Q&A Hero

Q: When market participants have rational expectations, A) the information they use contains only past experiences. B) the information they use contains not only past experiences, but also their expectations for the future. C) the information they use contains only their expectations for the future. D) their forecasts are always correct.

Q: The fact that banks can be either nationally or state chartered creates: A. situations where some banks go unregulated.B. situations where banks operating in more than one state can escape regulation.C. regulatory competition.D. banks being simultaneously regulated by more than one agency.

Q: When market participants have rational expectations, A) they use all information available to them. B) they only slowly adjust their expectations to news which could affect prices or returns. C) they are less likely to make accurate forecasts than if they have adaptive expectations. D) they are able to forecast interest rates more accurately than inflation rates.

Q: Banks can effectively choose their regulators by deciding whether to: A. be a private or public corporation.B. be a member of the Federal Reserve or not.C. purchase FDIC insurance or to forego the coverage.D. be chartered at the national or state level.

Q: According to the Gordon-Growth model, what is the value of a stock with a dividend of $2, required return on equity of 8% and expected growth rate of dividends of 4%? A) $25 B) $26 C) $50 D) $52

Q: Credit Unions are regulated by a combination of agencies which includes: A. state authorities.B. The Federal Reserve.C. The Federal Deposit Insurance Corporation.D. The Office of the Comptroller of the Currency.

Q: According to the Gordon-Growth model, what is the value of a stock with a dividend of $1, required return on equity of 10% and expected growth rate of dividends of 5%? A) $2 B) $10 C) $20 D) $21

Q: Which of the following regulates commercial banks as well as savings banks and savings and loans? A. The Federal Reserve SystemB. Securities and Exchange CommissionC. The Office of the Comptroller of the CurrencyD. The Internal Revenue Service

Q: The fundamental value of a stock equals A) the future value of all future dividends. B) the present value of all future dividends. C) the present value of current and future dividends. D) the present value of all future capital gains.

Q: Savings banks and savings and loans are regulated by a combination of agencies which includes the: A. Federal Reserve System.B. Office of the Comptroller of the Currency.C. Securities and Exchange Commission.D. Internal Revenue Service.

Q: The rate of return of a stock held for one year equals A) the change in the price of the stock. B) the dividend yield plus the rate of capital gain. C) the rate of capital gain minus the dividend yield. D) the dividend yield minus the rate of capital gain.

Q: Savings banks and savings and loans are regulated by a combination of agencies which includes all of the following except: A. The Federal Reserve System.B. The Comptroller of the Currency.C. The Federal Deposit Insurance Corporation.D. state authorities.

Q: Suppose you plan to hold a stock for one year. You expect that, in one year, it will sell for $30 and pay a dividend of $3 per share. If your required return on equity is 10%, what is the most you should be willing to pay for the share today? A) $3.30 B) $23 C) $30 D) $33

Q: Governments supervise banks mainly to do each of the following, except: A. reduce the potential cost to taxpayers of bank failures.B. be sure the banks are following the regulations set out by banking laws.C. reduce the moral hazard risk.D. eliminate all risk faced by investors.

Q: The required return on equity for an individual stock includes which of the following? A) systemic risk B) idiosyncratic risk C) risk-free interest rate D) all of the above

Q: The purpose of the government's safety net for banks is to do each of the following, except: A. protect the integrity of the financial system.B. eliminate all risk that investors face.C. stop bank panics.D. improve the efficiency of the economy.

Q: How can stock prices affect spending by businesses and households?

Q: Governments employ three strategies to contain the risks created by government safety nets. These include each of the following, except: A. government supervision.B. an excise tax on bank profits.C. government regulation.D. formal bank examination.

Q: What are the differences between common stock and preferred stock?

Q: If the government did not offer the too-big-to-fail safety net: A. large banks would be more disciplined by the potential loss of large corporate accounts.B. the moral hazard problem of insuring large banks would increase.C. the moral hazard problem of insuring large banks would not be affected.D. the FDIC deposit insurance limits would have to be raised.

