Question 1

SEC Rule 415

Accepted Answer

A) decreased competition among security underwriters. 
B) requires firms to sell an issue within two months of registering it with the SEC. 
C) requires firms to choose an underwriter before registering a security. 
D) led to underwriters taking positions in bonds on their own account. 
A) decreased competition among security underwriters. 
B) requires firms to sell an issue within two months of registering it with the SEC. 
C) requires firms to choose an underwriter before registering a security. 
D) led to underwriters taking positions in bonds on their own account. D

Question 2

Finance companies

Accepted Answer

A) take in deposits from savers and make loans to borrowers. 
B) sell commercial paper and securities and make loans to borrowers with the funds. 
C) take in deposits from savers and purchase assets with the funds. 
D) bring together small savers and large borrowers. 
A) take in deposits from savers and make loans to borrowers. 
B) sell commercial paper and securities and make loans to borrowers with the funds. 
C) take in deposits from savers and purchase assets with the funds. 
D) bring together small savers and large borrowers. B

Question 3

What are venture capital funds? Why have they been successful? Is it likely that venture capital firms will become as large mutual funds, insurance companies, or pension funds?

Accepted Answer

Venture capital firms act as financial intermediaries, raising funds from institutional investors and wealthy individuals and investing those funds in a portfolio of companies. Venture capital funds have been successful in reducing costs of adverse selection and moral hazard in entrepreneurial finance. Because the screening and monitoring roles essential to their success are time-consuming, venture capital firms are unlikely to become as large as mutual funds, insurance companies, or pension funds.

Question 4

Which of the following is true of mutual insurance companies?

Accepted Answer

A) Most life insurance companies are mutual insurance companies. 
B) The largest life insurance companies are mutual insurance companies. 
C) They are owned by their shareholders. 
D) They only grant group policies to large corporations. 
A) Most life insurance companies are mutual insurance companies. 
B) The largest life insurance companies are mutual insurance companies. 
C) They are owned by their shareholders. 
D) They only grant group policies to large corporations.

Question 5

Buying and selling securities on the basis of insider information is against the law

Accepted Answer

A) in all cases. 
B) only in the state of New York. 
C) for those who obtained the information because of their position within the firms involved in the trade. 
D) for those who, having obtained the information, refuse to divulge it to the general public. 
A) in all cases. 
B) only in the state of New York. 
C) for those who obtained the information because of their position within the firms involved in the trade. 
D) for those who, having obtained the information, refuse to divulge it to the general public.

Question 6

If an investment bank underwrites an issue on a "best efforts" basis,

Accepted Answer

A) the issuing company receives nothing unless the investment bank sells the complete issue at the offering price. 
B) the issuing company must pay the investment bank's fee only if the investment bank is found to have done its best to market the security issue. 
C) the investment bank makes no guarantee and is required to sell to investors only as much of the issue as it can. 
D) the investment bank will raise the indicated funds from an issue that is either all stock or all bonds. 
A) the issuing company receives nothing unless the investment bank sells the complete issue at the offering price. 
B) the issuing company must pay the investment bank's fee only if the investment bank is found to have done its best to market the security issue. 
C) the investment bank makes no guarantee and is required to sell to investors only as much of the issue as it can. 
D) the investment bank will raise the indicated funds from an issue that is either all stock or all bonds.

Question 7

In investment banking the "spread" is the difference between

Accepted Answer

A) the value of a firm's assets and the value of its liabilities. 
B) the bid and asked prices on a bond. 
C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market. 
D) the price of a new stock issue and the price of an equivalent new bond issue. 
A) the value of a firm's assets and the value of its liabilities. 
B) the bid and asked prices on a bond. 
C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market. 
D) the price of a new stock issue and the price of an equivalent new bond issue.

Question 8

Finance companies

Accepted Answer

A) issue stock and use the proceeds to purchase bonds. 
B) raise funds in financial markets to lend to households and firms. 
C) raise funds from banks to lend to households and firms. 
D) issue bonds and use the proceeds to purchase stock. 
A) issue stock and use the proceeds to purchase bonds. 
B) raise funds in financial markets to lend to households and firms. 
C) raise funds from banks to lend to households and firms. 
D) issue bonds and use the proceeds to purchase stock.

Question 9

Why did seats on the major exchanges decline in value in the late 1990s?

Accepted Answer

A) The decline in stock prices 
B) The rise in interest rates 
C) Competition from electronic trading 
D) Increased government regulation 
A) The decline in stock prices 
B) The rise in interest rates 
C) Competition from electronic trading 
D) Increased government regulation

Question 10

Securities market institutions

Accepted Answer

A) include insurance companies and pension funds. 
B) include commercial banks. 
C) include mutual funds. 
D) are not financial intermediaries. 
A) include insurance companies and pension funds. 
B) include commercial banks. 
C) include mutual funds. 
D) are not financial intermediaries.

Question 11

What is the most liquid market in the world?

