Question 1

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

Accepted Answer

Taking deposits is associated with commercial banking, not investment banking.

Question 2

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

Accepted Answer

A broker acts as a matchmaker by connecting buyers and sellers in financial markets and earns a commission for facilitating these transactions.

Question 3

All but one is associated with direct financing:

Accepted Answer

Direct financing typically involves large denominations, as it is usually conducted by large entities like governments and businesses, not small individual transactions.

Question 4

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

Accepted Answer

The household sector is the largest purchaser of financial claims issued by U.S. financial intermediaries, as individuals invest in various financial products like savings accounts, bonds, and mutual funds.

Question 5

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

Accepted Answer

Commodities are physical goods like oil, gold, or wheat, not financial claims. Financial claims represent a right to payment, such as bonds, money, or loans.

Question 6

In direct financing the lender

Accepted Answer

In direct financing, the lender provides funds directly to the borrower in exchange for a financial claim, such as a bond or note, issued by the borrower.

Question 7

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

Accepted Answer

A private placement is a sale of securities to a small group of investors, rather than through a public offering.

Question 8

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

Accepted Answer

The bid price is the highest price a dealer is willing to pay to purchase a given security.

Question 9

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)

Accepted Answer

The Gutierrez family is a surplus spending unit (SSU) because their expected income ($225,000) exceeds their budgeted expenditures ($180,000), resulting in a surplus.

Question 10

Brokers and dealers work in direct financial markets to

Accepted Answer

Brokers and dealers facilitate transactions by connecting buyers and sellers in financial markets.

Question 11

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

Accepted Answer

Brokers execute buy or sell orders for their clients, while dealers "make markets" by buying and selling securities from their own accounts.

Question 12

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

Accepted Answer

In direct financing, the lender directly holds the borrower's IOU, indicating a direct relationship between the saver and the borrower without intermediaries.

Question 13

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

Accepted Answer

Intermediation, or indirect financing, involves two financial claims: one between the SSU and the financial intermediary, and another between the financial intermediary and the DSU.

Question 14

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

Accepted Answer

The underwriting spread is the difference between the price at which the underwriter buys the stock from the issuer ($45.00) and the price at which it is sold to the public ($48.00), which is $3.00 per share.

Question 15

Surplus spending units (SSUs) are also called

Accepted Answer

Surplus spending units (SSUs) are entities that have excess funds and typically lend these funds to deficit spending units (DSUs), making them lenders.

Question 16

Direct finance is best exemplified by

Accepted Answer

Direct finance involves borrowing funds directly from a lender without using an intermediary, such as borrowing from a friend or relative.

Question 17

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 _____.

Accepted Answer

The bid is the price at which the dealer buys, which is $65.00. The bid-ask spread is the difference between the ask price ($67.50) and the bid price ($65.00), which is $2.50.

Question 18

The best synonym for "financial intermediation" is

Accepted Answer

Financial intermediation involves the transformation of claims, where intermediaries like banks transform deposits into loans, effectively bridging the gap between savers and borrowers.

Question 19

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

Accepted Answer

Marketability refers to the ease with which a financial claim can be resold or converted into cash.

Question 20

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

Accepted Answer

Dealers in direct financial markets provide liquidity, buy and sell from their inventory, and earn returns from the bid-ask spread. Transforming claims is typically a function of financial intermediaries, not dealers.

Quiz 1: An Overview of Financial Markets and Institutions