Q&A Hero

Q: The policy of _________ exacerbated _________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency.A)regulatory forbearance; moral hazardB)regulatory forbearance; adverse selectionC)regulatory stringency; moral hazardD)regulatory stringency; adverse selection

Q: When nearly half of the S&Ls in the United States had a negative net worth and were thus insolvent by the end of 1982, regulators adopted a policy of _________, which amounted to _________ capital requirements.A)regulatory forbearance; raisingB)regulatory forbearance; loweringC)regulatory stringency; raisingD)regulatory stringency; lowering

Q: The government granted thrifts greater powers in the early 1980s in hopes of turning the industry's problems around. These powersA)required greater expertise in managing risk than many thrift managers possessed.B)encouraged thrifts to expand lending rapidly in real estate, increasing their exposure to risk.C)expanded the scope and complexity of thrift lending activities that went beyond what regulators could effectively monitor, given their limited resources.D)did all of the above.E)did only A and B of the above.

Q: In the 1980s, thrift institutions, which had been almost entirely restricted to making loans for home mortgages only, were allowed by regulators toA)finance acquisitions in commercial real estate.B)extend consumer loans.C)purchase junk bonds.D)do all of the above.E)do only A and B of the above.

Q: Savings and loans lost a total of $10 billion in 1981-1982 due to a combination of rising interest rates in 1979-1981 andA)the recession of 1981-1982 that reduced real estate prices enough to cause significant loan defaults.B)the regulatory restrictions enacted by Congress in 1981 and 1982.C)the loss of market share to commercial banks that were allowed to compete directly with thrifts in the real estate market.D)the acceleration of inflation in 1981-1982 that caused thrifts to lose additional funds to money market mutual funds.

Q: The Riegle-Neal Act of 1994A)required all banks to become universal banks.B)removed ceilings on bank deposit interest rates.C)allowed banks to underwrite insurance and securities and engage in real estate activities.D)overturned prohibitions on interstate banking and branching.

Q: In the early stages of the 1980s banking crisis, financial institutions were especially harmed byA)declining interest rates from late 1979 until 1981.B)the severe recession in 1981-82.C)the disinflation from mid-1980 to early 1983.D)all of the above.

Q: The prohibition against banks underwriting corporate securities and engaging in brokerage, real estate, and insurance activities was repealed by theA)Gramm-Leach-Bliley Financial Services Modernization Act.B)Competitive Equality in Banking Act.C)Depositary Institution Deregulation and Monetary Control Act.D)Glass-Steagall Act.

Q: The legislation that separated investment banking from commercial banking was theA)National Bank Act.B)Federal Reserve Act.C)Glass-Steagall Act.D)McFadden Act.

Q: Which of the following is not expected to result from bank consolidation in the U.S.?A)Disappearance of small community banksB)Acceleration of the decline in the number of banksC)Banks will be more efficientD)Banks will be less likely to fail

Q: Although it has a population about half that of the United States, Japan hasA)many more banks.B)about 10 percent of the number of banks.C)about 5 percent of the number of banks.D)about 1 percent of the number of banks.

Q: As a result of restrictive banking regulations, the United StatesA)has too few banks when compared to other industrialized countries.B)has banks that are quite large relative to those in other countries.C)has too many banks when compared to other industrialized countries.D)both A and B of the above.

Q: The only country without a true national banking system in which banks have branches throughout the nation isA)Canada.B)Japan.C)the United Kingdom.D)the United States.

Q: A bank with a large credit-card customer base can market other financial products to these customers at a low cost. This is an example ofA)economies of scale.B)economies of scope.C)becoming a superregional bank.D)none of the above.

Q: The McFadden Act's prohibition against interstate branchingA)was weakened by the introduction of shared electronic banking facilities that provide banking services nationwide.B)was weakened by regional compacts that allowed banks to own banks in other states in their region.C)impeded banks' ability to diversify their loans and take advantage of economies of scale.D)all of the above.

Q: As a result of shared electronic banking facilities,A)barriers to branching have become less burdensome.B)banking has become less competitive.C)both of the above have occurred.D)neither of the above has occurred.

Q: So-called fallen angels differ from junk bonds in thatA)junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds which have had their credit ratings fall below Baa.B)junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings.C)junk bonds have ratings below Baa, whereas fallen angels have ratings below C.D)fallen angels have ratings below Baa, whereas junk bonds have ratings below C.

