B of the above are true.

 

 

Question 4

10 / 10 pts

Investment banks sell _________ securities to the public, and brokerage firms sell _________ securities to the public.

new; existing

new and existing; existing

existing; new

existing; new and existing

 

 

Question 5

10 / 10 pts

In a _________ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive, but agrees to sell the securities on a commission basis.

best-effort

brokered

private-placement

jump-start

 

 

Question 6

10 / 10 pts

Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently selling for $1,150 and has 8 years to maturity. What is the bond’s yield to maturity?

I=7.44

I=8.25

I=9.01

I=6.43

 

 

Question 7

10 / 10 pts

In which of the following situations would you prefer to be making a loan?

The interest rate is 9 percent and the expected inflation rate is 7 percent.

The interest rate is 4 percent and the expected inflation rate is 1 percent.

The interest rate is 13 percent and the expected inflation rate is 15 percent.

The interest rate is 25 percent and the expected inflation rate is 50 percent.

 

 

Question 8

10 / 10 pts

Which is a description of a private equity firm?

Public shares are retired.

A public company goes private.

The firm is no longer subject to controls and oversight required of publicly held companies.

All of the above.

 

 

Question 9

10 / 10 pts

A bond has a duration of 2.83 years and the current price of the bond is $973.76. Calculate the expected price change if interest rates drop to 6.75% using the duration approximation. Assume that all current market interest rates are 7%.
[Hint: Dollar change in bond price is (the percentage change in bond price) x (the current bond price).]

3.22

9.32

6.44

5.23

 

 

Question 10

10 / 10 pts

The process of underwriting a stock or bond issue requires that the investment bank

assure investors that the issue will provide them a high return.

arrange financing for companies by finding investors to buy newly issued securities.

purchase the entire issue at a predetermined price and then resell it in the market.

do both B and C of the above.

 

 

Quiz 4

 

 

 

Question 1

6.66 / 6.66 pts

Lower expected interest rates in the future _________ the demand for long -term bonds and shift the demand curve to the _________

increase; left.

increase; right.

decrease; left.

decrease; right.

 

 

Question 2

6.66 / 6.66 pts

Debt issued by Southeastern Corporation currently yields 12%. A municipal bond of equal risk currently yields 8%. At what marginal tax rate would an investor be indifferent between these two bonds?

Tax Rate ??0.33

Tax Rate = 0.52

Tax Rate = 0.21

Tax Rate = 0.76

 

 

Question 4

6.66 / 6.66 pts

If the yield curve slope is flat, the liquidity premium theory indicates that the market is predicting

a mild rise in short-term interest rates in the near future and a mild decline further out in the future.

constant short-term interest rates in the near future and further out in the future.

a mild decline in short-term interest rates in the near future and a continuing mild decline further out in the future.

constant short-term interest rates in the near future and a mild decline further out in the future.

 

 

Question 5

6.66 / 6.66 pts

Which of the following long-term bonds should have the lowest interest rate?

Corporate Baa bonds

U.S. Treasury bonds

Corporate Aaa bonds

Municipal bonds

 

 

Question 6

6.66 / 6.66 pts

When the interest rate on a bond is below the equilibrium interest rate, there is excess _________ in the bond market and the interest rate will _________.

demand; rise

demand; fall

supply; fall

supply; rise

 

 

Question 7

6.66 / 6.66 pts

According to the expectations theory of the term structure,

the interest rate on long-term bonds will exceed the average of expected future short-term interest rates.

interest rates on bonds of different maturities move together over time.

buyers of bonds prefer short-term to long-term bonds.

all of the above.

only A and B of the above.

 

 

Question 8

6.66 / 6.66 pts

When the price of a bond is above the equilibrium price, there is excess _________ in the bond market and the price will _________.

demand; rise

demand; fall

supply; fall

supply; rise

 

 

Question 9

6.66 / 6.66 pts

When the demand for bonds _________ or the supply of bonds _________, interest rate rise.

increases; increases

increases; decreases

decreases; decreases

decreases; increases

 

 

Question 10

6.66 / 6.66 pts

In a recession when income and wealth are falling, the demand for bonds _________ and the demand curve shifts to the _________.

falls; right

falls; left

rises; right

rises; left

 

 

Question 11

6.66 / 6.66 pts

Factors that cause the demand curve for bonds to shift to the left include

an increase in the inflation rate.

an increase in the liquidity of stocks.

a decrease in the volatility of stock prices.

all of the above.

none of the above.

