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Economics of Money, Banking and Financial Markets 9th Edition, Frederic Mishkin Test Bank

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Test Bank For Economics of Money, Banking and Financial Markets 9th Edition, Frederic Mishkin. Note: This is not a text book. Description: ISBN-13: 978-0321599797, ISBN-10: 0321599799.

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Test Bank Economics Money Banking Financial Markets 9th Mishkin

Chapter 1: Why Study Money, Banking, and Financial Markets?
1) Financial markets promote economic efficiency by
A) channeling funds from investors to savers.
B) creating inflation.
C) channeling funds from savers to investors.
D) reducing investment.
2) Financial markets promote greater economic efficiency by channeling funds from to              .
A) investors; savers
B) borrowers; savers
C) savers; borrowers
D) savers; lenders
3) Well-functioning financial markets promote
A) inflation.
B) deflation.
C) unemployment.
D) growth.
4) A key factor in producing high economic growth is
A) eliminating foreign trade.
B) well-functioning financial markets.
C) high interest rates.
D) stock market volatility.
5) Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called
A) commodity markets.
B) fund-available markets.
C) derivative exchange markets.
D) financial markets.
6) markets transfer funds from people who have an excess of available funds to people who have a shortage.
A) Commodity
B) Fund-available
C) Financial
D) Derivative exchange
7) Poorly performing financial markets can be the cause of
A) wealth.
B) poverty.
C) financial stability.
D) financial expansion.
8) The bond markets are important because they are
A) easily the most widely followed financial markets in the United States.
B) the markets where foreign exchange rates are determined.
C) the markets where interest rates are determined.
D) the markets where all borrowers get their funds.
9) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
10) Compared to interest rates on long -term U.S. government bonds, interest rates on three -month
Treasury bills fluctuate and are on average.
A) more; lower
B) less; lower
C) more; higher
D) less; higher
11) The interest rate on Baa (medium quality) corporate bonds is , on average, than other interest rates, and the spread between it and other rates became in the 1970s.
A) lower; smaller
B) lower; larger
C) higher; smaller
D) higher; larger
12) Everything else held constant, a decline in interest rates will cause spending on housing to
A) fall.
B) remain unchanged.
C) either rise, fall, or remain the same.
D) rise.
13) High interest rates might purchasing a house or car but at the same time high interest rates might saving.
A) discourage; encourage B) discourage; discourage C) encourage; encourage D) encourage; discourage
14) An increase in interest rates might saving because more can be earned in interest income.
A) encourage B) discourage C) disallow D) invalidate
15) Everything else held constant, an increase in interest rates on student loans
A) increases the cost of a college education.
B) reduces the cost of a college education.
C) has no effect on educational costs.
D) increases costs for students with no loans.
16) High interest rates might cause a corporation to building a new plant that would provide more jobs.
A) complete
B) consider
C) postpone
D) contemplate
17) The stock market is important because it is
A) where interest rates are determined.
B) the most widely followed financial market in the United States.
C) where foreign exchange rates are determined.
D) the market where most borrowers get their funds.
18) Stock prices are
A) relatively stable trending upward at a steady pace.
B) relatively stable trending downward at a moderate rate.
C) extremely volatile.
D) unstable trending downward at a moderate rate.
19) A rising stock market index due to higher share prices
A) increases peopleʹs wealth, but is unlikely to increase their willingness to spend.
B) increases peopleʹs wealth and as a result may increase their willingness to spend.
C) decreases the amount of funds that business firms can raise by selling newly -issued stock.
D) decreases peopleʹs wealth, but is unlikely to increase their willingness to spend.
20) When stock prices fall
A) an individualʹs wealth is not affected nor is their willingness to spend.
B) a business firm will be more likely to sell stock to finance investment spending.
C) an individualʹs wealth may decrease but their willingness to spend is not affected.
D) an individualʹs wealth may decrease and their willingness to spend may decrease.
21) Changes in stock prices
A) do not affect peopleʹs wealth and their willingness to spend.
