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Finance
Q:
The major form of organization for commercial banks in the U.S. is the
a. partnership
b. bank holding company
c. single charter
d. branch
Q:
Which of the following is NOTcharacteristic of small banks compared to large banks?
a. they have proportionally more fixed assets
b. they have proportionally more agricultural loans
c. they have proportionally less capital
d. they have proportionally more deposits
Q:
Which is the ultimate goal of a commercial bank?
a. long-term growth
b. deposit growth
c. bank safety
d. long-term profit maximization
Q:
The number of U.S. bank charters has been ___ but the number of branches has been __.
a. rising/falling
b. falling/stable
c. falling/rising
d. rising/rising.
Q:
Repurchase Agreements (Repos) are the most important non-deposit source of funds for commercial banks, which means banks buy and sell Fed Funds to adjust liquidity.
Q:
Since 1990's, due to financial liberalization, both the number and size of commercial banks in the U.S. has been increasing dramatically.
Q:
A bank holding company might apply for a "financial" holding company status from the Fed if it were planning to purchase a life insurance company.
Q:
"Off-balance-sheet" activities are exempt from regulation.
Q:
A sale of Fed Funds by a bank most likely represents a decrease in its excess reserves.
Q:
Capital notes are a nondeposit liability of banks.
Q:
Fed Funds sold represent an important source of borrowed funds for commercial banks.
Q:
Unlike loan sales, the originating bank continues to earn interest on its securitized loans.
Q:
Loan pricing must attempt a competitive rate of return on bank shareholder's equity.
Q:
Matched-funding loan pricing is a practical application of term structure.
Q:
A bank's investment account provides liquidity and income.
Q:
Demand deposits represent the largest deposit source of funds for commercial banks.
Q:
With interest rates expected to decrease in the future, banks would prefer to make floating-rate loans rather than fixed rate loans.
Q:
The prime rate is the lowest loan rate offered by banks.
Q:
Banks hold a substantial volume of low-risk corporate bonds because of their high yields.
Q:
Eurodollars are dollar denominated deposits owned by foreigners.
Q:
Fed Funds purchased is an important short-term asset for large banks.
Q:
Most banks issue negotiable certificates of deposits.
Q:
Savings deposits are a larger percent of funding for small banks, compared to large banks.
Q:
Banks usually pay low explicit interest rates on demand deposit accounts.
Q:
Banks operate under the same regulatory structure as any other financial services firms.
Q:
The number of banks in the US has significantly increased from 1980's to 2000's while the number of branches decreased.
Q:
Forrest Gump Bank, a U.S. bank, has 1-year U.S. $200 million loan that earns an average rate of return of 6%. Forrest Gump Bank also has one year single payment Euro loans of €110 million earning 8%. Forrest Gump Bank's funding source is $300 million in US$ one year NCDs, on which they are paying 4%. Initially the exchange rate is €1.10 per $1 U.S. The one year forward rate is €1.14 per $1 U.S. What is the bank's dollar % spread if they hedge fully using Euro forwards?
Q:
List a number of reasons for the increased internationalization of financial markets in the last two decades.
Q:
Increased U.S. inflation, relative to other trading partner nations, should have what impact on the value of the U.S. dollar? Explain thoroughly.
Q:
With reference to the concepts and terms related to the International Payments Flow (balance of payments), under which conditions could a country have a sizable deficit in its trade balance and still have an appreciating currency?
Q:
Explain why a decline in a country's exchange rate will generally increase the demand for its goods and reduce its demand for foreign goods.
Q:
Explain how and why the U.S. forward exchange rates are related to short-term interest rates in the United States and Germany.
Q:
A current account surplus of the U.S. implies that
a. More goods and services are exported than are imported
b. The U.S. borrowed from abroad more than it loaned, and/or sold off some of its assets
c. There is under consumption of foreign financial assets
d. The value of the dollar will drop
e. The country's credit rating is going to be downgraded
Q:
Which of the following conditions may lead to a decline in the value of a country's currency?
