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WorksheetsPART A: MCQS (Questions 1-14)
Total questions: 150
Worksheet time: 1hrs 15mins
Which of the following is a claim on the issuer's future income or assets?
A liability
A security
An exchange rate
A budget deficit
What is the market in which newly issued securities are sold to initial buyers?
Secondary market
Over-the-counter market
Primary market
Bond market
Which of the following is NOT a function of money?
Medium of Exchange
Unit of Account
Barter Facilitator
Store of Value
The M1 measure of the money supply includes which of the following?
Small-denomination time deposits
Savings accounts
Currency and demand deposits
Corporate bonds
What is the correct formula for the Future Value (FV) of a present sum P after n years at interest rate i?
FV=P/(1+i)n
FV = P×(1+i)n
FV = P × i × n
FV = P + (i/n)
A bond bought at a price below its face value and repaid at face value at maturity is called a:
Coupon bond
Fixed-payment loan
Discount bond
Simple loan
According to the Fisher Equation, the nominal interest rate equals the real interest rate plus which other component?
The risk premium
The liquidity premium
The expected inflation rate
The rate of capital gain
In the loanable funds model, the demand for credit primarily comes from:
Households and savers
The central bank
Borrowers like businesses and government
Foreign lenders
The relationship between a bond's yield and its term to maturity is shown by the:
Supply curve
Demand curve
Yield curve
Phillips curve
The One-Period Valuation Model calculates the current price of a stock based on its expected dividend and:
Its past price
Its expected future price
Its book value
The earnings per share
Why are financial intermediaries, like banks, important for the economy?
They print money for the government.
They reduce transaction costs and help solve problems of asymmetric information.
They only lend to large corporations.
They set the prices for all goods and services.
What is the key difference between debt and equity?
Debt holders own part of the firm, while equity holders are lenders.
Equity holders have a claim on assets and income, while debt holders receive fixed payments.
Debt is always short-term, while equity is always long-term.
Equity pays dividends, while debt pays no interest.
Why is the "double coincidence of wants" a problem in a barter economy?
It makes transactions very efficient.
It requires both parties in a trade to have what the other wants, which is rare and costly to find.
It ensures that goods are exchanged at a fair price.
It only works with services, not goods.
Which statement best explains why a dollar today is worth more than a dollar a year from now?
Because of inflation, the dollar will be worthless in a year.
A dollar today can be invested to earn interest, making it grow to more than a dollar in the future.
Money loses value only when held in cash.
Future dollars always have higher purchasing power.
How does an increase in the market interest rate affect the price of a previously issued bond?
It increases the bond's price because the coupon is now more attractive.
It has no effect on the bond's price.
It decreases the bond's price because its fixed coupon payments are less attractive compared to new bonds.
The effect depends on whether it is a government or corporate bond.
In the loanable funds framework, why is the supply curve for credit from households typically upward sloping?
At higher interest rates, the government borrows less.
At higher interest rates, the opportunity cost of consumption is higher, encouraging more saving.
At higher interest rates, businesses are more willing to invest.
At higher interest rates, people expect more inflation.
Which statement best describes the "risk structure of interest rates"?
It explains why bonds of different maturities have different interest rates.
It explains why bonds with the same maturity but different default risk have different interest rates.
It explains why short-term interest rates are more volatile than long-term rates.
It explains why interest rates rise during economic expansions.
According to the Expectations Theory, what does an upward-sloping yield curve suggest?
Investors expect future short-term interest rates to fall.
Investors expect future short-term interest rates to remain unchanged.
Investors expect future short-term interest rates to rise.
The market is segmented and long-term bonds are riskier.
Why do U.S. Treasury bonds generally have lower interest rates than corporate bonds of the same maturity?
U.S. Treasury bonds are tax-exempt.
U.S. Treasury bonds have a higher coupon rate.
U.S. Treasury bonds are considered to have no default risk.
U.S. Treasury bonds are less liquid.
What is the main idea behind the Gordon Growth Model (Constant Growth DDM)?
A stock's value is the sum of all its future earnings.
A stock's value is determined solely by its most recent dividend.
A stock's value is the present value of all its future dividends, assuming they grow at a constant rate.
A stock's value is its book value plus the present value of growth opportunities.
If you invest $500 in a savings account with a 6% annual interest rate, how long will it take for your investment to double, according to the Rule of 72?
6 years
8 years
10 years
12 years
A person moves $2,000 from a small-denomination time deposit (savings account) into a checking account. What is the immediate effect on M1 and M2?
M1 increases, M2 decreases.
M1 increases, M2 stays the same.
M1 stays the same, M2 increases.
Both M1 and M2 increase.
