Chapter 2

If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________. A) Eurobond B) foreign bond C) British bond D) currency bond

Eurobond

Financial institutions that accept deposits and make loans are called ________ institutions. A) investment B) contractual savings C) depository D) underwriting

depository

The primary liabilities of a commercial bank are A) bonds. B) mortgages. C) deposits. D) commercial paper.

deposits

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A) active B) determined C) indirect D) direct

direct

When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) A) exchange. B) over-the-counter market. C) common market. D) barter market.

exchange

Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely. A) financial intermediaries; securities markets B) financial intermediaries; government agencies C) government agencies; financial intermediaries D) government agencies; securities markets

financial intermediaries; securities markets

Bonds that are sold in a foreign country and are denominated in the countryʹs currency in which they are sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds.

foreign bonds

The principal lender-savers are A) governments. B) businesses. C) households. D) foreigners.

households

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification

adverse selection; moral hazard

A short-term debt instrument issued by well-known corporations is called A) commercial paper. B) corporate bonds. C) municipal bonds. D) commercial mortgages.

commercial paper

The primary assets of a finance company are A) municipal bonds. B) corporate stocks and bonds. C) consumer and business loans. D) mortgages.

consumer and business loans

An important financial institution that assists in the initial sale of securities in the primary market is the A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house.

investment bank

Secondary markets make financial instruments more A) solid. B) vapid. C) liquid. D) risky.

liquid

Which of the following is an example of an intermediate-term debt? A) A thirty-year mortgage. B) A sixty-month car loan. C) A six month loan from a finance company. D) A Treasury bond.

A sixty-month car loan

Which of the following are short-term financial instruments? A) A repurchase agreement. B) A share of Walt Disney Corporation stock. C) A Treasury note with a maturity of four years. D) A residential mortgage.

A repurchase agreement

Which of the following is a long-term financial instrument? A) A negotiable certificate of deposit. B) A repurchase agreement. C) A U.S. Treasury bond. D) A U.S. Treasury bill.

A U.S. Treasury bond

Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock. B) People buy shares in a mutual fund. C) A pension fund manager buys a short-term corporate security in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets.

A corporation issues new shares of stock

Which of the following is a depository institution? A) A life insurance company B) A credit union C) A pension fund D) A mutual fund

A credit union

Which of the following financial intermediaries is not a depository institution? A) A savings and loan association B) A commercial bank C) A credit union D) A finance company

A finance company

________ work in the secondary markets matching buyers with sellers of securities. A) Dealers B) Underwriters C) Brokers D) Claimants

Brokers

________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis. A) Investment B) Contractual savings C) Thrift D) Depository

Contractual savings

Which of the following instruments are traded in a capital market? A) Corporate bonds. B) U.S. Treasury bills. C) Negotiable bank CDs. D) Repurchase agreements.

Corporate bonds

Which of the following is not a secondary market? A) foreign exchange market B) futures market C) options market D) IPO market

IPO market

Savings and loan associations are regulated by the A) Federal Reserve System. B) Securities and Exchange Commission. C) Office of the Comptroller of the Currency. D) Office of Thrift Supervision.

Office of Thrift Supervision

Which of the following can be described as involving direct finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys a short-term corporate security in a secondary market. D) People buy shares of common stock in the primary markets.

People buy shares of common stock in the primary markets

Which of the following are not traded in a capital market? A) U.S. government agency securities. B) State and local government bonds. C) Repurchase agreements. D) Corporate bonds.

Repurchase agreements

Which of the following instruments is not traded in a money market? A) Residential mortgages. B) U.S. Treasury Bills. C) Negotiable bank certificates of deposit. D) Commercial paper.

Residential mortgages

Which of the following do not provide charters? A) The Office of the Comptroller of the Currency B) The Federal Reserve System C) The National Credit Union Administration D) State banking and insurance commissions

The Federal Reserve System

Which of the following instruments are traded in a capital market? A) U.S. Government agency securities. B) Negotiable bank CDs. C) Repurchase agreements. D) U.S. Treasury bills.

U.S. Government agency securities

Which of the following instruments are traded in a money market? A) State and local government bonds. B) U.S. Treasury bills. C) Corporate bonds. D) U.S. government agency securities.

U.S. Treasury Bills

Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) You buy shares in a mutual fund. C) You buy a U.S. Treasury bill from the U.S. Treasury. D) A corporation buys a short-term security issued by another corporation in the primary market.

You buy shares in a mutual fund

Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) A corporation buys a share of common stock issued by another corporation in the primary market. C) You buy a U.S. Treasury bill from the U.S. Treasury. D) You make a deposit at a bank.

You make a deposit at the bank

An investment bank helps ________ issue securities. A) a corporation B) the United States government C) the SEC D) foreign governments

a corporation

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 A) $400. B) $201. C) $200. D) $199.

