Insurance and Risk Management

221. In the loanable funds theory of interest determination, an increase in the productivity of capital equipment should lead to:

  1. Higher prices
  2. A reduction in interest rates
  3. A reduction in the amount of saving
  4. Higher interest rates
  5. More employment

Correct answer: (D)
Higher interest rates

222. Interest is usually paid on money market instruments:

  1. Monthly
  2. Twice a year
  3. Annually
  4. At maturity
  5. On request

Correct answer: (D)
At maturity

223. Interest rates are 7.5 per cent. A 9% corporate bond, maturing in three years time for £100 and paying annual coupons will have a price of:

  1. £83.33
  2. £833.33
  3. £103.90
  4. £120
  5. £80.50

Correct answer: (C)
£103.90

224. Investment trusts often expose investors to higher capital risk than unit trusts because:

  1. Investment trusts have higher operating costs
  2. Unit trusts hold more bonds
  3. Investment trusts are less diversified
  4. Investment trusts invest in overseas shares
  5. Investment trusts can be 'geared'

Correct answer: (E)
Investment trusts can be 'geared'

225. It is suggested in the text that the demand for money is not of great importance from the point of view of monetary policy because:

  1. Money has largely been replaced in the economy by credit and debit cards.
  2. The supply of money is endogenous.
  3. The supply of money is exogenous.
  4. The demand for money function is unstable.

Correct answer: (B)
The supply of money is endogenous.

226. Long dated government bonds tend to have higher yields than short-dated bonds because:

  1. There is a smaller market for them
  2. They are less liquid
  3. They carry higher capital risk
  4. There is less demand
  5. They carry higher income risk

Correct answer: (C)
They carry higher capital risk

227. Monetary authorities might be able to reduce inflation without causing a recession if their policies are:

  1. Unexpected
  2. Thought credible by market agents
  3. Supported by the opposition
  4. Believed by the voters
  5. Time inconsistent
  6. Consistent

Correct answer: (B)
Thought credible by market agents

228. Mutual and co-operative banks in France charge lower interest rates (than commercial banks) because:

  1. They have no shareholders
  2. They offer limited services
  3. They use cheap premises
  4. Of official regulations

Correct answer: (A)
They have no shareholders

229. My spending is a regular £2000 per month. However, I keep an average of £3000 per month in by bank account. This suggests that I am using bank deposits as both:

  1. Means of payment and store of wealth
  2. Savings and precautionary balances
  3. Idle balances
  4. Means of payment and medium of exchange
  5. Active balances and medium of exchange

Correct answer: (A)
Means of payment and store of wealth

230. Other things being equal, a high p/e ratio shows?

  1. The share is overpriced
  2. The firm operates a low dividen policy
  3. The share is underpriced
  4. Investors expect rapid earnings growth
  5. The firm earns low profits

Correct answer: (D)
Investors expect rapid earnings growth

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