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Exam #2
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Questions in this quiz (50)
1The risk structure of interest rates is
- Athe relationship among interest rates of different bonds with the same maturity.
- Bthe relationship among interest rates on bonds with different maturities.
- Cthe structure of how interest rates move over time.
- Dthe relationship among the terms to maturity of different bonds.
2Which of the following long-term bonds should have the lowest interest rate?
- AU.S. Treasury bonds
- BCorporate Aaa bonds
- CCorporate Baa bonds
- DMunicipal bonds
3 Which of the following long-term bonds should have the highest interest rate?
- ACorporate Aaa bonds
- BU.S. Treasury bonds
- CMunicipal bonds
- DCorporate Baa bonds
4Bonds with relatively low risk of default are called
- Ainvestment-grade bonds.
- Bzero coupon bonds.
- Cjunk bonds.
- DNone of the above.
5Bonds with relatively high risk of default are called
- Ainvestment-grade bonds.
- BBrady bonds.
- Czero coupon bonds.
- Djunk bonds.
6Between 1919 and 2022, when did long-term bond yields peak?
- Aaround 1945
- B1925
- Caround 1960
- Dearly 1980s
7 Holding everything else the same, if a corporation's earnings rise, then the default risk on its bonds will __________ and the expected return on those bonds will __________.
- Adecrease; decrease
- Bdecrease; increase
- Cincrease; decrease
- Dincrease; increase
8If a corporation's earnings rise, then the default risk on its bonds will __________ and the equilibrium interest rate on these bonds will __________.
- Aincrease; increase
- Bdecrease; increase
- Cdecrease; decrease
- Dincrease; decrease
9When the default risk on corporate bonds decreases, other things equal, the demand curve for corporate bonds shifts to the __________ and the demand curve for Treasury bonds shifts to the __________.
- Aright; left
- Bleft; right
- Cright; right
- Dleft; left
10The spread between interest rates on low-quality corporate bonds and U.S. government bonds __________ during the Great Depression.
- Anarrowed
- Bwas reversed
- Cwidened significantly
- Ddid not change
11When the corporate bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the _______ and the demand curve for Treasury bonds shifts to the _______.
- Aright; right
- Bleft; left
- Cright; left
- Dleft; right
12The spread between the interest rates on bonds with default risk and default-free bonds, both of the same maturity, is called the
- Abond premium.
- Brisk premium.
- Cmarket premium.
- Drate premium.
13 If income tax rates were lowered, then
- Athe interest rate on Treasury bonds would rise.
- Bthe interest rate on municipal bonds would rise.
- Cthe interest rate on municipal bonds would fall.
- Dthe price of Treasury bonds would fall.
14A decrease in marginal tax rates would likely have the effect of _______ the demand for municipal bonds and _______ the demand for U.S. government bonds.
- Adecreasing; increasing
- Bdecreasing; decreasing
- Cincreasing; decreasing
- Dincreasing; increasing
15 A bond rating of Aa or AA would mean that the quality of the bond is
- Ahigh.
- Bmedium grade.
- Cthe highest.
- Dspeculative.
16Which of the following is a credit rating agency?
- AA.) Fitch
- BB.) Standard and Poor's
- CC.) Moody's
- DB and C only
- EAll of these are credit rating agencies.
17Yield curves can be classified as
- AA.) upward-sloping.
- BB.) downward-sloping.
- CC.) flat.
- Dall of the above.
- Eonly A and B of the above.
18 If the expected path of one-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, then the pure expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of
- Aone year.
- Btwo years.
- Cthree years.
- Dfour years.
- Efive years.
19Of the following sources of external finance for American nonfinancial businesses, the least important is
- Astocks.
- Bnonbank loans.
- Cbonds and commercial paper.
- Dloans from banks.
20With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?
- AA.) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been sold directly to American households.
- BB.) Marketable securities account for a larger share of external business financing in the United States than in most other countries.
- CC.) The stock market accounted for the largest share of the financing of American businesses in the 1970–2000 period.
- DAll of the above.
- EOnly A and B of the above.
21 A financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders. This is an example of economies of
- Ascope.
- Bcomplexity.
- Cscale.
- Dinformation.
22 If borrowers take on big risks after obtaining a loan, then lenders face the problem of
- Afree-riding.
- Bmoral hazard.
- Ccostly state verification.
- Dadverse selection.
23 If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
- Aadverse selection.
- Bcostly state verification.
- Cmoral hazard.
- Dfree-riding.
24______ can only occur if one party has information about some hidden characteristic and takes economic advantage of that information.
- AAdverse selection
- BEconomies of scale
- CEconomies of scope
- DAsymmetric information
25Gus purchased a large life insurance policy to satisfy a lender’s loan requirement. The questionnaire asked whether he engaged in high-risk activities, and he checked “no” on the questionnaire. A few days later Gus went skydiving with some friends. This is an example of
- Aagency theory.
- Badverse selection.
- Cillegal behavior.
- Dmoral hazard.
26Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ______, which gives rise to the problem of ______.
- Alow; adverse selection
- Blow; moral hazard
- Chigh; moral hazard
- Dhigh; adverse selection
27In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay will
- Areflect the highest quality of used cars in the market.
- Breflect the average quality of used cars in the market.
- Creflect the lowest quality of used cars in the market.
