MGT411- Money & Banking

FINALTERM  EXAMINATION

Spring 2009

MGT411- Money & Banking (Session - 2)

Ref No:

Time: 120 min

Marks: 81

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Question No: 1    ( Marks: 1 )    - Please choose one

 Investing was an activity reserved for only __________ in the past.

       ► Business men

       ► Traders

       ► Wealthy people

       ► Stock brokers

   

Question No: 2    ( Marks: 1 )    - Please choose one

 Financial instruments are evolved just as ___________.

       ► Currency

       ► Stock

       ► Bond

       ► Commodity

   

Question No: 3    ( Marks: 1 )    - Please choose one

 Which of the following market allowed networks of dealers that are connected electronically?

       ► New York Stock Exchange

       ► NASDAQ

       ► Large exchanges in London

       ► Large exchanges in Tokyo

   

Question No: 4    ( Marks: 1 )    - Please choose one

 If at 5% interest rate, $100 payment has a PV of $90.70. Then what will be the PV value of $200 payment? (Without applying formula).

       ► $45.35

       ► $272.1

       ► $181.4

       ► $362.8

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Question No: 5    ( Marks: 1 )    - Please choose one

 _________ measures the probability of worst outcome in any investment project.

       ► Variance

       ► Standard deviation

       ► Value at risk

       ► Hedging

   

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

       ► $95.25

       ► $96.10

   

Question No: 7    ( Marks: 1 )    - Please choose one

 Which of the following best describes default risk?

       ► The chance the issuer will be unable to make interest payments or repay principal

       ► The chance the issuer will retire the debt early

       ► The chance the issuing firm will be sold to another firm

       ► The chance the issuer will sell more debt

   

Question No: 8    ( Marks: 1 )    - Please choose one

 Mr. Ghazanfar wants to invest Rs.2,000 in a bond. If this bond is expected to receive a return of Rs.100 per month and a tax of Rs.3 will be deducted on this return. Then Mr. Ghazanfar made his decision by considering which of the following fact?

       ► He is attracted by Rs.100 return per month

       ► He considers Rs.100 less deduction for tax i.e.Rs.97

       ► He takes into consideration only the portion of tax which is deducted

       ► His decision will not be affected by any of the given factors

   

Question No: 9    ( Marks: 1 )    - Please choose one

 Calculate tax implication on Bond yields. Consider a one year bond face value Rs.100 (issued by Government) with coupon rate of 6%.What is the income of bond that is received at maturity? (Tax rate is 30%).

       ► Rs.6

       ► Rs.1.80

       ► Rs.4.20

       ► Rs.7.80

   

Question No: 10    ( Marks: 1 )    - Please choose one

 Which of the following statement is true for the given sentence, "that tax affects the bond return"?

       ► Because only interest income they receive from bond is taxable

       ► Because principal amount and interest income they receive from bond is taxable

       ► Because bond holders are taxpayers

       ► Because all bond is sold with a condition that tax will be deducted from its return

   

Question No: 11    ( Marks: 1 )    - Please choose one

 The fact that common stockholders are residual claimants means:

       ► The stockholders receive their dividends before any other residuals are paid

       ► The stockholders receive the remains after everyone else is paid

       ► The stockholders are paid any past due dividends before other claims are paid

       ► The common stockholders are responsible for all corporate debts

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Question No: 12    ( Marks: 1 )    - Please choose one

 If a bank sells off all of its assets and pays all of its liabilities the remaining amount would be __________.

       ► Net profit

       ► Net worth

       ► Reserves

       ► Excess reserves

   

Question No: 13    ( Marks: 1 )    - Please choose one

 __________ measures how efficiently a bank uses its assets.

       ► Return on Assets

       ► Return on Equity

       ► Bank Capital

       ► Bank Profitability

   

Question No: 14    ( Marks: 1 )    - Please choose one

 The procedure that estimates the interest rate sensitivity of a bank's assets and liabilities is called ___________.

       ► Managing credit risk

       ► Gap analysis

       ► Trading risk minimization

       ► Managing liquidity risk

   

Question No: 15    ( Marks: 1 )    - Please choose one

 An insurance company provides liability insurance to a bakery protecting the owner against claims from customers. One area of coverage is protection against food poisoning claims. The insurance company may periodically send an employee into the bakery to observe food preparation and food storage processes. The insurance company is trying to avoid which of the following?

