BUS 641 Money and Banking
Content Covered: Lectures 1-3, and supporting textbook chapters.
Your answer to each question is worth 10% of your exam grade.
MIDTERM EXAM
Directions: Include a copy of the question with each of your answers. As a guideline, answer each essay question within 10-30 typed lines. If you use one or more sources of information in preparing any answer, provide an APA-style reference, and cite a reference wherever it is used. Each question is equally-weighted, and counts 10% of your exam grade. The exam is 20% of your course grade. Use the Assignment Feature to submit your exam answers to the Gradebook by the end of seminar three.
1. (a) Identify and briefly describe the three principal functions (i.e., uses) of money. (b) Provide an example of money being used in each of its three principal functions.
2. (a) Define the following aggregate measures of the money supply in terms of the types of the financial instruments they include: M1, M2, and M3. (b) Provide an example of how financial innovations since 1970 have changed the types of financial instruments included in M1 and M2. (c) What effect, if any, will the increasing use of debit cards, point-of-sale (POS) machines, and other parts of the electronic funds transfer system (EFTS) have on the future composition of M1? Briefly explain.
3. (a) Is the U.S. bond market part of the international bond market? Explain. (b) Why do U.S. firms sometimes sell bonds in the Eurobond market, rather than sell them in the U.S.? (c) Why do U.S. firms sometimes buy foreign stocks and bonds, rather than buy U.S. stocks and bonds? (d) What is the principal risk of buying or selling foreign securities, and how can this risk be reduced? (e) Would a substantial decline the Nikkei Average on the Tokyo Stock Exchange affect the Dow Jones Industrial Average on the New York Stock Exchange? Briefly explain.
4. According to monetary theory, what is the short-run effect, if any, of a decline in the money supply on each of the following economic variables: (a) real interest rate; (b) business cycle; (c) real economic growth rate; (d) unemployment rate. (e) What is the principal negative long-run economic effect of using an accommodative monetary policy to finance increasing government budget deficits?
5. Identify and explain which of the two financial assets in each group would usually pay a higher nominal interest rate: (a) U.S. Treasury bill rate vs. U.S. Treasury bond rate; (b) money market deposit account rate vs. commercial paper rate; (c) municipal bond vs. corporate bond; (d) fixed rate loan vs. flexible rate loan for loans issued in a period when nominal interests rate
are low; (e) low-default-risk bank loan vs. high-default-risk loan bank loan.
6. (a) Why might different banks charge the same borrower different nominal interest rates on the same type of loan? (b) Why do some banks offer some types of loans that are not offered by other banks? (c) Does the economic warning, “buyer beware”, apply to buying stocks and bonds and to borrowers taking out a bank loan? Briefly explain.
7. (a) State the efficient markets hypothesis(EMH). (b) According to EMH, is technical analysis, used by momentum investors useful for determining when to buy or sell particular stocks? Explain. (c) According to EMH are active stock portfolio managers, including equity mutual fund managers, likely to beat the benchmark market index for the types of stocks they’re trading? Explain. (d) Does most of the empirical evidence support EMH? Explain. (e) Does the fact that some individual stock investments have greatly outperformed others, prove that EMH isn’t a good theory – one lacking predictive validity? Explain.
8. (a) Identify one type of loan for which banks have suffered high default rates since 1980 and explain why banks underestimated the default risk on each type of loan. (b) Identify one type of loan for which banks have suffered high losses from interest rate risk and explain why banks underestimated the interest rate risk on this type of loan. (c) Provide an example of how banks have increased their risk from off-balance-sheet activities since 1980. (d) State and briefly evaluate the overall effect that banking deregulation has had on bank failure rates and the economic efficiency of banking, since 1980. (e) Since 1980, what overall effect have financial innovations had on bank failure rates and economic efficiency of the banking industry? Briefly explain.
9. (a) Define liquidity management. (b) State one way that a bank could raise cash by asset management for liquidity purposes. (c) State one way that a bank could raise cash by liability management for liquidity purposes. (d) State one reason why liability management was not an important part of liquidity management before 1960. (e) Could illiquidity problems drive a bank into insolvency? Briefly explain.
10. (a) Identify and explain four causes of the mergers and acquisitions wave since 1980 in the United States. (b) Have the mergers and acquisitions been financially beneficial for the firms involved and for the U.S. economy? Briefly discuss.