B) affect firmsʹ decisions to sell stock to finance investment spending.
C) occur in regular patterns.
D) are unimportant to decision makers.

Chapter 2: An Overview of the Financial System
1) Every financial market has the following characteristic:
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.
2) Financial markets have the basic function of
A) getting people with funds to lend together with people who want to borrow funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) providing a risk-free repository of spending power.
3) Financial markets improve economic welfare because
A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) eliminate the need for indirect finance.
4) Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) produce an efficient allocation of capital.
5) A breakdown of financial markets can result in
A) financial stability.
B) rapid economic growth.
C) political instability.
D) stable prices.
6) The principal lender-savers are
A) governments.
B) businesses.
C) households.
D) foreigners.
7) Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
8) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is
A) $400. B) $201. C) $200. D) $199.
9) You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
10) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market.
D) An insurance company buys shares of common stock in the over -the-counter markets.
11) Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short -term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
12) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another corporation in the primary market.
C) You buy a U.S. Treasury bill from the U.S. Treasury.
D) You make a deposit at a bank.
13) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) You buy shares in a mutual fund.
C) You buy a U.S. Treasury bill from the U.S. Treasury.
D) A corporation buys a short -term security issued by another corporation in the primary market.
14) Securities are for the person who buys them, but are for the individual or firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable
15) With finance, borrowers obtain funds from lenders by selling them securities in the financial markets.
A) active
B) determined
C) indirect
D) direct
16) With direct finance funds are channeled through the financial market from the directly to the .
A) savers, spenders
B) spenders, investors
C) borrowers, savers
D) investors, savers
17) Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States?
18) Which of the following statements about the characteristics of debt and equity is false?
A) They can both be long -term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuerʹs income.
D) They both enable a corporation to raise funds.
19) Which of the following statements about the characteristics of debt and equities is true?
A) They can both be long -term financial instruments.
B) Bond holders are residual claimants.
C) The income from bonds is typically more variable than that from equities.
D) Bonds pay dividends.
20) Which of the following statements about financial markets and securities is true?
A) A bond is a long-term security that promises to make periodic payments called dividends to the firmʹs residual claimants.
B) A debt instrument is intermediate term if its maturity is less than one year.
C) A debt instrument is intermediate term if its maturity is ten years or longer.
D) The maturity of a debt instrument is the number of years (term) to that instrumentʹs expiration date.

Chapter 3: What Is Money?
1) To an economist, is anything that is generally accepted in payment for goods and services or in the repayment of debt.
A) wealth B) income C) money D) credit
2) Money is
A) anything that is generally accepted in payment for goods and services or in the repayment of debt.
B) a flow of earnings per unit of time.
C) the total collection of pieces of property that are a store of value.
D) always based on a precious metal like gold or silver.
3) Currency includes
A) paper money and coins.
B) paper money, coins, and checks.
C) paper money and checks.
D) paper money, coins, checks, and savings deposits.
4) Even economists have no single, precise definition of money because
A) money supply statistics are a state secret.
B) the Federal Reserve does not employ or report different measures of the money supply.
C) the ʺmoneynessʺ or liquidity of an asset is a matter of degree.
D) economists find disagreement interesting and refuse to agree for ideological reasons.
5) The total collection of pieces of property that serve to store value is a personʹs
A) wealth. B) income. C) money. D) credit.
6) A personʹs house is part of her
A) money. B) income. C) liabilities. D) wealth.
7) is used to make purchases while is the total collection of pieces of property that serve to store value.
A) Money; income B) Wealth; income C) Income; money D) Money; wealth
8) is a flow of earnings per unit of time.
A) Income B) Money C) Wealth D) Currency
9) An individualʹs annual salary is her
A) money.
B) income.
C) wealth.
D) liabilities.
10) When we say that money is a stock variable, we mean that
A) the quantity of money is measured at a given point in time.
B) we must attach a time period to the measure.
C) it is sold in the equity market.
D) money never loses purchasing power.