       ► Paying claims

       ► Adverse selection

       ► Moral hazard

       ► Transaction cost

   

Question No: 16    ( Marks: 1 )    - Please choose one

 Which of the following is not a function of Investment banks?

       ► Research and advice for investors

       ► Immediate sale of assets

       ► Access to payment system

       ► Access to spectrum of assets allowed diversification

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Question No: 17    ( 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

       ► Stocks, Government bonds, corporate bonds, commercial papers

       ► Commercial papers, Bonds

   

Question No: 18    ( Marks: 1 )    - Please choose one

 All of the following are the primary sources of funds for depository institutions EXCEPT?

       ► Checkable deposits

       ► Savings and time deposits

       ► Short term loans

       ► Borrowings from other banks

   

Question No: 19    ( 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

       ► Insurance process

       ► Research process

       ► None of the given options

   

Question No: 20    ( Marks: 1 )    - Please choose one

 The "trade off" which can impact bank's likelihood of faliure is described as:

       ► The larger the bank in asset size the more likely it will fail

       ► The more competitive the banking environment, the more likely the bank will fail

       ► The more profitable the bank, the less liquid the bank will be and the more likely it will fail

       ► The greater the regulation from government the more likely the bank will fail

   

Question No: 21    ( Marks: 1 )    - Please choose one

 On which of the following success of monetary policy depends upon?

       ► It may be on the chance or by luck

       ► The institutional environment

       ► Competent people in responsible positions

       ► Both the institutional environment and Competent people in responsible positions

   

Question No: 22    ( Marks: 1 )    - Please choose one

 A central bank's balance sheet would categorize each of the following as liabilities EXCEPT:

       ► Currency

       ► Gold

       ► Reserves

       ► Accounts of the commercial banks

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Question No: 23    ( Marks: 1 )    - Please choose one

 If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $2 million open market purchase by the Fed will result in deposit creation of:

       ► $20 million

       ► $18 million

       ► $2 million

       ► $1,800,000

   

Question No: 24    ( 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:

       ► r_DD

       ► (1/r_D) D

       ► 1/r_D

       ► r_D times 10

   

Question No: 25    ( Marks: 1 )    - Please choose one

 The _____________ shows how the quantity of money is related to the monetary base:

       ► Money multiplier

       ► Deposit expansion multiplier

       ► Fiscal multiplier

       ► Tax multiplier

   

Question No: 26    ( Marks: 1 )    - Please choose one

 Central banks today place most of their focus on which of the following?

       ► The unemployment rate

       ► The quantity of M2

       ► Interest rates

       ► Controlling the size of the money multiplier

   

Question No: 27    ( Marks: 1 )    - Please choose one

 Which of the following statement is true regarding monetary policy tools?

       ► The Fed currently uses a quantity tool for monetary policy

       ► The required reserve rate is the most easily observable tool

       ► The federal funds rate is not the best tool because it fails the controllable test of a good monetary policy tool.

       ► The central banks cannot set a quantity and a price tool simultaneously

   

Question No: 28    ( Marks: 1 )    - Please choose one

 Inflation can be thought of as which of the following?

       ► A decrease in the price of money

       ► An increase in the price of money

       ► No change in the price of money, just in the supply of money

       ► No change in the price of money, just in the demand for money

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Question No: 29    ( Marks: 1 )    - Please choose one

 If a central bank sets an explicit inflation target it would require which one of the following?

       ► More emphasis on the interest rate target and less on a money target

       ► To shift their focus entirely to a nominal interest rate target

       ► Willingness to live with more volatility in the interest rate

       ► To give up control of targeting the monetary base

   

Question No: 30    ( Marks: 1 )    - Please choose one

 Inflation in the long run would be determined by which one of the following?

       ► The exchange rate

       ► Aggregate demand

       ► The rate of money growth

       ► Aggregate supply

   

Question No: 31    ( Marks: 1 )    - Please choose one

 Liquidity is the risk that is arises as a result of which one of the following consequences?