What is the present value of $1,100 to be received in one year if the discount rate is 10%?
$990
$1,000
$1,100
$1,210
A zero-coupon bond with a face value of 1,000issoldfor 900 and matures in one year. What is its yield to maturity (YTM)?
9%
10%
11.1%
12%
If the nominal interest rate on a loan is 8% and the expected inflation rate is 3%, what is the ex-ante real interest rate?
3%
5%
8%
11%
In the loanable funds model, if the government increases its budget deficit, what is the initial effect?
The supply of credit shifts right.
The demand for credit shifts left.
The demand for credit shifts right.
A corporate bond has a coupon rate of 6% and a face value of $1,000. If the market interest rate for similar bonds is 8%, at what price category will the bond trade?
Premium (above $1,000)
Par (at $1,000)
Discount (below $1,000)
Cannot be determined
Suppose the 1-year interest rate today is 3%, and the market expects the 1-year interest rate next year to be 5%. According to the Expectations Theory, what is the interest rate on a 2-year bond today?
3%
4%
5%
8%
A company's stock sells for 50pershare.Itisexpectedtopayadividendof 2 next year, and the stock price is expected to be $55 in one year. What is the expected rate of return?
10%
12%
14%
16%
A stock is expected to pay a dividend of $3 next year (D1). The required return r is 12% and the dividend is expected to grow at a constant rate g of 4% per year. Using the Gordon Growth Model, what is the stock’s current price P0?
$25.00
$37.50
$50.00
$75.00
Risk premiums on corporate bonds are usually anticyclical (they increase during recessions). What is the most likely reason?
During recessions, government bonds become riskier.
During recessions, the probability of corporate default increases, so investors demand a higher premium for holding corporate debt.
During recessions, the central bank lowers interest rates.
During recessions, corporate profits increase, making their bonds more valuable.
If the federal government guarantees that it will pay creditors if a corporation goes bankrupt, what happens to the interest rate on that corporation’s bonds and on Treasury securities?
Both interest rates will rise.
The corporate bond rate will fall, and the Treasury security rate will rise.
The corporate bond rate will rise, and the Treasury security rate will fall.
Both interest rates will fall.
During a period of high and volatile inflation, which function(s) of money are most severely undermined, and why?
Medium of exchange, because it becomes too heavy to carry.
Unit of account, because prices change so rapidly that they fail to provide a stable measure of value.
Store of value, because the purchasing power of money erodes quickly.
Both B and C are severely undermined.
If the yield curve is steeply upward-sloping, what does the combination of the Expectations Theory and Liquidity Preference Theory suggest?
The market expects a sharp decrease in future short-term rates.
The market expects future short-term rates to stay the same, and the slope is due only to the liquidity premium.
The market expects a significant rise in future short-term rates.
The market is forecasting an immediate recession.
In the loanable funds model, if the central bank pursues an expansionary monetary policy, what is the short-term effect on interest rates, and what might be a long-term consequence if higher inflation is expected?
Short-term: rates rise; Long-term: rates fall.
Short-term: rates fall; Long-term: rates rise even higher than the original level.
Short-term: rates fall; Long-term: rates fall further.
There is no effect on interest rates.
Between a 1-year bond and a 30-year bond, which has greater interest rate risk, and why?
The 1-year bond, because its price is more sensitive to short-term events.
The 30-year bond, because its price is the present value of cash flows far into the future, which are more heavily discounted by changes in interest rates.
Both have the same interest rate risk.
It depends on the coupon rate.
A negatively sloped (inverted) yield curve is often seen as a predictor of a recession. Why is this interpretation commonly made?
It implies that investors expect the central bank to sharply raise short-term interest rates in the future to stimulate the economy.
It implies that investors expect future short-term rates to be lower than current short-term rates, consistent with an economic slowdown.
It implies a surge in inflation expectations that pushes long-term rates up.
It implies that the liquidity premium has suddenly turned negative across maturities.
If Company A has a higher P/E ratio than Company B, despite similar risk and current earnings, what does this most likely imply about Company A according to fundamentals?
The market expects Company A to have lower future growth than Company B.
The market believes Company A's earnings are of lower quality.
The market expects Company A to have significantly higher future growth than Company B.
The market believes Company A is in a declining industry.
If the income tax exemption on municipal bonds were abolished, what would be the predicted effect on their interest rates?
Their interest rates would fall, as they become more attractive.
Their interest rates would remain unchanged.
Their interest rates would rise to become comparable with taxable bonds of similar risk.
Their interest rates would fall to zero.
How does the problem of adverse selection manifest in financial markets before a transaction occurs?
