Deck 2: Financial Markets and Institutions

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Financing for private corporations must flow through financial intermediaries.

Question 5

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

Question 6

Smaller businesses are especially dependent upon internally generated funds.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

In the United States,banks are the most important source of long-term financing for businesses.

Question 14

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

Question 15

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

Question 16

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.

Question 17

Financing for public corporations must flow through financial markets.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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 25

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 26

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 27

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 28

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

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

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 U.S. Treasury

Question 31

Short-term financing decisions commonly occur in the:

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

Question 32

Long-term financing decisions commonly occur in the:

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

Question 33

From June 2001 to June 2006,housing prices in the United States doubled.

Question 34

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 35

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 36

Which one of these is a money market security?

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

Question 37

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

Question 38

During the Financial Crisis of 2007-2009,the U.S.government bailed out all firms in danger of failing.

Question 39

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

Question 40

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 41

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 42

Corporate debt instruments are most commonly traded:

A) on the NYSE.
B) on NASDAQ.
C) in the money market.
D) in the over the counter market.

Question 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

You can buy silver in the:

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

Question 58

U.S.bonds and other debt securities are mostly held by:

A) institutional investors.
B) households.
C) foreign investors.
D) state and local governments.

Question 59

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 60

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 61

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

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

Question 62

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 63

"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 64

Which one of the following is least liquid?

A) foreign currency
B) U.S. Treasury bonds
C) real estate
D) savings deposit

Question 65

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 66

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 67

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 68

When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of GM stock,GM 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 69

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 70

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 71

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 72

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 73

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 74

The 2007-2009 financial crisis was mainly caused by the following organizations.

A) Easy money policies
B) US government
C) Rating Agencies and bankers
D) All of the choices are correct.

Question 75

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 76

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 77

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 78

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 79

"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 80

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