Deck 2: An Overview of the Financial System

Question 1

Which of the following statements about the characteristics of debt and equities is TRUE?

A)They can both be long-term financial instruments.
B)Bond holders are residual claimants.
C)The income from bonds is typically more variable than that from equities.
D)Bonds pay dividends.

Answer 1

A

Question 2

A breakdown of financial markets can result in

A)financial stability.
B)rapid economic growth.
C)political instability.
D)stable prices.

Answer 2

C

Question 3

Which of the following can be described as involving direct finance?

A)A corporation issues new shares of stock.
B)People buy shares in a mutual fund.
C)A pension fund manager buys a short-term corporate security in the secondary market.
D)An insurance company buys shares of common stock in the over-the-counter markets.

Answer 3

A

Question 4

Which of the following can be described as direct finance?

A)You take out a mortgage from your local bank.
B)You borrow $2500 from a friend.
C)You buy shares of common stock in the secondary market.
D)You buy shares in a mutual fund.

Question 5

Every financial market has the following characteristic.

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.

Question 6

Securities are ________ for the person who buys them,but are ________ for the individual or firm that issues them.

A)assets;liabilities
B)liabilities;assets
C)negotiable;nonnegotiable
D)nonnegotiable;negotiable

Question 7

Financial markets improve economic welfare because

A)they channel funds from investors to savers.
B)they allow consumers to time their purchase better.
C)they weed out inefficient firms.
D)they eliminate the need for indirect finance.

Question 8

Assume that you borrow $2000 at 10% annual interest to finance a new business project.For this loan to be profitable,the minimum amount this project must generate in annual earnings is

A)$400.
B)$201.
C)$200.
D)$199.

Question 9

Which of the following statements about financial markets and securities is 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 intermediate term if its maturity is ten years or longer.
D)The maturity of a debt instrument is the number of years (term)to that instrument's expiration date.

Question 10

You can borrow $5000 to finance a new business venture.This new venture will generate annual earnings of $251.The maximum interest rate that you would pay on the borrowed funds and still increase your income is

A)25%.
B)12.5%.
C)10%.
D)5%.

Question 11

Financial markets have the basic function of

A)getting people with funds to lend together with 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)providing a risk-free repository of spending power.

Question 12

Distinguish between direct finance and indirect finance.Which of these is the most important source of funds for corporations in the United States?

Question 13

With direct finance,funds are channeled through the financial market from the ________ directly to the ________.

A)savers,spenders
B)spenders,investors
C)borrowers,savers
D)investors,savers

Question 14

Well-functioning financial markets

A)cause inflation.
B)eliminate the need for indirect finance.
C)cause financial crises.
D)allow the economy to operate more efficiently.

Question 15

Which of the following can be described as involving direct finance?

A)A corporation takes out loans from a bank.
B)People buy shares in a mutual fund.
C)A corporation buys a short-term corporate security in a secondary market.
D)People buy shares of common stock in the primary markets.

Question 16

The principal lender-savers are

A)governments.
B)businesses.
C)households.
D)foreigners.

Question 17

Which of the following statements about the characteristics of debt and equity is FALSE?

A)They can both be long-term financial instruments.
B)They can both be short-term financial instruments.
C)They both involve a claim on the issuer's income.
D)They both enable a corporation to raise funds.

Question 18

Which of the following can be described as involving indirect finance?

A)You make a loan to your neighbor.
B)You buy shares in a mutual fund.
C)You buy a U.S.Treasury bill from the U.S.Treasury at Treasury Direct.gov.
D)You purchase shares in an initial public offering by a corporation in the primary market.

Question 19

With ________ finance,borrowers obtain funds from lenders by selling them securities in the financial markets.

A)active
B)determined
C)indirect
D)direct

Question 20

Which of the following can be described as involving indirect finance?

A)You make a loan to your neighbor.
B)A corporation buys a share of common stock issued by another corporation in the primary market.
C)You buy a U.S.Treasury bill from the U.S.Treasury at TreasuryDirect.gov.
D)You make a deposit at a bank.

Question 21

An important financial institution that assists in the initial sale of securities in the primary market is the

A)investment bank.
B)commercial bank.
C)stock exchange.
D)brokerage house.

Question 22

Long-term debt has a maturity that is

A)between one and ten years.
B)less than a year.
C)between five and ten years.
D)ten years or longer.

Question 23

A liquid asset is

A)an asset that can easily and quickly be sold to raise cash.
B)a share of an ocean resort.
C)difficult to resell.
D)always sold in an over-the-counter market.

Question 24

Secondary markets make financial instruments more

A)solid.
B)vapid.
C)liquid.
D)risky.

