FINALTERM EXAMINATION
Fall 2009
MGT411- Money & Banking (Session - 1)
www.mbilal.info
Time: 120 min
Marks: 87
Question No: 1 ( Marks: 1 ) - Please choose one
Stock exchange is an example of:
► Financial companies
► Financial institution
► Financial market (correct)
► Bank
Question No: 2 ( Marks: 1 ) - Please choose one
In electronic transfer the most common method is to send money through a system maintained by Federal reserve called __________.
► Fedex
► Fedwire (correct)
► Fedtransfer
► Fedmoney
Question No: 3 ( Marks: 1 ) - Please choose one
Financial markets enable the transfer of risk by:
► Not allowing risk averse investors access to U.S. Treasury bond markets
► Making sure that higher default risk is offset by greater liquidity
► Allowing firms less willing to bear risk to transfer risk to others who are more willing to bear risk (correct)
► Enabling even unsophisticated investors to purchase highly complex investment
Question No: 4 ( Marks: 1 ) - Please choose one
Risk sharing is the characteristic of which one of the following?
► Checks
► Checking accounts
► Money
► Bonds (correct)
Question No: 5 ( Marks: 1 ) - Please choose one
Suppose there are two investments, A and B, investment A has low standard deviation where as investment B has high standard deviation. What would you think that most people will choose?
► Investment A (correct)
► Investment B
► Indifference between them
► Insufficient information to decide
Question No: 6 ( Marks: 1 ) - Please choose one
If the annual interest rate is 6% (.06); the price of a one year Treasury bill would be:
► $94.00
► $94.33 (correct)
► $95.25
► $96.10
Question No: 7 ( Marks: 1 ) - Please choose one
If YTM equals the coupon rate the price of the bond is __________.
► Greater than its face value
► Lower than its face value
► Equals to its face value (correct)
► Insufficient information is given
Question No: 8 ( Marks: 1 ) - Please choose one
The return on the bond is equal to which of the following?
► Coupon rate + rate of capital gains
► Current yield + rate of capital gains (correct)
► Coupon rate - rate of capital gains
► Current yield - rate of capital gains
Question No: 9 ( Marks: 1 ) - Please choose one
An increase in the expected inflation shifts the bond supply to the _________
► Right (correct)
► Left
► No change
► None of the given options
Question No: 10 ( Marks: 1 ) - Please choose one
Which of the following ratings shows “Highest quality and credit worthiness”?
► AAA (correct)
► AA
► BB
► A
Question No: 11 ( Marks: 1 ) - Please choose one
Which of the following patterns of term structure occur most frequently?
► Ascending yield curve
► Descending yield curve
► Flat yield curve (correct)
► Humped yield curve
Question No: 12 ( Marks: 1 ) - Please choose one
Which one of the following is NOT true for the expectation hypothesis?
► Risk free interest rate can be computed (correct)
► There is uncertainty in the future
► Identifying yield of bond today that will be available next year
► It focuses on risk free interest rate and the risk premium
Question No: 13 ( Marks: 1 ) - Please choose one
According to the liquidity premium theory of the term structure, when the yield curve has its usual slope, the market expects
► Short-term interest rates to rise sharply
► Short-term interest rates to stay near their current levels (correct)
► Short-term interest rates to drop sharply
► Short-term interest rates does not change
Question No: 14 ( Marks: 1 ) - Please choose one
The Segmented Markets Theory of term structure suggests that:
► Investors have strong preferences for bonds of a particular maturity (correct)
► Investors have no preference for short-term bonds over long-term bonds, or vice versa
► Interest rates on long-term bonds strongly influence the demand for short-term bonds
► Bonds of different maturities are perfect substitutes for each other
Question No: 15 ( Marks: 1 ) - Please choose one
Funds of depository institution are primarily used in which of the following?
► Corporate bonds, Government bonds, Stocks, Mortgage
► Cash, Loan, Securities (correct)
► Stocks, Government bonds, corporate bonds, commercial papers
► Commercial papers, Bonds
Question No: 16 ( Marks: 1 ) - Please choose one
Which one of the following refers to the risk assessment and loss reimbursement guarantee by the individual risk experts of the relevant field?
► Underwriting process (correct)
► Insurance process
► Research process
► None of the given options
Question No: 17 ( Marks: 1 ) - Please choose one
Regulators of credit unions are which of the following?
