Deck 2: The Financial System and the Economy

Question 1

The amount of debt and equity outstanding in the United States is more than_____ times the nation's GDP.

A)2
B)3
C)4
D)5

Answer 1

5

Question 2

In the United States, the biggest investors in debt securities are

A)households.
B)business firms.
C)governments.
D)financial intermediaries.

Answer 2

D

Question 3

Principal is

A)the amount of interest accumulated on a bond.
B)the amount of dividends paid each year on a stock.
C)the original amount invested in a security.
D)the time until a borrowed fund is repaid.

Answer 3

C

Question 4

When a household borrows using credit cards and by taking out loans for large purchases (such as automobiles), the resulting security is known as

A)a discount bond.
B)a Treasury bill.
C)mortgage debt.
D)consumer credit.

Question 5

In the United States, the biggest issuers of securities are

A)households.
B)business firms.
C)governments.
D)financial intermediaries.

Question 6

A contract whereby a borrower, who seeks to obtain money from someone, promises to compensate the lender in the future is known as

A)a warrant.
B)an exchange rate.
C)a derivative security.
D)a financial security.

Question 7

When a household borrows to buy a home, the resulting security is referred to as

A)a discount bond.
B)a Treasury bill.
C)mortgage debt.
D)consumer credit.

Question 8

A contract that promises to pay a given amount of money to the owner of a security at specific dates in the future is known as

A)a debt security.
B)an equity security.
C)stock.
D)an option.

Question 9

In the United States, the biggest issuers of debt securities are

A)households.
B)business firms.
C)governments.
D)financial intermediaries.

Question 10

The financial system consists of

A)all the securities, intermediaries, and markets that exist to match savers and borrowers.
B)all transactions occurring in the goods market during a financial year.
C)all markets that exist to match the buyers and suppliers of various factors of production.
D)all transactions involving the government.

Question 11

In the United States, the biggest investors in equity securities are

A)households.
B)business firms.
C)governments.
D)financial intermediaries.

Question 12

In the United States, the biggest issuers of equity securities are

A)households.
B)business firms.
C)governments.
D)financial intermediaries.

Question 13

The periodic payments on debt securities are called

A)interest payments.
B)dividends.
C)debt swaps.
D)subordinations.

Question 14

In the financial system, savers transfer funds to borrowers in exchange for

A)cash.
B)gold.
C)financial securities.
D)derivative securities.

Question 15

Which of the following will be included in the financial system of a country?

A)Labor Unions
B)Banks
C)​Factor markets
D)Markets for raw materials

Question 16

A contract that makes the owner of a security a part owner of the company that issued the security is known as

A)a debt security.
B)an equity security.
C)a bond.
D)an option.

Question 17

Maturity is

A)the time until borrowed funds are repaid.
B)the total interest accumulated on a financial security.
C)a situation in which equity becomes worthless.
D)the principal amount invested in a financial security.

Question 18

The owner of a financial security is known as

A)an investor.
B)a debtor.
C)a broker.
D)a securitor.

Question 19

Another name for an equity security is

A)bond.
B)debt.
C)option.
D)stock.

Question 20

The ratio of debt to equity in the United States is about

A)2.
B)2.5.
C)3.
D)3.5.

Question 21

In the event that a firm goes bankrupt and is liquidated, who is paid off first, second, and third between workers, debt holders, and stockholders?

A)(1) debt holders; (2) workers; (3) stockholders
B)(1) stockholders; (2) workers; (3) debt holders
C)(1) workers; (2) debt holders; (3) stockholders
D)(1) workers; (2) stockholders; (3) debt holders

Question 22

The periodic payments on equity securities are called

A)interest payments.
B)dividends.
C)equity shares.
D)stock repurchases.

Question 23

When savers buy securities from borrowers without the assistance of any third-party, they are using

A)direct finance.
B)indirect finance.
C)a secondary market.
D)a financial intermediary.

Question 24

When savers invest through financial intermediaries, they are said to engage in

A)direct finance.
B)indirect finance.
C)a secondary market.
D)a tertiary market.

Question 25

Which of the following is true of an equity?

A)Equity securities can be bought and sold.
B)The periodic payment on an equity security is called the interest.
C)​An equity promises to pay a fixed amount periodically.
D)An equity security has a specific date of maturity.

Question 26

Which of the following is true of debt securities?

A)​The periodic payment on a debt security is known as dividend.
B)A debt security specifies a particular maturity date.
C)The original amount invested in a referred to as interest.
D)The amount of payment on a debt security depends on the company's profits.

Question 27

Andy keeps his savings in a certificate of deposit at a bank, Ben keeps his savings invested in U.S.savings bonds, Beth keeps her savings in the form of liquid cash in her vault, and Charlie uses his to buy stock on the New York Stock Exchange.Given this information, who among the following individuals is using indirect finance?

