Insurance and Risk Management Online MCQ Set 6

QN01. If market interest rates are 6%, the market price of a 7% 3-month CD for $100,000 with 60 days to maturity is:

1. $101,750
2. $100,757
3. $100,505
4. $100,254
5. $100,596

Answer

(B)$100,757

QN02. If market interest rates fall to 5%, the market price of the CD in question 5, when it has 40 days to maturity will be:

1. $101,195
2. $100,760
3. $101,750
4. $100,806
5. $100,246

Answer

(A)$101,195

QN03. If people are willing to lend at 7% when inflation is 2% and continue to lend the same amounts when inflation is 4% and interest rates have risen to 8%, they are assumed to be subject to:

1. Myopic expectations
2. Money illusion
3. Risk aversion
4. Extrapolative expectations
5. Asymmetric information

Answer

(B)Money illusion

QN04. If redemption yields on one year bonds are 4.5 per cent while yields on two year bonds are 5.3 per cent, this suggests that the rate on one year bonds in one year's time will be (approximately):

1. 1.8%
2. 6.1%
3. 9.8%
4. 4.9%
5. 3.7%

Answer

(B)6.1%

QN05. If savers decide to save more, ceteris paribus, the loanable funds theory predicts:

1. A reduction in investment and interest rates
2. A fall in the exchange rate
3. A reduction in interest rates and more investment
4. An increase in investment and interest rates
5. Higher economic growth

Answer

(C)A reduction in interest rates and more investment

QN06. If the current one-year rate is 5.5% while the current two-year rate is 6%, this suggests that the one year rate next year will be:

1. 6.75%
2. 5.75%
3. 6.5%
4. 6.25%
5. 5.25%

Answer

(C)6.5%

QN07. If the demand for money is interest-elastic, an increase in interest rates:

1. Would have little impact on the rest of the economy
2. Would increase the liquidity of financial assets other than money
3. Would cause the supply of money to fall
4. Would have a powerful impact on the rest of the economy
5. Would have no impact on the rest of the economy

Answer

(A)Would have little impact on the rest of the economy

QN08. If the discount rate on 3-month commercial paper is 4.9% while the yield on 3-month CDs is 5%, the real difference between them in basis points is:

1. 1
2. 39
3. 10
4. 100
5. 3.9

Answer

(E)3.9

QN09. If the required rate of return on a company's shares is 15 per cent, its last dividend payment was 8p and earnings are expected to continue their steady growth of 9 per cent p.a., the price of the shares (to the nearest whole p) will be:

1. 133p
2. 120p
3. 53p
4. 145p
5. 114p

Answer

(D)145p

QN10. If the risk free rate is 5 per cent while the market risk premium is 10 per cent, the required return on shares where the beta-coefficient is 0.8 is:

1. 13%
2. 8%
3. 10%
4. 18%
5. 9%

Answer

(A)13%

QN11. If the risk-free rate of interest is 5 per cent p.a. while the return on a whole market portfolio is 17 per cent, the rate of return required on a share with an â-coefficient of 1.15 will be:

1. 13.8%
2. 19.55%
3. 18.8%
4. 24.55%
5. 15%

Answer

(C)18.8%

QN12. Imagine a banking system with a reserve ratio of 0.1 and a public's cash ratio is 0.05. According to the base-multiplier approach, an open market purchase of £20m bonds from the general public by the central bank should:

1. Reduce the money supply by £20m
2. Reduce the money supply by £140m
3. Increase the money supply £20m
4. Increase the money supply by £200m
5. Increase the money supply by £140m

Answer

(E)Increase the money supply by £140m

QN13. Imagine that a bank grants new lending facilities to its customers of £200m. Customers borrow £150m which they use to make payments to creditors. The creditors decide to hold those payments as £100m additional bank deposits and £50m notes and coin. The effect on the money supply is:

1. +£100m
2. +£200m
3. +£150m
4. no change
5. +£50m

Answer

(C)+£150m

QN14. In 2008 you are advising someone with £1000 to invest. Their sole investment objective is to earn a rate of return which is absolutely guaranteed over the next four years. Which of the following would you recommend?

