chapter 3

Identify characteristics that make a financial instrument relatively more valuable.

A payment that is made sooner rather than later A payment that is more likely to be made Payments that are made when we need them most A relatively larger promised payment

Which of the following is true about financial instruments?

They are legally enforceable.

How are governments crucial to a well-run financial market?

They enforce the rules of the game.

Which of the following is a function of financial instruments but not a function of money?

Transfer of risk

Which of the following best describes indirect finance?

When a bank or other institution acts as an intermediary between the lender and the borrower.

An institution that gives households and corporations access to direct finance is called ________.

a brokerage

From your bank's point of view, your checking account is something it owes to you that you can withdraw at any time. From your point of view, your checking account is something of value that you own. Therefore, your checking account is ________ to your bank and ________ to you.

a liability; an asset

Good financial investors hold a diversified portfolio of securities (stocks and bonds) and various types of money. Financial markets assist them by

allowing for risk sharing.

An example of a financial instrument that ensures payments are made under specific conditions is ________.

an insurance contract

A type of financial instrument that ensures payments are made under specific conditions is _______ and its primary function is to _______.

an insurance contract; transfer risk

A collection of dealers trading securities via computer is referred to as ______.

an over-the-counter market

We say that a firm, homeowner, or economy is highly leveraged when it does a great deal of _______.

borrowing

An options contract is an example of a(n) ______ instrument.

derivative

Futures, options, and swaps are examples of ________.

derivative instruments

Financial institutions such as banks lend to consumers via _________.

indirect finance

As the historical gap between direct and indirect finance has narrowed,

intermediaries are generally involved on some level.

By ensuring that owners of financial instruments can buy and sell them cheaply and easily, financial markets provide ___________.

liquidity

A debt instrument that is completely repaid in less than a year are traded in ________.

money markets

As firms borrow more, they become _______ highly leveraged and their net worth ________.

more; falls

In order for a financial system to work well,

promises to pay lenders must be credible.

By specializing in issuing standardized securities, financial institutions

reduce transaction costs.

As leverage rises, risk ______ because a negative event increases the chance of __________.

rises; bankruptcy

A financial instrument is considered more valuable if

the promised payment is relatively large.

An asset-backed security is used primarily

to store value.

The fundamental distinction between direct and indirect finance involves

who owns the asset.

Financial instruments obligate one party to transfer something of value to another party. Good example of this include

you car insurance company paying to repair you car after an accident. a music publisher pays royalties for music that you wrote and they published. your monthly car payment.

Which of the following determines whether debt is traded in money markets versus bond markets?

The time until the debt is fully repaid

Which of the following is not an example of a financial instrument?

A credit union

A student loan or a credit card balance is considered which of the following?

A liability

Indicate which of the following financial instruments are used primarily as stores of value.

Stocks Home mortgages Asset-backed securities

Which of the following types of financial market was developed most recently?

Electronic communication networks

Of the economic entities listed, which tends to be most highly leveraged?

Financial institutions

Indicate which of the following financial instruments are used primarily to transfer risk.

Futures contracts Swaps Options

Identify the financial instruments that are used primarily as a store of value.

Home loans Stocks Bonds

In general, a well-run financial market is characterized by which of the following?

Investor protection Low transaction costs Accurate and available information

Which of the following is true about the value of a financial payment, all else equal?

Payments made when needed most are more valuable.

Which of the following are considered the major financial institutions?

Pension funds Depository institutions Securities firms Insurance companies

Investment banks and mutual funds companies Firms that invest contributions from employers and employees to provide for retired workers Federal credit agencies that directly provide loans Banks and credit unions

Securities firms Pension funds Government-sponsored enterprises Depository institutions