Econ 2035 Ch.2 TestBank

D Every financial market has the following characteristic:A) It determines the level of interest rates.B) It allows common stock to be traded.C) It allows loans to be made.D) It channels funds from lenders-savers to borrowers-spenders.
A Financial markets have the basic function ofA) getting people with funds to lend together with people who want to borrow funds.B) assuring that the swings in the business cycle are less pronounced.C) assuring that governments need never resort to printing money.D) providing a risk-free repository of spending power.
B Financial markets improve economic welfare becauseA) 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.
D Well-functioning financial marketsA) cause inflation.B) eliminate the need for indirect finance.C) cause financial crises.D) produce an efficient allocation of capital.
C A breakdown of financial markets can result inA) financial stability.B) rapid economic growth.C) political instability.D) stable prices.
C The principal lender-savers areA) governments.B) businesses.C) households.D) foreigners.
B Which of the following can be described as direct finance?A) You take out a mortgage from your local bank.B) You borrow $2500 from a friend.C) You buy shares of common stock in the secondary market.D) You buy shares in a mutual fund.
B 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 isA) $400.B) $201.C) $200.D) $199.
D You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income isA) 25%.B) 12.5%.C) 10%.D) 5%.
A 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.
D 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 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.
B 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.
A Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.A) assets; liabilitiesB) liabilities; assetsC) negotiable; nonnegotiableD) nonnegotiable; negotiable
D With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.A) activeB) determinedC) indirectD) direct
A With direct finance, funds are channeled through the financial market from the ________ directly to the ________.A) savers, spendersB) spenders, investorsC) borrowers, saversD) investors, savers
B 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 issuer’s income.D) They both enable a corporation to raise funds.
A Which of the following statements about the characteristics of debt and equities is true?A) They can both be long-term financial instruments.B) Bond holders are residual claimants.C) The income from bonds is typically more variable than that from equities.D) Bonds pay dividends.
D Which of the following statements about financial markets and securities is true?A) A bond is a long-term security that promises to make periodic payments called dividends to the firm’s residual claimants.B) A debt instrument is intermediate term if its maturity is less than one year.C) A debt instrument is intermediate term if its maturity is ten years or longer.D) The maturity of a debt instrument is the number of years (term) to that instrument’s expiration date.
B Which of the following is an example of an intermediate-term debt?A) A thirty-year mortgage.B) A sixty-month car loan.C) A six month loan from a finance company.D) A Treasury bond.
A If the maturity of a debt instrument is less than one year, the debt is calledA) short-term.B) intermediate-term.C) long-term.D) prima-term.
D Long-term debt has a maturity that isA) between one and ten years.B) less than a year.C) between five and ten years.D) ten years or longer.
D When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.A) bondsB) billsC) notesD) stock
C Equity holders are a corporation’s ________. That means the corporation must pay all of its debt holders before it pays its equity holders.A) debtorsB) brokersC) residual claimantsD) underwriters
C Which of the following benefit directly from any increase in the corporation’s profitability?A) a bond holderB) a commercial paper holderC) a shareholderD) a T-bill holder
B A financial market in which previously issued securities can be resold is called a ________ market.A) primaryB) secondaryC) tertiaryD) used securities
A 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 When an investment bank ________ securities, it guarantees a price for a corporation’s securities and then sells them to the public.A) underwritesB) undertakesC) overwritesD) overtakes
D Which of the following is not a secondary market?A) foreign exchange marketB) futures marketC) options marketD) IPO market
C ________ work in the secondary markets matching buyers with sellers of securities.A) DealersB) UnderwritersC) BrokersD) Claimants
A A corporation acquires new funds only when its securities are sold in theA) 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.
B A corporation acquires new funds only when its securities are sold in theA) secondary market by an investment bank.B) primary market by an investment bank.C) secondary market by a stock exchange broker.D) secondary market by a commercial bank.