A borrower uses loan funds for a risky project not disclosed to the lender.
Borrowers most likely to produce an undesirable outcome are the ones who most actively seek out loans.
A CEO sells their own company's stock because they know the company will perform poorly.
A bank refuses to make any loans at all.
The management of the money supply and interest rates is known as:
Fiscal policy
Monetary policy
Commercial policy
Incomes policy
What is the term for a situation where one party in a transaction has more or better information than the other?
Risk sharing
Diversification
Asymmetric information
Liquidity service
The total collection of pieces of property that serve to store value is known as:
Income
Money
Wealth
Credit
The interest rate that is not adjusted for inflation is called the:
Real interest rate
Effective interest rate
Discount rate
Nominal interest rate
The excess of government expenditures over revenues for a particular year is called a:
Budget surplus
Budget deficit
National debt
Trade deficit
A contractual agreement representing a claim to a share in the income and assets of a business is called:
A bond
A debt instrument
Equity
A loan
The interest rate that is adjusted for actual changes in the price level is the:
Ex-ante real interest rate
Nominal interest rate
Ex-post real interest rate
Coupon rate
Which theory states that the interest rate on a long-term bond is the average of the short-term interest rates that people expect to occur over the life of the long-term bond?
Liquidity Preference Theory
Segmented Markets Theory
Expectations Theory
Efficient Market Hypothesis
In finance, what does the acronym YTM stand for?
Yield to Maturity
Year to Month
Yield to Market
Yearly Taxable Margin
In the context of financial intermediaries, what are "liquidity services"?
Services that help borrowers get loans.
Services that allow customers to easily convert their assets into cash for transactions.
Services that provide information about stock prices.
Services that insure against risk.
What is the most important economic benefit of a secondary market?
It allows the government to issue more debt.
It provides funds directly to the corporations that originally issued the securities.
It increases the liquidity of securities, making them more desirable and thus easier for firms to sell in the primary market.
It is the only place where investment banks can operate.
Why is the M2 money supply considered a broader measure of money than M1?
M2 includes large-denomination time deposits, which M1 does not.
M2 includes M1 plus other assets that are less liquid, like savings deposits and money market funds.
M2 only includes currency, while M1 includes deposits.
M2 is calculated by the government, while M1 is calculated by private banks.
Which statement best explains the concept of "crowding out"?
When a central bank buys too many bonds, it crowds out private investors.
When a firm issues too much stock, it dilutes the value for existing shareholders.
When the government borrows heavily, it drives up interest rates, which in turn reduces borrowing and investment by private businesses.
When foreign lenders enter a market, they crowd out domestic savers.
How does the Liquidity Preference Theory explain the stylized fact that yield curves almost always slope upward?
It assumes that investors expect interest rates to rise in the future.
It assumes that investors prefer short-term bonds and must be paid a liquidity premium to hold riskier long-term bonds.
It assumes that the markets for short-term and long-term bonds are completely separate.
It assumes that inflation is always expected to increase.
Why is a bond with a 20-year maturity more sensitive to a 1% change in market interest rates than a bond with a 2-year maturity?
The 20-year bond has a higher coupon rate.
The 20-year bond's cash flows are received much further in the future, and their present value is therefore more significantly affected by a change in the discount rate.
The 20-year bond is less liquid.
The 20-year bond is more likely to default.
What is the fundamental difference between credit risk and interest-rate risk for a bondholder?
Credit risk affects price, while interest-rate risk affects yield.
Credit risk is the risk of the issuer failing to make payments, while interest-rate risk is the risk of the bond's price falling due to a rise in market interest rates.
Credit risk only applies to corporate bonds, while interest-rate risk only applies to government bonds.
Credit risk can be eliminated through diversification, but interest-rate risk cannot.
In the loanable funds model, why is the government's demand for credit often illustrated as a vertical (inelastic) curve?
Because the government can print its own money.
Because government borrowing decisions are based on policy needs (like funding a deficit) and are not typically sensitive to the level of the interest rate.
Because the government always borrows the same amount every year.
Because the government only borrows from the central bank.
What is the main distinction between a "simple loan" and a "fixed-payment loan"?
A simple loan has a variable interest rate, while a fixed-payment loan has a fixed rate.
A simple loan is repaid with a single payment of principal and interest at maturity, while a fixed-payment loan involves multiple identical payments over its life.
Simple loans are for consumers, while fixed-payment loans are for businesses.
Simple loans are always short-term, and fixed-payment loans are always long-term.
Why do municipal bonds in the U.S. generally offer lower interest rates than U.S. Treasury bonds, even though Treasury bonds are considered risk-free?
Municipal bonds have shorter maturities.
