Q&A Hero

Q: In a barter system individuals A) find it impossible to specialize. B) must be entirely self-sufficient. C) find it difficult to specialize, but may be able to do so. D) will almost invariably specialize.

Q: Banks exert some control over who will regulate them because banks: A. spend a lot of money contributing to political campaigns.B. can switch their charter from state to federal and vice versa.C. have the right to decide on which regulator will oversee their bank.D. pay the salary of the regulator.

Q: Which of the following is an example of a barter transaction? A) An individual pays her electric bill with a check. B) An individual pays her electric bill with currency. C) An individual provides three light bulbs to her neighbor in exchange for two gallons of milk. D) An individual deposits three twenty-dollar bills in her checking account.

Q: In the U.S. today: A. most banks are federally chartered.B. most banks are state chartered.C. there are approximately equal numbers of state and federally chartered banks.D. all new banks are federally chartered.

Q: Under a system of barter A) each individual trades output directly with another. B) only agricultural goods may be traded. C) goods may be traded for money, but money may not be traded for goods. D) currency is accepted for purchases, but personal checks are not.

Q: The dual banking system in the U.S. today refers to: A. a bank's ability to issue checking and saving accounts.B. a bank's ability to own another financial institution.C. the ability of banks to be either federally or state chartered.D. a deposit institution's decision to be either a bank or a savings and loan.

Q: Barter is A) another name for money. B) an exchange of goods and services directly for goods and services. C) the basis for economic specialization. D) the main system of exchange in the United States today.

Q: Prior to the Civil War most state banks issued their own banknotes. This resulted in all of the following problems except: A. their values decreased as the holder moved further from the bank.B. they were worthless if the bank failed.C. they were not efficient as a means of payment if the holder was far from the bank.D. they were usually redeemable in gold.

Q: Fundamentally, to reap the benefits of specialization, an economy must A) be heavily industrial. B) be heavily agricultural. C) have an extensive system of higher education. D) develop ways for individuals to trade goods with one another.

Q: A unit bank is a bank that: A. only makes one type of loan, (i.e.; home mortgages).B. only offers savings accounts.C. provides a myriad of financial services, so customers get all or most of their financial needs taken care of at the bank.D. has no branches.

Q: When an economy relies on specialization, A) the economy will generally produce only one product. B) the economy will usually be heavily agricultural. C) each individual in the economy produces the goods or services for which he or she has relatively the best ability. D) each individual will be assigned by the government to produce that good or service the government believes the economy should specialize in.

Q: Unit banks are: A. banks with no branches.B. more numerous in the United States than they were in previous decades.C. no longer permitted to exist in the United States.D. commercial banks that have combined into one unit with an investment bank.

Q: The most important economic benefit from specialization is that it A) makes it possible for an economy to begin using money. B) leads to an increase in the standard of living in an economy. C) makes barter possible. D) eliminates the need for financial markets.

Q: If someone wants to start a bank today they would have to: A. obtain a charter from the federal government.B. simply have $5 million is startup capital, a charter is no longer needed.C. obtain a charter either from the federal or state government.D. obtain a state charter, the federal government stopped issuing charters in 1970.

Q: The financial system performs the role of communicating information by A) constantly increasing the liquidity of most assets. B) constantly reducing the riskiness of most assets. C) incorporating all available information into the prices of financial assets. D) providing to investors for a nominal charge all government reports available about a particular company.

Q: The financial crisis in the United States in 2007-2009 brought about all but which of the following changes: A. a rise in the number of unit banks.B. an increase in the deposit share of the top four U.S. commercial banks.C. the placement of the two government-sponsored enterprises for housing finance into conservatorship.D. a run on money-market mutual funds.

Q: Increased liquidity in recent decades has reduced interest rates on which of the following assets (holding constant all other things that affect interest rates)? A) U.S. government bonds B) bonds issued by large corporations C) business loans D) bonds issued by state governments

Q: If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is: A. 10 to 1.B. 5 to 1.C. 9 to 1.D. 0.1 to 1.

Q: Which of the following assets is the least liquid? A) money market mutual fund B) stock C) treasury bond D) house

Q: Which of the following bank assets would be categorized as secondary reserves? A. U.S. Treasury billsB. CashC. Mortgage loansD. Deposits at the Federal Reserve

Q: Liquidity A) is the best available measure of the riskiness of an asset. B) is a characteristic of money, and of no other asset. C) is the ease with which an asset can be exchanged for money. D) was declining for many financial assets during the 1990s.

