Question 1

One of the most important contributions of security brokers and dealers is to facilitate the development and growth of secondary markets.

Accepted Answer

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Question 2

The hedging principle refers to risk reduction by approximately matching the maturities of assets held with the maturities of liabilities taken on.

Accepted Answer

The hedging principle, also known as matching principle in finance, suggests that to reduce risk, a company should aim to match the maturities of its assets with the maturities of its liabilities, thereby ensuring that cash flows from assets can be used to cover obligations from liabilities as they come due.

Question 3

During periods of disintermediation the total flow of credit through the financial system is reduced.

Accepted Answer

Disintermediation occurs when borrowers bypass traditional financial intermediaries, potentially reducing the total flow of credit through the traditional financial system.

Question 4

Real estate investment trusts are among the largest financial intermediaries.

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Question 5

The essential role of financial markets is to convert savings into investments.

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Question 6

Society as a whole is better off by the mere creation of financial assets and liabilities.

Accepted Answer

The creation of financial assets and liabilities allows for the transfer of risk and the efficient allocation of capital, which can lead to economic growth and improved welfare.

Question 7

Every financial asset represents the lending or investing of money transferred from one economic unit to another.

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Question 8

An example of a net lender is an economic unit which purchases U.S. Treasury Bills.

Accepted Answer

An economic unit that purchases U.S. Treasury Bills is lending money to the government, thus acting as a net lender.

Question 9

A benefit of a financial system is the ability of economic units to adjust their financial positions smoothly and efficiently.

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Question 10

It is not possible for an economic unit to be a lender and a borrower simultaneously.

Accepted Answer

An economic unit cannot be a lender and a borrower simultaneously because lending and borrowing are two different sides of a transaction. A lender provides funds to a borrower, while a borrower receives funds from a lender. Therefore, it is not possible for an economic unit to be both a lender and a borrower at the same time.

Question 11

It is necessary for a monetary unit to have an intrinsic value as a commodity to be accepted as a medium of exchange.

Accepted Answer

A monetary unit does not need to have intrinsic value as a commodity to be accepted as a medium of exchange; it primarily requires trust and acceptance by the people who use it. For example, fiat currencies like the US dollar or the Euro have no intrinsic value but are accepted widely as a medium of exchange.

Question 12

The financial asset which entitles its holder to a share of a business corporation's net earnings but carries no voting privileges is known as an indenture.

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Question 13

Passbook savings accounts and U.S. Savings Bonds are examples of negotiable debt securities.

Accepted Answer

Passbook savings accounts and U.S. Savings Bonds are non-negotiable debt securities because they cannot be sold or transferred in the secondary market; they are registered to a specific owner.

Question 14

A marketable corporate note would be a negotiable debt instrument.

Accepted Answer

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Question 15

By definition financial assets provide a continuing stream of services to their owner.

Accepted Answer

Financial assets, such as stocks, bonds, and bank deposits, are defined by their ability to generate income or increase in value over time, providing a continuing stream of services or benefits to their owner.

Question 16

Financial assets are fungible, which means they can easily be transported from one location to another.

Accepted Answer

Fungibility refers to the property of assets being interchangeable and identical in value for equal quantities, not their ease of transport.

Question 17

A new form of disintermediation in recent years has involved some banks and savings and loans selling off their capital by purchasing large quantities of new loans in an attempt to bolster their revenues, according to the text.

Accepted Answer

Disintermediation typically refers to the process where banks or savings institutions lose their traditional role as intermediaries because customers directly invest or borrow from other sources, rather than the institutions selling off their capital to purchase new loans.

Question 18

Due to recent deregulation, service innovations and lower average interest rates today's financial intermediaries face less uncertainty today than in the past regarding their funds sources and funds costs.

Accepted Answer

Despite deregulation and innovations, financial intermediaries today face more uncertainty due to increased market volatility, global financial crises, and rapid changes in technology and consumer behavior, which affect both their sources of funds and the costs associated with those funds.

Question 19

A corporation that decides to turn down a loan from a bank and borrow instead in the open market has switched from semi-direct finance to direct finance, according to the textbook.

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Question 20

Insurance companies and pension funds must adhere to the prudent man rule when making stock selections.

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Quiz 2: Financial Systems, Monetary Units, and the Role of Money in the Economy