Professional Documents
Culture Documents
C) restrictive covenants
D) contingencies
10. Measuring the sensitivity of bank profits to changes in interest rates by multiplying the
gap times the change in the interest rate is called
A) basic duration analysis.
B) basic gap analysis.
C) interest-exposure analysis.
D) gap-exposure analysis.
11. Secondary markets make financial instruments more
A) solid.
B) vapid.
C) liquid.
D) risky.
12. A financial market in which only short-term debt instruments are traded is called the
________ market.
A) bond
B) money
C) capital
D) stock
13. An increase in stock prices ________ the size of peoples wealth and may ________ their
willingness to spend, everything else held constant.
A) increases; increase
B) increases; decrease
C) decreases; increase
D) decreases; decrease
14. American farmers who sell beef to Europe benefit most from
________; in these two countries finance from financial intermediaries has been almost
ten times greater than that from securities markets.
A) Germany; Japan
B) Germany; Great Britain
C) Great Britain; Canada
D) Canada; Japan
20. The delivery of financial services electronically is called ________.
A) e-business
B) e-commerce
C) e-finance
D) e-possible
Section 2: Decide whether the statements are true (T) or false (F) (20pts -2pts/correct
answer)
21. When a countrys currency depreciates, its goods abroad become
more expensive and foreign goods in that country become cheaper.
22. If a bank is to make a profit, it can put that to productive use through
investing in bonds and making loans.
23. In market-based financial systems, loans from financial
intermediaries are more important for corporate finance than
marketable securities, but at a higher extent than in other financial
systems.
24. Generally, increasing interest rates from the banks encourages
individuals from lending.
25. Loans represent the most important source of finance in terms of
funds raised externally in most cases.
26. Treasury Bonds typically have the original maturity of less than 1
year
27. Municipal Governments and Corporations can issue stocks.
F
Answer: cheaper,
more expensive
T
F
Answer: lower
T
T
F
Answer: 10 - 30 years
F
Answer: Corporations
F
Answer: Federal
Reserve System
savings
liquidity
coupon rate
adverse
selection
marketable
checkable
mortgage
bond
commercial
banks
maturity
penalty
time
nondepository
financial
institutions
- (31)______________ accept deposits to make loans and to buy government securities. Deposits
are broad in range, including (32)______________ deposits (deposits on which cheques can be
written), (33)______________ deposits (deposits that are payable on demand, but do not allow
depositors to write cheques), (34)______________ deposits (deposits with a fixed term to
maturity). Loans include consumer, commercial and (35)______________ loans. (5)
- A bond has three main components: the (36)______________, or the stated interest on the debt;
the (37)______________, or the life of the bond; and the (38)______________, the principal or
the total amount initially borrowed that must be repaid to the lender at maturity.
- Themajordifferencebetweentheprimaryandsecondarymarketsisthe(39)______________
thesecondarymarketprovidestoinvestors.Ifastrongsecondarymarketexistsforafinancial
asset, investors know that the asset can be liquidated fairly quickly and without (40)______________,otherthanthefeesforhandlingthetransaction.
Answer:
31. commercial banks
32. checkable
33. savings
34. time
35. mortgage
37. maturity
39. liquidity
40. penalty
Answer: Collateral is property that is promised to the lender if the borrower defaults thus
reducing the lenders losses. Lenders are more willing to make loans when there is collateral that
can be sold if the borrower defaults.
42. Would you be more willing to lend to a friend if she put all of her life savings into her
business than you would if she had not done so? Why?
Answer: Yes. The person who is putting her life savings into her business has more to lose if she
takes on too much risk or engages in personally beneficial activities that dont lead to higher
profits. So she will act more in the interest of the lender, making it more likely that the loan will
be paid off.
43. If Mexicans go on a spending spree and buy twice as much French perfume, Japanese
TVs, English sweaters, Swiss watches and Italian wine, what will happen to the value
of the Mexican Peso.
Answer: The peso will depreciate. Consider Mexico to be the domestic country. An increased
demand for imports would lower the expected future exchange rate and result in a lower
expected appreciation of the peso. The resulting lower expected return on peso assets at any
given exchange rate would then shift the demand curve to the left, leading to a fall in the peso
exchange rate.
44. If the president of a bank told you that the bank was so well run that it never had to
call in loans, sell securities or borrow as a result of a deposit outflow, would you be
willing to buy stock in that bank? Why or why not?
Answer: No, because the bank president is not managing the bank well. The fact that the bank
has never incurred costs as a result of a deposit outflow means that the bank is holding a lot of
reserves that do not earn any interest. Thus the banks profits are low, and stock in the bank is not
a good investment.
45. Bank managers should always seek the highest return possible on their assets. Is
this statement true, false or uncertain? Explain your answer.
Answer: False. If an asset has a lot of risk, a bank manager might not want to hold it even if it
has a higher return than other assets. Thus a bank manager has to consider risk as well as the
expected return when deciding to hold an asset.