Q: Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1 million and its assets by $10 million, then the bank's: A. risk increases and its leverage decreases.B. liabilities decrease and its leverage increases.C. leverage decreases and its liabilities increase.D. leverage and risk increases.

Q: The financial system provides risk sharing by allowing A) borrowers to obtain funds either directly or indirectly. B) savers to earn interest tax-free. C) borrowers to convert liabilities into assets. D) savers to hold many assets.

Q: The largest liability for commercial banks in the U.S. is: A. demand deposits.B. non-transaction deposits.C. borrowing from other U.S. banks.D. borrowing from the Federal Reserve.

Q: The purpose of diversification is to A) increase the liquidity of a financial portfolio. B) reduce the brokerage fees involved in managing a financial portfolio. C) reduce risk. D) reduce tax liability.

Q: A bank's loan loss reserves are: A. the amount of loans that have defaulted in the past twelve months.B. the same as equity capital.C. an amount the bank sets aside to cover potential losses from defaulted loans.D. a liability of the bank since it is a source of funds.

Q: Diversification refers to the A) splitting of wealth into many assets. B) difference between the liquidity of an asset and its risk. C) difficulty of converting investments in common stocks into investments in bonds. D) difficulty of selling common stocks in a weak market.

Q: If a bank sells off all of its assets and pays all of its liabilities, the amount remaining would be its: A. net profit.B. reserves.C. net worth.D. excess reserves.

Q: Monetary policy refers to the government's A) decisions on how much money to spend. B) decisions on how much money to collect in taxes. C) plans for retiring the national debt. D) management of the money supply and interest rates to achieve macroeconomic objectives.

Q: Suppose a particular depository institution that specializes in residential mortgages is owned by its depositors. The institution is probably a: A. regional or super-regional bank.B. money center bank.C. community bank.D. savings bank.

Q: The Federal Reserve System A) is in charge of managing the New York Stock Exchange. B) is headed by the Secretary of the Treasury. C) is the central bank of the United States. D) is responsible for conducting fiscal policy for the United States.

Q: Suppose a particular bank is very large in terms of assets, and makes consumer and residential loans as well as commercial and industrial loan. The bank is probably a: A. regional or super-regional bank.B. money center bank.C. community bank.D. savings bank.

Q: Economists define money as A) cash in circulation. B) deposits in commercial banks. C) anything that people are willing to accept in payment for goods and services or to pay off debts. D) bonds issued by large corporations.

Q: Of the more than 6,100 banks in the United States at the end of 2013, by far the greatest numbers of them were: A. regional banks.B. money center banks.C. community banks.D. savings banks.

Q: The leading federal regulatory body for financial markets in the United States is the A) Federal Bureau of Investigation. B) Securities and Exchange Commission. C) Federal Financial Market Bureau. D) Investors Protection Agency.

Q: Savings and loan institutions: A. are owned by the depositors.B. originally were formed primarily to make home mortgages.C. today offer a much smaller array of services than when originally formed.D. are owned by depositors who also have a common bond.

Q: A bank lending depositors' money to a local business and a pension fund investing contributions in shares of a company are similar financial activities in that A) both involve the use of financial markets. B) both involve funds being channeled from savers to borrowers through financial intermediaries. C) both involve a reduction in the overall level of liquidity in the financial system. D) both involve in an increase in the overall level of risk in the financial system.

Q: Money Center Banks differ from community banks in all of the following ways except: A. they are usually much smaller.B. they obtain their funds primarily through borrowing and not by deposits.C. they are a much smaller percentage of the total number of banks.D. they are actively engaged in the money market.

Q: A "primary market" is a market A) for government securities. B) in which newly issued claims are sold to buyers by borrowers. C) in which newly issued claims are sold by savers to borrowers. D) for debt by large or "primary" corporations.

Q: The fact that returns from the stock market are less volatile over long-periods of time suggests that: A. investors are more risk averse over the long run.B. stock markets are efficient.C. people get comfortable with the stocks they own.D. stock market bubbles have become more common.

Q: Financial intermediaries A) include banks and other depository institutions. B) include the New York and American Stock exchanges. C) directly issue claims on individual borrowers to savers. D) are owned and operated by the federal government.

Q: When stock prices reflect fundamental values: A. all investors will have positive returns.B. the allocation of resources will be more efficient.C. all companies will have an easier task of obtaining financing for investment projects.D. the overall level of the stock market should move higher.