11) The difference between money and income is that
A) money is a flow and income is a stock.
B) money is a stock and income is a flow.
C) there is no differencemoney and income are both stocks.
D) there is no differencemoney and income are both flows.
12) Which of the following is a true statement?
A) Money and income are flow variables.
B) Money is a flow variable.
C) Income is a flow variable.
D) Money and income are stock variables.
13) Which of the following statements uses the economistsʹ definition of money?
A) I plan to earn a lot of money over the summer.
B) Betsy is richshe has a lot of money.
C) I hope that I have enough money to buy my lunch today.
D) The job with New Company gave me the opportunity to earn more money.
14) Of moneyʹs three functions, the one that distinguishes money from other assets is its function as a
A) store of value.
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
15) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are
A) bank deposits.
B) reserves.
C) money.
D) loanable funds.
16) are the time and resources spent trying to exchange goods and services.
A) Bargaining costs. B) Transaction costs. C) Contracting costs. D) Barter costs.
17) Compared to an economy that uses a medium of exchange, in a barter economy
A) transaction costs are higher.
B) transaction costs are lower.
C) liquidity costs are higher.
D) liquidity costs are lower.
18) When compared to exchange systems that rely on money, disadvantages of the barter system include:
A) the requirement of a double coincidence of wants.
B) lowering the cost of exchanging goods over time.
C) lowering the cost of exchange to those who would specialize.
D) encouraging specialization and the division of labor.
9) The conversion of a barter economy to one that uses money
A) increases efficiency by reducing the need to exchange goods and services.
B) increases efficiency by reducing the need to specialize.
C) increases efficiency by reducing transactions costs.
D) does not increase economic efficiency.
20) Which of the following statements best explains how the use of money in an economy increases economic efficiency?
A) Money increases economic efficiency because it is costless to produce.
B) Money increases economic efficiency because it discourages specialization.
C) Money increases economic efficiency because it decreases transactions costs.
D) Money cannot have an effect on economic efficiency.

Chapter 4: Understanding Interest Rates
1) The concept of is based on the common -sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A) present value B) future value C) interest D) deflation
2) The present value of an expected future payment as the interest rate increases.
A) falls
B) rises
C) is constant
D) is unaffected
3) An increase in the time to the promised future payment the present value of the payment.
A) decreases
B) increases
C) has no effect on
D) is irrelevant to
4) With an interest rate of 6 percent, the present value of $100 next year is approximately
A) $106. B) $100. C) $94. D) $92.
5) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is
A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent.
6) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of
A) face value. B) par value. C) deflation. D) discounting the future.
7) A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
8) A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
9) Which of the following are true of fixed payment loans?
A) The borrower repays both the principal and interest at the maturity date.
B) Installment loans and mortgages are frequently of the fixed payment type.
C) The borrower pays interest periodically and the principal at the maturity date.
D) Commercial loans to businesses are often of this type.
10) A fully amortized loan is another name for
A) a simple loan.
B) a fixed-payment loan.
C) a commercial loan.
D) an unsecured loan.
11) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
12) A pays the owner a fixed coupon payment every year until the maturity date, when the value is repaid.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
13) The is the final amount that will be paid to the holder of a coupon bond.
A) discount value
B) coupon value
C) face value
D) present value
14) When talking about a coupon bond, face value and mean the same thing.
A) par value
B) coupon value
C) amortized value
D) discount value
15) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bondʹs
A) coupon rate. B) maturity rate. C) face value rate. D) payment rate.
16) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is
A) $650. B) $1,300. C) $130. D) $13.
17) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of
A) 5 percent. B) 8 percent. C) 10 percent. D) 40 percent.
18) All of the following are examples of coupon bonds except
A) Corporate bonds
B) U.S. Treasury bills
C) U.S. Treasury notes
D) U.S. Treasury bonds
19) A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a
A) simple loan.
B) fixed-payment loan.
C) coupon bond.
D) discount bond.
20) A is bought at a price below its face value, and the value is repaid at the maturity date.
