Chapter 3

10. Which of the following statements is most correct? A. Financial intermediaries are banks. B. A bank is a financial intermediary. C. Financial intermediaries are insurance companies. D. Financial intermediaries are essential to direct finance.

A bank is a financial intermediary.

68. Which of the following is likely to be a primary financial market transaction? A. You cash the check your grandmother sent you for your birthday. B. You call a broker and purchase bonds for your retirement fund. C. A city issues bonds to finance new road construction. D. A supermarket needs to borrow the funds for a second location and takes out a loan from a commercial bank to pay for it.

A city issues bonds to finance new road construction.

17. Financial instruments and money share which of the following characteristics? A. Both can function as a means of payment and a store of value. B. Both can function as a store of value and allow for trading of risk. C. Both can function by acting as a means of payment and allow for trading of risk. D. Both can function as a store of value even though they do not allow for trading of risk.

A. Both can function as a means of payment and a store of value.A.

11. Which of the following statements is most correct? A. All banks are financial intermediaries, but not all financial intermediaries are banks. B. Financial intermediaries must be public corporations. C. All financial intermediaries are insurance companies. D. Financial intermediaries are government agencies.

All banks are financial intermediaries, but not all financial intermediaries are banks.

15. Which of the following is not a financial instrument? A. A share of Microsoft stock B. A U.S. Treasury Bond C. An electric bill D. A life insurance policy

An electric bill

35. A share of Microsoft stock would best be described as which of the following? A. A derivative instrument B. A means of payment C. An underlying instrument D. A debt instrument

An underlying instrument

14. A financial instrument would include: A. only a written obligation and a transfer of value. B. only a written obligation and a specified date. C. a written obligation, a transfer of value, a future date, and certain conditions. D. a written obligation, a transfer of value, a specific date for payment, uncertain conditions.

C. a written obligation, a transfer of value, a future date, and certain conditions.

81. Which of the following are depository institutions? A. Credit unions B. Mutual funds C. Pension funds D. Insurance companies

Credit unions

89. Which of the following is not considered to be a shadow bank? A. Credit unions B. Brokerages C. Insurers D. Money-market mutual funds

Credit unions

26. A counterparty to a financial instrument is always the: A. issuer of the financial instrument. B. government agency guaranteeing the value of the instrument. C. person or institution that purchases the financial instrument. D. person or institution that is on the other side of the financial contract.

D. person or institution that is on the other side of the financial contract.

72. Which of the following is not true of over-the-counter markets? A. Traders are linked by computer. B. Dealers buy and sell only for their customers. C. Trading does not take place in one physical location. D. Traders are willing to buy and sell stocks and bonds at posted prices.

Dealers buy and sell only for their customers.

21. Which of the following statements is most correct? A. When a risk is difficult to predict, financial instruments are created to transfer these risks. B. Financial instruments are created to transfer risks that are relatively easy to predict. C. Financial instruments require certainty of an event to be able to transfer risk. D. Financial instruments eliminate the risk from uncertainty, they do not transfer it.

Financial instruments are created to transfer risks that are relatively easy to predict.

54. Which of the following is not a reason why interbank lending dried up during the financial crisis of 2007-2009? A. Banks preferred to hold on to their liquid assets in case their own need for them increased. B. Banks grew increasingly concerned about the ability of their trading partners to repay the loans. C. The increased cost of loans. D. The Fed grew increasingly wary of making liquidity available to banks.

The Fed grew increasingly wary of making liquidity available to banks.

12. Which of the following is not a financial intermediary? A. A bank B. An insurance company C. The New York Stock Exchange D. A mutual fund

The New York Stock Exchange

45. Consider the price paid for debt issued by the State of California. Which of the following would lead to a decrease in the value of State of California bonds? A. The State of California bonds are in small dollar amounts. B. The State of California bonds have a shorter maturity. C. The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments. D. The State of California pays back its previous bonds ahead of schedule.

The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments.