I. high interest rates
II. high inflation
III. large current account deficit
IV. labor strike and violent protest
a. I only
b. I and II only
c. II, III, and IV only
d. II and IV only
e. I and III only
Q:
At the beginning of 2011, the exchange rate between the Australian dollar (AD) and the U.S. dollar (USD) is 2.2 AD per USD. Over the year, Australia's inflation is 12% and the U.S. inflation is 4%. If purchasing power parity holds, at the end of 2011, the exchange rate should be approximately _____ USDs per AD.
a. 2.3913
b. 0.4895
c. 2.8498
d. 0.4182
e. 0.3440
Q:
If interest rate parity holds and the annual Taiwan nominal interest rate is 7% and the U.S. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Taiwan is about _____ than in the U.S.
a. 1% higher
b. 2% higher
c. 1% lower
d. 2% lower
e. 3% lower
Q:
One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of
Nardasausau stock in a Japanese company at a price of 3,150 yen per share. The total
purchasing cost was 315,000 yen. At the time of purchase, in the currency market 1
yen equaled $0.00952. Today, Nardasausau stock is selling at a price of 3,465 yen
per share, and in the currency market $1 equals 130 yen. The stock does not pay a
dividend. If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from
holding Nardasausau stock?
a. +10.00%
b. -11.12%
c. +12.48%
d. +11.12%
e. -12.48%
Q:
Which of the following is true about Eurobonds?
a. They are underwritten by a multinational syndicate of investment banks.
b. Eurobonds are bearer bonds and do not have to be registered, which makes them more marketable.
c. Interest or coupon payments are annual and are calculated based on a 360-day year.
d. all of the above.
Q:
Which of the following is not the difference between Eurobonds and bonds sold in the U.S.?
a. Eurobonds are usually issued in bearer form; bonds sold in the U.S. are usually registered bonds.
b. Eurobonds usually pay interest once a year; bonds sold in the U.S. usually pay interest semiannually.
c. Eurobonds are denominated in Euros; bonds sold in the U.S. are denominated in dollars.
d. Interest on Eurobonds is computed using a 360-day year vs. a 365-day year for bonds issued in the U.S.
e. All of the above are differences between Eurobonds and bonds sold in the U.S.
Q:
Which of the following is not the reason the Eurocurrency market is an attractive place to store excess liquidity for corporations, countries, and individuals?
a. Investors are allowed to hold debt securities in bearer form
b. Automatic withholding of tax on interest earned
c. Investments earn higher returns
d. High liquidity of Eurocurrency deposits
Q:
Eurocurrency markets are a source of attractively priced working capital loans for multinational firms because:
a. Lower regulatory costs allow lenders to offer lower cost loans.
b. With transactions starting at $500,000, economies of scale provide better pricing.
c. Lower credit checking costs and other processing costs lowers lending rates.
d. all of the above
Q:
Eurocurrency is
a. Any currency held in a time deposit account outside of its country of origin.
b. Any currency held in a time deposit account in Europe.
c. Any currency held in a time deposit account outside of the U.S.
d. Euros held in a time deposit account in Europe.
Q:
Eurodollars are associated with
a. the use of dollar currency ($100 bills) in less-developed countries in Europe.
b. the financing of Europeans by domestic U.S. banks.
c. the holding of a dollar-denominated bank deposit outside the U. S.
d. the development of a common currency in Europe.
Q:
Which of the following instruments are not commonly used to facilitate international transactions?
a. letters of credit
b. bills of lading
c. sight drafts
d. repurchase agreements
e. All of the above instruments are used to facilitate international transactions.
Q:
A _______ draft is paid on demand; whereas a bank would pay a _______ draft at maturity as stated in the _______.
a. time; sight; bill of lading
b. sight; time; bill of lading
c. time; sight; letter of credit
d. sight; time; letter of credit
Q:
A payment guarantee issued by a commercial bank on behalf of an importer is a
a. sight draft.
b. time draft.
c. letter of credit.
d. documented transfer.
e. bill of lading.
Q:
An American firm sells farm equipment to a British company for ₤250,000 to be paid in 180 days. The current exchange rate is $1.98/₤. The exporter hedges its exchange rate risk by buying a put option on ₤250,000 with the strike exchange rate of $1.92/₤. The put expiring in 180 days cost the firm $5,000. What is the dollar amount the American firm will net on this transaction if the exchange rate is $1.96/₤ in 180 days?
a. $495,000
b. $490,000
c. $485,000
d. $480,000
e. $475,000
Q:
An American firm sells farm equipment to a British company for ₤250,000 to be paid in 180 days. The current exchange rate is $1.98/₤. The exporter hedges its exchange rate risk by selling ₤250,000 forward 180 days at the prevailing 180-day forward exchange rate of $2.01/₤. What is the dollar amount the American firm is expected to receive in 180 days?
