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Finance
Q:
A corporate treasurer is looking to invest about $4 million for 60 days. Commercial paper rates are a 3.65% discount and CD rates are 3.66%. Comparing the bond equivalent yields over a 365-day year, which is the best alternative? What is the opportunity cost of leaving the funds idle? (Watch your rounding)
Q:
As a corporate treasurer who is unsure how soon funds will be needed, which type of money market investment might you prefer? Explain the trade-offs. Would your answer differ if you had a definite time period during which you would not need the money? Explain.
Q:
How does a repo differ from a Fed Funds transaction? How do their rates compare?
Q:
A government securities dealer needs to make a 7% pre-tax annual return on $10 million of capital employed to make it worthwhile to make a market in T-Bills. If the bid discount on $10,000 face value, ninety day T-Bills is 3.50%, and the dealer can expect to do 5200 round trip deals today what must the ask discount be? Hint: A round trip is a buy and a sell transaction.
Q:
What is the difference between a discriminating auction and a single-price auction? How is the final price determined in a single-price auction? Why did the Treasury switch to a single-price auction?
Q:
Given the functions of the money markets, why is it necessary for money market securities to have a maturity of one year or less and low default risk?
Q:
Why do most money market securities have large denominations?
Q:
Eurodollar CDs would include
A. CDs denominated in Euros.
B. dollar investments by European entities in the U.S.
C. dollars deposited in Caribbean banks.
D. dollars deposited in Europe.
E. both C & D.
Q:
If your firm enters into an overnight reverse repurchase agreement your firm is
A. borrowing Fed funds temporarily.
B. selling a security now while agreeing to buy it back tomorrow.
C. giving an unsecured loan to the counterparty.
D. procuring a banker's acceptance.
E. none of the above.
Q:
Why do changes in reserve requirements have less predictable effects on the money supply in comparison to changes in open market operations?
Q:
What supervisory and regulatory authority does the Fed have under current law?
Q:
What does the 2004 Check 21 law allow? Why was this law passed? Does it benefit the customer or banks? Explain.
Q:
Suppose that oil prices hit an all-time high of $200 a barrel, driving U.S. inflation up to 7% per year. At the same time, weak U.S. growth and increasing foreign competition has generated unacceptably high levels of unemployment in the United States. You are the Chair of the Federal Reserve. What do you suggest?
Q:
Is there a trade-off between controlling domestic inflation and maintaining a sustainable pattern of international trade?
Q:
The Fed wishes to expand the money supply. What three things can they do? Which has the most predictable effects? Be specific.
Q:
Explain how the deposit multiplier works.
Q:
How have recent changes in Discount Window credit programs affected the use of this tool for monetary policy?
Q:
Explain how a change in open market operations can affect a new college graduate.
Q:
What are the main responsibilities of the FOMC?
Q:
Why did the Fed switch from increasing rates prior to 2007 to reducing interest rates in 2007 and 2008?
Q:
How do Federal Reserve Banks generate income? Do they require supplemental funding from Congress?
Q:
The 12 Federal Reserve Banks perform what functions?
Q:
What are the four major functions of the Federal Reserve System?
Q:
The Federal Reserve does all but which one of the following?
A. Conduct monetary policy
B. Supervise and regulate bank activities
C. Serve as the commercial bank for the U.S. Treasury
D. Operate check clearing and wire transfer facilities
E. Insure deposits
Q:
A bank has $770 million in checkable deposits. The bank has $85 million in reserves. The bank's required reserves are _____________ and its excess reserves are _____________.
A. $85 million; $0
B. $770 million; $85 million
C. $89 million; $21 million
D. $685 million; $8.5 million
E. $77 million; $8 million
Q:
The Check 21 Act effective in October 2004 does which of the following?
A. Allows bank customers to better take advantage of bank float
B. Requires banks to immediately clear all customer deposits
C. Prohibits the Fed from being involved in check clearing to prevent unfair competition with private check clearing agencies
D. Authorizes the use of an electronic image to facilitate paperless check clearing
E. Eliminates all fees on checking
Q:
In the area of bank supervision, which of the following are functions of the Federal Reserve Banks?
I. Examinations of state member banks
II. Approval of member bank and bank holding company acquisitions
III. Deposit insurance
A. I only
B. I and II only
C. II and III only
D. I and III only
E. I, II, and III
Q:
The major monetary policy making arm of the Federal Reserve is the
A. Board of Governors.
B. Council of Federal Reserve Bank Presidents.
C. Office of the Comptroller of the Currency.
D. Federal Reserve Bank of New York.
E. none of the above.
Q:
If the Fed is targeting interest rates and money demand increases, an appropriate policy response would be to
A. increase reserve requirements.
B. increase the discount rate.
C. buy U.S. Treasury securities from government bond dealers.
D. increase government spending.
E. none of the above.
Q:
The Fed increases bank reserves in the system by $75 million. If there are no drains the expected change in bank deposits is
