Q&A Hero

Q: Which of the following would not be an example of a secondary financial market transaction? A. You call a broker and purchase 100 shares of McDonalds Corp. stock.B. You go to the bank and purchase a $5000 certificate of deposit.C. You call a broker and purchase a U.S. Treasury bond.D. You call a broker and purchase a bond issued by General Motors.

Q: Standardization of financial instruments has occurred as a result of: A. the rule of 70.B. the law of demand.C. economies of scale.D. the law of supply.

Q: Which of the following statements is most correct? A. When a risk is difficult to predict, financial instruments are created to transfer these risks.B. Financial instruments are created to transfer risks that are relatively easy to predict.C. Financial instruments require certainty of an event to be able to transfer risk.D. Financial instruments eliminate the risk from uncertainty, they do not transfer it.

Q: A bank is a financial intermediary. Which of the following statements is most accurate? A. The bank's depositors are the ultimate lenders and the bank is the ultimate borrower.B. People seeking loans from the bank are the ultimate spenders while the bank is the ultimate lender.C. The bank's depositors are the ultimate lenders, while those seeking loans from the bank are the ultimate spenders.D. Those seeking loans from the bank are the ultimate spenders; the bank's stockholders are the ultimate lenders.

Q: Juan purchases automobile insurance; the insurance contract is a: A. financial instrument.B. form of money.C. transfer of risk from the insurance company to Juan.D. financial intermediary.

Q: Financial instruments are different from money because they: A. can act as a store of value and money cannot.B. can't be a means of payment but money can.C. can allow for the transfer of risk.D. have greater liquidity.

Q: Financial instruments and money share which of the following characteristics? A. Both can function as a means of payment and a store of value.B. Both can function as a store of value and allow for trading of risk.C. Both can function by acting as a means of payment and allow for trading of risk.D. Both can function as a store of value even though they do not allow for trading of risk.

Q: Sue has a checking account at the First National Bank; her checking account is a(n): A. asset to the bank and a liability to Sue.B. asset to Sue and a liability to the bank.C. asset to Sue but actually a liability to the Federal Reserve.D. liability to Sue until she spends the funds.

Q: Which of the following is not a financial instrument? A. A share of Microsoft stockB. A U.S. Treasury BondC. An electric billD. A life insurance policy

Q: A financial instrument would include: A. only a written obligation and a transfer of value.B. only a written obligation and a specified date.C. a written obligation, a transfer of value, a future date, and certain conditions.D. a written obligation, a transfer of value, a specific date for payment, uncertain conditions.

Q: Mary purchases a U.S. Treasury bond; the bond is a(n): A. asset of the U.S. government as well as an asset for Mary.B. liability of the U.S. government and an asset for Mary.C. asset for Mary but not a liability of the U.S. Government.D. asset for the government but a liability for Mary.

Q: Which of the following is not a financial intermediary? A. A bankB. An insurance companyC. The New York Stock ExchangeD. A mutual fund

Q: Options on futures contracts are referred to asA)stock options.B)futures options.C)American options.D)individual options.

Q: Options on individual stocks are referred to asA)stock options.B)futures options.C)American options.D)individual options.

Q: An option that can be exercised only at maturity is called a(n)A)swap.B)stock option.C)European option.D)American option.

Q: An option that can be exercised at any time up to maturity is called a(n)A)swap.B)stock option.C)European option.D)American option.

Q: The seller of an option has the _________ to buy or sell the underlying asset, while the purchaser of an option has the _________ to buy or sell the asset.A)obligation; rightB)right; obligationC)obligation; obligationD)right; right

Q: The seller of an option has theA)right to buy or sell the underlying asset.B)the obligation to buy or sell the underlying asset.C)ability to reduce transaction risk.D)right to exchange one payment stream for another.

Q: The price specified in an option contract at which the holder can buy or sell the underlying asset is called theA)premium.B)strike price.C)exercise price.D)both B and C are true.

Q: The price specified in an option contract at which the holder can buy or sell the underlying asset is called theA)premium.B)call.C)strike price.D)put.

Q: Options are contracts that give the purchasers theA)opportunity to buy or sell an underlying asset.B)the obligation to buy or sell an underlying asset.C)the right to hold an underlying asset.D)the right to switch payment streams.

Q: If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk byA)selling foreign exchange futures short.B)buying foreign exchange futures long.C)staying out of the exchange futures market.D)doing none of the above.

Q: If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future, then he shouldA)sell stock index futures short.B)buy stock index futures long.C)stay out of the futures market.D)borrow and buy securities now.

