Exam Blackboard Practice Name MULTIPLE CHOICE Choose the one alternative that best completes the statement or answers the question 1 If a one year and two year bonds both currently yield 5 term premium of two year bonds is 0 2 the liquidity premium theory predicts that the yield on one year bond next year is expected to be A 4 8 B 4 6 C 5 D 5 2 2 Which interest rate is typically the lowest A 10 year Treasury bonds C 30 year Treasury bonds 1 2 B 2 year Treasury notes D 3 month Treasury bills 3 A one year bond currently pays 5 interest It s expected that it will pay 4 5 next year and 4 the following year The two year term premium is 0 2 while the three year term premium is 0 35 What is the interest rate on a three year bond according to the liquidity premium theory A 4 5 B 4 85 C 5 05 D 4 68 3 4 4 The term structure of interest rates A reflects differing tax treatment received by different instruments B usually results in a downward sloping yield curve C represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities D always results in an upward sloping yield curve 5 An inverted yield curve A slopes down C has a U shape 5 B slopes up D is flat 6 If the expected path of 1 year interest rates over the next four years is 5 percent 4 percent 2 percent and 1 percent then the expectations theory predicts that today s interest rate on the fouryear bond is A 1 percent B 2 percent C 3 percent D 4 percent 6 7 According to the liquidity premium theory what does a flat yield curve indicate A Short term interest rates are expected to fall B Short term interest rates are expected to remain stable C Long term interest rates are expected to fall D Short term interest rates are expected to rise 7 8 The liquidity premium theory holds that investors A require a term premium to compensate them for investing in a less preferred maturity B always choose the bond with the highest expected return regardless of maturity C view bonds of different maturities as perfect substitutes D view bonds of different maturities as completely unsubstitutable 8 9 Information costs A are zero in financial markets but high for transactions carried out through financial intermediaries B include the costs borrowers incur to discover the best investments to make with the money they have borrowed C include the costs that savers incur to determine the credit worthiness of borrowers D are the costs of buying and selling financial claims 9 10 It is generally agreed that A small and medium sized firms benefit by the actions of intermediaries B the addition of intermediaries adds to transactions costs C intermediaries should not seek to profit from reducing transactions costs D the financial system would be more efficient if intermediaries were eliminated 11 Transactions costs are A zero in financial markets B the costs of direct financial transactions C zero in financial intermediaries D equal to the taxes imposed on financial transactions 10 12 Government regulations require publicly traded firms to provide information reducing A economies of scale B transactions costs C the adverse selection problem D the need for diversification 12 13 The concept of adverse selection helps to explain all of the following except A why firms are more likely to obtain funds from banks and other financial intermediaries rather than from the securities markets B why the financial system is so heavily regulated C why indirect finance is more important than direct finance as a source of business finance D why direct finance is more important than indirect finance as a source of business finance 13 14 Net worth can perform a similar role to A collateral C diversification 14 11 B intermediation D economies of scale 15 Moral hazard in equity contracts is known as the problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer A adverse selection B principal agent C debt deflation D free rider 16 You own a 2007 Ford Explorer Although it has high mileage you have maintained it very well You want to sell it but after checking the prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market you decide the prices are too low and you decide not to sell This is an example of A economies of scale B low information costs C moral hazard D the lemons problem 15 16 17 Which of the following is a name for when a bank promises to lend funds to a borrower to pay off its commercial paper A standby letter of credit B securitization C loan sale D loan commitment 17 18 A 5 million deposit outflow from a bank has the immediate effect of A reducing deposits and securities by 5 million B reducing deposits and reserves by 5 million C reducing deposits and capital by 5 million D reducing deposits and loans by 5 million 18 19 A bank with insufficient reserves can increase its reserves by A borrowing federal funds B buying municipal bonds C buying short term Treasury securities D lending federal funds 19 20 Of the following which would be the first choice for a bank facing a reserve deficiency A Borrow from the Fed B Borrow from other banks C Call in loans D Sell securities 20 21 When Jane Brown writes a 100 check to her nephew and he cashes the check Ms Brown s bank assets of 100 and liabilities of 100 A loses loses B loses gains C gains loses D gains gains 21 22 When a 10 check written on the First National Bank of Chicago is deposited in an account at Citibank then A the assets of Citibank fall by 10 B the reserves of the First National Bank increase by 10 C the liabilities of the First National Bank increase by 10 D the liabilities of Citibank increase by 10 22 23 If a bank holds 100 million in assets 90 million in liabilities 10 million in capital and last year its return on assets was 2 what was its return on equity A 20 B 2 1 C 5 D 0 2 23 24 The ratio of bank capital to bank assets is known as the bank s A return on equity B leverage ratio C net interest margin D return on capital 24 25 The shadow banking system refers to A pawn shops and institutions that offer payday loans B commercial banks C nonbank financial institutions such as investment banks and hedge funds D community banks 25 26 Which of the following is likely to be more of a problem after the introduction of deposit insurance A adverse selection B bank runs C contagion D moral hazard 26 27 Banks face liquidity risk because 27 A governments tend to