Question 1

The interests of the owners of a corporation are represented by&#10;A) The government&#10;B) Managers&#10;C) The board of directors&#10;D) The invisible hand

Accepted Answer

The board of directors is elected by the shareholders to represent their interests and make major decisions on behalf of the corporation.

Question 2

Critical to a well-functioning financial system is&#10;A) A sound legal system&#10;B) A sound payment system&#10;C) Strong fiduciaries&#10;D) All of the above

Accepted Answer

A well-functioning financial system relies on a sound legal system to enforce contracts and property rights, a sound payment system to facilitate transactions, and strong fiduciaries to manage assets responsibly.

Question 3

Which of the following is involved in direct finance?&#10;A) Securities dealers&#10;B) Investment banks&#10;C) Securities brokers&#10;D) All of the above

Accepted Answer

Investment banks are involved in direct finance by facilitating the issuance of new securities to investors, thereby directly connecting borrowers and lenders. Securities dealers and brokers, on the other hand, are typically involved in secondary market transactions, which do not constitute direct finance.

Question 4

Deficit units that utilize indirect means of finance do so because&#10;A) Cost is lower&#10;B) It's a matter of taste (preference)&#10;C) Asymmetric information discourages investors (surplus units) from advancing funds to such units through direct means&#10;D) There are SEC regulations

Accepted Answer

Deficit units use indirect means of finance primarily because asymmetric information makes it difficult for investors to assess the risk, leading them to prefer intermediaries who can better evaluate and manage the risk.

Question 5

The basic role of depository institutions is to&#10;A) Receive core deposits and make loans by addressing asymmetric information&#10;B) Issue large CDs and buy stocks&#10;C) Underwrite securities&#10;D) Act as a broker

Accepted Answer

Depository institutions primarily accept deposits from the public and use these funds to make loans. They play a crucial role in addressing asymmetric information between borrowers and lenders, thereby facilitating the lending process.

Question 6

Which is a platform for secondary market trading of financial instruments?&#10;A) Specialist system&#10;B) Over-the-counter system&#10;C) Electronic communications networks (ECNs)&#10;D) All of the above

Accepted Answer

All of the options listed are platforms for secondary market trading of financial instruments. The specialist system is used on some stock exchanges, the over-the-counter system is a decentralized market where trading occurs directly between parties, and electronic communications networks (ECNs) are automated systems that match buy and sell orders for securities.

Question 7

A fiduciary system&#10;A) Characterizes the financial system in the United States and elsewhere&#10;B) Is a system based on trust&#10;C) Is used for making payments&#10;D) Both a and b&#10;

Accepted Answer

In the context of the financial system, a fiduciary system can characterize the relationship between financial advisors and their clients, trustees and beneficiaries, or corporate directors and shareholders. These relationships are built on the expectation that the fiduciary will act in the best interest of the other party, rather than for personal gain.
Therefore, the correct answer to the input question is:
b) Is a system based on trust
While the fiduciary system does characterize aspects of the financial system in the United States and elsewhere, the term "fiduciary system" itself specifically refers to the trust-based nature of certain relationships, rather than the financial system as a whole. It is not used for making payments, which is a function of the monetary system. Hence, option d) Both a and b is not accurate in this context.

Deck 2: Overview of the Financial System