► Office of thrift Supervision
► State authorities (correct)
► National Credit Union Administration
► Federal Reserve System
Question No: 18 ( Marks: 1 ) - Please choose one
Central banks perform all of the following functions EXCEPT:
► Issue currency
► Operate a payments system
► Control the availability of money and credit
► Manage fiscal policy (correct)
Question No: 19 ( Marks: 1 ) - Please choose one
One advantage a central bank has over other businesses including banks is that___________.
► It receives all of its funding from the government
► It doesn't have stockholders
► It can control its balance sheet at its own will (correct)
► It doesn't have a board of directors
Question No: 20 ( Marks: 1 ) - Please choose one
If required reserves are expressed by RR ; the required reserve rate by rD and deposits by D; the simple deposit expansion multiplier is expressed as:
► rDD
► (1/rD) D
► 1/rD (correct)
► rD times 10
Question No: 21 ( Marks: 1 ) - Please choose one
The central bank makes which type of loans?
► Primary credit
► Secondary credit
► Seasonal credit
► All of the given options (correct)
Question No: 22 ( Marks: 1 ) - Please choose one
According to Milton Friedman, central banks should set the money growth at:
► Constant rate (correct)
► Increasing rate
► Decreasing rate
► None of the given options
Question No: 23 ( Marks: 1 ) - Please choose one
The quantity of money people hold for transactions purpose depends on which of the following?
► Their nominal income
► The cost of holding money
► The availability of substitutes
► All of the given options (correct)
Question No: 24 ( Marks: 1 ) - Please choose one
Interest rate risk arises as a result of which one of the following consequences?
► It arises when banks make additional profit by using derivatives
► It arises when loan is not repaid
► It arises because of sudden demands of funds
► It arises when two sides of the balance sheet do not match up (correct)
Question No: 25 ( Marks: 1 ) - Please choose one
Bank-X's outstanding loans all have fixed interest rates, with maturities in excess of two years. Bank-X's deposit liabilities all have shorter maturity-no more than six months. Bank-X most obviously is facing:
► Liquidity risk
► Operational risk
► Interest rate risk (correct)
► Credit risk
Question No: 26 ( Marks: 1 ) - Please choose one
One thing that is true about economic policy in the U.S. is that:
► Monetary and Fiscal policy often times conflict (correct)
► Fiscal and monetary policy never conflict
► Monetary policy ultimately controls fiscal policy
► Fiscal policy ultimately controls monetary policy
Question No: 27 ( Marks: 1 ) - Please choose one
Which of the following type/s of transaction/s affect the balance sheets of both the central bank and the banking system?
► An open market operation
► Central bank’s extension of a discount loan
► All of the given options (correct)
► A foreign exchange intervention
Question No: 28 ( Marks: 1 ) - Please choose one
The use of lagged reserve accounting usually makes the demand for reserves:
► Highly unpredictable to the point of volatility
► Nearly constant with hardly any change at all
► Predictable
► Subject to daily changes by the Fed
Question No: 29 ( Marks: 1 ) - Please choose one
The portfolio demand for money reflects which of the following?
► The money we hold for our everyday transactions
► The money we hold to purchase stocks and bonds and other financial securities
► The portion of wealth people desire to hold in the form of money
► None of the given option
Question No: 30 ( Marks: 1 ) - Please choose one
The FOMC targets the federal funds rate, but if they are going to alter the course of the economy they must influence which one of the following?
► The money growth rate as well
► The long-term nominal interest rate as well
► The real interest rate as well
► The nominal exchange rate as well
Question No: 31 ( Marks: 1 ) - Please choose one
Which one of the following statement is true for investment if all other factors are held constant?
► An investment with less risk should sell for a lower price and offer a lower return
► An investment with more risk should sell for a lower price and offer a higher return
► An investment with less risk should sell for a lower price and offer a higher return (correct)
► An investment with more risk should offer a lower return and sell for a higher price
Question No: 32 ( Marks: 1 ) - Please choose one
Which of the following are without maturity dates?
► Zero coupon bonds
► Coupon securities
► Consols
► Preferred Bonds
Question No: 33 ( Marks: 1 ) - Please choose one
Banking is a combination of businesses designed___________.
► To deliver Services
► To pool the savings
► To make the loans
► All of the given options (correct)
Question No: 34 ( Marks: 1 ) - Please choose one
Well run banks have ________________.
