Deck 2: Financial Markets and Institutions

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Households hold more than half of U.S.corporate equities.

Question 5

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 6

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

Question 7

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

Question 8

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

Question 9

The derivative market is also a source of financing.

Question 10

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

Question 11

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

Question 12

Apple Computer is well known for its product innovations.Access to financing was not vital to Apple's growth and profitability.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

Smaller businesses are especially dependent upon internally generated funds.

Question 19

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

Question 20

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

Question 21

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.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

Banks cover the costs of the service they provide primarily via:

A) a management fee.
B) a service charge.
C) an interest rate differential.
D) an operating fee.

Question 27

Compared to buying stocks and bonds directly,what are the advantages of investing in a mutual fund?

A) Mutual funds are efficiently diversified and professionally managed.
B) Investment returns are never taxed until withdrawn from the fund.
C) You can buy additional shares in the fund or cash out at any time.
D) All of these.

Question 28

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 the 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 29

A financial intermediary provides financing for:

A) individuals.
B) companies.
C) other organizations.
D) all of these.

Question 30

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 31

Financing for public corporations must flow through financial markets.

Question 32

"Balanced" mutual funds:

A) offer mixtures of 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 33

"Reinvestment" means:

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

Question 34

Financing for private corporations must flow through financial intermediaries.

Question 35

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

Question 36

Which of the following mutual funds have a tax advantage?

A) Balanced funds
B) Pension funds
C) Bond funds
D) Funds that invest in foreign countries

Question 37

Which of the following statements is not characteristic of mutual funds?

A) They are financial institutions.
B) They raise money by selling shares to investors.
C) They pool the savings of many investors.
D) They offer professional management.

Question 38

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

Question 39

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

Question 40

Excess cash held by a firm should be:

A) reinvested by the firm in projects offering the highest 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 41

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 42

Short-term financing decisions commonly occur in the:

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

Question 43

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 44

Which of the following financial intermediaries can loan money directly to businesses?

A) Mutual funds
B) Pension funds
C) Insurance companies
D) All of these

Question 45

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 46

Which of the following financial markets is in one centralized location?

A) NYSE
B) NASDAQ
C) The over-the-counter market
D) The European Monetary Union

Question 47

Property insurance companies protect themselves against the extensive damage caused by hurricanes and earthquakes by:

A) selling thousands of policies to different homeowners.
B) factoring the cost into the price of the policies.
C) buying reinsurance against such catastrophes.
D) declaring bankruptcy when the need arises.

Question 48

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 49

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 50

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 51

Which of the following financial markets is not located in one centralized location?

A) NYSE
B) LSE
C) NASDAQ
D) CBOT

Question 52

Insurance companies can usually cover the claims of policyholders because:

A) the incidence of claims normally averages out.
B) they issue thousands of insurance policies.
C) the cost of paying for claims has already been factored into the price of the policies.
D) all of these.

Question 53

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 54

A bond differs from a share of stock in that:

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

Question 55

Liquidity is important to a mutual fund 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) the fund's managers need liquidity to trade actively.
D) the fund needs to distribute payouts to its shareholders and managers periodically.

Question 56

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

A) Common stock of a large firm
B) Bank loans made to smaller firms
C) Bonds of a major, multinational corporation
D) Debt issued by the U.S. Treasury

Question 57

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

A) IBM.
B) The first investor.
C) The second investor.
D) Profit is split between IBM and the investor.

Question 58

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 59

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 60

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

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

Question 61

You can buy silver in the:

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

Question 62

Long-term financing decisions commonly occur in the:

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

Question 63

The opportunity 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 64

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 trade information

Question 65

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 66

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 2002
D) The cost of wiring one million yen to Japan

Question 67

A capital investment that generates a 10% rate of return is worthwhile if:

A) corporate bonds of similar risk offer 8% rates of return.
B) corporate bonds of similar risk offer 10% rates of return.
C) top-quality corporate bonds offer 10% rates of return.
D) the expected rate of return on the stock market is 12%.

Question 68

In 2010,U.S.corporate equities totaled:

A) less than $6 trillion.
B) about $10 trillion.
C) about $16 trillion.
D) more than $20 trillion.

Question 69

Which of the following is least liquid?

A) Foreign currency
B) U.S. Treasury bonds
C) Rare coins
D) Savings deposit

Question 70

The cost of capital:

A) is the expected rate of return on 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 71

In 2010,U.S.corporate and foreign bonds totaled:

A) less than $500 billion.
B) about $3 trillion.
C) about $7 trillion.
D) more than $11 trillion.

Question 72

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 73

An example of how financial intermediaries can assist in shifting an individual's consumption to the future is:

A) lending money to the individual.
B) providing a checking account.
C) opening a savings account.
D) requiring purchases to be in cash.

Question 74

An example of how financial intermediaries can assist in shifting an individual's consumption forward in time is:

A) providing a line of credit.
B) opening a passbook account.
C) starting a life insurance policy.
D) starting an auto insurance policy.

Question 75

For the consumer,a credit card:

A) transports money forward in time.
B) provides liquidity.
C) is a convenient way to pay.
D) all of these.

Question 76

Commodity and derivative markets:

A) are sources of financing.
B) enable the financial manager to adjust the firm's exposure to various business risks.
C) are always over-the-counter markets.
D) all of these.

Question 77

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) All of these

Question 78

Financial markets and intermediaries:

A) channel savings to real investment.
B) enable investors and businesses to reduce risk.
C) provide liquidity.
D) all of these.

Question 79

U.S.corporate equities are mostly held by:

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

Question 80

A financial institution:

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