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WorksheetsChap 2 M&B
Total questions: 126
Worksheet time: 1hrs 3mins
Which characteristic is common to every financial market?
It determines the level of interest rates.
It allows common stock to be traded.
It allows loans to be made.
It channels funds from lenders–savers to borrowers–spenders.
Financial markets have the basic function of
getting people with funds to lend together with people who want to borrow funds.
assuring that the swings in the business cycle are less pronounced.
assuring that governments need never resort to printing money.
providing a risk-free repository of spending power.
Financial markets improve economic welfare because
they channel funds from investors to savers.
they allow consumers to time their purchase better.
they weed out inefficient firms.
eliminate the need for indirect finance.
Well-functioning financial markets
cause inflation.
eliminate the need for indirect finance.
cause financial crises.
produce an efficient allocation of capital.
A breakdown of financial markets can result in
financial stability.
rapid economic growth.
political instability.
stable prices.
The principal lender–savers are
governments.
businesses.
households.
foreigners.
Which of the following can be described as direct finance?
You take out a mortgage from your local bank.
You borrow $2500 from a friend.
You buy shares of common stock in the secondary market.
You buy shares in a mutual fund.
Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is
$400.
$201.
$200.
$199.
You can borrow 5000tofinanceanewbusinessventure.Thisnewventurewillgenerateannualearningsof 251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is
25%.
12.5%.
10%.
5%.
Which of the following can be described as involving direct finance?
A corporation issues new shares of stock.
People buy shares in a mutual fund.
A pension fund manager buys a short-term corporate security in the secondary market.
An insurance company buys shares of common stock in the over-the-counter markets.
Which of the following can be described as involving direct finance?
A corporation takes out loans from a bank.
People buy shares in a mutual fund.
A corporation buys a short-term corporate security in a secondary market.
People buy shares of common stock in the primary markets.
Which of the following can be described as involving indirect finance?
You make a loan to your neighbor.
A corporation buys a share of common stock issued by another corporation in the primary market.
You buy a U.S. Treasury bill from the U.S. Treasury.
You make a deposit at a bank.
Which of the following can be described as involving indirect finance?
You make a loan to your neighbor.
You buy shares in a mutual fund.
You buy a U.S. Treasury bill from the U.S. Treasury.
A corporation buys a short-term security issued by another corporation in the primary market.
Securities are ______ for the person who buys them, but are ______ for the individual or firm that issues them.
assets; liabilities
liabilities; assets
negotiable; nonnegotiable
nonnegotiable; negotiable
With ______ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.
active
determined
indirect
direct
With direct finance funds are channeled through the financial market from the ______ directly to the ______.
savers, spenders
spenders, investors
borrowers, savers
investors, savers
Which statement correctly distinguishes direct finance from indirect finance and identifies the major source of funds for U.S. corporations?
Direct finance routes funds through a financial intermediary; financial intermediaries are a minor source of funds for U.S. corporations.
Direct finance involves funds flowing directly from lender/saver to borrower; financial intermediaries are the major source of funds for corporations in the U.S.
Indirect finance involves funds flowing directly from lender/saver to borrower; equity markets are the major source of funds for U.S. corporations.
Indirect finance routes funds through a financial intermediary; government grants are the major source of funds for U.S. corporations.
Which statement about the characteristics of debt and equity is false?
They can both be long-term financial instruments.
They can both be short-term financial instruments.
They both involve a claim on the issuer’s income.
They both enable a corporation to raise funds.
Which statement about the characteristics of debt and equities is true?
They can both be long-term financial instruments.
Bondholders are residual claimants.
The income from bonds is typically more variable than that from equities.
Bonds pay dividends.
Which statement about financial markets and securities is true?
A bond is a long-term security that promises to make periodic payments called dividends to the firm’s residual claimants.
A debt instrument is intermediate term if its maturity is less than one year.
A debt instrument is intermediate term if its maturity is ten years or longer.
The maturity of a debt instrument is the number of years (term) to that instrument’s expiration date.