20. A bank is a financial intermediary. Which of the following statements is most accurate? A. The bank's depositors are the ultimate lenders and the bank is the ultimate borrower. B. People seeking loans from the bank are the ultimate spenders while the bank is the ultimate lender. C. The bank's depositors are the ultimate lenders, while those seeking loans from the bank are the ultimate spenders. D. Those seeking loans from the bank are the ultimate spenders; the bank's stockholders are the ultimate lenders.

The bank's depositors are the ultimate lenders, while those seeking loans from the bank are the ultimate spenders.

3. Tom obtains a car loan from Old Town Bank. A. The car loan is Tom's asset and the bank's liability. B. The car loan is Tom's asset, but the liability belongs to the bank's depositors. C. The car loan is Tom's liability and an asset for Old Town Bank. D. The car loan is Tom's liability and a liability of the bank until Tom pays it off.

The car loan is Tom's liability and an asset for Old Town Bank.

Which of the following would not be an example of a secondary financial market transaction? A. You call a broker and purchase 100 shares of McDonalds Corp. stock. B. You go to the bank and purchase a $5000 certificate of deposit. C. You call a broker and purchase a U.S. Treasury bond. D. You call a broker and purchase a bond issued by General Motors.

You go to the bank and purchase a $5000 certificate of deposit.

48. Financial instruments used primarily to transfer risk would include all of the following, except: A. an insurance contract. B. a futures contract. C. options. D. a bank loan.

a bank loan.

49. Financial instruments used primarily to transfer risk would not include: A. a bank loan. B. options. C. an insurance policy. D. home mortgages.

a bank loan.

47. Financial instruments used primarily as stores of value would not include: A. a car insurance policy. B. a U.S. Treasury bond. C. shares of General Motors stock. D. a home mortgage.

a car insurance policy.

51. Financial instruments used primarily as stores of value do not include: A. asset backed securities. B. U.S. Treasury bonds. C. a car insurance policy. D. a bank loan.

a car insurance policy.

37. A futures contract is an example of: A. a derivative instrument. B. an instrument used solely by financial institutions. C. a high-risk security that will only have value if certain events occur. D. a contract that is traded but is not a financial instrument.

a derivative instrument.

25. A share of Ford Motor Company stock is an example of: A. a non-standardized financial instrument. B. a standardized financial instrument. C. a non-standardized financial instrument since their prices can differ over time. D. a financial instrument without risk.

a standardized financial instrument.

87. Derivative markets exist to allow for: A. allow for the transfer of risk. B. direct transfers of common stocks for bonds. C. cash receipts from the sale of bonds. D. reduced information asymmetry.

allow for the transfer of risk.

31. Financial markets enable the transfer of risk by: A. requiring that risk-averse investors have access to U.S. Treasury bond markets. B. allowing individuals and firms less willing to bear risk to transfer risk to other individuals and firms more willing to bear risk. C. making sure that higher default risk is offset by greater liquidity. D. enabling even unsophisticated investors to purchase highly complex financial instruments.

allowing individuals and firms less willing to bear risk to transfer risk to other individuals and firms more willing to bear risk.

70. The New York Stock Exchange (NYSE) originated as: A. a decentralized electronic market made up of dealers all over the world. B. an example of a centralized exchange. C. a financial market where nearly 100 million shares of stock are traded every business day. D. the only centralized stock exchange in the world.

an example of a centralized exchange.

65. Secondary financial markets: A. are financial markets for all financial instruments rated less than investment grade. B. are financial markets where existing securities are bought and sold. C. eliminate the transaction costs for buyers and sellers. D. are only for stock.

are financial markets where existing securities are bought and sold.

71. Over-the-counter (OTC) markets: A. employ specialists to minimize price volatility. B. are centralized exchanges but you must be a dealer to be part of an exchange. C. only deal in the stocks of companies with over $100 million in capital. D. are networks of security dealers linked electronically.

are networks of security dealers linked electronically.

