FIN 571 Module 5-8 Exam Questions and Answers Latest Update 2025 Already Passed
Module 5
Which of the following statements best describes the relationship between different money markets?
The interest rates in all money markets are determined by the money markets with the most
transactions.
The interest rates across all money markets generally move together.
The interest rates in all money markets will be exactly the same.
None of the other options are correct. - Answers The interest rates across all money markets generally
move together.
Financial institutions fund themselves in the money market that offers the most favorable terms and can
arbitrage the interest rates across markets by borrowing in the money market with the lower interest
rate and lending in the market with a higher interest rate. Therefore, the interest rates in all money
markets move together.
Module 5
True or false? Haircuts make repo transactions essentially risk-free.
True
False - Answers True
Haircuts are designed to absorb potential drops in security prices over the tenure of the repo
transactions. As such, a repo transaction is fully collateralized, and the lender can be made whole in case
the borrower fails to repurchase the security.
,Module 5
Which of the following statements about components of nominal interest rates is NOT correct?
Higher inflation expectations increase the real interest rate.
The term premium captures long run risks other than inflation.
Lower future inflation reduces the nominal interest rate.
None of the other options are incorrect. - Answers Higher inflation expectations increase the real
interest rate.
The nominal interest rate consists of the real interest rate plus expected inflation. Expected inflation
does not affect the real interest rate but only the nominal interest rate
Module 5
True or false? Treasury securities are called safe assets because investors in Treasury securities are not
exposed to any risk
True
False - Answers False
Safe assets are assets without credit risk. However, Treasury security prices are sensitive to changes in
inflation and other risk factors that are important in the longer run, such as changes in the interest rate.
Module 5
Which of the following statements about securitization is correct?
, The cashflow of loans in securitization pools is equally distributed to bond holders.
Loans in securitization pools are of low quality.
Securitization increases the total supply of credit in the economy.
None of the other options are correct. - Answers Securitization increases the total supply of credit in the
economy.
Bonds backed by pools of loans are purchased by a broad variety of investors. This increases the total
funding available to lenders and hence, securitization increases the credit supply in the economy.
Module 5
True or false? Investing in money market mutual funds is riskless.
True
False - Answers False
Investing in money market mutual funds has a small risk. Different from deposits, money market mutual
fund shares are not insured. While money market mutual funds shares are supposed to have a stable
value of $1 per share, during the 2008 financial crisis a money market mutual fund experienced losses
related to the bankruptcy of Lehman Brothers and could only repay 97 cents.
Which of the following statements about the federal funds market is true?
Any financial institution can participate in the federal funds market.
Module 5
Which of the following statements best describes the relationship between different money markets?
The interest rates in all money markets are determined by the money markets with the most
transactions.
The interest rates across all money markets generally move together.
The interest rates in all money markets will be exactly the same.
None of the other options are correct. - Answers The interest rates across all money markets generally
move together.
Financial institutions fund themselves in the money market that offers the most favorable terms and can
arbitrage the interest rates across markets by borrowing in the money market with the lower interest
rate and lending in the market with a higher interest rate. Therefore, the interest rates in all money
markets move together.
Module 5
True or false? Haircuts make repo transactions essentially risk-free.
True
False - Answers True
Haircuts are designed to absorb potential drops in security prices over the tenure of the repo
transactions. As such, a repo transaction is fully collateralized, and the lender can be made whole in case
the borrower fails to repurchase the security.
,Module 5
Which of the following statements about components of nominal interest rates is NOT correct?
Higher inflation expectations increase the real interest rate.
The term premium captures long run risks other than inflation.
Lower future inflation reduces the nominal interest rate.
None of the other options are incorrect. - Answers Higher inflation expectations increase the real
interest rate.
The nominal interest rate consists of the real interest rate plus expected inflation. Expected inflation
does not affect the real interest rate but only the nominal interest rate
Module 5
True or false? Treasury securities are called safe assets because investors in Treasury securities are not
exposed to any risk
True
False - Answers False
Safe assets are assets without credit risk. However, Treasury security prices are sensitive to changes in
inflation and other risk factors that are important in the longer run, such as changes in the interest rate.
Module 5
Which of the following statements about securitization is correct?
, The cashflow of loans in securitization pools is equally distributed to bond holders.
Loans in securitization pools are of low quality.
Securitization increases the total supply of credit in the economy.
None of the other options are correct. - Answers Securitization increases the total supply of credit in the
economy.
Bonds backed by pools of loans are purchased by a broad variety of investors. This increases the total
funding available to lenders and hence, securitization increases the credit supply in the economy.
Module 5
True or false? Investing in money market mutual funds is riskless.
True
False - Answers False
Investing in money market mutual funds has a small risk. Different from deposits, money market mutual
fund shares are not insured. While money market mutual funds shares are supposed to have a stable
value of $1 per share, during the 2008 financial crisis a money market mutual fund experienced losses
related to the bankruptcy of Lehman Brothers and could only repay 97 cents.
Which of the following statements about the federal funds market is true?
Any financial institution can participate in the federal funds market.
