Question 1

Today, major money center banks in U.S have been allowed back to provide investment banking services.

Accepted Answer

This is true. In 1999, the Gramm-Leach-Bliley Act repealed the Glass-Steagall Act, allowing commercial banks to provide both traditional banking and investment banking services. As a result, major money center banks can now provide investment banking services.

Question 2

Real rates of interest are perfectly observable.

Accepted Answer

Real rates of interest cannot be directly observed as they are calculated by adjusting the nominal interest rate for inflation. Therefore, real rates of interest are not perfectly observable.

Question 3

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

Accepted Answer

The presence of an active secondary market provides investors with a means to sell their holdings quickly and easily, which increases the liquidity of the security. This, in turn, can attract more buyers to the primary market, leading to higher demand and increased prices.

Question 4

Brokers are market specialists who do not bear risk of ownership of securities.

Accepted Answer

Brokers are intermediaries who facilitate buying and selling of securities on behalf of their clients. They do not hold ownership of the securities themselves and operate on a commission-based model. Clients provide the necessary funds to purchase the securities, and the broker executes the trade on their behalf. This means brokers do not bear the risk of fluctuations in the value of the securities.

Question 5

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

Accepted Answer

A direct market transaction involves the buying and selling of securities directly between two parties, typically in financial markets. A loan from a bank is a private transaction, not a market transaction.

Question 6

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

Accepted Answer

This is a basic definition of the role of the financial system.

Question 7

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

Accepted Answer

The majority of trading on the NYSE involves buying and selling previously issued securities, which are considered secondary market transactions. Primary market transactions, such as initial public offerings (IPOs), are less common.

Question 8

The nominal rate of interest is the rate of interest that is adjusted for inflation.

Accepted Answer

The nominal rate of interest is the stated rate of interest without any adjustment for inflation. The real rate of interest, on the other hand, is the nominal rate of interest adjusted for inflation.

Question 9

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

Accepted Answer

The term "money market" refers to a market where highly liquid and marketable short-term instruments such as Treasury bills, commercial paper, and certificates of deposit are traded. These instruments can be easily bought or sold in the market and can be converted into cash quickly, which is why the term "money market" is used.

Question 10

Businesses are the principal borrower-spenders in the economy.

Accepted Answer

Businesses take on loans and spend the borrowed funds on various expenses such as employee salaries, equipment purchases, and inventory. This spending has a significant impact on the overall economy.

Question 11

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

Accepted Answer

Without a financial market, individuals would not have access to mortgages or loans to finance a house purchase, and would therefore need to have the full amount in cash.

Question 12

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

Accepted Answer

The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, actually repealed the law that prohibited commercial banks from engaging in investment banking activities. It allowed for the creation of financial conglomerates that offered both commercial banking and investment banking services.

Question 13

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

Accepted Answer

The financial system is not just a collection of financial markets but also includes financial institutions, regulators, and intermediaries. These components work together to facilitate the flow of capital in a country's economy.

Question 14

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

Accepted Answer

Business finance companies obtain the majority of their funds through the issuance of debt, such as bonds or loans, rather than selling equity.

Question 15

Most companies use indirect market from a financial institution to fund their needs.

Accepted Answer

Many companies rely on financial institutions, such as banks or investment firms, to provide indirect funding for their needs. This can come in the form of loans, lines of credit, or other financial arrangements that allow the company to access capital and manage their finances effectively. Indirect funding can be a valuable tool for businesses of all sizes and types, providing them with the support they need to grow and succeed over time.

Question 16

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

Accepted Answer

A primary market is a financial market where new securities are issued, and investors can buy them directly from the issuer. The secondary market is where owners of outstanding securities can resell them to other investors.

Question 17

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

Accepted Answer

Direct financial markets deal with large-scale transactions and involve institutions such as banks, corporations, and governments. These markets are known as wholesale markets for funding as they provide financial resources to the entities involved in these transactions.

Question 18

Equities with maturity of greater than one year are generally traded in the capital market.

Accepted Answer

Equities with maturity of greater than one year are generally classified as long-term securities and are traded in the capital market. The capital market is a financial market where long-term securities such as stocks, bonds, and other financial instruments are traded.

Question 19

Governments are the principal lender-savers in the economy.

Accepted Answer

Governments are typically borrowers in the economy, financing public expenditures through issuing debt, rather than being the principal savers or lenders.

Question 20

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

Accepted Answer

The statement is incorrect. The downside to a private placement transaction is that it may be less liquid than a publicly traded, SEC-registered security and may be subject to less rigorous regulatory oversight. It still requires fees and expenses, such as legal and accounting fees, but they may be lower than those associated with an SEC registration.

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