Question 25

Which of the following is NOT a secondary market?

A)foreign exchange market
B)futures market
C)options market
D)IPO market

Question 26

When I purchase ________,I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.

A)bonds
B)bills
C)notes
D)stock

Question 27

When an investment bank ________ securities,it guarantees a price for a corporation's securities and then sells them to the public.

A)underwrites
B)undertakes
C)overwrites
D)overtakes

Question 28

Which of the following is an example of an intermediate-term debt?

A)a fifteen-year mortgage
B)a sixty-month car loan
C)a six-month loan from a finance company
D)a thirty-year U.S.Treasury bond

Question 29

The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.

A)more;primary
B)more;secondary
C)less;primary
D)less;secondary

Question 30

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.

Question 31

When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n)

A)exchange.
B)over-the-counter market.
C)common market.
D)barter market.

Question 32

A financial market in which previously issued securities can be resold is called a ________ market.

A)primary
B)secondary
C)tertiary
D)used securities

Question 33

A corporation acquires new funds only when its securities are sold in the

A)primary market by an investment bank.
B)primary market by a stock exchange broker.
C)secondary market by a securities dealer.
D)secondary market by a commercial bank.

Question 34

Equity holders are a corporation's ________.That means the corporation must pay all of its debt holders before it pays its equity holders.

A)debtors
B)brokers
C)residual claimants
D)underwriters

Question 35

Which of the following benefits directly from any increase in the corporation's profitability?

A)a bond holder
B)a commercial paper holder
C)a shareholder
D)a T-bill holder

Question 36

________ work in the secondary markets matching buyers with sellers of securities.

A)Dealers
B)Underwriters
C)Brokers
D)Claimants

Question 37

An important function of secondary markets is to

A)make it easier to sell financial instruments to raise funds.
B)raise funds for corporations through the sale of securities.
C)make it easier for governments to raise taxes.
D)create a market for newly constructed houses.

Question 38

If the maturity of a debt instrument is less than one year,the debt is called

A)short-term.
B)intermediate-term.
C)long-term.
D)prima-term.

Question 39

In a(n)________ market,dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices.

A)exchange
B)over-the-counter
C)common
D)barter

Question 40

Forty or so dealers establish a "market" in these securities by standing ready to buy and sell them.

A)secondary stocks
B)surplus stocks
C)U.S.government bonds
D)common stocks

Question 41

A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called

A)commercial paper.
B)a certificate of deposit.
C)a municipal bond.
D)federal funds.

Question 42

An important source of short-term funds for commercial banks are ________ which can be resold on the secondary market.

A)negotiable CDs
B)commercial paper
C)mortgage-backed securities
D)municipal bonds

Question 43

U.S.Treasury bills pay no interest but are sold at a ________.That is,you will pay a lower purchase price than the amount you receive at maturity.

A)premium
B)collateral
C)default
D)discount

Question 44

________ are short-term loans in which Treasury bills serve as collateral.

A)Repurchase agreements
B)Negotiable certificates of deposit
C)Federal funds
D)U.S.government agency securities

Question 45

Which of the following instruments is NOT traded in a money market?

A)residential mortgages
B)U.S.Treasury Bills
C)negotiable bank certificates of deposit
D)commercial paper

Question 46

Equity instruments are traded in the ________ market.

A)money
B)bond
C)capital
D)commodities

Question 47

Which of the following instruments are traded in a money market?

A)bank commercial loans
B)commercial paper
C)state and local government bonds
D)residential mortgages

Question 48

Corporations receive funds when their stock is sold in the primary market.Why do corporations pay attention to what is happening to their stock in the secondary market?

Question 49

Collateral is ________ the lender receives if the borrower does not pay back the loan.

A)a liability
B)an asset
C)a present
D)an offering

Question 50

Because these securities are more liquid and generally have smaller price fluctuations,corporations and banks use the ________ securities to earn interest on temporary surplus funds.

A)money market
B)capital market
C)bond market
D)stock market

Question 51

A short-term debt instrument issued by well-known corporations is called

A)commercial paper.
B)corporate bonds.
C)municipal bonds.
D)commercial mortgages.

Question 52

Which of the following are short-term financial instruments?

A)a repurchase agreement
B)a share of Walt Disney Corporation stock
C)a Treasury note with a maturity of four years
D)a residential mortgage

Question 53

Which of the following statements about financial markets and securities is TRUE?

A)Many common stocks are traded over-the-counter,although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange.
B)As a corporation gets a share of the broker's commission,a corporation acquires new funds whenever its securities are sold.
C)Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid.
D)Prices of capital market securities are usually more stable than prices of money market securities,and so are often used to hold temporary surplus funds of corporations.

