FINANCE 3323-001 Principles of Money, Banking and Credit, Professor Hein

Spring Semester 2003

Exam # 3

COLLEGE OF BUSINESS ADMINISTRATION

Texas Tech University

Form 1 (form 2)

Directions:    Each multiple-choice question is worth 3 points and each true/false question is worth 2 points.

 

 

1.        22. Which of the following is not an accurate fact characterizing the U.S. financial system?

  1. Indirect finance is far more important than direct finance.
  2. Banks are the most important source of external finance.
  3. The U.S. financial system is greatly unregulated.
  4. Collateral is a prevalent feature of debt contracts.

2.        23. True or false: Stock is the most important source of external finance for non-financial businesses in Japan.

  1. True.
  2. False.

3.        24. True or false: The Bank of Japan has recently started buying shares (common stock) in banks in that country.

  1. True.
  2. False.

4.        25. True or false: The discount rate set by the Federal Reserve today is 0.75%.

  1. True.
  2. False.

5.        26. Your quiz average makes up what percent of your final grade in this course, assuming you take all scheduled exams?

  1. 10%.
  2. 20%.
  3. 30%.
  4. 40%.

6.        27. True or false: Japanese banks have been highly profitable in recent years.

  1. True.
  2. False.

7.        28. True or false: If there is a significant "lemons problem" in the securities market then securities prices will not be set efficiently.

  1. True.
  2. False.

8.        29. Which of the following would be considered a loan secured by real estate?

  1. A credit card loan.
  2. Subordinated debt.
  3. Bank capital.
  4. A mortgage.

9.        30. Financial repression, or a lack of financial development, would occur as a result of all of the following except which?

  1. A poor legal system.
  2. Strong accounting standards.
  3. Nationalization of financial institutions.
  4. Inadequate government regulation.

10.     31. If the FOMC bought the Japanese yen in a case of unsterilized foreign exchange market intervention, which of the following would occur?

  1. The U.S. Treasury would have to sell more Treasury securities.
  2. The U.S. Treasury would have to sell less Treasury securities.
  3. The monetary base would increase.
  4. The monetary base would decrease.

11.     32. In 2000, as well as 2002, the U.S. was running a surplus under which of the following balance of payments account?

  1. Trade balance.
  2. Current account.
  3. Capital account.

12.     33. True or false: If the International Monetary Fund lends to all countries that run into financial difficulties this would potentially create a moral hazard problem in encouraging countries not to worry about their own financial systems.

  1. True.
  2. False.

13.     34. True or false: The fact that the U.S. is running a current account deficit means that the U.S. dollar will depreciate in value against all major currencies.

  1. True.
  2. False.

14.     35. Which of the following states that the expected return in any country in the world should be expected to be the same when stated in a common currency?

  1. The law of one price.
  2. Purchasing power parity.
  3. Interest rate parity.
  4. Asymmetric information.

15.     36. True or False: Purchasing power parity would require the dollar to appreciate against the British pound if the price level in Britain increased by more than the price level in the U.S.

  1. True.
  2. False.

16.     37. Suppose the interest rate is 4% in the U.S. and is 2% in Japan. According to interest rate parity, then which of the following should happen?

  1. Both investors in the U.S and investors in Japan will want to invest in the U.S.
  2. Both investors in the U.S and investors in Japan will want to invest in the Japan.
  3. Both investors in the U.S and investors in Japan will want to invest in the U.K.
  4. Both investors in the U.S and investors in Japan will be indifferent as to investing in the U.S. or investing in Japan.

17.     38. Suppose the interest rate is 4% in the U.S. and is 2% in Japan. According to interest rate parity, then which of the following should happen?

a.     The dollar is expected to appreciate against the Japanese yen by 2%.

b.  The dollar is expected to depreciate against the Japanese yen by 2%.

c.  The dollar is expected to appreciate against the Japanese yen by 4%.

d. The dollar is expected to depreciate against the Japanese yen by 4%.

18.     39. True or false: Bank capital is the cheapest source of funding for a bank.

  1. True.
  2. False.

19.     40. True or false: Because U.S. banks have been profitable in recent years, they have relatively high ROEs, say relative to 1990 and 1991, for example.