► High interest income
► High interest margin
► High interest income and high interest margin (correct)
► Low interest income and low interest margin
Question No: 35 ( Marks: 1 ) - Please choose one
If a customer makes a withdrawal of $3 million, from where the bank will deduct this withdrawal?
► From capital
► From cash at hand
► From reserves (correct)
► Other assets
Question No: 36 ( Marks: 1 ) - Please choose one
Why banks do not like to meet their deposit outflows by contracting the asset side of the balance sheet.
► Because it will shrink the size of the bank (correct)
► Because it will shrink the size of the total assets
► Because it will increase the liabilities of the bank
► None of the given options
Question No: 37 ( Marks: 1 ) - Please choose one
Which of the following technique is necessary for making profit in a bank?
► Interest rate on liabilities must be lower
► Interest rate on deposits must be higher
► Interest rate on deposits must be higher than the interest rate on the liabilities
► Interest rate on deposits must be lower than the interest rate on the liabilities (correct)
Question No: 38 ( Marks: 1 ) - Please choose one
What is the impact of growth of international banking?
► It increase the competition in the banking market
► It increase the efficiency of banking market
► Profits are harder to come as borrowers and depositors have more options
► All of the given options (correct)
Question No: 39 ( Marks: 1 ) - Please choose one
Managing _______ is a major concern for today’s banks.
► Trading risk (correct)
► Interest rate risk
► Systematic risk
► Other risk
Question No: 40 ( Marks: 1 ) - Please choose one
Which of the following provides a payment to the policyholder’s beneficiaries in the event of the insured’s death at any time during the policy term?
► Life insurance (correct)► Term life insurance
► Whole life insurance
► Causality insurance
Question No: 41 ( Marks: 1 ) - Please choose one
Which of the following is included in the government-sponsored enterprise?
► Small and Medium Enterprise (SME)
► House Building Finance Corporation (HBFC)
► Khushhali Bank
► All of the given options (correct)
Question No: 42 ( Marks: 1 ) - Please choose one
Which of the following are the primary uses of funds of Finance Company?
► Cash, loans, securities
► Corporate bonds, government bonds
► Commercial paper, bonds, mortgages
► Bonds, bank loans, commercial paper (correct)
Question No: 43 ( Marks: 1 ) - Please choose one
Which of the following situation in a central bank can wreak havoc on the economic and financial system of a country?
► Weak fiscal policy
► Extreme political pressure
► Incompetence of the central banks
► Extreme political pressure and incompetence of the central banks (correct)
Question No: 44 ( Marks: 1 ) - Please choose one
Which function was the Central Bank originally designed to perform?
► Control the money supply (correct)
► Clearing checks
► Acting as lender of last resort
► All of the above
Question No: 45 ( Marks: 1 ) - Please choose one
Which of the following are costs of high and/or unexpected inflation?
► Increased uncertainty
► Higher nominal interest rates
► Hurts net creditors
► All of the above (correct)
Question No: 46 ( Marks: 1 ) - Please choose one
Which of the following side of a balance sheet represent that central bank is a government’s bank?
► Asset side of the balance sheet
► Liabilities side of the balance sheet
► Equity side of the balance sheet
► The whole balance sheet (correct)
Question No: 47 ( Marks: 1 ) - Please choose one
The legal requirement of reserve of a bank is called________.
► Actual reserve► Required reserve (correct)
► Excess reserve
► None of the given option
Question No: 48 ( Marks: 1 ) - Please choose one
If a bank holds excess reserve it depends upon which of the following?
► Cost of holding the excess reserve
► Benefit of holding excess reserve
► Duration of holding excess reserve
► Cost and benefit of holding excess reserve (correct)
Question No: 49 ( Marks: 1 ) - Please choose one
The number of times each rupee is used (per unit of time) in making payments is called the_________.
► Velocity of money (correct)
► Quantity of money
► Exchange of money
► Aggregate money
Question No: 50 ( Marks: 1 ) - Please choose one
Portfolio demand for money goes up as the riskiness of the alternative __________
► Falls (correct)
► Rises
► Remain stable
► Cannot be determined
Question No: 51 ( Marks: 1 ) - Please choose one
Monetary policy makers react to changes in current inflation by changing the __________
► Effective interest rate
► None of the given options
► Real interest rate (correct)
► Nominal interest rate
Question No: 52 ( Marks: 1 ) - Please choose one
With a higher inflation target, the central bank will set a lower current __________ at every level of current inflation, shifting the monetary policy reaction curve to the right.
