True/False
Indicate whether the
statement is true or false.
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1.
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One assumption of the efficient markets hypothesis is that markets are so
unpredictable they will never truly clear.
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2.
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Deregulation refers to the rules placed on banks to reduce the risks involved in
lending.
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3.
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A characteristic of efficient markets is that market prices change
instantaneously when new information comes to light.
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4.
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The fair value of a share reflects the expected future stream of
dividends.
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5.
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The sub-prime market refers to lending to individuals with strong credit ratings
who are classed as low-risk.
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6.
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Asset bubbles can arise because markets ignore fundamentals and base decisions
on future expectations of themselves and others.
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7.
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Securitization of assets became more popular because it enabled banks to
generate additional reserve assets on its books and thus allowed them to expand lending.
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8.
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A credit rating of CCC represents a less risky asset than one rated at A
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9.
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The process of splitting assets on a bank’s balance sheet to allocate
reserves is called tranching.
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10.
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The use of mathematics can help to completely eliminate risk from
investment.
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11.
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Collateralised debt obligations rely on a stream if income being received from
payments of the asset on which the bond is based.
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12.
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Calculation of default correlations were not based on data covering a sufficient
spread of varying economic conditions which limited their value.
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13.
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Toxic debt refers to the stock of junk bonds held by banks and other financial
institutions which are used to leverage further lending.
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14.
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The financial instability hypothesis makes a distinction between the working of
normal markets and financial markets.
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15.
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The opportunity cost of a recession is the total sum of money that the
government has to spend on additional benefits for those who become unemployed.
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16.
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In a financial crisis, central banks will tighten monetary policy to prevent the
crisis getting out of control.
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17.
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Credit markets froze because interest rates were so low it was not worth banks
lending to each other.
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18.
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Moral hazard refers to the situation where decision-makers are isolated from the
consequences of their decisions and as a result they may behave in a way that is undesirable or
detrimental to others.
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19.
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The credit crunch occurred because Libor fell too low to make it worthwhile for
banks to lend to each other.
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20.
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Short selling involves traders betting on price changes in a limited range of
stocks related to a particular industry sector.
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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21.
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A Tobin tax is levied with the primary aim of:
a. | taxing bankers’ bonuses | b. | reducing short-term
speculation | c. | raising long-term funds for the government | d. | providing an
incentive for bankers to become risk seeking |
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22.
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The main purpose of financial regulation is to:
a. | penalize risk averse fund managers in financial institutions | b. | ensure monetary
policy is carried out in accordance with the Taylor Rule | c. | create efficiency
and equity in financial markets | d. | monitor the remuneration packages of senior
banking officials |
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23.
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Short selling is most likely to be a means to:
a. | insure against the likelihood of an increase in default rates of junk
bonds | b. | hedge against short positions taken by bond traders | c. | generate guaranteed
returns in a bull market | d. | demonstrate risk seeking trading
strategies | e. | offset losses that may be made on long positions |
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24.
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Asset price bubbles occur because:
a. | of a global imbalance in assets | b. | the supply of assets falls at a faster rate
than the demand thus creating a shortage | c. | expectations of price movements are factored in
as a result of the rise in global asset levels | d. | asset traders become more risk averse over
time | e. | regulators take insufficient notice of the supply and demand of global
assets |
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25.
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During a severe downturn in the economy, a central bank would be most likely
to:
a. | increase its base lending rates | b. | cut interest rates and increase liquidity in
the markets | c. | instruct markets to cut back lending to reduce inflation | d. | manage its assets so
that the exchange rate falls |
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26.
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The targeting of the sub-prime market for loans caused:
a. | the supply of housing to shift to the left in anticipation of a rise in house
prices | b. | interest rates to fall | c. | those with high credit ratings to find it
harder to access loans | d. | banks to be prepared to make riskier
loans | e. | a slump in demand in the buy to rent sector |
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27.
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In the US the Fed maintained low interest rates for much of the noughties. This
was because it:
a. | was concerned that inflationary pressures were rising throughout the
period | b. | it wanted to encourage banks to build up capital reserves | c. | wanted to maintain
economic confidence in the wake of exogenous shocks | d. | realized that dot.com businesses needed support
to become established |
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28.
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The securitization of assets relies on:
a. | banks building up their reserve assets | b. | the backing assets generating a stream of
income over time | c. | the present value of income streams rising over time | d. | real interest rates
continuing to be negative for at least a five-year period |
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29.
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The existence of moral hazard means that:
a. | key banks are protected from failure because they are too big to
fail | b. | bankers have a duty to conduct their activities in an ethical way | c. | risk seeking
behaviour may be encouraged | d. | the risks of trading in the bond market are
perceived as too high |
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30.
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The efficient markets hypothesis states that:
a. | information is more likely to be asymmetric in financial markets | b. | markets are highly
efficient and so are predictable over time | c. | buyers and sellers in financial markets always
have perfect information | d. | asset prices will tend to rise over time to
reflect their scarcity | e. | the price of financial assets reflects all
generally available information. |
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