a. $495,000
b. $502,500
c. $201,000
d. $198,000
e. ₤250,000
Q:
An importer who must pay yen in 60 days may hedge the foreign exchange risk
a. in the forward market.
b. in the spot market today.
c. in the spot market 60 days from now.
d. all of the above
Q:
The action of foreign exchange _______ tends to keep exchange rates among different currencies consistent with each other.
a. arbitragers
b. regulators
c. traders
d. brokers
e. bankers
Q:
A U.S. commercial bank must pay 20 million Canadian dollars (C$) in 90 days. It wishes to hedge the risk in the futures market. To do so the bank should
a. sell $20 million in Canadian dollar futures with two months maturity.
b. buy $20 million in Canadian dollar futures.
c. buy C$20 million in Canadian dollar futures.
d. sell C$20 million in Canadian dollar futures.
Q:
The foreign exchange market
a. is an auction market with a physical exchange floor, similar to NYSE
b. has restricted trading hours
c. is composed of a group of informal markets closely interlocked through international banking relationships
d. ensures that purchasing power parity holds
e. both a and b
Q:
Which of the following are largely responsible for keeping exchange rates the same in all world markets?
a. foreign exchange deals
b. forward markets
c. futures markets
d. arbitragers
e. none of the above
Q:
If the rate of inflation in the U.S. is twice the rate in Japan,
a. purchasing power parity will not be attained.
b. the yen/dollar exchange rate is likely to decrease.
c. the yen/dollar exchange rate is likely to increase.
d. the exchange rate will not change because inflation has no effect on exchange rates.
Q:
If expected inflation in the United States is below that in Britain, one would expect
a. U.S. imports from Britain to increase significantly.
b. the United States to experience balance of payments problems in the future.
c. the dollar to appreciate against the pound in the future.
d. U.S. interest rates to be above British rates.
Q:
If a country experiences inflation, generally
a. its forward exchange rate will fall relative to countries with lower inflation
b. its forward exchange rate will fall relative to countries with higher inflation
c. its exports will increase significantly.
d. its interest rates will fall.
e. the forward exchange rate will fall relative to all other countries.
Q:
If an item costs 4 Euros in Germany, assuming purchasing power parity with current exchange rates of $1.3135/€, what is the price of the item in the U.S.?
a. $0.33
b. $5.25
c. $3.05
d. $4.00
e. €4.00
Q:
An item costs $5.00 in the U.S. and 525 yen in Japan. If purchasing power parity holds, what is the yen/dollar exchange rate?
a. 105 yen/dollar
b. 525 yen/dollar
c. 100 yen/dollar
d. 125 yen/dollar
e. .0095 yen/dollar
Q:
A major reason that exchange rates do not adjust so purchasing power parity holds precisely is that
a. investors are using forward contracts when trading.
b. financial or capital flows may affect foreign exchange rates.
c. consumers and businesses of each country are not concerned about the cost of goods in other countries.
d. purchasing power parity is only a theory.
e. Exchange rates do, in fact, adjust to ensure that purchasing power parity holds.
Q:
If purchasing power parity existed in foreign exchange rates,
a. foreign exchange rates would remain constant.
b. goods and services would cost the same in terms of dollars everywhere in the world.
c. goods and services would cost the same in each local currency.
d. foreign exchange rates would be the same anywhere in the world markets.
Q:
Foreign merchants often conduct transactions in U.S. dollars because
a. the dollar is a generally acceptable medium of exchange in international transactions.
b. they don't have enough money of their own.
c. interest rates on the dollar are higher than on their currency.
d. inflation is higher in the United States.
Q:
If a government wanted to promote exports and a trade surplus, it might institute all of the following policies except:
a. Establish import trade barriers and quotas.
b. Buy domestic currency in the foreign exchange markets.
c. Provide low cost financing for export industries.
d. Buy foreign financial assets.
Q:
A government that wants to promote domestic exports would take which action?
a. buy assets (securities) abroad
b. sell assets (securities) abroad
c. buy dollars in foreign exchange markets
d. impose severe import restrictions
Q:
International trade flows are likely not influenced by
a. barriers to trade
b. consumer tastes
c. productivity
d. relative costs of factors of production
e. activity of arbitrageurs in the foreign exchange markets
Q:
Which of the following is not a factor that is likely to influence exchange rates?
a. trade flows of goods and services
b. financial capital flows
c. governmental intervention
d. an expansion in the number of traders of foreign exchange
Q:
Investment flows from one country to another occur based on the investors'
a. nominal rate of return on the foreign investment
b. the expected real rate of return on the foreign investment.
c. spot exchange rate when making the investment.
d. the realized real rate of return on the foreign investment.