1. Buy corporate bonds maturing in 2010 and then reinvest for two years
2. Buy government bonds maturing in 2012
3. Buy company shares now and sell in 2012
4. Buy perpetual bonds and sell in 2012
5. Put the money on deposit with a bank for four years

Answer

(B)Buy government bonds maturing in 2012

QN15. In Italy in recent years there has been:

1. A loss of competitiveness in the banking system
2. A reduction in the number of banks
3. An increase in the number of small, more specialist, banks
4. An increase in the role of the government in the banking system

Answer

(B)A reduction in the number of banks

QN16. In June 2008, UK banks held approximately £6bn in notes and coin, £26bn in operational deposits at the Bank of England, £475bn in money market loans and £3,958bn in sterling and foreign currency deposits. Their collective reserve ratio was:

1. 0.15%
2. 0.6%
3. 0.8%
4. 12.8%
5. 8%

Answer

(C)0.8%

QN17. In the course of 1923, German prices rose by approximately:

1. 20,000 times
2. 20bn times
3. 2m times
4. 2bn times
5. 200 times

Answer

(B)20bn times

QN18. In the course of a year a pension fund buys £15m of UK government bonds, £30m of UK company shares, £10m of ordinary company shares. It also sells £5m of overseas government bonds and £9m of UK preference shares. Its net acquisition of assets during the year was:

1. £30m
2. £55m
3. £69m
4. £14m
5. £41m

Answer

(E)£41m

QN19. In the flow of funds analysis of money supply determination an increase in government borrowing not financed by the sale of bonds is likely to lead to:

1. An increase in notes and coin
2. Less bank lending to the general public
3. Higher interest rates
4. A fall in banks' reserve ratio
5. An increase in bank deposits

Answer

(E)An increase in bank deposits

QN20. In the flow of funds approach to money supply determination a rise in the central bank's official dealing rate will most likely:

1. Reduce the demand for deposits
2. Lead to a smaller multiplier
3. Reduce the public's cash ratio
4. Reduce the demand for bank loans
5. Increase banks' reserve ratios

Answer

(D)Reduce the demand for bank loans

QN21. In the loanable funds theory of interest determination, an increase in the productivity of capital equipment should lead to:

1. Higher prices
2. A reduction in interest rates
3. A reduction in the amount of saving
4. Higher interest rates
5. More employment

Answer

(D)Higher interest rates

QN22. Interest is usually paid on money market instruments:

1. Monthly
2. Twice a year
3. Annually
4. At maturity
5. On request

Answer

(D)At maturity

QN23. Interest rates are 7.5 per cent. A 9% corporate bond, maturing in three years time for £100 and paying annual coupons will have a price of:

1. £83.33
2. £833.33
3. £103.90
4. £120
5. £80.50

Answer

(C)£103.90

QN24. Investment trusts often expose investors to higher capital risk than unit trusts because:

1. Investment trusts have higher operating costs
2. Unit trusts hold more bonds
3. Investment trusts are less diversified
4. Investment trusts invest in overseas shares
5. Investment trusts can be 'geared'

Answer

(E)Investment trusts can be 'geared'

QN25. It is suggested in the text that the demand for money is not of great importance from the point of view of monetary policy because:

1. Money has largely been replaced in the economy by credit and debit cards.
2. The supply of money is endogenous.
3. The supply of money is exogenous.
4. The demand for money function is unstable.

Answer

(B)The supply of money is endogenous.

