lOMoARcPSD| 50205883 Group: Class:
FINANCIAL MARKETS & INSTITUTIONS
REVISION CHAPTER 1 & 2
1. 'Direct financing" means that A.
No financial institutions are involved B.
Borrowers borrow directly from lenders C.
No financial markets are involved D.
Investment banks lend directly to other financial institutions 2. Capital market is A. An organized Exchange B.
Place where medium and long-term financial instruments are traded C.
Place where all financial instruments are traded D. An OTC market
3. To understand why financial intermediaries exist, we need to understand the role of A.
adverse selection and moral hazard B. supply and demand C.
transactions costs and information costs D. debt and equity E. risk and return
4. Asymmetric information problems occur in two forms A.
information costs and bargaining costs B.
adverse selection and moral hazard C.
systematic risk and unsystematic risk D.
monetary costs and opportunity costs E.
market failure and transaction failure
5. The two fundamental reasons for heavily regulating the financial system are A.
protecting consumers and stabilizing the financial system B.
stabilizing inflation and stabilizing interest rates C.
promoting exports and protecting consumers D.
strengthening the currency and stabilizing price levels E.
promoting liquidity and eliminating risk
6. The Central Bank extends monetary base by A. Selling on the open market B.
Lending at the "Discount Window" C. Raising reserve requirements D. Paying interest on reserves
7. Which monetary policy action will immediately, directly, and predictably change the monetary base? A. Discount Rate lOMoARcPSD| 50205883 B. Open market operation C. Reserve requirements D. Taxes
8. Which following transaction takes place on the primary market? A.
The Ministry of Finance issued treasury bills B.
Investors buy bonds via mutual funds C.
Commercial banks sell bonds of other enterprises D. Both A, B and C are correct
9. Sources of demand for loanable funds do not include A. business investment B. government budget deficit C. business savings D. consumer credit purchase
10. Sources of supply for loanable funds do not include A. consumer saving B. business investment C.
local government budget surpluses D.
state government budget surpluses
11. If loan contracts are not adjusted to address it, inflation can transfer wealth from A. borrowers to lenders B. businesses to households C. governments to businesses D.
the financial sector to the real sector E. lenders to borrowers
12. Calculate the present value of a discount bond with five years to maturity if the yield to maturity is
7% and the face value is S1000. A) $1403 B) $1070 C) $713 D) $935
13. The nominal rate can only equal the real rate if A.
general price levels are not expected to change B.
the real rate is not expected to change C.
the loanable funds market is in equilibrium D.
the loan maturity does not exceed 1 year E.
realized return is correctly predicted
14. Descending yield curves usually occur at or near A. the end of the year B. the beginning of a recession lOMoARcPSD| 50205883 C. the end of a recession D. equilibrium
15. Suppose the current 1-year rate is 2 percent. The market expects the 1-year rate to be 3 percent 1
year from now, and 5 percent 2 years from now. According to the term structure formula, the current 3-year rate should be A. 10.000% B. 10.313% C. 3.326% D. 3.333%
16. The actual yield curve is usually more upward sloping then the one predicted by expectation theory because A.
interest rate forecasts are usually wrong B.
investors are indifferent between short maturities and long maturities C.
shorter-term securities are more volatile D.
investors usually demand a liquidity premium on longer-term securities
17. The two theories of term structure in most direct conflict with each other are A.
market segmentation and expectation B.
liquidity premium and market segmentation C.
expectation and liquidity premium D.
default premium and tax consideration
18. Securities with maturities of one year or less are classified as A. capital market instruments. B. money market instruments. C. preferred stock. D. none of the above 19.
You decides to lend Kate $3000 at an 8% interest rate for 4 years. You want
Kate to pay you back in 4 equal annual payments. What will be your annual payments? A. $905,76 B. $750 C. $1020,37 D. $930 20.
Which of the following $6.000 face-value securities has the highest yield to maturity? A.
A 10 percent coupon bond selling for $6.000 B.
A 6 percent coupon bond selling for $6.500 C.