A)Andy
B)Ben
C)Charlie
D)Beth

Question 28

Mr.Smith bought stocks of several companies from the secondary market.He used

A)micro finance.
B)public finance.
C)direct finance.
D)indirect finance.

Question 29

A treasury bond issued by the U.S.government

A)does not have a maturity date.
B)makes periodic payments of specific amounts.
C)pays dividends to the bond holders.
D)is a short-term debt security.

Question 30

A financial intermediary

A)is a government-owned acceptor of deposits.
B)pools the funds of many people.
C)speculates in the stock market.
D)advances loans but does not accept deposits.

Question 31

A company that transfers funds from savers to borrowers by receiving funds from savers and investing in securities issued by borrowers is known as a(n)

A)broker.
B)financial intermediary.
C)stock exchange.
D)venture capitalist.

Question 32

A company that takes short term deposits and makes long term loans is a

A)a financial intermediary.
B)a brokerage.
C)an investment bank.
D)a secondary market maker.

Question 33

Mary used her savings to buy some stocks of a company in the secondary market while Jane sold some stocks she owned through a stock broker.George invested his savings in a bank while Tom bought treasury bills of the U.S.government.Who among the following is using direct finance?

A)Mary
B)Jane
C)George
D)Tom

Question 34

Treasury bills issued by the U.S.government

A)do not have a specific period of maturity.
B)promises to pay dividends to its owners.
C)are long term debt securities.
D)are short term debt securities.

Question 35

Andy keeps his savings in a money market mutual fund, Ben keeps his savings invested in U.S.savings bonds, Charlie keeps his in a bank, and Beth uses her savings to buy the stocks of a company.Given this information, who among the following individuals is using direct finance?

A)Andy
B)Ben
C)Charlie
D)Beth

Question 36

Which of the following is true of dividends?

A)The amount of dividends paid to stock owners depends on the company's performance.
B)The timing of dividend payments is the same across all companies.
C)Dividends are tax-free payments from insurance companies.
D)Dividends are tax-free social security payments.

Question 37

Interest payments are

A)the periodic payments on equity securities.
B)made by the borrower to the investor along with the principal.
C)tax-free payments from insurance companies.
D)taxable Social Security payments.

Question 38

When a country's financial system is young, it usually relies more on______ finance.

A)micro
B)direct
C)nonintermediary
D)indirect

Question 39

Four friends- Phillips, Eliza, John, and Jacob are associated with Redhood Ltd.in different ways.Phillips is the CEO of Redhood Ltd., Melissa works as an accountant while John owns some shares of Redhood Ltd.and Jacob has some debt securities issued by the company.​Who is likely to be paid last in case of a bankruptcy?

A)​John
B)​Jacob
C)​Phillips
D)​Melissa

Question 40

Most commonly, companies issue a(n) ______dividend.

A)quarterly
B)semiannual
C)annual
D)monthly

Question 41

Beth's financial adviser has asked her to invest in a number of securities rather than investing in one.This is an example of

A)securitization.
B)free-riding.
C)sterilization.
D)diversification.

Question 42

A financial intermediary specializes in knowing about people who apply for loans.The intermediary knows how to evaluate credit histories and the probabilities that borrowers will repay.These facts are examples of which of the following functions of financial intermediaries?

A)Gathering information
B)Helping savers diversify
C)Pooling funds
D)Taking short-term deposits in order to make long-term loans

Question 43

The market for new securities is known as:

A)the closed market.
B)the primary market.
C)the secondary market.
D)the open market.

Question 44

Suppose the quantity demanded for a security is BD = 150 − 0.1b,
And the quantity supplied of the security is
BS = 50 + 0.1b,
Where b is the price of the security in dollars.The equilibrium price of the security is

A)$50.
B)$125.
C)$250.
D)$500.

Question 45

Commercial banks, savings institutions, and mutual funds are all

A)financial intermediaries.
B)secondary market organizations.
C)owned by the government.
D)institutions that people use to engage in direct finance.

Question 46

Phillips regularly invests in the securities of established companies.However, he does not invest in new securities issued by companies.His transactions take place in the

A)closed market.
B)open market.
C)secondary market.
D)primary market.

Question 47

Everything else remaining unchanged, a decrease in the supply of security A and a decrease in the demand for security B will cause the price of security A to_____ and the price of security B to_____ .

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

Question 48

Which of the following is NOT a financial intermediary?

A)A commercial bank.
B)A savings institution.
C)A government treasury.
D)A mutual fund.

Question 49

Investors who wish to reduce their risk should

A)buy stocks of small companies.
B)diversify.
C)buy stocks of large companies.
D)keep large amounts of cash.

Question 50

Everything else remaining unchanged, an increase in the supply of security A and a decrease in the demand for security B will cause the price of security A to_____ and the price of security B to_____ .

