Revision of Unit 1

Financial Institutions & Services

Offshore Banking & Risk Management

Financial Markets

Regulation

Money

Efficient Market Hypothesis

Wire Transfer Codes & Investor Attitude

Risk & Investment

Portfolio Management

Behavioral Finance and taxation

Any Area 1

Any Area 2

100

financial institutions that protect individuals and corporations from adverse events

insurance companies

100

__________is the process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making.

Risk management

100

What are the six different types of Financial Markets?

Name at least 3

primary

secondary

money

capital

foreign exchange

derivative

100

The Basel Committee on Banking Supervision was established by

the central bank governors of the G-10 countries

100

Even economists have no single, precise definition of money because

A) money supply statistics are a state secret.

B) the Federal Reserve does not employ or report different measures of the money supply.

C) the "moneyness" or liquidity of an asset is a matter of degree.

D) economists find disagreement interesting and refuse to agree for ideological reasons.

C) the "moneyness" or liquidity of an asset is a matter of degree.

100

The theory of rational expectations, when applied to financial markets, is known as

A) monetarism.

B) the efficient markets hypothesis.

C) the theory of strict liability.

D) the theory of impossibility.

B) the efficient markets hypothesis.

100

_________ is a banking standard for the numbering of bank accounts in Mexico. This standard is a requirement for the sending and receiving of international transfers since June 1, 2004. The account code has 18 digits.

CABLE (Clave Bancaria Estandarizada )

100

The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.

A) present value

B) future value

C) interest

D) deflation

A) present value

100

what is an efficient portfolio?

those portfolios that offer the highest expected return for a given level of risk or offer the lowest risk for a given expected return

100

______ is tax on the income of individual

income tax

100

Moral Hazard is?

(After the transaction) The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

100

The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity demanded of bonds, everything else equal.

A) downward; inverse

B) downward; direct

C) upward; inverse

D) upward; direct

A) downward; inverse

200

Money market mutual funds

A) function as interest-earning checking accounts.
B) are legally deposits.
C) are subject to reserve requirements.
D) have an interest-rate ceiling.

A) function as interest-earning checking accounts.

200

This is where the depositor and the bank are located in the same country.

onshore banking

200

--------- markets are where the initial offering or origination of debt and equity securities takes place.

a. Money

b. Capital

c. Primary

d. Secondary

c. Primary

200

The regulatory agency that sets reserve requirements for all banks is

A) the Federal Reserve System.

B) the Federal Deposit Insurance Corporation.

C) the Office of Thrift Supervision.

D) the Securities and Exchange Commission.

A) the Federal Reserve System.

200

Currency includes

A) paper money and coins.

B) paper money, coins, and checks.

C) paper money and checks.

D) paper money, coins, checks, and savings deposits.

A) paper money and coins.

200

In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus

A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

200

List TWO types of investors

informed

uninformed

institutional

200

Two risky assets can be combined to lower overall risk. This principle is commonly referred to as

a. blending

b. asset allocation

c. diversification

d. portfolio segmentation

e. none of the above

c. diversification

200

How do calculate the market premium?

Expected return of the market less the risk free rate.

200

Define Jurisdiction as it relates to taxation.

The right of a government to levy tax on a specific person or organization.

200

Financial markets promote economic efficiency by

A) channeling funds from investors to savers.

B) creating inflation.

C) channeling funds from savers to investors.

D) reducing investment.

A) channeling funds from investors to savers.

200

When yield curves are steeply upward sloping

A) long-term interest rates are above short-term interest rates.

B) short-term interest rates are above long-term interest rates.

C) short-term interest rates are about the same as long-term interest rates.

D) medium-term interest rates are above both short-term and long-term interest rates.

A) long-term interest rates are above short-term interest rates.

300

Which of the following is NOT a financial institution?

A) a life insurance company

B) a pension fund

C) a credit union

D) a business college

300

This is where the depositor is located outside of the country that the bank is domiciled. It provides various legal and financial advantages for the depositors.

Offshore bank

300

When tax revenues are greater than government expenditures, the government has a budget

A) crisis.