Q: Which of the following are true statements concerning bank holding companies?A)Bank holding companies own almost all large banks.B)Bank holding companies have experienced dramatic growth in the past twenty-five years.C)Through a loophole in the McFadden Act, bank holding companies have successfully evaded interstate branching restrictions.D)All of the above are true.E)Only A and B of the above are true.

Q: So-called fallen angels differ from junk bonds in thatA)junk bonds refer to previously issued bonds which have had their credit ratings fall below Baa.B)fallen angels refer to newly issued bonds with low credit ratings.C)junk bonds refer to newly issued bonds with low credit ratings.D)both A and B of the above.

Q: "Stripping" a Treasury bondA)means selling each of its future payments as a separate zero-coupon bond.B)decreases the total present discounted value of future payments.C)both A and B.D)none of the above.

Q: Which of the following is an example of a financial innovation introduced to avoid regulations?A)SecuritizationB)Junk bondC)Debit cardD)Sweep account

Q: Which of the following is not a financial innovation stimulated by information technology?A)Credit cardB)Debit cardC)Adjustable-rate mortgageD)Electronic banking

Q: A smart-card is a form ofA)stored-value card.B)credit card.C)debit card.D)e-cash card.

Q: The entry of Sears, AT&T and GM into the credit card business is an indication ofA)government's efforts to deregulate the provision of financial services.B)the rising profitability of credit card operations.C)the reduction in costs of credit card operations since 1990.D)the sale of unprofitable operations by Bank of America and Citicorp.

Q: A firm issuing credit cards earns income fromA)loans it makes to credit card holders.B)payments made to it by stores on credit card purchases.C)payments made to it by manufacturers of the products sold in stores on credit card purchases.D)all of the above.E)only A and B of the above.

Q: Credit cards date back toA)prior to World War II.B)just after World War II.C)the early 1950s.D)the late 1950s.

Q: Adjustable-rate mortgagesA)benefit homeowners when interest rates are falling.B)reduce financial institutions' interest-rate risk.C)reduce households' risk of having to pay higher mortgage payments when interest rates rise.D)do only A and B of the above.

Q: Examples of financial services that became practical realities as the result of new computer technology includeA)credit cards.B)electronic banking facilities.C)checking accounts.D)all of the above.E)only A and B of the above.

Q: The most important source of the changes in supply conditions that stimulate financial innovation has been theA)aging of the baby-boomer generation.B)dramatic increase in the volatility of interest rates.C)improvement in information technology.D)dramatic increase in competition from foreign banks.E)deregulation of financial institutions.

Q: Adjustable-rate mortgagesA)protect households against higher mortgage payments when interest rates rise.B)keep financial institutions' earnings high even when interest rates are falling.C)have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.D)do only A and B of the above.E)none of the above.

Q: The most significant change in the economic environment that changed the demand for financial products since 1970 has beenA)the aging of the baby-boomer generation.B)the dramatic increase in the volatility of interest rates.C)the dramatic increase in competition from foreign banks.D)the deregulation of financial institutions.

Q: In the 1950s the interest rate on three-month Treasury bills fluctuated between 1.0% and 3.5%. In the 1980s, the three-month Treasury bill rate ranged from 5% to over 15%. From this one could predict that in the 1980s interest-rate risk was _________ and the demand for financial innovation was _________.A)greater; lowerB)greater; greaterC)lower; lowerD)lower; greater

Q: Large fluctuations in interest rates lead toA)substantial capital gains and losses to owners of securities.B)greater uncertainty about returns on investments.C)greater interest-rate risk.D)all of the above.

Q: Rising interest-rate risk _________ the _________ financial innovation.A)increased; cost ofB)increased; demand forC)reduced; cost ofD)reduced; demand for

Q: New computer technology hasA)increased the cost of financial innovation.B)increased the demand for financial innovation.C)reduced the cost of financial innovation.D)reduced the demand for financial innovation.

Q: Which of the following are important factors in determining the degree and timing of financial innovation?A)Changes in technologyB)Changes in financial market conditionsC)Changes in regulationD)All of the aboveE)Only A and B of the above

Q: Which of the following statements concerning bank regulation in the United States are true?A)The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System.B)The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System.C)The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies.D)All of the above are true.E)Only A and B of the above are true.