The interest income from most municipal bonds is exempt from federal income tax, making their after-tax return attractive even with a lower pre-tax yield.
Municipal bonds are more liquid than Treasury bonds.
The U.S. government guarantees all municipal bonds.
How does the "unit of account" function of money improve economic efficiency?
It allows for the storage of wealth over time.
It eliminates the need for a "double coincidence of wants".
It reduces transaction costs by providing a single, common measure of value, which simplifies pricing and comparison.
It ensures that money is durable and easy to carry.
A country's inflation rate is 9% per year. According to the Rule of 72, approximately how many years will it take for the general price level to double?
7 years
8 years
9 years
You are considering buying a coupon bond with a face value of 1,000andacouponrateof7 1,050, its yield to maturity (YTM) must be:
Greater than 7%
Equal to 7%
Less than 7%
Equal to the current yield
An economy is entering a strong expansion. Based on stylized facts about risk premiums, what is the likely change in the interest rate spread between corporate Baa bonds and default-free U.S. Treasury bonds?
The spread will widen (increase).
The spread will narrow (decrease).
The spread will remain unchanged.
The spread will become negative.
A commercial bank holds long-term, fixed-rate assets and funds them with short-term liabilities. If market interest rates suddenly rise sharply, what is the most immediate impact on the bank's net interest margin?
It will increase, as the bank can charge more for new loans.
It will decrease, because liability costs rise faster than returns on fixed-rate assets.
It will remain unchanged.
The impact cannot be determined.
A pharmaceutical company receives approval for a new blockbuster drug. According to the efficient market hypothesis and valuation principles, what is the expected immediate effect on its stock price?
Gradual increase over the next month
Fall due to high cost of production
Rise almost instantaneously to reflect new information
No change
If households decide to save less and consume more, what is the predicted effect on the equilibrium interest rate in the loanable funds model?
The interest rate will decrease.
The interest rate will increase.
The interest rate will remain the same, but quantity of funds will decrease.
The interest rate will remain the same, but quantity of funds will increase.
A bond has a face value of $1,000, a 5-year maturity, and a 6% coupon rate. If the market YTM for similar bonds is also 6%, what is the current price of the bond?
$950
$1,000
$1,050
Cannot be determined without a calculator
You are buying a stock that will pay a 2dividendinoneyear.Yourrequiredrateofreturnis12 40 in one year. Using the one-period valuation model, what is the maximum price you should pay today?
$37.50
$40.00
$42.00
$35.71
The interest rate on a 1-year bond is 2%, and the rate on a 2-year bond is 3%. According to Expectations Theory, what is the market's expectation of the 1-year interest rate one year from now?
2.5%
3.0%
3.5%
4.0%
You take out a simple loan of 200andmustrepay 224 in one year. What is the yield to maturity on this loan?
10%
12%
24%
8.9%
Evaluate: According to Expectations Theory of the term structure, if the yield curve is flat, is it better to invest in long-term bonds to lock in a rate?
True, because long-term bonds are less risky.
False, because expected future short-term rates equal current rates, so expected returns are the same.
True, because you avoid reinvestment transaction costs.
False, because a flat curve signals recession.
An expansionary monetary policy initially lowers nominal interest rates but significantly increases expected inflation. According to the Fisher effect, the likely long-run effect on nominal interest rates is:
Remain at the new, lower level
Return to original level
Rise and possibly exceed the original level
Fall further as the economy grows
Why might growth rates of M1 and M2 diverge significantly, and what challenge does this pose for a central bank that uses monetary aggregates?
Diverge due to government spending; no challenge
Diverge when funds shift between checking (in M1) and savings (in M2 but not M1); makes it hard to know which aggregate better reflects activity
Diverge due to stock market prices; challenge is predicting stocks
Diverge when reserve requirements change; challenge is tool is rarely used
A firm financed with both debt and equity considers a very high-risk project. Why might stockholders favor it while bondholders oppose it?
Stockholders are natural risk-takers; bondholders are risk-averse.
Classic moral hazard: stockholders have limited downside but unlimited upside; bondholders have fixed return and bear downside risk if bankruptcy occurs.
Bondholders must pay for the project.
Stockholders don't understand the risk.
An inverted yield curve is observed (e.g., 10-year yield below 2-year). Under a combined view of Expectations and Liquidity Preference theories, what must be true about the market's expectation for future short-term rates?
Mild increase expected
Rates expected to stay the same
Expecting a very significant decrease, enough to overcome the positive liquidity premium
Liquidity premium has become negative
Compare the impact of a large increase in the government budget deficit on interest rates in a closed economy versus a small open economy with perfect capital mobility.
