QN01. The 'clean price' of a bond is:
- The price when it is first issued
- The price including the interest which has accrued since the last coupon payment
- The price excluding accrued interest
- The price excluding the broker's commission
- The price net of tax
Answer
(C)The price excluding accrued interest
QN02. The ability of central banks to influence short-term interest rates rests upon:
- Government policy
- Their role as lenders of last resort
- Their supervisory role
- Sales of government bonds
- Mandatory reserve ratios
Answer
(B)Their role as lenders of last resort
QN03. The banking systems of Nordic countries are remarkable for their:
- Instability
- Economies of scale
- Mortgage lending
- Securities dealing
- Degree of market concentration
Answer
(E)Degree of market concentration
QN04. The Caisses d'Epargne are:
- Mutual banks providing services to local authorities
- Private commercial banks
- Co-operative savings banks
- Mutual banks linked to particular economic activities
Answer
(C)Co-operative savings banks
QN05. The conversion of building societies to PLC status allowed them:
- To raise funds by bond issues
- To raise capital by share issues
- To make personal loans
- To expand by merger
- To accept wholesale deposits
Answer
(B)To raise capital by share issues
QN06. The demand for insurance derives from the fact that people want:
- The certainty of a good return
- To reduce the risk of accidents
- The possibility of a large loss to the certainty of a small one
- The possibility of generous compensation
Answer
(D)The possibility of generous compensation
QN07. The essential characteristic that any monetary asset must possess is:
- Stable value
- Convenience
- Acceptability in exchange
- Classification as legal tender
- Divisibility
Answer
(C)Acceptability in exchange
QN08. The federal insurance of deposits is:
- Compulsory for thrifts
- Compulsory for all banks
- Compulsory for nationally-chartered banks
- Voluntary for all banks
- Compulsory for state-chartered banks
Answer
(C)Compulsory for nationally-chartered banks
QN09. The German banking system can be divided into 'specialised credit institutions' and:
- Co-operative banks
- 'Universal' banks
- Mortgage banks
- Foreign banks
- Savings banks
Answer
(B)'Universal' banks
QN10. The Glass-Steagall Act:
- Set up the Federal Reserve system
- Prevented national banks from opening branches
- Made national banks subject to the same branching restrictions as applied to national banks
- Established the Federal Deposit Insurance Corporation (FDIC)
- Required commercial and investment banks to be kept separate
Answer
(D, E) Established the Federal Deposit Insurance Corporation (FDIC) Required commercial and investment banks to be kept separate
QN11. The idea behind a capital adequacy ratio is that banking risk should be borne by:
- Shareholders
- Creditors
- Managers
- Borrowers
- Directors
Answer
(a)Shareholders
QN12. The interest yield on the treasury bill in question 2 is:
- 4.7%
- 0.8%
- 4.75%
- 8%
- 0.806%
Answer
(c)4.75%
QN13. The Italian banking system was similar to the US system in the 1930s in which of the following ways?
- There were many small banks in both countries
- The Mafia controlled both systems
- Investment banking was kept separate from commercial banking in both countries
- The state played a major role in both systems
- The development of branch networks was discouraged in both systems
Answer
(A, C, D)
There were many small banks in both countries
Investment banking was kept separate from commercial banking in both countries
The state played a major role in both systems
QN14. The largest item in the asset portfolio of German households in 2006 was:
- Bonds
- Insurance policies
- Unit trust certificates
- Company shares
- Bank deposits and currency
Answer
(B)Insurance policies
QN15. The major institutional holders of equity in Sweden are:
- Mutual funds
- National Pension Fund
- Banks
- Insurance companies
- Mortgage credit institutes
Answer
(D)Insurance companies
QN16. The ownership of ordinary company shares gives shareholders:
- A share in the management of the company
- A strong claim on the firm's assets in the event of insolvency
- A guaranteed rate of return
- The right to vote on specified issues concerning the firm
- The right to receive dividends
Answer
(A)A share in the management of the company
QN17. The Phillips curve implied that there was a trade-off available to governments between:
- Inflation and unemployment
- Out put and employment
- The price level and unemployment
- Unemployment and inflation
- Output and unemployment
- The price level and employment
Answer
(A)Inflation and unemployment
QN18. The real rate of interest required by investors is 3% p.a., inflation for the next year is expected to be 4% and the liquidity premium is 1% for every year to maturity. If the rate quoted on a two year loan is 11%, the risk premium must be:
- 9%
- 2%
- 4%
- 3%
- 7%
Answer
(D)3%
QN19. The reason that finding the present value of a future sum of money requires us to discount it, is that:
- Inflation will reduce its purchasing power
- We can’t be certain of receiving it
- We don’t know when we shall receive it
- Waiting deprives us of its use
- Waiting involves risk
Answer
(D)Waiting deprives us of its use
QN20. The recent structural changes in the US banking system have been the result of which five of the following:
(a) The depression of the 1930s
(b) Mergers and acquisitions
(c) Legislative changes affecting interstate expansion
(d) The growth of off-shore banking
(e) Legislative changes affecting expansion by branching
(f) The junk bonds collapse
(g) Failures of depository institutions
(h) The end of the IMF fixed exchange rate system
(i) Increased international capital flows
(j) Changes in credit union membership regulations
- (b), (c), (e), (g) and (i)
- (b), (c), (e), (h) and (j)
- (b), (c), (e), (i) and (j)
- (b), (c), (d), (g) and (j)
- (a), (c), (e), (g) and (j)
- (b), (c), (e), (g) and (j)
Answer
(F)(b), (c), (e), (g) and (j)
QN21. The rescue of insolvent banks inevitably raises problems of:
- Cost
- Insurance
- Ownership
- Moral hazard
Answer
(D)Moral hazard
QN22. The returns on the following 3-month instruments are quoted in the usual way (i.e. some as discount rates, some as interest yields). Which instrument offers the best rate of return?