16. Sue has a checking account at the First National Bank; her checking account is a(n): A. asset to the bank and a liability to Sue. B. asset to Sue and a liability to the bank. C. asset to Sue but actually a liability to the Federal Reserve. D. liability to Sue until she spends the funds.

asset to Sue and a liability to the bank.

7. Loans made between borrowers and lenders are: A. usually not taxable at the federal level. B. legal only in the state of origination. C. assets of the lenders. D. assets of the borrowers.

assets of the lenders.

5. Loans made between borrowers and lenders are: A. liabilities to the lenders and assets to the borrowers since the borrower obtains the funds. B. assets to the lenders and liabilities of the borrowers since the promises are made to the lenders. C. not part of either parties' assets or liabilities until the loans are repaid. D. liabilities to both the lenders and the borrowers.

assets to the lenders and liabilities of the borrowers since the promises are made to the lenders.

28. Asymmetric information in financial markets is a potential problem usually resulting from: A. borrowers having more information than the lenders. B. lenders having more information than borrowers. C. the fact that people are basically dishonest. D. the uncertainty about Federal Reserve monetary policy.

borrowers having more information than the lenders.

18. Financial instruments are different from money because they: A. can act as a store of value and money cannot. B. can't be a means of payment but money can. C. can allow for the transfer of risk. D. have greater liquidity.

can allow for the transfer of risk.

60. Brokerage commissions: A. are set by government regulators so they cannot vary across firms for the same services. B. can vary but typically don't because firms tend to set them at the same levels. C. can differ reflecting the different services being offered. D. are always a percentage of the amount of the trade.

can differ reflecting the different services being offered.

78. Financial institutions: A. raise the level of transaction costs relating to borrowing/lending. B. can lower the information asymmetry involved with borrowing/lending. C. decrease the liquidity to savers. D. are required for all financial transactions.

can lower the information asymmetry involved with borrowing/lending.

86. Financial intermediaries handle a larger flow of funds than do primary markets primarily because financial intermediaries: A. have a government-provided monopoly. B. have government-regulated prices, so there is little competition. C. can lower transaction costs and increase liquidity for savers. D. do not have to worry about information asymmetry.

can lower transaction costs and increase liquidity for savers.

24. Many financial instruments are standardized because: A. it is believed that most parties to a contract do not read them anyway. B. complexity is costly, the more complex a contract, the more it costs to create. C. the standardization of contracts makes them harder to understand. D. it is required by the government.

complexity is costly, the more complex a contract, the more it costs to create.

83. Non-depository institutions would include all of the following except: A. finance companies. B. pension funds. C. insurance companies. D. credit unions.

credit unions.

82. Nondepository institutions: A. do not serve as intermediaries. B. only serve as brokers. C. only transform assets. D. do not accept deposits.

do not accept deposits.

22. Standardization of financial instruments has occurred as a result of: A. the rule of 70. B. the law of demand. C. economies of scale. D. the law of supply.

economies of scale.

53. Roles served by financial markets include the following, except: A. eliminating risk. B. providing liquidity. C. pooling and communicating information. D. sharing of risk.

eliminating risk.

58. Financial markets: A. enable buyers and sellers to exchange financial instruments but not risk. B. enable buyers and sellers to exchange risk by buying and selling financial instruments. C. only allow the transfer of risk through derivative securities. D. do not allow for the transfer of risk but do help reduce it.

enable buyers and sellers to exchange risk by buying and selling financial instruments.

76. Well-run financial markets: A. keep transactions costs high to benefit brokers B. prevent the widespread pooling of information C. ensure that resources are allocated efficiently D. are usually the result of little or no government regulation

ensure that resources are allocated efficiently

4. The ultimate role of the financial system of a country is to: A. provide a place for wealthy households to save. B. be a low-cost source of funds for government. C. facilitate production, employment, and consumption. D. provide jobs in the financial sector.

facilitate production, employment, and consumption.