A An important function of secondary markets is toA) make it easier to sell financial instruments to raise funds.B) raise funds for corporations through the sale of securities.C) make it easier for governments to raise taxes.D) create a market for newly constructed houses.
C Secondary markets make financial instruments moreA) solid.B) vapid.C) liquid.D) risky.
A A liquid asset isA) an asset that can easily and quickly be sold to raise cash.B) a share of an ocean resort.C) difficult to resell.D) always sold in an over-the-counter market.
A The higher a security’s price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market. A) more; primaryB) more; secondaryC) less; primaryD) less; secondary
A When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) A) exchange.B) over-the-counter market.C) common market.D) barter market.
B In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.A) exchangeB) over-the-counterC) commonD) barter
C Forty or so dealers establish a “market” in these securities by standing ready to buy and sell them.A) Secondary stocksB) Surplus stocksC) U.S. government bondsD) Common stocks
A 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 broker’s 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.
B A financial market in which only short-term debt instruments are traded is called the ________ market.A) bondB) moneyC) capitalD) stock
C Equity instruments are traded in the ________ market.A) moneyB) bondC) capitalD) commodities
A Because these securities are more liquid and generally have smaller price fluctuations, corporations and banks use the ________ securities to earn interest on temporary surplus funds.A) money market B) capital marketC) bond marketD) stock market
A Prices of money market instruments undergo the least price fluctuations because of A) the short terms to maturity for the securities.B) the heavy regulations in the industry.C) the price ceiling imposed by government regulators.D) the lack of competition in the market.
D 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
B U.S. Treasury bills are considered the safest of all money market instruments because there is almost no risk ofA) defeat.B) default.C) desertion.D) demarcation.
B 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 calledA) commercial paper.B) a negotiable certificate of deposit.C) a municipal bond.D) federal funds.
A A short-term debt instrument issued by well-known corporations is calledA) commercial paper.B) corporate bonds.C) municipal bonds.D) commercial mortgages.
A ________ 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
B Collateral is ________ the lender receives if the borrower does not pay back the loan.A) a liabilityB) an assetC) a presentD) an offering
D 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.
A The British Banker’s Association average of interbank rates for dollar deposits in the London market is called theA) Libor rate.B) federal funds rate.C) prime rate.D) Treasury Bill rate.
A Which of the following are short-term financial instruments?A) A repurchase agreementB) A share of Walt Disney Corporation stockC) A Treasury note with a maturity of four yearsD) A residential mortgage
B Which of the following instruments are traded in a money market?A) State and local government bondsB) U.S. Treasury billsC) Corporate bondsD) U.S. government agency securities
B Which of the following instruments are traded in a money market?A) Bank commercial loansB) Commercial paperC) State and local government bondsD) Residential mortgages
A Which of the following instruments is not traded in a money market?A) Residential mortgagesB) U.S. Treasury BillsC) Negotiable bank certificates of depositD) Commercial paper
C Bonds issued by state and local governments are called ________ bonds.A) corporateB) TreasuryC) municipalD) commercial
A Equity and debt instruments with maturities greater than one year are called ________ market instruments.A) capitalB) moneyC) federalD) benchmark
C Which of the following is a long-term financial instrument?A) A negotiable certificate of depositB) A repurchase agreementC) A U.S. Treasury bondD) A U.S. Treasury bill
A Which of the following instruments are traded in a capital market?A) U.S. Government agency securitiesB) Negotiable bank CDsC) Repurchase agreementsD) U.S. Treasury bills
A Which of the following instruments are traded in a capital market?A) Corporate bondsB) U.S. Treasury billsC) Negotiable bank CDsD) Repurchase agreements
C Which of the following are not traded in a capital market?A) U.S. government agency securitiesB) State and local government bondsC) Repurchase agreementsD) Corporate bonds
C The most liquid securities traded in the capital market areA) corporate bonds.B) municipal bonds.C) U.S. Treasury bonds.D) mortgage-backed securities.
