ch 2 econ test questions

diversification

Reducing risk through the purchase of assets whose returns do not always move together is ________.

liquid

Secondary markets make financial instruments more ________.

assets; liabilities

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

banks

The Canada Deposit Insurance Corporation regulates ________.

financial intermediation

The process of indirect finance using financial intermediaries is called ________.

risk sharing

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as ________.

transaction costs

The time and money spent in carrying out financial transactions are called ________.

asymmetric information

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 ________.

Eurodollars

U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________.

produce an efficient allocation of capital

Well-functioning financial markets ________.

stock

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.

underwrites

When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public.

A corporation issues new shares of stock.

Which of the following can be described as involving direct finance

You make a deposit at a bank.

Which of the following can be described as involving indirect finance

A sixty-month car loan

Which of the following is an example of an intermediate-term debt?

direct

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.

depository

____ institutions include banks, trust and mortgage loan companies, and credit unions

Adverse Selection

_____ is a problem associated with equity and debt contracts arising from the lender's relative lack of information about the borrower's potential returns and risks of his investment activities

Brokers

________ work in the secondary markets matching buyers with sellers of securities.

secondary

A financial market in which previously issued securities can be resold is called a ________ market.

political instability

A breakdown of financial markets can result in ________.

asset

Collateral is an ________ the lender receives if the borrower does not pay back the loan.

reduce transactions costs

Economies of scale enable financial institutions to ________.

It channels funds from lenders-savers to borrowers-spenders

Every financial market has which of the following characteristics

depository

Financial institutions that accept deposits and make loans are called ________ institutions

they allow consumers to time their purchase better

Financial markets improve economic welfare because ________.

transactions costs

Government regulations to reduce the possibility of financial panic include all of the following except ________.

Eurobond

If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________.

adverse selection

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 ________.

short term

If the maturity of a debt instrument is less than one year, the debt is called ________.

10

Long-term debt has a maturity that is ________ years or longer

loans

Overnight funds are ________ made by banks to each other

the short terms to maturity for the securities

Prices of money market instruments undergo the least price fluctuations because of ________.

transaction costs

Risk sharing is profitable for financial institutions due to low ________.

Germany; Japan

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 that from securities markets.

more; primary

The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.

consumer loans

The primary assets of credit unions are ________.

deposits

The primary liabilities of a chartered bank are ________.

households

The principal lender-savers are ________.

adverse selection; moral hazard

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

shareholder

who benefit directly from any increase in the corporation's profitability?

primary

A corporation acquires new funds only when its securities are sold in the ________ market by an investment bank

money

A financial market in which only short-term debt instruments are traded is called the ________ market.

moral hazard

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.

secondary

An important function of ____ markets is to make it easier to sell financial instruments to raise funds

Eurobonds

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as ________.

foreign bonds

Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as ________.