Impact will be identical in both.
Rates rise more in the closed economy due to limited ability to attract foreign savings (more severe crowding out).
Rates rise more in the open economy because foreign investors demand a risk premium.
If a financial innovation creates a new type of deposit that is as liquid as a checking account but pays a higher interest rate, what is the predicted impact on the demand for M1 and the velocity of money?
Demand for M1 would decrease, and velocity would increase.
Demand for M1 would increase, and velocity would decrease.
Demand for M1 would remain unchanged, and velocity would increase.
Both demand for M1 and velocity would increase.
An analyst applies the Gordon Growth Model to a tech startup using its recent dividend growth rate of 30% per year. Why is this application likely to be flawed?
The model should only be used for bonds.
The model assumes a constant growth rate in perpetuity, and 30% is unlikely to be sustainable and may exceed the required return.
The model ignores the company's debt.
The model requires the P/E ratio, not the growth rate.
How do financial intermediaries like banks help overcome the free-rider problem in information production?
By publishing all their research for free.
By making private loans so their research and monitoring are proprietary and not revealed to others.
By only lending to the government, which has no private information.
By charging fees for all transactions.
Evaluate: "A rise in interest rates is always a negative sign for the stock market."
True, because higher rates always mean higher borrowing costs for firms.
False, because a rise in rates can signal a strong economy with high growth.
Uncertain; the effect depends on why rates rise—strong growth can be positive, anti-inflation hikes can be negative.
True, because bonds become more attractive than stocks.
The primary tool the Federal Reserve uses to conduct monetary policy is:
The discount rate
Reserve requirements
Open market operations
Margin requirements
What term describes a widespread panic in which depositors rush to withdraw their money from banks?
A bank run
A credit crunch
A stock market crash
A liquidity trap
What is the formula for the simple deposit multiplier?
1 / (1 − required reserve ratio)
1 / required reserve ratio
1 × required reserve ratio
1 + required reserve ratio
In banking, what does the acronym ROA stand for?
Risk on Assets
Return on Assets
Ratio of Assets
Rate of Appreciation
The price of one country's currency in terms of another's is called the:
Interest rate
Exchange rate
Inflation rate
Par value
The voting members of the Federal Open Market Committee (FOMC) consist of:
The 7 members of the Board of Governors and the president of the Federal Reserve Bank of New York.
The 12 presidents of the regional Federal Reserve Banks.
The 7 members of the Board of Governors only.
The 7 members of the Board of Governors, the president of the FRB of New York, and presidents of four other FRBs on a rotating basis.
The primary purpose of government-provided deposit insurance is to:
Help banks make more profit.
Prevent widespread bank runs and panics.
Allow the government to monitor bank activities.
Ensure all depositors are fully insured regardless of amount.
The sum of the central bank's monetary liabilities (currency in circulation and reserves) is known as the:
M1 money supply
Monetary base
M2 money supply
Bank capital
According to Purchasing Power Parity (PPP), exchange rates between two countries adjust to reflect changes in which factor?
Interest rate differentials
Price levels of the two countries
Stock market performance
Government budget deficits
On a commercial bank's balance sheet, which item is considered a liability?
Loans
Reserves
Securities
Checkable deposits
Why is the real‑world money multiplier always smaller than the simple deposit multiplier?
Because the central bank often changes the required reserve ratio.
Because the simple multiplier does not account for banks holding excess reserves or the public holding currency.
Because the simple multiplier only applies during economic expansions.
Because banks are not required to create loans.
How does an open market sale of government securities by the central bank affect bank reserves and the money supply?
It increases bank reserves and increases the money supply.
It decreases bank reserves and decreases the money supply.
It increases bank reserves and decreases the money supply.
It has no effect on either reserves or the money supply.
What is the primary argument in favor of central bank independence?
It allows the central bank to coordinate its policies with the government's fiscal policy.
It makes the central bank more accountable to the public.
It insulates monetary policy from political pressure, which can lead to an inflationary bias.
It ensures the central bank will always prioritize low unemployment over low inflation.
How does a depreciation of the U.S. dollar affect American consumers?
It makes foreign goods cheaper, increasing their purchasing power.
It makes foreign goods more expensive, reducing their purchasing power for imported items.
It has no effect on consumers, only on businesses.
It lowers the domestic inflation rate.
What is the fundamental trade‑off bank managers face when managing their level of capital?
Higher capital increases the risk of bank failure but also increases the return on equity.
Higher capital reduces the risk of bank failure but also reduces the return on equity for the bank's owners.
Higher capital increases the amount of loans the bank can make.
Higher capital is required to attract deposits.
Which statement correctly distinguishes the federal funds rate from the discount rate?