- Dnone of the above.
28A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called
- Aadverse selection.
- Bnoncollateralized risk.
- Casymmetric information.
- Dmoral hazard.
29When an accounting firm conducts an independent audit, the accounting firms certify that
- Athe firm is adhering to federal regulations with regard to product safety, hiring practices, and environmental regulations.
- Bthe firm’s management is qualified to conduct the firm’s business in the best interest of shareholders.
- Cthe firm is adhering to standard accounting principles and disclosing accurate information about sales, assets, and earnings.
- DAll of the above are correct answers.
30The problem of adverse selection helps to explain
- AA.) why collateral is an important feature of consumer, but not business, debt contracts.
- BB.) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets.
- Cwhy direct finance is more important than indirect finance as a source of business finance.
- Donly A and B of the above.
31In the United States, the government agency requiring that firms, which sell securities in public markets, adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the
- AU.S. Treasury Department.
- BSecurities and Exchange Commission.
- CFederal Corporate Securities Commission.
- DFederal Trade Commission.
- EFederal Reserve System.
32An audit certifies that
- Aa firm abides by standard accounting principles.
- Ba firm’s loans will be repaid.
- Ca firm’s securities are safe investments.
- Dthe information reported in a firm’s accounting statements is correct.
33The pecking order hypothesis predicts that the ______ a corporation is, the more likely it will be to ______.
- Alarger and more well known; issue securities
- Bsmaller and less well known; need external financing
- Clarger and more known; borrow from financial intermediaries
- Dsmaller and less well known; issue securities
34The authors' analysis of adverse selection indicates that financial intermediaries
- AA.) overcome free-rider problems by holding nontraded loans.
- BB.) must buy securities from corporations to diversify the risk that results from holding nontradable loans.
- CC.) have not been very successful in dealing with adverse selection problems in financial markets.
- Ddo all of the above.
- Edo only A and B of the above.
35Financial intermediaries (banks in particular) have the ability to avoid the free-rider problem as long as they primarily
- AA.) acquire a diversified portfolio of stocks.
- BB.) make private loans.
- CC.) buy junk bonds.
- Ddo a balanced combination of A and B of the above.
36The free rider problem
- Aprevents the private market from producing enough information to eliminate all the asymmetric information that leads to adverse selection.
- Boccurs when people who do not pay for information take advantage of the information other people have to pay for.
- Csuggests that the private sale of information will only be a partial solution to the lemons problem.
- Dall of the above.
37Financial crises
- AA.) are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.
- BB.) occur when adverse selection and moral hazard problems in financial markets become more significant.
- CC.) frequently lead to sharp contractions in economic activity.
- Dare all of the above.
- Eare only A and B of the above.
38One barrier that prevents financial markets from channeling funds efficiently from savers to borrowers is
- Athe credit spread.
- Ba financial crisis.
- Casymmetric information.
- Defficient markets.
39When financial frictions increase
- Ait makes it more difficult for lenders to determine a borrower’s creditworthiness.
- Bit reduces the probability of a financial crisis.
- Cit makes it easier for lenders to determine a borrower’s creditworthiness.
- Dit lowers the credit spread on loans.
40In an advanced economy, a financial crisis can begin in several ways, including
- Aan increase in uncertainty caused by the failure of financial institutions.
- Basset pricing booms and busts.
- Cmismanagement of financial liberalization or innovation.
- Dall of the above.
41In 1928 and the first half of 1929, prices _______ in the U.S. stock market.
- Atripled
- Bdropped by 50%
- Cdoubled
- Dfell 15%
42From its peak in 1929 to the trough in December 1932, the Dow Jones Industrial Average fell how much?
- A60%
- B90%
- C70%
- D80%
43The Baa–U.S. Treasury spread was about 2% at the beginning of 1929. By December 1932, the Dow Jones Industrial Average reached a low, and the spread had increased to how much?
- A4%
- B6%
- C8%
- D10%
44In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by _______ firms’ and households’ interest payments, thereby _______ their cash flow.
- Adecreasing; increasing
- Bincreasing; increasing
- Cincreasing; decreasing
- Ddecreasing; decreasing
45Approximately how large was the U.S. subprime mortgage market in 2007?
- A$100 million
- B$100 billion
- C$500 billion
- D$1 trillion
46Which of the following led to the U.S. financial crisis of 2007–2009?
- AA.) Agency problems in mortgage markets
- BB.) Financial innovation in mortgage markets
- CC.) An increase in moral hazard at credit rating agencies
- DAll of the above
- Eonly A and B of the above
47U.S. Stock prices (as proxied by the DJIA) fell by _______ from October 2007 to March 2009.
- A45%
- B50%
- C55%
- D60%
48The development of new, sophisticated financial instruments is known as
- Ashadow banking.
- Bfinancial engineering.
- Csecuritization.
- DCDOs.
49_______ are essentially insurance policies that pay out if a borrower fails to service a loan.
- ACDOs
- BSubprime mortgages
- CSecuritized debts
- DCredit default swaps
50Part of the reason for the Financial Crises of 2007–2009 is attributable to the conflicts of interest of
- Areal estate appraisers.
- Bmortgage originators.
- Ccredit rating agencies.
- Dall of these
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- Quiz on Exam #2, created by Harrison Obermann on 14/10/2024.
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- Harrison Obermann
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