Question 1

A breakdown of financial markets can result in ________.
A) financial stability
B) rapid economic growth
C) political instability
D) stable prices

Accepted Answer

A breakdown of financial markets can result in political instability, as the economy and government are closely intertwined. The collapse of financial markets can lead to distrust in the government's ability to manage the economy, potentially leading to social unrest and political turmoil. Financial stability, rapid economic growth, and stable prices are not likely outcomes of a breakdown in financial markets.

Question 2

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is ________.
A) 25 percent
B) 12.5 percent
C) 10 percent
D) 5 percent

Accepted Answer

D

Question 3

How do financial intermediaries play an important role in the economy?

Accepted Answer

Financial intermediaries play an important role in the economy because they provide liquidity services, they lower transaction costs through economies of scale, they reduce the risk exposure of investors through risk sharing, and they solve the asymmetric information problems of adverse selection and moral hazard. By doing this, they allow small savers and borrowers to benefit from the existence of financial markets and its instruments. They also improve economic efficiency because they help financial markets to channel funds from lenders-savers to people with productive investment opportunities.

Question 4

Which of the following is an example of an intermediate-term debt?
A) A thirty-year mortgage
B) A sixty-month car loan
C) A six month loan from a finance company
D) A Treasury bond

Accepted Answer

An intermediate-term debt typically has a maturity of 1-10 years. A sixty-month (5-year) car loan falls within this range, making it an example of an intermediate-term debt. Options A and D are long-term debts with maturities of 30 years and up to 30 years, respectively, while option C is a short-term debt with a maturity of only six months.

Question 5

Every financial market has which of the following characteristics?
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders.

Accepted Answer

The characteristic that every financial market has is that it channels funds from lenders-savers to borrowers-spenders. Options A and B are specific to certain financial markets, whereas option C is not true for every financial market.

Question 6

Financial markets have the basic function of ________.
A) getting people with funds to lend together with people who want to borrow funds
B) assuring that the swings in the business cycle are less pronounced
C) assuring that governments need never resort to printing money
D) providing a risk-free repository of spending power

Accepted Answer

Financial markets bring together people who have funds to lend, such as savers and investors, with people who want to borrow those funds, such as businesses and individuals. This enables the allocation of capital to those who can use it most efficiently and facilitates economic growth.

Question 7

Well-functioning financial markets ________.
A) cause inflation
B) eliminate the need for indirect finance
C) cause financial crises
D) produce an efficient allocation of capital

Accepted Answer

Well-functioning financial markets allow for an efficient allocation of capital, meaning that funds are allocated to their most productive uses. This can promote economic growth and development. Financial markets do not necessarily cause inflation or financial crises, and the need for indirect finance may still exist even in well-functioning financial markets.

Question 8

Which of the following statements about the characteristics of debt and equity is false?
A) They can both be long-term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuer's income.
D) They both enable a corporation to raise funds.

Accepted Answer

While both debt and equity can be long-term financial instruments, equity is typically a long-term investment while debt can also be a short-term borrowing. Therefore, statement B is false.

Question 9

Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in Canada?

Accepted Answer

The answer of Distinguish between direct finance and indirect finance....

Question 10

Which of the following statements about the characteristics of debt and equities is true?
A) They can both be long-term financial instruments.
B) Bond holders are residual claimants.
C) The income from bonds is typically more variable than that from equities.
D) Bonds pay dividends.

Accepted Answer

Both debt and equities can have long-term maturities. However, this is not a unique characteristic of either type of financial instrument. The other options are incorrect because bond holders are not residual claimants (equity holders are), the income from bonds is generally fixed and predictable (not variable), and bonds do not pay dividends (equities do).

Question 11

Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.

Accepted Answer

Direct finance occurs when borrowers directly borrow funds from lenders in the financial markets without using a third-party intermediary such as a bank. Borrowing $2500 from a friend is an example of direct finance because it involves a direct transaction between the lender and the borrower without an intermediary.

Question 12

Financial markets improve economic welfare because ________.
A) they channel funds from investors to savers
B) they allow consumers to time their purchase better
C) they weed out inefficient firms
D) eliminate the need for indirect finance

Accepted Answer

The answer of Financial markets improve economic welfare because ________.
A)...