A. $82.5 million.
B. $945 million.
C. $750 million.
D. $1,500 million.
E. $655 million.
Q:
The Fed changes reserve requirements from 10% to 14%, thereby eliminating $750 million in excess reserves. The total change in deposits (with no drains) would be (rounded)
A. $7.917 billion.
B. $6.630 billion.
C. $5.357 billion.
D. $4.934 billion.
E. none of the above.
Q:
Recently oil prices have risen in the U.S, generating concerns that inflation may increase. If the Fed wishes to ensure that inflation does not get out of hand the Fed could:
A. intervene in the currency markets to push the value of the dollar down.
B. decrease the discount rate.
C. lower the target fed funds rate.
D. lower the target money supply growth rate.
E. reduce reserve requirements at banks.
Q:
From October 1983 to July 1993 the Federal Reserve targeted
A. the fed funds rate.
B. borrowed reserves.
C. nonborrowed reserves.
D. M1.
E. M3.
Q:
Currently the Fed sets monetary policy by targeting
A. the fed funds rate.
B. the prime rate.
C. the level of non-borrowed reserves.
D. the level of borrowed reserves.
E. the stock market.
Q:
If the Fed wishes to stimulate the economy it could
I. buy U.S. government securities.
II. raise the discount rate.
III. lower reserve requirements.
A. I and III only
B. II and III only
C. I and II only
D. II only
E. I, II, and III
Q:
The Fed changes reserve requirements from 10% to 7%, thereby creating $900 million in excess reserves. The total change in deposits (with no drains) would be
A. $3,000 million.
B. $15,625 million.
C. $12,857 million.
D. $3,795 million.
E. none of the above.
Q:
Bank A has an increase in deposits of $20 million dollars and all bank reserve requirements are 10%. Bank A loans out the full amount of the deposit increase that is allowed. This amount winds up deposited in Bank B. Bank B lends out the full amount possible as well and this amount winds up deposited in Bank C. What is the total increase in deposits resulting from these three banks?
A. $48.00 million
B. $54.20 million
C. $56.33 million
D. $57.10 million
E. $60.00 million
Q:
A decrease in reserve requirements could lead to an
A. increase in bank lending.
B. increase in the money supply.
C. increase in the discount rate.
D. both A and B.
E. both A and C.
Q:
Before 2003 the discount window loan rate was set
A. below the target fed funds rate.
B. above the target fed funds rate.
C. equal to the target fed funds rate.
D. equal to the repurchase rate.
Q:
The Fed offers three types of discount window loans. ______________ credit is offered to small institutions with demonstrable patterns of financing needs, _____________ credit is offered for short-term temporary funds outflows, and _____________ credit may be offered at a higher rate to troubled institutions with more severe liquidity problems.
A. Seasonal; extended; adjustment
B. Extended; adjustment; seasonal
C. Adjustment; extended; seasonal
D. Seasonal; primary; secondary
E. Adjustment; seasonal; extended
Q:
The discount rate is the rate that
A. banks charge for loans to corporate customers.
B. banks charge to lend foreign exchange to customers.
C. banks charge each other on loans of excess reserves.
D. banks charge securities dealers to finance their inventory.
E. the Federal Reserve charges on loans to commercial banks.
Q:
The fed funds rate is the rate that
A. banks charge for loans to corporate customers.
B. banks charge to lend foreign exchange to customers.
C. the Federal Reserve charges on emergency loans to commercial banks.
D. banks charge each other on loans of excess reserves.
E. banks charge securities dealers to finance their inventory.
Q:
The major asset of the Federal Reserve is
A. U.S. Treasury securities.
B. depository institution reserves.
C. currency outside banks.
D. vault cash of commercial banks.
E. gold and foreign exchange.
Q:
The major liability of the Federal Reserve is
A. U.S. Treasury securities.
B. depository institution reserves.
C. currency outside banks.
D. vault cash of commercial banks.
E. gold and foreign exchange.
Q:
Which of the following is the major monetary policy making body of the U.S. Federal Reserve System?
A. FOMC
B. OCC
C. FRB bank presidents
D. U.S. Congress
E. Group of Eight
Q:
Ceteris paribus, if the Fed was targeting the quantity of money supplied and money demand dropped the Fed would likely ______________. If the Fed was instead targeting interest rates and money demand dropped the Fed would likely _______________.
A. increase the money supply; do nothing
B. do nothing; decrease the money supply
C. decrease the money supply; do nothing
D. do nothing; increase the money supply
E. increase the money supply; decrease the money supply
Q:
The _____________ is a network linking over 9,000 banks with the Federal Reserve that is used to transfer deposits and make loan payments between participants.
A. Fedwire
B. ACH
C. CHIPS
D. NASDAQ
E. SWIFT
Q:
The _______________ is a nationwide network jointly operated by the Fed and private institutions that electronically process credit and debit transfers of funds.