Which of the following is an example of an intermediate-term debt?
A thirty-year mortgage.
A sixty-month car loan.
A six month loan from a finance company.
A Treasury bond.
If the maturity of a debt instrument is less than one year, the debt is called _______.
short-term
intermediate-term
long-term
prima-term
Long-term debt has a maturity that is _______.
between one and ten years
less than a year
between five and ten years
ten years or longer
When I purchase _______, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.
bonds
bills
notes
stock
Equity holders are a corporation’s _______. That means the corporation must pay all of its debt holders before it pays its equity holders.
debtors
brokers
residual claimants
underwriters
Which of the following benefit directly from any increase in the corporation’s profitability?
a bond holder
a commercial paper holder
a shareholder
a T-bill holder
A financial market in which previously issued securities can be resold is called a _______ market.
primary
secondary
tertiary
used securities
An important financial institution that assists in the initial sale of securities in the primary market is the
investment bank
commercial bank
stock exchange
brokerage house
When an investment bank _______ securities, it guarantees a price for a corporation’s securities and then sells them to the public.
underwrites
undertakes
overwrites
overtakes
Which of the following is not a secondary market?
foreign exchange market
futures market
options market
IPO market
_______ work in the secondary markets matching buyers with sellers of securities.
Dealers
Underwriters
Brokers
Claimants
A corporation acquires new funds only when its securities are sold in the
primary market by an investment bank
primary market by a stock exchange broker
secondary market by a securities dealer
secondary market by a commercial bank
A corporation acquires new funds only when its securities are sold in the
secondary market by an investment bank
primary market by an investment bank
secondary market by a stock exchange broker
secondary market by a commercial bank
An important function of secondary markets is to _______.
make it easier to sell financial instruments to raise funds
raise funds for corporations through the sale of securities
make it easier for governments to raise taxes
create a market for newly constructed houses
Secondary markets make financial instruments more _______.
solid
vapid
liquid
risky
A liquid asset is _______.
an asset that can easily and quickly be sold to raise cash
a share of an ocean resort
difficult to resell
always sold in an over-the-counter market
The higher a security’s price in the secondary market the _______ funds a firm can raise by selling securities in the _______ market.
more; primary
more; secondary
less; primary
less; secondary
When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) _______.
exchange
over-the-counter market
common market
barter market
Forty or so dealers establish a "market" in these securities by standing ready to buy and sell them.
Secondary stocks
Surplus stocks
U.S. government bonds
Common stocks
Which of the following statements about financial markets and securities is true?
Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange.
As a corporation gets a share of the broker’s commission, a corporation acquires new funds whenever its securities are sold.
Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid.
Because of their short-terms to maturity, the prices of money market instruments tend to fluctuate wildly.
A financial market in which only short-term debt instruments are traded is called the _______ market.
bond
money
capital
stock
Equity instruments are traded in the _______ market.
money
bond
capital
commodities
Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market?
Price movements in the secondary market have no bearing on primary market outcomes.
The secondary market makes their stock less liquid, limiting future fundraising.
The existence of the secondary market makes their stock more liquid and sets the price the corporation would receive if they choose to sell more stock in the primary market.
Secondary markets only matter for government securities, not corporate stock.
Which statement best describes the two methods of organizing a secondary market?
Exchanges centralize trading in one location; over-the-counter markets rely on dispersed dealers who buy and sell to anyone willing to accept their prices.
Exchanges and over-the-counter markets are identical in structure and function.
Exchanges are used only for government bonds; over-the-counter markets are used only for common stocks.
Exchanges allow only buyers, while over-the-counter markets allow only sellers.
