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Chapter
1—Role of Financial Markets and Institutions
1. Financial
market participants who provide funds are called
|
a.
|
deficit units.
|
|
b.
|
surplus units.
|
|
c.
|
primary units.
|
|
d.
|
secondary units.
|
2. The
main provider(s) of funds to the U.S. Treasury is (are)
|
a.
|
households and businesses.
|
|
b.
|
foreign financial institutions.
|
|
c.
|
the Federal Reserve System.
|
|
d.
|
foreign nonfinancial sectors.
|
3. The
largest deficit unit is (are)
|
a.
|
households and businesses.
|
|
b.
|
foreign financial institutions.
|
|
c.
|
the U.S. Treasury.
|
|
d.
|
foreign nonfinancial sectors.
|
4. Those
financial markets that facilitate the flow of short-term funds are known as
|
a.
|
money markets.
|
|
b.
|
capital markets.
|
|
c.
|
primary markets.
|
|
d.
|
secondary markets.
|
5. Funds
are provided to the initial issuer of securities in the
|
a.
|
secondary market.
|
|
b.
|
primary market.
|
|
c.
|
deficit market.
|
|
d.
|
surplus market.
|
6. Which
of the following is a capital market instrument?
|
a.
|
a six-month CD
|
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b.
|
a three-month Treasury bill
|
|
c.
|
a ten-year bond
|
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d.
|
an agreement for a bank to loan funds directly to
a company for nine months
|
7. Which
of the following is a money market security?
|
a.
|
Treasury note
|
|
b.
|
municipal bond
|
|
c.
|
mortgage
|
|
d.
|
commercial paper
|
8. The
creditors in the federal funds market are
|
a.
|
households.
|
|
b.
|
depository institutions.
|
|
c.
|
firms.
|
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d.
|
government agencies.
|
9. Equity
securities have a ____ expected return than most long-term debt securities, and
they exhibit a ____ degree of risk.
|
a.
|
higher; higher
|
|
b.
|
lower; lower
|
|
c.
|
lower; higher
|
|
d.
|
higher; lower
|
10. Money
market securities generally have ____. Capital market securities are typically
expected to have a ____.
|
a.
|
less liquidity; higher annualized return
|
|
b.
|
more liquidity; lower annualized return
|
|
c.
|
less liquidity; lower annualized return
|
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d.
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more liquidity; higher annualized return
|
11. If
security prices fully reflect all available information, the markets for these
securities are
|
a.
|
efficient.
|
|
b.
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primary.
|
|
c.
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overvalued.
|
|
d.
|
undervalued.
|
12. If
markets are ____, investors could use available information ignored by the
market to earn abnormally high returns.
|
a.
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perfect
|
|
b.
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active
|
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c.
|
inefficient
|
|
d.
|
in equilibrium
|
13. If
financial markets are efficient, this implies that all securities should earn
the same return.
a.
True
b.
False
14. The
Securities Act of 1933
|
a.
|
required complete disclosure of relevant financial
information for publicly offered securities in the primary market.
|
|
b.
|
declared trading strategies to manipulate the
prices of public secondary securities illegal.
|
|
c.
|
declared misleading financial statements for
public primary securities illegal.
|
|
d.
|
required complete disclosure of relevant financial
information for securities traded in the secondary market.
|
|
e.
|
all of the above
|
15. The
Securities Exchange Commission (SEC) was established by the
|
a.
|
Federal Reserve Act.
|
|
b.
|
McFadden Act.
|
|
c.
|
Securities Exchange Act of 1934.
|
|
d.
|
Glass-Steagall Act.
|
|
e.
|
none of the above
|
16. Common
stock is an example of a(n)
|
a.
|
debt security.
|
|
b.
|
money market security.
|
|
c.
|
equity security.
|
|
d.
|
A and B
|
17. If
financial markets were ____, all information about any securities for sale in
primary and secondary markets would be continuously and freely available to
investors.
|
a.
|
efficient
|
|
b.
|
inefficient
|
|
c.
|
perfect
|
|
d.
|
imperfect
|
18. The
typical role of a securities firm in a public offering of securities is to
|
a.
|
purchase the entire issue for its own investment.
|
|
b.
|
place the entire issue with a single large
investor.
|
|
c.
