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UNIVERSITY OF TORONTO

Faculty of Arts and Science

JUNE 2016 EXAMINATIONS

EC0349H1F LEC0101
Money, Banking, and Financial Markets

Duration 2 ‫־‬ hours

Aids Allowed: Non-Programmable Calculators

INSTRUCTIONS: 1. Total marks = 100.

2. Answer all questions.

3. Please p u t your name and student number below.

Name:

Student Number:

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PART 1. Multiple Choice. Total 50 marks (2 marks each)

Choose the one alternative that best completes the statement or answers the question.
1) The primary difference between the "payoff" and the "purchase and assumption" methods of 1)
handling failed banks is .
A) that the CDIC is more likely to use the "payoff" method when the bank is large and it
fears that depositor losses may spur business bankruptcies and other bank failures
B) that the CDIC guarantees all deposits when it uses the "payoff" method
C) that the CDIC guarantees all deposits when it uses the "purchase and assumption"
method
D) that the CDIC is more likely to use the purchase and assumption method for small
institutions because it will be easier to find a purchaser for them compared to large
institutions

2) Moral hazard is an important concern of insurance arrangements because the existence of 2)


insurance .
A) is a hindrance to efficient risk taking
B) provides increased incentives for risk taking
C) causes the private cost of the insured activity to increase
D) creates an adverse selection problem

3) The government safety net creates problem because risk-loving entrepreneurs might 3)
find banking an attractive industry.
A) a lemons B) a revenue
C) an adverse selection D) a moral hazard

4) The too-big‫־‬to-fail policy . 4)


A) allows small banks to take on more risk than large banks
B) reduces moral hazard problems
C) treats large depositors of small banks inequitably when compared to depositors of large
banks
D) puts large banks at a competitive disadvantage in attracting large deposits

5) Off-balance-sheet activities . 5)
A) generate fee income with no increase in risk
B) generate fee income and reduce risk
C) generate fee income but increase a bank's risk
D) increase bank risk but do not increase income

6) The chartering process is similar to potential borrowers and the restriction of risk 6)
assets by regulators is similar to in private financial markets.
A) screening; branching restrictions B) identifying; branching restrictions
C) identifying; credit rationing D) screening; restrictive covenants

7) Regulations designed to provide information to the marketplace so that investors can make 7)
informed decisions are called .
A) efficient market requirements B) disclosure requirements
C) asset restrictions D) capital requirement

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8) The share of chequable deposits in total bank liabilities has . 8)
A) remained virtually unchanged since 1960
B) expanded dramatically over time
C) expanded moderately over time
D) shrunk over time

9) Bank reserves include . 9)


A) vault cash and short-term securities
B) deposits at other banks and deposits at the Bank of Canada
C) deposits at the Bank of Canada and short-term securities
D) vault cash and deposits at the Bank of Canada

10) may antagonize customers and thus can be a very costly w a y of acquiring funds to 10)
meet an unexpected deposit outflow.
A) Selling loans B) Selling securities
C) Selling negotiable CDs D) Calling in loans

11) Net profit after taxes per dollar of assets is a basic measure of bank profitability called 11)

A) return on equity B) return on investment


C) return on capital D) return on assets

12) In the absence of regulation, banks would probably hold . 12)


A) too much capital, reducing the profitability of banks
B) too much capital, making it more difficult to obtain loans
C) too much capital, reducing the efficiency of the payments system
D) too little capital

13) If a bank has rate-sensitive assets than liabilities, a in interest rates will 13)
reduce bank profits, while a in interest rates will raise bank profits.
A) more; decline; rise B) more; rise; decline
C) fewer; decline; decline D) fewer; rise; rise

14) If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point 14)
increase in interest rates will cause profits to .
A) increase by $1.5 million B) decline by $15 million
C) decline by $1.5 million D) increase by $15 million

15) Which of the following bank assets is the most liquid? 15)
A) Consumer loans B) Cash items in process of collection
C) Reserves D) Government securities

16) For a given return on assets, the lower is bank capital, . 16)
A) the higher is the return for the owners of the bank
B) the lower is the credit risk for the owners of the bank
C) the lower is the return for the owners of the bank
D) the lower the possibility of bank failure

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17) Conditions that likely contributed to a credit crunch in 2008 include . 17)
A) falling interest rates that raised interest rate risk, causing banks to choose to hold more
capital
B) increases in reserve requirements
C) regulated hikes in bank capital requirements
D) capital shortfalls caused in part by falling real estate prices

18) Forward contracts do not suffer from the problem of . 18)


A) a lack of flexibility B) the difficulty of finding a counterparty
C) a lack of liquidity D) default risk

19) If you buy in February a bond future contract for 120 that matures on June 30 of the same year, 19)
and at the maturity date the same future sells for 110, you have a of $ .
A) profit; 10000 B) profit; 10 C) loss; 10000 D) loss; 10

20) If you sell in March a bond future contract for 115 that matures on June 30 of the same year, 20)
and at the maturity date the same future sells for 110, you have a of $ .
A) loss; 5 B) profit; 5 C) profit; 5000 D) loss; 5000

21) Futures markets have grown rapidly because futures . 21)


A) are more flexible B) are standardized
C) have higher default risk D) are illiquid

22) All other things held constant, premiums on put options will increase when the . 22)
A) term to maturity increases B) volatility of the underlying asset falls
C) term to maturity decreases D) exercise price falls

23) The risk to the entire payments system due to the inability of one financial institution to fulfill 23)
its payment obligations in a timely fashion is known as .
A) systemic risk B) moral hazard
C) credit risk D) the principal-agent problem

24) The channel/corridor system for setting interest rates . 24)


A) limits the amount banks can borrow from the central bank
B) is being phased out as a monetary policy tool
C) is not appropriate for Canadian monetary policy
D) enables the central bank to set the overnight, policy rate

25) When the overnight rate is u p to 50 basis points below the bank rate . 25)
A) the demand curve for settlement balances is horizontal
B) the supply curve of settlement balances has a positive slope
C) the demand curve for settlement balances has a negative slope
D) the demand curve for settlement balances is vertical

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PART 2. LONG ANSWER QUESTIONS. TOTAL 50 MARKS (10 marks each). Answer all questions.

List the government safety nets that are in place to prevent a financial crisis.

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2) K S * mai"items in a bank's 33364 side ofthe balance sheet? Discuss them

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3.Outline the payoff from buying a call option. In your explanation show this graphically.
(10 marks)

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4. Explain how Greece, Portugal, Italy and Ireland got into sovereign debt crisis. Include in your argument
outline some of the data from these countries that acted as warning signs. (10 marks)

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Show and explain w h a t happens to the operating b a n d w h e n the Bank of Canada
raises the overnight target rate by 25 basis points (a quarter of a percent). (10 marks).

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