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WorksheetsPart 1. Multiple Choice Questions
Total questions: 146
Worksheet time: 1hrs 13mins
Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called
commodity markets.
fund-available markets.
derivative exchange markets.
financial markets.
A problem for equity contracts is a particular example of _________ called the _____ problem.
adverse selection; principal-agent
moral hazard; costly state verification
moral hazard; principal-agent
moral hazard; free-rider
adverse selection; free-rider
Investors buy and sell bonds in ________ markets.
Foreign exchange
Derivatives
Debt
Equity
Solutions to the moral hazard problem include
high net worth.
only (A) and (B) of the above.
all of the above.
monitoring and enforcement of restrictive covenants.
greater reliance on debt contracts and less on equity contracts.
The market in which the initial buyer of a stock or bond may choose to resell the asset to another party is known as the ________ market.
Primary
Money
Secondary
Dealer
You have purchased a savings bond that will pay $16,000 for your newborn child in fifteen years. If the bank discounts this bound at a rate of 4.307% per year, what is today’s price for this bond?
$8,417
$5,654
$8,500
$10,000
The process by which a company managers its day-to-day operating needs through its current assets and current liabilities is known as _________.
Capital budgeting
Capital structure
Accounts receivable management
Working capital management
You have an annuity of equal annual end-of-the year cash flows of $750 that begin two years from today and last for a total of ten cash flows. With a discount rate of 5%, what are those cash flows worth in today’s dollars?
$ 4,380.24
$5,000
$5,515.55
$3,899.47
The owners’ wealth in a company is represented ________
The bond value
The numbers of owners of the company
The value of assets of the company
The equity value of the company
A credit card that charges a monthly interest rate of 1.5% has an effective annual interest rate of:
18.0%
17.50%
19.6%
15.0%
In agency theory, the owners of the business are ________ and the managers are ________
Principals, agents
Bondholders, principals
Agents, principals
Stockholders, bondholders
Average U.S wages in 1990 were 28,960farhigherthantheaveragein1930of 1,970. What was the average annual increase in wages over this sixty year period?
24,50%
4.58%
2.45%
3.31%
A company selling a bond is ________money
Reinvesting
Borrowing
Lending
spending
With ____ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.
active
indirect
determined
direct
Financial institutions that accept deposits and make business loans are called ____
mutual funds
commercial banks
insurance companies
investment banks
Which transaction(s) increases equity of an entity?
only (b) and (c) of the above
issuing bonds
issuing common stock
addition to retained earning
all of the above
A share of common stock is a claim on a corporation's ____
expenses.
debt.
earnings and assets
liabilities.
An insurance company is an example of a financial institution that:
acts as a broker.
sells derivative securities.
transfers risk.
serves as a depository institution.
Financial intermediaries
hold very little of the average American's wealth.
can hurt the performance of the economy.
produce nothing of value and are therefore a drain on society's resources.
provide a channel for linking those who want to save with those who want to invest.
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
costly state verification; free-riding
moral hazard; adverse selection
free-riding; costly state verification
The primary assets of a finance company are
municipal bonds.
corporate stocks and bonds.
consumer and business loans.
Mortgages.
Economies of scale enable financial institutions to ____
reduce moral hazard.
avoid adverse selection problems.
avoid the asymmetric information problem.
reduce transaction costs.
A financial market in which only short-term debt instruments are traded is called the _____ market.
stock
capital
money
bondi
U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ____
Federal funds
Eurodollars
foreign dollars
municipal bonds
U.S. Treasury bills pay no interest but are sold at a ____ That is, you will pay a lower purchase price than the amount you receive at maturity.
default
collateral
premium
discount
Compound interest means that:
you get an interest deduction for paying your loan off early.
you get interest in interest.
you get an interest deduction if you take out a loan for longer than one year.
interest rates will rise on larger loans.
A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called
venture fund
commercial paper.
a negotiable certificate of deposit.
a municipal bond.
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 each other.
loans made by banks to the Federal Reserve System.
Collateral is ____ the lender receives if the borrower does not pay back the loan.
a present
an asset
an offering
a liability
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
Every financial market has which characteristic?
None of the above
It determines interest rate levels
It allows common stock to be traded
It channels funds from savers to spenders
It allows loans to be made
Which scenario is direct finance?
An insurer buys common stock OTC
Corporation buys another’s commercial paper
People buy shares in a mutual fund
None of the above
A corporation borrows directly from a bank
Which of the following are securities?
Texaco common stock
A Treasury bill
A certificate of deposit
Each of the above
Only (a) and (b)
Financial markets improve economic welfare because they
move funds to productive opportunities
help consumers time purchases better
weed out inefficient firms
do each of the above
do (a) and (b) only
Which are long‑term financial instruments?
