Deck 16: The Financial System

Question 1

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
____ allows customers to conduct some or all of their banking on the Internet.

Answer 1

k

Question 2

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
____ are backed only by the financial reputation of the issuing corporation.

Answer 2

m

Question 3

Describe the two ways that funds can be transferred between savers and users.

Answer 3

Funds can be transferred between savers and users in two ways: directly and indirectly. A direct transfer means that the user raises the needed funds directly from savers. While direct transfers occur, the vast majority of funds flow through either financial markets or financial institutions. For example, assume a local school district needs to build a new high school. The district doesn't have enough cash on hand to pay for the school construction costs, so it sells bonds to investors (savers) in the financial market. The district uses the proceeds from the sale to pay for the new school and in return pays bond investors interest each year for the use of their money.
The other way in which funds can be transferred indirectly is through financial institutions-for example, a commercial bank such as Cincinnati-based Fifth Third Bank or Alabama-based Regions Bank. The bank pools customer deposits and uses the funds to make loans to businesses and households. These borrowers pay the bank interest, and it, in turn, pays depositors interest for the use of their money.

Question 4

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
As a whole, ________ save more funds than they use.

Question 5

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
A(n) ____ allows the issuer to redeem the bond before its maturity at a specified price.

Question 6

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
The _____ is sometimes referred to as the Big Board, the most famous and one of the oldest stock markets in the world, having been founded in 1792.

Question 7

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
____ represent obligations on the part of issuers to provide purchasers with expected or stated returns on the funds invested or loaned.

Question 8

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
The _______ sets most policies concerning monetary policy and interest rates.

Question 9

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
The financial market where firms and governments issue securities and sell them initially to the general public is called the ____________.

Question 10

Explain the main features of preferred stock.

Question 11

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
____ are the largest and probably most important financial institutions in the United States and in most other countries as well.

Question 12

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
A(n) ____ sets a price ceiling when buying or a price floor when selling.

Question 13

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
All trading on the ____ takes place through its intranet, rather than on a trading floor.

Question 14

Differentiate among the different types of money market instruments.

Question 15

Explain the process of underwriting.

Question 16

Describe how the financial system operates.

Question 17

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
By selling ___, a firm obtains long-term debt capital.

Question 18

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
____ are cooperative financial institutions that are owned by their depositors, all of whom are members.

Question 19

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
The use of material nonpublic information about a company to make an investment profit is known as __________.

Question 20

MATCHING
Complete the following using the terms listed.
a.bonds
b.Commercial banks
c.Nasdaq
d.Credit unions
e.financial system
f.call provision
g.insider trading
h.Federal Open Markets Committee (FOMC)
i.Securities
j.New York Stock Exchange
k.Online banking
l.limit order
m.debentures
n.primary market
o.net savers
The process by which money flows from savers to users is called the ____.

Question 21

_____ is a form of short-term financing sold by corporations, such as Raytheon, that mature from 1 to 270 days from the date of issue.

A) Bonds
B) CDs
C) Treasury bills
D) Commercial paper

Question 22

Explain the government regulation of the financial markets and the role of the SEC.

Question 23

___ are short-term securities issued by the U.S. Treasury and backed by the full faith and credit of the U.S. government.

A) Treasury bills
B) CDs
C) Commercial paper
D) Bonds

Question 24

Treasury bills have a minimum denomination of ____.

A) $100,000
B) $10,000
C) $1,000
D) $100

Question 25

One of the most important variables that determine how much a person saves is _____.

A) what country he or she is from
B) the person's gender
C) the person's race
D) the person's age

Question 26

Securities are also called _____.

A) cash
B) savings accounts
C) financial institutions
D) financial instruments

Question 27

Funds can be transferred between savers and users in two ways:_____________.

A) individually and collectively
B) in person and electronically
C) directly and indirectly
D) free and with user charges

Question 28

All of the following are types of securities EXCEPT _____.

A) money market instruments
B) stock
C) bonds
D) cash

Question 29

In addition to the NYSE and NASDAQ, what other stock markets exist in the U.S.?