|
spread the issue across several investors until
the entire issue is sold.
|
|
d.
|
provide all large investors with loans so that
they can invest in the offering.
|
19. Without
the participation of financial intermediaries in financial market transactions,
|
a.
|
information and transaction costs would be lower.
|
|
b.
|
transaction costs would be higher but information
costs would be unchanged.
|
|
c.
|
information costs would be higher but transaction
costs would be unchanged.
|
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d.
|
information and transaction costs would be higher.
|
20. Which
of the following is most likely to be described as a depository institution?
|
a.
|
finance companies
|
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b.
|
securities firms
|
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c.
|
credit unions
|
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d.
|
pension funds
|
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e.
|
insurance companies
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21. In
aggregate, ____ are the most dominant depository institution, with more total
assets than other depository institutions.
|
a.
|
commercial banks
|
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b.
|
savings banks
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c.
|
credit unions
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d.
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S&Ls
|
22. Which
of the following is a nondepository financial institution?
|
a.
|
savings banks
|
|
b.
|
commercial banks
|
|
c.
|
savings and loan associations
|
|
d.
|
mutual funds
|
23. Which
of the following distinguishes credit unions from commercial banks and savings
institutions?
|
a.
|
Credit unions are non-profit
|
|
b.
|
Credit unions accept deposits but do not make
loans
|
|
c.
|
Credit unions make loans but do not accept
deposits
|
|
d.
|
Savings institutions restrict their business to
members who share a common bond
|
24. When
a securities firm acts as a broker, it
|
a.
|
guarantees the issuer a specific price for newly
issued securities.
|
|
b.
|
makes a market in specific securities by adjusting
its own inventory.
|
|
c.
|
executes transactions between two parties.
|
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d.
|
purchases securities for its own account.
|
25. When
a securities firm acts as a(n) ____, it maintains a position in securities.
|
a.
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adviser
|
|
b.
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dealer
|
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c.
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broker
|
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d.
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none of the above
|
26. ____
obtain funds by issuing securities, then lend the funds to individuals and
small businesses.
|
a.
|
Finance companies
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b.
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Securities firms
|
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c.
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Mutual funds
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d.
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Insurance companies
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27. Households
with ____ are served by ____.
|
a.
|
deficient funds; depository institutions and
finance companies
|
|
b.
|
deficient funds; finance companies only
|
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c.
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savings; finance companies only
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d.
|
savings; pension funds and finance companies
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28. ____
concentrate on mortgage loans.
|
a.
|
Finance companies
|
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b.
|
Commercial banks
|
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c.
|
Savings institutions
|
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d.
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Credit unions
|
29. ____
securities have a maturity of one year or less; ____ securities are generally
more liquid.
|
a.
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Money market; capital market
|
|
b.
|
Money market; money market
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|
c.
|
Capital market; money market
|
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d.
|
Capital market; capital market
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30. Which
of the following is not a major investor in stocks?
|
a.
|
commercial banks
|
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b.
|
insurance companies
|
|
c.
|
mutual funds
|
|
d.
|
pension funds
|
31. Which
of the following financial intermediaries commonly invests in stocks and bonds?
|
a.
|
pension funds
|
|
b.
|
insurance companies
|
|
c.
|
mutual funds
|
|
d.
|
all of the above
|
32. Securities
are certificates that represent a claim on the issuer.
a.
True
b.
False
33. Debt
securities are certificates that represent debt (borrowed funds) by the issuer.
a.
True
b.
False
34. A
five-year security was purchased two years ago by an investor who plans to
resell it. The security will be sold by the investor in the so-called
|
a.
|
secondary market.
|
|
b.
|
primary market.
|
|
c.
|
deficit market.
|
|
d.
|
surplus market.
|
35. When
security prices fully reflect all available information, the markets for these
securities are said to be efficient.
a.
True
b.
False
36. If
markets are perfect, securities buyers and sellers to not have full access to
information and cannot always break down securities to the precise size they
desire.
a.
True
b.
False
37. A
broker executes securities transactions between two parties and charges a fee
reflected in the bid-ask spread.
a.
True
b.
False
38. The
euro increased business between European countries and created a more
competitive environment in Europe.
a.
True
b.