C Equity of U.S. companies can be purchased byA) U.S. citizens only.B) foreign citizens only.C) U.S. citizens and foreign citizens.D) U.S. mutual funds only.
B One reason for the extraordinary growth of foreign financial markets isA) decreased trade.B) increases in the pool of savings in foreign countries.C) the recent introduction of the foreign bond.D) slower technological innovation in foreign markets.
A Bonds that are sold in a foreign country and are denominated in the country’s currency in which they are sold are known asA) foreign bonds.B) Eurobonds.C) equity bonds.D) country bonds.
B Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known asA) foreign bonds.B) Eurobonds.C) equity bonds.D) country bonds.
A If Microsoft sells a bond in London and it is denominated in dollars, the bond is aA) Eurobond.B) foreign bond.C) British bond.D) currency bond.
B U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called A) Atlantic dollars.B) Eurodollars.C) foreign dollars.D) outside dollars.
B The process of indirect finance using financial intermediaries is calledA) direct lending.B) financial intermediation.C) resource allocation.D) financial liquidation.
C 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
D The time and money spent in carrying out financial transactions are calledA) economies of scale.B) financial intermediation.C) liquidity services.D) transaction costs.
A Economies of scale enable financial institutions toA) reduce transactions costs.B) avoid the asymmetric information problem.C) avoid adverse selection problems.D) reduce moral hazard.
D An example of economies of scale in the provision of financial services isA) 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.
A 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 The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known asA) risk sharing.B) risk aversion.C) risk neutrality.D) risk selling.
C The process of asset transformation refers to the conversion ofA) safer assets into risky assets.B) safer assets into safer liabilities.C) risky assets into safer assets.D) risky assets into risky liabilities.
A Reducing risk through the purchase of assets whose returns do not always move together isA) diversification.B) intermediation.C) intervention.D) discounting.
B The concept of diversification is captured by the statementA) don’t look a gift horse in the mouth.B) don’t put all your eggs in one basket.C) it never rains, but it pours.D) make hay while the sun shines.
A Risk sharing is profitable for financial institutions due toA) low transactions costs.B) asymmetric information.C) adverse selection.D) moral hazard.
C Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A) moral selection.B) risk sharing.C) asymmetric information.D) adverse hazard
B If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem ofA) moral hazard.B) adverse selection.C) free-riding.D) costly state verification.
A 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 Adverse selection is a problem associated with equity and debt contracts arising fromA) the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities.B) the lender’s inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.C) the borrower’s lack of incentive to seek a loan for highly risky investments.D) the borrower’s lack of good options for obtaining funds.
B An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.A) adverse selectionB) moral hazardC) risk sharingD) credit risk
C Banks can lower the cost of information production by applying one information resource to many different services. This process is calledA) economies of scale.B) asset transformation.C) economies of scope.D) asymmetric information.
D Conflicts of interest are a type of ________ problem that can happen when an institution provides multiple services.A) adverse selectionB) free-ridingC) discountingD) moral hazard
C Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds fromA) government agencies.B) equities markets.C) financial intermediaries.D) bond markets.
A The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets.A) Germany; JapanB) Germany; Great BritainC) Great Britain; CanadaD) Canada; Japan
C Financial institutions that accept deposits and make loans are called ________ institutions.A) investmentB) contractual savingsC) depositoryD) underwriting
B Thrift institutions includeA) banks, mutual funds, and insurance companies.B) savings and loan associations, mutual savings banks, and credit unions.C) finance companies, mutual funds, and money market funds.D) pension funds, mutual funds, and banks.
B Which of the following is a depository institution?A) A life insurance companyB) A credit unionC) A pension fundD) A mutual fund
B Which of the following is a depository institution?A) A life insurance companyB) A mutual savings bankC) A pension fundD) A finance company
D Which of the following financial intermediaries is not a depository institution?A) A savings and loan associationB) A commercial bankC) A credit unionD) A finance company
C The primary assets of credit unions areA) municipal bonds.B) business loans.C) consumer loans.D) mortgages.