A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face

Chapter 5: The Behavior of Interest Rates
1) Pieces of property that serve as a store of value are called
A) assets.
B) units of account.
C) liabilities.
D) borrowings.
2) Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?
A) wealth
B) expected returns
C) risk
D) liquidity
3) If wealth increases, the demand for stocks and that of long -term bonds , everything else held constant.
A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases
4) Everything else held constant, a decrease in wealth
A) increases the demand for stocks.
B) increases the demand for bonds.
C) reduces the demand for silver.
D) increases the demand for gold.
5) An increase in an assetʹs expected return relative to that of an alternative asset, holding everything else constant, the quantity demanded of the asset.
A) increases
B) decreases
C) has no effect on
D) erases
6) Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock relative to ABC stock and the demand for CBS stock .
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
7) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock relative to U.S. Treasury bonds and the demand for GE stock .
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
8) If housing prices are expected to increase, then, other things equal, the demand for houses will
and that of Treasury bills will .
A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
9) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will and that of Treasury bills will .
A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
10) Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock relative to XYZ stock and demand for XYZ stock .
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
11) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds relative to U.S. Treasury bonds and the demand for corporate bonds .
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
12) An increase in the expected rate of inflation will the expected return on bonds relative to the that on assets, everything else held constant.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real
13) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks and the demand for long-term bonds .
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
14) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will and the demand for antiques will .
A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
15) If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will and the demand for real estate will .
A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
16) If gold becomes acceptable as a medium of exchange, the demand for gold will and the demand for bonds will , everything else held constant.
A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease
17) The demand for Picasso paintings rises (holding everything else equal) when
A) stocks become easier to sell.
B) people expect a boom in real estate prices.
C) Treasury securities become riskier.
D) people expect gold prices to rise.
18) The demand for silver decreases, other things equal, when
A) the gold market is expected to boom.
B) the market for silver becomes more liquid.
C) wealth grows rapidly.
D) interest rates are expected to rise.
19) You would be less willing to purchase U.S. Treasury bonds, other things equal, if
A) you inherit $1 million from your Uncle Harry.
B) you expect interest rates to fall.
C) gold becomes more liquid.
D) stock prices are expected to fall.
20) You would be more willing to buy AT&T bonds (holding everything else constant) if
A) the brokerage commissions on bond sales become cheaper.
B) interest rates are expected to rise.
C) your wealth has decreased.
D) you expect diamonds to appreciate in value.

Chapter 6: The Risk and Term Structure of Interest Rates
1) The risk structure of interest rates is
A) the structure of how interest rates move over time.
B) the relationship among interest rates of different bonds with the same maturity.
C) the relationship among the term to maturity of different bonds.
D) the relationship among interest rates on bonds with different maturities.
2) The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is
A) interest rate risk.
B) inflation risk.
C) moral hazard.
D) default risk.
3) Bonds with no default risk are called
A) flower bonds.
B) no-risk bonds.
C) default-free bonds.
D) zero-risk bonds.
4) Which of the following bonds are considered to be default -risk free?
A) Municipal bonds
B) Investment-grade bonds
C) U.S. Treasury bonds
D) Junk bonds
5) U.S. government bonds have no default risk because
A) they are backed by the full faith and credit of the federal government.
B) the federal government can increase taxes to pay its obligations.
C) they are backed with gold reserves.
D) they can be exchanged for silver at any time.
6) The spread between the interest rates on bonds with default risk and default -free bonds is called the
A) risk premium. B) junk margin. C) bond margin. D) default premium.
7) If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will and the expected return on these bonds will , everything else held constant.
A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease
8) A bond with default risk will always have a risk premium and an increase in its default risk will the risk premium.
A) positive; raise B) positive; lower C) negative; raise D) negative; lower
9) If a corporation begins to suffer large losses, then the default risk on the corporate bond will
A) increase and the bondʹs return will become more uncertain, meaning the expected return on the corporate bond will fall.
