Overview of the Financial System Part 1

Financial Markets and Institutions Chapter 2 Overview of the Financial System 2.1 Multiple Choice 1) Every financial market performs the following function: 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. Answer: D Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 2) Securities are ________ for the person who buys them, but ________ for the individual/firm that sells them. A) assets; liabilities B) liabilities; assets C) income; liabilities D) liabilities; expenses Answer: A Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 3) Financial markets have the basic function of A) bringing together people with funds to lend and 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) both A and B of the above. E) both B and C of the above. Answer: A Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 4) Which of the following can be described as involving direct finance? A) A corporation's stock is traded in an over-the-counter market. B) People buy shares in a mutual fund. C) A pension fund manager buys commercial paper in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets. E) None of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 1 5) Which of the following can be described as involving direct finance? A) A corporation's stock is traded in an over-the-counter market. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper from the issuing corporation. D) Both A and B of the above. E) Both B and C of the above. Answer: B Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 6) Which of the following can be described as involving indirect finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys commercial paper in a secondary market. D) All of the above. E) Only A and B of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 7) Which of the following can be described as involving indirect finance? A) A bank buys a U.S. Treasury bill from one of its depositors. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper in the primary market. D) Both A and C of the above. Answer: D Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 8) Financial markets improve economic welfare because A) they allow funds to move from those without productive investment opportunities to those who have such opportunities. B) they allow consumers to time their purchases better. C) they weed out inefficient firms. D) they do all of the above. E) they do A and B of the above. Answer: E Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 2 9) A country whose financial markets function poorly is likely to A) efficiently allocate its capital resources. B) enjoy high productivity. C) experience economic hardship and financial crises. D) increase its standard of living. Answer: C Topic: Chapter 2.1 Function of Financial Markets Question Status: Previous Edition 10) Wealth, either financial or physical, that is employed to produce more wealth is referred to as A) assets. B) the market. C) capital. D) funding. Answer: C Topic: Chapter 2.1 Function of Financial Markets Question Status: New Question 11) Which of the following are securities? A) A certificate of deposit B) A share of Texaco common stock C) A Treasury bill D) All of the above E) Only A and B of the above Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 12) Which of the following statements about the characteristics of debt and equity are true? A) They both can be long-term financial instruments. B) They both involve a claim on the issuer's income. C) They both enable a corporation to raise funds. D) All of the above. E) Only A and B of the above. Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 13) The money market is the market in which ________ are traded. A) new issues of securities B) previously issued securities C) short-term debt instruments D) long-term debt and equity instruments Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 3 14) A debt instrument is called ________ if its maturity is less than a year. A) newly issued B) intermediate-term C) short-term D) long-term Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 15) A debt instrument is called ________ if its maturity is greater than 10 years. A) perpetual B) intermediate-term C) short-term D) long-term Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 16) Long-term debt and equity instruments are traded in the ________ market. A) primary B) secondary C) capital D) money Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 17) Which of the following are primary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) None of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 18) Which of the following are secondary markets? A) The New York Stock Exchange B) The U.S. government bond market C) The over-the-counter stock market D) The options markets E) All of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 4 19) A corporation acquires new funds only when its securities are sold in the A) 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. Answer: B Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 20) Equities often make periodic payments, called ________, to their holders and are considered long-term securities. A) principal B) interest C) dividends D) payouts Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 21) Which of the following statements about financial markets and securities are true? A) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. D) All of the above are true. E) Only A and B of the above are true. Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 22) Which of the following statements about financial markets and securities are 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 long term if its maturity is ten years or longer. D) The maturity of a debt instrument is the time (term) that has elapsed since it was issued. Answer: C Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 5 23) Security ________ link buyers and sellers by buying and selling securities at stated prices, while ________ are agents of investors who match buyers with sellers of securities. A) brokers; dealers B) brokers; agents C) agents; dealers D) dealers; brokers Answer: D Topic: Chapter 2.2 Structure of Financial Markets Question Status: New Question 24) Which of the following statements about financial markets and securities are true? A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid. D) All of the above are true. E) Only A and B of the above are true. Answer: B Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 25) Which of the following markets is sometimes organized as an over-the-counter market? A) The stock market B) The bond market C) The foreign exchange market D) The federal funds market E) all of the above Answer: E Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 26) At the end of 2012, the value of debt instruments in the U.S. was around ________ trillion, and the value of equities was around ________ trillion. A) $38; $19 B) $20; $10 C) $19; $38 D) $10; $20 Answer: A Topic: Chapter 2.2 Structure of Financial Markets Question Status: Previous Edition 6 27) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: B Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 28) The DAX (Germany) and the FTSE 100 (London) are examples of A) foreign stock exchanges. B) foreign currencies. C) foreign stock price indexes. D) foreign mutual funds. Answer: C Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 29) Bonds that are sold in a foreign country and are denominated in that country's currency are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: A Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 30) The country whose banks are the most restricted in the range of assets they may hold is A) Japan. B) Canada. C) Germany. D) the United States. Answer: D Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 7 31) Foreign bonds have been an important instrument in the international capital market for centuries. In fact, a large percentage of U.S. railroads built in the nineteenth century were financed by sales of foreign bonds in A) Japan. B) Britain. C) Canada. D) Germany. Answer: B Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: New Question 32) Foreign currencies that are deposited in banks outside the home country are known as A) foreign bonds. B) Eurobond. C) Eurocurrencies. D) Eurodollars. Answer: C Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 33) U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as A) Eurodollars. B) Eurocurrencies. C) Eurobonds. D) foreign bonds. Answer: A Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: Previous Edition 34) After 2002, the ________ handle(s) a larger share of initial public offerings (IPOs) of stock than do/does the ________. A) New York Stock Exchange; London and Hong Kong stock exchanges B) London and Hong Kong stock exchanges; New York Stock Exchange C) FTSE and DAX exchanges; London and Hong Kong stock exchanges D) FTSE and DAX exchanges; New York Stock Exchange Answer: B Topic: Chapter 2.3 Internationalization of Financial Markets Question Status: New Question 8 35) Banks providing depositors with checking accounts that enable them to pay their bills easily is known as A) liquidity services. B) asset transformation. C) risk sharing. D) transaction costs. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 36) Intermediaries who are agents of investors and match buyers with sellers of securities are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above. Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 37) Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called A) investment bankers. B) traders. C) brokers. D) dealers. E) none of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 38) Financial intermediaries A) exist because there are substantial information and transaction costs in the economy. B) improve the lot of the small saver. C) are involved in the process of indirect finance. D) do all of the above. E) do only A and B of the above. Answer: D Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 9 39) The main sources of financing for businesses, in order of importance, are A) financial intermediaries, issuing bonds, issuing stocks. B) issuing bonds, issuing stocks, financial intermediaries. C) issuing stocks, issuing bonds, financial intermediaries. D) issuing stocks, financial intermediaries, issuing bonds. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 40) The presence of transaction costs in financial markets explains, in part, why A) financial intermediaries and indirect finance play such an important role in financial markets. B) equity and bond financing play such an important role in financial markets. C) corporations get more funds through equity financing than they get from financial intermediaries. D) direct financing is more important than indirect financing as a source of funds. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 41) Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of A) poorly informed consumers. B) standardization. C) economies of scale. D) their market power. Answer: C Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 42) The reduction in transaction costs per dollar of transactions as the size (scale) of transactions increases is known as A) economies of scope. B) economies of scale. C) standardization. D) market power. Answer: B Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: New Question 43) The purpose of diversification is to A) reduce the volatility of a portfolio's return. B) raise the volatility of a portfolio's return. C) reduce the average return on a portfolio. D) raise the average return on a portfolio. Answer: A Topic: Chapter 2.4 Function of Financial Intermediaries: Indirect Finance Question Status: Previous Edition 10