BA4345 - Summer 2003 test 1.
Multiple
choice, 25 questions. Choose the best alternative. This is a
closed book test. Please keep this test and hand in only your scantron. Use only a 882-ES
Scantron.
Solution
and grade distribution at end.
1.
The real interest rate is defined as:
a.
the actual interest rate plus the expected
rate of inflation
b. the
actual interest rate minus the expected rate of inflation
c.
the actual rate people pay rather than the
advertised rate
d. none
of the above
2.
According to most textbooks, money is
a. a
medium of exchange (= a means of payment)
b. a
store of value
c. a
unit of account
d. all
of the above
3.
Which of the following is unique to money
a. a
medium of exchange
b. a
store of value
c. a
unit of account
d. all
of the above
4.
Which of the following is true of money?
a. it
facilitates exchange
b. it
facilitates production
c. it is
the invention of some brilliant minds
d. all
of the above
e. a and
b of the above
5.
Which of the following is the most
destructive of the smooth functioning of money?
a. foreign
exchange
b. inflation
c. taxation
d. deflation
6.
Intermediation occurs whenever
a. lenders
lend directly to borrowers
b. borrowers
obtain their loans from banks
c. borrowers
find their own lenders
d. borrowers
use brokers
7.
Surplus spending units are ___________.
Deficit spending units are ___________.
a. borrowers,
lenders
b. lenders,
borrowers
c. numerous,
few
d. few,
numerous
e. b and
d of the above
8.
Which of the following receives fixed
interest payments from the company?
a. equity
holders
b. holders
of preferred shares
c. debt
holders
d. all
of the above
e. none
of the above
9.
Intermediation involves
a. direct
financing
b. indirect
financing
c. backhand
financing
d. all
of the above
e. none
of the above
10.
Primary markets refer to
a. the
elections held by political parties to determine candidates
b. markets
that function very smoothly
c. the
markets in which financial assets originate
d. none
of the above
11.
Which of the following is most closely and
fundamentally connected to the phenomenon of Interest?
a. inflation
b. deflation
c. foreign
exchange
d. time
preference
12.
Which of the following is a true
statement?
a. interest
would not exist in a pure exchange economy
b. interest
can only exist in an economy where production takes place
c. interest
is a reflection of the rate of productivity
d. interest
exists wherever there is trade
e. all
of the above
13.
An perceived increase in the rate of
profit that can be earned on business projects would lead, other things
constant to
a. a
decrease in the rate of interest
b. an
increase in the rate of interest
c. an
increase in the supply of money
d. a and
c of the above
e. none
of the above
14.
An increase in the proportion of their
income that people save will, other things constant, lead to
a. a
decrease in the rate of interest
b. an
increase in the rate of interest
c. an
increase in the supply of money
d. a and
c of the above
e. none
of the above
15.
Interest rates are determined by
a. the
demand for loanable funds
b. the
supply of loanable funds
c. both
of the above
d. none
of the above
16.
If the market interest rate is 10 percent,
what is the value of a security that pays you $1,100 the first year, $1,210 the
second year, and $1,331 the third year, with no additional payments after the
third year?
a. $2432
b. $4120
c. $3000
d. $1000
e. $500
17.
The interest elasticity of present value
will be higher the higher is the ___________ of an asset
a. term
to maturity
b. rate
of return
c. duration
d. all
of the above
e. none
of the above
18.
If a bond yields 12 percent and the public
is generally expecting 3 percent inflation indefinitely, an investor in a 33
percent marginal income tax bracket can earn an after-tax real return of:
a. minus
1.4 percent
b. 7
percent
c. 3.4
percent
d. 5
percent
e. 2 percent
19.
Which would have the lowest price if
market interest rates are 10 percent?
a. a 180
day T-bill issued today
b. a 90
day T-bill issued today
c. a
30-year T-bond with a coupon rate of 10 percent
d. a
30-year T-bond with a coupon rate of 12 percent
20.
Consider the following
expression
? =
a.
(1+r)n
b.
c.
(1+r1)
(1+r2) (1+r3)
d.
(1+r)n-1
e.
(1+r)n/2
21.
If the one year interest rate for this
year is 5%, and you expect this rate to be 6% for next year and 7% for the year
after that, then, according to the pure expectations theory of the term
structure of interest rates, the three year rate on a risk comparable asset
would have to be at least _______ to interest you.
a. 5%
b. 6%
c. 7%
d. 8%
e. 9%
22.