A negotiable certificate of deposit
A banker’s acceptance
A U.S. Treasury bond
None of the above
A six‑month loan
Which are short‑term financial instruments?
All of the above
A six‑month loan
A negotiable certificate of deposit
A U.S. Treasury bill
A banker’s acceptance
Which are primary markets?
New York Stock Exchange
Over‑the‑counter stock market
None of the above
U.S. government bond market
Options markets
Which are secondary markets?
New York Stock Exchange
U.S. government bond market
All of the above
Options markets
Over‑the‑counter stock market
Which instrument is not traded in a money market?
Banker’s acceptances
Commercial paper
None of the above
U.S. Treasury bills
Eurodollars
Which instruments trade in the capital market?
Negotiable bank CDs
Repurchase agreements
U.S. government agency securities
None of the above
Banker’s acceptances
Markets that transfer funds from surplus units to deficit units are called
Derivative exchanges
Fund‑available markets
None of the above
Financial markets
Commodity markets
A problem for equity contracts is an example of ________ called the _____ problem.
adverse selection; free‑rider
adverse selection; principal‑agent
moral hazard; costly verification
moral hazard; principal‑agent
None of the above
Investors buy and sell bonds in ________ markets.
Debt
Equity
Derivatives
Foreign exchange
None of the above
Solutions to moral hazard include
high net worth requirements
all of the above
monitoring with restrictive covenants
more reliance on debt contracts
only (a) and (b)
Where can the initial buyer resell a stock or bond to another party?
Money market
Primary market
Secondary market
None of the above
Dealer market
A savings bond will pay $16,000 in 15 years. If the discount rate is 4.307% per year, what is today’s price?
$8,417
$8,500
$6,800
$5,654
$10,000
Managing day‑to‑day operating needs through current assets and liabilities is
Working capital management
Accounts receivable management
Capital budgeting
Capital structure
Cash forecasting
An annuity of ten end‑of‑year $750 cash flows starts two years from now. With a 5% discount rate, what is the value today?
$5,000
$4,380.24
$5,515.55
$4,900.00
$3,899.47
Owners’ wealth in a company is represented by
The value of assets only
The number of owners
The equity value of the company
None of the above
The bond value
A credit card charging 1.5% per month has an effective annual rate closest to
18.0%
19.6%
15.0%
17.5%
20.0%
In agency theory, the owners are ________ and the managers are ________.
Stockholders; bondholders
Principals; agents
Bondholders; principals
Agents; principals
Creditors; trustees
Average U.S. wages rose from 1,970in1930to 28,960 in 1990. What was the average annual increase over the sixty‑year period?
3.31%
2.45%
24.50%
5.00%
4.58%
A company selling a bond is ________ money.
Reinvesting
Spending
Lending
Saving
Borrowing
With _____ finance, borrowers obtain funds by selling securities directly to lenders.
active
direct
determined
indirect
hybrid
Financial institutions that accept deposits and make business loans are
mutual funds
broker‑dealers
insurance companies
commercial banks
investment banks
Which transactions increase equity?
all of the above
only (b) and (c)
adding to retained earnings
issuing common stock
issuing bonds
A share of common stock is a claim on a corporation’s
expenses
dividends only
debt
liabilities
earnings and assets
An insurance company is a financial institution that primarily
serves as a depository
sells derivative securities
manages mutual funds
acts as a broker
transfers risk
Financial intermediaries ______.
provide a channel linking savers with investors
hold very little of households’ wealth
produce nothing of value and drain resources
can hurt overall economic performance
The problem created by asymmetric information before a transaction occurs is called ______, while the problem created after the transaction occurs is called ______.
moral hazard; adverse selection
adverse selection; moral hazard
free-riding; costly state verification
costly state verification; free-riding
Every financial market has which characteristic?
It channels funds from lenders to borrowers
It allows common stock to be traded
It determines interest rate levels
It allows loans to be made
Which is an example of direct finance?
An insurer buys OTC common stock
A corporation gets a bank loan
A corporation buys another’s commercial paper
People buy shares in a mutual fund
Which of the following are securities?
A certificate of deposit
A Treasury bill
Texaco common stock
Each of the above
Financial markets improve economic welfare because they ______.
shift funds to productive users
let consumers time purchases
weed out inefficient firms
do (a) and (b)
Which are long-term financial instruments?
None of the above
A U.S. Treasury bill
A negotiable certificate of deposit
A six‑month loan
A banker’s acceptance
Which are short-term financial instruments?
