chapter 2

1) Financial markets improve economic welfare because A) they channel funds from investors to savers.B) they allow consumers to time their purchase better.C) they weed out inefficient firms.D) eliminate the need for indirect finance. B
2) The principal lender-savers are A) governments.B) businesses.C) households.D) foreigners. C
7) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is A) $400. B) $201. C) $200. D) $199. B
8) Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock.B) People buy shares in a mutual fund.C) A pension fund manager buys a short-term corporate security in the secondary market.D) An insurance company buys shares of common stock in the over-the-counter markets. A
9) Which of the following can be described as involving direct finance? A) A corporation takes out loans from a bank.B) People buy shares in a mutual fund.C) A corporation buys a short-term corporate security in a secondary market.D) People buy shares of common stock in the primary markets. D
10) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor.B) A corporation buys a share of common stock issued by another corporation in the primary market.C) You buy a U.S. Treasury bill from the U.S. Treasury.D) You make a deposit at a bank. D
11) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor.B) You buy shares in a mutual fund.C) You buy a U.S. Treasury bill from the U.S. Treasury.D) A corporation buys a short-term security issued by another corporation in the primary market. B
1) Which of the following statements about the characteristics of debt and equity is false? A) They can both be long-term financial instruments.B) They can both be short-term financial instruments.C) They both involve a claim on the issuerʹs income.D) They both enable a corporation to raise funds. B
6) Equity holders are a corporationʹs ________. That means the corporation must pay all of its debt holders before it pays its equity holders.A) debtorsB) brokersC) residual claimantsD) underwriters C
7) An important financial institution that assists in the initial sale of securities in the primary market is theA) investment bank.B) commercial bank.C) stock exchange.D) brokerage house. A
8) When an investment bank ________ securities, it guarantees a price for a corporationʹs securities and then sells them to the public.A) underwritesB) undertakesC) overwritesD) overtakes A
9) A corporation acquires new funds only when its securities are sold in the A) primary market by an investment bank.B) primary market by a stock exchange broker.C) secondary market by a securities dealer.D) secondary market by a commercial bank. A
10) Secondary markets make financial instruments more A) solid.B) vapid.C) liquid.D) risky. C
11) Forty or so dealers establish a ʺmarketʺ in these securities by standing ready to buy and sell them.A) Secondary stocks B) Surplus stocksC) U.S. government bondsD) Common stocks C
12) Which of the following statements about financial markets and securities is true?A) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange.B) As a corporation gets a share of the brokerʹs commission, a corporation acquires new funds whenever its securities are sold.C) Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid.D) Because of their short-terms to maturity, the prices of money market instruments tend to fluctuate wildly. A
1) U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity.A) premiumB) collateralC) defaultD) discount D
2) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper.B) a negotiable certificate of deposit.C) a municipal bond.D) federal funds. B
3) A short-term debt instrument issued by well-known corporations is called A) commercial paper.B) corporate bonds.C) municipal bonds.D) commercial mortgages. A
4) ________ are short-term loans in which Treasury bills serve as collateral.A) Repurchase agreementsB) Negotiable certificates of depositC) Federal fundsD) U.S. government agency securities A
7) Federal funds areA) funds raised by the federal government in the bond market.B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System.D) loans made by banks to each other. D
8) Which of the following instruments are traded in a money market? A) State and local government bonds.B) U.S. Treasury bills.C) Corporate bonds.D) U.S. government agency securities. B
9) Which of the following instruments is not traded in a money market? A) Residential mortgages.B) U.S. Treasury Bills.C) Negotiable bank certificates of deposit.D) Commercial paper. A
10) Equity and debt instruments with maturities greater than one year are called ________ market instruments.A) capital B) moneyC) federalD) benchmark A
11) Which of the following is a long-term financial instrument? A) A negotiable certificate of deposit.B) A repurchase agreement.C) A U.S. Treasury bond.D) A U.S. Treasury bill. C
12) Which of the following instruments are traded in a capital market? A) U.S. Government agency securities.B) Negotiable bank CDs.C) Repurchase agreements.D) U.S. Treasury bills. A