The federal funds rate is the rate banks charge each other for overnight loans, while the discount rate is the rate the central bank charges banks for loans.
The discount rate is the rate banks charge each other, while the federal funds rate is the rate charged by the central bank.
They are the same thing, just used in different contexts.
The federal funds rate applies to long‑term loans, while the discount rate applies to short‑term loans.
How can deposit insurance contribute to the "moral hazard" problem in banking?
It encourages depositors to monitor their banks more carefully.
It encourages banks to take on more risk than they otherwise would, because they know their depositors are protected from losses.
It causes banks to hold too much capital.
It forces the central bank to keep interest rates low.
What is the main difference between a fixed exchange rate regime and a floating exchange rate regime?
In a fixed regime, the government or central bank actively intervenes to keep the currency's value at a certain level; in a floating regime, the value is determined by market supply and demand.
A fixed regime is determined by supply and demand, while a floating regime is set by the government.
Fixed regimes are only used by developed countries, while floating regimes are used by developing countries.
There is no significant difference.
Why is the role of "lender of last resort" important for a central bank?
It is the primary way the central bank earns a profit.
It allows the central bank to prevent bank failures from spiraling into a systemic crisis by providing liquidity to solvent but illiquid banks.
It allows the central bank to control the government's budget.
It is the mechanism used to set the required reserve ratio.
What best defines a "credit crunch"?
A situation where there is too much lending in the economy.
A sharp reduction in the availability of credit from lenders, or a sudden tightening of lending conditions.
An increase in consumer credit card limits across the economy.
A temporary halt in government bond issuance.
If the required reserve ratio is 10% and the central bank conducts an open market purchase of $100 million, what is the maximum possible expansion of the money supply?
$10 million
$100 million
$1 billion
$10 billion
A commercial bank has total assets of 500millionandbankcapitalof 40 million. If it must write off $50 million in bad loans, what is the state of the bank?
The bank is still profitable.
The bank's capital is reduced but it is still solvent.
The bank is insolvent because its liabilities now exceed its assets.
The bank's assets increase.
A bottle of French wine costs €20. If the exchange rate is $1.20 per euro (€), what is the price of the wine in U.S. dollars?
$16.67
$20.00
$24.00
$21.20
A laptop costs 1,000intheU.S.and¥110,000inJapan.AccordingtoPurchasingPowerParity(PPP),whatisthenominalexchangerate(¥/ )?
100 ¥/$
110 ¥/$
120 ¥/$
90 ¥/$
An economy faces severe recession with high unemployment and low inflation. What monetary policy would the central bank most likely implement?
Sell government bonds on the open market.
Increase the required reserve ratio.
Increase the discount rate.
Purchase government bonds on the open market.
A bank reports a Return on Assets (ROA) of 0.8% and an equity multiplier (Assets/Equity) of 15. What is its Return on Equity (ROE)?
1.2%
15.8%
18.75%
12.0%
A U.S. company plans to buy machinery from Germany for €5 million in three months and fears the dollar will depreciate against the euro. Which action best hedges this risk?
Sell euros in the forward market.
Buy euros forward for delivery in three months.
Do nothing, as depreciation would be favorable.
Borrow U.S. dollars.
If the central bank buys $5 million in bonds from the public and the public holds all proceeds as currency, what is the immediate effect on the monetary base and on M1?
Both increase by $5 million.
The monetary base increases by $5 million, but M1 is unchanged.
M1 increases by $5 million, but the monetary base is unchanged.
Neither changes until the money is deposited in a bank.
A bank has risk‑weighted assets of $800 million. Under Basel III with an 8% capital adequacy requirement, what minimum total capital must it hold?
$8 million
$100 million
$64 million
$80 million
Interest rates are 4% in the U.S. and 2% in the Eurozone. According to the uncovered interest parity condition, what is the expected change in the euro relative to the dollar over the next year?
The euro is expected to appreciate by approximately 2%.
The euro is expected to depreciate by approximately 2%.
The euro is expected to appreciate by approximately 6%.
The euro's value is expected to remain constant.
Evaluate: "A central bank can simultaneously target both the money supply and the interest rate." Which is correct?
True; by using both open market operations and the discount rate.
False; it can target one at a time because the money demand curve determines the interest rate for a given money supply.
Why does the "too big to fail" problem create a systemic risk for the financial system?
It forces large banks to take on less risk, slowing economic growth.
It creates a moral hazard, where very large, systemically important financial institutions take excessive risk believing they will be bailed out, making the system more vulnerable.
It concentrates all financial activity in a few large banks, which is inefficient.
If a small bank fails, it will cause a domino effect.