Question 30

In the U.S. financial system, which of the following is a net saver?

A) households
B) business
C) the government
D) financial institutions

Question 31

Explain the Federal Reserve's three major policy tools.

Question 32

Alex buys a money market instrument. It will mature within, at most, ____.

A) 10 years
B) 2 years
C) 1 year
D) 6 months

Question 33

____ are short-term debt securities issued by governments, financial institutions, and corporations.

A) Stock
B) Bonds
C) Checks
D) Money market instruments

Question 34

Indirect transfer of funds occurs through _____.

A) personal checks
B) cash payments
C) financial institutions
D) consumer purchases

Question 35

What are financial institutions?

Question 36

What is the Federal Reserve's most important function? How does this function affect the nation's rate of inflation and employment?

Question 37

The difference between what you own and what you owe is called _____.

A) net worth
B) gross worth
C) net value
D) debt factor

Question 38

Explain what a credit union is and give an example of one.

Question 39

Explain the differences between market orders and limit orders.

Question 40

Describe the global financial environment.

Question 41

_____ securities are backed by a pool of mortgage loans purchased from lenders, such as savings banks.

A) Mortgage pass-through
B) Mortgage bond
C) Commercial paper
D) Corporate bond

Question 42

Which of the following is a depository financial institution?

A) Life insurance companies
B) Credit unions
C) Pension funds
D) Mutual funds

Question 43

A _____ is a time deposit at a financial institution, such as a commercial bank, savings bank, or credit union.

A) commercial paper
B) Treasury bill
C) certificate of deposit
D) Bond

Question 44

Other things being equal, as interest rate rises, the price of a bond _____.

A) stays the same
B) will also rise
C) cannot be determined
D) decreases

Question 45

Two factors determine the price of a bond: ____ and ____.

A) risk; interest rate
B) market; risk
C) interest rate; call provision
D) price of other bonds; the company selling the bond

Question 46

Bonds with ratings of BBB and above are classified as ____.

A) speculative bonds
B) investment-grade bonds
C) junk bonds
D) convertible bonds

Question 47

_____ are creditors of a corporation or government body.

A) Commercial paper holders
B) Bondholders
C) Treasury bills holders
D) Certificate of deposit holders

Question 48

Daily trading on the AMEX market is ____ shares.

A) over 10 billion
B) over 2 billion
C) about 500 million
D) less than 100 million

Question 49

The U.S. Department of Treasury sells what type of bonds?

A) Corporate bonds
B) Government bonds
C) Certificate of deposits bonds
D) Municipal bonds

Question 50

Two types of municipal bonds exist. What are they?

A) Government bonds and mortgage pass-through security bonds
B) Corporate bonds and general obligation bonds
C) Revenue bonds and government bonds
D) Revenue bonds and general obligation bonds

Question 51

_____ are loans made to borrowers with poor credit ratings.

A) Low value mortgages
B) Prime mortgages
C) Corporate mortgages
D) Subprime mortgages

Question 52

The ____ is a collection of financial markets in which previously issued securities are traded among investors.

A) primary market
B) secondary market
C) government market
D) super market

Question 53

The two largest stock markets in the world are the ____ and the ____.

A) New York Stock Exchange; SP 500
B) Tokyo Stock Exchange; New York Stock Exchange
C) Tokyo Stock Exchange; London Stock Exchange
D) New York Stock Exchange; NASDAQ stock market

Question 54

What provision allows the issuer to redeem the bond before its maturity at a specified price?

A) Bond provision
B) Convertible provision
C) Call provision
D) Redeem provision

Question 55

An owner of which form of stock would receive dividend payments first?

A) Convertible securities
B) Common stock
C) Preferred stock
D) Standard stock

Question 56

Corporate bonds are a diverse group and often vary based on the ____ that backs it.

A) market
B) value
C) collateral
D) company

Question 57

When a company needs capital to purchase inventory, expand a plant, make major investments, acquire another firm, or pursue other business goals, it may sell a bond or stock issue to the investing public. This is done in the _____ market.

A) primary
B) secondary
C) government
D) labor

Question 58

What feature gives the bondholder or preferred stockholder the right to exchange the bond or preferred stock for a fixed number of shares of common stock?

A) Bond rating
B) Convertible securities
C) Pass-through securities
D) Standard stock

Question 59

Tom just bought a bond from United Pet Group. This bond is only backed by the financial reputation of the company. What type of bond did Tom buy?

A) Debenture
B) Secured bond
C) Certificate of deposit
D) Commercial paper

Question 60

The basic form of corporate ownership is embodied in ____.

A) preferred stock
B) standard stock
C) convertible securities
D) common stock

Question 61

Which of the following financial institutions would invest the greatest percentage of its assets in common stocks and other long-term investments?

A) Commercial bank
B) Pension fund
C) Credit union
D) Property and liability insurance company

Question 62

Which of the following statements is incorrect?

A) The number of commercial banks is declining each year.
B) Commercial banks are the most important financial institution.
C) Commercial banks are prohibited from selling securities or insurance.
D) Banks offer the widest range of services of any financial institution.

Question 63

Which of the following financial institutions would typically invest the largest portions of its funds in home mortgage loans?

A) Savings bank
B) Credit union
C) Commercial bank
D) Life insurance company

Question 64

The ______ is perhaps the most international of all stock markets.

A) New York Stock Exchange
B) London Stock Exchange
C) NASDAQ stock market
D) Tokyo Stock Exchange

Question 65

Savings banks were originally established to make ________ loans.

A) home mortgage
B) business
C) agricultural
D) automobile

Question 66

Sean made a purchase at his local Walmart. Instead of writing a check, Sean used a card issued by his bank with a Visa logo on the front. He entered his PIN and the purchase was automatically deducted from his checking account. Sean used his ________ card.

A) credit
B) debit
C) mortgage
D) point-of-sale

Question 67

Which of the following statements concerning the Fed is incorrect?

A) The Fed is the nation's central bank.
B) The Fed acts as the banker's bank.
C) Credit unions and savings banks must belong to the Fed.
D) Virtually, all large commercial banks are Fed members.

Question 68

The rate the Fed charges member banks for short-term loans is called the ________.

A) discount rate
B) margin rate
C) federal funds rate
D) reserve requirement

Question 69

There are ________ Federal Reserve districts.

A) 5
B) 8
C) 12
D) 15

Question 70

Deposit insurance shifts most of the financial risk of bank failures from depositors to ________.

A) the bank's creditors
B) the bank's stockholders
C) borrowers
D) the federal agency.

Question 71

Which of the following financial institutions is organized as a not-for-profit cooperative?

A) Commercial bank
B) Credit union
C) Life insurance company
D) Savings bank

Question 72

Which of the following is a nondepository financial institution?

A) Life insurance company
B) Savings bank
C) Commercial bank
D) Credit union

Question 73

Which of the following is not one of the four major policy tools the Fed has for controlling the growth in the supply of money and credit?

A) Reserve requirements
B) Check clearing
C) The discount rate
D) Open market operations

Question 74

M2 includes ________ M1.

A) all of
B) none of
C) some of
D) half of

Question 75

In ____, buyers and sellers meet in a virtual stock market and trade directly with one another.

A) traditional brick-and-mortar online banking
B) nondepository financial institutions
C) open market operations
D) electronic communications networks

Question 76

What type of financial institution raises money from investors by selling shares?

A) Credit union
B) Property and liability insurance company
C) Mutual fund
D) Pension fund

Question 77

All of the following are included in M1 EXCEPT ________.

A) money market mutual funds
B) total value of coins
C) checking accounts
D) currency in circulation

Question 78

Commercial banks obtain most of their funds from ________.

A) the government
B) the sale of securities
C) depositors
D) stockholders

Question 79

The _____ order is called instructs the broker to obtain the best possible price-the highest price when selling and the lowest price when buying.

A) fast
B) stock
C) market
D) limit

Question 80

The process used by an insurance company to determine whom to insure and how much to charge is called ________.

A) a premium
B) underwriting
C) an insuring agreement
D) indemnity