Question 1

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

Accepted Answer

A)  asset-backed security. 
B)  derivative. 
C)  futures contract. 
D)  portfolio.

Question 2

Financial intermediaries pool funds of:

Accepted Answer

A)  many small savers and provide it to a few large borrowers. 
B)  few large savers and provide it to many small borrowers. 
C)  few large savers a few large borrowers. 
D)  many small savers and provide it to many borrowers.

Question 3

Why has the pace of structural change in financial markets accelerated in recent years?

Accepted Answer

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Question 4

Newly issued U.S. Treasury Securities are sold in:

Accepted Answer

A)  the primary financial market. 
B)  only to the Federal Reserve who then resells them. 
C)  the secondary market since bonds cannot be sold in the primary market. 
D)  secondary markets but only using registered bond dealers.

Question 5

Briefly explain one function of financial instruments that can make them very different from money.

Accepted Answer

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Question 6

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

Question 7

Financial instruments used primarily to transfer risk would not include:

Accepted Answer

A)  a bank loan. 
B)  options. 
C)  an insurance policy. 
D)  home mortgages.

Question 8

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.

Question 9

Describe what is likely to happen to the average price of a share of stock if the stock markets decide to close every Friday and Monday to provide workers at the exchanges with longer weekends.

Accepted Answer

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Question 10

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

Accepted Answer

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

Question 11

Financial instruments used primarily as stores of value include each of the following, except:

Accepted Answer

A)  bonds. 
B)  futures contracts. 
C)  stocks. 
D)  home mortgages.

Question 12

What are the four characteristics of a financial instrument?

Accepted Answer

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Question 13

Derivatives would include all of the following except:

Accepted Answer

A)  options. 
B)  U.S. Treasury securities. 
C)  swaps. 
D)  futures.

Question 14

Financial intermediaries handle a larger flow of funds than do primary markets primarily because financial intermediaries:

Accepted Answer

A)  have a government-provided monopoly. 
B)  have government-regulated prices, so there is little competition. 
C)  can lower transaction costs and increase liquidity for savers. 
D)  do not have to worry about information asymmetry.

Question 15

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

Accepted Answer

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Question 16

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.

Question 17

Sue has a checking account at the First National Bank; her checking account is a(n):

Accepted Answer

A)  asset to the bank and a liability to Sue. 
B)  asset to Sue and a liability to the bank. 
C)  asset to Sue but actually a liability to the Federal Reserve. 
D)  liability to Sue until she spends the funds.

Question 18

As we saw in the chapter, some financial instruments are used primarily to transfer risk. Explain how a bread maker can use a financial instrument to transfer the following risk: the bread maker has the opportunity to provide bread to a local army base. The base figures they will need 10,000 loaves of bread each week, or roughly 500,000 for a year. The problem is the baker must quote a price for the entire year. The baker would really like to have this contract but he realizes that fluctuating input prices (specifically wheat) could result in significant losses.

Accepted Answer

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Question 19

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

Accepted Answer

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

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