B) deficit.

C) surplus.

D) revision.

C) surplus.

300

5) Government regulations require publicly traded firms to provide information, reducing

A) transactions costs.

B) the need for diversification.

C) the adverse selection problem.

D) economies of scale.

C) the adverse selection problem.

300

________ is a flow of earnings per unit of time.

A) Income

B) Money

C) Wealth

D) Currency

A) Income

300

The small-firm effect refers to the

A) negative returns earned by small firms.

B) returns equal to large firms earned by small firms.

C) abnormally high returns earned by small firms.

D) low returns after adjusting for risk earned by small firms.

C) abnormally high returns earned by small firms.

300

_______ is an attribute of an investor that is always willing to take on more risk for higher rewards.

Risk Loving (tolerant)

300

A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio.

A) alpha

B) beta

C) CAPM

D) APT

B) beta

300

If you believe in the _________ form of the EMH, you believe that stock prices reflect all available information, including information that is available only to insiders

Strong

300

What is the OECD and what is its mission?

The Organisation for Economic Cooperation and Development (OECD) state that their mission is to promote policies that will improve the economic and social well-being of people around the world.

300

During a recession, output declines result in

A) lower unemployment in the economy.

B) higher unemployment in the economy.

C) no impact on the unemployment in the economy.

D) higher wages for the workers.

B) higher unemployment in the economy.

300

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.

A) demand for; rise

B) demand for; fall

C) supply of; fall

D) supply of; rise

C) supply of; fall

400

A financial institution owned by investors that focuses on business customers, providing bank accounts along with specialized services such as foreign exchange, investment services, and capital loans; some also provide limited customer-oriented services, such as personal checking and savings accounts.

This Is?

commercial bank

400

How does the banking industry in offshore centres support the trust and fiduciary sector?

By providing a range of services, including the taking of deposits

400

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?

A) risk

B) expected returns

C) wealth

D) liquidity

C) wealth

400

The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the

A) central bank.

B) commercial bank.

C) bank of settlement.

D) monetary fund.

A) central bank.

400

Money is defined as

A) bills of exchange.

B) anything that is generally accepted in payment for goods and services or in the repayment of debt.

C) a risk-free repository of spending power.

D) the unrecognized liability of governments.

B) anything that is generally accepted in payment for goods and services or in the repayment of debt.

400

If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement?

A) A stock that has done poorly in the past is more likely to do well in the future.

B) One investment is as good as any other because the securities' prices are correct.

C) A security's price reflects all available information about the intrinsic value of the security.

D) Security prices can be used by managers to assess their cost of capital accurately.

A) A stock that has done poorly in the past is more likely to do well in the future.

400

I am offered a bet in which I pay $10 to predict whether a coin toss gives heads or tails. If I predict correctly I get $25 and, if I don't, I get nothing. If I am risk averse I will never take this bet.

TRUE OR FALSE

FALSE

400

The interest rate that equates the present value of payments received from a debt instrument with its value today is the

A) simple interest rate.

B) current yield.

C) yield to maturity.

D) real interest rate.

C) yield to maturity.

400

This is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions and balancing risk against performance.

Portfolio Management

400

_________ is lawful permanent resident in a territory.

Resident (domicile)

400

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as

A) barter.

B) redistribution.

C) financial intermediation.

D) taxation.

C) financial intermediation.

400

An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.

A) increases

B) decreases

C) has no effect on

D) erases

A) increases

500

depository institutions whose major assets are loans and major liabilities are deposits. loans are broader in range

commercial banks

500

Identify atleast TWO transactions that are carried out by offshore banks

1. eurocurrency loans and deposits

2. underwriting, trading in different

securities for investment purposes

3. risk and wealth management

4. private banking

5. regulation and money production

6. risk sharing and asset transformation

500

The New York Stock Exchange is an example of which of the six parts of the financial system?

A. Government regulatory agencies
B. Financial markets
C. Financial instruments
D. Central banks

B. Financial markets

500

What does The Basel Committee on Banking Supervision do?

It is the primary global standard-setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.

