Name:________________________
Second Midterm Exam -- FIN 4520 -- FINANCIAL MARKETS AND INSTITUTIONS Spring 1999 KEY point total = 102
SHORT ANSWER
1. What is the Law of One Price? [3 points]
[Identical goods should sell at the same price (or should not sell at different prices).]
2. Beside each factor below, tell whether that factor will tend to cause the U.S. dollar to appreciate or depreciate (2 points for each correct answer).
A_______________ The U.S. imposes a tariff on imports.
A_______________ The U.S. imposes a quota on imports.
D_______________ Americans demand more imports.
A_______________ Foreign consumers demand more American products.
A_______________ American productivity rises.
3. What influences exchange rates mainly in the short run? [2 points]
[any of: the interest parity condition; capital mobility or capital flows or investment flows]
4. Show a T-account containing at least four components of a typical bank's balance sheet. [8 points]
5. List the different types of charters for commercial banks and state which federal agency is the primary regulator for each type. [12 points]
[national or federal charter: OCC
state charter with Fed membership: Federal Reserve
state charter without Fed membership: FDIC]
6. List two ways in which U.S. Treasury bonds differ from municipal bonds. [6 points]
[U.S. Treasuries have no default risk; interest income on municipal bonds is exempt from federal income tax.]
7. List two ways that problems of asymmetric information can be reduced in financial transactions. [6 points]
[any two of: private production and sale of information; invest in information and profit from it internally; government-imposed disclosure requirements]
8. Rank the following sources of funds for nonfinancial businesses from 1 to 3, where 1 is the largest source and 3 is the smallest source: [9 points]
3__stocks
1__loans
2__bonds
9. Name two ways in which collateral helps reduce a lender's risk. [6 points]
[reduces the borrower's incentive to default (or equivalently, increases the borrower's incentive to repay); and reduces the consequences of default]
10. List five areas in which bank examiners evaluate the financial condition (or safety and soundness) of a bank. [10 points]
[any 5 of: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk]
72 points to here
TRUE / FALSE (2 points for each right answer)
t__1. A foreign exchange rate is the price of one currency in terms of another currency.
t__2. The theory of Purchasing Power Parity is an application of the Law of One Price to national price levels.
f__3. The theory of Purchasing Power Parity does a better job of explaining exchange rates in the short run than in the long run.
t__4. Stocks and long-term bonds are traded in the capital markets.
f__5. U.S. Treasury securities have no risk of any sort.
f__6. Debt covenants help to reduce adverse selection problems.
84 points to here (+12)
MULTIPLE CHOICE [3 points for each right answer]
b1. When a bank increases its equity capital, the main tradeoffs are:
a. Higher ROE but lower liquidity.
b. Lower ROE but lower likelihood of bankruptcy.
c. Higher liquidity but higher likelihood of bankruptcy.
d. Higher ROE but lower ROA.
c2. The current number of U.S. banks is approximately:
a. 14,000 b. 2,500 c. 9,000 d. 500
a3. Banks are regulated, or have historically been regulated, in ALL BUT which of the following ways?
a. Maximum size b. Minimum capital c. Pricing d. Branching
d4. Regulations have been increasingly strict for banks in recent years in which of the following areas?
a. Branching b. Pricing c. Allowable products d. Capital
a5. The number of U.S. banks in recent years has been:
a. Declining b. Rising c. Holding steady d. Fluctuating
d6. Appreciation of the dollar against the Japanese yen will benefit:
a. American consumers b. Japanese consumers
c. Japanese exporters d. Both a and c
102 points total; +18 points
END OF TEST