False
39. In
recent years, financial institutions have consolidated to capitalize on
economies of scale and on economies of scope.
a.
True
b.
False
40. Securities
are certificates that represent a claim on the provider of funds.
a.
True
b.
False
41. Debt
securities include commercial paper, Treasury bonds, and corporate bonds.
a.
True
b.
False
42. Common
types of capital market securities include Treasury bills and commercial paper.
a.
True
b.
False
43. Common
types of money market securities include negotiable certificates of deposit and
Treasury bills.
a.
True
b.
False
44. Money
market securities are commonly issued in order to finance the purchase of
assets such as buildings, equipment, or machinery.
a.
True
b.
False
45. The
total asset value of savings institutions is larger than that of commercial
banks.
a.
True
b.
False
46. Financial
markets facilitating the flow of short-term funds with maturities of less than
one year are known as
|
a.
|
secondary markets.
|
|
b.
|
capital markets.
|
|
c.
|
primary markets.
|
|
d.
|
money markets.
|
|
e.
|
none of the above
|
47. Which
of the following transactions would not be considered a secondary market
transaction?
|
a.
|
An individual investor purchases some existing shares
of stock in IBM through his broker.
|
|
b.
|
An institutional investor sells some Disney stock
through its broker.
|
|
c.
|
A firm that was privately held engages in an
offering of stock to the public.
|
|
d.
|
All of the above are secondary market
transactions.
|
48. If
investors speculate in the underlying asset rather than derivative contracts on
the underlying asset, they will probably achieve ____ returns, and they are
exposed to relatively ____ risk.
|
a.
|
lower; lower
|
|
b.
|
lower; higher
|
|
c.
|
higher; lower
|
|
d.
|
higher; higher
|
49. ____
maintain a larger amount of assets in aggregate than the other types of
nondepository institutions.
|
a.
|
Finance companies
|
|
b.
|
Mutual funds
|
|
c.
|
Life insurance companies
|
|
d.
|
Securities firms
|
50. A common
use of funds for ____ is investment in stocks and businesses, while their main
use of funds is providing loans to households and businesses.
|
a.
|
savings institutions
|
|
b.
|
commercial banks
|
|
c.
|
mutual funds
|
|
d.
|
finance companies
|
51. Long-term
debt securities tend to have a ____ expected return and ____ risk than money
market securities.
|
a.
|
lower; lower
|
|
b.
|
lower; higher
|
|
c.
|
higher; lower
|
|
d.
|
higher; higher
|
52. Common
types of capital market securities include Treasury bills and commercial paper.
a.
True
b.
False
53. Common
types of money market securities include negotiable certificates of deposit and
Treasury bills.
a.
True
b.
False
54. Capital
market securities are commonly issued in order to finance the purchase of
assets such as buildings, equipment, or machinery.
a.
True
b.
False
55. Commercial
banks in aggregate have more assets than credit unions.
a.
True
b.
False
56. Those
participants who receive more money than they spend are referred to as
|
a.
|
deficit units.
|
|
b.
|
surplus units.
|
|
c.
|
borrowing units.
|
|
d.
|
government units.
|
57. Equity
securities
|
a.
|
have a maturity.
|
|
b.
|
pay interest on a periodic basis.
|
|
c.
|
represent ownership in the issuer.
|
|
d.
|
repay the principal amount at maturity.
|
58. The
term ____ involves decisions such as how much funding to obtain, and how to
invest the proceeds to expand operations.
|
a.
|
corporate finance
|
|
b.
|
investment management
|
|
c.
|
financial markets and institutions
|
|
d.
|
none of the above
|
59. There
is a ____ relationship between the risk of a security and the expected return
from investing in the security.
|
a.
|
positive
|
|
b.
|
negative
|
|
c.
|
indeterminable
|
|
d.
|
none of the above
|
60. If
a security is undervalued, some investors would capitalize from this by
purchasing that security. As a result, the security's price will ____,
resulting in a ____ return for those investors.
|
a.
|
rise; lower
|
|
b.
|
fall; higher
|
|
c.
|
fall; lower
|
|
d.
|
rise; higher
|
61. The
credit crisis in the 2008-2009 period was caused by weak economies in Asia.
a.
True
b.
