Professional Documents
Culture Documents
Final Test 1
Final Test 1
C) regulations
D) equity
United States.
B) the markets where foreign exchange rates are determined.
C) the markets where interest rates are determined.
D) the markets where all borrowers get their funds.
9. Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
10. Assume that you borrow $2000 at 10% annual interest to
finance a new business project. For this loan to be profitable, the
minimum amount this project must generate in annual earnings
is
A) $400.
B) $201.
C) $200.
D) $199.
11. You can borrow $5000 to finance a new business venture. This
new venture will generate annual earnings of $251. The
maximum interest rate that you would pay on the borrowed
funds and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
12. Which of the following can be described as involving direct
finance?
A) A corporation issues new shares of stock.
A) active
B) determined
C) indirect
D) direct
Comparative
Financial
intermediarie
s
17. Financial institutions that accept deposits and make loans are
called ________ institutions.
A) investment
B) contractual savings
C) depository
D) underwriting
18. Which of the following is not a nontransaction deposit?
A) Savings accounts
B) Small-denomination time deposits
C) Negotiable order of withdrawal accounts
D) Certificate of deposit
21. A bank that wants to monitor the check payment practices of its
commercial borrowers, so that moral hazard can be prevented,
will require borrowers to
A) place a bank officer on their board of directors.
B) place a corporate officer on the banks board of directors.
C) keep compensating balances in a checking account at the
bank.
D) purchase the banks CDs.
22. The difference of rate-sensitive liabilities and rate-sensitive
assets is known as the
A) duration.
B) interest-sensitivity index.
C) rate-risk index.
D) gap.
Financial
markets
B) liabilities.
C) expenses.
D) earnings and assets.
Forex market
Financial
instruments
Collateral is ________ the lender receives if the borrower does not pay
back the loan.
A) a liability
B) an asset
C) a present
D) an offering
Section 2: Decide whether the statements are true (T) or false (F) (20pts 2pts/correct answer)
1. Risk that is related to the uncertainty about interest rate movements is called default
risk
4. If borrowers with the most risky investment projects seek bank loans in higher
proportion to those borrowers with the safest investment projects, banks are said to face
the problem of moral hazard.
10. A banks balance sheet shows that total assets equal total liabilities plus equity
capital.
risk. There are two ways of monitoring credit risk: to write covenants into loan contracts
and to establish long-term customer relationships. (2)
Section 4: Answer the questions (30pts - 6pts/correct answer)
1. How does a fall in the value of the pound sterling affect British consumers?
It makes foreign goods more expensive, so British consumers will buy fewer foreign
goods and more domestic goods.
2. Compare Common stock and preferred stock.
Common stocks represent ownership interests in the firm. Common stockholders receive
dividends (when distributed), take capital gains (or losses) when the stock price on the
market increases (or decreases), and have the right to vote.
Preferred stocks are equity claims with limited ownership rights in comparison to
common stocks. They differ from common stocks in several ways. First, preferred stocks
distribute a fixed constant dividend, which makes them more similar to bonds than to
common stocks. Second, the price of preferred stocks is relatively stable, as the dividend
is a constant amount. Third, preferred stocks do not usually carry voting rights. Finally,
preferred stockholders have a residual claim on assets and income left over after creditors
have been satisfied, but they have priority over common stockholders.
3. In some cities, newspapers publish a weekly list of restaurants that have been
cited for health code violations by local health inspectors. What information
problem is this feature designed to solve? How?
This solves both adverse selection and moral hazard. People who dine out at restaurants
may have a difficult time identifying restaurants that dont meet certain health standards.
Because of this, some people may not want to eat out at all. Also, restaurants dont have
an incentive to follow health regulations since diners cant distinguish restaurants that
meet the health standards from those that dont. However, publishing the names of
restaurants cited for health code violations allows people to identify unsanitary
restaurants and thus holds restaurants accountable for following health regulations.
What is a stock? How do stocks affect the economy?
Answer: A stock represents a share of ownership of a corporation, or a claim on a firm s
earnings/assets. Stocks are part of wealth, and changes in their value affect people s
willingness to spend. Changes in stock prices affect a firms ability to raise funds, and
thus their investment.
8. If there is a strike in France, making it harder to buy French goods, what will
happen to the value of the Euro?
Consider France to be the domestic country. Because it is harder to get French goods,
people will buy more foreign goods and the value of the euro in the future will fall. The
expected depreciation of the euro lowers the expected return on euro assets at any
exchange rate, so the demand curve shifts to the left and the value of the euro will fall.
10. If you are a banker and expect interest rates to rise in the future, would you want to
make short-term or long-term loans?
You should want to make short-term loans. Then, when these loans mature, you will be
able to make loans at higher interest rates, which will generate more income for the bank.