19. Juan purchases automobile insurance; the insurance contract is a: A. financial instrument. B. form of money. C. transfer of risk from the insurance company to Juan. D. financial intermediary.

financial instrument.

73. Equity markets are markets: A. of U.S. Treasury bonds. B. for AAA rated bonds. C. for stocks. D. for either stocks or bonds.

for stocks.

46. Financial instruments used primarily as stores of value include each of the following, except: A. bonds. B. futures contracts. C. stocks. D. home mortgages.

futures contracts.

36. A derivative instrument: A. comes into existence after the underlying instrument is in default. B. is a low-risk financial instrument used by highly risk-averse savers. C. gets its value and payoff from the performance of the underlying instrument. D. should be purchased prior to purchasing the underlying security.

gets its value and payoff from the performance of the underlying instrument.

30. The better the information provided to financial markets the: A. less the amount of funds transferred between savers and borrowers. B. greater the amount of funds transferred between savers and borrowers though risk increases. C. higher the return required by lenders. D. greater will be the flow of funds in these markets.

greater will be the flow of funds in these markets.

92. Reasons for the rapid structural change in financial markets in recent years include all of the following except: A. globalization. B. technological advances in computing. C. technological advances in communication. D. high real interest rates.

high real interest rates.

9. The process of financial intermediation: A. creates a net cost to an economy. B. increases the economy's ability to produce. C. is always used when a borrower needs to obtain funds. D. is used primarily in underdeveloped countries.

increases the economy's ability to produce.

32. A borrower has information that is not available to a prospective lender; this is an example of: A. a wise borrower and an unwise lender. B. a transfer of risk. C. information asymmetry. D. liquidity risk.

information asymmetry.

34. The owner of a small business applies for a bank loan and tells the loan officer that the funds will be used to expand inventory for the upcoming holiday season. The small business finds itself in need of additional funds to meet the monthly rent for the next quarter and the owner uses the loan proceeds to pay the rent. This is an example of: A. liquidity risk. B. default risk. C. a lack of diversification for the bank. D. information asymmetry.

information asymmetry.

80. All of the following are depository institutions, except: A. commercial banks. B. credit unions. C. insurance companies. D. savings banks.

insurance companies.

Disability Income Insurance is: A. insurance borrowers can take out in case the company they invest in defaults. B. insurance that makes payments of wages to workers when the company they work for is disabled due to a natural disaster. C. insurance that makes payments to workers when they are unable to work due to an injury. D. only available through the government as part of the Social Security System.

insurance that makes payments to workers when they are unable to work due to an injury.

64. Most of the buying and selling in primary markets: A. is in the public view. B. is highly transparent and closely monitored by the SEC. C. involve an investment bank. D. is done by the Federal Reserve.

involve an investment bank.

1. A financial intermediary: A. is an agency that guarantees a loan. B. is a third-party that facilitates a transaction between a borrower and a lender. C. would be used in direct finance. D. must be a depository institution.

is a third-party that facilitates a transaction between a borrower and a lender.

84. Small savers would rather use financial institutions than lend directly to borrowers because: A. financial institutions will offer the savers higher interest rates than the savers could obtain directly from borrowers. B. lenders wouldn't want to deal with small savers. C. it allows them to diversify risk. D. the liquidity is lower with financial institutions but the return is higher.

it allows them to diversify risk.

8. Loans made between lenders and borrowers are: A. assets to the borrowers. B. liabilities of the lenders. C. not taxable in the state of origination. D. liabilities of the borrowers.

liabilities of the borrowers.

13. Mary purchases a U.S. Treasury bond; the bond is a(n): A. asset of the U.S. government as well as an asset for Mary. B. liability of the U.S. government and an asset for Mary. C. asset for Mary but not a liability of the U.S. Government. D. asset for the government but a liability for Mary.

liability of the U.S. government and an asset for Mary.

