Q&A Hero

Q: A reduction in expected inflation will result in all of the following EXCEPT: A) lower nominal interest rates B) lower real interest rates C) reduced demand for bonds D) increased supply of bonds

Q: How does the lender of last resort potentially create a moral hazard problem?

Q: Suppose that there is concern about the stability of the global financial system causing a flight to the safety of U.S. government bonds. Which of the following is NOT a likely consequence? A) higher price of U.S. government bonds B) lower interest rate on U.S. government bonds C) increased demand for U.S. government bonds D) reduced supply of U.S. government bonds

Q: Does the lender of last resort function guarantee an end to bank runs? Explain.

Q: The supply curve for bonds would be shifted to the left by A) a decrease in government borrowing. B) a decrease in the corporate tax on profits. C) an increase in tax subsidies for investment. D) an increase in expected inflation.

Q: In 1873, British economist Walter Bagehot proposed that the central bank function as the lender of last resort. Specifically, he suggested the central bank lend freely to banks which have good collateral at high rates of interest. Why the requirements of good collateral and a high rate of interest?

Q: The supply curve for bonds would be shifted to the right by A) a decrease in expected profitability. B) a decrease in the corporate tax on profits. C) a decrease in tax subsidies for investment. D) a decrease in government borrowing.

Q: Explain why depository institutions receive a disproportionate amount of attention from government regulators (compared to most other industries).

Q: If households increase their saving at the same time that the government increases its deficit, A) the demand and supply curves for bonds will be unaffected. B) the demand curve for bonds will shift to the left. C) the supply curve for bonds will shift to the right. D) the equilibrium interest rate will definitely rise.

Q: Briefly describe the combination of strategies used by government officials to protect investors and ensure the stability of the financial system.

Q: If the government increases taxes while holding expenditures constant, A) the bond supply curve will shift to the left and the equilibrium interest rate will fall. B) the bond supply curve will shift to the right and the real interest rate will fall. C) government borrowing will be increased. D) the government's deficit will increase.

Q: Why is the financial industry inherently more unstable than most other industries?

Q: Studies by economists suggest that A) households do not increase their saving as the government's dissaving increases. B) households increase their saving, but not by the full amount of an increase in government dissaving. C) households also increase their dissaving when the government increases its dissaving. D) households also increase their saving when the government increases its saving.

Q: How do banks potentially make economic downturns more severe and how do economic downturns contribute to the increased failure of banks?

Q: If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate A) would fall. B) would rise. C) would be unaffected. D) might either rise or fall.

Q: Why is it that a run on a single bank can turn into a widespread financial panic, or what the text identified as contagion?

Q: If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the A) left and the equilibrium interest rate rises. B) left and the equilibrium interest rate falls. C) right and the equilibrium interest rate rises. D) right and the equilibrium interest rate falls.

Q: What is the difference between a bank that is insolvent and one that is illiquid?

Q: During most of the time in recent decades, the domestic government sector was A) a net borrower. B) a net lender. C) neither a borrower nor a lender. D) a major factor in keeping real interest rates low.

Q: Why do bank runs usually have people rushing to their bank instead of waiting for the lines to taper off so they do not have to wait so long?

Q: At an interest rate of 6%, how much will need to be invested today to have $10,000 in 5 years? A) $5,000 B) $7,473 C) $10,000 D) $13,382

Q: Why might there be a trade-off between a bank's profitability and its safety?

Q: $1 received n years from now has a value today of A) ($1 + i)/i. B) $1/(1 + i). C) ($1 + i/i. D) $1/(1 + i.

Q: The text points out that there is an inverse relationship between the fiscal cost of a bank crisis and real GDP growth. What are some of the reasons that can explain this inverse relationship?

Q: If you deposit $10,000 in a savings account at an annual interest rate of 6%, how much will you have in the account at the end of three years? A) $8,396 B) $11,800 C) $11,910 D) $10,600

Q: Which of the following is not a goal of the Dodd-Frank Act of 2010? A. To anticipate and prevent financial crises by limiting systemic riskB. To end "too big to fail"C. To promote competitionD. To reduce moral hazard

Q: If you deposit $500 in a savings account at an annual interest rate of 5%, how much will you have in the account at the end of five years? A) $625 B) $392 C) $638 D) $550

Q: Which of the following is not an important addition made to the Basel Accords by Basel III in 2010? A. It supplements capital requirements based on risk-weighted assets with restrictions on leverage. B. It introduces three buffers over and above capital requirements itself. C. It adds a liquidity requirement that compels banks to hold a quantity of high-quality liquid assets. D. It ends the too-big-to-fail problem.

Q: Compounding refers to A) the calculation of interest rates after the compounding effect of taxes has been allowed for. B) the paying back of both interest and principal during the life of a fixed payment loan. C) the process of earning interest on both the interest and the principal of an investment. D) the increased value of an investment that arises from the payment of periodic interest.

