Deck 1: An Overview of Financial Markets and Institutions

Question 1

There must be an equal number of DSUs and surplus spending units ( SSUs) in a period.

Answer 1

False

Question 2

A financial claim is an "IOU" from a deficit spending unit.

Answer 2

True

Question 3

Deposits in a credit union by a household are an example of direct finance.

Answer 3

False

Question 4

When a surplus spending units (SSU) owns a financial claim created by financial intermediation, its residual claim is against a deficit spending units (DSU).

Question 5

Businesses are never deficit spending units (DSUs).

Question 6

Depository intermediaries issue claims that are for the most part highly liquid.

Question 7

Deficit spending units (DSUs) and surplus spending units (SSUs) always have some contact with each other in financial markets.

Question 8

Every financial claim appears on two balance sheets.

Question 9

Commercial banks lend to businesses in direct financial markets.

Question 10

The purpose of the financial system is to bring savers and borrowers together.

Question 11

Without a financial sector, real investment must be financed internally by the deficit spending unit.

Question 12

"Futures contract" and "forward contract" are interchangeable terms.

Question 13

Financial claims or securities are written for the mutual benefit of both SSU and DSU.

Question 14

Investment bankers help deficit spending units (DSUs) bring new primary security issues to market.

Question 15

Finance companies take small consumer deposits and make large consumer loans.

Question 16

Assets of financial intermediaries include direct financial claims only.

Question 17

A surplus spending units surplus spending unit (SSU) must hold a claim until its scheduled maturity.

Question 18

Liabilities of financial intermediaries are indirect financial claims.

Question 19

A household is a surplus spending units when income for the period exceeds spending.

Question 20

Direct finance requires a more or less exact match of preferences.

Question 21

The New York Stock Exchange is an example of an organized exchange.

Question 22

When a stock is listed on an exchange, members may trade it on the floor of the exchange.

Question 23

Mortgages are capital market debt securities.

Question 24

Commercial banks are the major issuer and investor of money market securities.

Question 25

The money market is a dealer market, not an exchange, and has no specific location.

Question 26

The money market provides short-term liquidity; the capital market finances long-term corporate growth.

Question 27

Competition among financial intermediaries tends to force interest rates downward.

Question 28

Money markets have a greater variety of investors than borrowers.

Question 29

Federal funds are the funds provided by the Federal Government for domestic corporations for long-term growth.

Question 30

Primary markets are markets where users of funds raise cash by selling securities to funds suppliers.

Question 31

The money market is a market where liquidity is bought and sold.

Question 32

Households are the major source of funds to the financial system.

Question 33

All money market instruments are short-term debt.

Question 34

Dealers bring buyer and seller together; brokers make a market.

Question 35

Private placements are the simplest form of direct finance.

Question 36

OTC markets are not very important any more.

Question 37

Money market borrowers are small in number compared to money market lenders.

Question 38

Primary markets offer liquidity and ways for investors to alter the risk of their portfolios.

Question 39

Every asset is someone else's liability, but not every liability is someone else's asset.

Question 40

Secondary markets are important because they provide funds directly to deficit spending units (DSUs).

Question 41

Which sector has been most consistently in a surplus budget position?

A) Business
B) Government
C) Foreign
D) Household

Question 42

When the financial system has achieved a high degree of efficiency,

A) Borrowers are able to finance at the highest possible cost.
B) Surplus spending units are able to receive the lowest return on their savings.
C) Transaction and intermediation costs are low.
D) Lenders will have a limited choice of financial investments.

Question 43

Money market mutual funds are a strong competitor for

A) depository institutions.
B) contractual savings institutions.
C) finance companies.
D) the real estate market.

Question 44

Financial institutions such as commercial banks typically have assets that are riskier than their liabilities.

Question 45

Which of the following would tend to hold corporate bonds in significant amounts?

A) life insurance company
B) credit union
C) mutual savings bank
D) commercial bank

Question 46

All but one of the following is comparative advantage of financial intermediaries:

A) ability to finance businesses and governments.
B) ability to achieve economies of scale.
C) ability to reduce transaction costs.
D) ability to find confidential information.

Question 47

Profitability of financial intermediaries derives from all of the following except

A) government regulation of interest rates
B) economies of scale
C) ability to manage credit risk
D) control of transactions costs

Question 48

All but one of the following is a standard characteristic of financial claims:

A) They are recognized on two balance sheets.
B) They are intangible assets.
C) They are IOU's traded for funds.
D) They represent ownership of real assets.

Question 49

Privately placed securities are usually sold to one or more investment bankers and then resold to the general public.

Question 50

An efficient financial system

A) eliminates search and transactions costs
B) is a mere theoretical possibility
C) promotes economic growth and social progress
D) depends on high volumes of "direct" transactions

Question 51

Most financial intermediaries:

A) issue direct claims and purchase direct financial assets.
B) issue indirect claims and purchase indirect financial assets.
C) purchase large amounts of real, tangible assets.
D) purchase direct financial claims and issue indirect securities.

Question 52

Which of the following is an example of indirect financing?

