FIN301_Review

What is the primary role of financial markets?

• To guarantee profits for investors.

• To transfer funds from those who have excess funds to those who need funds

• To manage the operations of financial institutions.

• To issue new securities exclusively.

Participants who receive more money than they spend, such as investors, are classified as:

• Deficit units.

• Equity units.

• Surplus units.

• Credit units.

Derivative securities allow an investor to speculate on movements in the value of underlying assets without having to purchase those assets. This is known as:

• Risk management.

• Diversification

• Speculation.

• Liquidation.

Financial institutions are primarily needed to resolve limitations caused by market imperfections, specifically concerning:

• The high cost of financial assets.

• The difficulty in selling existing securities.

• Limited information regarding the creditworthiness of borrowers.

• The volatility of stock prices.

The Loanable Funds Theory suggests that the market interest rate is determined by factors controlling the supply of and demand for:

• Real assets

• Consumer debt.

• Consumer debt.

• Equity securities.

Economic growth places upward pressure on interest rates by:

• Shifting the supply of loanable funds inward

• Shifting the demand for loanable funds outward.

• Reducing the expected inflation rate.

• Decreasing business investment needs.

According to the Fisher effect, the nominal or quoted rate of interest () is composed of:

• The real interest rate only

• The expected inflation rate only.

• The expected inflation rate plus the real interest rate.

• The expected inflation rat minus the real interest rate (.

The phenomenon where excessive government demand for funds tends to "crowd out" the private demand for funds is known as the:

• Fisher effect.

• Substitution effect.

• Crowding-out Effect.

• Foreign flow effect.

Holding all other factors constant, how does a higher degree of default (credit) risk affect the yield a security must offer?

• The yield must be lower.

• The yield must be higher.

• The yield is unaffected.

• The yield only changes for short-term securities.

According to the Liquidity Premium Theory, how is the relationship between the liquidity premium () and the term to maturity expressed?

• LP1​=LP2​=LP3​.

• LP1​>LP2​>LP3​
  

• LP1​>LP2​>LP3​...LP20
  

• LPn​ must be 0 for all maturities n.