Deck 2: The Financial System and the Level of Interest Rates

Question 1

Brokers are market specialists who do not bear risk.

Answer 1

True

Question 2

Businesses are the principal borrower-spenders in the economy.

Answer 2

True

Question 3

The existence of an active secondary market for a security will help enhance the price for a security in the primary market.

Answer 3

True

Question 4

The downside to a private placement transaction is that it does not require the fees and expenses associated with an SEC registration.

Question 5

The law that barred commercial banks from investment banking activities is the Financial Services Modernization Act of 1999.

Question 6

Equities are generally traded in the capital market.

Question 7

The term money market reflects the idea that the instruments traded in the money market are highly marketable and easily converted into cash.

Question 8

LIBOR refers to the rate that U.S. banks quote to each other for overnight borrowing.

Question 9

Without a financial market, purchasing a house would require a cash purchase.

Question 10

The elimination of small financial institutions is primarily a by-product of deregulating the financial markets.

Question 11

The method that most individuals use to fund their needs is through indirect financing.

Question 12

A privately held corporation securing a loan from its regional commercial bank is an example of a direct market transaction.

Question 13

The vast preponderance of securities sales on the New York Stock Exchange are classified as secondary market transactions.

Question 14

A primary market is any financial market in which owners of outstanding securities can resell them to other investors.

Question 15

The financial system is nothing more than a collection of financial markets.

Question 16

The role of the financial system is to gather money from people and businesses that have funds to invest and to channel money to those that need it.

Question 17

Governments are the principal lender-savers in the economy.

Question 18

Business finance companies obtain the majority of their funds by selling equity.

Question 19

Direct financial markets could be broadly labeled as wholesale markets for funding.

Question 20

Today, large money center banks have been allowed back into the investment business.

Question 21

The ease with which a security can be sold and converted into cash is called

A) convertibility.
B) book value.
C) marketability.
D) none of the above.

Question 22

What is the generally recognized minimum denominated transaction in the direct financial markets?

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

Question 23

Direct financing occurs when

A) an lender-savers borrows directly from a borrower-spenders.
B) a borrower-spenders borrows directly from a lender-savers.
C) an lender-savers borrows from the federal government.
D) a borrower-spenders borrows from the federal government.

Question 24

Savings by ________ is the origin of much of the money that funds large business loans in the economy.

A) consumers
B) the U.S. government
C) small businesses
D) none of the above

Question 25

Secondary financial markets are similar to

A) direct auction markets.
B) new-car markets.
C) used-car markets.
D) all of the above.

Question 26

Which law is responsible for rolling back many of the rules against commercial banks offering investment banking activities?

A) the Securities Act of 1933
B) the Securities Exchange Act of 1934
C) the Glass-Steagall Act of 1933
D) the Financial Services Modernization Act of 1999

Question 27

The nominal rate of interest is indirectly related to real rates.

Question 28

The presence of a financial market increases the marketability of a financial security by

A) essentially insuring the price of the security.
B) reducing the transaction costs for selling the security.
C) guaranteeing the accuracy of information produced by the issuer of the security.
D) none of the above.

Question 29

One of the main services offered by investment banks to companies is

A) helping companies sell new debt or equity issues in the security markets.
B) making loans to companies.
C) taking deposits from companies.
D) all of the above.

Question 30

The financial market where a new security is sold for the first time is

A) a primary market.
B) a secondary market.
C) an indirect market.
D) none of the above.

Question 31

An economy with a large flow of funds requires

A) a lot of gold reserves.
B) a tightly controlled central bank.
C) an efficient financial system.
D) all of the above.

Question 32

Real rates of interest are perfectly observable.

Question 33

Financial markets and financial institutions are both part of

A) the U.S. Treasury.
B) the financial system.
C) the SEC.
D) none of the above.

Question 34

________ are the principal lender-savers in the economy.

A) Households
B) The federal government
C) State governments
D) Businesses

Question 35

The financial system's primary concern is funneling money from ________ to _________

A) wealthy individuals, individuals.
B) Lender-savers, borrower-spenders
C) borrower-spenders, Lender-savers
D) the government, wealthy individuals

Question 36

If you just purchased a share of IBM through a New York Stock Exchange-based transaction, you participated in

A) a primary market transaction.
B) a secondary market transaction.
C) a futures market transaction.
D) none of the above.

Question 37

Which types of individuals are able to participate in the direct financial market?

A) Entrepreneurs
B) wealthy individuals
C) venture capitalists
D) all of the above.

Question 38

The major players in the direct financial markets are

A) investment banks.
B) money center banks.
C) regional banks.
D) both a and b.

Question 39

An important function of the financial system is

A) to direct money to the best investment opportunities in the economy.
B) to allow the federal government to view all financial transactions.
C) to help state governments to coordinate state tax levies.
D) all of the above.

Question 40

It is impossible for the nominal rate of interest to be below the real rate of interest.

Question 41

If a firm needs to finance a new corporate headquarters building, then it would most likely seek the funds in the

A) money market.
B) capital market.
C) futures market.
D) all of the above.

Question 42

The most common reason that corporate firms use the futures and options markets is

A) to hedge risk.
B) to take risk.
C) to make deposits.
D) none of the above.

Question 43

A line of credit to a corporation is like _______ to an individual.

A) a term loan
B) a bond
C) a credit card
D) none of the above

Question 44

The price of borrowing money is called

A) inflation.
B) return.
C) interest.
D) all of the above.