Accepted Answer

A) The market for gold 
B) The market for U.S. Treasury bonds 
C) The market for Japanese government bonds 
D) The market for U.S. corporate bonds 
A) The market for gold 
B) The market for U.S. Treasury bonds 
C) The market for Japanese government bonds 
D) The market for U.S. corporate bonds

Question 12

Investment banks

Accepted Answer

A) lease machinery and equipment to business firms. 
B) acquire deposits from savers and lend them to borrowers. 
C) assist business firms in raising new capital in primary markets. 
D) aid the government to raise funds to cover the budget deficit. 
A) lease machinery and equipment to business firms. 
B) acquire deposits from savers and lend them to borrowers. 
C) assist business firms in raising new capital in primary markets. 
D) aid the government to raise funds to cover the budget deficit.

Question 13

Under a current SEC proposal,

Accepted Answer

A) the majority of the directors of any individual mutual fund must be independent of the fund's sponsor. 
B) funds that hold common stock may not also hold bonds. 
C) funds that hold short-term assets may not also hold long-term assets. 
D) the tax rate on returns to the fund would be greatly reduced. 
A) the majority of the directors of any individual mutual fund must be independent of the fund's sponsor. 
B) funds that hold common stock may not also hold bonds. 
C) funds that hold short-term assets may not also hold long-term assets. 
D) the tax rate on returns to the fund would be greatly reduced.

Question 14

Many analysts think Electronic communications networks (ECNs) will become important executors of exchange-traded stocks because

Accepted Answer

A) they cater to institutional investors. 
B) they will have an expanded presence in NASDAQ. 
C) they offer low transaction costs and anonymity to large investors. 
D) they seek out the small investor. 
A) they cater to institutional investors. 
B) they will have an expanded presence in NASDAQ. 
C) they offer low transaction costs and anonymity to large investors. 
D) they seek out the small investor.

Question 15

Why did the risks associated with underwriting bond issues rise during the 1980s?

Accepted Answer

A) Because rising federal taxes forced a number of issuing firms close to bankruptcy 
B) Because of the higher volatility of interest rates 
C) Because accelerating inflation during the decade led to ever-increasing bond prices 
D) Because excessive government regulation reduced the profitability of underwriting 
A) Because rising federal taxes forced a number of issuing firms close to bankruptcy 
B) Because of the higher volatility of interest rates 
C) Because accelerating inflation during the decade led to ever-increasing bond prices 
D) Because excessive government regulation reduced the profitability of underwriting

Question 16

Which of the following is NOT one of the three largest financial institutions in the world?

Accepted Answer

A) UBS 
B) Mitsubishi UFJ Financial Group 
C) Barclays Bank 
D) Bank of America 
A) UBS 
B) Mitsubishi UFJ Financial Group 
C) Barclays Bank 
D) Bank of America

Question 17

Unlike brokers, dealers

Accepted Answer

A) buy and sell both stocks and bonds. 
B) hold inventories of securities. 
C) are unregulated by the federal government. 
D) are taxed by the federal government but not by state and local governments. 
A) buy and sell both stocks and bonds. 
B) hold inventories of securities. 
C) are unregulated by the federal government. 
D) are taxed by the federal government but not by state and local governments.

Question 18

What percentage of the mutual fund market is held by money market mutual funds?

Accepted Answer

A) 1% 
B) 8% 
C) 23% 
D) 38% 
A) 1% 
B) 8% 
C) 23% 
D) 38%

Question 19

When an insurance company makes a direct loan to a firm, the loan is known as

Accepted Answer

A) a private placement. 
B) a commercial paper. 
C) an account receivable. 
D) an account payable. 
A) a private placement. 
B) a commercial paper. 
C) an account receivable. 
D) an account payable.

Question 20

Which of the following is a contractual saving institution?

Accepted Answer

A) The New York Stock Exchange 
B) Greater Illinois Savings and Loan 
C) Prudential Insurance Company 
D) Fidelity Magellan Mutual Fund 
A) The New York Stock Exchange 
B) Greater Illinois Savings and Loan 
C) Prudential Insurance Company 
D) Fidelity Magellan Mutual Fund

Exam 12: What Financial Institutions Do

SEC Rule 415

Finance companies

What are venture capital funds? Why have they been successful? Is it likely that venture capital firms will become as large mutual funds, insurance companies, or pension funds?

Which of the following is true of mutual insurance companies?

Buying and selling securities on the basis of insider information is against the law

If an investment bank underwrites an issue on a "best efforts" basis,

In investment banking the "spread" is the difference between

Finance companies

Why did seats on the major exchanges decline in value in the late 1990s?

Securities market institutions

What is the most liquid market in the world?

Investment banks

Under a current SEC proposal,

Many analysts think Electronic communications networks (ECNs) will become important executors of exchange-traded stocks because

Why did the risks associated with underwriting bond issues rise during the 1980s?

Which of the following is NOT one of the three largest financial institutions in the world?

Unlike brokers, dealers

What percentage of the mutual fund market is held by money market mutual funds?

When an insurance company makes a direct loan to a firm, the loan is known as

Which of the following is a contractual saving institution?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters