Question 1

Commercial banks advise firms on major transactions such as mergers or financial restructurings.

Accepted Answer

False

Question 2

A financial institution is an intermediary that channels the savings of individuals,businesses,and governments into loans or investments.

Accepted Answer

This is the correct definition of a financial institution.

Question 3

As a key participant in financial transactions,individuals are ________.

Accepted Answer

Individuals are typically net suppliers of funds because they often save more than they borrow. This means they have money to invest or lend, making them suppliers of funds for others who need to borrow.

Question 4

Which of the following serves as an intermediary channeling the savings of individuals,businesses,and governments into loans and investments?

Accepted Answer

Financial institutions, such as banks and credit unions, serve as intermediaries between savers and borrowers by channeling savings into loans and investments. Financial markets, such as the stock market and bond market, also play a role in this process but they are not intermediaries themselves. Securities and Exchange Commission and OTC market do not directly channel savings into loans and investments.

Question 5

Which of the following is a forum in which suppliers and demanders of funds can transact business directly?

Accepted Answer

Financial markets are forums where suppliers and demanders of funds can transact business directly, such as stock markets and bond markets. Shadow banking system refers to financial activities that take place outside of traditional banks. Commercial banks and financial institutions act as intermediaries between suppliers and demanders of funds.

Question 6

Primary and secondary markets are markets for short-term and long-term securities,respectively.

Accepted Answer

Primary markets are markets where newly issued securities are bought and sold, while secondary markets are markets where previously issued securities are bought and sold. The distinction between short-term and long-term securities is not the defining factor in determining whether a market is primary or secondary.

Question 7

Firms that require funds from external sources can obtain them ________.

Accepted Answer

Firms typically obtain funds from external sources through financial institutions, such as banks, which provide loans, credit facilities, and other financial products designed for business financing. Central banks generally do not lend directly to firms, the forex market is for trading currencies and not a direct source of funding, and T-bills are short-term government securities, not instruments that firms can issue.

Question 8

The Glass-Steagall Act was imposed to allow commercial and investment banks to combine and work together.

Accepted Answer

The Glass-Steagall Act (also known as the Banking Act of 1933) was actually imposed to separate commercial and investment banking activities, in order to prevent another financial crisis like the Great Depression. It prohibited commercial banks from engaging in risky investment activities, and created the Federal Deposit Insurance Corporation to protect the deposits of individuals. The act was repealed in 1999, which has been cited as a contributing factor to the 2008 financial crisis.

Question 9

The shadow banking system describes a group of institutions that engage in lending activities,much like traditional banks.

Accepted Answer

The statement is true. The shadow banking system includes non-bank financial institutions such as hedge funds, money market funds, and investment banks that conduct lending activities similar to traditional banks, but operate outside of the traditional regulatory framework.

Question 10

A primary market is a financial market in which pre-owned securities are traded.

Accepted Answer

A primary market is a financial market in which new securities are issued and sold to initial buyers by the issuing company or government. Pre-owned securities are traded in the secondary market.

Question 11

Government can obtain funds ________.

Accepted Answer

The government can obtain funds by selling debt securities, such as treasury bonds and treasury bills, to investors. This is a common way for governments to finance their spending and manage their debt. Trading in equity market, issuing financial instruments such as futures and options, and forex market are not commonly used by governments to obtain funds.

Question 12

The sale of a new security directly to an investor or a group of investors is called ________.

Accepted Answer

The sale of a new security directly to an investor or a group of investors is known as a private placement. A private placement is a type of capital market transaction, but not all capital market transactions involve a private placement. Arbitraging and short selling are different types of investment strategies and not related to the direct sale of a security to an investor.

Question 13

Which of the following provides savers with a secure place to invest funds and offer both individuals and companies loans to finance investments?

Accepted Answer

Commercial banks provide a secure place to invest funds in various types of accounts, such as savings accounts, and offer loans to both individuals and companies to finance investments. Investment banks focus on advising and underwriting securities offerings, securities exchanges provide a platform for buying and selling securities, and mutual funds pool funds from multiple investors to invest in a diversified portfolio of securities.

Question 14

Which of the following is a means of selling bonds or stocks to the public?

Accepted Answer

A public offering is the process of selling securities (such as bonds or stocks) to the general public. This is typically done through an underwriting process in which investment banks and other financial institutions help to market and sell the securities to investors. Private placement (A) involves selling securities to a limited number of select investors, while organized selling (C) and direct placement (D) are not generally used to sell securities to the public.

Question 15

Which of the following assists companies in raising capital,advise firms on major transactions such as mergers or financial restructuring,and engage in trading and market making activities?

Accepted Answer

Investment banks provide services such as underwriting, which involves raising capital for companies by selling securities to investors, advising firms on major transactions such as mergers or financial restructuring, and engaging in trading and market-making activities. Securities exchanges facilitate the trading of securities but do not provide capital-raising or advisory services. Mutual funds pool money from multiple investors to invest in a diversified portfolio of securities, but they do not directly assist companies in raising capital or engage in advisory services. Commercial banks primarily provide lending and deposit-taking services to individuals and businesses.

Question 16

Financial markets are intermediaries that channel the savings of individuals,businesses,and government into loans or investments.

Accepted Answer

The answer of Financial markets are intermediaries that channel the...

Question 17

Government is typically a ________.

Accepted Answer

Government typically spends more than it collects in revenue, therefore it must borrow funds to cover its expenses. This makes it a net demander of funds in financial markets.

Question 18

Most businesses raise money by selling their securities in a ________.

Accepted Answer

Public offerings, also known as initial public offerings (IPOs), are a common way for businesses to raise money by selling their securities to the public. Forex, futures, and commodities markets are not typically used for this purpose.

Question 19

A public offering is the sale of a new security issue-typically debt or preferred stock-directly to an investor or group of investors.

Accepted Answer

A public offering refers to the sale of securities to the general public, typically through a stock exchange, and not directly to a specific investor or group of investors.

Question 20

Investment banks are institutions that ________.

Accepted Answer

Investment banks engage in trading and market making activities, such as underwriting securities offerings, assisting companies with mergers and acquisitions and providing financial advisory services. They are not involved in typical banking activities like taking deposits and making loans, which are handled by commercial and retail banks. Investment banks must comply with Securities and Exchange Commission regulations, and they are not limited to capital market activities.

Quiz 2: The Financial Market Environment