$201

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is A) 25%. B) 12.5%. C) 10%. D) 5%.

5%

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 A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds.

Eurobonds

The agency that was created to protect depositors after the banking failures of 1930 -1933 is the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Treasury Department. D) Office of the Comptroller of the Currency.

Federal Deposit Insurance Corporation

Collateral is ________ the lender receives if the borrower does not pay back the loan. A) a liability B) an asset C) a present D) an offering

an asset

A goal of the Securities and Exchange Commission is to reduce problems arising from A) competition. B) banking panics. C) risk. D) asymmetric information.

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 A) moral selection. B) risk sharing. C) asymmetric information. D) adverse hazard

asymmetric information

Equity instruments are traded in the ________ market. A) money B) bond C) capital D) commodities

capital

Money market mutual fund shares function like A) checking accounts that pay interest. B) bonds. C) stocks. D) currency.

checking accounts that pay interest

Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other.

loans made by banks to each other

Risk sharing is profitable for financial institutions due to A) low transactions costs. B) asymmetric information. C) adverse selection. D) moral hazard.

low transaction costs

An important function of secondary markets is to A) make it easier to sell financial instruments to raise funds. B) raise funds for corporations through the sale of securities. C) make it easier for governments to raise taxes. D) create a market for newly constructed houses.

make it easier to sell financial instruments to raise funds

A financial market in which only short-term debt instruments are traded is called the ________ market. A) bond B) money C) capital D) stock

money

The higher a securityʹs price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market. A) more; primary B) more; secondary C) less; primary D) less; secondary

more; primary

Bonds issued by state and local governments are called ________ bonds. A) corporate B) Treasury C) municipal D) commercial

municipal

A breakdown of financial markets can result in A) financial stability. B) rapid economic growth. C) political instability. D) stable prices.

political instability

Well-functioning financial markets A) cause inflation. B) eliminate the need for indirect finance. C) cause financial crises. D) produce an efficient allocation of capital.

produce an efficient allocation of capital

With direct finance funds are channeled through the financial market from the ________ directly to the ________. A) savers, spenders B) spenders, investors C) borrowers, savers D) investors, savers

savers; spenders

Thrift institutions include A) banks, mutual funds, and insurance companies. B) savings and loan associations, mutual savings banks, and credit unions. C) finance companies, mutual funds, and money market funds. D) pension funds, mutual funds, and banks.

savings and loan associations, mutual savings banks, and credit unions

A financial market in which previously issued securities can be resold is called a ________ market. A) primary B) secondary C) tertiary D) used securities

secondary

If the maturity of a debt instrument is less than one year, the debt is called ________. A) short-term B) intermediate-term C) long-term D) prima-term

short-term

Financial markets improve economic welfare because A) they channel funds from investors to savers. B) they allow consumers to time their purchase better. C) they weed out inefficient firms. D) eliminate the need for indirect finance.

they allow consumers to time their purchase better

When an investment bank ________ securities, it guarantees a price for a corporationʹs securities and then sells them to the public. A) underwrites B) undertakes C) overwrites D) overtakes

underwrites

The primary assets of credit unions are A) municipal bonds. B) business loans. C) consumer loans. D) mortgages.

consumer loans

Which of the following are not contractual savings institutions? A) Life insurance companies B) Credit unions C) Pension funds D) State and local government retirement funds

credit unions

The concept of diversification is captured by the statement A) donʹt look a gift horse in the mouth. B) donʹt put all your eggs in one basket. C) it never rains, but it pours. D) make hay while the sun shines.

don't put all your eggs in one basket

The process of indirect finance using financial intermediaries is called A) direct lending. B) financial intermediation. C) resource allocation. D) financial liquidation.

financial intermediation

Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power.

getting people with funds to lend together with people who want to borrow funds

One reason for the extraordinary growth of foreign financial markets is A) decreased trade. B) increases in the pool of savings in foreign countries. C) the recent introduction of the foreign bond. D) slower technological innovation in foreign markets.

increases in the pool of savings in foreign countries

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. A) adverse selection B) moral hazard C) risk sharing D) credit risk

moral hazard

Equity holders are a corporationʹs ________. That means the corporation must pay all of its debt holders before it pays its equity holders. A) debtors B) brokers C) residual claimants D) underwriters

residual claimants

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as A) risk sharing. B) risk aversion. C) risk neutrality. D) risk selling.

risk sharing

The process of asset transformation refers to the conversion of A) safer assets into risky assets. B) safer assets into safer liabilities. C) risky assets into safer assets. D) risky assets into risky liabilities.

risky assets into safer assets

Which of the following statements about the characteristics of debt and equity is false? A) They can both be long-term financial instruments. B) They can both be short-term financial instruments. C) They both involve a claim on the issuerʹs income. D) They both enable a corporation to raise funds.

they can both be short-term financial instruments