 

 

Question 12

6.66 / 6.66 pts

When people begin to expect a large stock market decline, the demand curve for bonds shifts to the _________ and the interest rate _________.

right; falls

right; rises

left; falls

left; rises

 

 

Question 13

6.66 / 6.66 pts

If Moody’s or Standard and Poor’s downgrades its rating on a corporate bond, the demand for the bond _________ and its yield _________.

increases; decreases

decreases; increases

increases; increases

decreases; decreases

 

 

Question 14

6.66 / 6.66 pts

The liquidity premium theory of the term structure

indicates that today’s long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond.

assumes that bonds of different maturities are perfect substitutes.

suggests that markets for bonds of different maturities are completely separate.

does none of the above.

 

 

Question 15

6.76 / 6.76 pts

1-year T-bill rates are expected to steadily increase by 150 basis points per year over the next 6 years. Determine the required interest rate on a 3-year T-bond and a 6-year T-bond if the current 1-year interest rate is 7.5%. Assume that the Pure Expectations Hypothesis for interest rates holds. [Hint: 1 basis point = 0.01%]

3-year T-bond: 9.0%, 6-year T-bond: 11.25%

3-year T-bond: 11.25%, 6-year T-bond: 9.0%

3-year T-bond: 5.6%, 6-year T-bond: 9.0%

3-year T-bond: 9.0%, 6-year T-bond: 5.6%

 

 

 

Quiz 5

 

 

 

Question 1

10 / 10 pts

Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis.

currency

stock market

Correct!

banking

commodities

 

 

Question 2

10 / 10 pts

Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period

usually beat the market in the next time period.

usually beat the market in the next two subsequent time periods.

usually beat the market in the next three subsequent time periods.

Correct!

usually do not beat the market in the next time period.

 

 

Question 3

10 / 10 pts

According to the efficient market hypothesis, the advantage of a “buy-and-hold strategy” is that

Correct!

net profits will tend to be higher because there will be fewer brokerage commissions.

losses will eventually be eliminated.

the longer a stock is held, the higher will be its price.

only B and C of the above are true.

 

 

Question 4

10 / 10 pts

Which of the following led to the U.S. financial crisis of 2007-2009?

financial innovation in mortgage markets

agency problems in mortgage markets

low interest rate

all of the above

Correct!

only A and B of the above

 

 

Question 5

10 / 10 pts

In an advanced economy, a financial crisis can begin in several ways, including:

mismanagement of financial liberalization or innovation.

asset price booms and busts.

an increase in uncertainty caused by failure of financial institutions.

Correct!

all of the above.

 

 

Question 6

10 / 10 pts

Stage Three of a financial crisis in an advanced economy features

a general increase in inflation.

Correct!

debt deflation.

an increase in general price levels.

a full-fledged financial crisis.

 

 

Question 7

10 / 10 pts

According to the efficient market hypothesis, the current price of a financial security

is the discounted net present value of future interest payments.

is determined by the highest successful bidder.

Correct!

fully reflects all available relevant information.

is a result of none of the above.

 

 

Question 8

10 / 10 pts

According to the efficient market hypothesis

one cannot expect to earn an abnormally high return by purchasing a security.

information in newspapers and in the published reports of financial analysts is already reflected in market prices.

unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities.

all of the above are true.

Correct!

only A and B of the above are true.

 

 

Question 9

10 / 10 pts

Stage Two of a financial crisis in an emerging market economy usually involves a ________ crisis.

Correct!

Currency

Stock Market

Banking

Commodities

 

 

Question 10

10 / 10 pts

In an emerging market economy, there are typically two paths to a financial crisis: financial liberalization/globalization and ________.

asset pricing bubbles

Correct!

severe fiscal imbalances

a global financial crisis

none of the above

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