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

Question 51

Joe E.Conomist purchased 100 shares of IBM corporation in 2011 for $10,000.In 2014, Joe sold these shares to Sally Forth for $15,000.How would this sale of stock in 2014 affect IBM corporation?

A)IBM makes $5,000 in profit.
B)IBM invests $5,000 in capital equipment.
C)IBM suffers a loss of $5,000.
D)IBM is unaffected.

Question 52

The market in which a security is sold from one investor to another is known as

A)the closed market.
B)the primary market.
C)the secondary market.
D)the open market.

Question 53

A financial market is

A)a place or a mechanism by which borrowers, savers, and financial intermediaries trade.
B)an electronic means of transacting.
C)a place where people engage in indirect finance.
D)a secondary market.

Question 54

Which of the following is NOT a financial intermediary?

A)A credit union.
B)A life insurance company.
C)A mutual fund.
D)A labor union.

Question 55

Owning a variety of securities means engaging in

A)securitization.
B)sterilization.
C)diversification.
D)free-riding.

Question 56

​Mobi's is a new company that manufactures premium apparel for men.It needs fund for expanding its production units and is planing to issue the first lot of shares.These shares will be traded in the .

A)​primary market
B)​secondary market
C)​tertiary market
D)​closed market

Question 57

GLTP Inc.transformed from a private company into a public company after offering its shares in a securities exchange for the first time.Such transactions take place in a

A)tertiary market.
B)closed market.
C)secondary market.
D)primary market.

Question 58

Everything else remaining unchanged, an increase in the supply of security A and an increase in the demand for security B causes the price of security A to_____ and the price of security B to_____ .

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

Question 59

Which of the following is true of a financial market?

A)Only new securities can be traded in a financial market.
B)Some financial markets are local.
C)All financial markets have a central physical location.
D)All financial markets are secondary markets.

Question 60

The U.S.government borrows by auctioning its bonds in the

A)primary market.
B)stock market.
C)secondary market.
D)derivative market.

Question 61

An investor calculating the standard deviation of different investments is measuring the ______ of alternative investment portfolios.

A)expected return
B)risk
C)taxation
D)liquidity

Question 62

In the Asian crisis, which began in 1997,

A)investors began to pull their financial investments out of Asia with urgency.
B)large banks from Asia began purchasing large American banks, threatening the health of the U.S.financial system.
C)mutual funds in Asia began to fail in large numbers.
D)savings-and-loan institutions in Asia began to fail in large numbers.

Question 63

In the 1980s, the United States suffered one of its worst financial crises when _____began to fail in large numbers.

A)commercial banks
B)stock brokers
C)money market mutual funds
D)savings and loan institutions

Question 64

Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.Which investment provides the highest expected return?
Investment A: $\quad$ Total return = 10 percent with probability 50 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 20 percent with probability 50 percent

Investment B: $\quad$ Total return = 12 percent with probability 50 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 20 percent with probability 50 percent

Investment C: $\quad$ Total return = 5 percent with probability 60 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 25 percent with probability 40 percent

Investment D: $\quad$ Total return = 5 percent with probability 60 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 7 percent with probability 40 percent

A)Investment A
B)Investment B
C)Investment C
D)Investment D

Question 65

Suppose you are an investor facing a choice between three investments that are identical in every way except in terms of their rates of return and taxability.Which investment provides the highest after-tax return?
Investment A: $\quad$ interest rate 10 percent, tax rate 40 percent of interest income.
Investment B: $\quad$ interest rate 8 percent, tax rate 25 percent of interest income.
Investment C: $\quad$ interest rate 6.5 percent, tax rate 0 percent.
Investment D: $\quad$ interest rate 5 percent, tax rate 1 percent.

A)Investment A
B)Investment B
C)Investment C
D)Investment D

Question 66

The income an investor receives in some period divided by the value of the security at the beginning of that period is known as _____yield.

A)capital-gains
B)expected
C)current
D)realized

Question 67

The quantity demanded of a security is Q_D= 220 - 0.2b and the quantity supplied of it is Q_S=100 + 0.2b.The equilibrium price of the security is______ .

A)?$300
B)?$280
C)?$420
D)?$500

Question 68

Consider the following four debt securities, which are identical in every characteristic except as noted:
W: $\quad$ A corporate bond rated AAA
X: $\quad$ A corporate bond rated BBB
Y: $\quad$ A corporate bond rated AAA with a shorter time to maturity than bonds W and X
Z: $\quad$ ?A corporate bond rated AAA with the same time to maturity as bond Y that trades in a
More liquid market than bonds W, X, or Y

Which of the following is the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest?

