1.The U.S. Treasury issues bonds where the return is indexed to the consumer price index. We should expect that these bonds, relative to other U.S. Treasury bonds, will have:

A. lower price and lower return due to the decreased risk.

B. lower price and a lower fixed return since the demand for them should be higher.

C. higher price and higher fixed return since we always seem to have some inflation.

D. higher price and lower return due to the decreased risk from inflation in holding these bonds.

2.U.S. government bonds that provide for bondholders to receive a fixed rate of interest plus the change in the consumer price index were designed to remove:

A. default risk.

B. liquidity risk.

C. inflation risk.

D. interest-rate risk.

3.Default risk is the risk associated with:

A. the bond issuer not being able to make the promised payments.

B. the illiquidity associated with small issues.

C. the effect on bond prices caused by changes in market rates of interest.

D. changes in the expected inflation rate.

4.Which of the following would lead to an increase in bond supply?

A. A decrease in government spending relative to revenue.

B. An increase in corporate taxes.

C. A deterioration in general business conditions.

D. An improvement in general business conditions.

5.An inverted yield curve is a valuable forecasting tool because:

A. the yield curve usually is inverted so it reflects a growing economy.

B. the yield curve seldom is inverted and can signal an economic slowdown.

C. inverted yield curves signal better economic times are expected.

D. none of the above.

6.The market for bonds is initially described by the supply of bonds - S0, and the demand for bonds - D0, with the equilibrium price and quantity being P0 and Q0. An increase in the nation's wealth, all else constant, would cause the

A. Bond supply curve to shift to S1.

B. Bond demand curve to shift to D1.

C. Bond supply curve to shift to S2.

D. Bond demand curve to shift to D2.

7.Interest on most bonds issued by states is usually exempt from:

A. state income tax but not federal.

B. from federal income tax but not state.

C. both state and federal income taxes.

D. from city income taxes.

8.Bonds with the same tax status and ratings:

A. always have the same yield.

B. can have different yields due to different maturities.

C. should sell for the same price.

D. none of the above

9.Which of the following is not typically used for qualifying mortgages as prime or subprime?

A. The borrower's income

B. The borrower's credit score

C. The borrower's ethnicity

D. none of the above

10.Suppose the tax rate is 25% and the taxable bond yield is 8%. What is the equivalent tax-exempt bond yield?

A. 2%

B. 2.3%

C. 6%

D. 6.9%

11.The Nasdaq Composite Index:

A. is made of mainly newer, smaller firms

B. is a price-weighted index

C. is made up of over 5000 companies traded on the NYSE

D. is made of mainly older firms and is heavily weighted by manufacturing

12.Stock market bubbles impact consumers by:

A. encouraging greater consumption and greater saving.

B. encouraging greater consumption and less saving.

C. encouraging more work and delaying retirement.

D. none of the above.

13.Index funds are often preferred to other mutual funds because:

A. they offer greater diversification.

B. they are managed better.

C. they have greater liquidity.

D. on average they have lower management fees.

14.Mutual funds are characterized by the fact that they all:

A. have the same management fee set by regulation.

B. require the same minimum investment of $10,000.

C. provide some degree of diversification.

D. provide the same degree of liquidity.

15.People who claim to have the ability to accurately predict the future prices of stocks:

A. are strong advocates of the theory of efficient markets.

B. should be looked at with skepticism, unless they have information not available to others.

C. are unusually lucky, and should be listened to intently.

D. are always psychologists.

16.Often a bank will require a loan officer to make personal visits on customers with loans outstanding. This is encouraged because:

A. the bank worries about another bank trying to steal their customers.

B. the bank wants to make sure the business is busy.

C. this is an effective monitoring technique and should reduce moral hazard.

D. the bank has excess funds available and hopes to make another loan to the business.

17.One reason that financial intermediaries exist is that they:

A. are required by government regulation.

B. have developed low-cost methods to obtain information.

C. are the only way to obtain information.

D. earn high returns from lending their own funds.

18.Providing stock options to corporate managers was an idea designed to:

A. hide increases in pay of corporate executives from stockholders.

B. align managers' interest with the stockholders' interest.

C. treat adverse selection.

D. treat the free-rider problem.

19.One reason lenders may require a large net worth before making a loan is because:

A. then the borrower does not need the funds.

B. it tells the lender the firm has good employees.

C. it is one way to treat the problem of moral hazard.

D. banking laws require firms have significant net worth before a bank can make a loan.

20.Tom borrows $100,000 from his local bank to purchase inventory for his store for the upcoming holiday season. Tom's neighbor tells him about a get-rich-quick scheme that can take this $100,000 and triple it in a month. Tom decides to buy into this scheme figuring he can repay the bank and still have plenty left for inventory. This is an example of:

A. adverse selection.

B. sound risk analysis on Tom's part.

C. diversification.

D. moral hazard.

21.A bank faces foreign exchange risk when:

A. it has assets denominated in one currency and liabilities in another.

B. it lends to foreign borrowers because they are less likely to repay a U.S. bank.

C. foreign governments restrict dollar-denominated payments.

D. none of the above.

22.The credit risk a bank faces is the risk resulting specifically from:

A. the economy entering a recession.

B. interest rates falling.

C. some of the bank's loans not being repaid.

D. the bank experiencing a decrease in deposits.

23.Regulators require a bank to hold some of its assets as reserves mainly to address:

A. liquidity risk.

B. trading risk.

C. credit risk.

D. none of the above.

24.If a bank has deposits of $250 million, reserves that total $30 million and has a required reserve rate of 10 percent:

A. the bank is short of required reserves.

B. the bank has excess reserves of $27.5 million.

C. the bank has excess reserves of $5 million.

D. the bank has excess reserves of $3 million.

25.The difference between a bank's reserves and its required reserves is:

A. profits.

B. net interest income.

C. excess reserves.

D. vault cash.