False
62. ____
are classified as a depository institution.
|
a.
|
Credit unions
|
|
b.
|
Pension funds
|
|
c.
|
Finance companies
|
|
d.
|
Securities firms
|
63. The
main reason that depository institutions experienced financial problems during
the credit crisis was their investment in:
|
a.
|
mortgages.
|
|
b.
|
money market securities.
|
|
c.
|
stock.
|
|
d.
|
Treasury bonds.
|
64. Those
financial markets that facilitate the flow of short-term funds (with maturities
of less than one year) are known as capital markets, while those that
facilitate the flow of long-term funds are known as money markets.
a.
True
b.
False
65. Treasury
bonds have a maturity of one to three years.
a.
True
b.
False
66. Since
markets are efficient, institutional and individual investors should ignore the
various investment instruments available.
a.
True
b.
False
67. Speculating
with derivative contracts on an underlying asset typically results in both
higher risk and higher returns than speculating in the underlying asset itself.
a.
True
b.
False
68. When
security prices fully reflect all available information, the markets for these
securities are said to be perfect.
a.
True
b.
False
69. Securities
that are not as safe and liquid as other securities are never considered for
investment by anyone.
a.
True
b.
False
70. By
requiring full disclosure of information, securities laws prevent investors
from making poor investment decisions.
a.
True
b.
False
71. When
a depository institution offers a loan, it is acting as a creditor.
a.
True
b.
False
72. Savings
institutions represent a nondepository institution.
a.
True
b.
False
73. Most
mutual funds obtain funds by issuing securities, then lend the funds to
individuals and small businesses.
a.
True
b.
False
74. Institutional
investors not only provide financial support to companies but exercise some
degree of corporate control over them.
a.
True
b.
False
75. Which
of the following is not a reason why depository financial institutions are
popular?
|
a.
|
They offer deposit accounts that can accommodate
the amount and liquidity characteristics desired by most surplus units.
|
|
b.
|
They repackage funds received from deposits to
provide loans of the size and maturity desired by deficit units.
|
|
c.
|
They accept the risk on loans provided.
|
|
d.
|
They use their information resources to act as a
broker, executing securities transactions between two parties.
|
|
e.
|
They have more expertise than individual surplus
units in evaluating the creditworthiness of deficit units.
|
76. According
to your text, which of the following is not considered a money market security?
|
a.
|
Treasury bills
|
|
b.
|
Treasury notes
|
|
c.
|
retail CD
|
|
d.
|
banker's acceptance
|
|
e.
|
commercial paper
|
77. ____
are not considered capital market securities.
|
a.
|
Repurchase agreements
|
|
b.
|
Municipal bonds
|
|
c.
|
Corporate bonds
|
|
d.
|
Equity securities
|
|
e.
|
Mortgages
|
78. ____
are long-term debt obligations issued by corporations and government agencies
to support their operations.
|
a.
|
Common stock
|
|
b.
|
Derivative securities
|
|
c.
|
Bonds
|
|
d.
|
None of the above
|
79. Equity
securities should normally have a ____ expected return and ____ risk than money
market securities.
|
a.
|
lower; lower
|
|
b.
|
lower; higher
|
|
c.
|
higher; lower
|
|
d.
|
higher; higher
|
80. If
investors speculate in derivative contracts rather than the underlying asset,
they will probably achieve ____ returns, and they are exposed to relatively
____ risk.
|
a.
|
lower; lower
|
|
b.
|
lower; higher
|
|
c.
|
higher; lower
|
|
d.
|
higher; higher
|
81. When
particular securities are perceived to be ____ by the market, their prices
decrease when they are sold by investors.
|
a.
|
undervalued
|
|
b.
|
overvalued
|
|
c.
|
fairly priced
|
|
d.
|
efficient
|
|
e.
|
none of the above
|
82. Which
of the following are not considered depository financial institutions?
|
a.
|
finance companies
|
|
b.
|
commercial banks
|
|
c.
|
savings institutions
|
|
d.
|
credit unions
|
|
e.
|
All of the above are depository financial
institutions.
|
83. The
main source of funds for ____ is proceeds from selling securities to households
and businesses, while their main use of funds is providing loans to households
and businesses.
|
a.
|
savings institutions
|
|
b.
|
commercial banks
|
|
c.
|
mutual funds
|
|
d.