B) increase and the bondʹs return will become less uncertain, meaning the expected return on the corporate bond will fall.
C) decrease and the bondʹs return will become less uncertain, meaning the expected return on the corporate bond will fall.
D) decrease and the bondʹs return will become less uncertain, meaning the expected return on the corporate bond will rise.
10) If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will , and the bondsʹ returns will become uncertain, meaning that the expected return on these bonds will decrease, everything else held constant.
A) increase; less B) increase; more C) decrease; less D) decrease; more
11) Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the and the demand curve for Treasury bonds to the .
A) right; right
B) right; left
C) left; right
D) left; left
12) An increase in the riskiness of corporate bonds will the price of corporate bonds and the price of Treasury bonds, everything else held constant.
A) increase; increase
B) reduce; reduce
C) reduce; increase
D) increase; reduce
13) An increase in the riskiness of corporate bonds will the yield on corporate bonds and the yield on Treasury securities, everything else held constant.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase
14) An increase in default risk on corporate bonds the demand for these bonds, but the demand for default -free bonds, everything else held constant.
A) increases; lowers
B) lowers; increases
C) does not change; greatly increases
D) moderately lowers; does not change
15) As default risk increases, the expected return on corporate bonds , and the return becomes uncertain, everything else held constant.
A) increases; less B) increases; more C) decreases; less D) decreases; more
16) As their relative riskiness , the expected return on corporate bonds relative to the expected return on default-free bonds, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; does not change
17) Which of the following statements are true?
A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds.
B) The expected return on corporate bonds decreases as default risk increases.
C) A corporate bondʹs return becomes less uncertain as default risk increases.
D) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default -free bonds.
18) Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will and the interest rate on Treasury securities will .
A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
19) Bonds with relatively high risk of default are called
A) Brady bonds.
B) junk bonds.
C) zero coupon bonds.
D) investment grade bonds.
20) Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called .
A) investment grade; lower grade
B) investment grade; junk bonds
C) high quality; lower grade
D) high quality; junk bonds

Chapter 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis
1) A stockholderʹs ownership of a companyʹs stock gives her the right to
A) vote and be the primary claimant of all cash flows.
B) vote and be the residual claimant of all cash flows.
C) manage and assume responsibility for all liabilities.
D) vote and assume responsibility for all liabilities.
2) Stockholders are residual claimants, meaning that they
A) have the first priority claim on all of a companyʹs assets.
B) are liable for all of a companyʹs debts.
C) will never share in a companyʹs profits.
D) receive the remaining cash flow after all other claims are paid.
3) Periodic payments of net earnings to shareholders are known as
A) capital gains.
B) dividends.
C) profits.
D) interest.
4) The value of any investment is found by computing the
A) present value of all future sales.
B) present value of all future liabilities.
C) future value of all future expenses.
D) present value of all future cash flows.
5) In the one-period valuation model, the value of a share of stock today depends upon
A) the present value of both dividends and the expected sales price.
B) only the present value of the future dividends.
C) the actual value of the dividends and expected sales price received in one year.
D) the future value of dividends and the actual sales price.
6) In the one-period valuation model, the current stock price increases if
A) the expected sales price increases.
B) the expected sales price falls.
C) the required return increases.
D) dividends are cut.
7) In the one-period valuation model, an increase in the required return on investments in equity
A) increases the expected sales price of a stock.
B) increases the current price of a stock.
C) reduces the expected sales price of a stock.
D) reduces the current price of a stock.
8) Using the one-period valuation model, assuming a year -end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be
A) $110.11. B) $121.12. C) $100.10. D) $100.11
9) Using the one-period valuation model, assuming a year -end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be
A) $110.00. B) $101.00. C) $100.00. D) $96.19.
10) In the generalized dividend model, if the expected sales price is in the distant future
A) it does not affect the current stock price.
B) it is more important than dividends in determining the current stock price.
C) it is equally important with dividends in determining the current stock price.
D) it is less important than dividends but still affects the current stock price.