An economy is experiencing stagflation (high inflation and high unemployment). What dilemma does this pose for a central bank's monetary policy?
There is no dilemma; the central bank should focus only on inflation.
Tools work in opposite directions: tightening to fight inflation can worsen unemployment, while easing to fight unemployment can worsen inflation.
The central bank should devalue its currency to solve both problems.
Stagflation can only be solved with fiscal policy, not monetary policy.
For a small, trade‑dependent country, what is the primary advantage and disadvantage of a fixed exchange rate regime?
Advantage: independent monetary policy. Disadvantage: exchange rate volatility.
Advantage: promotes trade and reduces uncertainty. Disadvantage: loss of independent monetary policy to address domestic issues like unemployment.
Advantage: more tax collection. Disadvantage: deflation risk.
Advantage: automatic trade imbalance correction. Disadvantage: requires large gold reserves.
What is the fundamental difference between conventional open market operations and Quantitative Easing (QE)?
QE involves selling bonds, while conventional operations involve buying them.
Conventional operations target the short‑term federal funds rate; QE is used when that rate is near zero and involves purchasing longer‑term assets to influence long‑term rates and provide liquidity.
QE is conducted by the Treasury, while conventional operations are done by the central bank.
There is no fundamental difference; QE is just a new name for the same policy.
Why is central bank credibility crucial for the success of an inflation‑targeting policy?
Without credibility, the central bank cannot change the money supply.
If the public and markets believe the bank’s commitment to the inflation target, they adjust expectations accordingly, helping anchor inflation and making policy more effective.
Credibility allows the central bank to ignore unemployment.
Credibility is required by international law.
How did securitization (e.g., creating Mortgage‑Backed Securities) contribute to the 2008 financial crisis?
It made mortgages safer by spreading them across many investors.
It created a disconnect between the original lender and the ultimate owner of the loan, weakening screening and monitoring incentives and lowering lending standards.
It was too expensive, causing banks to lose money.
It was outlawed by the government, creating panic in the market.
According to the Policy Trilemma (Impossible Trinity), if a country chooses a fixed exchange rate and free capital mobility, what must it give up?
The ability to control its own interest rates (independent monetary policy).
The ability for citizens to invest abroad.
The ability to trade with other countries.
The ability to issue its own currency.
What is the primary rationale for raising bank capital requirements as a tool to prevent future crises?
It is ineffective because banks always evade rules.
It provides a larger cushion to absorb losses, lowering insolvency risk and improving incentives to avoid excessive risk, though it may raise credit costs.
It is harmful because it reduces profitability and forces banks to lend less.
It works only if deposit insurance is eliminated.
A central bank unexpectedly hikes interest rates sharply to combat rising inflation. What is the likely immediate effect on the domestic stock market and currency value in FX markets?
Stocks rise; currency depreciates.
Stocks fall due to higher borrowing costs and growth fears; currency appreciates as higher returns attract foreign capital.
Both stocks and the currency appreciate.
Both stocks and the currency depreciate.
A bond sold at a discount to face value that makes no periodic interest payments is called a:
Coupon bond
Zero‑coupon bond
Convertible bond
Which market is where new issues of a security, such as a stock or a bond, are sold to initial buyers?
Secondary market
Primary market
Money market
Over-the-counter market
In bond terminology, what does YTM stand for?
Yield to Maturity
Years to Maturity
Yield to Market
Yearly Treasury Measurement
What is the key difference between a stock and a bond?
A stock represents ownership in a firm, while a bond represents debt owed by the firm.
A bond represents ownership in a firm, while a stock represents debt owed by the firm.
Stocks are only sold in primary markets, while bonds are only sold in secondary markets.
Stocks always pay dividends, while bonds always pay coupons.
A financial contract that gives the holder the right, but not the obligation, to buy an asset at a specified price is a:
Put option
Futures contract
Call option
Swap
Name the major U.S. financial regulatory reform act passed in 2010 in response to the 2008 financial crisis.
The Glass-Steagall Act
The Sarbanes-Oxley Act
The Dodd-Frank Act
The Gramm-Leach-Bliley Act
Which financial market trades only short-term debt instruments with original maturity of less than one year?
Capital market
Stock market
Bond market
Money market
The face value of a bond—the amount the issuer repays at maturity—is also known as:
Par value
Market value
Coupon payment
Current yield
A payment made by a corporation to its shareholders, usually as a distribution of profits, is called a:
Coupon
Interest payment
Dividend
Capital gain
What is the risk that a bond issuer will be unable to make promised interest payments or repay principal?
Interest-rate risk
Inflation risk
Default risk (or credit risk)
Liquidity risk
If the market interest rate rises, what happens to the price of a previously issued bond?
