Question 1

Nondepository institutions:

Accepted Answer

A)  do not serve as intermediaries. 
B)  only serve as brokers. 
C)  only transform assets. 
D)  do not accept deposits. 
A)  do not serve as intermediaries. 
B)  only serve as brokers. 
C)  only transform assets. 
D)  do not accept deposits.

Question 2

What is meant by the "paradox of leverage?"

Accepted Answer

The paradox of leverage occurs when all

Question 3

What is the primary distinction between debt/equity markets and derivative markets?

Accepted Answer

The market for equities (stocks) and deb

Question 4

Why might a life insurance company insist on an individual having a physical exam before agreeing to provide life insurance to the individual?

Accepted Answer

The life insurance policy is a contract

Question 5

Standardization of financial instruments has occurred as a result of:

Accepted Answer

A)  the rule of 70. 
B)  the law of demand. 
C)  economies of scale. 
D)  the law of supply. 
A)  the rule of 70. 
B)  the law of demand. 
C)  economies of scale. 
D)  the law of supply.

Question 6

Juan purchases automobile insurance; the insurance contract is a:

Accepted Answer

A)  financial instrument. 
B)  form of money. 
C)  transfer of risk from the insurance company to Juan. 
D)  financial intermediary. 
A)  financial instrument. 
B)  form of money. 
C)  transfer of risk from the insurance company to Juan. 
D)  financial intermediary.

Question 7

An insurance company is an example of a financial institution that:

Accepted Answer

A)  transfers risk. 
B)  acts as a broker. 
C)  serves as a depository institution. 
D)  sells derivative securities. 
A)  transfers risk. 
B)  acts as a broker. 
C)  serves as a depository institution. 
D)  sells derivative securities.

Question 8

Secondary financial markets:

Accepted Answer

A)  are financial markets for all financial instruments rated less than investment grade. 
B)  are financial markets where existing securities are bought and sold. 
C)  eliminate the transaction costs for buyers and sellers. 
D)  are only for stock. 
A)  are financial markets for all financial instruments rated less than investment grade. 
B)  are financial markets where existing securities are bought and sold. 
C)  eliminate the transaction costs for buyers and sellers. 
D)  are only for stock.

Question 9

Agencies exist which rate bonds based on characteristics of the borrower. Such bond rating agencies are an example of a financial market response designed to:

Accepted Answer

A)  increase information asymmetry. 
B)  decrease the real return to bondholders. 
C)  provide a lower cost solution to the high cost of information. 
D)  transfer risk from the buyer to the rating agency. 
A)  increase information asymmetry. 
B)  decrease the real return to bondholders. 
C)  provide a lower cost solution to the high cost of information. 
D)  transfer risk from the buyer to the rating agency.

Question 10

Well-run financial markets:

Accepted Answer

A)  keep transactions costs high to benefit brokers 
B)  prevent the widespread pooling of information 
C)  ensure that resources are allocated efficiently 
D)  are usually the result of little or no government regulation 
A)  keep transactions costs high to benefit brokers 
B)  prevent the widespread pooling of information 
C)  ensure that resources are allocated efficiently 
D)  are usually the result of little or no government regulation

Question 11

Roles served by financial markets include the following, except:

Accepted Answer

A)  eliminating risk. 
B)  providing liquidity. 
C)  pooling and communicating information. 
D)  sharing of risk. 
A)  eliminating risk. 
B)  providing liquidity. 
C)  pooling and communicating information. 
D)  sharing of risk.

Question 12

Consider the price paid for debt issued by the State of California. Which of the following would lead to a decrease in the value of State of California bonds?

Accepted Answer

A)  The State of California bonds are in small dollar amounts. 
B)  The State of California bonds have a shorter maturity. 
C)  The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments. 
D)  The State of California pays back its previous bonds ahead of schedule. 
A)  The State of California bonds are in small dollar amounts. 
B)  The State of California bonds have a shorter maturity. 
C)  The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments. 
D)  The State of California pays back its previous bonds ahead of schedule.

