Finance 660 Test Questions Review

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Finance 660 Test Questions : 1. The risk-return tradeoff principle describes a.How to increase returns by diversifying risk as much as possible b.How higher levels of risk are associated with higher potential returns c.How higher levels of risk are associated with higher returns d.How low levels of uncertainty are associated with high potential returns e.a and c are correct 2.In contract theory, information asymmetry deals with a.Decisions where the parties do not know each other well enough??? b.Decisions where the parties almost always have a conflict of interest c.Decisions where one party has more or better information about the other – Think its this one !!!! d.Decisions in transactions where there is a post-agreement market for lemons 3.Moral hazard occurs a.When a party takes more risk because someone else bears the cost of a potential downside b.When banks take too much risk because of the development of commercial paper and excessive regulation c.When banks are too big to fail and they can always be bailed out to avoid systemic risk d.When a big pension fund has made risky investments on behalf of millions of public employees 4.Asset substitution means that a.Managers overlook low risk, low return opportunities because it would benefit debtholders mostly b.Managers choose high risk opportunities because it would benefit shareholders mostly c.Managers choose high risk opportunities because it would hurt debtholders mostly d.b and c are correct 5. Debt overhang occurs because a.There is excessive unsubordinated debt and managers work for shareholders b.There is excessive debt and a market for lemons that favors shareholders c.There is excessive debt and a principal-agent information asymmetry problem d.There is excessive debt and managers maximize utility and favor shareholders 6. Free cash flow is a concept associated to a. Empire building, corporate capitalism, crony socialism b. Empire building, corporate socialism, expensive acquisitions c. Empire building, corporate socialism, value-destroying acquisitions d. Empire building, corporate socialism, cash cows e. c and d are correct 7. The 2007-2009 financial crisis is argued to have been caused by a. Moral hazard, global systemic risk, rating agencies, deregulation b. Moral hazard, crony capitalism, global systemic risk, reregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by

a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation The 2007-2009 financial crisis is argued to have been caused by a. agency problems, global systemic risk, rating agencies, reregulation b. Moral hazard, crony capitalism, global systemic risk, deregulation c. Fed and Treasury, asymmetric information, systemic risk, rating agencies d. Moral hazard, global systemic risk, rating agencies, reregulation 8. Ben Bernanke a. Chaired the Fed during the 2007-2009 Financial Crisis b. Chaired the Fed and was blamed for the 2007-2009 Financial Crisis c. Is an unapologetic free-marketer and expert in the Great Depression d.Helped repeal Glass-Steagal and replace it with the Volcker Rule Alan greenspan was blamed for the 2007-2009 Financial Crisis 9. The chronological order of events is a. Fed supports Bear Stern’s sale to JP Morgan, Fannie Mae & Freddie Mac are nationalized, Lehman files bankruptcy, AIG is bailed, Goldman and Morgan Stanley become holdings, TARP is passed b. Fed supports Bear Stern’s sale to JP Morgan, Lehman files bankruptcy, Fannie Mae &

Freddie Mac are nationalized, AIG is bailed, Goldman and Morgan Stanley become holdings, TARP is passed c.Fannie Mae & Freddie Mac are nationalized, Fed supports Bear Stern’s sale to Goldman, AIG is bailed, TARP is passed, Goldman and Morgan Stanley become holdings d. Fed supports Bear Stern’s sale to Goldman, Fannie Mae & Freddie Mac are nationalized, Lehman files bankruptcy, AIG is bailed, Goldman and Morgan Stanley become holdings, TARP is passed 10. PMI - “ desert island statistic”, moves the markets more than GDP reports because it is the a. Earliest macroeconomic indicator, published the 1 st business day of the month by a non-profit educational association in Arizona and surveys purchasingexecutives at private manufacturing firms b. Earliest macroeconomic indicator, published the 1st business day of the month by an independent financial firm in Arizona that surveys purchasing executives at private manufacturing firms c.Earliest macroeconomic indicator, published the 1 st Friday of the month by a non- Department of Commerce association in Arizona that surveys executives at private manufacturing firms d. Earliest macroeconomic indicator, published the 1 st business of the month by an independent financial firm in Arizona that surveys purchasing executives at private manufacturing firms 11. The largest market in the world is a.The fixed income market, with a volume equal in two weeks to the world’s GDP b.The fixed income market, with a volume of $100 Trillion, and US treasuries as the world’s piggy bank c.The fixed income market, with a volume of $72 Trillion, and US treasuries as theworld’s piggy bank d.The fixed income market, with a volume of $72 Trillion, and US fixed income as 35% of world fixed income market 12. PMI a.Less than 60 indicates contraction and reaching 52 a recession b.Less than 50 indicates contraction and reaching 42 a recession c.Less than 40 would likely lead to monetary contraction d.Less than 60 would likely lead to monetary expansion 13. The Gini coefficient a.Measures the misery index per country b.Is a standard measure of national income inequality c.Depicts the trade-off between inflation and unemployment d. Depicts the trade-off between return and maturity 14. The yield curve a.Depicts the cost of borrowing for various risk-aversion preferences b.Normally goes from bottom left to top right, because risk increases with maturity c.Reveals the Fed’s nudging through the left-hand side and subsequent slope d.a, b, c are correct e.b, c are correct 15. Financial institutions provide a. Broker and asset transformation services b.Broker and maturity intermediation services subject to regulation c.Broker and maturity intermediation services while maximizing value d.Broker and denomination intermediation services 16. Depository institutions are special financial institutions because a.They provide maturity intermediation

