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 financ...
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
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%
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