11) In the generalized dividend model, a future sales price far in the future does not affect the current stock price because
A) the present value cannot be computed.
B) the present value is almost zero.
C) the sales price does not affect the current price.
D) the stock may never be sold.
12) In the generalized dividend model, the current stock price is the sum of
A) the actual value of the future dividend stream.
B) the present value of the future dividend stream.
C) the present value of the future dividend stream plus the actual future sales price.
D) the present value of the future sales price.
13) Using the Gordon growth model, a stockʹs price will increase if
A) the dividend growth rate increases.
B) the growth rate of dividends falls.
C) the required rate of return on equity rises.
D) the expected sales price rises.
14) In the Gordon growth model, a decrease in the required rate of return on equity
A) increases the current stock price.
B) increases the future stock price.
C) reduces the future stock price.
D) reduces the current stock price.
15) Using the Gordon growth formula, if D 1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is
A) $20. B) $50. C) $100. D) $150.
16) Using the Gordon growth formula, if D 1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is
A) $10. B) $20. C) $30. D) $40.
17) One of the assumptions of the Gordon Growth Model is that dividends will continue growing at rate.
A) an increasing
B) a fast
C) a constant
D) an escalating
18) In the Gordon Growth Model, the growth rate is assumed to be the required return on equity.
A) greater than
B) equal to
C) less than
D) proportional to
19) You believe that a corporationʹs dividends will grow 5% on average into the foreseeable future. If the companyʹs last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?
20) What rights does ownership interest give stockholders?

Chapter 8: An Economic Analysis of Financial Structure
1) American businesses get their external funds primarily from
A) bank loans.
B) bonds and commercial paper issues.
C) stock issues.
D) loans from nonbank financial intermediaries.
2) Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately of the total.
A) 6% B) 40% C) 56% D) 60%
3) Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately of the total.
A) 5% B) 10% C) 32% D) 50%
4) Of the following sources of external finance for American nonfinancial businesses, the least important is
A) loans from banks.
B) stocks.
C) bonds and commercial paper.
D) loans from other financial intermediaries.
5) Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately of the total.
A) 2% B) 11% C) 20% D) 40%
6) Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true?
A) Stocks are a far more important source of finance than are bonds.
B) Stocks and bonds, combined, supply less than one -half of the external funds.
C) Financial intermediaries are the least important source of external funds for businesses.
D) Since 1970, more than half of the new issues of stock have been sold to American households.
7) Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true?
A) Issuing marketable securities is the primary way that they finance their activities.
B) Bonds are the least important source of external funds to finance their activities.
C) Stocks are a relatively unimportant source of finance for their activities.
D) Selling bonds directly to the American household is a major source of funding for American businesses.
8) With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?
A) Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan.
B) Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households.
C) Direct finance accounts for more than 50 percent of the external financing of American businesses.
D) Smaller businesses almost always raise funds by issuing marketable securities.
9) Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds
A) by issuing stock.
B) by issuing bonds.
C) from nonbank loans.
D) from bank loans.
10) As a source of funds for nonfinancial businesses, stocks are relatively more important in
A) the United States. B) Germany.C) Japan. D) Canada.
11) Direct finance involves the sale to of marketable securities such as stocks and bonds.
A) households
B) insurance companies
C) pension funds
D) financial intermediaries
12) Regulation of the financial system
A) occurs only in the United States.
B) protects the jobs of employees of financial institutions.
C) protects the wealth of owners of financial institutions.
D) ensures the stability of the financial system.
13) One purpose of regulation of financial markets is to
A) limit the profits of financial institutions.
B) increase competition among financial institutions.
C) promote the provision of information to shareholders, depositors and the public.
D) guarantee that the maximum rates of interest are paid on deposits.
14) Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called
A) collateral.
B) points.
C) interest.
D) good faith money.
15) Collateralized debt is also know as
A) unsecured debt.
B) secured debt.
C) unrestricted debt.
D) promissory debt.
16) Credit card debt is
A) secured debt.
B) unsecured debt.