Q: The main role of financial intermediaries is to A) provide funds to the federal government to cover the budget deficit. B) borrow funds from savers and lend them to borrowers. C) provide advice to consumers on how they should handle their finances. D) help ensure that there is enough money in circulation.

Q: Index funds are often preferred to other mutual funds because: A. they offer greater diversification.B. they are managed better.C. they have greater liquidity.D. on average they have lower management fees.

Q: Which of the following is NOT a financial intermediary? A) mutual fund B) bank C) stock exchange D) insurance company

Q: Management fees for mutual funds are: A. different across funds and can significantly impact the return to an investor.B. fixed by regulation.C. fixed by regulation but can vary by the size of the fund.D. usually a percentage of the return achieved by fund managers.

Q: Which of the following is NOT a financial intermediary? A) NASDAQ B) Allstate Insurance Company C) Bank of America D) Vanguard Total Stock Market Index Fund

Q: Management fees for mutual funds are: A. fixed by regulation.B. fixed by regulation and can vary by the size of the fund.C. usually a percentage of the gains the fund achieves.D. usually a percentage of the funds under management.

Q: Funds flow from lenders to borrowers A) indirectly through financial markets. B) directly through financial intermediaries. C) indirectly through financial intermediaries. D) primarily through government agencies.

Q: Mutual funds are characterized by the fact that they all: A. have the same management fee set by regulation.B. require the same minimum investment of $10,000.C. provide some degree of diversification.D. provide the same degree of liquidity.

Q: Which president said, "Prosperity is just around the corner"? A) Herbert Hoover near the start of the Great Depression B) Franklin Delano Roosevelt near the start of the Great Depression C) George W. Bush near the start of the Great Recession D) Barack Obama near the start of the Great Recession

Q: Professor Jeremy Siegel, of the University of Pennsylvania, conducted research that showed that: A. over the long run, stocks have been less risky than bonds.B. over the long run, bonds have been less risky than stocks.C. over the long run, bonds frequently outperform stocks.D. investors should only own stocks for short periods of time to maximize returns.

Q: If you purchase a Treasury bond, the Treasury bond is A) an asset to you as well as an asset to the U.S. government. B) an asset to you, but a liability to the U.S. government. C) a liability to you, but an asset to the U.S. government. D) a liability to you as well as a liability to the U.S. government.

Q: Professor Jeremy Siegel, of the University of Pennsylvania, did research showing that: A. owning stocks over the long run produces returns below the risk-free return.B. if an investor owns stocks for a very short time the risk is greater than if the stocks are held for a long time.C. the return on the S&P 500 for a 25-year period often produces returns below zero.D. bonds really are less risky to hold over the long-term.

Q: Financial markets A) channel funds indirectly between borrowers and lenders. B) channel funds directly from lenders to borrowers. C) act as go-betweens by holding a portfolio of assets and issuing claims based on that portfolio to savers. D) generally provide lenders with lower returns than do financial intermediaries.

Q: Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by: A. people are irrational in their investment behavior, only focusing on positive outcomes.B. people are not very risk-averse and do not require a risk premium for stocks.C. investing in stocks over the long run is not as risky as short-term holdings of stocks.D. people are not efficient users of information.

Q: If a bank grants you a mortgage, the mortgage is A) an asset to you as well as an asset to the bank. B) an asset to you, but a liability to the bank. C) a liability to you, but an asset to the bank. D) a liability to you as well as a liability to the bank.

Q: According to the theory of efficient markets, mutual fund managers may be expected to earn above-average returns if they: A. take on less risk.B. have access to illegal, private information.C. participate in efficient markets.D. have learned from investing in the same stocks repeatedly.

Q: According to the theory of efficient markets: A. investors use rules of thumb to make choices about which stocks to buy and sell.B. investors are able to use forecasts based on the dividend-discount model to generate above-average returns.C. a portfolio manager who charges no commission should not, on average, outperform an individual investor with access to the same funds.D. the stock price should remain constant.

Q: The required stock return an investor seeks can best be represented by which of the following? A. Risk Premium - Risk-free ReturnB. Risk-free Return × Risk PremiumC. (Risk-free Return + Risk Premium)/(1 + i)D. Risk-free Return + Risk Premium

Q: The basic dividend-discount model is a bit of an oversimplification for valuing stocks because it: A. ignores expected dividend growth.B. ignores the value of future dividends.C. ignores the risk involved in holding stocks.D. cannot handle stocks that do not pay dividends.

Q: All other things equal, a decrease in the equity risk premium leads to a(n): A. increase in the required return on stock.B. decrease in the present value of stock.C. increase in the price of equity shares.D. decrease in dividend growth.