13) Which of the following instruments are traded in a capital market? A) Corporate bonds.B) U.S. Treasury bills.C) Negotiable bank CDs.D) Repurchase agreements. A
14) Which of the following are not traded in a capital market? A) U.S. government agency securities.B) State and local government bonds.C) Repurchase agreements.D) Corporate bonds. C
1) The process of indirect finance using financial intermediaries is called A) direct lending.B) financial intermediation.C) resource allocation.D) financial liquidation. B
2) In the United States, loans from ________ are far ________ important for corporate finance than are securities markets.A) government agencies; moreB) government agencies; lessC) financial intermediaries; moreD) financial intermediaries; less C
4) An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets.B) providing depositors with a variety of savings certificates.C) spreading the cost of borrowed funds over many customers.D) spreading the cost of writing a standardized contract over many borrowers. D
5) Financial intermediaries provide customers with liquidity services. Liquidity services A) make it easier for customers to conduct transactions.B) allow customers to have a cup of coffee while waiting in the lobby.C) are a result of the asymmetric information problem.D) are another term for asset transformation. A
6) The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as A) risk sharing.B) risk aversion.C) risk neutrality.D) risk selling. A
7) The process of asset transformation refers to the conversion of A) safer assets into risky assets.B) safer assets into safer liabilities.C) risky assets into safer assets.D) risky assets into risky liabilities. C
8) Risk sharing is profitable for financial institutions due to A) low transactions costs.B) asymmetric information.C) adverse selection.D) moral hazard. A
9) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.A) adverse selection; moral hazardB) moral hazard; adverse selectionC) costly state verification; free-ridingD) free-riding; costly state verification A
10) Adverse selection is a problem associated with equity and debt contracts arising fromA) the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities.B) the lenderʹs inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.C) the borrowerʹs lack of incentive to seek a loan for highly risky investments.D) the borrowerʹs lack of good options for obtaining funds. A
6) The primary liabilities of a commercial bank are A) bonds.B) mortgages.C) deposits.D) commercial paper. C
7) ________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.A) InvestmentB) Contractual savingsC) ThriftD) Depository B
8) The primary assets of a pension fund are A) money market instruments.B) corporate bonds and stock.C) consumer and business loans.D) mortgages. B
9) Which of the following are investment intermediaries?A) Life insurance companiesB) Mutual fundsC) Pension fundsD) State and local government retirement funds B
10) ________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.A) Mutual fundsB) Investment banksC) Finance companiesD) Credit unions A
11) An important feature of money market mutual fund shares is A) deposit insurance.B) the ability to write checks against shareholdings.C) the ability to borrow against shareholdings.D) claims on shares of corporate stock. B
1) Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets.A) adverse selection; moral hazardB) adverse selection; risk sharingC) moral hazard; transactions costsD) adverse selection; economies of scale A
2) Government regulations to reduce the possibility of financial panic include all of the following exceptA) transactions costs.B) restrictions on assets and activities.C) disclosure.D) deposit insurance. A
6) Which of the following do not provide charters?A) The Office of the Comptroller of the CurrencyB) The Federal Reserve SystemC) The National Credit Union Administration D) State banking and insurance commissions B
7) In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds.B) making real estate loans.C) making personal loans.D) owning common stock. D
8) Savings and loan associations are regulated by the A) Federal Reserve System.B) Securities and Exchange Commission.C) Office of the Comptroller of the Currency.D) Office of Thrift Supervision. D
9) The regulatory agency that sets reserve requirements for all banks is A) the Federal Reserve System.B) the Federal Deposit Insurance Corporation.C) the Office of Thrift Supervision.D) the Securities and Exchange Commission. A
10) Asymmetric information is a universal problem. This would suggest that financial regulations A) in industrial countries are an unqualified failure.B) differ significantly around the world.C) in industrialized nations are similar.D) are unnecessary. C

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