Q:
Differences in real interest rates between countries produce what type of capital flows?
a. investment capital flows.
b. political capital flows
c. speculative capital flows
d. capital flight
e. all of the above
Q:
A foreign exchange transaction may be motivated by
a. trade.
b. speculation.
c. flight of capital.
d. all of the above
Q:
Exchange rates are influenced by
a. trade flows.
b. financial flows.
c. government intervention.
d. all of the above.
Q:
The United States can import more goods that it exports without experiencing a decline in its exchange rate if
a. foreigners are buying more long-term investments in the United States than U.S. citizens are buying abroad.
b. foreigners wants to hold additional dollars to help them mediate their financial institutions.
c. foreign governments loan their excess dollars to the Unites States.
d. all of the above
Q:
Everything else equal, significant trade deficits, imports exceeding exports, should have what effect on a country's exchange rate?
a. Trade levels do not affect exchange rates.
b. The country's currency should appreciate in value relative to their major trading countries.
c. The country's currency should depreciate in value relative to their major trading countries.
d. None of the above is correct.
Q:
Exchange rates are unlikely to change if
a. the U.S. inflation rate is twice that of other developed nations.
b. current account budget deficits/surpluses are offset by reverse capital flows.
c. the current account deficits in the U.S. are offset by capital flows much larger than the current account deficit.
d. central banks want them stable.
Q:
With reference to international balance of payment accounting, if a country's merchandise imports exceed merchandise exports for a period,
a. the country has a surplus in the balance on current account.
b. the country has a deficit in the capital accounts for the period.
c. the country has a deficit in the merchandise trade account.
d. the country has a surplus in the merchandise trade account.
Q:
When a Balance of Payments trade balance is in a surplus position,
a. another trade or service account must balance it.
b. the entire balance of payments will be in a surplus position.
c. other accounts or capital movements offset the surplus to provide a balance.
d. a shift of capital must balance the trade surplus.
Q:
If a Canadian dollar costs $0.84 in U.S. dollars today and traded for $0.86 last year, the U.S. dollar
a. has appreciated against the Canadian dollar.
b. has depreciated against the Canadian dollar.
c. has more buying power in England.
d. none of the above
Q:
From a trade basis, if U.S. trade deficit with Japan continues, and if U.S. inflation rates exceed those in Japan,
a. the yen is likely to appreciate moving from 110 yen per dollar to 120 yen per dollar.
b. the yen is likely to appreciate moving from 120 yen per dollar to 110 yen per dollar.
c. the yen is likely to depreciate moving from 120 yen per dollar to 110 yen per dollar.
d. the yen is likely to depreciate moving from 110 yen per dollar to 120 yen per dollar.
Q:
If the cost of yen per dollar changes from 100 to 110 yen per dollar,
a. The yen has appreciated against the dollar.
b. The dollar has depreciated against the yen.
c. The dollar has appreciated against the yen.
d. the cost of a yen has increased in terms of dollars.
Q:
The current exchange rate between U.S. Dollar and Euro is $1.355/€. It means that
a. one Dollar can buy 1.355 Euros
b. one Euro can buy 0.738 Dollars
c. one Dollar can buy 0.738 Euros
d. one Euro can buy 1.355 Dollars
e. both c and d
Q:
A U.S. investor purchased a $100,000 Canadian dollar CD 180 days ago at a rate of 7 percent. The Canadian spot rate was 1.367 C$/U.S.$ when the investment was made. The U.S. dollar cost of the investment was ________ and the total amount of Canadian investment was _________ C$ after 180 days?
a. 136,700; 107,000
b. $100,000; 107,000
c. $73,153; 103,500
d. $136,700; 103,500
Q:
A Detroit bank pays 6% for a $100,000 six-month certificate of deposit, while a Windsor, Ontario bank advertises a rate of 7.5%. If it costs approximately $50 in travel and forward contract commissions to invest in Canada, which CD should the Detroit investor take? Refer to the foreign exchange rates below.
U.S. Equiv. Rates
Canada (dollar) $0.8345
180 day Forward $0.8225
a. Make the U.S. CD investment.
b. Make the Canadian CD investment.
c. The investor is indifferent between the two because of interest parity.
d. One is unable to make this calculation with the data provided