55. If financial markets didn't exist: A. required returns would be lower since fewer instruments would trade. B. liquidity would diminish and returns would be lower. C. more funds would flow directly between borrowers and savers. D. liquidity would diminish, reducing the flow of funds between borrowers and savers.

liquidity would diminish, reducing the flow of funds between borrowers and savers.

56. The high volume of shares of stock that are traded on a normal day on stock markets reflects the: A. high transaction costs associated with these financial markets. B. low transaction costs and high liquidity associated with these markets. C. low transaction costs and low liquidity associated with these markets. D. high transactions costs and low liquidity associated with these markets.

low transaction costs and high liquidity associated with these markets.

An over-the-counter (OTC) market is: A. made up of dealers who only sell government bonds. B. an example of a centralized market. C. made up of dealer who buy and sell only for their own accounts. D. made up of dealers who buy and sell for their customers and for their own accounts.

made up of dealers who buy and sell for their customers and for their own accounts.

85. Financial intermediaries pool funds of: A. many small savers and provide it to a few large borrowers. B. few large savers and provide it to many small borrowers. C. few large savers a few large borrowers. D. many small savers and provide it to many borrowers.

many small savers and provide it to many borrowers.

74. Debt instruments that have maturities less than one year are traded in the: A. primary market exclusively. B. bond markets exclusively. C. bond market if they are already in existence. D. money market.

money market.

23. More detailed financial instruments tend to be: A. less costly because all possible contingencies are covered. B. more costly because it will cost more to create. C. more desirable than less detailed ones, no matter what the price. D. less costly because they can be standardized more easily.

more costly because it will cost more to create.

39. Considering the value of a financial instrument, the bigger the size of the promised payment the: A. less valuable the financial instrument because risk must be greater. B. longer an investor has to wait for the payment. C. more valuable the financial instrument. D. greater the risk.

more valuable the financial instrument.

61. A primary financial market is: A. a market just for corporate stocks. B. a market only for AAA rated Securities. C. the New York Stock Exchange. D. one in which newly issued securities are sold.

one in which newly issued securities are sold.

62. A primary financial market is: A. located only in New York, London, and Tokyo but can handle transactions anywhere in the world. B. one where the borrower obtains funds directly from the lender for newly issued securities. C. a market where U.S. Treasury bonds are traded. D. one that can only deal in the highest investment grade securities.

one where the borrower obtains funds directly from the lender for newly issued securities.

42. Considering the value of a financial instrument, the circumstances under which the payment is to be made influence the value because: A. we like uncertain payoffs because this adds to the return. B. payments that are made when we need them the most are more valuable. C. the sooner the payment is to be made the better. D. we know when certain events are going to occur and that is when we want the payment.

payments that are made when we need them the most are more valuable.

26. A counterparty to a financial instrument is always the: A. issuer of the financial instrument. B. government agency guaranteeing the value of the instrument. C. person or institution that purchases the financial instrument. D. person or institution that is on the other side of the financial contract.

person or institution that is on the other side of the financial contract.

66. A collection of assets is known as a(n): A. asset-backed security. B. derivative. C. futures contract. D. portfolio.

portfolio.

29. Agencies exist which rate bonds based on characteristics of the borrower Such bond rating agencies are an example of a financial market response designed to: A. increase information asymmetry. B. decrease the real return to bondholders. C. provide a lower cost solution to the high cost of information. D. transfer risk from the buyer to the rating agency.

provide a lower cost solution to the high cost of information.

6. Financial instruments are used to channel funds from: A. savers to borrowers in financial markets and via financial institutions. B. savers to borrowers in financial markets but not through financial institutions. C. borrowers to savers in financial markets but not through financial institutions. D. borrowers to savers through financial institutions, but not in financial markets.

savers to borrowers in financial markets and via financial institutions.

52. The most prominent of asset-backed securities is: A. shares of stock in corporations since stockholders own the assets. B. securities backed by home mortgages. C. U.S. Treasury bonds since they are backed by all public assets. D. movie box-office receipts.

securities backed by home mortgages.