Q: In the United Kingdom, regulation of the financial system is concentrated in two agencies. They are: A. The Federal Deposit Insurance Conglomerate and the Bank of England.B. The Financial Conduct Authority and the Bank of England.C. The Financial Conduct Authority and English Banking Authority.D. The Bank of England and the U.K. Treasury.

Q: The key to present value calculations is that they A) are appropriate only for funds in the same time period. B) provide a common unit for measuring funds at different times. C) provide accurate answers only in a low-inflation environment. D) provide accurate answers only in a high-inflation environment.

Q: The financial crisis of 2007-2009 has made which of the following regulatory goals a top priority for government: A. disclosure of accounting information.B. minimum capital requirements.C. avoidance of systemic risk.D. promotion of competition.

Q: Which of the following will lead to a higher interest rate on a loan? A) lower inflation B) lower opportunity cost C) increased perceived risk of default D) reduced likelihood of borrower not paying the loan

Q: In today's world, the goal of financial stability means: A. no institution should fail.B. competition should be eliminated.C. preventing large-scale financial catastrophes.D. creating one mega regulatory agency.

Q: Though Treasury bonds may have little default risk, what type of risk exists when current interest rates are low? A) price risk B) refinancing risk C) interest-rate risk D) present value risk

Q: Regulators and supervisors of banks are challenged by all of the following, except: A. globalization of financial services.B. the use of new financial instruments that shift risk without shifting ownership.C. technological innovation.D. reinforcement by Congress of functional and geographic barriers in banking.

Q: Suppose Matt's New Cars issues a bond in which they'll need to pay $10,000 in one year, which includes 4% interest. How much will they receive for the bond? A) $9,600 B) $9,615 C) $10,000 D) $10,400

Q: A bank supervisor examines the bank's portfolio of loans to see if the loans are being repaid in a timely manner. In terms of the acronym CAMELS, this would be part of rating the bank's: A. asset quality.B. losses.C. management.D. earnings.

Q: If the real interest rate is -1.4% and the nominal interest rate is 6%, expected inflation equalsA) -2%B) -0.8%C) 0.8%D) 2%

Q: The CAMELS ratings are: A. made public monthly to the financial markets so people can judge the relative quality of banks.B. published once a quarter in banking journals issued by the Federal Reserve.C. included in the annual report of publicly owned banks.D. not made public.

Q: If the real interest rate is 2% and expected inflation is 2%, the nominal interest rate is: A) 0% B) 1% C) 2% D) 4%

Q: The acronym CAMELS, which is the criteria used by supervisors to evaluate the health of banks, includes the following, except: A. asset quality.B. losses.C. management.D. earnings.

Q: Suppose you purchase a bond with a coupon of $30 for $1025. You sell it one year later for $1050. What rate of return did you earn? Report a percentage with two decimal places.

Q: One reason a bank's officer may be reluctant to write off a past-due loan is that it will: A. increase the bank's liabilities.B. decrease the bank's assets and capital.C. increase the bank's liabilities and assets, requiring more capital to be held.D. make the bank's accounts less transparent.

Q: How can a bond have a negative rate of return? A) if the current yield is greater than the coupon rate B) if the current yield is less than the coupon rate C) if the rate of capital loss exceeds the current yield D) if the rate of capital gains is less than the current yield

Q: Prior to the financial crisis of 2007-2009 banks did all but which of the following to bulk up their profit: A. bought or sponsored hedge funds.B. traded securities for customers.C. purchased equities for their own account.D. colluded to fix benchmark interest rates.

Q: Why isn't the current yield a good indicator of holding a bond? A) It doesn't account for the yield to maturity. B) It doesn't account for capital gains or losses. C) It doesn't account for the coupon. D) It assumes that the current price equals its par value.

Q: The supervision of banks includes: A. requiring bank officers to attend classes on an annual basis.B. on-site examinations of the bank.C. extensive background checks of all bank officers.D. requiring banks to file monthly reports on their revenues, expenses and profits.

Q: U.S. Treasury bonds A) carry no risk of default and are therefore not risky investments. B) have constant yields to maturity and are therefore not risky investments. C) have constant coupon rates and are therefore not risky investments. D) are subject to fluctuations in their market prices and are therefore risky investments.

Q: Banks are required to disclose certain information. This disclosure is done for all of the following reasons except: A. to enable regulators to more easily assess the financial condition of banks.B. to allow financial market participants to penalize banks that carry additional risk.C. to allow customers to more easily compare prices for services offered by banks.D. create uniform prices for standard bank services.

Q: Interest-rate risk can best be characterized as the risk that A) you could have earned a higher interest rate if you waited to purchase a bond. B) fluctuations in the price of a financial asset in response to changes in market interest rates. C) you could have gotten a lower interest rate if you waited to lock in a mortgage. D) short-term interest rates may exceed long-term interest rates.

