Question 1

The value of a financial instrument rises as:

Accepted Answer

A) The size of the payment promised decreases 
B) The promised payment is made sooner rather than later 
C) It is less likely the payment will be made 
D) The payments are made when the prospective investor needs them least 
A) The size of the payment promised decreases 
B) The promised payment is made sooner rather than later 
C) It is less likely the payment will be made 
D) The payments are made when the prospective investor needs them least B

Question 2

Many countries of the former Soviet Union are finding the transformation to a market-based economy to be quite difficult and economic growth rates for many of these countries are quite low.Explain what role the lack of financial market development may play in these countries.

Accepted Answer

Financial markets really did not exist for many of these countries when they were under a command and control system.As the countries seek to become more market oriented, financial markets will need to develop just like other markets.One problem that will need to be overcome is the creation of a system of property rights and laws on which all markets, especially financial markets, can rely.Many of us in industrialized market economies take the system of property rights and laws that protect investors for granted.It is the extensive system of property rights, laws, and investor protection that has many people quite comfortable placing their funds with financial intermediaries or lending their funds directly to other individuals or firms, knowing that there is legal recourse should the counterparty not do what he/she was supposed to do.In developing market economies it is not surprising that many people who may have funds to invest may be quite reluctant to do so until they are comfortable that there is adequate legal protection, methods to minimize information asymmetry, and the development of financial intermediaries to reduce the risk of lending.Until this happens these economies will not operate as efficiently or grow as rapidly as they otherwise might.

Question 3

A financial instrument would include:

Accepted Answer

A) Only a written obligation and a transfer of value 
B) Only a written obligation and a specified date 
C) A written obligation, a transfer of value, a future date, and certain conditions 
D) A written obligation, a transfer of value, a specific date for payment, uncertain conditions 
A) Only a written obligation and a transfer of value 
B) Only a written obligation and a specified date 
C) A written obligation, a transfer of value, a future date, and certain conditions 
D) A written obligation, a transfer of value, a specific date for payment, uncertain conditions C

Question 4

The better the information provided to financial markets:

Accepted Answer

A) The less the amount of funds transferred between savers and borrowers 
B) The greater the amount of funds transferred between savers and borrowers, though risk increases 
C) The higher the return required by lenders 
D) The greater will be the flow of funds in these markets 
A) The less the amount of funds transferred between savers and borrowers 
B) The greater the amount of funds transferred between savers and borrowers, though risk increases 
C) The higher the return required by lenders 
D) The greater will be the flow of funds in these markets

Question 5

A collection of assets is known as a(n):

Accepted Answer

A) Asset-backed security 
B) Derivative 
C) Futures contract 
D) Portfolio 
A) Asset-backed security 
B) Derivative 
C) Futures contract 
D) Portfolio

Question 6

The high volume of shares of stock that are traded on a normal day on stock markets reflects:

Accepted Answer

A) The high transaction costs associated with these financial markets 
B) The low transaction costs and high liquidity associated with these markets 
C) The low transaction costs and low liquidity associated with these markets 
D) The high transactions costs and low liquidity associated with these markets 
A) The high transaction costs associated with these financial markets 
B) The low transaction costs and high liquidity associated with these markets 
C) The low transaction costs and low liquidity associated with these markets 
D) The high transactions costs and low liquidity associated with these markets

Question 7

What evidence is there that the transaction costs involved with the buying and selling of stocks is low?

Accepted Answer

Probably the best evidence is the volume

Question 8

Considering the value of a financial instrument, the more likely it is the payment will be made:

Accepted Answer

A) The more valuable the financial instrument 
B) The less valuable is the instrument because risk is lower 
C) The less valuable is the financial instrument because it is highly liquid 
D) The greater the uncertainty; therefore the less valuable is the financial instrument 
A) The more valuable the financial instrument 
B) The less valuable is the instrument because risk is lower 
C) The less valuable is the financial instrument because it is highly liquid 
D) The greater the uncertainty; therefore the less valuable is the financial instrument

Question 9

Over-the-counter (OTC) markets:

Accepted Answer

A) Employ specialists to minimize price volatility 
B) Are centralized exchanges but you must be a dealer to be part of an exchange 
C) Only deal in the stocks of companies with over $100 million in capital 
D) Are networks of security dealers linked electronically 
A) Employ specialists to minimize price volatility 
B) Are centralized exchanges but you must be a dealer to be part of an exchange 
C) Only deal in the stocks of companies with over $100 million in capital 
D) Are networks of security dealers linked electronically

Question 10

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 11

The New York Stock Exchange (NYSE) is:

Accepted Answer

A) A decentralized electronic market made up of dealers all over the world 
B) An example of a centralized exchange 
C) A financial market where nearly 100 million shares of stock are traded every business day 
D) The only centralized stock exchange in the world 
A) A decentralized electronic market made up of dealers all over the world 
B) An example of a centralized exchange 
C) A financial market where nearly 100 million shares of stock are traded every business day 
D) The only centralized stock exchange in the world

Question 12

Financial markets:

Accepted Answer

A) Enable buyers and sellers to exchange financial instruments but not risk 
B) Enable buyers and sellers to exchange risk by buying and selling financial instruments 
C) Only allow the transfer of risk through derivative securities 
D) Do not allow for the transfer of risk but do help reduce it 
A) Enable buyers and sellers to exchange financial instruments but not risk 
B) Enable buyers and sellers to exchange risk by buying and selling financial instruments 
C) Only allow the transfer of risk through derivative securities 
D) Do not allow for the transfer of risk but do help reduce it

Question 13

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

Accepted Answer

A) Transforms assets 
B) Acts as a broker 
C) Serves as a depository institution 
D) Sells derivative securities 
A) Transforms assets 
B) Acts as a broker 
C) Serves as a depository institution 
D) Sells derivative securities

Question 14

Where would you expect prices to be more volatile, on instruments traded in the money market or instruments traded in the bond market? Explain.

Accepted Answer

We learned in previous chapters that pri

Question 15

Explain why most financial instruments are fairly complex, while at the same time quite standardized.

Accepted Answer

Most financial instruments are complex i

Question 16

Loans made between borrowers and lenders are:

Accepted Answer

A) Usually not taxable at the federal level 
B) Legal only in the state of origination 
C) Assets of the lenders 
D) Assets of the borrowers 
A) Usually not taxable at the federal level 
B) Legal only in the state of origination 
C) Assets of the lenders 
D) Assets of the borrowers

Question 17

What are the four fundamental characteristics that determine the value of a financial instrument?

Accepted Answer

The four fundamental characteristics tha

Question 18

Financial instruments used primarily as stores of value would not include:

Accepted Answer

A) A car insurance policy 
B) A U.S.Treasury bond 
C) Shares of General Motors stock 
D) A home mortgage 
A) A car insurance policy 
B) A U.S.Treasury bond 
C) Shares of General Motors stock 
D) A home mortgage

Question 19

Credit cards usually charge higher rates of interest than most other forms of lending.In terms of information, collateral and monitoring, how might these higher rates be explained?

Accepted Answer

When providing credit cards to customers

Question 20

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

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

The value of a financial instrument rises as:

Many countries of the former Soviet Union are finding the transformation to a market-based economy to be quite difficult and economic growth rates for many of these countries are quite low.Explain what role the lack of financial market development may play in these countries.

A financial instrument would include:

The better the information provided to financial markets:

A collection of assets is known as a(n):

The high volume of shares of stock that are traded on a normal day on stock markets reflects:

What evidence is there that the transaction costs involved with the buying and selling of stocks is low?

Considering the value of a financial instrument, the more likely it is the payment will be made:

Over-the-counter (OTC) markets:

Secondary financial markets:

The New York Stock Exchange (NYSE) is:

Financial markets:

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

Where would you expect prices to be more volatile, on instruments traded in the money market or instruments traded in the bond market? Explain.

Explain why most financial instruments are fairly complex, while at the same time quite standardized.

Loans made between borrowers and lenders are:

What are the four fundamental characteristics that determine the value of a financial instrument?

Financial instruments used primarily as stores of value would not include:

Credit cards usually charge higher rates of interest than most other forms of lending.In terms of information, collateral and monitoring, how might these higher rates be explained?

Standardization of financial instruments has occurred as a result 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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