Q: In what way do owners of stocks have limited liability?

Q: Implicit government support for "too big to fail" banks: A. increases the scrutiny of the bank's risk by large corporate depositors.B. reduces the risk faced by depositors with accounts less than $250,000.C. reduces the risk faced by depositors with accounts exceeding $250,000.D. reduces the moral hazard problem of insuring large banks.

Q: What was the decline in the value of mutual funds held by households during the depths of the financial crisis, between the third quarter of 2008 and the first quarter of 2009 A) $2 million B) $2 billion C) $200 billion D) $2 trillion

Q: The government's too-big-to-fail policy applies to: A. certain highly populated states where a bank run impacts a large percent of the total population.B. large banks whose failure would start a widespread panic in the financial system.C. large corporate payroll accounts held by some banks where many people would lose their income.D. banks that have branches in more than two states.

Q: Using estimates of past returns, which monthly investment is most likely to result in the largest amount of money at retirement for a person in the early 20s? A) CDs B) Treasury bills C) stocks D) all of the above will result in a similar amount of money

Q: The moral hazard problem caused by government safety nets: A. is greater for larger banks.B. is greater for smaller banks.C. is pretty constant across banks of all sizes.D. only exists for banks with high leverage ratios.

Q: What are the economic implications of an inverted yield curve?

Q: As a result of government provided deposit insurance, the ratio of assets to capital for commercial banks since the 1920s has: A. just about doubled.B. almost tripled.C. not changed.D. decreased.

Q: How does the liquidity premium theory explain an upward sloping yield curve during normal economic times?

Q: Since the 1920's, the ratio of assets to capital has almost tripled for commercial banks. Many economists believe this is the direct result of: A. lower quality management in banks.B. the increase in branch banking.C. allowing banks to offer non-bank services.D. government provided deposit insurance.

Q: A one-year bond has an interest rate of 0.2% and is expected to rise to 0.5% next year and 1.1% in two years. The term premium for a two-year bond is 0.1% and for a three-year bond is 0.25%. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?

Q: Which of the following statements is most correct? A. the higher the deposit insurance limit the lower the risk of moral hazard.B. the higher the deposit insurance limit the greater the risk of moral hazard.C. deposit insurance limits do not impact moral hazard, they impact adverse selection.D. increasing the deposit insurance limits above $100,000 would increase coverage for over 50 percent of all depositors.

Q: A one-year bond has an interest rate of 3% and is expected to fall to 5% next year and 2% in two years. The term premium for a two-year bond is 0.3% and for a three-year bond is 0.5%. What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?

Q: In the ten years after the FDIC limit was increased to $100,000: A. more than four times the number of banks and savings and loans failed than did during the first 46 years of FDIC's existence.B. less than one-fourth the number of banks and savings and loans failed than during the first 46 years of FDIC's existence.C. the cost to taxpayers of failed institutions in that period was negligible because FDIC was in place.D. increasing the deposit insurance limit to $250,000 provided complete coverage for all deposits except those of large corporations.

Q: Why does the segmented markets theory suggest think that bonds of different maturities are not perfect substitutes for each other?

Q: Deposit insurance only seems to be viable at the federal level. This is likely due to the fact that: A. state funds are less informed about the solvency of national banks.B. a run on the banks within a state will always spread countrywide.C. the U.S. Treasury backs the FDIC and can therefore withstand virtually any crisis.D. the cost of state insurance is prohibitively high.

Q: According to the expectations theory, what will be the interest rate on a three-year bond if a one-year bond has an interest rate of 2% and is expected to have an interest rate of 3% next year and 5% in two year? Report your answer using a percentage with two decimal places.

