Money and Banking Module 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 instruments, preferring credit cards

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

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

c. an underlying instrument

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

c. assets of the lenders

Investment banks: a. receive deposits in checking and savings accounts and borrow from other entities. The funds they receive are used to make loans and purchase government securities. b. receive premium payments, which they invest in securities or other assets to earn income until claims are paid. c. charge fees for advising clients on mergers and acquisitions and for preparing new stock and bond issues for the market. They may use funds to participate in some of the initial public offerings they distribute. d. receive regular contributions from firms, invests these funds long-term assets, and pays benefits to firms' retirees.

c. charge fees for advising clients on mergers and acquisitions and for preparing new stock and bond issues for the market. They may use funds to participate in some of the initial public offerings they distribute.

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

c. ensure that resources are allocated efficienctly

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

c. facilitate production, employment, and consumption

equity markets are markets: a. of U.S. Treasury bonds b. for AAA rated bonds c. for stocks d. for either stocks or bonds

c. for stocks

a derivative instrument: a. comes into existence after the underlying instrument is in default b. is a low-risk financial instrument used highly by 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

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

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

c. information asymmetry

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

c. more valuable the instrument

Financial institutions: a. summarize essential information about the borrower b. aggregate information from many sources and communicate it widely c. produce information to screen and monitor borrowers

c. produce information to screen and monitor borrowers

financial instruments used to transfer risk would include all of the following, except: a. an insurance contract b. a futures contract c. options d. a bank loan

d. a bank loan

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

d. are networks of security dealers linked electronically

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

d. high real interest rates

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

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

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 and few large borrowers d. many small savers and provide it to many borrowers

d. many small savers and provide it to many borrowers

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

d. money market

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

Pension funds: a. receive deposits in checking and savings accounts and borrow from other entities. The funds they receive are used to make loans and purchase government securities. b. receive premium payments, which they invest in securities or other assets to earn income until claims are paid. c. charge fees for advising clients on mergers and acquisitions and for preparing new stock and bond issues for the market. They may use funds to participate in some of the initial public offerings they distribute. d. receive regular contributions from firms, invests these funds long-term assets, and pays benefits to firms' retirees.

d. receive regular contributions from firms, invests these funds long-term assets, and pays benefits to firms' retirees.

everything else being equal, which would be more valuable to you -- a derivative instrument whose value is derived from an underlying instrument with a very volatile price history or one derived from an underlying instrument with a very stable price history? The derivative based on the more (stable / volatile) underlying asset should have (equal / less / more) value to you

The derivative based on the more volatile underlying asset should have more value to you.

Has the distinction between direct and indirect forms of finance become more or less important in recent times? Why? a. Less important. The increasing sophistication of the financial system has led to greater institutionalization, so that even direct finance transactions usually involve a financial institution to some extent. b. More important. The increasing sophistication of the financial system has led to greater institutionalization, so that even direct finance transactions usually involve a financial institution to some extent. c. Less important. The increasing sophistication of the financial system has led to less institutionalization, so that even direct finance transactions usually involve a financial institution to some extent. d. More important. The decreasing sophistication of the financial system has led to greater institutionalization, so that even direct finance transactions usually involve a financial institution to some extent.

a. Less important. The increasing sophistication of the financial system has led to greater institutionalization, so that even direct finance transactions usually involve a financial institution to some extent.

Splitland is a developing economy with two distinct regions. The northern region has great investment opportunities, but the people who live there need to consume all of their income to survive. Those living in the south are better off than their northern counterparts and save a significant portion of their income. The southern region, however, has few profitable investment opportunities and so most of the savings remain in shoeboxes and under mattresses. How could the development of the financial sector benefit both regions and promote economic growth in Splitland? a. The presence of a financial intermediary would reduce the information costs that may have prevented the southerners from lending directly to the northerners in the past. This would promote economic growth. b. The presence of a financial intermediary would increase the information costs that may have prevented the southerners from lending directly to the northerners in the past. This would promote economic growth. c. A more developed financial sector would lead to a more efficient allocation of resources, resulting in higher economic growth in the northern region. The financial sector cannot yield any benefit to the southern region, however. d. A more developed financial sector would lead to a more efficient allocation of resources, resulting in higher economic growth in the southern region. The financial sector cannot yield any benefit to the northern region, however.

a. The presence of a financial intermediary would reduce the information costs that may have prevented the southerners from lending directly to the northerners in the past. This would promote economic growth.

financial instruments used primarily to transfer risk would not include: a. a bank loan b. options c. an insurance policy d. home mortgages

a. a bank loan

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. a car insurance policy

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. a derivative instrument

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

a. allow for the transfer of risk

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

a. borrowers having more information than the lenders

Which of the following are depository institutions? a. credit unions b. mutual funds c. pension funds d. insurance companies

a. credit unions

how might broader access to finance benefit a country where access was previously very limited? select all that apply. a. lowering transaction costs b. facilitating the channeling of savings to the most productive uses c. enabling greater specialization d. providing brokerage services e. transitioning loans to savings

a. lowering transaction costs b. facilitating the channeling of savings to the most productive uses c. enabling greater specialization

Commercial banks: a. receive deposits in checking and savings accounts and borrow from other entities. The funds they receive are used to make loans and purchase government securities. b. receive premium payments, which they invest in securities or other assets to earn income until claims are paid. c. charge fees for advising clients on mergers and acquisitions and for preparing new stock and bond issues for the market. They may use funds to participate in some of the initial public offerings they distribute. d. receive regular contributions from firms, invests these funds long-term assets, and pays benefits to firms' retirees.

a. receive deposits in checking and savings accounts and borrow from other entities. The funds they receive are used to make loans and purchase government securities.

Financial instruments: a. summarize essential information about the borrower b. aggregate information from many sources and communicate it widely c. produce information to screen and monitor borrowers

a. summarize essential information about the borrower

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

a. transfers risk

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

b. a bank is a financial intermediary

Financial markets: a. summarize essential information about the borrower b. aggregate information from many sources and communicate it widely c. produce information to screen and monitor borrowers

b. aggregate information from many sources and communicate it widely

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

b. an example of a centralized exchange

secondary financial markets: a. are financial markets for all financial instruments rates 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

b. are financial markets where existing securities are bought and sold

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

b. asset to Sue and a liability to the bank

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

b. can lower the information asymmetry involved with borrowing/lending

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

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

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.

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

Insurance companies: a. receive deposits in checking and savings accounts and borrow from other entities. The funds they receive are used to make loans and purchase government securities. b. receive premium payments, which they invest in securities or other assets to earn income until claims are paid. c. charge fees for advising clients on mergers and acquisitions and for preparing new stock and bond issues for the market. They may use funds to participate in some of the initial public offerings they distribute. d. receive regular contributions from firms, invests these funds long-term assets, and pays benefits to firms' retirees.

b. receive premium payments, which they invest in securities or other assets to earn income until claims are paid.

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

b. the promised payment is made sooner rather than later