Q: Which of the following statements concerning bank regulation in the United States are true?A)The Office of the Comptroller of the Currency has the primary responsibility for national banks.B)The Federal Reserve and the state banking authorities jointly have responsibility for state banks that are members of the Federal Reserve System.C)The Fed has sole regulatory responsibility over bank holding companies.D)All of the above are true.E)Only A and B of the above are true.

Q: Which of the following statements is false?A)Checkable deposits are usually the lowest cost source of bank funds.B)Checkable deposits are the primary source of bank funds.C)Checkable deposits are payable on demand.D)Checkable deposits include NOW accounts.

Q: Which regulatory body charters national banks?A)The Federal ReserveB)The Federal Deposit Insurance CorporationC)The Comptroller of the CurrencyD)None of the above

Q: Checkable deposits and money market deposit accounts areA)payable on demand.B)liabilities of the banks.C)assets of the banks.D)only A and B of the above.E)only A and C of the above.

Q: The share of checkable deposits in total bank liabilities hasA)expanded moderately over time.B)expanded dramatically over time.C)shrunk over time.D)remained virtually unchanged since 1960.

Q: Which of the following are reported as liabilities on a bank's balance sheet?A)Discount loansB)Cash items in the process of collectionC)State government securitiesD)All of the aboveE)Only B and C of the above

Q: Which of the following are reported as liabilities on a bank's balance sheet?A)ReservesB)Checkable depositsC)LoansD)Deposits with other banks

Q: A bank's balance sheetA)shows that total assets equal total liabilities plus equity capital.B)lists sources and uses of bank funds.C)indicates whether or not the bank is profitable.D)does all of the above.E)does only A and B of the above.

Q: Which of the following statements is false?A)A bank's assets are its uses of funds.B)A bank issues liabilities to acquire funds.C)A bank's assets provide the bank with income.D)Bank capital is an asset on the bank balance sheet.

Q: Which of the following statements is true?A)A bank's assets are its uses of funds.B)A bank's assets are its sources of funds.C)A bank's liabilities are its uses of funds.D)Only B and C of the above are true.

Q: Which of the following statements are true?A)A bank's assets are its sources of funds.B)A bank's liabilities are its uses of funds.C)A bank's balance sheet shows that total assets equal total liabilities plus equity capital.D)Each of the above.

Q: Owners cannot write checks on non-transaction deposits, but the interest rate paid on these deposits are usually higher than those on checkable deposits.

Q: A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is calledA)a sinking fund.B)a call provision.C)a restrictive covenant.D)a shelf registration.

Q: Call provisions will be exercised when interest rates _________ and bond values _________.A)rise; riseB)fall; riseC)rise; fallD)fall; fall

Q: The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality.

Q: (I) Restrictive covenants often limit the amount of dividends that firms can pay the stockholders.(II) Most corporate indentures include a call provision, which states that the issuer has the right to force the holder to sell the bond back.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: Restrictive covenants canA)limit the amount of dividends the firm can pay.B)limit the ability of the firm to issue additional debt.C)restrict the ability of the firm to enter into a merger agreement.D)do all of the above.E)do only A and B of the above.

Q: Typically, the interest rate on corporate bonds will be _________ the more restrictions are placed on management through restrictive covenants, because _________.A)higher; corporate earnings will be limited by the restrictionsB)higher; the bonds will be considered safer by bondholdersC)lower; the bonds will be considered safer by buyersD)lower; corporate earnings will be higher with more restrictions in place

Q: Policies that limit the discretion of managers as a way of protecting bondholders' interests are calledA)restrictive covenants.B)debentures.C)sinking funds.D)bond indentures.

Q: The bond contract that states the lender's rights and privileges and the borrower's obligations is called theA)bond syndicate.B)restrictive covenant.C)bond covenant.D)bond indenture.

Q: (I) Most corporate bonds have a face value of $1000, pay interest semi-annually, and can be redeemed anytime the issuer wishes. (II) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: (I) Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. (II) General obligation bonds do not have specific assets pledged as security or a specific source of revenue allocated for their repayment.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: The interest rates on government agency bonds areA)almost identical to those available on Treasury securities since it is unlikely that the federal government would permit its agencies to default on their obligations.B)significantly higher than those available on Treasury securities due to their low liquidity.C)significantly lower than those available on Treasury securities because agency interest payments are tax exempt.D)significantly lower than those available on Treasury securities because the interest-rate risk on agency securities is lower than that on Treasury securities.