► Real interest rate (correct)
► Nominal interest rate
► Effective interest rate
► None of the given options
Question No: 53 ( Marks: 1 ) - Please choose one
Who set the relationship between current inflation and real interest rate?
► Monetary policy makers (correct)► Fiscal policy makers
► Budget makers
► Monetary policy maker or fiscal policy maker
Question No: 54 ( Marks: 1 ) - Please choose one
Inflation falls and output rises until the economy returns to the point where current output _______ potential output and inflation equals the central bank’s target.
► Equals (correct)► Greater than
► Lower than
► Incomplete information
Question No: 55 ( Marks: 3 )
Why banks are there in an economy?
- Banks monitor Stabilizes the Economy
- Control the availability of money and credit in so it can keep low inflation, high growth, and stability of the financial system
- A stable economy grows faster than an unstable one so bank plays vital role
- Banks mitigate risk by taking deposits from a large number of clients and make numerous of loans , thus giving each depositor a small stake in each of the loans. So it provide economic of scale.
Question No: 56 ( Marks: 5 )
Discuss the impact of inflation shock on output and inflation.
Inflation shock is a change in the cost of producing output which causes the
the short run aggregate supply curve to shift.
It can be the result of change in the cost of raw materials or change in price of energy.
A positive inflation shock causes the short run aggregate supply curve to shift upward, and cause the inflation to rise
Question No: 57 ( Marks: 5 )
Discuss different types of insurance companies in detail.
Insurance companies.
Accept premiums, which they invest in securities and real estate in return for promise to compensate the policy holder incase of any events occurs like fire, accident, death etc.
There are two type of in Insurance companies
- Life insurance
- Property and casualty insurance
Which makes a payment to the insured’s beneficiaries upon the death of the policy holder.
Company can get group insurance for their employees.
Whole life insurance
It is combination of life insurance and fix saving account.
We pay fix amount for a fixed period of time and in case of death of
policy holder his/her beneficiary gets the money.
If the policyholder decides to discontinue the policy
Property and casualty Insurance
The policyholder pays fixed amount in exchange for protection to its property or assets.
For example. Insuring the building against the fire.
Insurance of house for theft.
auto insurance.
Question No: 58 ( Marks: 10 )
Discuss adjustments in short run equilibrium if aggregate demand increases.
Short-run equilibrium is determined by the intersection of the aggregate demand curve with the short-run aggregate supply curve.
At point output is greater the potential output
SARS start to move shift up and output start falling down.
Inflation will rise . if no action will be taken by policy maker at this stage then
Economy will move to point 3, where Current inflation will be greater then Target inflation
aggregate demand curve shifts to the right and inflation will rise
if policymakers committed to their original inflation target then they will
do something to get the economy back to the point where it started
government purchases will raise the real interest rate
increasing the real interest rate at every level of inflation will be achieved by compensating the shifting of monetary reaction curve to the left.
When the monetary policy reaction curve shifts, the aggregate demand curve also shifts with it.
The aggregate demand curve will shift to the left, and economy will be back to long-run equilibrium.
Question No: 59 ( Marks: 10 )
a) Distinguish between illiquidity and insolvency. Why is it difficult for a lender of last resort to tell insolvency from illiquidity?
Does the distinction matter?
Insolvent mean bankrupt or someone who has insufficient assets to cover their debts. Insolvent is not in position to pay its due bills
Illiquidity
In such a position where assets are not immediately or easily be converted into cash. Illiquid assets can be converted into cash,
but usually only after a time or at lower value.
Insolvent is in hard time or not an position to revive its working condition compared to insolvency illiquidity is position where business has enough assets only thing is not immediately available. Lender of last resort can take those assets as security to provide the funds.
b) A government is considering changing its deposit insurance system from one in which deposits are implicitly guaranteed
(that is, if a bank fails, people trust the government to put enough resources into the bank so that depositors will lose nothing)
to one with an explicit ceiling. What would be the impact of such a change on depositors? On bankers?
Bank will be having less money to business as they have to keep money as deposit.
Due to keeping more money as required reserve banks will not be in position to lend more loans.
It will reduce their business activity. Same time it will increase the liquidity of bank.
People will trust then banks more, due to guaranty form govt.
Due to shortage of lending more money to public bank might charge more keeping demand and supply rule in mind.
Cost of borrow from bank can increase.
