Question 1

Brokers are market specialists who do not bear risk.

Accepted Answer

Brokers act as intermediaries between buyers and sellers and do not take ownership of the products being bought or sold, therefore they do not bear financial risk.

Question 2

Businesses are the principal borrower-spenders in the economy.

Accepted Answer

Businesses borrow money to invest in their operations and spend on various expenses such as salaries, supplies, advertising, and equipment. Their spending contributes to economic growth and job creation.

Question 3

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

Accepted Answer

An active secondary market allows investors to easily sell or buy securities, providing liquidity that can increase demand for a security and enhance its price in the primary market.

Question 4

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 does require fees and expenses associated with legal, accounting, and due diligence services, which can be substantial. However, these costs are often outweighed by the benefits of raising capital without having to go through the lengthy and costly registration process with the SEC.

Question 5

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

Accepted Answer

The law that barred commercial banks from investment banking activities is the Glass-Steagall Act of 1933. The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, repealed key provisions of the Glass-Steagall Act and allowed for commercial banks to engage in investment banking activities.

Question 6

Equities are generally traded in the capital market.

Accepted Answer

Equities, also known as stocks or shares, are typically traded in the capital market. This is where companies can raise funds by issuing shares to investors, who can then buy and sell them on stock exchanges such as the New York Stock Exchange (NYSE) or NASDAQ.

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.

Accepted Answer

The term money market refers to the market for highly liquid and short-term financial instruments that can be easily bought and sold, and are therefore highly marketable and easily convertible into cash. Therefore, the statement is true.

Question 8

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

Accepted Answer

LIBOR (London Interbank Offered Rate) is the rate that banks in London quote each other for overnight lending. It is not specific to U.S. banks.

Question 9

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

Accepted Answer

Without a financial market, there would be no mortgage industry or other forms of borrowing to finance a home purchase. Therefore, the only way to buy a house would be with cash.

Question 10

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

Accepted Answer

Deregulation of the financial markets allowed larger institutions to merge and expand, leading to the consolidation and elimination of smaller competitors.

Question 11

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

Accepted Answer

Indirect financing refers to obtaining funds from a financial intermediary like a bank or a credit union, which in turn obtains funds from other sources like deposits or investments. This is the most common method of funding for individuals as it is easy and accessible.

Question 12

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

Accepted Answer

The answer of A privately held corporation securing a loan...

Question 13

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

Accepted Answer

Secondary market transactions involve the buying and selling of existing securities among investors, while primary market transactions involve the issuance of new securities by companies to investors. The majority of trades on the New York Stock Exchange involve buying and selling existing securities, making them secondary market transactions.

Question 14

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 where new securities are issued and sold to the public, while a secondary market is where existing securities are traded between investors.

Question 15

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

Accepted Answer

The financial system includes not only financial markets but also financial institutions, such as banks and insurance companies, and other financial intermediaries, as well as regulatory bodies and government entities.

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.

Accepted Answer

This statement accurately describes the role of the financial system.

Question 17

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 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

Direct financial markets refer to those markets where funds are directly transferred between lenders and borrowers without any intermediary. These markets mostly serve large institutions, corporations, and governments, and are commonly referred to as wholesale markets for funding.

Question 20

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

Accepted Answer

The Glass-Steagall Act, which separated commercial banking and investment banking, was repealed in 1999, allowing large money center banks to move back into the investment business.

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