Q: Which of the following is not a pillar of the latest Basel Accord? A. A revised set of minimum capital requirementsB. It includes liquidity requirements in addition to capital requirementsC. It supplements capital requirements based on risk-weighted assets with restrictions on leverageD. Uniform international laws for bank regulation

Q: What is the rate of return on a bond with a coupon of $38 payable in one year that was purchased for $950 and sold one year later for $931? A) 2% B) 4% C) 6% D) 19%

Q: Which of the following is not a positive effect of the Basel Accord? A. It forced regulators to change the way they thought about bank capital.B. It promoted a more uniform international system.C. It provided a framework that less developed countries could use to improve the regulation of their banks.D. It provided a system to differentiate between bonds based on their systemic risk.

Q: If an investor is certain that market interest rates will decline in the future, which of the following will she be most likely to purchase? A) a six-month government bill B) a two-year government note C) a ten-year government bond D) a fifty-year government bond

Q: The original Basel Accord was: A. the basic set of guidelines the Federal Reserve applies in regulating domestic banks.B. a set of guidelines for basic capital requirements for internationally active banks.C. an agreement between state and federal regulators to try to have one standard set of guidelines for all banks.D. a set of guidelines applied only to international banks operating with U.S. boundaries.

Q: For a specific change in the yield to maturity A) the shorter the time until a bond matures, the greater will be the change in its price. B) the longer the time until a bond matures, the greater will be the change in its price. C) the longer the time until a bond matures, the greater will be the change in its par value. D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.

Q: Financial regulators set capital requirements for banks. One characteristic about these requirements is: A. every bank will have to hold the same level.B. the riskier the asset holdings of a bank, the more capital it will be required to have.C. the more branches a bank has, the more capital it must have.D. the amount of capital required is inversely related to the amount of assets the bank owns.

Q: If the current price of a bond is less than its face value, A) an investor will receive a capital gain by holding the bond until maturity. B) the yield to maturity must be less than the current yield. C) the coupon rate must be greater than the current yield. D) the coupon rate must be equal to the current yield.

Q: One reason that financial regulations restrict the assets that banks can own is to: A. combat the moral hazard that government safety nets provide.B. limit the growth rate of banks.C. prevent banks from being too profitable.D. keep banks from spending lavishly on perks for executives.

Q: If the current price of a bond is equal to its face value, A) there is no capital gain or loss from holding the bond until maturity. B) the yield to maturity must be greater than the current yield. C) the current yield must be greater than the coupon rate. D) the coupon rate must be greater than the yield to maturity.

Q: Considering the government-sponsored enterprises like Freddie Mac, Fannie Mae, and others, do you see any indication that the managers of these agencies are creating a moral hazard? Explain.

Q: The rate of return is equal to A) the coupon rate plus the rate of capital gains. B) the coupon rate plus the current yield. C) the current yield plus the rate of capital gains. D) the coupon rate multiplied by the rate of capital gains.

Q: Evaluate the pros and cons of the repeal of the Glass-Steagall Act of

Q: What is normally the ultimate cause of hyperinflation?

Q: How might Freddie Mac and Fannie Mae have contributed to the financial crisis experienced in the United States in 2007-2009?

Q: Make use of the quantity equation to answer the following problem. If the Fed increases the money supply by 6%, economic growth is 2%, and inflation is 2%, what is happening to the velocity of money? Be specific.

Q: Explain why a large equipment provider that sells to many of its commercial customers on account may use a finance company.

Q: Make use of the quantity equation to answer the following problem. If the Fed increases the money supply by 4%, velocity increases by 1%, and economic growth is 3%, by how much will the price level increase?

Q: From a transaction cost perspective, discuss why a firm may contract with an investment bank to underwrite or place an issue.

Q: Make use of the quantity theory of money to solve the following problem. If the Fed has an inflation target of 2% and the velocity of money is constant, by how much should it increase the money supply each year if economic growth is expected to average 3%?

Q: Why do you think Congress and the President are reluctant to fix the problems (identified in the text) with the Social Security System?

Q: The American Civil War lasted from the spring of 1861 to the spring of 1865. During the war the Confederate government issued substantial amounts of fiat paper currency. What do you think happened to the price level (measured in Confederate dollars) in the Confederate states during the final months of the war?

Q: In what way(s) can a pension plan be seen as the opposite of life insurance?

Q: In quantity theory terms, during a hyperinflation, A) money supply increases rapidly, but velocity does not B) velocity increases rapidly, but money supply does not C) both the money supply and velocity increase rapidly D) neither the money supply nor velocity increase rapidly

Q: Explain the difference between a pension fund that is a defined-contribution plan from one that is a defined-benefit.

Q: Evidence indicates that there's a strong relationship between money and inflation in: A) both the short and long run B) neither the short nor the long run C) short run, but not the long run D) long run, but not the short run

Q: Explain why the decoding of the human genome has interesting implications for the life insurance industry.

Q: Who benefits from rising inflation? A) those who already have fixed-rate loans B) those considering taking out a loan C) lenders that already made loans D) lenders considering whether to make new loans

Q: Why do insurance companies often find it necessary to purchase re-insurance?