Deck 1: Role of Financial Markets and Institutions

Question 1

Financial market participants who provide funds are called

A)deficit units.
B)surplus units.
C)primary units.
D)secondary units.

Answer 1

B

Question 2

If security prices fully reflect all available information, the markets for these securities are

A)efficient.
B)primary.
C)overvalued.
D)undervalued.

Answer 2

A

Question 3

Money market securities generally have ____. Capital market securities are typically expected to have a ____.

A)less liquidity; higher annualized return
B)more liquidity; lower annualized return
C)less liquidity; lower annualized return
D)more liquidity; higher annualized return

Answer 3

D

Question 4

If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.

A)perfect
B)active
C)inefficient
D)in equilibrium

Question 5

Without the participation of financial intermediaries in financial market transactions,

A)information and transaction costs would be lower.
B)transaction costs would be higher but information costs would be unchanged.
C)information costs would be higher but transaction costs would be unchanged.
D)information and transaction costs would be higher.

Question 6

Common stock is an example of a(n)

A)debt security.
B)money market security.
C)equity security.
D)A and B

Question 7

Which of the following is a capital market instrument?

A)a six-month CD
B)a three-month Treasury bill
C)a ten-year bond
D)an agreement for a bank to loan funds directly to a company for nine months

Question 8

If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.

A)efficient
B)inefficient
C)perfect
D)imperfect

Question 9

Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.

A)higher; higher
B)lower; lower
C)lower; higher
D)higher; lower

Question 10

If financial markets are efficient, this implies that all securities should earn the same return.

Question 11

Those financial markets that facilitate the flow of short-term funds are known as

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

Question 12

Which of the following is a money market security?

A)Treasury note
B)municipal bond
C)mortgage
D)commercial paper

Question 13

The largest deficit unit is (are)

A)households and businesses.
B)foreign financial institutions.
C)the U.S. Treasury.
D)foreign nonfinancial sectors.

Question 14

Which of the following is most likely to be described as a depository institution?

A)finance companies
B)securities firms
C)credit unions
D)pension funds
E)insurance companies

Question 15

The typical role of a securities firm in a public offering of securities is to

A)purchase the entire issue for its own investment.
B)place the entire issue with a single large investor.
C)spread the issue across several investors until the entire issue is sold.
D)provide all large investors with loans so that they can invest in the offering.

Question 16

Funds are provided to the initial issuer of securities in the

A)secondary market.
B)primary market.
C)deficit market.
D)surplus market.

Question 17

The creditors in the federal funds market are

A)households.
B)depository institutions.
C)firms.
D)government agencies.

Question 18

The Securities Exchange Commission (SEC) was established by the

A)Federal Reserve Act.
B)McFadden Act.
C)Securities Exchange Act of 1934.
D)Glass-Steagall Act.
E)none of the above

Question 19

The main provider(s) of funds to the U.S. Treasury is (are)

A)households and businesses.
B)foreign financial institutions.
C)the Federal Reserve System.
D)foreign nonfinancial sectors.

Question 20

The Securities Act of 1933

A)required complete disclosure of relevant financial information for publicly offered securities in the primary market.
B)declared trading strategies to manipulate the prices of public secondary securities illegal.
C)declared misleading financial statements for public primary securities illegal.
D)required complete disclosure of relevant financial information for securities traded in the secondary market.
E)all of the above

Question 21

Debt securities are certificates that represent debt (borrowed funds) by the issuer.

Question 22

When a securities firm acts as a broker, it

A)guarantees the issuer a specific price for newly issued securities.
B)makes a market in specific securities by adjusting its own inventory.
C)executes transactions between two parties.
D)purchases securities for its own account.

Question 23

When security prices fully reflect all available information, the markets for these securities are said to be efficient.

Question 24

In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.

Question 25

____ concentrate on mortgage loans.

A)Finance companies
B)Commercial banks
C)Savings institutions
D)Credit unions

Question 26

Securities are certificates that represent a claim on the provider of funds.

Question 27

Which of the following financial intermediaries commonly invests in stocks and bonds?

A)pension funds
B)insurance companies
C)mutual funds
D)all of the above

Question 28

Which of the following distinguishes credit unions from commercial banks and savings institutions?

A)Credit unions are non-profit
B)Credit unions accept deposits but do not make loans
C)Credit unions make loans but do not accept deposits
D)Savings institutions restrict their business to members who share a common bond

Question 29

Which of the following is not a major investor in stocks?

A)commercial banks
B)insurance companies
C)mutual funds
D)pension funds

Question 30

In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.

A)commercial banks
B)savings banks
C)credit unions
D)S&Ls

Question 31

Which of the following is a nondepository financial institution?

A)savings banks
B)commercial banks
C)savings and loan associations
D)mutual funds

Question 32

A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.

Question 33

The euro increased business between European countries and created a more competitive environment in Europe.

