Deck 3: Understanding Financial Markets and Institutions

Question 1

The declining profits made banks to undertake the business of:

A)Merchant banking
B)Mutual funds
C)Venture capital
D)all of the above

Answer 1

all of the above

Question 2

Retail banking means granting loans for:

A)Construction of houses
B)Purchases of consumer durables
C)Educational purposes
D)All of these

Answer 2

All of these

Question 3

Investment banking was developed by

A)Japan
B)England
C)USA
D)None of the above

Answer 3

England

Question 4

Financial institutions expect that

A)moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans.
B)opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans.
C)borrowers will commit moral hazard by taking on too much risk, and this is what drives financial institutions to take steps to limit moral haza

Question 5

The largest depository institution at the end of 2001 was

A)life insurance companies.
B)pension funds.
C)state retirement funds.
D)none of the above.

Question 6

The value of assets held by commercial banks in 2001 was $6.7 trillion dollars, making commercial banks the

A)second most important sector of financial intermediaries after mutual funds.
B)second most important sector of financial intermediaries after lifeinsurance companies.
C)second most important sector of financial intermediaries after privatepension funds.
D)largest sector of financial intermediaries.

Question 7

The market value size of outstanding instruments of capital markets depends on factors

A)primary cash flows
B)number of issued securities
C)market prices of securities
D)both b and c

Question 8

When maturities of liabilities and assets are mismatched and risk incurred by financial intermediaries then this risk is classified as

A)interest rate risk
B)channel rate risk
C)economic risk
D)issuance risk

Question 9

The money market where securities are issued by governments to obtain funds for short term is classified as

A)money market instruments
B)capital market instruments
C)counter instruments
D)long term instruments

Question 10

The federal funds, bankers acceptance, commercial paper and repurchase agreements are classified as

A)counter instruments
B)long term instruments
C)money market instruments
D)capital market instruments

Question 11

In financial transactions, the risk that there will be no profit in selling of this asset is classified as

A)price risk
B)profit risk
C)selling risk
D)financial risk

Question 12

The type of risk in which the value of liabilities and assets is affected by the exchange rate is classified a

A)economic rates
B)foreign exchange risk
C)selling rate
D)buying rates

Question 13

In commercial banks, the subordinate debentures and subordinate notes are considered as

A)stated rates
B)banks debentures
C)banks liabilities
D)banks deposits

Question 14

The type of financial security having payoffs which are connected to some securities Issued some time back is classified as

A)linked security
B)previous security
C)payoff security
D)derivative security

Question 15

A bond whose coupon rate is below the current market rate of interest will have a price:

A)more than its maturity value of Rs.100.
B)less than its maturity value.
C)equal to its maturity value
D)none

Question 16

A widening of the difference between the return on corporate bonds and on government bonds might suggest which of the following?

A)The economy is on the brink of recession.
B)Interest rates are going to rise in future.
C)Government bonds are becoming more risky compared to corporate bonds.
D)Investors should avoid government bonds.

Question 17

In a situation where share prices are generally depressed because long-term interest rates are expected to rise in future, a large firm looking for long-term finance would normally consider:

A)issuing long-dated bonds.
B)making a new share issue.
C)borrowing from its bank on overdraft.
D)borrowing in the interbank market.

Question 18

Using a supply and demand framework, what is likely to happen to share prices in general if the central bank unexpectedly raises interest rates?

A)The demand curve shifts to the left.
B)The supply curve shifts to the left.
C)Both curves shift outwa

Question 19

Using a supply and demand framework, what is likely to happen to share prices in general if the central bank raises interest rates in response to a fall in the exchange rate?

A)The supply curve shifts to the left.
B)No changes.
C)Both curves shift inwa

Question 20

Which of the following actions might you expect lenders to take during periods of variable and unpredictable inflation?

A)Reduce the amount of lending they are prepared to do.
B)Increase the average length of loans they are willing to make.
C)Increase the amount of lending they are prepared to do.
D)Reduce the average length of loans they are willing to make.

Question 21

In the 'walking stick' hypothesis, the yield curve slopes:

A)down and then up
B)down
C)up
D)up and then down

Question 22

Secondary markets

A)engage in buying and selling that is out of the public view.
B)are where governments go to finance ongoing operations.
C)include centralized exchanges, over-the-counter markets, and electronic communication networks.
D)include all of the above.

Question 23

Financial institutions:

A)provide access to the financial markets.
B)are also known as financial intermediaries.
C)include banks, insurance companies, securities firms, and pension funds.
D)include all of the above.

Question 24

Debt markets:

A)are markets for money.
B)are markets for bonds, loans, and mortgages.
C)are markets for stocks.
D)are markets for either stocks or bonds.

Question 25

Centralized exchanges:

A)are electronic systems that bring buyers and sellers together for electronic execution.
B)are markets where claims based on an underlying asset are traded for payment at a later date.
C)are markets where financial claims are bought and sold for immediate cash payment.
D)are secondary markets where buyers and sellers meet in the same location.

Question 26

Debt and equity markets:

A)are markets where financial claims are bought and sold for immediate cash payments.
B)are decentralized secondary markets where dealers stand ready to buy and sell securities electronically.
C)are markets where newly issued securities are so

Question 27

The internal rate of return is:

A)the interest rate at which money is borrowed for investment.
B)the interest that allows a profit.
C)profit divided by investment amount.
D)the interest rate that equates the present value of an investment with its cost.

Question 28

Coupon bonds:

A)require borrowers to pay the lender coupon payments until maturity, when the borrower pays the principle.
B)require borrowers to pay lenders coupon payments until maturity.
C)require borrowers to pay lenders principle and interest at maturity.
D)require only interest payments until maturity when principle and interest are paid.

Question 29

The present value of a coupon bond is:

A)the present value of the coupon payments plus the future value of the principle payment.
B)the sum of the coupon payments and the principle payment.
C)the sum of the coupon payments.
D)the present value of the coupon payments and the present value of the principle payment.

Question 30

The real interest rate:

A)is the nominal interest rate + inflation.
B)greater than the nominal interest rate when inflation is greater than0.
C)is the interest rate expressed in current dollar terms.
D)is the inflation adjusted interest rate.

Question 31

The nominal interest rate indicates that:

A)people care only about the number of dollars.
B)people care about what dollars can buy.
C)people want compensated only for inflation.
D)people only require the opportunity cost as payment when lending.

Question 32

The commercial paper issued with low interest rate thus the commercial paper is categorized as

A)payables rating
B)commercial rating
C)poor credit rating
D)better credit rating