A banker’s acceptance
A six‑month loan
A U.S. Treasury bill
All of the above
A negotiable certificate of deposit
Which of the following are primary markets?
The New York Stock Exchange
The options markets
The U.S. government bond market
The over‑the‑counter stock market
Which of the following are secondary markets?
The U.S. government bond market
The options markets
The over‑the‑counter stock market
All of the above
The New York Stock Exchange
Which instrument is not traded in a money market?
U.S. Treasury bills
Eurodollars
None of the above
Commercial paper
Banker’s acceptances
Which instruments are traded in the capital market?
Negotiable bank CDs
U.S. government agency securities
Banker’s acceptances
None of the above
Repurchase agreements
Financial intermediaries ______.
do each of the above
engage in indirect finance
improve the lot of small savers
do only (a) and (b)
exist due to information and transaction costs
Federal funds are ______.
loans made by banks to the Fed
loans made by banks to each other
none of the above
funds raised by the federal government
loans made by the Fed to banks
Which is not a goal of financial regulation?
Encouraging home ownership
Providing information to investors
Ensuring the system’s soundness
Ensuring investors never suffer losses
Which statement about financial markets and securities is true?
Debt is long term if maturity is ten years or longer
Maturity is unrelated to expiration date
Debt is intermediate term if maturity is under one year
A bond’s dividends go to residual claimants
Which institution assists in the initial sale of securities in the primary market?
Brokerage house
Stock exchange
Investment bank
Commercial bank
U.S. Treasury bills are issued in ______ maturities.
three, nine, and twelve months
three, six, nine, and twelve months
three, and six months
three, six, and twelve months
U.S. Treasury bills ______.
are issued in three‑, six‑, nine‑, and twelve‑month maturities
are most liquid among money market securities
are only (b) and (c)
sell at a discount with no interest payments
are all of the above
A bank‑sold debt instrument paying annual interest and returning principal at maturity is called ______.
federal funds
commercial paper
a banker’s acceptance
a negotiable certificate of deposit
An inequality of information where borrowers know more about project risks than lenders is ______.
moral hazard
reverse causation
asymmetric information
adverse selection
If bad credit risks most actively seek loans, financial intermediaries face ______.
costly state verification
adverse selection
free‑riding
moral hazard
The information problem before a transaction is ______, while after the transaction it is ______.
moral hazard; adverse selection
costly state verification; free‑riding
free‑riding; costly state verification
adverse selection; moral hazard
Transaction costs in financial markets help explain why ______.
financial intermediaries and indirect finance are vital
equity and bonds dominate financing
corporations mainly use equity financing
direct finance is more important than indirect
There is no single precise measure of money because ______.
the government keeps money data secret
deciding what is generally accepted as payment is hard
economists disagree about currency’s role
both (a) and (b)
each of the above
The difference between money and income is that ______.
there is no difference—both are flows
money is a flow and income is a stock
money is a stock and income is a flow
both are stocks
Currency includes ______.
paper money and coins
paper money, coins, checks, savings deposits
paper money and checks
The interest rate that equates a bond’s present value of payments with its price is called what?
simple interest rate
yield to maturity
discount rate
real interest rate
Which statements best capture the distinction between interest rates and return on bonds?
Return equals current yield plus capital gains
Bond return may differ from bond’s stated interest rate
Return always exceeds interest when price falls
All of the above statements are true
If expected return on ABC stock rises while CBS stays unchanged, what happens to expected return of holding CBS relative to ABC and the demand for CBS?
rises; rises
falls; rises
rises; falls
falls; falls
If household wealth increases, what happens to demand for stocks and for long-term bonds?
increases; decreases
increases; increases
decreases; decreases
decreases; increases
When the price of gold becomes more volatile, how do demand for stocks and for antiques change, all else equal?
decrease; increase
decrease; decrease
increase; increase
increase; decrease
If housing prices are expected to rise sharply, how do demand for houses and for Treasury bills change?
increase; decrease
increase; increase
decrease; increase
decrease; decrease
Holding other factors constant, which statements about asset demand are correct?