C) restricted debt.
D) unrestricted debt.
17) The predominant form of household debt is
A) consumer installment debt.
B) collateralized debt.
C) unsecured debt.
D) unrestricted debt.
18) If you default on your auto loan, your car will be repossessed because it has been pledged as for the loan.
A) interest
B) collateral
C) dividend
D) commodity
19) Commercial and farm mortgages, in which property is pledged as collateral, account for
A) one-quarter of borrowing by nonfinancial businesses.
B) one-half of borrowing by nonfinancial businesses.
C) one-twentieth of borrowing by nonfinancial businesses.
D) two-thirds of borrowing by nonfinancial businesses.
20) A is a provision that restricts or specifies certain activities that a borrower can engage in.
A) residual claimant
B) risk hedge
C) restrictive barrier
D) restrictive covenant

Chapter 9: Financial Crises and the Subprime Meltdown
1) A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a
A) financial crisis.
B) fiscal imbalance.
C) free-rider problem.
D) ʺlemonsʺ problem.
2) A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system
A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
B) allows for a more efficient use of funds.
C) increases economic activity.
D) reduces uncertainty in the economy and increases market efficiency.
3) A serious consequence of a financial crisis is
A) a contraction in economic activity.
B) an increase in asset prices.
C) financial engineering.
D) financial globalization.
4) A sharp decline in the stock market means that the of corporations has fallen making lenders willing to lend.
A) net worth; less B) net worth; more C) liability; less D) liability; more
5) A sharp stock market decline increases moral hazard incentives
A) since borrowing firms have less to lose if their investments fail.
B) because it is immoral to profit from someoneʹs loss.
C) since lenders are more willing to make loans.
D) reducing uncertainty in the economy and increasing market efficiency.
6) An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firmsʹ assets. The result is
A) that net worth in real terms declines.
B) that adverse selection and moral hazard problems are reduced.
C) an increase in the real net worth of the borrowing firm.
D) an increase in lending.
7) If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in
A) a decline in a firmʹs net worth.
B) an increase in a firmʹs net worth.
C) a decrease in adverse selection and moral hazard.
D) an increase in willingness to lend.
8) Factors that lead to worsening conditions in financial markets include:
A) declining interest rates.
B) unanticipated increases in the price level.
C) the deterioration in banksʹ balance sheets.
D) increases in bond prices.
9) In a bank panic, the source of contagion is the
A) free-rider problem.
B) too-big-to-fail problem.
C) transactions cost problem.
D) asymmetric information problem.
10) A bank panic can lead to a severe contraction in economic activity due to
A) a decline in international trade.
B) the losses of bank shareholders.
C) the losses of bank depositors.
D) a decline in lending for productive investment.
11) In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by firmsʹ and householdsʹ interest payments, thereby their cash flow.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; decreasing
D) decreasing; increasing
12) In emerging economies, government fiscal imbalances may cause fears of
A) debt deflation.
B) default on government debt.
C) stock price declines.
D) lower interest rates.
13) How can asymmetric information lead to a bank panic?
14) When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a
A) credit boom.
B) credit bust.
C) deleveraging.
D) market race.
15) When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called
A) deleveraging. B) releveraging. C) capitulation. D) deflation.
16) When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in
A) a contraction of economic activity. B) an economic boom.
C) an increased opportunity for growth. D) a call for government regulation.
17) A credit boom can lead to a(n) such as we saw in the tech stock market in the late
1990s.
A) asset-price bubble
B) liability war
C) decline in lending
D) decrease in moral hazard
18) Many 19th century U.S. financial crises were started by
A) spikes in interest rates.
B) financial innovation.
C) onerous financial regulations.
D) a strong improvement in banksʹ balance sheets.
19) Most U.S. financial crises have started during periods of either after the start of a recession or a stock market crash.
A) high uncertainty B) low interest rates C) low asset prices D) high financial regulation
20) If uncertainty about banksʹ health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)
A) banking crisis.
B) financial recovery.