Question 54

Describe the two methods of organizing a secondary market.

Question 55

Which of the following instruments are traded in a money market?

A)state and local government bonds
B)U.S.Treasury bills
C)corporate bonds
D)U.S.government agency securities

Question 56

Bonds issued by state and local governments are called ________ bonds.

A)corporate
B)Treasury
C)municipal
D)commercial

Question 57

U.S.Treasury bills are considered the safest of all money market instruments because there is a low probability of

A)defeat.
B)default.
C)desertion.
D)demarcation.

Question 58

A financial market in which only short-term debt instruments are traded is called the ________ market.

A)bond
B)money
C)capital
D)stock

Question 59

Federal funds are

A)funds raised by the federal government in the bond market.
B)loans made by the Federal Reserve System to banks.
C)loans made by banks to the Federal Reserve System.
D)loans made by banks to each other.

Question 60

Prices of money market instruments undergo the least price fluctuations because of

A)the short terms to maturity for the securities.
B)the heavy regulations in the industry.
C)the price ceiling imposed by government regulators.
D)the lack of competition in the market.

Question 61

If Toyota sells a $1000 bond in the United States,the bond is a

A)foreign bond.
B)Eurobond.
C)Tokyo bond.
D)currency bond.

Question 62

Mortgage-backed securities are similar to ________ but the interest and principal payments are backed by the individual mortgages within the security.

A)bonds
B)stock
C)repurchase agreements
D)negotiable CDs

Question 63

U.S.dollar deposits in foreign banks outside the U.S.or in foreign branches of U.S.banks are called

A)Atlantic dollars.
B)Eurodollars.
C)foreign dollars.
D)outside dollars.

Question 64

Which of the following instruments are traded in a capital market?

A)U.S.Government agency securities
B)negotiable bank CDs
C)repurchase agreements
D)U.S.Treasury bills

Question 65

The most liquid securities traded in the capital market are

A)corporate bonds.
B)municipal bonds.
C)U.S.Treasury bonds.
D)mortgage-backed securities.

Question 66

Equity and debt instruments with maturities greater than one year are called ________ market instruments.

A)capital
B)money
C)federal
D)benchmark

Question 67

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as

A)foreign bonds.
B)Eurobonds.
C)equity bonds.
D)country bonds.

Question 68

The time and money spent in carrying out financial transactions are called

A)economies of scale.
B)financial intermediation.
C)liquidity services.
D)transaction costs.

Question 69

Economies of scale enable financial institutions to

A)reduce transactions costs.
B)avoid the asymmetric information problem.
C)avoid adverse selection problems.
D)reduce moral hazard.

Question 70

Distinguish between a foreign bond and a Eurobond.

Question 71

If Microsoft sells a bond in London and it is denominated in dollars,the bond is a

A)Eurobond.
B)foreign bond.
C)British bond.
D)currency bond.

Question 72

The process of indirect finance using financial intermediaries is called

A)direct lending.
B)financial intermediation.
C)resource allocation.
D)financial liquidation.

Question 73

Which of the following is a long-term financial instrument?

A)a negotiable certificate of deposit
B)a repurchase agreement
C)a U.S.Treasury bond
D)a U.S.Treasury bill

Question 74

In the United States,loans from ________ are far ________ important for corporate finance than are securities markets.

A)government agencies;more
B)government agencies;less
C)financial intermediaries;more
D)financial intermediaries;less

Question 75

One reason for the extraordinary growth of foreign financial markets is

A)decreased trade.
B)increases in the pool of savings in foreign countries.
C)the recent introduction of the foreign bond.
D)slower technological innovation in foreign markets.

Question 76

Which of the following are NOT traded in a capital market?

A)U.S.government agency securities
B)state and local government bonds
C)repurchase agreements
D)corporate bonds

Question 77

Which of the following instruments are traded in a capital market?

A)corporate bonds
B)U.S.Treasury bills
C)negotiable bank CDs
D)repurchase agreements

Question 78

Equity of U.S.companies can be purchased by

A)U.S.citizens only.
B)foreign citizens only.
C)U.S.citizens and foreign citizens.
D)U.S.mutual funds only.

Question 79

An example of economies of scale in the provision of financial services is

A)investing in a diversified collection of assets.
B)providing depositors with a variety of savings certificates.
C)hiring more support staff so that customers don't have to wait so long for assistance.
D)spreading the cost of writing a standardized contract over many borrowers.

Question 80

Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as

A)foreign bonds.
B)Eurobonds.
C)equity bonds.
D)country bonds.