Prices of money market instruments undergo the least price fluctuations primarily because of which factor?
the short terms to maturity for the securities
the heavy regulations in the industry
the price ceiling imposed by government regulators
the lack of competition in the market
U.S. Treasury bills pay no interest but are sold at a ________, meaning you pay a lower purchase price than the amount you receive at maturity.
premium
collateral
default
discount
U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________.
defeat
default
desertion
demarcation
A debt instrument sold by a bank to its depositors that pays annual interest and repays the original purchase price at maturity is called a
commercial paper
a negotiable certificate of deposit
a municipal bond
federal funds
A short-term debt instrument issued by well-known corporations is called
commercial paper
corporate bonds
municipal bonds
commercial mortgages
_______ are short-term loans in which Treasury bills serve as collateral.
Repurchase agreements
Negotiable certificates of deposit
Federal funds
U.S. government agency securities
Collateral is ________ the lender receives if the borrower does not pay back the loan.
a liability
an asset
a present
an offering
Federal funds are
funds raised by the federal government in the bond market
loans made by the Federal Reserve System to banks
loans made by banks to the Federal Reserve System
loans made by banks to each other
The British Bankers' Association average of interbank rates for dollar deposits in the London market is called the
Libor rate
federal funds rate
prime rate
Treasury Bill rate
Which of the following are short-term financial instruments?
A repurchase agreement
A share of Walt Disney Corporation stock
A Treasury note with a maturity of four years
A residential mortgage
Which of the following instruments are traded in a money market?
State and local government bonds
U.S. Treasury bills
Corporate bonds
U.S. government agency securities
Which of the following instruments are traded in a money market?
Bank commercial loans
Commercial paper
State and local government bonds
Residential mortgages
Which of the following instruments is not traded in a money market?
Residential mortgages
U.S. Treasury bills
Negotiable bank certificates of deposit
Commercial paper
Bonds issued by state and local governments are called ________ bonds.
corporate
Treasury
municipal
commercial
Equity and debt instruments with maturities greater than one year are called ________ market instruments.
capital
money
federal
benchmark
Which of the following is a long-term financial instrument?
A negotiable certificate of deposit
A repurchase agreement
A U.S. Treasury bond
A U.S. Treasury bill
Which of the following instruments are traded in a capital market?
U.S. Government agency securities
Negotiable bank CDs
Repurchase agreements
U.S. Treasury bills
Which of the following instruments are traded in a capital market?
Corporate bonds.
U.S. Treasury bills.
Negotiable bank CDs.
Repurchase agreements.
Which of the following are not traded in a capital market?
U.S. government agency securities.
State and local government bonds.
Repurchase agreements.
Corporate bonds.
Equity of U.S. companies can be purchased by
U.S. citizens only.
foreign citizens only.
U.S. citizens and foreign citizens.
U.S. mutual funds only.
One reason for the extraordinary growth of foreign financial markets is
decreased trade.
increases in the pool of savings in foreign countries.
the recent introduction of the foreign bond.
slower technological innovation in foreign markets.
Bonds that are sold in a foreign country and are denominated in the country’s currency in which they are sold are known as
foreign bonds.
Eurobonds.
equity bonds.
country bonds.
Bonds sold in a foreign country and denominated in a currency other than that of the country in which they are sold are known as _______.
foreign bonds
Eurobonds
equity bonds
country bonds
If Microsoft sells a bond in London and it is denominated in U.S. dollars, the bond is a _______.
Eurobond
foreign bond
British bond
currency bond
U.S. dollar deposits in foreign banks outside the U.S., or in foreign branches of U.S. banks, are called _______.
Atlantic dollars
Eurodollars
foreign dollars
outside dollars
Which statement best distinguishes a foreign bond from a Eurobond?
A foreign bond is sold in a foreign country and priced in that country’s currency; a Eurobond is sold in a foreign country and priced in a currency that is not that country’s currency.
Both foreign bonds and Eurobonds are sold domestically and priced in U.S. dollars.
Foreign bonds are issued by governments only; Eurobonds are issued by corporations only.
Foreign bonds are always riskier than Eurobonds due to exchange rate volatility.