  1. True.
  2. False.

20.     41. Which of the following is the largest source of funds for all commercial banks combined in 2001?

  1. Borrowings.
  2. Checkable deposits.
  3. Small time deposits and savings deposits.
  4. Large time deposits.
  5. Bank Capital.

21.  42. True of false: The loan amount listed on a bank's balance sheet is an amount net of the loan loss reserve.

  1. True.
  2. False.

22.   1. True or false: If a bank needs more bank capital, one thing it could do is to sell more common stock in the bank.

  1. True.
  2. False.

23.   2. True or false: Small time deposits are any individual deposits in accounts with balances of less than $100,000.

  1. True.
  2. False.

24.   3. Which of the following would not be a source of funds for a bank to meet liquidity needs due to a large unexpected deposit outflow?

  1. Bank Capital.
  2. Borrowing from other banks or corporations.
  3. Selling securities.
  4. Borrowing from the Fed.
  5. Calling in loans, or selling loans.

25.   4. True or false: German banks are likely to have much higher ROEs than their U.S. counterparts.

  1. True.
  2. False.

26.   5. Which of the following would not be considered a major mortgage lending institution?

  1. Commercial banks.
  2. Savings and Loans.
  3. Federal Agencies, like Freddie Mac and Fannie Mae.
  4. Credit Unions.

27.   6. True or false: The FFIEC (Federal Financial Institutions Examination Council's) web page contains links to financial information provided by all U.S. banks balance sheet, income statements, and other financial information.

  1. True.
  2. False.

28.   7. True or false: Bank capital shareholders are the first to bear financial losses incurred by the bank.

  1. True.
  2. False.

29.   8. True or false: Private mortgage insurance (PMI) protects the homebuyer from property losses.

  1. True.
  2. False.

30.   9. True or false: Mortgage rates in the U.S.  today are very low by the historical standards of the last 20 years.

  1. True.
  2. False.

31.   10. Which of the following banking acts allowed commercial banks to get into investment banking and insurance?

  1. Gramm-Leach-Bliley.
  2. Riegel-Neal.
  3. Glass-Steagall.
  4. The Federal Reserve Act of 1913.

32.   11. Commercial banks that have less than $1 billion in total assets are generally referred to as which of the following?

  1. Regional banks.
  2. Money center banks.
  3. Large bank holding companies.
  4. Community banks.

33.   12. True or false: Because there are so many small commercial banks in the U.S., they control the vast majority of total assets in the banking industry.

  1. True.
  2. False.

34.   13. True or false: There are a fewer number of commercial banks in the U.S. today then there was in 1985.

  1. True.
  2. False.

35.   14. True or false: A provision for loan loss results in less net income for a bank on a bank's income statement.

  1. True.
  2. False.

36.   15. True or false: Commercial banks in the U.S. engage in no off-balance sheet activities.

  1. True.
  2. False.

37.   16. Federal deposit insurance has been in existence in the U.S. since which year?

a.     1782.

b.    1863.

c.     1913.

d.    1933.

e.     1953.

38.   17. True or false: Professor Hein has argued that we will have no community banks in the U.S. in five more years.

a.     True.

b.     False.

39.   18. True or false: The stock market in the U.S. fell sharply for the eight days immediately following President Bush's imposing a 48 hour deadline on the Saddam Hussein regime in Iraq.

a.     True.

b.     False.

40.   19. True or false: Last year the Bush Administration imposed tariffs on steel imports into the U.S., which have now been ruled against World Trade Organization principles.

a.     True.

        b.     False.

41.   20. True or false: At its March meeting the FOMC left the Federal Funds Rate unchanged at 1.25%, but in an unusual move, policy makers said they can't "usefully characterize" the balance of risks between weakness and inflation.

        a.     True.

b.     False.

42.     21. Who recently suggested that the two government-sponsored enterprises, Fannie Mae and Freddie Mac, might have too little capital in light of the risk they bear?

a.   Bill Poole.

b.   Donald Rumsfeld.

c.   Colin Powell.

d.   President Bush.