b.They transmit monetary policy cProvide credit to critical sectors d.All of the above 17. The Depository institutions are a .Banks, credit unions and thrifts -  b.Banks, credit unions, and S&Ls c.Investment banks that are systemic d.a and b are correct 18. The main bank regulators are a. Fed, OCC, FDIC, State b. Fed, OCC, FDIC, SEC c. Fed, OCC, FDIC, IMF d. a, b, c are correct e. a, bare correct 19. FDIC was created during the Great Depression a.With the Fed chairman serving as a director b.With a $100 trillion line of credit with the treasury c .With a $100 billion line of credit with the Treasury d.a and b are correct 20. Who serves as director at FDIC? a.The secretary of the Treasury b.The comptroller of the currency c.The chairman of the Fed system d.The chairman of the NY Fed 21. The benchmark rates are a. Prime and LIBOR, with prime about 3% above Fed funds rate b.Fed funds and prime, with LIBOR always close to Fed funds rate c.Fed and discount rate, since they are US rates, unlike LIBOR d.Any rates used in floating securities that only affect interest rate risk 22. Capital structure is the a. Mix of stocks and bonds b. Mix of loans and bonds c. Mix of bonds and equity d. Mix of debt and equity 23. Savings & Loans Crisis of mid 80s to mid 90s a. Was caused by higher interest rates, reregulation and fraud b. Was cause by lower interest rates, deregulation and corruption c. Was caused by deregulation, higher interest rates, lead to FIRREA & FDICIA d. a and c are correct 24. The great Depression lead to a.Fed, FDIC, Glass-Steagall act, SEC b.OCC, FDIC, Glass-Steagall act, SEC c.FDIC, Glass-Steagall act, SEC, Basel d. FDIC, Glass-Steagall act, SEC 25 If APR is 12% and compounding quarterly, what is the EAR

a. 13.08% b.12.55% c. 11.46% d. 12.15% 26. If EAR is 12% and compounding semiannually, what is the APR a. 12.04% b. 11.66% c. 11.18% d. 11.05% 27. If a semi-annual bond has par-value is $100, 5% coupon and 8 years of remaining maturity, what would be the market price if yield is 6% a. $93.71 b. $100 c. $106.78 d. None of the above 28. Savings & Loans Crisis of mid 80s to mid 90s a.Involved the failure of 25% of S&Ls, and lead to FIRREA, FDICIA and Basel b.Involved the failure of over 30% of S&Ls, lead to FIRREA, FDICIA and Basel c.Was caused by deregulation, higher interest rates, lead to FIRREA & FDICIA d. Was caused by fraud, higher interest rates, lead to FIRREA, FDICIA, IMF and Basel 29.The dual mandate of the Fed refers to a. 2% inflation and 5% unemployment with quality of employment b. Stability of prices and employment maximization c. Stable prices and employment with moderate long-term interest rates d. a and c are correct 30.Who from the Basel Committee are members from the US? AFed Board B.NY Fed C.OCC D.FDIC EAll the above 31. Basel was a consequence of FIRREA & FDICIA a.True b.False 32. The Federal Reserve banks impact the world through monetary policy and its effects on the yield curve and benchmark rates a. True- !!!!!!! b.False 33. The Troubled Assets Relief Program (TARP) approved by Congress authorized a. Fed to spend up to $700 billion to bail US financial system b.Treasury to spend up to $700 billion to bail US financial system c.The support for 700 FIs, 50% of them with assets less than $500 million d.The support for 700 FIs, 50% of them with assets less than $50 billion e. b and c are correct

What is the insurance limit set forth by the FDIC for a single person per institution? A. $500,000 per person per institution for checking and savings accounts, money market accounts, CDs and IRAs. B. $250,000 per person per institution for checking and savings accounts, money market accounts, CDs and IRAs. C. $500,000 per person per institution for only checking, money market accounts and IRAs. D. $250,000 per person per institution for only checking and savings accounts. 34. A clear advantage of bank stress tests over CAMELS ratings is A Stress test results are made public, incentivizing the banks if bad and reassuring the public when good b Banks need to come up with their own scenarios, besides those released by OCC in Spring c The Fed publishes them during the Summer, allowing preparations for next cycle d a and b are correct 35. The purpose of bank stress tests is to make sure A systemic banks of more than $500 million in assets have enough capital to absorb losses b. banks of more than $50 million in assets have enough capital to absorb losses c. banks of more than $50 billion in assets can fund operations in case of extreme adverse economic conditions d. banks of more than $500 million in assets have enough capital to absorb losses 36. What are the primary goals of the Fed? a. Maximize employment, stabilize prices, and fix short-term interest rates. b. Maximize employment, stabilize prices, and moderate long-term interest rates. c. Goal of price stability is above all other goals of monetary policy in United States d. Maintain unemployment rate at 6% unless there is a crisis and quantitative easing 37. How do you stand out if you are a plum in a market for lemons? a. By signaling quality to investors, by doing something lemons cannot imitate b. Do nothing, and wait for a bank or another financial institution to come to you c. Apply for loans to multiple banks, to get multiple conditions and rates d. All of the above 38. According to NYU professor David Yermack, what is most likely the best use for bitcoin? a. A unit of account that allows you to compare the prices of relative goods b. A medium of exchange where people will accept it for other valuable things c. A store of value like gold, diamonds or, generally speaking, real estate d. A marketing device use in multiple coffee shops and other establishments 39. Credit Unions typically offer: a. Lower rates on deposits & charge lower rates on loans b. Higher rates on deposits & charge lower rates on loans c. Lower rates on deposits & charge higher rates on loans d. Higher rates on deposits & charge higher rates on loans 40. What led to the creation of the FDIC? A. The loss of trust in banks despite the Fed B. The collapse of Enron during the Great Depression

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