The price of the bond rises.
The price of the bond falls.
The price of the bond is unaffected.
The bond's coupon payment increases.
What is the primary economic function of a secondary market?
To allow corporations to raise new funds.
To provide liquidity so owners of securities can sell to other investors.
To set coupon rates on newly issued bonds.
To insure investors against losses.
Which statement best distinguishes a capital market from a money market?
The capital market is for stocks, and the money market is for bonds.
The capital market trades long-term securities (over one year maturity), while the money market trades short-term securities (less than one year maturity).
The capital market is a primary market, and the money market is a secondary market.
The capital market is regulated by the Fed, and the money market is regulated by the Treasury.
Why might an investor choose to purchase a zero-coupon bond?
To receive regular, predictable income payments.
Because they are sold at a premium over their face value.
To avoid reinvestment risk, as there are no coupons to reinvest over the life of the bond.
How does the concept of systemic risk differ from the risk associated with an individual firm?
Systemic risk is just another name for default risk.
Systemic risk is the risk of a collapse of the entire financial system or market, as opposed to the risk associated with any one individual entity, group or component.
Systemic risk only applies to the stock market, not the bond market.
Only the government can create systemic risk.
How does a corporate stock buyback program typically affect the company's earnings per share (EPS)?
It decreases EPS by reducing the company's cash.
It has no effect on EPS.
It increases EPS by reducing the number of shares outstanding.
It increases the company's total earnings.
Differentiate between microprudential and macroprudential regulation. Which statement is most accurate?
Microprudential focuses on the safety and soundness of individual financial institutions, while macroprudential focuses on the stability of the financial system as a whole.
Microprudential is regulation for small banks, while macroprudential is for large banks.
Microprudential is conducted by the central bank, while macroprudential is conducted by the government.
They are two names for the same regulatory approach.
Why is the Yield to Maturity (YTM) a more accurate measure of a bond's return than its current yield?
Because YTM is always higher than the current yield.
Because YTM accounts for the total return including interest payments plus any capital gain or loss if the bond is held to maturity, while current yield only considers the interest payments relative to the current price.
Because YTM is simpler to calculate.
Because current yield does not account for the bond's market price.
What is the main economic function of a futures contract?
To provide ownership in a company.
To allow parties to hedge against price fluctuations in a commodity or financial asset.
To provide a short-term loan.
To pay dividends to investors.
How does a large government budget deficit typically affect the bond market?
It decreases the supply of government bonds, causing their prices to rise.
It increases the supply of government bonds (as the government borrows to cover the deficit), which can put downward pressure on bond prices and upward pressure on yields.
It has no effect on the bond market.
It forces the central bank to buy all the new bonds.
A bond with a par value of 1,000paysanannualcouponof 50. If the bond is currently trading for $950, what is its current yield?
5.00%
5.26%
4.75%
10.00%
A corporation earns $20 million in profit and has 10 million shares of stock outstanding. What is its Earnings Per Share (EPS)?
$0.50
$2.00
$5.00
$200 million
Following the previous scenario, if the corporation uses its profits to buy back 1 million of its own shares, what is the new EPS?
$2.00
$1.80
$2.22
$2.50
An investor buys a call option on a stock with a strike price of 50.Ontheexpirationdate,thestock′smarketpriceis 58. What is the intrinsic value of the option per share?
$0
$8
$50
$58
An investor holds a put option on a stock with a strike price of 100.Ifthestock′smarketpricefallsto 90, exercising the option would allow the investor to:
Buy the stock for 90andsellitfor 100.
Sell the stock (which is worth 90)forthestrikepriceof 100.
Do nothing, as the option is worthless.
Buy the stock for $100.
A one-year zero-coupon bond with a face value of 1,000issoldtodayfor 970. What is its yield to maturity (annual, simple basis)?
3.00%
2.91%
1.03%
9.70%
A technology startup is issuing shares to the public for the first time. In which market does this Initial Public Offering (IPO) occur?
The secondary market
The money market
The primary market
The futures market
An extremely risk-averse investor needs to park cash safely for 90 days. Which instrument is most suitable?
A blue-chip common stock
A 30-year corporate bond
A U.S. Treasury Bill (T-Bill)
A real estate investment trust (REIT)
A company's stock trades at 40andpaysanannualdividendof 2 per share. What is the dividend yield?
2%
5%
8%
20%
To hedge a 30-year fixed payment liability and eliminate interest-rate risk for that cash flow, which is most appropriate?
A portfolio of short-term T-Bills
A 30-year zero-coupon bond
A high-dividend stock
A floating-rate note