Q: As a company issues more debt: A. its leverage decreases.B. the share of financing from equity increases.C. the expected return to equity holders falls.D. risk increases.

Q: In the event of bankruptcy, stockholders: A. are paid before bondholders.B. receive at least their initial investment due to limited liability.C. could lose more than their initial investment.D. are the last to be paid and could end up losing what they have invested.

Q: Consider the effect of business cycles on bondholders versus stockholders. We expect that business cycles will affect: A. bondholders and stockholders about the same.B. bondholders more since the amount they receive depends on profits.C. stockholders more since they are residual claimants.D. bondholders more since they do not have any claim to property.

Q: Without the stockholders' limited liability, the risk from the use of leverage would: A. be significantly less.B. be significantly greater.C. still be the same.D. be irrelevant.

Q: The fact that many corporations use debt financing as well as equity financing creates all of the following except: A. the opportunity for a greater expected return for the stockholders.B. greater risk for the stockholders.C. leverage for the stockholders.D. consistently lower debt-to-equity ratios.

Q: As the corporation uses more debt financing, which of the following holds true for the stockholders? A. The expected return to the stockholders decreases and the standard deviation of that return decreases.B. The expected return to the stockholders increases and the standard deviation of the return decreases.C. The expected return to the stockholders increases and the standard deviation of the return increases.D. The expected return to the stockholders decreases and the standard deviation of the return increases.

Q: A share of stock resembles a consol in all of the following ways except that the: A. share of stock does not have a maturity date.B. annual dividend the stock pays resembles the coupon on a consol.C. prices of both can be computed using a variation of the net present value formula.D. are both residual claims.

Q: Suppose that the current dividend for a stock is Dtoday, the expected dividend growth rate is r, and the interest rate is i. If we ignore risk, which of the following represents the dividend-discount model formula for the fundamental price of a stock? A. Dtoday/(i + g)B. (i + g)/DtodayC. Dtoday(1 + g)/(i - g)D. Dtoday/(i - g)

Q: You start with a portfolio valued at $500. Over the next twelve months it loses 40%; the following year it has a gain of 30%. At the end of two years your portfolio is worth: A. $390.B. $450.C. $300.D. $410.

Q: You start with a $1000 portfolio; it loses 50% over the next year, the following year it gains 50% in value. At the end of two years your portfolio is worth: A. $1,000.B. $500.C. $750.D. $950.

Q: The dividends that stockholders receive are: A. fixed by contract and paid annually.B. distributions from profits.C. paid before all other obligations of the company are met.D. always equal to the average amount of interest paid to a bond holder, adjusting for the value of the holdings.

Q: People differ on the method by which stock should be valued. Some people are chartists, others behaviorists. The basic difference between these groups is: A. chartists rely on astrological charts to predict stock values, behaviorists rely on psychology.B. behaviorists are finance based, chartists study charts of investor psychology.C. chartists study charts of stock prices; behaviorists focus on investor psychology and behavior.D. chartists and behaviorists are the same in their approach; essentially there aren't any differences.

Q: When comparing stock indexes around the world we: A. find that a given percentage change across all indexes has the same value.B. observe that they always move together.C. can see that the numeric change in indices allows investors to make easy comparisons of value.D. can examine their respective movements if we look at them as percentage changes.

Q: When studying world stock indexes, we observe that: A. the S&P 500 is largest in terms of index value.B. most of the world's indexes are price-weighted.C. the indexes are very comparable.D. the indexes are comparable but only in percentage terms.

Q: The most broadly based stock index in use is the: A. Nasdaq Composite Index.B. Wilshire 5000.C. Dow Jones Industrial Average.D. Standard and Poor's 500 Index.

Q: The Nasdaq Composite Index is: A. made up of over 50,000 firms traded on the Over-the-Counter market.B. a price-weighted index.C. made up of mainly newer firms, and heavily influenced by technology and internet companies.D. the most broadly based index in use.

Q: The Nasdaq Composite Index is: A. a value-weighted index.B. a price-weighted index.C. made up of over 5000 companies traded on the NYSE.D. made of mainly older firms and is heavily weighted by manufacturing.

Q: Which of the following statements is not true? A. A value-weighted index is a better index to use to reflect changes in the economy's overall wealth.B. A price-weighted index is a better index to use to reflect the average change in the price of a typical share of stock.C. The Dow Jones Industrial Average is a price-weighted index.D. The S&P 500 is a price-weighted index.