Multiple choice questions:
Question 1
Which of the following is an example of a source of internal finance for companies?
A) corporate bonds
B) withheld earnings
C) commercial loans
D) employee pension funds
Question 2
Which of the following is a technique lenders use to alleviate asymmetric information problems?
A) checking credit ratings
B) monitoring borrowing activity
C) restrictive covenants
D) all of the above
Question 3
Which of the following is a technique lenders use to alleviate moral hazard problems?
A) specialized lending
B) diversified lending
C) requiring collateral
D) all of the above
Question 4
Sarbanes-Oxley was intended to reduce
A) asymmetric information
B) allocational efficiency
C) transactions costs
D) all of the above
Question 5
A bank can increase its level of reserves by
A) buying securities
B) increasing borrowings
C) making loans
D) all of the above
Question 6
Which of the following is a method banks use to deal with interest rate risk?
A) specialization
B) gap analysis
C) restrictive covenants
D) compensating balances
Question 7
When a bank turns demand deposits into mortgages it is creating:
A) contingency risk
B) credit risk
C) interest rate risk
D) liquidity risk
Question 8
A bank can increase its level of reserves by
A) buying securities
B) increasing borrowings
C) making loans
D) all of the above
Question 9
Unit banks
A) have no branches
B) are highly competitive
C) are an increasingly common type of financial institution
D) all of the above
Question 10
With an ARM, who must take on the interest rate risk?
A) both
B) lender
C) neither
D) borrower
Question 11
Bank consolidation is potentially a problem because
A) larger banks are harder to regulate
B) banks are less diversified
C) banks are less able to innovate
D) they cannot manage complex technology
Question 12
The "too big to fail" policy exacerbates the moral hazard problem between
A) regulators and banks
B) politicians and regulators
C) the public and politicians
D) banks and borrowers
Question 13
The creation of the SEC was intended to increase _____ in financial markets.
A) credit risk options
B) transparency
C) profits
D) liquidity
Question 14
The FDIC was created in response to
A) the stock market crash
B) unscrupulous S&Ls
C) hyperinflation trends
D) bank runs
Question 15
Which of the following is considered to be a derivative?
A) bonds
B) swaps
C) equities
D) mutual funds
Question 16
Which of the following markets is least liquid?
A) the stock market
B) the forwards market
C) the currency market
D) the bond market
Question 17
Which of the following is true of a financial derivative?
A) Derivatives are not traded on exchanges and so cannot be regulated.
B) The price of a derivative is independent of its supply in the market.
C) Derivatives can be used to multiply gains or losses from an asset.
D) Derivatives can also be traded without any underlying asset.
Question 18
Lenders of last resort intend to
A) restore confidence in financial markets.
B) impose more regulation on the banks
C) restrain money supply growth.
D) increase the capital in financial institutions.
Question 19
All of the following EXCEPT one would have a strong propensity to initiate a financial crisis. Which is the exception?
A) exchange rate appreciation
B) government fiscal deficits
C) increases in interest rates
D) banking panics
Question 20
During a housing bubble, people continue to buy houses because
A) the government guarantees house value won't fall.
B) they expect house price to continue to rise.
C) they are offered adjustable rate mortgages
D) they are able to get loans at high interest rates.