Deck 2: The Financial System

Question 1

A positive net present value project is any project that will earn money in the future.

Answer 1

False

Question 2

The quantity of assets in commercial banks as a ratio to all the assets held by financial institutions in the United States is less than it was 50 years ago.

Answer 2

True

Question 3

A mortgage is an asset of a bank and a liability of a homeowner.

Answer 3

True

Question 4

If you saved to buy a car, you would be using external finance.

Question 5

A security that pays $100 after 1 year and $500 after 3 years is an example of a derivative.

Question 6

Capital refers to the short term financing needs of firms.

Question 7

GDP is the value of all final goods and services over a given period of time.

Question 8

An insurance premium is the amount paid to the insured on the expiry of the insurance contract.

Question 9

The quantity of financial assets as a percentage of GDP for the United States is less than it was 50 years ago.

Question 10

GDP is the value of all imported goods and services over a given period of time.

Question 11

GDP is the value of all intermediate and final goods over a given period of time.

Question 12

The Great Inflation took place during the 1970s.

Question 13

When a pension fund buys stock on the NYSE, it is using a secondary market.

Question 14

Assets in savings institutions have continually decreased as a fraction of financial assets in the United States over the past 50 years.

Question 15

All financial transactions involve intermediaries.

Question 16

The "too-big-to-fail" policy has not been invoked since the Great Depression.

Question 17

Total assets of commercial and savings institutions have increased over the past 50 years.

Question 18

When an investor buys stock on E-trade, she is using a primary market.

Question 19

It is easier for banks to achieve minimum efficient scale than for individuals.

Question 20

Mutual fund assets as a fraction of financial assets in the United States have increased over the past 50 years.

Question 21

Equities are ownership stakes that entitle owners to a portion of the profits.

Question 22

Bankers never make mistakes.

Question 23

The problem for lenders, that highest risk borrowers tend to be the most eager to take loans, is an example of

A) adverse selection.
B) moral hazard.
C) both of the above.
D) neither of the above.

Question 24

Hybrid instruments are part debt and part equity or convertible from one into the other.

Question 25

High Frequency Trading accounts for one-third of all U.S. trading volume.

Question 26

The problem for lenders, that a borrower has the incentive to take chances once the loan is made, is an example of

A) adverse selection.
B) moral hazard.
C) both of the above.
D) neither of the above.

Question 27

Banks might be more efficient than individual lenders due to

A) returns to scale.
B) expertise in accounting tasks.
C) expertise in advertising to borrowers.
D) all of the above.

Question 28

When a corporation forgoes paying a dividend to expand its business, it is engaging in

A) internal finance.
B) external finance.
C) both of the above.
D) neither of the above.

Question 29

When Nikki mortgages her home, she is engaged in

A) internal finance.
B) external finance.
C) both of the above.
D) neither of the above.

Question 30

Which of the following is an example of direct finance?

A) A home buyer takes a mortgage.
B) You borrow money from a friend for lunch.
C) Your parents buy life insurance.
D) All of the above.

Question 31

An acquisition occurs when two companies combine into one.

Question 32

More than 10 billion shares are traded daily.

Question 33

Electronic Communication Networks (ECNs) are not as popular today as they once were.

Question 34

People with few valuables won't want property insurance. This is an example of a(n) _____ problem for insurance companies.

A) adverse selection
B) moral hazard
C) both of the above
D) neither of the above

Question 35

Every loan involves financial intermediation.

Question 36

The terms financial securities and financial instruments can be used interchangeably.

Question 37

If you do not have a car payment on your car, your car is an asset.

Question 38

Which of the following does not involve a financial intermediary?

A) a credit card purchase
B) buying stock online
C) buying renter's insurance
D) all of the above

Question 39

The tendency of people with renter's insurance to leave the apartment door unlocked is an example of a(n) _____ problem for insurance companies.

A) adverse selection
B) moral hazard
C) both of the above
D) neither of the above

Question 40

When Google issued stock to raise money, it was engaged in

A) internal finance.
B) external finance.
C) both of the above.
D) neither of the above.

Question 41

Banks might be more efficient than individual lenders due to

A) returns to scale.
B) their access to the stock market.
C) increasing returns on capital.
D) all of the above.

Question 42

Which of the following is NOT a financial intermediary?

A) mutual fund
B) pension fund
C) insurance company
D) all of the above

Question 43

Investors in fine art must have a high tolerance for

A) low return.
B) high inflation.
C) low liquidity.
D) all of the above.

Question 44

Which of the following is a centralized market?