Question 34

Securities are certificates that represent a claim on the issuer.

Question 35

A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called

A)secondary market.
B)primary market.
C)deficit market.
D)surplus market.

Question 36

When a securities firm acts as a(n) ____, it maintains a position in securities.

A)adviser
B)dealer
C)broker
D)none of the above

Question 37

Households with ____ are served by ____.

A)deficient funds; depository institutions and finance companies
B)deficient funds; finance companies only
C)savings; finance companies only
D)savings; pension funds and finance companies

Question 38

____ securities have a maturity of one year or less; ____ securities are generally more liquid.

A)Money market; capital market
B)Money market; money market
C)Capital market; money market
D)Capital market; capital market

Question 39

____ obtain funds by issuing securities, then lend the funds to individuals and small businesses.

A)Finance companies
B)Securities firms
C)Mutual funds
D)Insurance companies

Question 40

If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.

Question 41

There is a ____ relationship between the risk of a security and the expected return from investing in the security.

A)positive
B)negative
C)indeterminable
D)none of the above

Question 42

Common types of capital market securities include Treasury bills and commercial paper.

Question 43

Which of the following transactions would not be considered a secondary market transaction?

A)An individual investor purchases some existing shares of stock in IBM through his broker.
B)An institutional investor sells some Disney stock through its broker.
C)A firm that was privately held engages in an offering of stock to the public.
D)All of the above are secondary market transactions.

Question 44

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

A)lower; lower
B)lower; higher
C)higher; lower
D)higher; higher

Question 45

A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses.

A)savings institutions
B)commercial banks
C)mutual funds
D)finance companies

Question 46

Equity securities

A)have a maturity.
B)pay interest on a periodic basis.
C)represent ownership in the issuer.
D)repay the principal amount at maturity.

Question 47

Common types of money market securities include negotiable certificates of deposit and Treasury bills.

Question 48

Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities.

A)lower; lower
B)lower; higher
C)higher; lower
D)higher; higher

Question 49

Common types of capital market securities include Treasury bills and commercial paper.

Question 50

Debt securities include commercial paper, Treasury bonds, and corporate bonds.

Question 51

Money market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

Question 52

Commercial banks in aggregate have more assets than credit unions.

Question 53

Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

Question 54

If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.

A)rise; lower
B)fall; higher
C)fall; lower
D)rise; higher

Question 55

Common types of money market securities include negotiable certificates of deposit and Treasury bills.

Question 56

____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.

A)Finance companies
B)Mutual funds
C)Life insurance companies
D)Securities firms

Question 57

Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as

A)secondary markets.
B)capital markets.
C)primary markets.
D)money markets.
E)none of the above

Question 58

The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.

A)corporate finance
B)investment management
C)financial markets and institutions
D)none of the above

Question 59

Those participants who receive more money than they spend are referred to as

A)deficit units.
B)surplus units.
C)borrowing units.
D)government units.

Question 60

The total asset value of savings institutions is larger than that of commercial banks.

Question 61

Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.

Question 62

Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small businesses.

Question 63

Savings institutions represent a nondepository institution.

Question 64

Securities that are not as safe and liquid as other securities are never considered for investment by anyone.

Question 65

Treasury bonds have a maturity of one to three years.

Question 66

____ are not considered capital market securities.

A)Repurchase agreements
B)Municipal bonds
C)Corporate bonds
D)Equity securities
E)Mortgages

Question 67

Which of the following is not a reason why depository financial institutions are popular?

A)They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
B)They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
C)They accept the risk on loans provided.
D)They use their information resources to act as a broker, executing securities transactions between two parties.
E)They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

Question 68

If investors speculate in derivative contracts rather than the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

A)lower; lower
B)lower; higher
C)higher; lower
D)higher; higher

Question 69

When security prices fully reflect all available information, the markets for these securities are said to be perfect.

Question 70

Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets.

Question 71

According to your text, which of the following is not considered a money market security?

A)Treasury bills
B)Treasury notes
C)retail CD
D)banker's acceptance
E)commercial paper

Question 72

Equity securities should normally have a ____ expected return and ____ risk than money market securities.

A)lower; lower
B)lower; higher
C)higher; lower
D)higher; higher

Question 73

Institutional investors not only provide financial support to companies but exercise some degree of corporate control over them.

Question 74

When a depository institution offers a loan, it is acting as a creditor.

Question 75

By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.

Question 76

The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:

A)mortgages.
B)money market securities.
C)stock.
D)Treasury bonds.

Question 77

____ are classified as a depository institution.

A)Credit unions
B)Pension funds
C)Finance companies
D)Securities firms

Question 78

Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.

Question 79

The credit crisis in the 2008-2009 period was caused by weak economies in Asia.

Question 80

____ are long-term debt obligations issued by corporations and government agencies to support their operations.

A)Common stock
B)Derivative securities
C)Bonds
D)None of the above