Question 1

Common stock, preferred stock, and mortgage loans are all examples of equity instruments.

Accepted Answer

Common stock and preferred stock are equity instruments, but mortgage loans are debt instruments, not equity.

Question 2

Secondary markets are the key to the wealth creation process because they enable money to be transferred to those who can make the best use of it in terms of developing new real assets like houses and factories.

Accepted Answer

Secondary markets facilitate the trading of existing securities between investors, which does not directly result in the funding of new real assets like houses and factories. Primary markets are where new securities are issued and funds are raised for the creation of new assets.

Question 3

Without well-functioning secondary markets, governments and companies would be unable to raise financing because investors could not sell securities when necessary.

Accepted Answer

Secondary markets provide liquidity, allowing investors to buy and sell securities, which is crucial for the initial issuance of securities in primary markets.

Question 4

Mortgage loans, municipal bonds, and corporate bonds all represent equity interests.

Accepted Answer

Mortgage loans, municipal bonds, and corporate bonds represent debt obligations, not equity interests. Equity interests refer to ownership stakes, such as stocks in a company.

Question 5

Secondary market trading in equity securities is many times the size of the primary market, whereas for debt securities it is the opposite.

Accepted Answer

In equity markets, secondary market trading volume significantly exceeds primary market issuance as stocks are traded more frequently among investors. Conversely, in debt markets, the primary market is often larger because debt securities, such as bonds, are issued in large volumes and may not be traded as frequently in the secondary market.

Question 6

Exchange market or auction market is a secondary market that does not have a physical location and consists of a network of dealers who trade directly with one another.

Accepted Answer

Exchange markets, such as stock exchanges, often have physical locations (e.g., New York Stock Exchange) where trading activities are centralized, unlike over-the-counter (OTC) markets, which operate without a centralized physical location and consist of a network of dealers.

Question 7

Dealer market or over-the-counter (OTC) market is a secondary market that does not have a physical location and consists of a network of dealers who trade directly with one another.

Accepted Answer

The dealer market, or over-the-counter (OTC) market, indeed does not have a centralized physical location. Instead, it operates through a network of dealers who buy and sell securities directly with each other, often via electronic systems.

Question 8

The twelve-member committee that affects the monetary policy of the U.S. is the Federal Open Market Committee (FOMC).

Accepted Answer

The Federal Open Market Committee (FOMC) consists of twelve members and is responsible for setting monetary policy in the United States, including the decisions on interest rates and open market operations.

Question 9

The federal agency responsible for monitoring and advising regulators about insurance companies' risk and solvency is called the Federal Reserve System.

Accepted Answer

The Federal Reserve System primarily oversees and regulates banks and financial institutions, not insurance companies. The National Association of Insurance Commissioners (NAIC) and state insurance regulatory agencies primarily oversee the insurance industry in the United States.

Question 10

There is substantial investment in the U.S. by non-U.S. investors, and there is also substantial investment outside the U.S. by U.S. investors.

Accepted Answer

The United States both attracts and makes substantial investments globally, with non-U.S. investors investing in the U.S. economy and U.S. investors actively investing in foreign markets. This reflects the global nature of investment flows and the interconnectedness of the world economy.

Question 11

The 2007 - 2008 financial crisis is an example of the globalization of the financial system.

Accepted Answer

The 2007-2008 financial crisis demonstrated the interconnectedness of global financial markets, as problems originating in the U.S. housing market and financial system quickly spread to other countries, affecting global financial stability and economic performance.

Question 12

The process of converting loans into securities is best referred to as packaging.

Accepted Answer

The process of converting loans into securities is best referred to as securitization, not packaging.

Question 13

The process of converting loans into securities is best referred to as securitization.

Accepted Answer

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations and selling their related cash flows to third-party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations.

Question 14

Mortgage backed securities carry claims on the cash flows of a pool of mortgages.

Accepted Answer

Mortgage-backed securities (MBS) are investments that are secured by mortgages. They are a type of asset-backed security and represent claims on the cash flows from pools of mortgage loans, typically on residential property.

Question 15

Term Asset-Backed Securities Loan Facility (TALF) is one of the U.S. Government programs put into place in response to the financial crisis of 2007 - 2008. TALF is designed to infuse capital in the financial system by purchasing assets and equity from troubled financial institutions.

Accepted Answer

TALF was designed to support the issuance of asset-backed securities (ABS) to improve the credit conditions for consumers and businesses, not to purchase assets or equity directly from financial institutions.

Question 16

Stress tests were one of the tools Federal regulators used to evaluate bank holding companies' solvency following the financial crisis of 2007-2008.

Accepted Answer

Stress tests were indeed used by Federal regulators to assess the resilience and solvency of bank holding companies in the aftermath of the 2007-2008 financial crisis, ensuring they could withstand future economic downturns.

Question 17

Deregulation in the 1990s resulted in fewer bank failures following the financial crisis of 2007 - 2008, as compared to previous economic downturns, but the size of losses per institution was larger during the 2007-2008 crisis.

Accepted Answer

Deregulation in the 1990s led to fewer bank failures during the 2007-2008 financial crisis, but the size of losses per institution was larger compared to previous economic downturns.

Question 18

The U.S. economy faltering along with economies around the world during the 2007 - 2008 financial crisis is an example of the insulation of the U.S. economy to the globalization of the financial system.

Accepted Answer

The 2007-2008 financial crisis exemplifies how interconnected and susceptible the U.S. economy is to the global financial system, as problems in the U.S. housing market and financial sector had widespread effects on economies around the world.

Question 19

What is finance?

Accepted Answer

The answer of What is finance?...

Question 20

List three different types of securities.

Accepted Answer

The answer of List three different types of securities....

Quiz 1: An Introduction to Finance