75. Money markets are where trades occur for: A. stocks. B. bonds of all maturities. C. derivatives. D. short-term bonds issued by both governments and private companies.

short-term bonds issued by both governments and private companies.

57. The pool of information collected by financial markets is usually: A. only available to lenders. B. summarized in the form of a price. C. valuable and not made available until the parties pay for it. D. more than a borrower needs to make a loan.

summarized in the form of a price.

88. Financial intermediaries include each of the following, except: A. the New York Stock Exchange. B. credit unions. C. savings banks. D. commercial banks.

the New York Stock Exchange.

40. Considering the value of a financial instrument, the sooner the promised payment is made: A. the less valuable is the promise to make it since time is valuable. B. the greater the risk, therefore the promise has greater value. C. the more valuable is the promise to make it. D. the less relevant is the likelihood that the payment will be made.

the more valuable is the promise to make it.

41. Considering the value of a financial instrument, the more likely it is the payment will be made: A. the more valuable the financial instrument. B. the less valuable is the instrument because risk is lower. C. the less valuable is the financial instrument because it is highly liquid. D. the greater the uncertainty; therefore the less valuable is the financial instrument.

the more valuable the financial instrument.

63. Newly issued U.S. Treasury Securities are sold in: A. the primary financial market. B. only to the Federal Reserve who then resells them. C. the secondary market since bonds cannot be sold in the primary market. D. secondary markets but only using registered bond dealers.

the primary financial market.

The value of a financial instrument rises as: A. the size of the payment promised decreases. B. the promised payment is made sooner rather than later. C. it is less likely the payment will be made. D. the payments are made when the prospective investor needs them least.

the promised payment is made sooner rather than later.

The primary use of derivative contracts is: A. for IRA and other pension plans since they only have value well into the future. B. to shift risk among investors. C. for investors seeking a greater return by taking greater risk. D. to add to the profits an investor obtains through information asymmetry.

to shift risk among investors.

59. Commissions paid to a stock broker are an example of: A. risk transfer. B. transaction costs. C. information asymmetry. D. liquidity.

transaction costs.

79. An insurance company is an example of a financial institution that: A. transfers risk. B. acts as a broker. C. serves as a depository institution. D. sells derivative securities.

transfers risk.

2. Most individuals borrow: A. directly without the use of a financial intermediary. B. using a financial intermediary because it lowers the cost of borrowing. C. using a financial intermediary, but would save money if they financed directly. D. without using financial intermediaries, preferring credit cards.

using a financial intermediary because it lowers the cost of borrowing.

43. The fundamental characteristics influencing the value of a financial instrument include each of the following except: A. the size of the payment promised. B. when the promised payment will be made. C. where the instrument is traded. D. the likelihood of payment.

where the instrument is traded.

77. Countries that lack well-defined property laws and legal structures: A. have large secondary financial markets because the primary markets do not exist. B. will not develop as fast economically as counties with clear property rights and a formal legal system. C. will have much lower transaction costs associated with any level of lending. D. will not have any financial markets at all.

will not develop as fast economically as counties with clear property rights and a formal legal system.

91. Derivatives would include all of the following except: A. options. B. U.S. Treasury securities. C. swaps. D. futures.

U.S. Treasury securities.

90. Today the primary distinction between direct and indirect finance is in: A. direct finance the asset holder has a claim on a financial institution while in indirect finance the asset holder has a direct claim on the borrower. B. indirect finance the lender has a direct claim on the borrower while in direct finance the lender has a claim on a financial institution. C. direct finance the asset holder has a direct claim on the borrower while in indirect finance the asset holder has a claim on a financial institution. D. indirect finance the asset holder has a claim on the government while in direct finance the asset holder has a direct claim on a private sector corporation.

C. direct finance the asset holder has a direct claim on the borrower while in indirect finance the asset holder has a claim on a financial institution.

50. Which of the following financial instruments is used mainly to transfer risk? A. Asset-backed securities B. Bonds C. Options D. Stocks

Options