- 4.58% on a CD
- 4.56% on commercial paper
- 4.5% on a treasury bill
- 4.55% on a repo
- 4.6% on an interbank deposit
Answer
(B)4.56% on commercial paper
QN23. The risk free rate of interest is 5% while the whole market return is 16%. According to the CAPM, the rate of return required on an asset with a β-coefficient of 1.1 is:
- 17.1%
- 67.1%
- 17.6%
- 22.6%
- 22.1%
Answer
(A)17.1%
QN24. The risk free rate of interest is 6% while the market risk premium is 10%. A share which is twice as risky as the whole market portfolio should produce a return of:
- 26%
- 38%
- 32%
- 22%
- 36%
Answer
(A)26%
QN25. The simple Phillips curve was attacked as suffering from:
- Money illusion
- Backward-looking expectations
- Optimism
- Lack of sufficient evidence
- Rational expectations
Answer
(A)Money illusion
QN26. The Swedish banking system is dominated by:
- Universal banks
- Large banks
- Specialist banks
- Mortgage banks
- Co-operative banks
Answer
(A)Universal banks
QN27. The target inflation rate in the UK is set by:
- The European Central Bank
- The government
- The European Commission
- The Monetary Policy Committee
Answer
(B)The government
QN28. The yields on government bonds are usually less than yields on corporate bonds of similar maturity because:
- Corporate bonds have a shorter maturity than government bonds
- Government bonds are less risky than corporate bonds
- Corporate bonds have a longer maturity than government bonds
- Governments are non-profit-making institutions
- Government bonds are riskier than corporate bonds
Answer
(B)Government bonds are less risky than corporate bonds
QN29. Two assets have variances of 24 (asset A) and 45 (asset B). The covariance between them is 15. If a portfolio is composed of the two assets in the proportions 70% in A and 30% in B the portfolio standard deviation will be:
- 4.7
- 30.3
- 11.6
- 22.11
- 69
Answer
(A)4.7
QN30. Two assets have variances of 24 (asset A) and 45 (asset B). The covariance between them is 15. The correlation coefficient of returns is:
- 0.33
- 0.46
- 0.64
- 1.29
- 0.22
Answer
(B)0.46
QN31. Using the symbols of Chapter 11, a reduction in the riskiness of a company's earnings, other things being equal, will be reflected in:
- A reduction in the market risk premium (Km- Krf)
- A rise in D
- A rise in the beta-coefficient
- A reduction in the beta-coefficient
- A reduction in g
Answer
(A)A reduction in the market risk premium (Km- Krf)
QN32. Which of the following are bank assets?
- Customer deposits and advances to the general public
- Reserves and advances to the general public
- Investments and capital
- Reserves and customer deposits
- Notes and coin and customer deposits
Answer
(B)Reserves and advances to the general public
QN33. Which of the following are characteristics of the US financial system?
- It has been dominated by large New York banks
- Modern firm's raise funds largely through the stock market
- It has had a history of bank collapses
- All banks are licensed by the Federal Reserve Board
Answer
(C)It has had a history of bank collapses
QN34. Which of the following are depository institutions?
- Insurance companies
- Credit unions
- Money market mutual funds
- Savings and loan associations
- Investment banks
- Commercial banks
Answer
(B)Credit unions
QN35. Which of the following are generally characteristics of bonds:
- Zero default risk and fixed coupon payments
- Fixed coupon payments and no fixed period to maturity
- No fixed period to maturity and variable coupon payments
- Zero capital risk and bi-annual coupons
- Prior claim on the assets of issuers and a fixed period to maturity
Answer
(E)Prior claim on the assets of issuers and a fixed period to maturity
QN36. Which of the following institutions are classified as thrifts?
