Question 1

An important financial institution that assists in the initial sale of securities in the primary market is the

Accepted Answer

A) investment bank. 
B) commercial bank. 
C) stock exchange. 
D) brokerage house. 
A) investment bank. 
B) commercial bank. 
C) stock exchange. 
D) brokerage house.

Question 2

Banks providing depositors with checking accounts that enable them to pay their bills easily is known as

Accepted Answer

A) liquidity services. 
B) asset transformation. 
C) risk sharing. 
D) transaction costs. 
A) liquidity services. 
B) asset transformation. 
C) risk sharing. 
D) transaction costs.

Question 3

A corporation acquires new funds only when its securities are sold in the

Accepted Answer

A) secondary market by an investment bank. 
B) primary market by an investment bank. 
C) secondary market by a stock exchange broker. 
D) secondary market by a commercial bank. 
A) secondary market by an investment bank. 
B) primary market by an investment bank. 
C) secondary market by a stock exchange broker. 
D) secondary market by a commercial bank.

Question 4

When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.

Accepted Answer

A) asymmetric information 
B) adverse selection 
C) moral hazard 
D) fraud 
A) asymmetric information 
B) adverse selection 
C) moral hazard 
D) fraud

Question 5

Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of

Accepted Answer

A) poorly informed consumers. 
B) standardization. 
C) economies of scale. 
D) their market power. 
A) poorly informed consumers. 
B) standardization. 
C) economies of scale. 
D) their market power.

Question 6

The purpose of diversification is to

Accepted Answer

A) reduce the volatility of a portfolio's return. 
B) raise the volatility of a portfolio's return. 
C) reduce the average return on a portfolio. 
D) raise the average return on a portfolio. 
A) reduce the volatility of a portfolio's return. 
B) raise the volatility of a portfolio's return. 
C) reduce the average return on a portfolio. 
D) raise the average return on a portfolio.

Question 7

When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the

Accepted Answer

A) moral hazard problem. 
B) adverse selection problem. 
C) shirking problem. 
D) free-rider problem. 
E) principal-agent problem. 
A) moral hazard problem. 
B) adverse selection problem. 
C) shirking problem. 
D) free-rider problem. 
E) principal-agent problem.

Question 8

The government regulates financial markets for two main reasons:

Accepted Answer

A) to ensure soundness of the financial system and to increase the information available to investors. 
B) to improve control of monetary policy and to increase the information available to investors. 
C) to ensure that financial intermediaries do not earn more than the normal rate of return and to improve control of monetary policy. 
D) to ensure soundness of financial intermediaries and to prevent financial intermediaries from earning less than the normal rate of return. 
A) to ensure soundness of the financial system and to increase the information available to investors. 
B) to improve control of monetary policy and to increase the information available to investors. 
C) to ensure that financial intermediaries do not earn more than the normal rate of return and to improve control of monetary policy. 
D) to ensure soundness of financial intermediaries and to prevent financial intermediaries from earning less than the normal rate of return.

Question 9

Bonds that are sold in a foreign country and are denominated in that country's currency are known as

Accepted Answer

A) foreign bonds. 
B) Eurobonds. 
C) Eurocurrencies. 
D) Eurodollars. 
A) foreign bonds. 
B) Eurobonds. 
C) Eurocurrencies. 
D) Eurodollars.

Question 10

Through risk-sharing activities, a financial intermediary ________ its own risk and ________ the risks of its customers.

Accepted Answer

A) reduces; increases 
B) increases; reduces 
C) reduces; reduces 
D) increases; increases 
A) reduces; increases 
B) increases; reduces 
C) reduces; reduces 
D) increases; increases

Question 11

Which of the following can be described as involving indirect finance?

Accepted Answer

A) A bank buys a U.S. Treasury bill from one of its depositors. 
B) A corporation buys commercial paper issued by another corporation. 
C) A pension fund manager buys commercial paper in the primary market. 
D) Both A and C of the above. 
A) A bank buys a U.S. Treasury bill from one of its depositors. 
B) A corporation buys commercial paper issued by another corporation. 
C) A pension fund manager buys commercial paper in the primary market. 
D) Both A and C of the above.

Question 12

The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year)are traded.

Accepted Answer

A) True 
 B)False

Question 13

An example of direct financing is if you were to lend money to your neighbor.

Accepted Answer

A) True 
 B)False

Question 14

Why can a financial intermediary's risk-sharing activities be described as asset transformation?

Accepted Answer

Financial intermediaries, such as banks,

Question 15

Which of the following are secondary markets?

Accepted Answer

A) The New York Stock Exchange 
B) The U.S. government bond market 
C) The over-the-counter stock market 
D) The options markets 
E) All of the above 
A) The New York Stock Exchange 
B) The U.S. government bond market 
C) The over-the-counter stock market 
D) The options markets 
E) All of the above

Question 16

Which of the following statements about financial markets and securities are true?

Accepted Answer

A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. 
B) A corporation acquires new funds only when its securities are sold in the primary market. 
C) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid. 
D) All of the above are true. 
E) Only A and B of the above are true. 
A) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. 
B) A corporation acquires new funds only when its securities are sold in the primary market. 
C) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid. 
D) All of the above are true. 
E) Only A and B of the above are true.

Question 17

Which of the following is a contractual savings institution?

Accepted Answer

A) A life insurance company 
B) A credit union 
C) A savings and loan association 
D) A mutual fund 
A) A life insurance company 
B) A credit union 
C) A savings and loan association 
D) A mutual fund

Question 18

A pension fund is not a contractual savings institution.

Accepted Answer

A) True 
 B)False

Question 19

Financial markets improve economic welfare because

Accepted Answer

A) they allow funds to move from those without productive investment opportunities to those who have such opportunities. 
B) they allow consumers to time their purchases better. 
C) they weed out inefficient firms. 
D) they do all of the above. 
E) they do A and B of the above. 
A) they allow funds to move from those without productive investment opportunities to those who have such opportunities. 
B) they allow consumers to time their purchases better. 
C) they weed out inefficient firms. 
D) they do all of the above. 
E) they do A and B of the above.

Question 20

In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called

Accepted Answer

A) comparative informational disadvantage. 
B) asymmetric information. 
C) variant information. 
D) caveat venditor. 
A) comparative informational disadvantage. 
B) asymmetric information. 
C) variant information. 
D) caveat venditor.

Exam 2: Overview of the Financial System

An important financial institution that assists in the initial sale of securities in the primary market is the

Banks providing depositors with checking accounts that enable them to pay their bills easily is known as

A corporation acquires new funds only when its securities are sold in the

When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.

Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of

The purpose of diversification is to

When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the

The government regulates financial markets for two main reasons:

Bonds that are sold in a foreign country and are denominated in that country's currency are known as

Through risk-sharing activities, a financial intermediary ________ its own risk and ________ the risks of its customers.

Which of the following can be described as involving indirect finance?

The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year)are traded.

An example of direct financing is if you were to lend money to your neighbor.

Why can a financial intermediary's risk-sharing activities be described as asset transformation?

Which of the following are secondary markets?

Which of the following statements about financial markets and securities are true?

Which of the following is a contractual savings institution?

A pension fund is not a contractual savings institution.

Financial markets improve economic welfare because

In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called

Why Study Financial Markets and Institutions

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

Through risk-sharing activities, a financial intermediary its own risk and the risks of its customers.