C) reduction of the adverse selection and moral hazard problems.
D) increase in information available to investors.

Chapter 10: Banking and the Management of Financial Institutions
1) Which of the following statements are true?
A) A bankʹs assets are its sources of funds.
B) A bankʹs liabilities are its uses of funds.
C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital.
D) A bankʹs balance sheet indicates whether or not the bank is profitable.
2) Which of the following statements is false?
A) A bankʹs assets are its uses of funds.
B) A bank issues liabilities to acquire funds.
C) The bankʹs assets provide the bank with income.
D) Bank capital is recorded as an asset on the bank balance sheet.
3) Which of the following are reported as liabilities on a bankʹs balance sheet?
A) Reserves
B) Checkable deposits
C) Loans
D) Deposits with other banks
4) Which of the following are reported as liabilities on a bankʹs balance sheet?
A) Discount loans
B) Reserves
C) U.S. Treasury securities
D) Loans
5) The share of checkable deposits in total bank liabilities has
A) expanded moderately over time.
B) expanded dramatically over time.
C) shrunk over time.
D) remained virtually unchanged since 1960.
6) Which of the following statements is false?
A) Checkable deposits are usually the lowest cost source of bank funds.
B) Checkable deposits are the primary source of bank funds.
C) Checkable deposits are payable on demand.
D) Checkable deposits include NOW accounts.
7) In recent years the interest paid on checkable and time deposits has accounted for around
of total bank operating expenses, while the costs involved in servicing accounts have been approximately of operating expenses.
A) 45 percent; 55 percent
B) 55 percent; 4 percent
C) 25 percent; 50 percent
D) 50 percent; 30 percent
8) Which of the following statements are true?
A) Checkable deposits are payable on demand.
B) Checkable deposits do not include NOW accounts.
C) Checkable deposits are the primary source of bank funds.
D) Demand deposits are checkable deposits that pay interest.
9) Because checking accounts are liquid for the depositor than passbook savings, they earn interest rates.
A) less; higher
B) less; lower
C) more; higher
D) more; lower
10) Which of the following are transaction deposits?
A) Savings accounts
B) Small-denomination time deposits
C) Negotiable order of withdraw accounts
D) Certificates of deposit
11) Which of the following is not a nontransaction deposit?
A) Savings accounts
B) Small-denomination time deposits
C) Negotiable order of withdrawal accounts
D) Certificate of deposit
12) Large-denomination CDs are , so that like a bond they can be resold in a
market before they mature.
A) nonnegotiable; secondary
B) nonnegotiable; primary
C) negotiable; secondary
D) negotiable; primary
13) Because are less liquid for the depositor than , they earn higher interest rates.
A) money market deposit accounts; time deposits
B) checkable deposits; passbook savings
C) passbook savings; checkable deposits
D) passbook savings; time deposits
14) Because are less liquid for the depositor than , they earn higher interest rates.
A) passbook savings; time deposits
B) money market deposit accounts; time deposits
C) money market deposit accounts; passbook savings
D) time deposits; passbook savings
15) Banks acquire the funds that they use to purchase income -earning assets from such sources as
A) cash items in the process of collection
B) savings accounts.
C) reserves.
D) deposits at other banks.
16) Bank loans from the Federal Reserve are called and represent a of funds.
A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source
17) Which of the following is not a source of borrowings for a bank?
A) Federal funds
B) Eurodollars
C) Transaction deposits
D) Discount loans
18) Bank capital is equal to minus .
A) total assets; total liabilities
B) total liabilities; total assets
C) total assets; total reserves
D) total liabilities; total borrowings
19) Bank capital is listed on the side of the bankʹs balance sheet because it represents a of funds.
A) liability; use
B) liability; source
C) asset; use
D) asset; source
20) Bank reserves include
A) deposits at the Fed and short -term treasury securities.
B) vault cash and short-term Treasury securities.
C) vault cash and deposits at the Fed.
D) deposits at other banks and deposits at the Fed.

AND MUCH MORE