Q: Many states had their own insurance fund to protect depositors. The critical problem with these state funds is: A. they are monopolies in their own state and extract extremely high prices for the insurance they provide.B. they are highly inefficient they cannot achieve the economies of scale a federal fund can achieve.C. they do not have regulators as knowledgeable as the regulators at FDIC.D. no state fund is large enough to withstand a run on all of the banks it insures.

Q: Describe the facts found in the bond market about the relationship between interest rates on bonds of different maturities.

Q: Under the purchase-and-assumption method, the FDIC usually finds it: A. can sell the failed bank for more than the bank is actually worth.B. can sell the bank at a price equaling the value of the failed banks assets.C. has to sell the bank at a negative price since the bank is insolvent.D. cannot sell the bank and almost always has to revert to the payoff method for dealing with a failed bank.

Q: If the expectations theory of the term structure is correct, would a reduction in the supply of thirty-year Treasury bonds affect their yields?

Q: Considering the methods available to the FDIC for dealing with a failed bank, the depositors of the failed bank should: A. be indifferent between the two since it really does not matter to them which method is used.B. prefer the purchase and assumption method since the deposits over $250,000 will also be protected.C. prefer the payoff method because they will have access to their funds earlier.D. prefer the payoff method since a lot less paperwork is involved for the depositor.

Q: Almost every time that there has been an inverted yield curve, what took place within one year? A) recession B) rising inflation C) financial crisis D) higher bond yields

Q: Under the purchase-and-assumption method of dealing with a failed bank, the FDIC: A. finds another bank to take over the insolvent bank.B. takes over the day to day management of the bank.C. sells the failed bank to the Federal Reserve.D. sells off the profitable loans of the failed bank in an open auction.

Q: Which theory explains all three facts about the term structure? A) expectations B) segmented markets C) preferential treatment D) liquidity premium

Q: The payoff method used by the FDIC to address the insolvency of a bank is when the FDIC: A. pays the owners of the bank for the losses they would otherwise face.B. pays off all depositors the balances in their accounts so no depositor suffers a loss, though the owners of the bank may suffer losses.C. pays off the depositors up to the current $250,000 limit, so it is possible that some depositors will suffer losses.D. takes all of the assets of the bank, sells them, pays off the liabilities of the bank, in full and then replenishes their fund with any remaining balance.

Q: The additional interest that investors require to buy a long-term bond instead of a sequence of short-term bonds is known as the: A) risk premium B) default premium C) term premium D) segmented premium

Q: On November 20, 1985, the Bank of New York needed to use the lender of last resort function due to: A. a run on the bank started by a rumor that the president of the bank embezzled tens of millions of dollars from the bank.B. a computer error caused the bank's records to wipe out the balances of all of its customers.C. a rumor that the bank was about to be taken over by FDIC due to insolvency.D. a computer error that made it impossible for the bank to keep track of its Treasury bond trades.

Q: If the federal government replaced the current income tax with a value-added tax A) the prices of Treasury and municipal bonds would rise. B) the prices of Treasury and municipal bonds would fall. C) the prices of Treasury bonds would rise, while the prices of municipal bonds would fall. D) the prices of Treasury bonds would fall, while the prices of municipal bonds would rise.

Q: One reason customers do not care about the quality of their bank's assets is: A. most people cannot distinguish an asset from a liability.B. the quality of a bank's assets changes almost daily.C. they assume the bank only has high quality assets.D. with deposit insurance, there isn't any real reason to care; their deposits are protected even if the bank fails.

Q: Interest and capital gains are taxed differently in the United States in that A) interest is exempt from state and local taxes. B) interest is taxed as ordinary income, but capital gains are taxed only when realized. C) interest is taxed as ordinary income, but capital gains are taxed as accrued. D) capital gains when realized are exempt from state and local taxes.

Q: When the Federal Reserve was unable to stem the bank panics of the 1930s, Congress responded by: A. taking over the lender of last resort function and assigning this function to the U.S. Treasury.B. ordering the printing of tens of billions of dollars of additional currency.C. creating the FDIC and offering deposit insurance.D. declaring a bank holiday and closing banks for 30 days.

