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DARTMOUTH COLLEGE Department of Economics Economics 26 Meir Kohn Financial Intermediaries and Markets Summer 2022 F INAL E XAMINATION : Q UESTIONS FOR P ART 1 Read DIRECTIONS and QUESTIONS carefully DIRECTIONS: This exam has two parts. Part 1 is worth 81 points and Part 2 is worth 39 points. The questions of Part 1 follow. Read each question carefully. On the answer sheet which you will find on the first page of Part 2, circle the letter corresponding to the BEST answer. Be sure to write your name on the answer sheet. 1. Of the following, which are not engaged in direct financing? a. shareholders in mutual funds. b. bondholders. c. commercial banks. d. government securities dealers. 2. Banks hold government securities: a. as a part of their required reserves. b. to enable repo borrowing. c. as an instrument of asset management. d. as an instrument of liability management. 3. Near-banks provided services to ordinary households when banks found it unprofitable to do so. Which of the following is not an explanation of how they were able to do so? a. passing on some of the costs to the customer. b. charitable support. c. lower regulatory costs. d. the need for the availability of financing to sell ‘big-ticket’ items. 4. Which of the following is not a part of the relationship between correspondent and respondent banks? a. loan participations. b. lending by the correspondent to the respondent. c. respondent deposits at the correspondent. d. provision of services, like foreign exchange transactions, by the correspondent to the respondent. 5. A difference between bank dollars and Fed dollars is that: a. only bank dollars can take the form of deposits. b. only bank dollars can be transferred by check. c. only Fed dollars can be transferred electronically. d. only bank dollars are convertible.

Economics 26 Page 2 of Part 1 Summer 2022 6. Longevity risk is the risk of outliving one's wealth. One can protect against this risk by purchasing: a. a life annuity. b. a term life policy. c. a zero-coupon bond. d. shares in a mutual fund. 7. For a pension plan to be funded, it is necessary that: a. participants make regular contributions to the plan. b. future liabilities are matched by dedicated assets. c. future liabilities are backed by the assets of the sponsor. d. retirees are guaranteed a known level of benefits. 8. The asked price of a security is considered 'fair' if it is: a. freely negotiated between buyer and seller. b. the highest price an informed buyer would pay. c. the lowest price an informed seller would accept. d. equal to the true value of the security. 9. Government securities dealers initially made a market in repos ('ran a book' in repos). They later went on to become ‘shadow bankers’. Which of the following was probably a necessary prerequisite for this development: a. a significant rise in the level of interest rates. b. a significant fall in the level of interest rates. c. a large increase in the amount of government securities outstanding. d. securities firms, previously partnerships, reorganizing as corporations. 10. The business plan of a modern mortgage bank is to a. buy mortgages originated by other lenders, with the intent of long-term investment. b. originate mortgages and sell them in the secondary market. c. provide their own insurance to eliminate the default risk of the mortgages they originate. d. service mortgages that other financial institutions originate. 11. Which of the following instruments makes it possible for otherwise unsuitable borrowers to access arm’s-length debt markets? a. commercial paper. b. mortgage-backed securities. c. preferred stock. d. repos. 12. Which of the following has been an important reason for the emergence of a money market? a. a desire to reduce dependence on long-term financing. b. a desire to provide money market mutual funds with assets. c. a desire to get around regulatory restrictions or costs. d. a desire to increase bank safety.

Economics 26 Page 3 of Part 1 Summer 2022 13. A bank standby letter of credit is best described as a promise by a bank to a. lend to an issuer of commercial paper the funds needed to pay off maturing paper if the issuer has difficulty in rolling it over. b. pay off the commercial paper if the issuer defaults. c. lend to the issuer if commercial paper rates rise above a certain level, making rolling over the paper too expensive. d. lend to an issuer of commercial paper the funds needed to pay off the maturing paper if there are problems in the commercial paper market. 14. Of the following companies, which is most likely to experience problems of corporate governance ? a. one that is highly profitable and in a mature industry. b. one in which the founding family owns a third of the shares. c. one in a highly competitive industry. d. one with a high debt to equity ratio. 15. Of the following, which is not a benefit to a company of being publicly traded? a. provides a relatively inexpensive source of funds. b. allows the owners to diversify. c. makes mergers and acquisitions easier. d. provides the owners with greater liquidity. 16. The difference between angel investing and venture capital is that: a. angel investing is relationship financing. b. angel investing is direct financing. c. angel investors finance startups. d. most angel investments are unsuccessful. 17. Credit derivatives protect lenders against ____. The main worry with them is_____. a. default risk; counter-party risk. b. default risk; replacement risk. c. market risk; counter-party risk. d. market risk; replacement risk. 18. The purpose of which of the following is not the reduction of replacement risk? a. daily settlement. b. marking to market. c. margin requirement. d. cash settlement. 19. Why would a hedger hedge with over-the-counter derivatives rather than with exchange-traded derivatives? a. easier access. b. less replacement risk. c. less basis risk. d. better liquidity.

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Economics 26 Page 4 of Part 1 Summer 2022 20. Stock exchanges are generally organized in mutual form because: a. mutual funds are among the largest traders. b. this form of organization is more conducive to efficiency. c. this protects brokers from being exploited by a monopoly. d. market-makers are engaged in a co-operative endeavor. 21. Which of the following is not true of HFTs: a. they help to integrate securities markets. b. their profits have been falling. c. they hurt information traders. d. they hurt ‘ordinary investors’ (liquidity traders). 22. Which of the following is not used by large banks as an instrument of liability management? a. purchasing federal funds from their respondent banks. b. the sale of NCDs. c. overnight eurodollars. d. interbank loans. 23. Of the following financial intermediaries, which would be least likely to face a problem of liquidity? a. A finance company. b. A pension fund. c. A large bank. d. A credit union. 24. Which of the following would a bank not do if it anticipated a rise in interest rates? a. reduce its duration gap. b. use futures to hedge its holdings of long-term treasuries. c. become a floating-rate payer on interest-rate swaps. d. sell its holdings of mortgage-backed securities. 25. Which of the following would be least likely to reduce the cost of deposit insurance to the taxpayer? a. increasing reserve requirements. b. increasing capital requirements. c. allowing full interstate banking. d. limiting the kind of assets that banks may hold.

Economics 26 Page 5 of Part 1 Summer 2022 26. Of the following, which was not an important cause of the 2008 financial crisis? a. adaptation of the financial system to capital requirements. b. reliance on credit ratings to ensure safety. c. policies intended to promote home ownership. d. deregulation of the financial system. 27. Which of the following forms of debt is subject to SEC regulation? a. syndicated loans. b. junk bonds. c. privately placed bonds. d. Eurodollar bonds.

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