The process of indirect finance using financial intermediaries is called _______.
direct lending
financial intermediation
resource allocation
financial liquidation
In the United States, loans from _______ are far _______ important for corporate finance than are securities markets.
government agencies; more
government agencies; less
financial intermediaries; more
financial intermediaries; less
The time and money spent in carrying out financial transactions are called
economies of scale
financial intermediation
liquidity services
transaction costs
Economies of scale enable financial institutions to
reduce transactions costs
avoid the asymmetric information problem
avoid adverse selection problems
reduce moral hazard
Which is an example of economies of scale in the provision of financial services?
investing in a diversified collection of assets
providing depositors with a variety of savings certificates
spreading the cost of borrowed funds over many customers
spreading the cost of writing a standardized contract over many borrowers
Financial intermediaries provide customers with liquidity services. Liquidity services
make it easier for customers to conduct transactions
allow customers to have a cup of coffee while waiting in the lobby
are a result of the asymmetric information problem
are another term for asset transformation
The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as
risk sharing
risk aversion
risk neutrality
risk selling
The process of asset transformation refers to the conversion of
safer assets into risky assets
safer assets into safer liabilities
risky assets into safer assets
risky assets into risky liabilities
Reducing risk through the purchase of assets whose returns do not always move together is
diversification
intermediation
intervention
discounting
The concept of diversification is captured by the statement
don't look a gift horse in the mouth
don't put all your eggs in one basket
it never rains, but it pours
make hay while the sun shines
Risk sharing is profitable for financial institutions due to
low transactions costs
asymmetric information
adverse selection
moral hazard
Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called
moral selection
risk sharing
asymmetric information
adverse hazard
If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
moral hazard
adverse selection
free-riding
costly state verification
The problem created by asymmetric information before the transaction occurs is called _______, while the problem created after the transaction occurs is called _______.
adverse selection; moral hazard
moral hazard; adverse selection
costly state verification; free-riding
free-riding; costly state verification
Adverse selection in equity and debt contracts arises from which situation?
the lender's relative lack of information about the borrower's potential returns and risks of his investment activities
the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults
the borrower's lack of incentive to seek a loan for highly risky investments
the borrower's lack of good options for obtaining funds
An example of moral hazard occurs when a corporation sells bonds to fund expansion but then uses the funds to pay for Caribbean cruises for employees and their families. What problem is this?
adverse selection
moral hazard
risk sharing
credit risk
In major developed countries, when businesses seek funds to finance their activities, they usually obtain these funds from which source?
government agencies
equities markets
financial intermediaries
bond markets
The countries that have made the least use of securities markets are ______ and ______; in these two countries finance from financial intermediaries has been almost ten times greater than from securities markets.
Germany; Japan
Germany; Great Britain
Great Britain; Canada
Canada; Japan
Although the dominance of ______ over ______ is clear in all countries, the relative importance of bond versus stock markets differs widely.
financial intermediaries; securities markets
financial intermediaries; government agencies
government agencies; financial intermediaries
government agencies; securities markets
Financial institutions that accept deposits and make loans are called ______ institutions.
investment
contractual savings
depository
underwriting
Thrift institutions include which group?
banks, mutual funds, and insurance companies
savings and loan associations, mutual savings banks, and credit unions
finance companies, mutual funds, and money market funds
pension funds, mutual funds, and banks
Which of the following is a depository institution?
A life insurance company
A credit union
A pension fund
A mutual fund
Which of the following is a depository institution?
A life insurance company
A mutual savings bank
A pension fund
A finance company
Which of the following financial intermediaries is not a depository institution?
A savings and loan association
A commercial bank
A credit union
A finance company
The primary assets of credit unions are
municipal bonds
business loans
consumer loans
mortgages
The primary liabilities of a commercial bank are
bonds
mortgages
deposits
commercial paper
The primary liabilities of depository institutions are
premiums from policies
shares
deposits
bonds
_____ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.
Investment
Contractual savings
Thrift
Depository
Which of the following is a contractual savings institution?
A life insurance company
A credit union
A savings and loan association
A mutual fund
Which of the following are not contractual savings institutions?