Q: Which of the following is a likely reason for a portfolio manager to sell a stock index future short?A)He believes the market will rise.B)He wants to lock in current prices.C)He wants to reduce stock market risk.D)Both B and C are correct.

Q: If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the firm shouldA)sell foreign exchange futures short.B)buy foreign exchange futures long.C)stay out of the exchange futures market.D)do none of the above.

Q: If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you willA)lose $12,500.B)gain $12,500.C)lose $50.D)gain $50.

Q: f you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you willA)lose $12,500.B)gain $12,500.C)lose $50.D)gain $50.

Q: Who would be most likely to buy a long stock index future?A)A mutual fund manager who believes the market will riseB)A mutual fund manager who believes the market will fallC)A mutual fund manager who believes the market will be stableD)None of the above would be likely to purchase a futures contract

Q: The most widely traded stock index future is on theA)Dow Jones 1000 index.B)S&P 500 index.C)NASDAQ index.D)Dow Jones 30 index.

Q: The risk that occurs because stock prices fluctuate is calledA)stock market risk.B)reinvestment risk.C)interest-rate risk.D)default risk.

Q: When a financial institution is hedging interest-rate risk on its overall portfolio, the hedge is aA)macro hedge.B)micro hedge.C)cross hedge.D)futures hedge.

Q: When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called aA)macro hedge.B)micro hedge.C)cross hedge.D)futures hedge.

Q: Which of the following features of Treasury bond futures contracts were not designed to increase liquidity?A)Standardized contracts.B)Traded up until maturity.C)Not tied to one specific type of bond.D)Can be closed with offsetting trade.

Q: If interest rates rise by 5 percentage points, then bank profits (measured using gap analysis) will increase regardless of the income gap.

Q: Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis.

Q: Which of the following features of Treasury bond futures contracts were not designed to increase liquidity?A)Standardized contracts.B)Traded up until maturity.C)Not tied to one specific type of bond.D)Marked to market daily.

Q: Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.

Q: Credit rationing occurs when lenders charge higher interest rates on the loans they make to riskier borrowers.

Q: Credit rationing reduces adverse selection problems.

Q: A correspondent account is sometimes required of a borrower as a condition for a loan.

Q: Due-on-sale clauses in loan contracts reduce moral hazard.

Q: Banks face the problem of adverse selection in loan markets because bad credit risks are the ones most likely to seek bank loans.

Q: If a bank has a negative gap, then a decrease in interest rates will increase income.

Q: The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.

Q: A bank manager concerned about interest income who expects interest rates to fall and who knows the bank currently has a positive gap should _________ rate-sensitive assets and _________ rate-sensitive liabilities.A)increase; increaseB)decrease; increaseC)decrease; decreaseD)increase; decrease

Q: If a bank has more rate-sensitive liabilities than assets, then an increase in interest rates will reduce bank profits.

Q: A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should _________ rate-sensitive assets and _________ rate-sensitive liabilities.A)increase; increaseB)decrease; increaseC)decrease; decreaseD)increase; decrease

Q: One problem with basic gap analysis is that itA)is calculated assuming interest rates on all maturities are equal.B)is calculated assuming interest rates on all maturities change by equal amounts.C)measures the sensitivity of net worth to interest rate changes.D)does not measure the sensitivity of income to interest rate changes.E)applies only to financial institutions.

Q: One problem with duration gap analysis is that itA)is calculated assuming that the yield curve is flat.B)is calculated assuming that the yield curve does not change.C)does not measure the sensitivity of net worth to interest rate changes.D)does not measure the sensitivity of income to interest rate changes.E)applies only to financial institutions.

Q: If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have aA)negative duration gap.B)positive duration gap.C)negative gap.D)positive gap.

Q: If a decline in interest rates causes the market value of a bank's net worth to rise, then the bank must have aA)negative duration gap.B)positive duration gap.C)negative gap.D)positive gap.

Q: If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3 percent will lead toA)a rise in the market value of its net worth of 5.66 percent.B)a fall in the market value of its net worth of 5.66 percent.C)a rise in net interest income of 5.66 percent.D)a fall in net interest income of 5.66 percent.E)an unknown change.

Q: If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9 percent will lead toA)a rise in the market value of its net worth of 5.66 percent.B)a rise in net interest income of 5.66 percent.C)a fall in the market value of its net worth of 5.66 percent.D)a fall in net interest income of 5.66 percent.E)an unknown change.

Q: To use the concept of duration to analyze the effect of changes in interest rates on the market value of an asset, a bank manager would multiplyA)the negative of the duration of the asset by the change in the interest rate, Δi.B)the negative of the duration of the asset by Δi /(1 + i).C)the duration of the asset by the change in the interest rate, Δi.D)the duration of the asset by Δi /(1 + i).

