EC 3010 Test 1 Practice

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

A

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. A) Germany; Japan B) Germany; Great Britain C) Great Britain; Canada D) Canada; Japan

A

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

A

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

A

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.

B

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

D

An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) spreading the cost of borrowed funds over many customers. D) spreading the cost of writing a standardized contract over many borrowers.

D

In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock.

D

Long-term debt has a maturity that is __________. A) between one and ten years. B) less than a year. C) between five and ten years. D) ten years or longer.

D

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.

D

U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity. A) premium B) collateral C) default D) discount

D

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. A) bonds B) bills C) notes D) stock

D

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

D

Which of the following is not a goal of financial regulation? A) Ensuring the soundness of the financial system B) Reducing moral hazard C) Reducing adverse selection D) Ensuring that investors never suffer losses

D

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

B

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

C

The primary assets of money market mutual funds are A) stocks. B) bonds. C) money market instruments. D) deposits.

C

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

C

The primary liabilities of a credit union are A) bonds. B) mortgages. C) deposits. D) commercial loans.

C

A corporation acquires new funds only when its securities are sold in the A) primary market by an investment bank. B) primary market by a stock exchange broker. C) secondary market by a securities dealer. D) secondary market by a commercial bank.

A

Adverse selection is a problem associated with equity and debt contracts arising from A) the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities. B) the lenderʹs inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrowerʹs lack of incentive to seek a loan for highly risky investments. D) the borrowerʹs lack of good options for obtaining funds.

A

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

A

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.

A

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.

A

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.

A

Economies of scale enable financial institutions to A) reduce transactions costs. B) avoid the asymmetric information problem. C) avoid adverse selection problems. D) reduce moral hazard.

A

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

A

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

A

Which of the following statements about the characteristics of debt and equities is true? A) They can both be long-term financial instruments. B) Bond holders are residual claimants. C) The income from bonds is typically more variable than that from equities. D) Bonds pay dividends.

A

Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems.

Adverse selection is the asymmetric information problem that exists before the transaction occurs. For lenders, it is the difficulty in judging a good credit risk from a bad credit risk. Moral hazard is the asymmetric information problem that exists after the transaction occurs. For lenders, it is the difficulty in making sure the borrower uses the funds appropriately. Financial intermediaries can reduce adverse selection through intensive screening and can reduce moral hazard by monitoring the borrower.

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

B

An important feature of money market mutual fund shares is A) deposit insurance. B) the ability to write checks against shareholdings. C) the ability to borrow against shareholdings. D) claims on shares of corporate stock.

B

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.

B

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

B

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 A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.

B

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.

B

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.

B

The money market instruments that were created to assist in carrying out international trade are called ________. A) negotiable CDs. B) bankerʹs acceptances. C) repurchase agreements. D) federal funds.

B

The primary assets of a mutual savings bank are A) bonds. B) mortgages. C) commercial loans. D) deposits.

B

The primary assets of a pension fund are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages.

B

The primary liabilities of depository institutions are A) premiums from policies. B) shares. C) deposits. D) bonds.

C

Asymmetric information is a universal problem. This would suggest that financial regulations A) in industrial countries are an unqualified failure. B) differ significantly around the world. C) in industrialized nations are similar. D) are unnecessary.

C

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

C

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

C

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

C

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.

C

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 ________, and it creates the ________ problem. A) adverse selection; moral hazard B) asymmetric information; risk sharing C) asymmetric information; adverse selection D) adverse selection; risk sharing

C

Which of the following are long-term financial instruments? A) A negotiable certificate of deposit. B) A bankerʹs acceptance. C) A U.S. Treasury bond. D) A U.S. Treasury bill.

C

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.

C

Which of the following is not a contractual savings institution? A) A life insurance company B) A pension fund C) A savings and loan association D) A fire and casualty insurance company

C

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

C

How do regulators help to ensure the soundness of financial intermediaries?

