Deck 1: Role of Financial Markets and Institutions

Question 1

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

Answer 1

C

Question 2

Funds are provided to the initial issuer of securities in the

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

Answer 2

B

Question 3

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) imposed heavy penalties for insider trading.
D) required complete disclosure of relevant financial information for securities traded in the secondary market.
E) all of the above

Answer 3

A

Question 4

Money market securities generally have ____.

A) relatively low liquidity, low expected return, and a high degree of credit risk.
B) relatively high liquidity, high expected return, and a high degree of credit risk.
C) relatively low liquidity, high expected return, and a low degree of credit risk.
D) relatively high liquidity, low expected return, and a low degree of credit risk.

Question 5

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 6

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

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

Question 7

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

Question 8

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 9

Which of the following is not an issuer of bonds?

A) households
B) corporations
C) the U.S. Treasury
D) government agencies

Question 10

Which of the following is a capital market instrument?

A) a six-month certificate of deposit
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 11

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 12

Which of the following is not a typical function of securities firms?

A) provide brokerage services
B) provide underwriting services
C) accept deposits that are insured by the federal government and use the funds to provide loans to corporations
D) offer advice on mergers and other corporate restructurings.

Question 13

Behavioral finance

A) applies concepts from sociology and anthropology to the behavior of market participants.
B) studies the behavior of financial markets in response to changes in Federal Reserve policy.
C) applies psychology to financial decision making.
D) explains why markets are efficient.

Question 14

The Securities and 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 15

Financial market participants who provide funds are called

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

Question 16

Stock issued by a corporation is an example of a(n)

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

Question 17

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 18

Which of the following is a money market security?

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

Question 19

The creditors in the federal funds market are

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

Question 20

Investors in equity securities may earn a return from

A) coupon payments and the return of principal at the maturity date.
B) coupon payments and a capital gain when they sell the securities.
C) quarterly dividends (if paid) and a capital gain when they sell the securities.
D) quarterly dividends (if paid) and the return of principal at the maturity date.

Question 21

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

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

Question 22

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 23

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

Question 24

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 25

Securities represent a claim on the provider of funds.

Question 26

____ concentrate on mortgage loans.

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

Question 27

Which of the following are not major investors in stocks?

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

Question 28

Which of the following is a nondepository financial institution?

A) savings bank
B) commercial bank
C) savings and loan association
D) mutual fund

Question 29

____ securities have a maturity of one year or less; ____ securities generally have relatively high liquidity.

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

Question 30

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 31

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 securities transactions between two parties.
D) purchases securities for its own account.

Question 32

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

Question 33

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

Question 34

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 35

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

Question 36

Securities represent a claim on the issuer.

Question 37

Debt securities represent debt (borrowed funds) incurred by the issuer.

Question 38

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

A) Credit unions are nonprofit.
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 39

A five-year security was purchased two years ago by an investor who plans to resell it. The investor will sell the security r in the

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

Question 40

When a securities firm acts as a(n) ____, it makes a market in specific securities by maintaining an inventory of those securities.

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

Question 41

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

Question 42

Financial markets facilitating the flow of short-term debt securities 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 43

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

Question 44

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

A) An individual investor purchases some existing shares of stock in Apple through her 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 45

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

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

If a security is undervalued, some investors would capitalize on 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 48

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

Question 49

____ involve(s) decisions such as how much funding to obtain and what types of securities to issue when financing operations.

A) Corporate finance
B) Investment management
C) Financial markets and institutions
D) none of the above

Question 50

Bonds issued by corporations have a ____ expected return and ____ risk than Treasury bonds.

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

Question 51

Commercial banks in aggregate have more assets than credit unions.

Question 52

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

Question 53

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 54

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 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

If investors speculate in the underlying asset rather than in 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 58

Systemic risk is the risk that a large decline in one stock's price could cause investors to sell their stock in other companies.

Question 59

The Sarbanes-Oxley Act requires firms to provide complete and accurate financial information and imposes penalties on key executives of the firm if financial fraud is detected.

Question 60

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

Question 61

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 62

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

Question 63

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 fundsare known as money markets.

Question 64

Which of the following is an example of an asymmetric information problem?

A) A corporation releases toxic wastes into a river.
B) A corporation relocates to Ireland to take advantage of lower corporate tax rates.
C) A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock.
D) A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.

Question 65

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

Question 66

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

Question 67

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

Question 68

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 69

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 70

Which of the following are not considered money market securities?

A) Treasury bills
B) mortgage-backed securities
C) negotiable certificates of deposit
D) commercial paper

Question 71

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

Question 72

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

Question 73

Savings institutions are a type of nondepository institution.

Question 74

Bonds commonly have maturities of one to three years.

Question 75

If investors speculate in derivative contracts rather than in 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 76

____ 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

Question 77

____ are not considered capital market securities.

A) Derivative securities
B) Treasury bonds
C) Corporate bonds
D) Equity securities
E) Mortgages

Question 78

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

Question 79

When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

A) undervalued
B) overvalued
C) fairly priced
D) efficient
E) none of the above

Question 80

____ are classified as depository institutions.

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