Deck 3: Financial Instruments, Markets, and Institutions

Question 1

An important role of financial institutions is to

A) provide borrowers with low interest rates.
B) provide information to lenders about the quality of financial claims issued.
C) buy primary securities.
D) control the money supply.

Answer 1

B

Question 2

__________ is not a cash flow associated with a bond.

A) Payment to purchase a bond
B) Periodic interest payments
C) Periodic dividend payments
D) Repayment of the face value when the bond matures

Answer 2

C

Question 3

Bonds that pay no periodic (annual)interest are

A) zero-coupon bonds.
B) coupon securities.
C) perpetuities.
D) tax-exempts.

Answer 3

A

Question 4

A secondary market is one in which

A) new securities are issued.
B) financial intermediaries make loans.
C) savers place funds in financial intermediaries.
D) existing securities can be bought and sold.

Question 5

An example of direct finance would be when

A) a person purchases a certificate of deposit from a bank.
B) a person buys a life insurance policy.
C) a person buys 100 shares of stock from a corporation.
D) a bank makes a loan to a customer.

Question 6

The largest group of saver-lenders in the financial system is

A) businesses.
B) government.
C) households.
D) financial intermediaries.

Question 7

Which of the following is a primary market transaction?

A) Sally Wither purchases 100 shares of IBM through her broker.
B) Kold Co. issues 1 million new shares through Morgan Stanley.
C) Bob Hill sells 1,000 shares of Disney directly to his friend.
D) Kip Peters sells 1,000 shares of Dush, Inc., which he bought in an IPO last month, through his broker.

Question 8

Investment banks specialize in information regarding

A) commodities.
B) certificates of deposit.
C) demand deposits.
D) primary securities.

Question 9

The most prominent secondary financial market is

A) the New York Stock Exchange.
B) the American Stock Exchange.
C) the Nasdaq.
D) the over-the-counter market.

Question 10

Bonds without a maturity date are called

A) zero-coupon bonds.
B) preferred bonds.
C) common bonds.
D) consols.

Question 11

An efficient financial system

A) must disseminate information to lenders about the quality of financial claims issued.
B) provides minimal information about financial markets.
C) provides perfect information regarding investment opportunities to savers.
D) does not provide any information to borrowers.

Question 12

An indirect flow of funds occurs when

A) funds flow from saver-lenders to borrower-spenders through financial intermediaries.
B) funds flow from saver-lenders to borrower-spenders through financial markets.
C) funds flow to saver-lenders from borrower-spenders through financial intermediaries.
D) funds flow to saver-lenders from borrower-spenders through financial markets.

Question 13

Which of the following bonds are called tax-exempts?

A) Municipal bonds
B) U.S. savings bonds
C) U.S. Treasury bonds
D) Consols

Question 14

Traditionally, bonds have been issued with coupons that bondholders redeem every

A) year.
B) quarter.
C) six months.
D) month.

Question 15

Most borrower-spenders in the financial system are

A) businesses and governments.
B) banks and thrift institutions.
C) households and foreigners.
D) governments and financial institutions.

Question 16

Which of the following statements is not true?

A) Financial and intermediated markets are conduits through which funds are channeled.
B) Borrower-spenders benefit from financial and intermediated markets because they earn interest or dividends on their funds.
C) Without financial and intermediated markets, savers would have no choice but to hoard their excess money.
D) When funds flow through intermediaries, the process is indirect.

Question 17

Financial markets serve as the

A) primary source of funds for financial intermediaries.
B) means of converting cash into tangible assets.
C) transmission mechanism between savers and borrowers.
D) economic system's ultimate source of funds.

Question 18

__________ are never borrower-spenders.

A) Governmental bodies
B) Business firms
C) Households
D) All of the above can be borrower-spenders.

Question 19

When borrower-spenders raise funds in financial markets, they issue new securities in the

A) primary market.
B) secondary market.
C) third market.
D) fourth market.

Question 20

The issuer of a bond is a

A) borrower.
B) creditor.
C) saver.
D) lender.

Question 21

Which of the following is not true regarding mortgages?

A) Some of them, called ARMs, have interest rates that are adjusted periodically.
B) FHA-VA mortgages are insured by government agencies.
C) They always have a fixed mortgage rate.
D) They often have maturities between 25 and 30 years.

Question 22

All financial securities share the characteristic that they represent a claim to future

A) interest income.
B) ownership.
C) cash flows.
D) dividend payments.

Question 23

That segment of the market for securities which have original maturities of more than one year is called the

A) stock market.
B) derivative securities market.
C) money market.
D) capital market.

Question 24

A market in which stock prices are rising is called a

A) bull market.
B) bear market.
C) pig market.
D) primary market.

