Fin 3080 Exam 1 Summer Guide Questions with Answers
1. Investment funds are financial institutions that pool financial resources of individuals and companies
and invest those resources ________________________________. - correct answer sin diversified pools
of assets
2. List one way that financial institutions benefit suppliers of funds. - correct answers Reduce need for
monitoring, Reduce liquidity and price risk
Maturity intermediation, Transaction cost services, Denomination intermediation
3. List one factor affecting the growth in foreign financial markets (page 21 in Saunders-Cornett). -
correct answers Increase in pool of savings, ability to diversify portfolio, Information
New low-cost products, Rising importance of the euro
Growth in Pacific Basin and China
Deregulation
4. What is one way that financial institutions benefit the overall economy? - correct answers Money
supply transmission
Credit allocation
Intergenerational wealth transfer
Payment services
5. The long-term trend in the financial sector has been a shift of assets away from commercial banks to
________________. - correct answers Investment companies (securities firms)
6. Who are the main suppliers of funds in the economy? - correct answers Households
Foreign participants in U.S. markets
7. Who are the main demanders of funds in the economy? - correct answers Non-Financial Business
8. In class, we discussed "Banking Examples" of 7 common transactions. List one of the transactions that
resulted in an increase to the money supply. - correct answers Bank makes a loan
, Store sells government securities (T-Bonds)
Bank buys government securities
9. List one of the 4 major functions of the Federal Reserve System - correct answers Monetary policy
Supervise
Financial Stability
Payment services
10. What was the target range for the federal funds rate in December 2008? - correct answers0% to
0.25%
11. A bank has $400M in deposits on its balance sheet, and the Federal Reserve lowers the reserve ratio
from 12% of deposits to 7%. What is the maximum amount of total deposits in the bank after the full
effect of the decrease in reserve ratio? - correct answers$686M
($400M x .05)= $20M in new excess reserves
$20M/.07 = 286M in new deposits
$400+$286 = $686
. _______________ are the main suppliers of loanable funds in the economy (in the aggregate), while
_____________ are the main demanders of loanable funds.
A. Non-financial businesses; households and foreign participants
B. Non-financial firms; financial firms
C. Households; foreign participants
D. Households and foreign participants; non-financial businesses - correct answers D
You calculate that the fair interest rate on a bond issued by NEP, Inc. is 15.78%. Your analysis also shows
the following: the inflation risk premium is 2.15%, the real risk-free rate is 1.77%, the bond's liquidity
premium is 3.41%, and the bond's maturity premium is 5.11%. The bonds have no special covenants.
Calculate the bond's default risk premium.
A. 2.47%
B. 3.34%
1. Investment funds are financial institutions that pool financial resources of individuals and companies
and invest those resources ________________________________. - correct answer sin diversified pools
of assets
2. List one way that financial institutions benefit suppliers of funds. - correct answers Reduce need for
monitoring, Reduce liquidity and price risk
Maturity intermediation, Transaction cost services, Denomination intermediation
3. List one factor affecting the growth in foreign financial markets (page 21 in Saunders-Cornett). -
correct answers Increase in pool of savings, ability to diversify portfolio, Information
New low-cost products, Rising importance of the euro
Growth in Pacific Basin and China
Deregulation
4. What is one way that financial institutions benefit the overall economy? - correct answers Money
supply transmission
Credit allocation
Intergenerational wealth transfer
Payment services
5. The long-term trend in the financial sector has been a shift of assets away from commercial banks to
________________. - correct answers Investment companies (securities firms)
6. Who are the main suppliers of funds in the economy? - correct answers Households
Foreign participants in U.S. markets
7. Who are the main demanders of funds in the economy? - correct answers Non-Financial Business
8. In class, we discussed "Banking Examples" of 7 common transactions. List one of the transactions that
resulted in an increase to the money supply. - correct answers Bank makes a loan
, Store sells government securities (T-Bonds)
Bank buys government securities
9. List one of the 4 major functions of the Federal Reserve System - correct answers Monetary policy
Supervise
Financial Stability
Payment services
10. What was the target range for the federal funds rate in December 2008? - correct answers0% to
0.25%
11. A bank has $400M in deposits on its balance sheet, and the Federal Reserve lowers the reserve ratio
from 12% of deposits to 7%. What is the maximum amount of total deposits in the bank after the full
effect of the decrease in reserve ratio? - correct answers$686M
($400M x .05)= $20M in new excess reserves
$20M/.07 = 286M in new deposits
$400+$286 = $686
. _______________ are the main suppliers of loanable funds in the economy (in the aggregate), while
_____________ are the main demanders of loanable funds.
A. Non-financial businesses; households and foreign participants
B. Non-financial firms; financial firms
C. Households; foreign participants
D. Households and foreign participants; non-financial businesses - correct answers D
You calculate that the fair interest rate on a bond issued by NEP, Inc. is 15.78%. Your analysis also shows
the following: the inflation risk premium is 2.15%, the real risk-free rate is 1.77%, the bond's liquidity
premium is 3.41%, and the bond's maturity premium is 5.11%. The bonds have no special covenants.
Calculate the bond's default risk premium.
A. 2.47%
B. 3.34%