A)X, W, Y, Z
B)W, X, Z, Y
C)X, Y, Z, W
D)X, Z, W, Y

Question 69

Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.Which security has the least risk? Note: You can answer this question intuitively, without calculating the standard deviation.However, if you want to calculate the standard deviation, the equation is: Standard deviation = S = $$\left\{ p _ { 1 } \left( X _ { 1 } - E \right) ^ { 2 } + p _ { 2 } \left( X _ { 2 } - E \right) ^ { 2 } + \ldots + p _ { N } \left( X _ { N } - E \right) ^ { 2 } \right\} ^ { \frac { 1 } { 2 } }$$
Investment A: $\quad$ total return = 10 percent with probability 50 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Total return = 20 percent with probability 50 percent

Investment B: $\quad$ total return = 12 percent with probability 50 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ total return = 20 percent with probability 50 percent

Investment C: $\quad$ total return = 5 percent with probability 60 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ total return = 25 percent with probability 40 percent

Investment D: $\quad$ total return = 5 percent with probability 60 percent
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ total return = 7 percent with probability 40 percent

A)Investment A
B)Investment B
C)Investment C
D)Investment D

Question 70

A nonmarketable security is one that

A)is not widely advertised.
B)has a present value of zero.
C)cannot be resold in a secondary market.
D)has only a current yield and not a capital-gains yield.

Question 71

If the demand for a company's stock decreases​, supply remaining unchanged,

A)​both its equilibrium price and quantity will rise.
B)​both its equilibrium price and quantity will fall.
C)​its equilibrium price will rise while its equilibrium quantity will fall.
D)​its equilibrium price will fall while its equilibrium quantity will rise.

Question 72

Suppose the quantity demanded for a security is
B_D = 150 ? 0.1b,
And the quantity supplied of the security is
B_S = 50 + 0.1b,
Where b is the price of the security in dollars.The equilibrium quantity of the security is

A)100.
B)125.
C)145.
D)500.

Question 73

Risk that cannot be eliminated by diversification is referred to as

A)idiosyncratic risk.
B)market risk.
C)default risk.
D)interest-rate risk.

Question 74

One lesson learned from the financial crisis of 2008 was that

A)government regulators need to respond slowly when financial practices threaten the economy.
B)unregulated financial firms need to be prevented from growing so large that their failure would severely damage the economy.
C)the ease of owning a home has no relationship to the efficiency of the financial system.
D)unregulated financial firms need to be prevented from growing so small that their success would have no or little effect on the economy.

Question 75

​Which of the following statements is true?

A)​Over the last fifty years, the risk spread between Aaa bonds and Baa bonds always remained positive except in 1998.
B)The risk spread between Aaa bonds and Baa bonds became negative only in the mid-1960s.
C)For most of the last twenty years, the risk bread between Aaa bonds and Baa bonds remained negative.
D)Over the last fifty years, the risk spread between Aaa bonds and Baa bonds never became negative

Question 76

The price of a stock at the beginning of a year is $50.There is a 70 percent chance of its price rising to $55 by the end of the year and a 30 percent chance of its price falling to $45.The stock will pay an amount of $2 at the end of the year.The current yield of the security is

A)​4 percent
B)​5 percent
C)​70 percent
D)​30 percent

Question 77

Suppose the quantity demanded for a security is B_D = 150 ? 0.1b,
And the quantity supplied of the security is
B_S = 50 + 0.1b,
Where b is the price of the security in dollars.Suppose that the supply curve shifts to
B_S = 75 + 0.1b.
The equilibrium price of the security

A)rises by $50.
B)rises by $125.
C)falls by $125.
D)falls by $50.

Question 78

Consider three investments, where expected return is the expected value of the total return and risk is measured by the standard deviation.The investments are identical in every way except for their expected return and risk:
Investment A: $\quad$ expected return = 2 percent, risk = 5 percent
Investment B: $\quad$ expected return = 5 percent, risk = 4 percent
Investment C: $\quad$ expected return = 14 percent, risk = 20 percent
Investment D $\quad$ expected return = 6 percent, risk = 12 percent

If a risk-averse investor can buy only one of the three investments and compares each investment with the other three, which investment option would he never choose?

A)Investment A, because its expected return is lower than Investment B and its risk is higher.
B)Investment B, because its expected return is so much lower than Investment C.
C)Investment C, because its risk exceeds its expected return.
D)Investments D, because the expected return to investment D is so much lower than Investment C.

Question 79

Everything else remaining unchanged, a decrease in the supply of security A and an increase in the demand for security B will cause the price of security A to _____and the price of security B to____ .

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

Question 80

Suppose the quantity demanded for a security is B_D = 150 ? 0.1b,
And the quantity supplied of the security is
B_S = 50 + 0.1b,
Where b is the price of the security in dollars.Suppose that the supply curve shifts to
B_S = 75 + 0.1b.
The equilibrium quantity of the security

A)rises by 12.5.
B)rises by 2.5.
C)falls by 2.5.
D)falls by 12.5.