Master Financial Markets: Hard Practice Test

Question 1

Of the following, which is an example of credit substitution but not delegation?

Accepted Answer

Letter of credit issuer

Question 2

If the credit markets of two regions become integrated and interest rates equalize, which of the following is most likely to occur?

Accepted Answer

Capital flows from the low-rate region to the high-rate region

Question 3

A bank currently has $100 million in assets, $90 million in liabilities, and $10 million in equity. If the bank earns $1 million in net income, which action would most increase its ROE next year (assu…

Accepted Answer

Using deposits to buy back $5 million in equity

Question 4

The discount window differs from the Fed funds market in that:

Accepted Answer

The discount window involves borrowing directly from the Federal Reserve

Question 5

Which of the following helped U.S. banks overcome restrictions on interstate banking to achieve economies of scale?

Accepted Answer

Loan participations and correspondent banking

Question 6

Mobile money systems in developing countries have been particularly valuable because they:

Accepted Answer

Provide financial services to the unbanked population

Question 7

A property and casualty insurance company, compared to a life insurance company, would be more concerned with:

Accepted Answer

Maintaining highly liquid assets

Question 8

An investor who wants to trade fund shares throughout the day at market prices should choose:

Accepted Answer

An exchange-traded fund

Question 9

The pecking order theory of corporate finance suggests that firms prefer financing in which order?

Accepted Answer

Internal funds, then debt, then equity

Question 10

A money market fund manager might prefer investing in repos rather than Treasury bills because repos:

Accepted Answer

Can be customized to precise maturity needs