Q: (I) Because interest rates on Treasury bills are more volatile than rates on long-term securities, the return on short-term Treasury securities is usually above that on longer-term Treasury securities.(II) A Treasury STRIP separates the periodic interest payments from the final principal repayment.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: Which of the following statements about Treasury inflation-indexed bonds is not true?A)The principal amount used to compute the interest payment varies with the consumer price index.B)The interest payment rises when inflation occurs.C)The interest rate rises when inflation occurs.D)At maturity the securities pay the greater of face-value or inflation-adjusted principal.

Q: (I) In most years the rate of return on short-term Treasury bills is below that on the 20-year Treasury bond. (II) Interest rates on Treasury bills are more volatile than rates on long-term Treasury securities.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: Most of the time, the interest rate on Treasury notes and bonds is _________ that on money market securities because of _________ risk.A)above; interest-rateB)above; defaultC)below; interest-rateD)below; default

Q: To sell an old bond when interest rates have _________, the holder will have to _________ the price of the bond until the yield to the buyer is the same as the market rate.A)risen; lowerB)risen; raiseC)fallen; lowerD)risen; inflate

Q: (I) To sell an old bond when interest rates have risen, the holder will have to discount the bond until the yield to the buyer is the same as the market rate. (II) The risk that the value of a bond will fall when market interest rates rise is called interest-rate risk.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: The security with the longest maturity is a TreasuryA)note.B)bond.C)acceptance.D)bill.

Q: The prices of Treasury notes, bonds, and bills are quotedA)as a percentage of the coupon rate.B)as a percentage of the previous day's closing value.C)as a percentage of $100 face value.D)as a multiple of the annual interest paid.

Q: Treasury bonds are subject to _________ risk but are free of _________ risk.A)default; interest-rateB)default; underwritingC)interest-rate; defaultD)interest-rate; underwriting

Q: (I) The coupon rate is the rate of interest that the issuer of the bond must pay. (II) The coupon rate on old bonds fluctuates with market interest rates so they will remain attractive to investors.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: Fed policy since 1982 suggests thatA)monetary aggregates continue to be rejected as its intermediate target.B)it is pursuing a policy of interest rate smoothing.C)it is now more concerned with exchange rates than with interest rates.D)all of the above are true.E)only A and B of the above are true.

Q: (I) The coupon rate is the rate of interest that the issuer of the bond must pay.(II) The coupon rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates.A)(I) is true, (II) false.B)(I) is false, (II) true.C)Both are true.D)Both are false.

Q: Monetary policy since 1982 suggests that the Fed isA)finally using a monetary aggregate as its intermediate target.B)less concerned with fluctuations in the federal funds rate than in the 1979-1982 period.C)more concerned with exchange rates than with interest rates.D)none of the above.

Q: The _________ rate is the rate of interest that the issuer must pay.A)marketB)couponC)discountD)funds

Q: The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the FedA)never intended to target monetary aggregates.B)used the announced strategy of targeting nonborrowed reserves as a smoke screen to fight inflation.C)had shifted to the monetary base as an operating target.D)both A and B of the above.

Q: The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the FedA)had shifted to borrowed reserves as an operating target.B)had shifted to nonborrowed reserves as an operating target.C)had shifted to the monetary base as an operating target.D)never intended to target monetary aggregates.

Q: Explanations for the Fed's poor monetary control during 1979-1982 includeA)the acceleration of financial deregulation.B)the suspension of credit controls in mid-1979.C)the Fed's desire to fight inflation without taking all the criticism for the high interest rate policy.D)only A and B of the above.E)only A and C of the above.

Q: The Fed's operating procedures employed between 1979 and 1982 resulted in _________ swings in the federal funds rate and _________ swings in the M1 growth rate.A)increased; increasedB)increased; decreasedC)decreased; decreasedD)decreased; increased

Q: The Fed's use of the federal funds rate as an operating target in the 1970s resulted inA)countercyclical monetary policy.B)too slow growth in M1 throughout the decade.C)procyclical monetary policy.D)too rapid growth in M1 throughout the decade.E)none of the above.

Q: Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasizedA)free reserve targeting.B)interest rate targeting.C)a real bills doctrine.D)price index targeting.