Question 1

Which of the following best describes adverse selection in the context of banking?

Accepted Answer

It is the problem that arises when those most likely to default are the ones most likely to seek loans.

Question 2

Suppose a stock pays no dividends and is expected to grow at a constant rate $$g. If $$the required return is $$r$$, what is the formula for the price of the stock according to the Gordon growth model?

Accepted Answer

$$P = \frac{D_1$}{r-g}$$

Question 3

A bank has assets in 2-year bonds worth $$1,000$$ and liabilities in 2-year bonds worth $$800. $$What is the bank's gap?

Accepted Answer

$$200$$

Question 4

Which of the following is NOT a function of the Federal Reserve Bank?

Accepted Answer

Providing loans to private corporations

Question 5

If the expected return on a stock is $$10\%$$ and the risk-free rate is $$2\%$$, what is the risk premium?

Accepted Answer

$$8\%$$

Question 6

Which of the following best explains why banks engage in gap analysis?

Accepted Answer

To measure the difference between interest-sensitive assets and liabilities, helping manage interest rate risk.

Question 7

A bank faces a sudden increase in loan defaults due to an economic downturn. Which concept best describes the bank's response of tightening lending standards?

Accepted Answer

Credit rationing

Question 8

If a bond has a face value of $$1,000$$, a coupon rate of $$5\%$$, and sells for $$950$$, what is the current yield?

Accepted Answer

$$\frac{50}{950} = 5.26\%$$

Question 9

Which of the following is an example of asymmetric information in financial markets?

Accepted Answer

Borrowers know more about their ability to repay than lenders do.

Question 10

The Federal Open Market Committee (FOMC) primarily influences which of the following?

Accepted Answer

Monetary policy

Question 11

If the price of a stock is $$P$$, the expected dividend is $$D_1$$, and the required return is $$r$$, what is the expected capital gain rate?

Accepted Answer

$$\frac{P_1$ - P}{P}$$

Question 12

Which of the following would most likely increase a bank's liquidity risk?

Accepted Answer

A sudden withdrawal of large deposits by customers.

Question 13

A bank's balance sheet shows $$500 in $$assets and $$400 in $$liabilities. What is the bank's equity?

Accepted Answer

$$100$$

Question 14

Which of the following is a tool used by the Federal Reserve to conduct monetary policy?

Accepted Answer

Setting the federal funds rate

Question 15

If a bank wants to hedge against interest rate risk, which of the following strategies is most appropriate?

Accepted Answer

Match the maturities of its assets and liabilities.

Question 16

Which of the following best describes the role of the lender of last resort?

Accepted Answer

Provides emergency funding to banks facing liquidity crises.

Question 17

If the supply curve for loans shifts to the left, what is the likely effect on the equilibrium interest rate?

Accepted Answer

It will increase.

Question 18

Which of the following is a consequence of moral hazard in banking?

Accepted Answer

Banks may take on excessive risk, expecting to be bailed out if losses occur.

Question 19

A bank calculates its Return on Assets (ROA) as $$\frac{	ext{Net Income}}{	ext{Total Assets}}. If $$net income is $$20,000$$ and total assets are $$500,000$$, what is the ROA?

Accepted Answer

$$0.04 or$$ $$4\%$$

Question 20

Which of the following best describes the concept of expected return on equity?

Accepted Answer

The anticipated profit as a percentage of shareholders' equity.

Financial System, Banking, and Credit Risk: Exam 3 Study Guide (Macroeconomics)

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