A) a surplus spending unit (SSU) purchasing a financial claim from a deficit spending unit (SSU) spending unit (DSU)
B) a surplus spending unit (SSU) purchasing a financial claim from a dealer
C) a surplus spending unit (SSU) purchasing a financial claim from a commercial bank
D) a surplus spending unit (SSU) purchasing a financial claim from an underwriter

Question 53

Pension funds tend to invest in

A) higher-yielding long-term securities
B) money market securities exclusively
C) government securities exclusively
D) none of the above

Question 54

Denomination intermediation is best exemplified by

A) issuing insured deposits and making risky business loans.
B) bringing together investors of different religions
C) issuing five $3,000 CDs and making one $15,000 loan.
D) promising liquidity to surplus spending units (SSUs) while investing the funds long-term

Question 55

Which of the following best describes the "two faces of debt" concept?

A) Deficit spending units (DSUs) are sometimes Surplus spending units (SSUs).
B) Every financial asset is someone else's liability.
C) Intermediaries may own both direct and indirect financial assets.
D) The government is unable to control its federal spending.

Question 56

A surplus spending unit's

A) income and expenditures for the period are equal.
B) income for the period exceeds expenditures.
C) expenditures for the period exceed receipts.
D) spending is entirely financed by credit cards

Question 57

Which of the following does not take deposits?

A) commercial banks.
B) savings and loan associations.
C) credit unions.
D) finance companies.

Question 58

A dealer offers to buy shares of IBM at $116 and sell to investors at $118. The "bid" is

A) $116
B) $118
C) $2
D) none of the preceding

Question 59

Which of the following are "economic units"?

A) households
B) businesses
C) governments
D) all of the above

Question 60

Financial institutions facilitate the flow of investment funds

A) from savers to borrowers
B) from Surplus spending units (SSUs) to deficit spending units (DSUs)
C) from the household sector to the business sector
D) any of the above

Question 61

All but one of the following is associated with investment banking:

A) Taking deposits.
B) Marketing new issues of securities.
C) Underwriting securities.
D) Completing regulatory paperwork and rendering advice.

Question 62

Acting as matchmaker and earning a commission, the ______ is an important component in direct financial markets.

A) dealer
B) investment banker
C) broker
D) seller

Question 63

All but one is associated with direct financing:

A) single financial instrument.
B) a broker, dealer or investment banker.
C) small denominations.
D) dominance of governments and businesses as borrowers.

Question 64

Most of the financial claims issued by U.S. financial intermediaries are purchased by

A) the household sector.
B) the business sector.
C) the government sector.
D) the foreign sector

Question 65

All of the following are terms for or examples of financial claims except

A) bonds.
B) money.
C) loans.
D) commodities.

Question 66

In direct financing the lender

A) trades a financial claim for money.
B) trades money for a financial claim issued by a financial institution.
C) trades money with a broker who owns the financial claims of a borrower.
D) trades money for the financial claim of the borrower.

Question 67

A sale of an entire security issue to one investor or a small group of investors is

A) a dealer arrangement.
B) a private placement.
C) an underwriting.
D) intermediation financing.

Question 68

The _____ price is the highest price offered by the dealer to purchase a given security.

A) market
B) ask
C) offering
D) bid

Question 69

During 2008, Bob and Nancy Gutierrez expect total income of about $225,000 and are budgeting total expenditures of about $180,000. For this budget period, the Gutierrez family is most specifically a(n)

A) deficit spending unit (DSU)
B) business
C) surplus spending unit (SSU)
D) household

Question 70

Brokers and dealers work in direct financial markets to

A) make commissions.
B) minimize the bid-ask spread.
C) bring sellers and buyers together.
D) underwrite new issues of securities.

Question 71

______ merely execute buy or sell orders for their clients; _______ "make markets".

A) dealers; brokers
B) brokers; investment bankers
C) dealers; financial institutions
D) brokers; dealers

Question 72

The flow of funds from saving to investment through direct financing involves

A) the saver holding the lender's IOU.
B) two separate contracts.
C) the lender holding the borrower's IOU.
D) several different financial institutions.

Question 73

Intermediation, or ____ financing, involves ___ financial claim(s) linking surplus spending unit (SSU) and deficit spending unit (DSU) .

A) indirect; two
B) direct; two
C) indirect; one
D) direct; one

Question 74

Hollon Securities is underwriting an issue of Llamas Unlimited, Inc. common stock. Hollon will pay LU $45.00 a share and offer the stock to the public at $48.00. The direct cost of underwriting the issue is $1.00 per share. The underwriting spread is

A) $4.00 per share.
B) $3.00 per share.
C) $2.00 per share.
D) not ascertainable from the information above.

Question 75

Surplus spending units (SSUs) are also called

A) lenders.
B) borrowers.
C) sellers of securities.
D) balanced budget units.

Question 76

Direct finance is best exemplified by

A) the purchase of mutual fund shares.
B) depositing in a credit union.
C) borrowing from a friend or relative.
D) employee contributions to a pension fund.

Question 77

Hammond Securities holds an inventory of ABC Corp. stock, buying at $65.00 and selling at $67.50. The bid is _____; the bid-ask spread is _____.

A) $65.00; $2.50
B) $67.50; $2.50
C) lower than the ask price; higher than the bid price
D) higher than the ask price; $2.50

Question 78

The best synonym for "financial intermediation" is

A) direct finance
B) investment banking
C) market making
D) transformation of claims

Question 79

The ease with which a financial claim can be resold is its

A) quality.
B) risk.
C) marketability.
D) perpetuity.

Question 80

All but one describes a dealer involved in direct financial market:

A) provides liquidity to sellers
B) buys and sells from inventory
C) earns return from bid-ask spread
D) transforms claims