Q: Duration analysis involves comparing the average duration of the bank's _________ to the average duration of its _________A)securities portfolio; non-deposit liabilities.B)loan portfolio; non-deposit liabilities.C)loan portfolio; rate-sensitive liabilities.D)rate-sensitive assets; rate-sensitive liabilities.E)assets; liabilities.

Q: Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is calledA)basic gap analysis.B)the segmented maturity approach to gap analysis.C)the maturity bucket approach to gap analysis.D)the segmented maturity approach to interest-exposure analysis.E)none of the above.

Q: Duration gap analysisA)is a refinement of basic gap analysis that accounts for interest-rate changes over a multiyear period.B)is a refinement of basic gap analysis that accounts for how long a gap will last.C)is a complement to basic gap analysis that accounts for the effect of interest rate changes on market value.D)is a complement to basic gap analysis that accounts for the influence of partially rate-sensitive assets.

Q: Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is calledA)basic duration analysis.B)basic gap analysis.C)interest-exposure analysis.D)gap-exposure analysis.

Q: If First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits toA)increase by $15 million.B)increase by $1.5 million.C)decline by $15 million.D)decline by $1.5 million.

Q: If First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will cause profits toA)increase by $10 million.B)increase by $1.0 million.C)decline by $10 million.D)decline by $1.0 million.

Q: First National Bank Table 24.2Refer to Table 24.2. Assuming that the average duration of the bank's assets is four years, while the average duration of its liabilities is three years, a rise in interest rates from 5 percent to 10 percent will cause the net worth of First National to _________ by _________ of the total original asset value.A)decline; 5%B)decline; 3%C)decline; 2%D)increase; 5%

Q: First National Bank Table 24.2Referring to Table 24.2, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis) willA)decline by $0.5 million.B)decline by $1.5 million.C)decline by $2.5 million.D)increase by $2.0 million.

Q: First National Bank Table 24.2Referring to Table 24.2, First National Bank has a gap of _________.A)-10B)10C)20D)0

Q: First National Bank Table 24.1Refer to Table 24.1. Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, a rise in interest rates from 5% to 10% will cause the net worth of First National to _________ by _________ of the total original asset value.A)increase; 11%B)decline; 11%C)increase; 10%D)decline; 5%

Q: First National Bank Table 24.1Referring to Table 24.1, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis) willA)decline by $0.5 million.B)decline by $1.5 million.C)decline by $2.5 million.D)increase by $1.5 million.

Q: Banks face the problem of _________ in loan markets because bad credit risks are the ones most likely to seek bank loans.A)adverse selectionB)moral hazardC)moral suasionD)intentional fraud

Q: First National Bank Table 24.1Referring to Table 24.1, First National Bank has a gap of _________.A)-30B)+30C)60D)0

Q: Within the broad universe of private equity sectors, the two most common are venture funds and capital buyouts.

Q: The difference between rate-sensitive liabilities and rate-sensitive assets is known as theA)duration.B)interest-sensitivity index.C)interest-rate risk index.D)gap.

Q: In a typical private equity buyout, a partnership is formed and private equity investors are contacted to pledge participation.

Q: An additional perk of a private equity firm is that the profits for both CEOs and the partners are taxed at the 15% capital gains rather than the 35% rate they would suffer if the income was received as income.

Q: Investors in venture capital firms expect to profit quickly from their investment.

Q: Venture capital firms reduce risk by investing in only a few companies which can be carefully monitored and nurtured.

Q: An investment pool is formed to manipulate the market for a stock by spreading false rumors about the health of the firm.

Q: The Securities Acts Amendment of 1975 abolished fixed commissions.

Q: Junk bonds are high-risk, high-return equity securities that were used primarily to finance takeover attempts.

Q: One disadvantage of the private placement of securities issues is the high cost of registering the issue.

Q: Insurance management tools that give policyholders incentives to avoid accidents insured against includeA)deductibles.B)risk-based premiums.C)coinsurance.D)all of the above.

Q: Investment bankers perform a number of tasks required to sell securities to the public, among them pricing the security, preparing the filings required by the SEC, arranging for the security to be rated, and marketing the security through their contacts with brokerage houses.

Q: To prevent the moral hazard problem, health and life insurance companies may write policiesA)that increase benefits dramatically once the policyholder is discovered to have contracted an illness so that the patient can recover sooner.B)containing provisions which either reduce or eliminate benefits to persons who contract pre-specified illnesses.C)boosting the amount the companies will pay health providers in the event that claims are submitted by policyholders.D)with only A and B of the above provisions.