Exam 2
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These multiple choice questions will not appear on the exam, but they reflect the style of questions from the test bank. |
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1. _____ If the price of a futures contract increases, then: (a) The additional funds will be required from either the buyer or the seller until the delivery date. 2. _____ If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period, futures market investors must expect that: (a) Treasury bond prices will be higher in the future. 3. _____ Investors are charged a fee to buy an option. What is this fee called? (a) Option premium. 4. _____ When a buyer has the obligation to pay for an asset as set forth in the futures contract, what is this called? (a) Put option. 5. _____ When buyers and sellers agree to trade a certain quantity of a security for a specific price and at a specified date in the future, what is this? (a) The futures market. 6. _____ If a bank granted a loan to a customer at 15%, and the funds will be given to the customer one year from now, how can the bank protect itself from interest rate risk, if the market interest rate is 10% now? (a) Issue a futures contract now at 10% for certificates of deposit, so the bank would have a source of funds for next year. 7. _____ Which of the following institutions would be classified as a securities market institution? (a) Pension fund. 8. _____ Why is the Dow Jones Industrial Average so useful? (a) It provides investors with slow information. 9. _____ What are money market deposit accounts? (a) Investors can buy shares into a pool of corporate stock. 10. _____ What kind of insurance company tends to purchase long-term corporate bonds, because it can predict with accuracy future payments? (a) Property and casualty insurance company. 11. _____ Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problems of: (a) Moral hazard. 12. _____ Credit unions have invested primarily in: (a) Corporate stock. 13. _____ A banks net worth will decline following an increase in interest rates if the value of its: (a) Fixed-rate assets is greater than the value of its fixed-rate liabilities. 14. _____ Which of the following things do banks do with the funds they acquire from savers? (a) Invest in corporate stock. 15. _____ When a bank is holding a financial security such as a U.S. government bond, how is this recorded on a balance sheet? (a) As an asset. 16. _____ If there is a possibility that depositors may withdraw more money from their accounts than the amount of cash in a banks vault, what is this called? (a) Floating rate debt. 17. _____ What is bank net worth? (a) It is a loan received from the central bank. 18. _____ If a bank is not holding enough required reserves, which strategy can the bank do below to acquire more required reserves? (a) The bank buys more U.S. government securities. 19. _____ Which agency below acts as the lender of the last resort? (a) The Comptroller of the Currency. 20. _____ From the items below, which one is a reason that government regulates the banking sector? (a) The government wants to ensure the financial system is unstable. 21. _____ Critics of allowing bank examiners too much discretion argue that doing so results in banks: (a) Charging higher interest rates on loans. 22. _____ Comparing the U.S. banking system to the systems in other major industrial countries, which of the following statements is true? (a) The United States has more banks and more bank offices per capita. 23. _____ How did Money Market Mutual Funds hurt commercial banks and savings and loan institutions during the 1970s? (a) Money Market Mutual Funds could offer lower interest rates to investors, causing investors to withdraw their funds from the banks. 24. _____ Why did the U.S. government divide up the functions of investment and commercial banking? (a) The government believed that banks were underwriting too many risky securities. 25. _____ What is a benefit of international banks? (a) These banks innovate more, when they are regulated more. 26. _____ If your U.S. company invested $2 million into Russia and the loan is denominated in rubles, what happens to your investment if the exchange rate changes from [ $1 to 2,000 rubles ] to [ $1 to 1,000 rubles ]? (a) Your company has been hurt by exchange rate risk. 27. _____ When an international bank is not located in a financial center, has little regulation, has low tax rates, and has strict-customer confidentiality laws, what is this called? (a) Offshore markets. 28. _____ What is the preferred method by foreign banks to enter the United States banking market? (a) Agency office. 29. _____ A currency swap is: (a) The informal name bankers give to the exchange rate. 30. _____ A bankers acceptance is: (a) Currency accepted for deposit in a foreign bank. 31. _____ If the money multipliers become more stable, what happens to the Feds control of the money supply? (a) The Fed has less control over the money supply. 32. _____ If the Fed buys securities worth $10 million, then (assume some customers will withdraw some deposits as currency): (a) Bank reserves will increase by $10 million. 33. _____ Does it make any difference on the money supply, whom the Fed buys U.S. government securities from, such as an individual, business, or bank? (a) No. 34. _____ When the public avoids paying taxes or participates in more illegal activity, what happens to the currency-deposit ratio? (a) The ratio decreases. 35. _____ Which of the following assumptions made in deriving the simple deposit multiplier so unrealistic? (a) The Fed sets the required reserve ratio. 36. _____ If the Fed bought from you a $20,000 T-bill and used a Fed check, what is the effect on the money supply, if the required reserve ratio is 10% and no currency is withdrawn from the banks (using simple money multiplier)? (a) There is no change in the money supply. |
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Essay Questions |
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These questions reflect the style of the instructor; I will explain these in class. |
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1. What are the three factors that influence the size of the option premium? 2. You have a call option for gold, which specifies gold for $200 per ounce in the contract. What shall you do if the market price of gold is $250 per ounce? 3. (a) What are the two ways the federal government can enter the financial markets? (b) Is there a potential problem of doing this? 4. (a) What are the two ways to organize a life insurance company? (b) Does one way have any benefits of the other method? 5. (a) Drawing a T-account, please record the transaction where you deposit $5,000 into a bank. The bank is required to hold 10% of the deposit as required reserves. (b) The bank decides to lend out all of its excess reserves as a credit card loan, please record this transaction. 6. (a) Looking at the banks balance sheet below, what happens to this bank when the interest rate increases? (b) If you believe interest rates will increase, what will be your strategy? |
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Your Bank
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7. What are the three ways the banks have found to circumvent regulations? Please explain. 8 (i). The Fed buys a $20,000 T-bill from you by using a Fed check.bPlease record this transaction in the T-account below. The required reserve ratio is 10%, so allocate the reserves between Required Reserves and Excess Reserves. Your Bank
Change in M1: _______________ (ii) Your bank lends out its excess reserves for a home loan. Please record this transaction at your bank above and the First National Bank below: First National Bank
Total change in M1 from first two transactions: _______________ (iii) The First National bank lends out its excess reserves as a loan. Please record this transaction for the First National bank above and the Norwest bank below: Norwest Bank
Total change in M1 from first three transactions: _______________ |
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