A) NYSE
B) CBOT
C) FTSE
D) All of the above

Question 45

Nonnegotiable shares are those that:

A) trade at a fixed price on the stock exchange.
B) cannot be issued in a primary market.
C) cannot be transferred to third parties.
D) cannot be changed to cash.

Question 46

When U.S. Steel issues commercial paper (for short term borrowing), it is accessing

A) financial intermediaries.
B) the OTC market.
C) the bond market.
D) none of the above.

Question 47

Which of the following is a financial regulator?

A) MLB
B) CIA
C) CFTC
D) All of the above

Question 48

Which of the following regularly hold stock portfolios?

A) pension funds
B) brokers
C) mutual funds
D) all of the above

Question 49

Investors in lottery tickets must have a high tolerance for high

A) return.
B) risk.
C) liquidity.
D) all of the above.

Question 50

The Great Inflation took place during the

A) 1950s.
B) 1960s.
C) 1970s.
D) 1980s.

Question 51

Which of the following is NOT a financial intermediary?

A) mutual fund
B) auction house
C) insurance company
D) all of the above

Question 52

Which of the following is NOT a financial regulator?

A) FDIC
B) FBI
C) SEC
D) All of the above

Question 53

Credit card companies are required to disclose the APR (annual percentage rate) giving a standard measure of borrowing costs. This is an example of

A) a transparency regulation.
B) ceteris paribus.
C) monetary policy.
D) all of the above.

Question 54

The primary source of funds for an insurance company is

A) loans.
B) premiums.
C) deposits.
D) none of the above.

Question 55

The value of a wheat futures contract is based on the expected price of wheat, so it is an example of a(n)

A) stock.
B) derivative.
C) option.
D) none of the above.

Question 56

Investors in collectible musical instruments must have a high tolerance for low

A) return.
B) risk.
C) liquidity.
D) none of the above.

Question 57

Joanna decides to buy a U.S. government bond instead of stock in a technology firm that has just gone public (issued stock for the first time). She is primarily concerned with

A) risk.
B) return.
C) liquidity.
D) none of the above.

Question 58

Mutual funds provide

A) diversification to small stock market investors.
B) expertise in insurance contracts.
C) home loans.
D) none of the above.

Question 59

Which of the following does NOT regulate banks?

A) SEC
B) FDIC
C) Federal Reserve
D) All of the above

Question 60

Which of the following is a decentralized market?

A) NYSE
B) CBOT
C) OTC market
D) All of the above

Question 61

What is a direct placement of corporate bonds?

Question 62

Drivers with theft insurance are less likely to lock their car. Explain the type of asymmetric information problem this represents for insurance companies.

Question 63

What are the two types of asymmetric information and what is the difference between them?

Question 64

The recent bailout of AIG by the Federal Reserve and the Treasury Department is an example of what regulatory policy?

Question 65

An investor's primary concerns are usually:

A) risk
B) return
C) liquidity
D) all of the above.

Question 66

Healthy people are less likely to buy medical insurance. Explain what type of asymmetric information problem this represents for the insurance company.

Question 67

What is the difference between debt and equity?

Question 68

Which of the following is NOT considered one of the major types of financial instruments?

A) debt
B) equity
C) capital
D) hybrid

Question 69

Which of the following does NOT regulate stock markets?

A) SEC
B) FDIC
C) NYSE
D) All of the above

Question 70

What is the difference between liquidity and capital financing requirements for a firm?

Question 71

What is the minimum efficient scale of the business?

Question 72

Makers can include:

A) individuals.
B) governments.
C) businesses.
D) all of the above.

Question 73

Samantha's restaurant just burned down, destroying all of her net worth, and she wants a loan to rebuild. Explain what type of asymmetric information problem this represents for the bank.

Question 74

Why are mutual funds necessary, now that investors can buy stocks and bonds via online trading services?

Question 75

How have financial systems contributed to material progress and technological breakthroughs?

Question 76

What does "ceteris paribus" mean?

Question 77

Which of the following is a hybrid financial instrument?

A) Treasury bond
B) convertible bond
C) a share of common stock
D) certificate of deposit

Question 78

Which of the following contributed to the reversal of financial globalization?

A) the creation of the Bretton Woods arrangement
B) the beginning of the Civil War
C) the increase of the gold standard
D) all of the above

Question 79

Why are some banking regulations aimed at limiting competition?

Question 80

When a borrower uses a loan to buy lottery tickets, what type of asymmetric information problem does this represent for the lender? Explain briefly.