Deck 2: Financial Markets and Institutions

Question 1

Hedge fund managers, unlike mutual fund managers, do not receive fund-performance-related fees.

Answer 1

False

Question 2

Whenever there is uncertainty, investors might be interested in trading, either to speculate or to lay off their risks, and a market may rise to meet the trading demand.

Answer 2

True

Question 3

Only the IPOs for large corporations are sold in primary markets.

Answer 3

False

Question 4

For corporate bonds, the higher the credit quality of an issuer, the higher the interest rate.

Question 5

Financial markets and intermediaries allow investors and businesses to reduce and reallocate risk.

Question 6

Only small companies can go through financial markets to obtain financing.

Question 7

The markets for long-term debt and equity are called capital markets.

Question 8

The stocks of major corporations trade in many markets throughout the world on a continuous or near-continuous basis.

Question 9

Financing for private corporations must flow through financial intermediaries.

Question 10

Apple Computer is well known for its product innovations.Access to financing was vital to Apple's growth and profitability.

Question 11

Financing for public corporations must flow through financial markets.

Question 12

The derivative market is also a source of financing for corporations.

Question 13

Like public companies, private companies can also use their stock price as a measure of performance.

Question 14

Smaller businesses are especially dependent upon internally generated funds.

Question 15

The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment.

Question 16

Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in New York and London.

Question 17

Previously issued securities are traded among investors in the secondary markets.

Question 18

The key to the banks' ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors.

Question 19

An individual can save and invest in a corporation only by lending money to it or by purchasing additional shares.

Question 20

A financial intermediary invests in financial assets rather than real assets.

Question 21

You can buy silver in the:

A)capital markets.
B)foreign exchange markets.
C)commodities markets.
D)option markets.

Question 22

The effects of the financial crisis of 2007-2009 were confined to the U.S.and domestic companies.

Question 23

Which of the following actions does not help reduce risk?

A)extending the service warranty for your notebook
B)converting your money market account to a mutual fund account
C)contracting to sell your farm produce to the neighborhood grocery
D)buying Japanese yen now when you plan to study in Japan next year

Question 24

The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm's capital investments.

Question 25

Which one of the following funds not provides a tax advantage to individual investors?

A)balanced funds
B)pension funds
C)bond funds
D)funds that are invested in foreign countries

Question 26

Which of the following is not typically considered a function of financial intermediaries?

A)providing a payment mechanism
B)investing in real assets
C)accumulating funds from smaller investors
D)spreading, or pooling risk among individuals

Question 27

Commodity and derivative markets:

A)are additional sources of financing for corporate projects.
B)enable the financial manager to adjust a firm's exposure to various business risks.
C)are always over-the-counter markets.
D)deal only in foreign currencies.

Question 28

The cost of capital is the interest rate paid on a loan from a bank or some other financial institution.

Question 29

One root of the financial crisis of 2007-2009 was the strict money policies promoted by the U.S.Federal Reserve and other central banks after the technology bubble burst (i.e., money was relatively expensive during this time).

Question 30

The cost of capital is the minimum acceptable rate of return for capital investment.

Question 31

Which type of financial institution generally does not accept deposits but does underwrite stock offerings?

A)Insurance company
B)Mutual fund
C)Commercial bank
D)Investment bank

Question 32

Which one of these is a money market security?

A)commercial paper
B)common stock
C)2-year bond
D)20-year bond

Question 33

Which of the following financial assets is least likely to have an active secondary market?

A)common stock of a large public firm
B)bank loans made to smaller firms
C)bonds of a major, multinational corporation
D)debt issued by the federal government

Question 34

The rates of return on investments outside the corporation set the minimum return for investment projects inside the corporation.

Question 35

A company can pay for its expansion in all the following ways except:

A)by using the earnings generated from its sale of obsolete equipment.
B)by persuading a director's mother to make a personal loan to the company.
C)by purchasing bonds in the secondary market.
D)by selling stock certificates for a new subsidiary.

Question 36

Which one of these assists in shifting an individual's consumption forward in time?

A)a bank line of credit
B)a bank savings account
C)a life insurance policy
D)a retirement savings plan

Question 37

Who was responsible for the financial crisis of 2007-2009?