Q: Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on a thirty-year corporate bond is 10%. You would be indifferent between buying this corporate bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield ofA) 6.5%.B) 7.0%.C) 9.5%.D) 10.0%.

Q: During the financial crisis of 2007-2009 in the United States it was revealed that the function of a lender of last resort had not kept pace with the evolving financial system because: A. financial intermediaries had grown sufficiently large so as not to need a lender of last resort.B. shadow banks lacked access to the financial resources available through the lender of last resort.C. banks were sufficiently linked to one another that the need for a lender of last resort had diminished.D. banks had become sufficiently diversified so as to be able to provide for their own liquidity.

Q: Suppose that your marginal federal income tax rate is 30%, the sum of your marginal state and local tax rates is 5%, and the yield on thirty-year U.S. Treasury bonds is 10%. You would be indifferent between buying a thirty-year Treasury bond and buying a thirty-year municipal bond issued within your state (ignoring differences in liquidity, risk, and costs of information) if the municipal bond has a yield ofA) 6.5%.B) 7.0%.C) 9.5%.D) 10.0%.

Q: The existence of a lender of last resort creates moral hazard for bank managers because: A. they have an incentive to take too much risk in their operations.B. officials are likely to undervalue the bank's portfolio of assets.C. they are less likely to apply for a direct loan from the central bank.D. banks seek loans from the central bank only after exploring other options.

Q: Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because A) the after-tax yield on municipal bonds is greater. B) municipal bonds invariably have lower default risk. C) municipal bonds are more liquid than most other instruments. D) the yield on municipal bonds is considered inflation proof.

Q: If your stockbroker gives you bad advice and you lose your investment: A. the government will reimburse you similar to reimbursing depositors if a bank fails.B. the government will not reimburse you for the loss; you are not protected from bad advice by your stockbroker.C. these losses would be covered under FDIC insurance.D. your investment would only be covered if the stockbroker was employed by a bank.

Q: For state residents, interest on most bonds issued by their state government is A) exempt from state and federal income taxes. B) exempt from state, but not from federal, income taxes. C) exempt from federal, but not from state, income taxes. D) subject to both state and federal income taxes.

Q: A moral hazard situation arises in the lender of last resort function because: A. a central bank finds it difficult to distinguish illiquid from insolvent banks.B. a central bank usually will only make a loan to a bank after it becomes insolvent.C. a central bank usually undervalues the assets of a bank in a crisis.D. the central bank is the first place a bank facing a crisis will turn.

Q: Municipal bonds are issued A) only by local governments. B) only by state governments. C) by both state and local governments. D) by the federal government, and by state and local governments.

Q: During a bank crisis: A. officials at the Federal Reserve find it easy to sort out solvent from insolvent banks.B. it is important for regulators to be able to distinguish insolvent from illiquid banks.C. it is easy to determine the market prices of bank's assets.D. a bank will go to the central bank for a loan before going to other banks.

Q: Differences in the taxation of returns A) only affect the yields of illiquid credit market instruments. B) have a negligible effect on the yields of credit market instruments. C) only affect the yields of high-information cost credit market instruments. D) create differences in yields among credit market instruments.

Q: One lesson learned from the bank panics of the early 1930's is: A. the lender of last resort function almost guarantees that bank panics are a thing of the past.B. the mere existence of a lender of last resort will not keep the financial system from collapsing.C. only the U.S. Treasury can be a true lender of last resort.D. the financial system will collapse without a lender of last resort.

Q: During the financial crisis of 2007-2009, A) mortgage-backed securities became more liquid. B) information costs of mortgage-backed securities rose. C) information costs of mortgage-backed securities declined. D) the tax treatment of mortgage-backed securities was changed.