Higher relative risk reduces demand
Lower expected return reduces demand
More liquid assets face higher demand
All of the above are true
When a bond’s market price exceeds equilibrium price, there is excess what for bonds and price moves how?
demand; rise
supply; fall
supply; rise
demand; fall
If the interest rate on a bond is below the equilibrium rate, what is in excess in the bond market and how do rates move?
above; supply; rise
below; supply; rise
below; demand; fall
below; demand; rise
below; supply; fall
During a recession, how do demand and supply of bonds typically change?
decreases; decreases
decreases; increases
increases; increases
increases; decreases
If people expect future interest rates to rise, which bond curve shifts where?
supply; right
supply; left
demand; left
demand; right
When the federal government’s budget deficit increases, which bond curve shifts and in what direction?
demand; right
demand; left
supply; right
supply; left
If expected inflation rises, how do bond demand, bond supply, and interest rates change?
increases; decreases; falls
increases; increases; rises
decreases; decreases; falls
decreases; increases; rises
When bond interest rates become more volatile, how do bond demand and interest rates respond?
decreases; rises
increases; falls
decreases; falls
increases; rises
As bonds become widely traded and market liquidity improves, which way does the demand curve for bonds shift and what happens to interest rates?
right; rises
left; falls
left; rises
right; falls
If prices in the art market become more uncertain, what happens to the bond market?
None of the above occurs
Bond demand right; rates rise
Bond supply right; rates fall
Bond demand left; rates rise
Bond demand left; rates fall
Which factor set causes the bond demand curve to shift left?
Lower inflation rate
Lower expected stock returns
None of the listed factors
All of the listed factors
Higher stock price volatility
Loans made between borrowers and lenders are recorded as what for each party?
None of the answers is correct
Liabilities to lenders and borrowers
Not assets or liabilities until repaid
Assets to lenders; liabilities to borrowers
Liabilities to lenders; assets to borrowers
Which statement about financial intermediaries is most correct?
All banks are financial intermediaries but not all intermediaries are banks
All statements above are correct
Intermediaries must be public corporations
Intermediaries are government agencies
All intermediaries are insurance companies
Financial instruments and money share which common characteristics?
Means of payment and store of value
Store of value and risk trading
All choices are correct
Means of payment and risk trading
Store of value without risk trading
Why are many financial instruments standardized?
Standardization increases confusion
Complexity is costly to create
All choices are correct
Government requires it
Parties rarely read contracts
Which instrument is not primarily used as a store of value?
home mortgages
bonds
All choices are correct
stocks
futures contracts
Financial intermediaries pool funds in what way?
Few large savers to few large borrowers
Few large savers to many small borrowers
None of the answers is correct
Many small savers to few large borrowers
Many small savers to many borrowers
Which of the following are long-term financial instruments?
None of the answers is correct
A banker’s acceptance
A negotiable CD
A six-month loan
A U.S. Treasury bill
Which instrument is not traded in a money market?
Municipal bonds
U.S. Treasury bills
None of the above
Banker’s acceptances
Eurodollars
Which entities are contractual savings institutions?
commercial banks
money market mutual funds
life insurance companies
mutual savings banks
None of the above
The primary assets held by money market mutual funds are what?
stocks
deposits
money market instruments
bonds
none of the above
U.S. Treasury bills are best described as which combination of traits?
Issued in three-, six-, nine-, twelve-month terms
Most liquid among money market securities
Sold at a discount with no interest payments
Only the second and third traits
All of the listed characteristics
Moral hazard is important in insurance arrangements primarily because insurance
Hinders efficient risk taking
Increases the private cost to the insured
Raises incentives for risk taking
Combines the first two effects
Combines the second and third effects
Which financial intermediary helps reduce moral hazard from the principal–agent problem?
Pawn broker
Savings and loan association
Money market mutual fund
Venture capital firm
An investment bank purchasing securities from a corporation at a set price and reselling them is called
Undertaking
Understanding
Underhanded
Underwriting
A mortgage advertised at 7.25% APR over twenty years, paid quarterly, has an effective annual rate closest to
7.5%
7.4%
7.44%
43.22%
Transaction costs in financial markets help explain why
Corporations rely more on equity financing
Equity and bond financing dominate markets
Intermediaries and indirect finance become vital
Direct finance is more important than indirect
A share of common stock represents
Unlimited liability to the owner
Claim from lender against borrower
Share in the company’s debts
Share of ownership in the company
Stock options for corporate managers were designed to
Align managers’ and stockholders’ interests
Treat adverse selection problems
Hide executive pay increases
Address free-rider problems
Adverse selection in markets typically
Leads to fewer market transactions
Causes faster price adjustments
Helps customers find what they want
Improves market efficiency
Saying an asset is liquid implies
We focus on physically liquid assets like oil
We consider assets readily convertible to payment
We consider only U.S. currency
None of these
We consider any asset that can be sold
Which statement best describes financial instruments?
All instruments are means of payment
They move resources but not risk
They transfer resources and risk between people
None of these
They transfer risk but not resources
Money markets are where trades occur for
Bonds of all maturities
Derivatives
Stocks
Short-term bonds by governments and firms
None of these
Which institution assists with the initial sale of securities in the primary market?
