THERE ARE 6 PARTS MULTIPLE CHOICE QUESTIONS ON MONEY AND BANKING, THE CHOICES CAN BE FOUND BELOW THE QUESTIONS, EACH QUESTION HAS 4 CHOICES. THE CHOICES ARE NOT NUMBERED BUT EACH CHOICE IS IN A SEPARATE LINE, JUST WRITE THE CORRECT ANSWER UNDER EACH QUESTION IN RED COLOR.
PART 1
Question 1(4 points)
The risk premium is measured:
Question 1 options:
By an index published monthly by the Securities and Exchange Commission (SEC).
By the length of time until a bond matures.
As the difference between the yield on the security and the yield on a U.S. Treasury security of the same maturity.
As the difference between the nominal yield on a security and the after-tax yield on the security.
Question 2(4 points)
Separate the bond market into municipal bonds and corporate bonds, if the President lowers the federal income tax rate by 5% and holding everything else constant:
Question 2 options:
The interest rate on both corporate and municipal bonds should increase.
The interest rate on both corporate and municipal bonds should decrease.
The interest rate on corporate bonds should increase relative to the rate for municipal bonds (increase the spread between the two).
The interest rate on corporate bonds should decrease relative to the rate for municipal bonds (decrease the spread between the two).
Question 3(4 points)
The greatest appeal of U.S. Treasury securities is that:
Question 3 options:
They have high yields relative to corporate bonds.
They have no default risk.
The U.S. Treasury will repurchase them at any time.
Their market prices are fixed.
Question 4(4 points)
The term structure of interest rates:
Question 4 options:
Represents the variation in yields for related financial instruments differing in maturity.
Reflects differing tax treatment received by different instruments.
Always results in an upward-sloping yield curve.
Reflects differences in liquidity between assets.
Question 5(4 points)
If a one-year bond currently yields 4% and is expected to yield 6% next year, the expectations theory predicts that the current yield on a two-year bond will be:
Question 5 options:
4%.
between 4% and 5%.
5%.
more than 5%.
Question 6(4 points)
Which of the following is true of the segmented markets theory?
Question 6 options:
It assumes that borrowers have particular periods for which they want to borrow.
It assumes that lenders always lend for short periods.
It provides a good explanation for why yields on different instruments of different maturities tend to move together.
It assumes that instruments with different maturities are perfect substitutes.
Question 7(4 points)
If market participants expect that future inflation will be lower than it currently is:
Question 7 options:
The yield curve will have a positive slope as demand for long-term bonds increases relative to short-term bonds.
The yield curve will have a positive slope as investors try to lock into short-term bonds.
The Federal Reserve will be expected to use a restrictive monetary policy as a result and the yield curve is likely to become inverted.
An inverted yield curve is likely as interest rates are also expected to fall in the future.
PART 2
Question 1(3 points)
If the wealth elasticity of demand for stocks exceeds a value of 1.0, this indicates that if your wealth increases by 1%:
Question 1 options:
Your consumption of goods and services will increase by more than 1%.
You will increase cash holdings by more than 1%.
The portion of your asset portfolio held in stocks will increase by more than 1%.
The portion of your asset portfolio held in stocks will increase by less than 1%.
Question 2(3 points)
Suppose that when your wealth increases from $1 million to $2 million, the balance in your checking account increase from $75,000 to $125,000. Your wealth elasticity of demand for checking account balances then is:
Question 2 options:
Less than 1 and checking account balances are a luxury asset.
Less than 1 and checking account balances are a necessity asset.
Greater than 1 and checking account balances are a luxury asset.
Greater than 1 and checking account balances are a necessity asset.
Question 3(3 points)
The interest earned on securities issued by state and local governments generally are:
Question 3 options:
Not subject to federal taxation.
Not taxed at the federal level if the interest is used to purchase newly issued municipal bonds.
Subject to the same tax rates as corporate bonds are.
Subject to the same tax rates as corporate stocks are.
Question 4(3 points)
Which of the following assets has yielded the greatest average annual rate of return:
Question 4 options:
Gold.
Municipal bonds.
Stocks
Treasury bonds.
Question 5(3 points)
The main reason for diversifying a stock portfolio is:
Question 5 options:
To take advantage of the favorable tax treatment of diversified portfolios.
That diversified portfolios have greater liquidity than non-diversified portfolios.
To make the portfolio less subject to market volatility.
To reduce the portfolio volatility associated with changes in any given stock.
Question 6(3 points)
As the likelihood that a company will default on its bonds increases, then the yields on the company’s bonds will:
Question 6 options:
Rise to compensate investors for this greater risk.