Question 13

Which of the following statements is most correct?

Accepted Answer

A)  All banks are financial intermediaries, but not all financial intermediaries are banks. 
B)  Financial intermediaries must be public corporations. 
C)  All financial intermediaries are insurance companies. 
D)  Financial intermediaries are government agencies. 
A)  All banks are financial intermediaries, but not all financial intermediaries are banks. 
B)  Financial intermediaries must be public corporations. 
C)  All financial intermediaries are insurance companies. 
D)  Financial intermediaries are government agencies.

Question 14

Trading in electronic exchanges has grown tremendously in recent years, what are some of the disadvantages of trading in decentralized electronic exchanges?

Accepted Answer

Electronic operations have proven prone

Question 15

Considering the value of a financial instrument, the bigger the size of the promised payment the:

Accepted Answer

A)  less valuable the financial instrument because risk must be greater. 
B)  longer an investor has to wait for the payment. 
C)  more valuable the financial instrument. 
D)  greater the risk. 
A)  less valuable the financial instrument because risk must be greater. 
B)  longer an investor has to wait for the payment. 
C)  more valuable the financial instrument. 
D)  greater the risk.

Question 16

Mary purchases a U.S. Treasury bond; the bond is a(n):

Accepted Answer

A)  asset of the U.S. government as well as an asset for Mary. 
B)  liability of the U.S. government and an asset for Mary. 
C)  asset for Mary but not a liability of the U.S. Government. 
D)  asset for the government but a liability for Mary. 
A)  asset of the U.S. government as well as an asset for Mary. 
B)  liability of the U.S. government and an asset for Mary. 
C)  asset for Mary but not a liability of the U.S. Government. 
D)  asset for the government but a liability for Mary.

Question 17

Is the obtaining of a car loan a primary or secondary market transaction?

Accepted Answer

The obtaining of a car loan is

Question 18

Financial instruments used primarily to transfer risk would include all of the following, except:

Accepted Answer

A)  an insurance contract. 
B)  a futures contract. 
C)  options. 
D)  a bank loan. 
A)  an insurance contract. 
B)  a futures contract. 
C)  options. 
D)  a bank loan.

Question 19

Why are options referred to as derivative instruments?

Accepted Answer

Unlike underlying instruments, such as s

Question 20

Commissions paid to a stock broker are an example of:

Accepted Answer

A)  risk transfer. 
B)  transaction costs. 
C)  information asymmetry. 
D)  liquidity. 
A)  risk transfer. 
B)  transaction costs. 
C)  information asymmetry. 
D)  liquidity.

Exam 3: Financial Instruments, Financial Markets, and Financial Institutions

Nondepository institutions:

What is meant by the "paradox of leverage?"

What is the primary distinction between debt/equity markets and derivative markets?

Why might a life insurance company insist on an individual having a physical exam before agreeing to provide life insurance to the individual?

Standardization of financial instruments has occurred as a result of:

Juan purchases automobile insurance; the insurance contract is a:

An insurance company is an example of a financial institution that:

Secondary financial markets:

Agencies exist which rate bonds based on characteristics of the borrower. Such bond rating agencies are an example of a financial market response designed to:

Well-run financial markets:

Roles served by financial markets include the following, except:

Consider the price paid for debt issued by the State of California. Which of the following would lead to a decrease in the value of State of California bonds?

Which of the following statements is most correct?

Trading in electronic exchanges has grown tremendously in recent years, what are some of the disadvantages of trading in decentralized electronic exchanges?

Considering the value of a financial instrument, the bigger the size of the promised payment the:

Mary purchases a U.S. Treasury bond; the bond is a(n):

Is the obtaining of a car loan a primary or secondary market transaction?

Financial instruments used primarily to transfer risk would include all of the following, except:

Why are options referred to as derivative instruments?

Commissions paid to a stock broker are an example of:

An Introduction to Money and the Financial System

Money and the Payments System

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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