500

Money ________ transaction costs, allowing people to specialize in what they do best.

A) increases

B) reduces

C) enhances

D) eliminates

B) reduces

500

According to the efficient markets hypothesis, the current price of a financial security

A) is the discounted net present value of future interest payments.

B) is determined by the lowest successful bidder.

C) fully reflects all available relevant information.

D) is a result of none of the above.

C) fully reflects all available relevant information.

500

__________ is a unique, 9 digit identifying transit number assigned to each bank.

(American Bankers’ Association National Numeric System)

ABA

500

Beta measures?

Beta measure the systematic risk of the market.

500

Which statement is not true regarding the capital market line (CML)?

A. The CML is the line from the risk-free rate through the market portfolio.

B. The CML is the best attainable capital allocation line.

C. The CML is also called the security market line.

D. The CML always has a positive slope.

E. The risk measure for the CML is standard deviation.

C. The CML is also called the security market line.

Both the capital market line and the security market line depict risk/return relationships. However, the risk measure for the CML is standard deviation and the risk measure for the SML is beta (thus the CML is not also called the security market line; the other statements are true).

500

________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

A) Behavioral finance

B) Strategical finance

C) Methodical finance

D) Procedural finance

A) Behavioral finance

500

Adverse selection is?

A situation where sellers have information that buyers don't (or vice versa) about some aspect of product quality. It occurs before the transaction.

500

In the figure above, a factor that could cause the supply of bonds to shift to the right is

A) a decrease in government budget deficits.

B) a decrease in expected inflation.

C) a recession.

D) a business cycle expansion.

600

_____________ is a promise of future payment issued by a firm and guaranteed by a bank that is used to finance international trade with typical maturities ranging from one to six months.

a. A negotiable certificate of deposit (NCD)

b. A repurchase agreement

c. Commercial paper

d. A banker's acceptance

e. none of the above

d. A banker's acceptance

600

___________ are islands or microstates that offer financial services that are typically confidential and tax-exempt. As part of a global financial system, they have developed a unique niche, offering their services to individual and corporate clients for set fees. The Bahamas and the Cayman Islands are leaders in this sector.

Offshore banking

600

What is a financial Market?

The arena through which funds flow

600

How do regulators help to ensure the soundness of financial intermediaries?

Regulators restrict who can set up a financial intermediary, conduct regular examinations, restrict assets, and provide insurance to help ensure the soundness of financial intermediaries.

600

The total collection of pieces of property that serve to store value is a person's

A) wealth.

B) income.

C) money.

D) credit.

A) wealth.

600

Evidence against market efficiency includes

A) failure of technical analysis to outperform the market.

B) the random walk behavior of stock prices.

C) the inability of mutual fund managers to consistently beat the market.

D) the January effect.

C) the inability of mutual fund managers to consistently beat the market.

600

An investor's degree of risk aversion will determine his or her

optimal mix of the risk-free asset and risky asset

600

According to the Capital Asset Pricing Model (CAPM), a security with a

A. positive alpha is considered overpriced.

B. zero alpha is considered to be a good buy.

C. negative alpha is considered to be a good buy.

D. positive alpha is considered to be underpriced.

D. positive alpha is considered to be underpriced.

A security with a positive alpha is one that is expected to yield an abnormal positive rate of return, based on the perceived risk of the security, and thus is underpriced.

600

______is the assertion that stock prices already reflect all information contained on the history of past trading

weak-form EMH

600

The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. They work with governments to understand what drives economic, social and environmental change and measure productivity and global flows of trade and investment.

TRUE OR FALSE

TRUE

600

When money prices are used to facilitate comparisons of value, money is said to function as a

A) store of value.

B) medium of exchange.

C) unit of account.

D) payments-system ruler.

C) unit of account.

600

List atleast THREE measure of risk in investment

Capital Asset Pricing Model

Present Discounted Value

Standard Deviation Value at Risk

Measured Market Risk

Alpha

Beta

700

A financial institution that provides many of the same services as banks and S & L's, but owned by its members and run on a nonprofit basis.

This is?

credit union

700

If an investor does not diversify their portfolio and instead puts all of their money in one stock, the appropriate measure of security risk for that investor is the

stock's standard deviation

700

______ markets are where debt securities with maturities of one year or less are issued and traded.

a. Money

b. Capital

c. Primary

d. Secondary

a. Money

700

The agency that restricts insider trading is the

A) Federal Reserve System.

B) Securities and Exchange Commission.

C) Office of the Comptroller of the Currency.

D) Federal Deposit Insurance Corporation.

B) Securities and Exchange Commission.

700

For a commodity to function effectively as money it must be

A) easily standardized, making it easy to ascertain its value.

B) difficult to make change.

C) deteriorate quickly so that its supply does not become too large.

D) hard to carry around.

A) easily standardized, making it easy to ascertain its value.

700

When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called

A) the January effect.

B) mean reversion.

C) market overreaction.

D) the small-firm effect.

C) market overreaction.

700

_________ is a series of alphanumeric characters which uniquely identify an account held at a bank. It can be up to 34 characters long and contains a two-character country code, two check digits, and the basic bank account number.

IBAN (International Bank Account Number )

700

Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return

A) when it has a greater systematic risk.

B) when it has a greater risk in isolation.

C) when it has a lower systematic risk.

D) when it has a lower systematic risk and a lower risk in isolation.

A) when it has a greater systematic risk.

700

The first two steps of the portfolio management process are

1. development of a policy statement

2. analysis of the macro-economic conditions

700

Behavioral finance assumes that heuristic-driven bias and framing effects cause market prices to deviate from fundamental value

This is a ______

Inefficient markets

Heuristic

the process by which people find things out for themselves, usually by trial and error (heuristics = rule of thumb)

700

________ are the time and resources spent trying to exchange goods and services.

A) Bargaining costs

B) Transaction costs

C) Contracting costs

D) Barter costs

B) Transaction costs

700

Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.

A) rises; rises

B) rises; falls

C) falls; rises

D) falls; falls

C) falls; rises

800

A ____________ is a short-term debt instrument issued by commercial banks in denominations of $100,000 or more with typical maturities ranging from one month to one year that have an active secondary market that allows short-term investors to easily match their cash or liquidity needs when they arise.

a. negotiable certificate of deposit (NCD)

b. repurchase agreement

c. Treasury bill

d. money market security

e. none of the above

a. negotiable certificate of deposit (NCD)

800

____________ is a measure of the uncertainty of the rate of return

Risk

800

A movement along the bond demand or supply curve occurs when ________ changes.

A) bond price

B) income

C) wealth

D) expected return

A) bond price

800

The first Basel Concordat was developed because of the

(A) capital adequacy of banks

(B) off-balance sheet activities of banks

(D) division of responsibilities among national supervisory authorities

800

When we say that money is a stock variable, we mean that

A) money never loses purchasing power.

B) we must attach a time period to the measure.

C) it is sold in the equity market.

D) the quantity of money is measured at a given point in time.

800

If the optimal forecast of the return on a security exceeds the equilibrium return, then

A) the market is inefficient.

B) no unexploited profit opportunities exist.

C) the market is in equilibrium.

D) the market is myopic.

A) the market is inefficient.

800

A method of electronic funds transfer from one person or entity to another.

wire transfer

800

An individual investors investment objectives should be expressed in terms of

A. Risk and return
B. Capital market expectations
C. Liquidity needs and time horizon
D. Tax factors and legal and regulatory constraints

A. Risk and return

800

The final step in the portfolio management process is?

monitoring and updating of the performance of the portfolio.

800

Tax levied on the disposal of an investment or asset.

Capital Gains Tax

800

Banks accept deposits from customers, often on a short-term basis and do what with those funds?

Lend to other customers

800

If future changes in stock prices are unpredictable, then we say that the stock prices follow a

A) random walk.

B) straight and narrow path.

C) meandering path.

D) generalized walk.

A) random walk.

900

The most basic functions of depository institutions are:

a. safekeeping for depositors

b. record keeping for depositors

c. efficient and economical transfer of payments

d. accepting deposits and granting loans

900

List Atleast TWO benefits of offshore banking

efficient allocation of capital

liquidity intermediation

contribution to economic activity

900

A plot of the interest rates on default-free government bonds with different terms to maturity is called

A) a risk-structure curve.

B) a default-free curve.

C) a yield curve.

D) an interest-rate curve.

C) a yield curve.

900

The reason The Basel Committee on Banking Supervision was established to____________

to promote sound bank supervisory standards worldwide - it focuses on banks and supervision of banks

900

________ money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry.

A) Electronic

B) Fiat

C) Paper

D) Commodity

900

Evidence in support of the efficient markets hypothesis includes

A) the failure of technical analysis to outperform the market.

B) the small-firm effect.

C) the January effect.

D) excessive volatility.

A) the failure of technical analysis to outperform the market.

900

Unwillingness to take on risk. An investor who is risk averse will always choose the investment with the lowest risk.

Risk Aversed

900

Which of the following statements about the characteristics of debt and equity is FALSE?

A) They can both be long-term financial instruments.

B) They can both be short-term financial instruments.

C) They both involve a claim on the issuer's income.

D) They both enable a corporation to raise funds.

B) They can both be short-term financial instruments.

900

Everything else equal, we would expect lenders to require _______ payments on a riskier loan.

A. lower

B. higher

900

What is a tax?

A payment to support the cost of government.

900

The payments system is

A) the method of conducting transactions in the economy.

B) used by union officials to set salary caps.

C) an illegal method of rewarding contracts.

D) used by your employer to determine salary increases.

A) the method of conducting transactions in the economy.

900

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market

A) it will tend to go unnoticed for some time.

B) it will be quickly eliminated.

C) financial analysts are your best source of this information.

D) all profits will be eliminated through taxation.

B) it will be quickly eliminated.

1000

Which of the following are not depository institutions?

a. The Federal Reserve

b. credit unions

c. savings banks

d. commercial banks

a. The Federal Reserve

1000

This is the process of creating and selling assets with risk characteristics that matches the needs of investors

Risk Sharing

1000

When the price of a bond decreases, all else equal, the bond demand curve

A) shifts right.

B) shifts left.

C) does not shift.

D) inverts.

C) does not shift.

1000

____________ a voluntary membership organization of insurance supervisors and regulators from more than 200 jurisdictions, constituting 97% of the world's insurance premiums. It is the international standard-setting body responsible for developing and assisting in the implementation of principles, standards and other supporting material for the supervision of the insurance sector.

International Association of Insurance Supervisors (IAIS)

1000

Monetary aggregates are

A) measures of the money supply reported by the Federal Reserve.

B) measures of the wealth of individuals.

C) never redefined since "money" never changes.

D) reported by the Treasury Department annually.

A) measures of the money supply reported by the Federal Reserve.

1000

The January effect refers to the fact that

A) most stock market crashes have occurred in January.

B) stock prices tend to fall in January.

C) stock prices have historically experienced abnormal price increases in January.

D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year.

C) stock prices have historically experienced abnormal price increases in January.

1000

_________ is an 8-character code also known as the SWIFT address and is uniquely assigned to banks.

BIC (Bank Identifier Code)

1000

In contrast to the CAPM, the APT assumes that there can be several sources of ________ that cannot be eliminated through diversification.

A) nonsystematic risk

B) systematic risk

C) credit risk

D) arbitrary risk

B) systematic risk

1000

_______________is the curve defined by the return on optimal portfolios of only risky assets at every level of risk. All points below the curve are inefficient because they offer less return at the same level of risk. It is based on the idea that it is possible to diversify away unsystematic risk.

The efficient frontier

1000

_________ is tax minimization in the planning of future events and transactions.

tax planning

1000

n the figure above, one factor NOT responsible for the decline in the demand for money is

A) a decline the price level.

B) a decline in income.

C) an increase in income.

D) a decline in the expected inflation rate.

C) an increase in income.

1000

what is diversification

the process of investing funds across several securites, wich results in reduced risk