Question 45

A mutual fund is an example of

A) a commercial bank.
B) an insurance company.
C) an investment fund.
D) a pension fund.

Question 46

A highly liquid financial instrument with a maturity of 90 days would be traded in

A) the money market.
B) the bond market.
C) the stock market.
D) none of the above.

Question 47

The term money market came about because

A) firms that issue securities in this market are in dire need of cash.
B) it is a market where stocks are converted into money.
C) the securities traded in this market are a close substitute for cash.
D) none of the above.

Question 48

Which of the following stock exchange organizational forms has no physical location?

A) a futures exchange
B) an over-the-counter market
C) an auction market.
D) none of the above.

Question 49

If you have an asset that you will be selling during the next two weeks, then you might be able to hedge the proceeds from the asset sale by

A) purchasing a call option on the asset.
B) purchasing a put option on the asset.
C) purchasing more of the asset.
D) none of the above.

Question 50

Which of the following would not make up a major proportion of a pension fund investment portfolio?

A) commercial paper
B) long-term corporate bonds
C) stocks
D) none of the above

Question 51

Casualty insurance companies sell

A) protection against loss of income in the event of the death of the insured.
B) protection against loss of property from fire, theft, accidents, and other predictable causes.
C) protection against a loss of pension revenue for retirees.
D) all of the above.

Question 52

If a firm needs to adjust its liquidity position, then it would participate in

A) the money market.
B) the bond market.
C) the stock market.
D) all of the above.

Question 53

Which of the following grants the owner the right to purchase an asset at a prespecified price for a prespecified period of time?

A) a call option
B) a put option
C) a futures contract
D) all of the above

Question 54

Which of the following are the primary investment vehicles for the funds in which life insurance companies must invest?

A) CDs
B) stocks
C) long-term corporate bonds
D) both b and c

Question 55

Money market instruments are generally issued by

A) firms in dire need of cash to maintain their credit rating.
B) firms of the highest credit rating.
C) firms of the lower credit ratings.
D) all of the above.

Question 56

The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called

A) financial bundling.
B) financial intermediation.
C) financial disintermediation.
D) none of the above.

Question 57

The NYSE is an example of

A) an over-the-counter market exchange.
B) an organized exchange.
C) an electronic market exchange.
D) all of the above.

Question 58

One aspect of deregulating the financial markets has been

A) the elimination of smaller, less efficient institutions.
B) the reemergence of smaller, less efficient institutions.
C) the elimination of larger institutions.
D) none of the above.

Question 59

If your firm primarily borrows from commercial banks, then it primarily accesses the capital markets through

A) direct financing.
B) indirect financing.
C) a legal loophole that allows all commercial banks the ability to underwrite securities.
D) none of the above.

Question 60

If a small business opts not to borrow from a commercial bank, then what is probably its next best alternative?

A) an insurance company
B) a pension
C) an investment fund
D) a finance company

Question 61

If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?

A) 5 percent
B) 10 percent
C) 25 percent
D) none of the above

Question 62

The general level of interest rates tends to follow

A) deflation.
B) the business cycle.
C) the default cycle.
D) all of the above.

Question 63

If you are a borrower, which would you prefer to occur during the life of your loan?

A) a level of inflation that is higher than that anticipated at the outset of the loan
B) a level of inflation that is lower than that anticipated at the outset of the loan
C) a level of inflation that is exactly as anticipated at the outset of the loan
D) no inflation at all

Question 64

During an economic expansion, we would expect

A) interest rates to increase.
B) interest rates to decrease.
C) interest rates to remain the same.
D) the price of money to decrease.

Question 65

Stocks that are traded _____________ are typically those of smaller and lesser know firms.

A) National stock exchange
B) New York stock exchange
C) American stock exchange
D) Over-the-counter

Question 66

Which of the following is the process by which investment bankers purchase new securities directly from the issuing company and resell them to the public?

A) Agency marketing
B) Underwriting
C) Distribution
D) Private placement

Question 67

What is the theory that security prices reflect all public information but not all private information?

A) Weak-form efficiency
B) Semi-strong-form efficiency
C) Strong-form efficiency
D) Nominal-form efficiency

Question 68

What is the theory that security prices reflect all information, whether public or private?

A) Weak-form efficiency
B) Semi-strong-form efficiency
C) Strong-form efficiency
D) Nominal-form efficiency

Question 69

The real rate of return can be justified, at a basic level, by

A) compensation for inflation.
B) compensation for deferring consumption.
C) compensation for the level of international borrowing.
D) all of the above.

Question 70

Explain why secondary markets are so important to businesses that need to raise capital?

Question 71

If the supply of loanable funds decreases relative to the demand for those funds, then we would expect

A) interest rates to remain unchanged.
B) interest rates to increase.
C) interest rates to decrease.
D) the price of money to remain unchanged.

Question 72

The nominal rate of interest is made up of

A) the real rate of interest.
B) compensation for inflation.
C) a commodity cross-index return.
D) both a and b above.

Question 73

In the United States, the real rate of interest is generally about

A) 1 percent.
B) 3 percebt.
C) 5 percent.
D) 7 percent.

Question 74

If a firm sells common stock to the public for the very first time, it is known as ______________.

A) An underwriting
B) An IPO
C) Financial intermediation
D) A LIBO