Fall because the company will not be able to afford to pay as much interest.
Fall as investors insist on higher prices for the binds to compensate them for the greater risk.
Be unchanged.
Question 7(3 points)
An efficient financial market is one in which:
Question 7 options:
Transactions costs for trading securities are zero.
All information available to market participants is reflected in market prices.
All securities are very liquid.
There are no capital gains taxes.
Question 8(3 points)
In an efficient market, the market price of an asset:
Question 8 options:
Reflects the returns the asset has been earning previously.
Is fixed by federal regulators.
Equals the present value of expected future returns.
Is largely determined on the demand side, since the supply of assets is fixed.
Question 9(3 points)
How is a bond affected by a decline in market interest rates:
Question 9 options:
Reduces the value of future interest coupon payments.
The par value of the bond falls when it matures.
Increases the prices of newly issued bonds.
Increases the prices of bonds already in circulation.
Question 10(3 points)
According to the efficient market hypothesis:
Question 10 options:
Common stock prices should be constant.
The price of a corporation’s stock will adjust to new information about the company’s prospects.
The price of a corporation’s stock will be determined by charts that describe past movements in a stock’s price.
The trend is your friend and you can predict future movements of stock prices with reasonable accuracy.
Question 11(3 points)
A bubble occurs when:
Question 11 options:
The price of a stock moves significantly higher than its fundamental value.
Inside information is used to make profits from trading a company’s stock.
A company reports profits that a above the consensus forecast.
The futures price is greater than the spot market price.
PART 3
Question 1(3 points)
Derivative instruments are:
Question 1 options:
Assets such as bonds and stocks that derive their value from the value of the companies that issue them.
Government bonds.
Assets that derive their value from underlying assets.
An index of stock values such as the S&P 500.
Question 2(3 points)
An options contract:
Question 2 options:
Confers the right to buy or sell an asset at a predetermined price at a predetermined time.
Is a contract that requires delivery of a commodity on a specific date.
Gives the buyer the option to purchase a futures contract by a given date.
Is only used for foreign exchange transactions.
Question 3(3 points)
The buyer of a call option:
Question 3 options:
Must purchase the underlying asset on the expiration date of the contract.
Must sell the underlying asset on the expiration date of the contract.
May exercise the contract if the price of the underlying asset increases above the strike price.
May exercise the contract if the price of the underlying asset decreases below the strike price.
Question 4(3 points)
The buyer of a put option:
Question 4 options:
Must purchase the underlying asset on the expiration date of the contract.
Must sell the underlying asset on the expiration date of the contract.
May exercise the contract if the price of the underlying asset increases above the strike price.
May exercise the contract if the price of the underlying asset decreases below the strike price.
Question 5(3 points)
If prices of existing options contracts for call options on IBM stocks are rising, this would be the result of:
Question 5 options:
Call option prices will soon fall again.
A reduction in the dividend paid by IBM.
IBM share prices will be higher in the future.
IBM share prices will be lower in the future.
Question 6(3 points)
The buyers of a futures contract:
Question 6 options:
Assumes the short position.
Assumes the long position.
Is required to receive the underlying stock or commodity at the specified future date.
Is expecting the price of the underlying stock or commodity to decrease before the contract expires.
Question 7(3 points)
If you sell a futures contract for IBM and on the delivery date the share price of IBM is lower than the contract price:
Question 7 options:
Lost money on your long position.
Lost money on your short position.
Gained money on your long position.
Gained money on your short position.
Question 8(3 points)
Potential loses are unbounded (unlimited):
Question 8 options:
If the buyer of a long contract sees the price of the underlying asset increase.
If the buyer of a long contract sees the price of the underlying asset decrease.
If the seller of a short contract sees the price of the underlying asset increase.
If the seller of a short contract sees the price of the underlying asset decrease.
Question 9(3 points)
Assume that IBM is trading for $100 a share and you purchase a call option with a strike price of $105 a share. Also assume that the price of the option equals $200.
Question 9 options:
You would profit by exercising the option if IBM’s share price increases to $103 a share.
You would profit by exercising the option if IBM’s share price increases to $110 a share.
You would profit by exercising the option if IBM’s share price decreases to $97 a share.
Both answers a) and b) are correct.
Question 10(3 points)
Assume that IBM is trading for $100 a share and you purchase a put option with a strike price of $95 a share. Also assume that the price of the option equals $500.
Question 10 options:
You would profit by exercising the option if IBM’s share price increases to $103 a share.
You would profit by exercising the option if IBM’s share price decreases to $97 a share.
You would profit by exercising the option if IBM’s share price decreases to $88 a share.
Both answers b) and c) are correct.