|
finance companies
|
|
e.
|
pension funds
|
84. Which
of the following statements is incorrect?
|
a.
|
Financial markets attract funds from investors and
channel the funds to corporations.
|
|
b.
|
Money markets enable corporations to borrow funds
on a short-term basis so that they can support their existing operations.
|
|
c.
|
Financial institutions serve solely as intermediaries
with the financial markets and never serve as investors.
|
|
d.
|
Investors seek to invest their funds in the stock
of firms that are presently undervalued and have much potential to improve.
|
85. Which
of the following is not a typical money market security?
|
a.
|
Treasury bills
|
|
b.
|
Treasury bonds
|
|
c.
|
Commercial paper
|
|
d.
|
Negotiable certificates of deposit
|
86. Debt
securities issued by a small firm may be ________, meaning that _______
investors want to invest in those securities.
|
a.
|
a. liquid; many
|
|
b.
|
a. liquid; not many
|
|
c.
|
a. illiquid; not many
|
|
d.
|
a. illiquid; many
|
87. Valuing
stocks is easier than valuing debt securities because stocks promise to provide
investors with specific payments at regular intervals.
a.
True
b.
False
88. ____________
applies psychology to financial decisions and offers an explanation for why
markets are not always efficient.
|
a.
|
a. Psychological marketing
|
|
b.
|
a. Behavioral finance
|
|
c.
|
a. Inefficient markets theory
|
|
d.
|
a. Financial psychology
|
89. International
integration of securities markets allows:
|
a.
|
a. governments and corporations to have easier access to funding
from creditors and investors in other countries.
|
|
b.
|
a. investors and creditors to benefit from investment opportunities
in other countries.
|
|
c.
|
a. one’s country’s financial problems to adversely affect other
countries.
|
|
d.
|
a. All of the above
|
90. The
foreign exchange market facilitates the exchange of:
|
a.
|
a. information between investors in different countries.
|
|
b.
|
a. debt securities.
|
|
c.
|
a. equity securities.
|
|
d.
|
a. currencies.
|
91. Which
of the following is not an example of the government’s recent increased
role in financial markets?
|
a.
|
a. the Federal Reserve’s purchase of debt securities during the
credit crisis
|
|
b.
|
a. regulations changing the way that the credit risk of bonds is
assessed
|
|
c.
|
a. regulations setting maximum rates for Treasury securities
|
|
d.
|
a. increased monitoring of stock trading and prosecution of those
who trade on inside information
|
92. Commercial
paper represents long-term debt obligations created to finance the purchase of
commercial property.
a.
True
b.
False
93. The
risk that financial problems could spread among financial institutions and
across financial markets, causing a collapse of the financial system, is known
as:
|
a.
|
a. systemic risk.
|
|
b.
|
a. leverage risk.
|
|
c.
|
a. financial meltdown risk.
|
|
d.
|
a. credit risk.
|
94. Systemic
risk exists because:
|
a.
|
a. there is no government regulation of financial markets.
|
|
b.
|
a. financial institutions invest in similar securities and
therefore are similarly exposed to large declines in prices of those
securities.
|
|
c.
|
a. financial institutions borrow using long-term debt securities
but lend their funds for short-term periods.
|
|
d.
|
a. financial institutions invest heavily in Treasury securities and
therefore are exposed to the possibility that the government will default on
its debts.
|
Chapter
2—Determination of Interest Rates
MULTIPLE
CHOICE
1. The
level of installment debt as a percentage of disposable income is generally
____ during recessionary periods.
|
a.
|
higher
|
|
b.
|
lower
|
|
c.
|
zero
|
|
d.
|
negative
|
2. At
any given point in time, households would demand a ____ quantity of loanable
funds at ____ rates of interest.
|
a.
|
greater; higher
|
|
b.
|
greater; lower
|
|
c.
|
smaller; lower
|
|
d.
|
none of the above
|
3. Businesses
demand loanable funds to
|
a.
|
finance installment debt.
|
|
b.
|
subsidize other companies.
|
|
c.
|
invest in fixed and short-term assets.
|
|
d.
|
none of the above
|
4. The
required return to implement a given business project will be ____ if interest
rates are lower. This implies that businesses will demand a ____ quantity of
loanable funds when interest rates are lower.