Question 25

To the stockholder, corporate stock represents

A) a source of fixed interest income.
B) a loan.
C) ownership.
D) a guaranteed return of principal.

Question 26

A major difference between stocks and bonds is that

A) bonds pay their owners dividends while stocks pay interest.
B) bonds pay their owners interest while stocks pay dividends.
C) the interest on a bond depends on the earnings of the corporation and is not guaranteed while dividends on stock are legally required.
D) bonds represent ownership while stock represent debt.

Question 27

Which of the following investments offers fixed dividend payments?

A) Consols
B) Zero-coupon bonds
C) Preferred stock
D) Convertible stock

Question 28

Which of the following statements is true?

A) Convertible preferred stockholders receive quarterly interest payments.
B) Common stockholders receive a fixed dividend, and they are entitled to it before preferred stockholders get anything.
C) Convertible preferred stock can be converted into preferred stock at a predetermined price.
D) Many buyers of common stock are more interested in capital gains than in dividends.

Question 29

One of the most popular types of mortgage pools is insured by the

A) Federal Deposit Insurance Corporation.
B) Federal Savings and Loan Insurance Corporation.
C) Federal Home Loan Bank Board.
D) Government National Mortgage Association.

Question 30

Peter Lemmings purchased a call option on XYZ Stock with a strike price of $50.

A) Peter will exercise the option if the price of XYZ Stock at expiration is $30.
B) Peter will exercise the option if the price of XYZ Stock at expiration is above $50.
C) Peter will let the option expire if the price of XYZ Stock at expiration is $60.
D) Peter will buy a put option to close out his position if the price of XYZ Stock at expiration is above $60.

Question 31

Which of the following investments does not make interest payments annually but is sold at a discount, with the face value of the security paid at maturity?

A) Preferred stock
B) Preferred bonds
C) Zero-coupon bonds
D) Convertible preferred stock

Question 32

Mortgages carry an uncertain flow of cash because

A) borrowers often default on home loans.
B) mortgages are short-term debt instruments.
C) homeowners often prepay their mortgage loans.
D) lenders cannot legally fix interest rates.

Question 33

An example of a derivative financial instrument is a(n)

A) corporate bond.
B) option contract on U.S. Treasury bonds.
C) variable-rate mortgage.
D) preferred stock.

Question 34

Funds that used to flow through intermediated markets and now flow through financial markets are

A) intermediated.
B) indirectly financed.
C) securitized.
D) saved.

Question 35

FHA-VA mortgages differ from conventional mortgages in that

A) the mortgaged land and building are collateral for conventional mortgages but not for FHA-VA mortgages.
B) FHA-VA mortgages are insured by the federal government, while conventional mortgages are not.
C) FHA-VA mortgages involve real estate, while conventional mortgages may or may not involve real estate.
D) conventional mortgages run for 25-30 years, but FHA-VA are considerably shorter in duration.

Question 36

Some mortgage pools are referred to as

A) municipal securities.
B) pass-through securities.
C) preferred mortgages.
D) common securities.

Question 37

The most popular and widely followed stock index is the

A) New York Stock Exchange Composite Index.
B) S&P 500 Index.
C) Dow Jones Industrial Average.
D) Nasdaq Composite Index.

Question 38

A put option gives the owner the

A) right to sell the underlying asset at a fixed price.
B) right to buy the underlying asset at a fixed price.
C) obligation to sell the underlying asset at a fixed price.
D) obligation to buy the underlying asset at a fixed price.

Question 39

A call option gives the owner the

A) right to sell the underlying asset at a fixed price.
B) right to buy the underlying asset at a fixed price.
C) obligation to sell the underlying asset at a fixed price.
D) obligation to buy the underlying asset at a fixed price.

Question 40

An investor who anticipates that Treasury bond prices will fall should

A) buy a variable-rate bond.
B) buy preferred corporate stock.
C) buy a bond futures contract.
D) sell a bond futures contract.

Question 41

If an individual sells a U.S. Treasury bill and uses the funds to open a money market deposit account, it is an example of

A) consumption.
B) direct finance.
C) tax avoidance.
D) financial intermediation.

Question 42

An index fund

A) is a bond fund that provides diversification.
B) is a mutual fund that buys the stocks that compose a well-known index.
C) is a growth fund that reduces transaction costs.
D) produces information on the securities it invests in.

Question 43

A business firm that has temporary surplus funds is most likely to buy

A) U.S. Treasury bills.
B) U.S. Treasury bonds.
C) corporate stock.
D) corporate bonds.

Question 44

Unlike most companies, financial intermediaries

A) carry financial instruments only on the liabilities side of their balance sheet.
B) carry financial instruments only on the asset side of their balance sheet.
C) carry financial instruments on both sides of the balance sheet.
D) have no debt.

