Chapter 10: Financial Markets & Securities

Financial intermediaries facilitate indirect transactions by...

• Creating loans and giving them to investors

• Primarily insure bank deposits.

• Setting interest rates across markets.

• Regulating the overall financial market activity.

In the context of direct versus indirect financing, what is the role of banks and other financial intermediaries?

• They act as intermediaries by mobilizing funds from savers and channeling them to borrowers.

• They solely issue stocks to raise capital.

• They primarily manage government debt.

• They function mainly as central banks controlling monetary policy.

To undertake direct finance, a security is a tradable contract that entitles its owner to certain rights. True or False?

• True

• False

Fill in the blank: A bond is a formal IOU, security specifying who owes how much and a ______ for repayment.

• term

• date

• clause

• agreement

The three vital pieces of information contained in bonds are face value, maturity date, and coupon rate.

• Face value, maturity date, and coupon rate

• Issuer, coupon rate, and call protection

• Yield, duration, and rating

• Coupon rate, yield-to-maturity, and convexity

Default risk in bonds refers to the possibility that the issuer will fail to repay interest or principal.

• It is the possibility that the issuer will default on its payments.

• It is the risk associated with fluctuations in the market interest rates.

• It is the uncertainty due to unexpected changes in the economic policy.

• It is the potential for a decline in the market value of the bond due to market trends.

Which of the following is a rating agency that evaluates and grades the default risk of bonds?

• Moody's

• Standard & Poor's (S&P)

• Fitch

• All of the above

Fill in the blank: Most stable firms, the most likely to pay their debts, are given a rating of ____.

• AAA

• BBB

• CCC

• DDD

A firm sells stocks instead of bonds because it prefers equity financing over debt financing.

• It avoids debt obligations and leverage risks.

• It ensures fixed interest payments.

• It aims to obtain tax benefits from bonds.

• It reduces exposure to market fluctuations.

Treasury securities, which are government-issued debt instruments, are sold through auctions.

• They are sold at auctions by the U.S. Treasury.

• They are sold only through banks.

• They are sold exclusively on secondary markets.

• They are distributed as gifts.