A. Fedwire
B. ACH
C. CHIPS
D. NASDAQ
E. SWIFT
Q:
The Federal Reserve System is charged with
A. regulating securities exchanges.
B. conducting monetary policy.
C. providing payment and other services to a variety of institutions.
D. setting bank prime rates.
E. both B and C.
Q:
The primary policy tool used by the Fed to meet its monetary policy goals is:
A. changing the discount rate.
B. changing reserve requirements.
C. devaluing the currency.
D. changing bank regulations.
E. open market operations.
Q:
An increase in Treasury securities held by the Fed leads to a decrease in the money supply.
Q:
If the FOMC wished to generate faster economic growth, they could issue a policy directive to the Federal Reserve Board Trading desk to purchase U.S. government securities.
Q:
Federal Reserve Board members are appointed by the U.S. President and confirmed by the Senate for a non-renewable 14-year term.
Q:
The major asset of the Federal Reserve is currency outside banks and the major liability is U.S. Treasury securities.
Q:
About 40% of all U.S. banks are members of the Federal Reserve System.
Q:
Nationally chartered banks are required to become members of the Federal Reserve System.
Q:
The monetary base is the amount of coin and currency in circulation plus reserves.
Q:
Four seats on the FOMC are allocated to Federal Reserve Bank presidents on an annual rotating basis.
Q:
Federal Reserve interest rate decisions can be vetoed by the U.S. President or the Congress.
Q:
You have 5 years until you need to take your money out of your investments to make a planned expenditure. Right now bonds are promising an 8% return. You buy a 5-year duration bond. After you buy the bond, interest rates fall to 6% and stay there for the full five years. You reinvest the coupons and earn 6%. Will your realized return be more or less than the originally promised 8%? Explain.
Q:
An investor is considering purchasing a Treasury bond with a 16-year maturity, a 6% coupon and a 7% required rate of return. The bond pays interest semiannually.
a) What is the bond's modified duration?
b) If annual promised yields decrease 30 basis points immediately after the purchase, what is the predicted price change in dollars based on the bond's duration?
Q:
How does an increase in interest rates affect a security's duration?
Q:
Which would have a longer duration: a) a 5-year fully amortized installment loan with semiannual payments or b) a 5-year semiannual payment bond, ceteris paribus. Why?
Q:
Explain the effects of coupon and maturity on volatility.
Q:
What is convexity? How does convexity affect duration-based predicted price changes for interest rates changes?
Q:
A 15-year, 7% coupon annual payment corporate bond has a PV of $1055.62. However, you pay $1024.32 for the bond. By how many basis points is your Err different from your rrr?
Q:
Conceptually, why does a bond's price fall when required returns rise on an existing fixed income security?
Q:
Is the realized rate of return related to the expected return? The required return? Explain.
Q:
For large interest rate increases, duration _____________ the fall in security prices, and for large interest rate decreases, duration ______________ the rise in security prices.
A. overpredicts; overpredicts
B. overpredicts; underpredicts
C. underpredicts; overpredicts
D. underpredicts; underpredicts
E. none of the above
Q:
The duration of a 180-day T-Bill is (in years)
A. 0.493.
B. 0.246.
C. 1.
D. 0.
E. indeterminate.
Q:
Convexity arises because
A. bonds pay interest semiannually.
B. coupon changes are the opposite sign of interest rate changes.
C. duration is an increasing function of maturity.
D. present values are a nonlinear function of interest rates.
E. duration increases at higher interest rates.
Q:
A bond that pays interest semiannually has a 6% promised yield and a price of $1045. Annual interest rates are now projected to increase 50 basis points. The bond's duration is 5 years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)
A. $1020.35
B. $1069.65
C. $1070.36
D. $1019.64
E. None of the above
Q:
A bond that pays interest annually has a 6% promised yield and a price of $1025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is 6 years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)
A. $1042.33
B. $995.99
C. $1054.01
D. $987.44
E. None of the above
Q:
An annual payment bond has a 9% required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change?
A. -2.75%
B. 33.33%
C. 1.95%
D. -1.95%
E. 2.75%
Q:
A six-year maturity bond has a five-year duration. Over the next year maturity will decline by 1 year and duration will decline by
A. less than one year.
B. more than one year.
C. 1 year.
D. N years.
E. N/(N-1) years.
Q:
A 10-year maturity coupon bond has a 6-year duration. An equivalent 20-year bond with the same coupon has a duration
A. equal to 12 years.
B. less than 6 years.
C. less than 12 years.
D. equal to 6 years.
E. greater than 20 years.
Q:
A decrease in interest rates will
A. decrease the bond's PV.
B. increase the bond's duration.
C. lower the bond's coupon rate.
D. change the bond's payment frequency.
E. not affect the bond's duration.
Q:
A 4-year maturity 0% coupon corporate bond with a required rate of return of 12% has an annual duration of _______________ years.
A. 3.05
B. 2.97
C. 3.22
D. 3.71
E. 4.00
Q:
You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?
A. 8.89%
B. 8.51%
C. 5.84%
D. 4.44%
E. 2.96%
Q:
The ___________ the coupon and the ______________ the maturity; the __________ the duration of a bond, ceteris paribus.
A. larger; longer; longer
B. larger; longer; shorter
C. smaller; shorter; longer
D. smaller; shorter; shorter
E. none of the above