Deck 1: An Overview of Financial Markets and Institutions

Question 1

Deposits in a credit union by a household are an example of direct finance.

Answer 1

False

Question 2

The purpose of the financial system is to bring savers and borrowers together.

Answer 2

True

Question 3

Investment bankers help deficit spending units (DSUs) bring new primary security issues to market.

Answer 3

True

Question 4

Sales finance companies specialize in mortgage lending.

Question 5

Most banks are considered systemically risky under the 2010 Dodd Frank bill.

Question 6

Finance companies take small consumer deposits and make large consumer loans.

Question 7

Direct finance requires a more or less exact match of preferences between DSUs and SSUs

Question 8

In the modern financial system, there must be an equal number of DSUs and surplus spending units (SSUs) in a period.

Question 9

"Futures contract" and "forward contract" are identical terms.

Question 10

Pension funds transfer spending power from the work period to the retirement period.

Question 11

A surplus spending unit (SSU) must hold a claim until its scheduled maturity.

Question 12

A financial claim is an "IOU" from a deficit spending unit.

Question 13

Liabilities of financial intermediaries often include commercial paper.

Question 14

Businesses are never deficit spending units (DSUs).

Question 15

Commercial banks often lend to businesses in direct financial markets.

Question 16

A household is a surplus spending units when income for the period exceeds spending.

Question 17

Every financial claim appears on two balance sheets.

Question 18

SSUs may prefer intermediated financing to direct financing if they are seeking liquidity and safety for their investments.

Question 19

Without a financial sector, real investment must be financed internally by the deficit spending unit.

Question 20

Depository intermediaries issue claims that are for the most part highly liquid.

Question 21

Every asset is someone else's liability, but not every liability is someone else's asset.

Question 22

OTC markets are not very important any more.

Question 23

The money market is a market where liquidity is bought and sold.

Question 24

The money market is a dealer market, not an exchange, and has no specific location.

Question 25

Competition among financial intermediaries tends to force borrowing rates downward.

Question 26

Households are the major source of funds to the financial system.

Question 27

Money markets have a greater variety of investors than borrowers.

Question 28

The money market provides short-term liquidity; the capital market finances long-term corporate growth.

Question 29

The New York Stock Exchange is an example of an organized exchange.

Question 30

Life insurance liabilities are generally more predictable than property and casualty insurer claims.

Question 31

Most Federal agency financial activity is designed to increase funding and reduce the cost of borrowing for certain targeted sectors of the economy.

Question 32

Primary markets were created to offer liquidity and ways for investors to alter the risk of their portfolios.

Question 33

Mortgages are capital market debt securities.

Question 34

Primary markets are markets where users of funds raise cash by selling securities to funds suppliers.

Question 35

Secondary markets are important because they provide funds directly to deficit spending units (DSUs).

Question 36

Dealers bring buyer and seller together; brokers make a market.

Question 37

When a stock is listed on an exchange, members may trade it on the floor of the exchange.

Question 38

Money market instruments are a form of short-term debt.

Question 39

Private placements are the simplest form of direct finance.

Question 40

Federal funds are the funds provided by the Federal Government for domestic corporations for long-term growth.

Question 41

Explain financial intermediation and its benefits.

Question 42

Discuss the problem of systemically risky banks. What is a systemically risky bank and what is the government doing to limit the risk from these institutions? Is it likely to work and prevent another financial crisis?

Question 43

Privately placed securities are usually sold to one or more investment bankers and then resold to the general public.

Question 44

List and briefly describe the main risks managed by financial intermediaries.

Question 45

Explain how and why the secondary capital markets play an important role in our economy. How do secondary markets assist the primary market?