A)The U.S.Federal Reserve, for its policy of easy money
B)The U.S.government, for pushing banks to expand credit for low-income housing
C)bankers, who aggressively promoted and resold subprime mortgages
D)The U.S.Federal Reserve, the U.S.government, rating agencies, and bankers

Question 38

Which one of these transports income forward in time?

A)retirement savings
B)car loan
C)bank line of credit
D)credit card purchase

Question 39

Short-term financing decisions commonly occur in the:

A)primary markets.
B)secondary markets.
C)capital markets.
D)money markets.

Question 40

Long-term financing decisions commonly occur in the:

A)option markets.
B)secondary markets.
C)capital markets.
D)money markets.

Question 41

Financial markets and intermediaries:

A)channel savings to real investment.
B)increase risks for businesses.
C)generally reduce the liquidity of securities.
D)prevent the transportation of cash across time.

Question 42

Which one of these enterprises generally acts as an underwriter for an initial public offering?

A)commercial bank
B)government
C)investment bank
D)insurance company

Question 43

A bond differs from a share of stock in that a bond:

A)represents a claim on the firm.
B)has more risk.
C)has guaranteed dividend payments.
D)has a maturity date.

Question 44

During the Financial Crisis of 2007-2009, the U.S.government bailed out all of the following firms except:

A)AIG.
B)Fannie Mae.
C)Lehman Brothers.
D)Freddie Mac.

Question 45

One reason suggesting that banks may be better than individuals at matching lenders to borrowers is that banks:

A)can shift loan risk to their deposit customers.
B)are motivated by the potential for profit.
C)do not have any income tax liability.
D)have information to evaluate creditworthiness.

Question 46

Which one of the following financial intermediaries has shown the greatest preference for investing in long-term financial assets?

A)Commercial banks
B)Insurance companies
C)Finance companies
D)Savings banks

Question 47

Which one of these may provide a financial return to some investors while not providing any financial return to other investors?

A)Mutual funds
B)Pension funds
C)Insurance companies
D)Hedge fund

Question 48

Which one of these was a contributing factor to the need for many foreign banks to seek aid from their governments as a result of the financial crisis of 2007-2009?

A)decrease in their exchange rates
B)investments in U.S.subprime mortgages
C)interest rate spikes
D)currency controls

Question 49

The cost of capital:

A)is the interest rate that the firm pays on a loan from a financial institution.
B)is the maximum acceptable rate of return on a project.
C)is the minimum acceptable rate of return on a project.
D)is always less than 10%.

Question 50

A mother in a developing country wants to borrow the equivalent of $20 to enable her to start a small restaurant run by her family.Which type of financing is she looking to obtain?

A)public bond issue
B)IPO
C)micro loan
D)futures contract on a commodity

Question 51

The cost of capital:

A)is the expected rate of return on a capital investment.
B)is an opportunity cost determined by the risk-free rate of return.
C)is the interest rate that the firm pays on a loan from a bank or insurance company.
D)for risky investments is normally higher than the firm's borrowing rate.

Question 52

Which of the following factors contributed to the financial crisis of 2007-2009?

A)Greece's debt
B)Subprime mortgages
C)Drought conditions in the mid-west
D)Both Greece's debt and subprime mortgages

Question 53

Financing for public corporations flows through:

A)the financial markets only.
B)financial intermediaries only.
C)derivatives markets.
D)the financial markets, financial intermediaries, or both.

Question 54

"Reinvestment" means:

A)new investment in new operations.
B)additional investment in existing operations.
C)new investment by new shareholders.
D)additional savings by existing shareholders.

Question 55

The financial crisis of 2007-2009 contributed to the largest sovereign default in history by which one of these countries?

A)Italy
B)Portugal
C)Ireland
D)Greece

Question 56

Which one of these parties cannot invest in a hedge fund?

A)small retail investors
B)pension funds
C)insurance companies
D)wealthy individuals

Question 57

Short term corporate debt instruments are most commonly traded:

A)on the TSX.
B)on commodities.
C)in the money market.
D)in the over the counter market.

Question 58

Which one of the following is the biggest provider of payment mechanisms?

A)hedge funds
B)banks
C)mutual funds
D)insurance companies

Question 59

Which of the following are both a financial intermediary and a financial institution?

A)mutual funds
B)pension funds
C)insurance companies
D)hedge funds

Question 60

Which of the following information is not provided by the financial markets?

