Question 1

Behavioral finance

Accepted Answer

A)  applies concepts from sociology and anthropology to the behavior of market participants. 
B)  studies the behavior of financial markets in response to changes in Federal Reserve policy. 
C)  applies psychology to financial decision making. 
D)  explains why markets are efficient. 
A)  applies concepts from sociology and anthropology to the behavior of market participants. 
B)  studies the behavior of financial markets in response to changes in Federal Reserve policy. 
C)  applies psychology to financial decision making. 
D)  explains why markets are efficient. C

Question 2

Debt securities represent debt (borrowed funds) incurred by the issuer.

Accepted Answer

A) True 
 B)False  True

Question 3

Most of the funds that insurance companies receive from premiums are invested in short-run money market securities.

Accepted Answer

A) True 
 B)False  False

Question 4

____ obtain funds by issuing securities and then lend the funds to individuals and small businesses.

Accepted Answer

A)  Finance companies 
B)  Securities firms 
C)  Mutual funds 
D)  Insurance companies 
A)  Finance companies 
B)  Securities firms 
C)  Mutual funds 
D)  Insurance companies

Question 5

If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

Accepted Answer

A)  lower; lower 
B)  lower; higher 
C)  higher; lower 
D)  higher; higher 
A)  lower; lower 
B)  lower; higher 
C)  higher; lower 
D)  higher; higher

Question 6

If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.

Accepted Answer

A)  rise; lower 
B)  fall; higher 
C)  fall; lower 
D)  rise; higher 
A)  rise; lower 
B)  fall; higher 
C)  fall; lower 
D)  rise; higher

Question 7

Which of the following is not an example of the government's recent increased role in financial markets?

Accepted Answer

A)  the Federal Reserve's purchase of debt securities during the credit crisis 
B)  regulations changing the way that the credit risk of bonds is assessed 
C)  regulations setting maximum rates for Treasury securities 
D)  increased monitoring of stock trading and prosecution of those who trade on inside information 
A)  the Federal Reserve's purchase of debt securities during the credit crisis 
B)  regulations changing the way that the credit risk of bonds is assessed 
C)  regulations setting maximum rates for Treasury securities 
D)  increased monitoring of stock trading and prosecution of those who trade on inside information

Question 8

Systemic risk exists because:

Accepted Answer

A)  there is no government regulation of financial markets. 
B)  financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities. 
C)  financial institutions borrow using long-term debt securities but lend their funds for short-term periods. 
D)  financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts. 
A)  there is no government regulation of financial markets. 
B)  financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities. 
C)  financial institutions borrow using long-term debt securities but lend their funds for short-term periods. 
D)  financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.

Question 9

Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.

Accepted Answer

A) True 
 B)False

Question 10

By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is an example of an asymmetric information problem?

Accepted Answer

A)  A corporation releases toxic wastes into a river. 
B)  A corporation relocates to Ireland to take advantage of lower corporate tax rates. 
C)  A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock. 
D)  A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China. 
A)  A corporation releases toxic wastes into a river. 
B)  A corporation relocates to Ireland to take advantage of lower corporate tax rates. 
C)  A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock. 
D)  A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.

Question 12

____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient.

Accepted Answer

A)  Psychological marketing 
B)  Behavioral finance 
C)  Inefficient markets theory 
D)  Financial psychology 
A)  Psychological marketing 
B)  Behavioral finance 
C)  Inefficient markets theory 
D)  Financial psychology

Question 13

Which of the following are not major investors in stocks?

Accepted Answer

A)  commercial banks 
B)  insurance companies 
C)  mutual funds 
D)  pension funds 
A)  commercial banks 
B)  insurance companies 
C)  mutual funds 
D)  pension funds

Question 14

If investors speculate in the underlying asset rather than in derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

Accepted Answer

A)  lower; lower 
B)  lower; higher 
C)  higher; lower 
D)  higher; higher 
A)  lower; lower 
B)  lower; higher 
C)  higher; lower 
D)  higher; higher

Question 15

Which of the following is most likely to be described as a depository institution?

Accepted Answer

A)  finance companies 
B)  securities firms 
C)  credit unions 
D)  pension funds 
E)  insurance companies 
A)  finance companies 
B)  securities firms 
C)  credit unions 
D)  pension funds 
E)  insurance companies

Question 16

When security prices fully reflect all available information, the markets for these securities are said to be efficient.

Accepted Answer

A) True 
 B)False

Question 17

____ concentrate on mortgage loans.

Accepted Answer

A)  Finance companies 
B)  Commercial banks 
C)  Savings institutions 
D)  Credit unions 
A)  Finance companies 
B)  Commercial banks 
C)  Savings institutions 
D)  Credit unions

Question 18

Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

Accepted Answer

A) True 
 B)False

Question 19

A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.

Accepted Answer

A) True 
 B)False

Question 20

The total asset value of savings institutions is larger than that of commercial banks.

Accepted Answer

A) True 
 B)False

Exam 1: Role of Financial Markets and Institutions

Behavioral finance

Debt securities represent debt (borrowed funds) incurred by the issuer.

Most of the funds that insurance companies receive from premiums are invested in short-run money market securities.

____ obtain funds by issuing securities and then lend the funds to individuals and small businesses.

If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.

Which of the following is not an example of the government's recent increased role in financial markets?

Systemic risk exists because:

Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.

By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.

Which of the following is an example of an asymmetric information problem?

____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient.

Which of the following are not major investors in stocks?

If investors speculate in the underlying asset rather than in derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

Which of the following is most likely to be described as a depository institution?

When security prices fully reflect all available information, the markets for these securities are said to be efficient.

____ concentrate on mortgage loans.

Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.

A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.

The total asset value of savings institutions is larger than that of commercial banks.

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance Operations

Pension Fund Operations

Filters

If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve returns, and they are exposed to relatively risk.

If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the security's price will , resulting in a return for those investors.

If investors speculate in the underlying asset rather than in derivative contracts on the underlying asset, they will probably achieve returns, and they are exposed to relatively risk.