Question 13

Which of the following statements about financial markets and securities is true?
A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants.
B) A debt instrument is intermediate term if its maturity is less than one year.
C) A debt instrument is intermediate term if its maturity is ten years or longer.
D) The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.

Accepted Answer

The maturity of a debt instrument refers to the time until its expiration date, so the correct option is D.

Option A is incorrect because a bond is a long-term security that promises to make periodic payments called interest payments, not dividends, and residual claimants are shareholders, not bondholders.

Option B is incorrect because an intermediate-term debt instrument has a maturity between one and ten years, not less than one year.

Option C is incorrect because a ten-year maturity would be considered a long-term debt instrument.

Question 14

Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.

Accepted Answer

Direct finance involves the transfer of funds from savers to borrowers through financial markets. Option D is the only choice that involves the purchase of shares in the primary markets, which is a direct method of financing. The other options involve indirect finance, where intermediaries such as banks and mutual funds are involved in the transfer of funds.

Question 15

The principal lender-savers are ________.
A) governments
B) businesses
C) households
D) foreigners

Accepted Answer

Households are typically the main lender-savers in an economy, as they save a portion of their income for future use, such as retirement or emergencies. While governments and businesses may also save, their primary role in the economy is usually as borrowers rather than lenders. Foreigners may also invest in a country's economy, but they are not considered as a primary source of lending and saving.

Question 16

Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) People buy shares in a mutual fund.
C) A pension fund manager buys a short-term corporate security in the secondary market.
D) An insurance company buys shares of common stock in the over-the-counter markets.

Accepted Answer

Direct finance involves a direct transfer of funds between savers and borrowers. In this case, the corporation is the borrower and is directly issuing shares of stock to raise funds. This is in contrast to indirect finance, where financial intermediaries such as banks and mutual funds are involved in the transfer of funds.

Question 17

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable

Accepted Answer

Securities are assets for the person who buys them because they have value and can be bought or sold for a profit. However, they represent a liability for the individual or firm that issues them because they are obligated to repay the investor's initial investment plus any returns as specified in the terms of the security.

Question 18

Assume that you borrow $2000 at 10 percent annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is ________.
A) $400
B) $201
C) $200
D) $199

Accepted Answer

The answer of Assume that you borrow $2000 at 10...

Question 19

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.
A) active
B) determined
C) indirect
D) direct

Accepted Answer

Direct finance involves borrowers obtaining funds directly from lenders in the financial markets by selling them securities, such as bonds or stocks. Indirect finance involves financial intermediaries, such as banks, obtaining funds from lenders and then lending those funds to borrowers. Active and determined do not relate to the type of finance being described in the question.

Question 20

Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another corporation in the primary market.
C) You buy a Canadian Treasury bill from the Bank of Canada.
D) You make a deposit at a bank.

Accepted Answer

Indirect finance involves a financial intermediary between the saver and the borrower. When you make a deposit at a bank, the bank then uses those funds to make loans to others, which is a classic example of indirect finance. Choices A, B, and C involve direct finance, where financial assets are bought directly from the issuer or from another investor without the involvement of a financial intermediary.

Quiz 2: An Overview of the Financial System

A breakdown of financial markets can result in ________.

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is ________.

How do financial intermediaries play an important role in the economy?

Which of the following is an example of an intermediate-term debt?

Every financial market has which of the following characteristics?

Financial markets have the basic function of ________.

Well-functioning financial markets ________.

Which of the following statements about the characteristics of debt and equity is false?

Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in Canada?

Which of the following statements about the characteristics of debt and equities is true?

Which of the following can be described as direct finance?

Financial markets improve economic welfare because ________.

Which of the following statements about financial markets and securities is true?

Which of the following can be described as involving direct finance?

The principal lender-savers are ________.

Which of the following can be described as involving direct finance?

Securities are for the person who buys them, but are for the individual or firm that issues them.

Assume that you borrow $2000 at 10 percent annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is ________.

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.

Which of the following can be described as involving indirect finance?