Because of the liquidity premium the yield
curve for interest rates is most often
a. negatively
sloped
b. flat
c. positively
sloped
d. S
shaped
23.
The two dimensions along which interest
rates can vary are
a. life
and death
b. default
and risk
c. risk
and term
d. term
and default
24.
When one identifies a company as a
“public” company, this means that
a. the
company is owned by the government
b. the
company is in the public sector
c. the
company is listed on a stock exchange and its stock is traded publicly
d. b and
c of the above
25.
The term “money market” refers to
a. all
transactions in money
b. all
transactions in financial assets
c. all
transactions in financial assets with a term to maturity of 5 years or less
d. all
transactions in financial assets with a term to maturity of 1 year or less
26.
Commercial paper is to corporate bonds as
Treasury Bills are to
a. stocks
b. money
c. Treasury
bonds
d. a and
c of the above
27.
Which of the following is most similar to
the federal funds market?
a. the
discount window
b. trade
in Treasury bills and notes
c. Eurodollars
d. the
budget deficit
28.
Which of the following is a true
statement?
a. diversification
can be used to banish all risk and still earn a positive return
b. diversification
makes not sense as an investment strategy
c. diversification
can often reduce risk for any return
d. a and
c of the above
e. none
of the above is true
29.
Some types of risk are not subject to
reduction by diversification. This is known as
a. systematic
risk
b. non-systematic
risk
c. non-reducible
risk
d. paradoxical
risk
30.
The fundamental economic force underlying
the determination of real interest rates is:
a. the
inflation rate
b. time
preference
c. the
productivity of capital
d. income
tax rates and expected inflation
31.
Holding
a group of assets reduces risk relative to holding a single asset as long as
the assets
a.
are
dependent on each other
b.
are
positively correlated
c.
are
uncorrelated
d.
do
not have precisely the same pattern of returns
32.
Assume Congress decides to dramatically
increase the number of
a. demand
for funds would rise and interest rates would rise
b. supply
of funds would fall and interest rates would rise
c. demand
for funds would fall and interest rates would rise
d. supply
of funds would fall and interest rates would fall
33.
Referring to the previous question, what
will happen to interest rates? They will tend to _______________ as a result of
this action.
a.
rise
b.
fall
c.
be unaffected
d.
collapse
34.
Which of the following is a form of
behavior falling under moral hazard
a.
insurance fraud
b.
embezzlement of funds
c.
cheating on your spouse
d.
all of the above
e.
a and b of the above
35.
Private
placements avoid
a.
restrictive
agreements
b.
public
disclosure of financial information that is required of securities that are
registered with the SEC
c.
the
need for collateral
d.
the
primary market
36. The
manager-stockholder conflict generally becomes worse
a.
the
smaller the firm
b.
the
larger the firm
c.
is
unaffected by the size of the firm
d.
none
of the above
37.
The
stockholder-lender conflict refers to situations in which
a.
firm
owners have an incentive to understate their true riskiness in order to borrow
on more favorable terms
b.
firm
owners have an incentive to overstate their true riskiness in order to borrow
on more favorable terms
c.
firm
owners have an incentive to accurately reveal their true riskiness in order to
borrow on more favorable terms
d.
firms
(managers and owners) have an incentive to become riskier after their loans are
funded
e.
a
and d of the above
38.
The
manager-stockholder conflict refers to situations in which
a.
ownership
and control are separated
b.
ownership
and control are united
c.
the
owner is the only shareholder
d.
none
of the above
39.
The fact that a potential borrower has
more knowledge about the likely risks associated with the use of funds than a
potential lender is known as the problem of:
a.
moral
hazard
b.
adverse
selection
c.
asymmetric
information
d.
default
risk
40.
Which
of the following countries has a market oriented financial system?
a.
b.
c.
d.
GRADE DISTRIBUTION:
If you score is greater than or equal to: your grade is
|
28 |
A |
|
27 |
A- |
|
26 |
B + |
|
25 |
B |
|
23 |
B- |
|
22 |
C+ |
|
20 |
C |
|
else |
C- |
Solution:
1.
b
2.
d
3.
a
4.
e
5.
b
6.
b
7.
b or
c
8.
c
9.
b
10.
c
11.
d
12.
d
13.
b
14.
a
15.
c
16.
c
17.
c
18.
d
19.
a
20.
b
21.
b
22.
c
23.
c
24.
c
25.
d
26.
c
27.
c
28.
c
29.
a
30.
c
31.
c or
d
32.
a
33.
a
34.
e
35.
b
36.
b
37.
e
38.
a
39.
c
40.
b