Stock exchange
Investment bank
None of these
Brokerage house
Commercial bank
Which statement is true for a coupon bond?
Price and yield to maturity are positively related
Yield is below coupon when price is below par
At par price, yield to maturity equals coupon rate
None of these
Yield exceeds coupon when price is above par
If a public corporation goes bankrupt lacking enough assets to pay creditors, stockholders
None of these
Cannot lose more than their investment
Receive dividends before other creditors
Must add capital due to residual claims
Are personally liable for balances
Which is a primary financial market transaction?
Cashing a birthday check
Buying bonds via a broker
City issues bonds to fund roads
None of these
Supermarket borrows for expansion
Lan deposits 150andhas 156.38 after one year. What annual interest rate did she earn?
4.25%
6.38%
4.52%
5.63%
None of these
Mike obtains a car loan from BIDV Bank. Which statement is accurate?
Loan is Mike’s and bank’s liability
Loan is Mike’s liability and bank’s asset
None of these
Loan is Mike’s asset, depositors’ liability
Loan is Mike’s asset, bank’s liability
A financial instrument includes
Written obligation and specified date only
Written obligation and transfer of value only
Written obligation, transfer of value, future date, conditions
None of these
Written obligation, transfer, specific date, uncertain conditions
As a financial intermediary, a bank functions such that
Depositors are ultimate lenders; bank ultimate borrower
Borrowers are ultimate spenders; bank ultimate lender
None of these
Depositors are ultimate lenders; bank customers ultimate spenders
Considering the value of a financial instrument, the bigger the size of the promised payment the instrument is
less valuable because risk must be greater
longer an investor must wait for payment
none of the above
greater risk than similar alternatives
more valuable to the holder of the instrument
Financial instruments used primarily as stores of value would NOT include
none of the above choices
a home mortgage agreement
shares of Toyota common stock
a U.S. Treasury bond security
a car insurance policy contract
A primary financial market is
one where borrowers obtain funds directly from lenders
a market where U.S. Treasury bonds are traded
one dealing only in highest investment grades
located only in major global cities
none of the above statements
Equity markets are markets
of U.S. Treasury debt instruments
none of the above definitions
for AAA rated corporate bonds
for either stocks or bonds broadly
for stocks issued by firms
Financial intermediaries include each of the following, EXCEPT
the HCMC Stock Exchange venue
credit unions member-owned
commercial banks chartered firms
savings banks deposit institutions
none of the above exceptions
Today the primary distinction between direct and indirect finance is
none of the above alternatives
indirect finance gives claim on government issuer
direct finance gives asset holder a claim on borrower
indirect finance gives lender a direct borrower claim
direct finance means a claim on an institution
An investment pays 400inoneyear,Xintwoyears,and 500 in three years. The total present value of all cash flows equals $1,500. If APR is 6%, what is X approximately?
$822.41 two-year payment
$702.83 two-year payment
$749.67 two-year payment
$600.00 two-year payment
$789.70 two-year payment
Upon graduating, you expect 25,000peryear.WithanMBAinoneyear,youexpect 35,000 per year. Inflation is expected to be 5 percent. In today’s dollars, how much additional money will you make in your first year from getting the MBA?
$10,000 real difference
–$2,462 real difference
$8,333 real difference
$8,750 real difference
$9,524 real difference
A 180-day $3 million CD has a 4.25 percent annual rate quote. If you buy the CD, how much will you collect in 180 days?
$3,063,750 proceeds
$3,062,877 proceeds
$3,127,500 proceeds
$3,045,678 proceeds
$3,047,439 proceeds
An 18-year Treasury bond can be stripped into how many separate securities?
37 separate securities
36 separate securities
19 separate securities
38 separate securities
18 separate securities
If the returns of two assets are perfectly positively correlated, splitting savings into each will
reduce portfolio risk overall
increase expected portfolio return
reduce risk but lower return
not gain from diversification
none of the above is correct
The fact that not everyone keeps all savings in U.S. Treasury bonds indicates that
most people are exactly risk-neutral
most investors are not risk averse
none of the above statements
many investors are true risk seekers
even risk-averse people take risks if compensated
Financial institutions acting as intermediaries perform all of the following, EXCEPT
none of the above functions
provide safekeeping and accounting
increase transaction costs in markets
pool the resources of small savers
provide ways to diversify risk pools
Companies sometimes offer money-back guarantees if customers are not satisfied. These guarantees are a way to treat the problem of
none of the above issues
excessive transaction costs
systemic market volatility
moral hazard after purchase
adverse selection before purchase
