Pre class task Ch1, 2, ,4_version1 (2)-converted

Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false.
1) If you earn 0.5 percent a month in your bank account, this would be the same as earning a
6 percent annual interest rate with annual compounding.

⊚ true
⊚ false

2) The real risk-free rate is the increment to purchasing power that the lender earns in order
to induce him or her to forego current consumption.

⊚ true
⊚ false

3) Simple interest calculations assume that interest earned is never reinvested.

⊚ true
⊚ false

4) For any positive interest rate, the present value of a given annuity will be less than the
sum of the cash flows, and the future value of the same annuity will be greater than the sum of
the cash flows.

⊚ true
⊚ false

5) With a zero interest rate, both the present value and the future value of an N payment
annuity would equal N × payment.

⊚ true
⊚ false

6) The monetary base is the amount of coin and currency in circulation plus reserves.

⊚ true
⊚ false

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7) One of the objectives of the FOMC is to formulate policies to promote 100 percent
employment.

⊚ true
⊚ false

8) The Quantitative Easing program initiated by the Federal Reserve during the 2010–2014
period, involved the purchase of long-term corporate bonds.

⊚ true
⊚ false

9) Countries with independent central banks are subject to political pressure to conduct
monetary policies with short-term expectations.

⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
10) What factors are encouraging financial institutions to offer overlapping financial services
such as banking, investment banking, brokerage, etc.? 1.I. Regulatory changes allowing
institutions to offer more services

2.II. Technological improvements reducing the cost of providing financial services
3.III. Increasing competition from full-service global financial institutions
4.IV. Reduction in the need to manage risk at financial institutions

A) I only
B) II and III only
C) I, II, and III only
D) I, II, and IV only
E) I, II, III, and IV

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11) A corporation seeking to sell new equity securities to the public for the first time in order
to raise cash for capital investment would most likely:

A) conduct an IPO with the assistance of an investment banker.
B) engage in a secondary market sale of equity.
C) conduct a private placement to a large number of potential buyers.
D) place an ad in the Wall Street Journal soliciting retail suppliers of funds.
E) issue bonds with the assistance of a dealer.

12) The largest capital market security outstanding in 2019 measured by market value was:

A) securitized mortgages.
B) corporate bonds.
C) municipal bonds.
D) Treasury bonds.
E) corporate stocks.

13) Depository institutions include:

A) banks only.
B) thrifts only.
C) finance companies only.
D) banks and thrifts.
E) All of these choices are correct.

14) Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a
capital market security, even though the intermediary invests in risky illiquid instruments
because:

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A) FIs can diversify away some of their risk.
B) FIs closely monitor the riskiness of their assets.
C) the federal government requires them to do so.
D) FIs can diversify away some of their risk and closely monitor the riskiness of their
assets.
E) FIs can diversify away some of their risk and the federal government requires them
to do so.

15) Which of the following is/are money market instrument(s)?

A) Negotiable CDs
B) Common stock
C) T-bonds
D) 4-year maturity corporate bond
E) Negotiable CDs, common stock, and T-bonds

16) The most diversified type of depository institutions is:

A) credit unions.
B) savings associations.
C) commercial banks.
D) finance companies.
E) mutual funds.

17) Liquidity risk at a financial intermediary (FI) is the risk:

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A) that promised cash flows from loans and securities held by FIs may not be paid in
full.

B) incurred by an FI when the maturities of its assets and liabilities do not match.
C) that a sudden surge in liability withdrawals may require an FI to liquidate assets
quickly at fire sale prices.
D) incurred by an FI when its investments in technology do not result in cost savings or
revenue growth.
E) that an FI may not have enough capital to offset a sudden decline in the value of its
assets.

18) Commercial paper is a:

A) time draft payable to a seller of goods, with payment guaranteed by a bank.
B) loan to an individual or business to purchase a home, land, or other real property.
C) short-term fund transferred between financial institutions usually for no more than
one day.
D) marketable bank-issued time deposit that specifies the interest rate earned and a fixed
maturity date.
E) short-term unsecured promissory note issued by a company to raise funds for a short
time period.

19) A negotiable CD is a:

A) time draft payable to a seller of goods, with payment guaranteed by a bank.
B) loan to an individual or business to purchase a home, land, or other real property.
C) short-term fund transferred between financial institutions usually for no more than
one day.
D) marketable bank-issued time deposit that specifies the interest rate earned and a fixed
maturity date.
E) short-term unsecured promissory note issued by a company to raise funds for a short
time period.

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20) Classify each of the following in terms of its effect on interest rates (increase or
decrease):

1.I. Perceived risk of financial securities increases.
2.II. Near term spending needs decrease.
3.III. Future profitability of real investments increases.

A) I increases: II increases: III increases
B) I increases: II decreases: III decreases
C) I decreases: II increases: III increases
D) I decreases; II decreases; III decreases
E) None of these choices are correct.

21) Classify each of the following in terms of its effect on interest rates (increase or
decrease):

1.I. Covenants on borrowing become more restrictive.
2.II. The Federal Reserve increases the money supply.
3.III. Total household wealth increases.

A) I increases; II increases; III increases
B) I increases; II decreases; III decreases
C) I decreases; II increases; III increases
D) I decreases; II decreases; III decreases
E) None of these choices are correct.

22) Inflation causes the demand curve for loanable funds to shift to the _____ and causes the
supply curve to shift to the _____.

A) right; right
B) right; left
C) left; left
D) left; right

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23) Which of the following bond types pays interest that is exempt from federal taxation?

A) Municipal bonds
B) Corporate bonds
C) Treasury bonds
D) Convertible bonds
E) Municipal bonds and Treasury bonds

24) The relationship between maturity and yield to maturity is called the
__________________.

A) loan covenant
B) term structure
C) bond indenture
D) Fisher effect
E) DRP structure

25) 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.

26) The Federal Reserve System is charged with:

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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) conducting monetary policy and providing payment and other services to a variety of
institutions.

27) All else held constant, 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

28) 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.

29) The discount rate is the rate that: 8

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.

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30) If the Fed wishes to stimulate the economy, it could: 1.I. buy U.S. government
securities.

2.II. raise the discount rate.
3.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

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