Life insurance companies
Credit unions
Pension funds
State and local government retirement funds
Which of the following is not a contractual savings institution?
A life insurance company
A pension fund
A savings and loan association
A fire and casualty insurance company
The primary assets of a pension fund are
money market instruments
corporate bonds and stock
consumer and business loans
mortgages
Which of the following are investment intermediaries?
Life insurance companies
Mutual funds
Pension funds
State and local government retirement funds
An investment intermediary that lends funds to consumers is
a finance company
an investment bank
a finance fund
a consumer company
The primary assets of a finance company are
municipal bonds.
corporate stocks and bonds.
consumer and business loans.
mortgages.
______ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.
Mutual funds
Investment banks
Finance companies
Credit unions
Money market mutual fund shares function like
checking accounts that pay interest.
bonds.
stocks.
currency.
An important feature of money market mutual fund shares is
deposit insurance.
the ability to write checks against shareholdings.
the ability to borrow against shareholdings.
claims on shares of corporate stock.
The primary assets of money market mutual funds are
stocks.
bonds.
money market instruments.
deposits.
An investment bank helps ______ issue securities.
a corporation
the United States government
the SEC
foreign governments
An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called
underwriting.
underhanded.
understanding.
undertaking.
Which of the following is not a goal of financial regulation?
Ensuring the soundness of the financial system
Reducing moral hazard
Reducing adverse selection
Ensuring that investors never suffer losses
Increasing the amount of information available to investors helps to reduce the problems of ______ and ______ in the financial markets.
adverse selection; moral hazard
adverse selection; risk sharing
moral hazard; transactions costs
adverse selection; economies of scale
A goal of the Securities and Exchange Commission is to reduce problems arising from
competition.
banking panics.
risk.
asymmetric information.
The purpose of the disclosure requirements of the Securities and Exchange Commission is to
increase the information available to investors.
prevent bank panics.
improve monetary control.
protect investors against financial losses.
Government regulations to reduce the possibility of financial panic include all of the following except which measure?
transactions costs.
restrictions on assets and activities.
disclosure.
deposit insurance.
Which of the following agencies does not provide charters?
The Office of the Comptroller of the Currency
The Federal Reserve System
The National Credit Union Administration
State banking and insurance commissions
A restriction on bank activities that was repealed in 1999 was
the prohibition of the payment of interest on checking deposits.
restrictions on credit terms.
minimum down payments on loans to purchase securities.
separation of commercial banking from the securities industries.
To reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from which of the following?
owning municipal bonds.
making real estate loans.
making personal loans.
owning common stock.
What is the primary purpose of deposit insurance?
improve the flow of information to investors.
prevent banking panics.
protect bank shareholders against losses.
protect bank employees from unemployment.
Which agency was created to protect depositors after the banking failures of 1930–1933?
Federal Reserve System.
Federal Deposit Insurance Corporation.
Treasury Department.
Office of the Comptroller of the Currency.
Savings and loan associations are regulated by which agency?
Federal Reserve System.
Securities and Exchange Commission.
Office of the Comptroller of the Currency.
Office of Thrift Supervision.
Which regulatory agency sets reserve requirements for all banks?
the Federal Reserve System.
the Federal Deposit Insurance Corporation.
the Office of Thrift Supervision.
the Securities and Exchange Commission.
Asymmetric information is a universal problem. What does this suggest about financial regulations?
in industrial countries are an unqualified failure.
differ significantly around the world.
in industrialized nations are similar.
are unnecessary.
Which method is NOT listed among how regulators help ensure the soundness of financial intermediaries?
Restrict who can set up a financial intermediary
Conduct regular examinations
Restrict assets
Provide insurance
Subsidize bank profits
A bank considering new activities wants to remain within regulatory limits designed to prevent panics. Which option best aligns with these limits?
Increase transactions costs for customers
Enhance disclosure and maintain deposit insurance
Purchase large amounts of common stock
Eliminate reserve requirements