Question 45

Commercial paper is mostly held by

A) corporations.
B) commercial banks.
C) bond mutual funds.
D) money market mutual funds.

Question 46

Commercial paper represents the

A) capital assets of business firms.
B) short-term liabilities of the most creditworthy business firms and finance companies.
C) long-term liabilities of investment banks.
D) short-term liabilities of commercial banks.

Question 47

All financial intermediaries acquire funds by

A) selling bonds.
B) selling stocks.
C) issuing their own liabilities.
D) charging interest.

Question 48

Which of these financial institutions is the most likely to have a portfolio very similar to those of life insurance companies?

A) Money market mutual funds
B) Mutual savings banks
C) Private noninsured pension funds
D) Property and casualty insurance companies

Question 49

A wide variety of purchasers buy securities issued by all of the following government agencies except

A) Federal Home Loan Banks and Federal Land Banks.
B) the Federal National Mortgage Association.
C) the U.S. Treasury.
D) the Federal Reserve.

Question 50

An example of a financial instrument in the money market is a

A) residential mortgage.
B) corporate bond.
C) negotiable bank CD.
D) U.S. government agency security.

Question 51

Which of the following is not a financial intermediary?

A) A commercial bank
B) A commercial finance company
C) An index fund
D) An investment bank

Question 52

Besides differences in maturities, the characteristic that distinguishes financial assets in the capital market from those in the money market is the level of

A) activity.
B) liquidity.
C) velocity.
D) intermediation.

Question 53

Saver-lenders often choose to invest in financial intermediaries because the intermediaries

A) reduce transactions costs for saver-lenders.
B) increase risk by diversification.
C) produce information on saver-lenders.
D) engage in direct finance.

Question 54

Financial institutions are just like other firms in that they attempt to maximize

A) total assets.
B) total liabilities.
C) capital.
D) profits.

Question 55

If financial intermediation were substantially reduced, the likely initial effect on individual investors would be

A) higher inflation.
B) a shift to a barter economy.
C) a reduction in disintermediation.
D) increased risk.

Question 56

An example of a financial instrument in the capital market is

A) commercial paper.
B) a corporate bond.
C) a negotiable bank CD.
D) a U.S. Treasury bill.

Question 57

Which of the following is not a major purpose of financial intermediaries?

A) Transaction costs
B) Diversification
C) Information
D) All of the above are major purposes of financial intermediaries.

Question 58

That segment of the market for securities which have original maturities of less than one year is called the

A) stock market.
B) derivative securities market.
C) money market.
D) capital market.

Question 59

Which of the following securities is least likely to be guaranteed by the full faith and credit of the federal government?

A) A bond issued by a Federal Land Bank
B) A bond issued by the United States Postal Service
C) A note issued by the Federal National Mortgage Association
D) A security issued by a Federal Home Loan Bank

Question 60

Financial intermediaries participate in the money and capital markets as

A) lenders only.
B) borrowers only.
C) both lenders and borrowers.
D) trustees only.

Question 61

Assets on the balance sheet of a money market mutual fund typically include

A) commercial mortgages.
B) high-grade commercial paper.
C) U.S. Treasury bonds.
D) municipal bonds.

Question 62

Consumer finance companies specialize in

A) consumer loans.
B) residential mortgages.
C) corporate stock.
D) financial disintermediation.

Question 63

Traditionally, the largest asset held by savings-and-loan associations has been

A) NOW deposits.
B) business loans.
C) residential mortgages.
D) consumer loans.

Question 64

Which of these institutions has the greatest degree of certainty regarding the timing of liability payouts?

A) Life insurance companies
B) Property and casualty insurance companies
C) Money market mutual funds
D) Credit unions

Question 65

A __________ is a "thrift institution."

A) credit union
B) commercial bank
C) consumer finance company
D) life insurance company

Question 66

Consumer finance companies get their funds primarily from

A) the federal government.
B) selling stock.
C) selling commercial paper.
D) issuing long term bonds.

Question 67

Mutual funds usually do not invest in

A) the stock market.
B) the municipal bond market.
C) the residential mortgage market.
D) Mutual funds invest in all of the above.

Question 68

__________ are concentrated on the East Coast and have a relatively long history of making nonmortgage consumer loans.

A) Savings and loan associations (S&Ls)
B) Commercial banks
C) Credit unions
D) Savings banks

Question 69

Large-size bank CDs are most likely to appear on the balance sheet of a

A) pension fund.
B) life insurance company.
C) mutual fund.
D) money market mutual fund.

Question 70

Savings banks are very similar to

A) finance companies.
B) savings and loan associations (S&Ls).
C) bond mutual funds.
D) money market mutual funds.

Question 71

Checking accounts can be offered by

A) pension funds.
B) life insurance companies.
C) consumer finance companies.
D) savings and loan associations.