Fin 6320, Spring 2002 - Test 2.                       Peter Lewin.

 

Please read the following carefully:

 

Multiple Choice -25 questions.  Please use a half page scantron (882-ES) with a pencil.  Hand in only the scantron (you may keep this question paper). 

 

This is a closed book exam.  Cheating will result in a zero (among other possible sanctions).

 

Among the possibilities given in each question select the best  alternative.

 

SOLUTION AND GRADE DISTRIBUTION AT END

 

1.        Lenders must be concerned that borrowers may do risky unauthorized things with the funds they are lent.  This is the problem of

a.        moral hazard

b.       asymmetric information

c.        nondivisibility

d.       adverse selection

 

2.        Most bank loans are _________ maturity because of the _______ in monitoring how the borrower maintains his obligations

a.        held to, ease

b.       held to, difficulty

c.        sold before, ease

d.       sold before, difficulty

 

3.        Nontraded securities are part of

a.        direct but not indirect finance

b.       indirect but not direct finance

c.        direct and indirect finance

d.       d.  neither direct nor indirect finance

 

4.        One type of financial intermediary now rising in relative importance is

a.        pension funds

b.       banks

c.        savings-and-loans

d.       life insurance companies

 

5.        Regulation Q was responsible for the drop in importance of _________ as a source of bank funds.

a.        time deposits

b.       transactions deposits

c.        savings deposits

d.       equity

 

6.        Since 1970 there has been a huge increase in the relative importance of _________ as a source  of bank funds.

a.        negotiable CDs

b.       time deposits

c.        foreign deposits

d.       transactions deposits

 

7.        For term life insurance, the policy holder pays

a.        premiums based on current interest rates

b.       a constant premium

c.        premiums that vary with mortality risk

d.       constantly declining premiums

 

8.        Until the 1980s most private pension plans were "defined _______" plans under which the periodic employer payment into the plan was _______.

a.        benefit, variable

b.       benefit, preset

c.        contribution, variable

d.       contribution, preset

 

9.        Compared with the average man, the average woman pays

a.        less for health insurance but more for life insurance

b.       less for life insurance but more for health insurance

c.        more for life and health insurance

d.       less for life and health insurance

 

10.     "Mid-size" firms may issue publicly-traded _______ and they usually turn to commercial banks for _____-term debt financing.

a.        bonds, long

b.       bonds, short

c.        equity, long

d.       equity, short

 

11.     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

 

 

12.     Unlike private placements, publicly-sold securities lack

a.        any kind of statement of the financial condition of the borrower

b.       a secondary market

c.        a definite maturity date

d.       restrictive covenants

 

13.     A large business finds it _______ than a small business to pursue secretly a high-risk investment in violation of the terms of its loan agreement, and so the large business is ________ beset by the moral hazard problem.

a.        more difficult, more

b.       more difficult, less

c.        easier, more

d.       easier, less

 

14.     An example of an "insider trading" law is that

a.        no officer of a corporation is allowed to hold stock in that corporation

b.       an officer of a corporation must report to the SEC any buying or selling of stock in that corporation

c.        no dealer in domestic securities is allowed to handle foreign securities

d.       no more than 25 percent of the outstanding shares of a corporation may be held by the executives of that corporation

 

15.     The manager-stockholder conflict generally becomes worse

a.        the smaller the firm

b.       the larger the firm

c.        the more the firm borrows from banks

d.       the less the firm borrows from banks

 

16.     In Germany, banks ____________________ shares in the large firms they lend to, which ______________ lender-stockholder conflict.

a.        are not allowed to own, is their way of minimizing

b.       are not allowed to own, gives rise to

c.        own a considerable bloc of, is their way of minimizing

d.       own a considerable bloc of, gives rise to

 

17.     Double-digit inflation in the 1970s encouraged the widespread use of

a.        junk bonds

b.       Eurodollars

c.        variable-rate mortgages

d.       stock options

 

18.     The rapid inflation of the 1970s was particularly difficult for thrift institutions because their assets were concentrated in

a.        federal funds

b.       NOW accounts

c.        variable-rate mortgages

d.       fixed-rate mortgages

 

19.     Unless there are deaths or resignations, a two-term U.S. President can appoint up to

a.        twelve members of the Federal Reserve Board of Governors

b.       eight members of the Federal Reserve Board of Governors

c.        four members of the Federal Reserve Board of Governors

d.       two members of the Federal Reserve Board of Governors

 

20.     Which of the following was an objective of the framers of the Federal Reserve System?

a.        decentralized power

b.       executive branch power

c.        elimination of private-sector influence

d.       consolidation of the banking industry

 

21.     If the required reserve ratio is .25, demand deposits are $400 million, and total reserves are $150 million, then excess reserves are

a.        $25 million

b.       $50 million

c.        $75 million

d.       $125 million

 

22.     Assume that excess reserves are $10 million, demand deposits are $500 million, and total reserves are $135 million.  The required reserve ratio is

a.        .05

b.       .1

c.        .2

d.       .25

 

23.     If the required reserve ratio was 1, the demand deposit expansion multiplier would be

a.        0

b.       1

c.        1.2

d.       5

 

24.     The primary function of reserve requirements is to serve as

a.        a source of bank liquidity

b.       an instrument of monetary control

c.        a means of reducing bank profits

d.       a means of controlling the amount of currency in the banking system

 

25.     Which of the following is a primary policy tool of the Federal Reserve?

a.        the federal funds rate

b.       open market operations

c.        the prime rate

d.       the money supply

 

GRADE DISTRIBUTION:

 

If you score is greater than or equal to:  your grade is

22

A

21

B+

20

B

18

B-

17

C+

ELSE

C

 

Solution:

 

1.     a

2.     b

3.     b

4.     a

5.     b

6.     c please refer to page 220, table 12.3 of the text. Read the question carefully.  The relative importance of foreign deposits went from 0% to 10%. Non transactions deposits went from 41% to 43%.

7.     c

8.     a

9.     b

10.  b or d

11.  b

12.  d

13.  b

14.  b

15.  b

16.  c

17.  c

18.  d

19.  c

20.  a

21.  b

22.  d

23.  b

24.  b

25.  b