A)the price of six ounces of gold
B)the cost of borrowing $500,000 for 5 years
C)Microsoft's earnings in 2013
D)the cost of one million yen in U.S.dollars

Question 61

A share of Canadian Tire stock is purchased by an individual investor for $75 and later sold to another investor for $125.Who profits from this sale?

A)Canadian Tire
B)the first investor
C)the second investor
D)Canadian Tire and both investors

Question 62

One contributing factor to the 2007-2009 financial crisis was the structuring of mortgage loans with:

A)high initial payments, offset by significantly lower payments later.
B)low initial payments, offset by significantly higher payments later.
C)no initial payments, offset by significantly high payments later.
D)equal payments over the life of the loan.

Question 63

When corporations need to raise funds through stock issues, they rely on the:

A)primary market.
B)secondary market.
C)tertiary market.
D)centralized NASDAQ exchange.

Question 64

"Balanced" mutual funds:

A)invest in both stocks and bonds.
B)spread their investments equally over a specified geographic area.
C)spread their investments equally over various industries.
D)charge a management fee that is proportionate to the investment return.

Question 65

A financial institution:

A)is a kind of financial intermediary.
B)simply pools and invests savings.
C)raises financing by selling shares.
D)invests primarily in commodities.

Question 66

Firms can often determine the current price of any commodities they use in their production process by consulting the price quotes provided by:

A)their investment bank.
B)the New York Mercantile Exchange.
C)the New York Stock Exchange.
D)the Standard & Poor's market indexes.

Question 67

Excess cash held by a firm should be:

A)reinvested by the firm in projects offering the lowest rate of return.
B)reinvested by the firm in projects offering rates of return higher than the cost of capital.
C)reinvested by the firm in the financial markets.
D)distributed to bondholders in the form of extra coupon payments.

Question 68

Foreign currencies are traded:

A)only by banks in New York and London.
B)over the counter.
C)on both the NYSE and NASDAQ.
D)on the Intercontinental Exchange.

Question 69

When Patricia sells her Air Canada common stock at the same time that Brian purchases the same amount of Air Canada stock, Air Canada receives:

A)the dollar value of the transaction.
B)the dollar amount of the transaction, less brokerage fees.
C)only the par value of the common stock.
D)nothing.

Question 70

Which of the following functions does not require financial markets?

A)transporting of cash across time
B)provision of liquidity
C)risk reduction by investment in diversified portfolios
D)provision of pricing information

Question 71

A primary market would be utilized when:

A)investors buy or sell existing securities.
B)shares of common stock are exchanged.
C)securities are initially issued.
D)a commission must be paid on the transaction.

Question 72

NINJA stands for

A)No income, No Job, No Assets
B)No income, No job, Assets
C)No interest rate, No Job, No Assets
D)No insider information, No Jeopardy, No Assets

Question 73

The primary distinction between securities sold in the primary and secondary markets is the:

A)riskiness of the securities.
B)price of the securities.
C)previous issuance of the securities.
D)profitability of the issuing corporation.

Question 74

Insurance companies primarily reduce an individual's risk by:

A)transporting that risk forward in time.
B)providing payment services.
C)spreading that risk across many individuals.
D)providing low-interest-rate loans.

Question 75

Liquidity is important to a mutual fund primarily because:

A)a fund that is less liquid will attract more investors.
B)the fund's shareholders may want to redeem their shares at any time.
C)new investors may invest in the fund at any time.
D)the fund requires cash to pay its taxes.

Question 76

Which one of these is generally a key difference between U.S.and foreign commercial banks?

A)pooling and investing savings
B)accepting investor deposits
C)providing debt financing to corporations
D)making equity investments in corporations

Question 77

Which one of the following is least liquid?

A)foreign currency
B)Government of Canada Treasury bonds
C)real estate
D)savings deposit

Question 78

The main cause of the financial crisis of 2007-2009 was caused by which financial market factor?

A)Corporate greed
B)Agency
C)Poor economic advice
D)Lack of understanding about who financial markets operate

Question 79

Which one of these was a major cause of the deep recession and severe unemployment throughout much of Europe that followed the financial crisis of 2007-2009?

A)government actions to raise interest rates
B)investor speculation
C)risk-adverse investor attitudes
D)government actions to lower government debt

Question 80

Corporate financing comes ultimately from:

A)savings by households and foreign investors.
B)cash generated from the firm's operations.
C)the financial markets and intermediaries.
D)the issue of shares in the firm.