|
a.
|
greater; lower
|
|
b.
|
lower; greater
|
|
c.
|
lower; lower
|
|
d.
|
greater; greater
|
5. If
interest rates are ____, ____ projects will have positive NPVs.
|
a.
|
higher; more
|
|
b.
|
lower; more
|
|
c.
|
lower; no
|
|
d.
|
none of the above
|
6. The
demand for funds resulting from business investment in short-term assets is
____ related to the number of projects implemented, and is therefore ____
related to the interest rate.
|
a.
|
inversely; positively
|
|
b.
|
positively; inversely
|
|
c.
|
inversely; inversely
|
|
d.
|
positively; positively
|
7. If
economic conditions become less favorable, then:
|
a.
|
expected cash flows on various projects will
increase.
|
|
b.
|
more proposed projects will have expected returns
greater than the hurdle rate.
|
|
c.
|
there would be additional acceptable business
projects.
|
|
d.
|
there would be a decreased demand by business for
loanable funds.
|
8. As
a result of more favorable economic conditions, there is a(n) ____ demand for
loanable funds, causing an ____ shift in the demand curve.
|
a.
|
decreased; inward
|
|
b.
|
decreased; outward
|
|
c.
|
increased; outward
|
|
d.
|
increased; inward
|
9. The
federal government demand for loanable funds is ____. If the budget deficit was
expected to increase, the federal government demand for loanable funds would
____.
|
a.
|
interest elastic; decrease
|
|
b.
|
interest elastic; increase
|
|
c.
|
interest inelastic; increase
|
|
d.
|
interest inelastic; decrease
|
10. Other
things being equal, foreign governments and corporations would demand ____ U.S.
funds if their local interest rates were lower than U.S. rates. Therefore, for
a given set of foreign interest rates, foreign demand for U.S. funds is ____
related to U.S. interest rates.
|
a.
|
less; inversely
|
|
b.
|
more; positively
|
|
c.
|
less; positively
|
|
d.
|
more; inversely
|
11. For
a given set of foreign interest rates, the quantity of U.S. loanable funds
demanded by foreign governments or firms will be ____ U.S. interest rates.
|
a.
|
positively related to
|
|
b.
|
inversely related to
|
|
c.
|
unrelated to
|
|
d.
|
none of the above
|
12. The
quantity of loanable funds supplied is normally
|
a.
|
highly interest elastic.
|
|
b.
|
more interest elastic than the demand for loanable
funds.
|
|
c.
|
less interest elastic than the demand for loanable
funds.
|
|
d.
|
equally interest elastic as the demand for
loanable funds.
|
|
e.
|
A and B
|
13. The
____ sector is the largest supplier of loanable funds.
|
a.
|
household
|
|
b.
|
government
|
|
c.
|
business
|
|
d.
|
none of the above
|
14. If
a strong economy allows for a large ____ in households income, the supply curve
will shift ____.
|
a.
|
decrease; outward
|
|
b.
|
increase; inward
|
|
c.
|
increase; outward
|
|
d.
|
none of the above
|
15. The
equilibrium interest rate
|
a.
|
equates the aggregate demand for funds with the
aggregate supply of loanable funds.
|
|
b.
|
equates the elasticity of the aggregate demand and
supply for loanable funds.
|
|
c.
|
decreases as the aggregate supply of loanable
funds decreases.
|
|
d.
|
increases as the aggregate demand for loanable
funds decreases.
|
16. The
equilibrium interest rate should
|
a.
|
fall when the aggregate supply funds exceeds
aggregate demand for funds.
|
|
b.
|
rise when the aggregate supply of funds exceeds
aggregate demand for funds.
|
|
c.
|
fall when the aggregate demand for funds exceeds
aggregate supply of funds.
|
|
d.
|
rise when aggregate demand for funds equals
aggregate supply of funds.
|
|
e.
|
B and C
|
17. Which
of the following is likely to cause a decrease in the equilibrium U.S. interest
rate, other things being equal?
|
a.
|
a decrease in savings by foreign savers
|
|
b.
|
an increase in inflation
|
|
c.
|
pessimistic economic projections that cause
businesses to reduce expansion plans
|
|
d.
|
a decrease in savings by U.S. households
|