A 6 percent coupon bond selling for $6.000 D.
A 10 percent coupon bond selling for $5.500 Group: Class:
FINANCIAL MARKETS & INSTITUTIONS lOMoARcPSD| 50205883
REVISION CHAPTER 3 & 4
1. A private investor, purchases a Treasury bill with a $10,000 par value for $9,645. One hundred days
later, he sells the T-bill for $9,719. What is his annualized rate of return? A. 13.43 percent B. 2.78 percent C. 10.55 percent D. 2.80 percent E. none of the above
2. At any given time, the yield on commercial paper is __________ the yield on a T-bill with the same maturity A. slightly less than B. slightly higher than C. equal to D.
A and B both occur with about equal frequency
3. Money market instruments share all the following features except A. small denominations B. low default risk C. low price risk D. high liquidity
4. The difference between a "discount" instrument and an "add-on" instrument is chiefly a matter of A. When interest is paid B. How interest is paid C. Where interest is paid D. Regulation
5. Which of the following money market instruments does not have a secondary market? A. repurchase agreements B. T-bills C. commercial paper D. bankers' acceptances
6. T-bills are auctioned to the bidders who offer the A. highest premiums over par B. highest volumes of orders C. lowest discounts from par D. highest discount from par
7. A "repo" transaction is essentially A. an unsecured short-term loan B. an option transaction C. riskiest lOMoARcPSD| 50205883 D. a secured short-term loan
8. Which of the following is not a money market instrument? A. banker's acceptance B. municipal bonds C.
negotiable certificate of deposits D. repurchase agreements
9. Firms issue securities in the capital markets in order to A.
hedge against falling interest rates B. finance capital goods C. earn liquidity premiums D. avoid taxes 10.
The municipal bond market is unique among the capital markets because it has A. so many issuers B. such light volume C. so much risk D. so few participants
11. The yield curve for AAA-rated municipal bonds should plot
A. above that of U.S. Treasuries but below that of AAA-rated corporate bonds B.
below that of U.S. Treasuries but above that of AAA-rated corporate bonds C.
above that of both U.S. Treasuries and AAA corporates D.
below that of both U.S. Treasuries and AAA corporates
12. Yield differences among debt instruments with different credit ratings are called A. arbitrage B. default premiums C. liquidity premiums D. anomalies 13. Federal funds A.
are U.S. dollars deposited in the U.S. by European investors B.
are short term funds on interbank markets C.
indicate banks accept responsibilities for future payments D.
Have slightly lower interest rates than Treasury Bills
14. The most unfavored feature of common stock is that it A. pays dividends B. carries limited liability C.
is the residual claim against the firm's cash flows or assets D.
trades on an organized exchange
15. A difference between common and prefered stocks is: A.
preferred dividends are payable only after ordinary dividends have been paid lOMoARcPSD| 50205883 B.
preference dividends are a fixed amount C.
ordinary shares are less risky D.
preference shares have greater potential for capital gains.
16. "Nonparticipating" means that A.
preferred shareholders do not vote B.
the preferred stock dividend is fixed C.
preferred shareholders share the "'residual claim" D.
shareholders do not direct day-to-day activities
17. Which of the following is not true with respect to preferred stock? A.
Preferred stock usually does not allow for significant voting rights. B.
If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the
preferred shareholders may force the firm into bankruptcy. C.
Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend. D.
Payment of preferred dividends is not a tax-deductible expense. E. All of the above are true. 18. IPO stands for A. Investor Preferred Option B.
Internally Profitable °operations C. Initial Public Offering D. Initial Private Offering
19. The process of conducting an IPO: A.
is typically handled by an investment bank or stockbroking firm engaged by the firm B.
requires a prospectus that is meant to overcome the problem of information asymmetry C.
requires the firm satisfy the requirements of SEC D.
requires stock price evaluation process E. All of these above.
20. An order to buy or sell a stock means to execute the transaction at the best possible price. A. market B. limit C. stop-loss D. stop-buy