- Savings and loan associations
- State chartered banks
- Savings bank
- Credit unions
- Small commercial banks
Answer
Savings and loan associations
Savings bank
QN37. Which of the following is an 'AFB' bank:
- BNP-Paribas
- MONEP
- Credit Mutuel
- Credit Municipal
Answer
(A)BNP-Paribas
QN38. Which of the following is likely to have the lowest degree of income risk for an investor investing for five years?
- Ordinary company shares
- A bank sight deposit
- Government bonds with ten years to maturity
- A succession of one year bank time deposits
- A succession of 3-month treasury bills
Answer
(C)Government bonds with ten years to maturity
QN39. Which of the following is not a member of the European Monetary Union?
- Finland
- Denmark
- Norway
- Sweden
Answer
(C)Norway
QN40. Which of the following makes US monetary policy?
- The Federal Reserve System
- The Federal Reserve Bank
- The Board of Governors of the Federal Reserve System
- None of the above
Answer
(D)None of the above
QN41. Which of the following might explain why an upward sloping yield curve is 'normal'?
- Long-dated bonds are less liquid than short-dated bonds
- The bond market is dominated by capital risk averse investors
- The bond market is dominated by income risk averse investors
- Short-dated bonds are less liquid than long-dated bonds
- People expect future short-term interest rates to be higher than today
Answer
(B)The bond market is dominated by capital risk averse investors
QN42. Which of the following play a part in the regulation of the US financial system?
(a) FRB
(b) FDIC
(c) MMF
(d) FSLIC
(e) OCC
(f) NCUA
(g) FFIEC
(h) FOMC
(i) SEC(j) NASD(a), (b), (c), (f), (g), (i) and (j)
- (a), (b), (e), (f), (i) and (j)
- (a), (b), (e), (g), (h), (i) and (j)
- (a), (b), (e), (f), (g) and (i)
- (a), (b), (d), (f), (g), (i) and (j)
- (a), (b), (e), (f), (g), (i) and (j)
Answer
(D)(a), (b), (d), (f), (g), (i) and (j)
QN43. Which of the following statements are false?
- The Single European Act had little significance for the Italian financial system
- Because the savings ratio in Italy has been falling, there has been little growth in investment funds there
- The ownership of banks in Italy is more concentrated than is suggested by the number of banks
- The profits of Italian banks remain relatively low
- The Bank of Italy is not an independent central bank
Answer
(B, D )
The Single European Act had little significance for the Italian financial system
Because the savings ratio in Italy has been falling, there has been little growth in investment funds there
The profits of Italian banks remain relatively low
QN44. Which of the following statements are true?
- The profits of Italian banks remain relatively low
- The Bank of Italy is not an independent central bank
- The movement towards monetary union and membership of the eurozone has had a large impact on the Italian financial system
- Savings ratios in Italy have risen but are still low
- Banks in Italy have on average become much larger in recent years
Answer
(C)
The profits of Italian banks remain relatively low
The movement towards monetary union and membership of the eurozone has had a large impact on the Italian financial system
QN45. Which of the following ways of forming expectations are forward-looking?
- Rational expectations
- Regressive expectations
- Psychological expectations
- Adaptive expectations
- Exogenous expectations
Answer
(A)Rational expectations
QN46. Why were the charters of the First Bank of the United States and the Second Bank of the United States not renewed?
- Because they operated inflationary monetary policies
- Because their profit rates were too low
- Because they conflicted with American democratic ideals
- Because they gave too much power to the Federal Reserve System
- Because they collapsed in bank panics
Answer
(C)Because they conflicted with American democratic ideals
QN47. You are thinking of making an investment in government bonds and you propose to hold the bonds to maturity. Which measure of bond yield is the most appropriate in making your choice:
- Simple yield to maturity
- Holding period yield
- Interest yield
- Current yield
- Redemption yield
Answer
(E)Redemption yield
QN48. You buy a portfolio of long-dated bonds at a price of £101 each. Shortly afterwards, interest rates rise by 1% and the market value of your bonds falls to £96. This is an example of:
- Default risk
- Reinvestment risk
- Income risk
- Capital risk
- Business risk
Answer
(D)Capital risk
QN49. You hold a portfolio of government bonds and you expect interest rates to fall in the near future. In order to take advantage of this you should now:
- Sell the whole portfolio
- Buy high-coupon bonds
- Sell long-dated bonds
- Buy long-dated, low-coupon bonds
- Buy short-dated bonds
Answer
(D)Buy long-dated, low-coupon bonds