Q: The first test of the Federal Reserve as lender of last resort occurred with the: A. attack on Pearl Harbor by the Japanese.B. widespread failures of Savings and Loans in the 1980's.C. introduction of flexible exchange rates in the U.S. in 1971.D. stock market crash in 1929.

Q: Following the downgrade of U.S. debt by Standard & Poor's in August, 2011: A) other rating agencies also downgraded U.S. debt B) interest rates spiked as investor's perception of risk increased C) investors didn't seem to be any more concerned about default risk than before the downgrade D) the U.S. implemented a plan to significantly reduce its budget deficit later that year

Q: If the lender of last resort function of the government is to be effective in working to minimize a crisis, it must be: A. reserved only for those banks that are most deserving.B. used on a limited basis.C. credible, with banks knowing they can get loans quickly.D. only available during economic downturns.

Q: The existence of rating agencies has A) lowered returns on corporate bonds. B) raised returns on corporate bonds. C) left returns on corporate bonds largely unaffected. D) raised returns on both corporate bonds and Treasury securities.

Q: The creation of the Federal Reserve in 1913: A. provided the opportunity for lender of last resort but not the guarantee that it would be used.B. guaranteed the Federal Reserve would always act as lender of last resort.C. eliminated bank panics in the U.S.D. was in response to the Great Depression in the U.S.

Q: Financial instruments with high information costs A) will usually be more liquid than similar instruments with low information costs. B) will have lower yields than U.S. Treasury securities. C) may not be offered for sale in some states. D) will have lower prices than similar instruments with low information costs.

Q: The need for a lender of last resort was identified as far back as: A. the start of the Great Depression in 1929.B. 1913, when the Federal Reserve was created.C. 1873, by British economist Walter Bagehot.D. 1776, by the first U.S. Secretary of the Treasury, Alexander Hamilton.

Q: Suppose that savers become less willing to purchase medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will A) fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds. B) rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds. C) rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds. D) fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds.

Q: The best way for a government to stop the failure of one bank from turning into a bank panic is to: A. make sure solvent institutions can meet the withdrawal demands of depositors.B. declare a bank holiday until solvent banks can acquire adequate liquidity.C. limit the withdrawals of depositors.D. provide zero-interest rate loans to all banks regardless of net worth.

Q: Suppose that savers become much more willing to purchase a certain type of municipal bond. The result will be that the bond's price will A) fall relative to the price of U.S. Treasury securities but rise relative to the price of corporate bonds. B) rise relative to the price of U.S. Treasury securities but fall relative to the price of corporate bonds. C) rise relative to the prices of U.S. Treasury securities and corporate bonds. D) fall relative to the prices of U.S. Treasury securities and corporate bonds.

Q: The inter-bank loans that appear on banks' balance sheets represent what proportion of bank capital? A. Nearly ten percentB. Almost three-fourthsC. About one-thirdD. Less than one percent

Q: The greatest appeal of U.S. Treasury securities is that A) they have high yields. B) they have no default risk. C) the U.S. Treasury will repurchase them at any time. D) their market prices fluctuate very little.

Q: One of the unique problems that banks face is: A. they hold liquid assets to meet illiquid liabilities.B. they hold illiquid assets to meet liquid liabilities.C. they hold liquid assets to meet liquid liabilities.D. both their assets and their liabilities are illiquid.

Q: A company that retains a high bond rating during a recession in which many other companies see their bond ratings cut will experience A) an increased flow of funds into the market for its securities. B) an increased demand for its securities, resulting in a higher expected return. C) a decreased demand for its securities, resulting in a lower expected return. D) a decreased flow of funds into the market for its securities.

Q: The government's providing of deposit insurance and functioning as the lender of last resort has significantly: A. decreased the incentive for bank managers to take on risk.B. increased the amount of regulation of banks required, but has had no effect on bank's incentive to take on risk.C. increased the incentive for banks to take on risk, but has had no effect on the amount of regulation of banks required.D. increased the amount of regulation of banks required and increased the incentive for banks to take on risk.