Financial Markets & Institutions Exam 1

maturity intermediation refers to the ability of financial institutions to connect suppliers of funds, who only want to lend out on a short-term basis, with users of funds who want long-term loans

True

the markets in which users of funds raise cash by selling securities are called primary markets.

True

the liquidity offered on secondary markets can affect the price of a security offered in primary markets

True

liquidity risk includes the risk that interest rates may suddenly fall

True

real interest rates include anticipated inflation

False

the equilibrium interest rate is where the demand and supply curves meet.

True

the government increases taxes which reduce the ability of individuals to save money. This should decrease interest rates

False

the higher a bond's coupon payment, the more exposed it is to interest rate risk

False

money market instruments are generally low-risk investments, largely because their duration is higher than other debt instruments

False

a downward sloping yield curve is often interpreted as an indication that bond traders think we are heading into a recession

True

a bond that has no collateral is called a debenture

True

secondary markets for municipal bonds are highly liquid

False

the federal funds market is very liquid and allows banks to get or make loans very quickly.

True

certificates of deposit can be sold on secondary markets

True

off-the-run Treasury bonds have higher prices than on-the-run Treasury bonds

False

general obligation municipal bonds are riskier than revenue bonds

False

all else being equal, investors would prefer a putable bond to a callable bond

True

because their interest payments are exempt from taxation, interest rates on municipal bonds can be lower than US Treasury rates

True

the Federal Reserve primarily regulates state banks

True

the Federal Reserve facilitates check cashing across the 50 states

True

because the multiplier effect has a large impact on the money supply, it is more widely used as a tool for monetary policy than open market operations.

False

banks are required by law to borrow and lend to other banks at the interest rates specified by the Federal Reserve

False

Primary markets are

a. where securities are issued for the first time.

A bank collects deposits that average $800 per account. The bank makes loans that average $250,000 per loan. This is an example of:

c. Denomination intermediation

The benefits of financial institutions to users of funds include

d. All of the above.

A risk that is more pronounced for the finance industry than it is for other industries is:

d. Credit risk

Derivatives are primarily used by investors to

d. Only A and C above.

Which of the following categories of financial institutions collectively owns the largest amount of assets?

c. Depository institutions

A par bond:

a. Is one whose price is equal to its face.

When entities borrow money (either by issuing a bond or via a bank loan) they often post collateral. Why would a borrower be willing to do this?

b. To receive a lower interest rate

Which of the following is true for zero-coupon loans?

d. All of the above.

The yield curve is flat. Which of the following is most incompatible with this fact?

d. Investors feel the economy is about to expand.

Which of the following is true for the risk premium (or liquidity premium) theory?

b. It basically says long-term bonds have higher interest rates because they are riskier

Which of the following is true for the pure expectations theory?

a. It says that the term structure is sloped in the direction that investors think short-term interest rates are going to go

A securitized short-term, unsecured loan issued by a corporation is

b. commercial paper.

Which of the following is true for repurchase agreements?

c. They are agreements to sell, and then repurchase, a security

A banker's acceptance is

d. Only B and C are true.

Which of the following is false about money market securities?

b. They are often issued by low credit quality companies

Relative to investment-grade bonds, which of the following is false for so-called junk bonds?

b. They are often purchased by pension funds.

You are an investor in fixed income securities. You have a strong belief that interest rates are going to rise sharply. Given this belief, which of the following trades makes the LEAST financial sense?

a. Buy long-term bonds.

Standard revenue bonds are

c. are collateralized by the earnings of a specific project.

A callable bond

b. can be purchased for a pre-determined price by the issuing company.

The interest rate that relates the promised cash flow of a bond to its current price is most commonly called the

d. yield-to-maturity.

The safest municipal bond is a:

a. General obligation bond

The Federal Reserve is charged with

d. Both A and C are correct.

In the context of the Federal Reserve, the discount rate

b. The rate the Fed charges on direct loans it makes.

A decrease in the reserve requirements could lead to

d. an increase in the money supply.

If the federal reserve were to sell its assets, the results would likely include

b. an increase in interest rates.

The Federal Reserve requires banks to maintain a reserve to

d. Only A and B above.

Within the context of the Federal Reserve, the "discount rate" is:

d. The interest rate that the Fed charges on loans it makes to banks and other borrowers