Final Review

Question 1

Financial markets have the basic function of

Answer 1

bringing together people with funds to lend and people who want to borrow

Question 2

A discount bond requires the borrower to repay the principal at the maturity date plus interest payment

Answer 2

FALSE

Question 3

A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified amount is repaid.

Answer 3

TRUE

Question 4

What are secondary markets?

Answer 4

NYSE, US government bonds, NASDAQ, and futures markets

Question 5

A corporation acquires new funds only when its securities are sold in the

Answer 5

primary market by investment banks

Question 6

Technical analysis used to predict movements in stocks based on past patterns are, according to efficient market theory ____.

Answer 6

Waste of time

Question 7

The weak form of efficient market theory asserts

Answer 7

future changes in stock prices cannot be predicted from past prices and technical analysis cannot expect to outperform the market.

Question 8

An open market sale of securities by the Federal Reserve will

Answer 8

decrease liabilities of the Fed and not affect assets of the banking system

Question 9

If the Fed wants to lower the monetary base and the money supply it will….

Answer 9

sell government securities

Question 10

Investors buy at the ___ and sell at the ____

Answer 10

buy at ask and sell at bid

Question 11

Banks buy at __ and sell at ___

Answer 11

buy at bid and sell at ask

Question 12

When the value of money changes from 0.50 to 0.75 the money has ___

Answer 12

Depreciated

Question 13

If the dollar ___ from 0.5 yen per dollar to 0.8 yen per dollar; the dollar ____ from 2 dollars/yen to 1.25 dollars/yen.

Answer 13

Appreciates; Appreciates

Question 14

If the yen appreciates relative to the dollar

Answer 14

Japanese guitars will be more expensive in the US and American cars will be cheaper in Japan

Question 15

An important notion about the PPP is that exchange rates are determined in the ____

Answer 15

long run

Question 16

The theory of PPP asserts that exchange rates adjust according to ____

Answer 16

The two countries price levels

Question 17

If the Fed buys domestic $ in exchange for foreign $ this will result in

Answer 17

foreign reserves and monetary base to decrease

Question 18

Assume a country is practicing fixed exchange rate, The domestic currency is currently _____
which is ____ the level its supposed to be. This pushes central bank to sell domestic currency in exchange for foreign currency.

Answer 18

undervalued; below.

Question 19

If the federal reserve of the US cannot continue to intervene bc it ran out of international reserves. This would cause USD to ___ and a ___ must occur where the equilibrium exchange rate settles in a __ level.

Answer 19

Depreciate; devaluation; lower

Question 20

A banks assets are

Answer 20

its uses of funds

Question 21

A banks liabilities are

Answer 21

its sources of funds

Question 22

Secondary reserves

Answer 22

can be converted into cash with low transaction costs

Question 23

When comparing S&L and mutual savings banks, which is the most significant difference?

Answer 23

Depositors as a group own mutual banks.

Question 24

Difference between value and glamour fund is

Answer 24

value funds stocks have high book/market equity prices

Question 25

Co-insurance is basically

Answer 25

the strategy to decrease moral hazard.

Question 26

Law of Large Numbers states

Answer 26

the more observations you have the better the distribution is, or smoother the bell curve.

Question 27

Which is the highest % of Assets for Life Insurance companies and which is the lowest %?

Answer 27

Highest - Bonds

Lowest - Loans

Question 28

Pension

Answer 28

similar to mutual funds

Question 29

Defined Benefit vs Defined Contribution Pensions

Answer 29

benefit calculates how much you will get out of the pension, while contribution calculates what you will pay into the pension

Question 30

What is credit risk?

Answer 30

the risk they assume by lending to different people. Some people won’t be able to pay back the loan and creates a credit risk.

Question 31

What is compensating balances

Answer 31

Basically money set aside as collateral.

Question 32

Credit Rationing

Answer 32

it means not everyone who applies for a loan will get it, or not everyone will get the amount they are asking for.

Question 33

What does the DURATION try to accomplish

Answer 33

essentially the weighted average of the collection time of the asset that are rate sensitive