Regulators restrict who can set up a financial intermediary, conduct regular examinations, restrict assets, and provide insurance to help ensure the soundness of financial intermediaries.

Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market?

The existence of the secondary market makes their stock more liquid and the price in the secondary market sets the price that the corporation would receive if they choose to sell more stock in the primary market.

In the early 1980s, a particular bank in Oklahoma developed a reputation of readily providing loans to borrowers for the purpose of exploring for oil deposits. Many of these loans were never repaid, because this bank failed to address the A) adverse selection problem. B) regulatory avoidance problem. C) free-rider problem. D) risk-sharing problem.

A

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

A

Reducing risk through the purchase of assets whose returns do not always move together is A) diversification. B) intermediation. C) intervention. D) discounting.

A

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

A

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

A

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.

A

The purpose of the disclosure requirements of the Securities and Exchange Commission is to A) increase the information available to investors. B) prevent bank panics. C) improve monetary control. D) protect investors against financial losses.

A

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

A

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) Bankerʹs acceptances.

A

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

A

Which of the following is a contractual savings institution? A) A life insurance company B) A credit union C) A savings and loan association D) A mutual fund

A

Which of the following statements about financial markets and securities is true? A) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) As a corporation gets a share of the brokerʹs commission, a corporation acquires new funds whenever its securities are sold. C) Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid. D) Because of their short-terms to maturity, the prices of money market instruments tend to fluctuate wildly.

A

A corporation acquires new funds only when its securities are sold in the A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank.

B

A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper. B) a negotiable certificate of deposit. C) a bankerʹ acceptance. D) federal funds.

B

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

B

A professional baseball player may be contractually restricted from skiing. The team owner includes this clause in the playerʹs contract to protect against A) risk sharing. B) moral hazard. C) adverse selection. D) regulatory circumvention.

B

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

B

The primary purpose of deposit insurance is to A) improve the flow of information to investors. B) prevent banking panics. C) protect bank shareholders against losses. D) protect bank employees from unemployment.

B

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

B

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.

B

U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________. A) defeat B) default C) desertion D) demarkation

B

U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________. A) Atlantic dollars B) Eurodollars C) foreign dollars D) outside dollars

B

Which of the following are investment intermediaries? A) Life insurance companies B) Mutual funds C) Pension funds D) State and local government retirement funds

B

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

B

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

B

Which of the following instruments are traded in a money market? A) Bank commercial loans. B) Bankerʹs acceptances. C) State and local government bonds. D) Residential mortgages.

B

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.

B

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

B

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.

B

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

B

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

C

Forty or so dealers establish a ʺmarketʺ in these securities by standing ready to buy and sell them. A) Secondary stocks B) Surplus stocks C) U.S. government bonds D) Common stocks

C

In the United States, loans from ________ are far ________ important for corporate finance than are securities markets. A) government agencies; more B) government agencies; less C) financial intermediaries; more D) financial intermediaries; less

C

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

C

Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from A) government agencies. B) equities markets. C) financial intermediaries. D) bond markets.

C

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

C

An important restriction on bank activities that was repealed in 1999 was A) the prohibition of the payment of interest on checking deposits. B) restrictions on credit terms. C) minimum down payments on loans to purchase securities. D) separation of commercial banking from the securities industries.

D

Contractual savings institutions include A) mutual savings banks. B) money market mutual funds. C) commercial banks. D) life insurance companies.

D

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.

D

One reason for the extraordinary growth of foreign financial markets is A) decreased trade. B) lack of savings in foreign countries. C) the recent introduction of the foreign bond. D) deregulation of foreign financial markets.

D

The primary assets of a savings and loan association are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages.

D

Which of the following statements about financial markets and securities is true? A) A bond is a long-term security that promises to make periodic payments called dividends to the firmʹs residual claimants. B) A debt instrument is intermediate term if its maturity is less than one year. C) A debt instrument is intermediate term if its maturity is ten years or longer. D) The maturity of a debt instrument is the number of years (term) to that instrumentʹs expiration date.

D