Question 1

A counterparty to a financial instrument is always:

Accepted Answer

A) The issuer of the financial instrument 
B) The government agency guaranteeing the value of the instrument 
C) The person or institution that purchases the financial instrument 
D) The person or institution that is on the other side of the financial contract 
A) The issuer of the financial instrument 
B) The government agency guaranteeing the value of the instrument 
C) The person or institution that purchases the financial instrument 
D) The person or institution that is on the other side of the financial contract

Question 2

Tom obtains a car loan from Old Town Bank.

Accepted Answer

A) The car loan is Tom's asset and the bank's liability 
B) The car loan is Tom's asset, but the liability belongs to the bank's depositors 
C) The car loan is Tom's liability and an asset for Old Town Bank 
D) The car loan is Tom's liability and a liability of the bank until Tom pays it off 
A) The car loan is Tom's asset and the bank's liability 
B) The car loan is Tom's asset, but the liability belongs to the bank's depositors 
C) The car loan is Tom's liability and an asset for Old Town Bank 
D) The car loan is Tom's liability and a liability of the bank until Tom pays it off

Question 3

More detailed financial instruments tend to be:

Accepted Answer

A) Less costly because all possible contingencies are covered 
B) More costly because it will cost more to create 
C) More desirable than less detailed ones, no matter what the price 
D) Less costly because they can be standardized more easily 
A) Less costly because all possible contingencies are covered 
B) More costly because it will cost more to create 
C) More desirable than less detailed ones, no matter what the price 
D) Less costly because they can be standardized more easily

Question 4

An annuity is a contract that makes monthly payments as long as someone lives.Explain why an individual would want to purchase such a contract.What risk is being transferred?

Accepted Answer

An annuity transfers the risk that the b

Question 5

The fundamental characteristics influencing the value of a financial instrument include each of the following except:

Accepted Answer

A) The size of the payment promised 
B) When the promised payment will be made 
C) Where the instrument is traded 
D) The likelihood of payment 
A) The size of the payment promised 
B) When the promised payment will be made 
C) Where the instrument is traded 
D) The likelihood of payment

Question 6

An over-the-counter (OTC) market is:

Accepted Answer

A) Made up of dealers who only sell government bonds 
B) An example of a centralized market 
C) Made up of dealer who buy and sell only for their own accounts 
D) Made up of dealers who buy and sell for their customers and for their own accounts 
A) Made up of dealers who only sell government bonds 
B) An example of a centralized market 
C) Made up of dealer who buy and sell only for their own accounts 
D) Made up of dealers who buy and sell for their customers and for their own accounts

Question 7

What is meant by the "paradox of leverage?"

Accepted Answer

The paradox of leverage occurs when all

Question 8

A futures contract is an example of:

Accepted Answer

A) A derivative instrument 
B) An instrument used solely by financial institutions 
C) A high-risk security that will only have value if certain events occur 
D) A contract that is traded but is not a financial instrument 
A) A derivative instrument 
B) An instrument used solely by financial institutions 
C) A high-risk security that will only have value if certain events occur 
D) A contract that is traded but is not a financial instrument

Question 9

What is the relationship between financial market development and economic growth?

Accepted Answer

A country's economic growth is linked to

Question 10

Considering the value of a financial instrument, the sooner the promised payment is made:

Accepted Answer

A) The less valuable is the promise to make it since time is valuable 
B) The greater the risk, therefore the promise has greater value 
C) The more valuable is the promise to make it 
D) The less relevant is the likelihood that the payment will be made 
A) The less valuable is the promise to make it since time is valuable 
B) The greater the risk, therefore the promise has greater value 
C) The more valuable is the promise to make it 
D) The less relevant is the likelihood that the payment will be made

Question 11

A share of Microsoft stock would best be described as which of the following?

Accepted Answer

A) A derivative instrument 
B) A means of payment 
C) An underlying instrument 
D) A debt instrument 
A) A derivative instrument 
B) A means of payment 
C) An underlying instrument 
D) A debt instrument

Question 12

One of the advantages of the financial system is:

Accepted Answer

A) It gathers information about borrowers both before and after they obtain resources 
B) It communicates more information to lenders than borrowers 
C) It eliminates information asymmetry 
D) It makes sure that all information communicated is truthful 
A) It gathers information about borrowers both before and after they obtain resources 
B) It communicates more information to lenders than borrowers 
C) It eliminates information asymmetry 
D) It makes sure that all information communicated is truthful

Question 13

Which of the following is not a financial intermediary?

Accepted Answer

A) A bank 
B) An insurance company 
C) The New York Stock Exchange 
D) A mutual fund 
A) A bank 
B) An insurance company 
C) The New York Stock Exchange 
D) A mutual fund

Question 14

A financial intermediary:

Accepted Answer

A) Is an agency that guarantees a loan 
B) Is involved in indirect finance 
C) Would be used in direct finance 
D) Must be a depository institution 
A) Is an agency that guarantees a loan 
B) Is involved in indirect finance 
C) Would be used in direct finance 
D) Must be a depository institution

Question 15

Countries that lack well-defined property laws and legal structures:

Accepted Answer

A) Have large secondary financial markets because the primary markets do not exist 
B) Will not develop as fast economically as counties with clear property rights and a formal legal system 
C) Will have much lower transaction costs associated with any level of lending 
D) Will not have any financial markets at all 
A) Have large secondary financial markets because the primary markets do not exist 
B) Will not develop as fast economically as counties with clear property rights and a formal legal system 
C) Will have much lower transaction costs associated with any level of lending 
D) Will not have any financial markets at all

Question 16

Can a financial instrument be bought and sold in both a primary and secondary financial market? Explain.

Accepted Answer

The answer is yes and highly likely.When

Question 17

From the savers' perspective, what are the benefits of going to a depository institution to obtain accounts in which to hold a portion of wealth, instead of buying securities directly from financial markets?

Accepted Answer

First, the saver does not bear a transac

Question 18

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 19

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 20

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

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

A counterparty to a financial instrument is always:

Tom obtains a car loan from Old Town Bank.

More detailed financial instruments tend to be:

An annuity is a contract that makes monthly payments as long as someone lives.Explain why an individual would want to purchase such a contract.What risk is being transferred?

The fundamental characteristics influencing the value of a financial instrument include each of the following except:

An over-the-counter (OTC) market is:

What is meant by the "paradox of leverage?"

A futures contract is an example of:

What is the relationship between financial market development and economic growth?

Considering the value of a financial instrument, the sooner the promised payment is made:

A share of Microsoft stock would best be described as which of the following?

One of the advantages of the financial system is:

Which of the following is not a financial intermediary?

A financial intermediary:

Countries that lack well-defined property laws and legal structures:

Can a financial instrument be bought and sold in both a primary and secondary financial market? Explain.

From the savers' perspective, what are the benefits of going to a depository institution to obtain accounts in which to hold a portion of wealth, instead of buying securities directly from financial markets?

Well-run financial markets:

Nondepository institutions:

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:

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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