C The primary liabilities of a commercial bank areA) bonds.B) mortgages.C) deposits.D) commercial paper.
C The primary liabilities of depository institutions areA) premiums from policies.B) shares.C) deposits.D) bonds.
B ________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.A) InvestmentB) Contractual savingsC) ThriftD) Depository
A Which of the following is a contractual savings institution?A) A life insurance companyB) A credit unionC) A savings and loan associationD) A mutual fund
D Contractual savings institutions includeA) mutual savings banks.B) money market mutual funds.C) commercial banks.D) life insurance companies.
B Which of the following are not contractual savings institutions?A) Life insurance companiesB) Credit unionsC) Pension fundsD) State and local government retirement funds
C Which of the following is not a contractual savings institution?A) A life insurance companyB) A pension fundC) A savings and loan associationD) A fire and casualty insurance company
B The primary assets of a pension fund areA) money market instruments.B) corporate bonds and stock.C) consumer and business loans.D) mortgages.
B Which of the following are investment intermediaries?A) Life insurance companiesB) Mutual fundsC) Pension fundsD) State and local government retirement funds
A An investment intermediary that lends funds to consumers is A) a finance company.B) an investment bank.C) a finance fund.D) a consumer company.
C The primary assets of a finance company areA) municipal bonds.B) corporate stocks and bonds.C) consumer and business loans.D) mortgages.
A ________ 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 Money market mutual fund shares function likeA) checking accounts that pay interest.B) bonds.C) stocks.D) currency.
B An important feature of money market mutual fund shares isA) deposit insurance.B) the ability to write checks against shareholdings.C) the ability to borrow against shareholdings.D) claims on shares of corporate stock.
C The primary assets of money market mutual funds areA) stocks.B) bonds.C) money market instruments.D) deposits.
A An investment bank helps ________ issue securities.A) a corporationB) the United States governmentC) the SECD) foreign governments
A An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is calledA) underwriting.B) underhanded.C) understanding.D) undertaking.
D Which of the following is not a goal of financial regulation?A) Ensuring the soundness of the financial systemB) Reducing moral hazardC) Reducing adverse selectionD) Ensuring that investors never suffer losses
A 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
D A goal of the Securities and Exchange Commission is to reduce problems arising fromA) competition.B) banking panics.C) risk.D) asymmetric information.
A The purpose of the disclosure requirements of the Securities and Exchange Commission is toA) increase the information available to investors.B) prevent bank panics.C) improve monetary control.D) protect investors against financial losses.
A 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.
B 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 AdministrationD) State banking and insurance commissions
D A restriction on bank activities that was repealed in 1999 wasA) the prohibition of the payment of interest on checking deposits.B) restrictions on credit terms.C) minimum down payments on loans to purchase securities.D) separation of commercial banking from the securities industries.
D In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited fromA) owning municipal bonds.B) making real estate loans.C) making personal loans.D) owning common stock.
B The primary purpose of deposit insurance is toA) improve the flow of information to investors.B) prevent banking panics.C) protect bank shareholders against losses.D) protect bank employees from unemployment.
B The agency that was created to protect depositors after the banking failures of 1930-1933 is theA) Federal Reserve System.B) Federal Deposit Insurance Corporation.C) Treasury Department.D) Office of the Comptroller of the Currency.
D Savings and loan associations are regulated by theA) Federal Reserve System.B) Securities and Exchange Commission.C) Office of the Comptroller of the Currency.D) Office of Thrift Supervision.
A 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.
C Asymmetric information is a universal problem. This would suggest that financial regulationsA) in industrial countries are an unqualified failure.B) differ significantly around the world.C) in industrialized nations are similar.D) are unnecessary.

Leave a Reply

Your email address will not be published. Required fields are marked *