QN26. Long dated government bonds tend to have higher yields than short-dated bonds because:

1. There is a smaller market for them
2. They are less liquid
3. They carry higher capital risk
4. There is less demand
5. They carry higher income risk

Answer

(C)They carry higher capital risk

QN27. Monetary authorities might be able to reduce inflation without causing a recession if their policies are:

1. Unexpected
2. Thought credible by market agents
3. Supported by the opposition
4. Believed by the voters
5. Time inconsistent
6. Consistent

Answer

(B)Thought credible by market agents

QN28. Mutual and co-operative banks in France charge lower interest rates (than commercial banks) because:

1. They have no shareholders
2. They offer limited services
3. They use cheap premises
4. Of official regulations

Answer

(A)They have no shareholders

QN29. My spending is a regular £2000 per month. However, I keep an average of £3000 per month in by bank account. This suggests that I am using bank deposits as both:

1. Means of payment and store of wealth
2. Savings and precautionary balances
3. Idle balances
4. Means of payment and medium of exchange
5. Active balances and medium of exchange

Answer

(A)Means of payment and store of wealth

QN30. Other things being equal, a high p/e ratio shows?

1. The share is overpriced
2. The firm operates a low dividen policy
3. The share is underpriced
4. Investors expect rapid earnings growth
5. The firm earns low profits

Answer

(D)Investors expect rapid earnings growth

QN31. Other things being equal, a rise in the price of a company's shares:

1. Reduces the cost of equity capital
2. Increases its costs of capital
3. Means that fewer shares will be demanded
4. Reduces the price of its bonds
5. Makes it a takeover target

Answer

(A)Reduces the cost of equity capital

QN32. Other things being equal, according to the base multiplier analysis of money supply determination, a decrease in banks' reserve ratios will lead to:

1. A larger multiplier and decrease in the money supply
2. A reduction in demand for deposits
3. A smaller multiplier and reduction in money supply
4. A rise in interest rates
5. A larger multiplier and increase in the money supply

Answer

(E)A larger multiplier and increase in the money supply

QN33. Other things being equal, according to the base multiplier analysis of money supply determination, an increase in the public's cash ratio will lead to:

1. Less spending
2. A larger multiplier and increase in the money supply
3. An increase in demand for deposits
4. A smaller multiplier and reduction in money supply
5. A smaller multiplier and increase in the money supply

Answer

(D)A smaller multiplier and reduction in money supply

QN34. Other things being equal, lenders prefer to lend for short periods because:

1. They can earn higher interest
2. The future is uncertain
3. They have more choice
4. They can reinvest frequently
5. This suits borrowers

Answer

(B)The future is uncertain

QN35. Pension and life insurance funds hold few short-term assets because:

1. Their cashflows are predictable
2. Most people live for a long time
3. Long-term assets are more profitable
4. Short-term assetsare too dear
5. Short-term assets are too risky

Answer

(A)Their cashflows are predictable

QN36. Shares in ABC plc. have an â-coefficient of 0.9. The risk free rate of interest is 4 per cent p.a. while the return on a whole market portfolio is 15 per cent. The last dividend paid by the firm was 10p per share and earnings have grown steadily in recent years at 9 per cent p.a. The share price (to the nearest whole p) will be:

1. 222p
2. 242p
3. 168p
4. 204p
5. 154p

Answer

(A)222p

QN37. Standard and Poor's bond rating agency reduces your firm's bond rating from AA+ to AA. The likely effect on your firm's bonds will be:

1. The price will rise
2. Investors will prefer your company's shares
3. Investors will not hold them
4. Your firm will find new bond issues impossible
5. The price will fall

Answer

(E)The price will fall

QN38. Suppose that the Bank of England cuts interest rates by 0.5 per cent. Other things being equal, the change in the price of shares in Q.7 will be:

1. -95p
2. -3p
3. 11p
4. 165p
5. 70p

Answer

(C)11p

QN39. Suppose that the β-coefficient of ABC shares (in Q6) increases to 1.1. Other things being equal, the new share price would be:

1. 62p
2. 95p
3. 141p
4. 68p
5. 154p

Answer

(E)154p

QN40. Suppose that three year interest rates rise from 5 per cent to 6 per cent while one year rates remain at 3 per cent. This suggests:

1. Three year bonds have become less liquid
2. Short term interest rates are likely to rise in future
3. Three year bonds have become more risky
4. Investors have become more risk averse
5. The central bank has raised three year rates

Answer

(B)Short term interest rates are likely to rise in future