       ► It arises because of sudden demands of funds

       ► It arises when two sides of the balance sheet do not match up

       ► It arises when banks make additional profit by using derivatives

       ► It arises when loan is not repaid

   

Question No: 32    ( Marks: 1 )    - Please choose one

 For securities issued across international borders, changes in the legal and governmental environment can make it difficult for the investor to collect. Such a risk would be termed as:

       ► Credit risk

       ► Sovereign risk

       ► Insolvency risk

       ► Interest rate risk

   

Question No: 33    ( Marks: 1 )    - Please choose one

 In general, if the financial institution's balance sheet displays assets and liabilities that are "mis-matched" to a significant degree, the institution faces:

       ► Operational risk

       ► Sovereign risk

       ► Interest rate risk

       ► Liquidity risk

   

Question No: 34    ( Marks: 1 )    - Please choose one

 The idea that central banks should be independent of political pressure is an idea that:

       ► Is included in Federal Reserve Act in 1913

       ► Is relatively new

       ► Every central bank was founded upon

       ► Became quite popular in the early 1900's

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Question No: 35    ( 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

       ► Fiscal and monetary policy never conflict

       ► Monetary policy ultimately controls fiscal policy

       ► Fiscal policy ultimately controls monetary policy

   

Question No: 36    ( Marks: 1 )    - Please choose one

 Which of the following is the component of monetary base?

       ► Currency in the hands of the public

       ► Reserves of the banking system

       ► Vault cash plus deposits at the central bank

       ► All of the given options

   

Question No: 37    ( Marks: 1 )    - Please choose one

 In the long run, if we ignore changes in velocity then which of the following statement is true?

       ► Inflation will equal money growth less the growth in potential output

       ► Inflation will equal the rate of money growth

       ► Inflation will be zero

       ► Inflation will equal money growth plus the growth in potential output

   

Question No: 38    ( Marks: 1 )    - Please choose one

 Complete crowding-out will occur if:

       ► The money supply rises when Government purchases increases

       ► An increase in Government purchases does not change Consumption

       ► Taxes rise when Government purchases increases

       ► An increase in Government purchases causes an equal fall in Consumption, Investment, and Net Exports

   

Question No: 39    ( Marks: 1 )    - Please choose one

 An increase in the money supply will do all the following except: 

       ► Increase real GDP in the short-run

       ► Increase Price level in the long-run

       ► Increase  Price level in the short-run

       ► Increase real GDP in the long-run

   

Question No: 40    ( Marks: 1 )    - Please choose one

 An increase in capital stock, which shifts long-run supply out, will:

       ► Lower prices and will not change output

       ► Increase prices and will not change output

       ► Lower prices and will increase output

       ► Increase prices as well as output

   

Question No: 41    ( Marks: 1 )    - Please choose one

 Components of M₁ DO NOT include which one of the following?

       ► Currency in the hands of public

       ► Demand deposits

       ► Small denominations time deposit

       ► Checkable deposits

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Question No: 42    ( Marks: 1 )    - Please choose one

 Which one of the following is the unique problem that banks face?

       ► They hold illiquid assets to meet liquid liabilities

       ► They hold liquid assets to meet illiquid liabilities

       ► They hold liquid assets to meet liquid liabilities

       ► Both banks' assets and liabilities are illiquid

   

Question No: 43    ( Marks: 3 )

 Write down the categories of assets in the balance sheet of commercial banks.

   

Question No: 44    ( Marks: 3 )

 How Central banks link tools to meet their objectives?

   

Question No: 45    ( Marks: 3 )

 Name the factors that affect the transaction demand for money.

   

Question No: 46    ( Marks: 5 )

 "Principal function of Commercial banks is to receive demand deposits and to make short-term loans".Discuss

   

Question No: 47    ( Marks: 5 )

 Give brief explanation of the following.

What is reserve requiremnet?

How is it controlled?

What is its impact on economy?

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Question No: 48    ( Marks: 10 )

 a) If people suddenly lost faith in the banking system, what would happen to the demand for money?  What impact would their loss of confidence have on inflation?

b) Why is inflation higher than money growth in high inflation countries and lower than money growth in low inflation countries?  

   

Question No: 49    ( Marks: 10 )

 Discuss the force of real interest rate on:

I.  Monetary policy

II.                       Aggregate demand

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