ECON 330 EXAM 1 CHAPTER 2

________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.

contractual savings

The process of indirect finance using financial intermediaries is called

financial intermediation

The British Bankerʹs Association average of interbank rates for dollar deposits in the London market is called the

libor rate

A breakdown of financial markets can result in

political instability

The primary purpose of deposit insurance is to

prevent banking panics

Economies of scale enable financial institutions to

reduce transaction costs

Which of the following are NOT traded in a capital market?

repurchase agreements

________ are short-term loans in which Treasury bills serve as collateral.

repurchase agreements

Which of the following instruments is NOT traded in a money market?

residential mortgages

Adverse selection is a problem associated with equity and debt contracts arising from

the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities.

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

asymmetric information

________ work in the secondary markets matching buyers with sellers of securities.

brokers

Equity and debt instruments with maturities greater than one year are called ________ market instruments.

capital

Equity instruments are traded in the ________ market.

capital

Money market mutual fund shares function like

checking accounts that pay interest

A short-term debt instrument issued by well-known corporations is called

commercial paper

The primary assets of a finance company are

consumer and business loans

The primary assets of a pension fund are

corporate bonds and stock

Which of the following are NOT contractual savings institutions?

credit unions AND a savings and loan association

U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________.

default

Financial institutions that accept deposits and make loans are called ________ institutions.

depository

The primary liabilities of a commercial bank are

deposits

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.

direct

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.

discount

If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________.

eurobond

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

eurobonds

U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________.

eurodollars

When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n)

exchange

Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from

financial intermediaries

In the United States, loans from ________ are far ________ important for corporate finance than are securities markets.

financial intermediaries, more

Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely.

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

foreign bonds

Financial markets have the basic function of

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

Secondary markets make financial instruments more

liquid

Financial intermediaries provide customers with liquidity services. Liquidity services

make it easier for customers to conduct transactions.

A financial market in which only short-term debt instruments are traded is called the ________ market.

money

The primary assets of money market mutual funds are

money market instruments

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.

moral hazard

The higher a securityʹs price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.

more, primary

Bonds issued by state and local governments are called ________ bonds.

municipal

Which of the following are investment intermediaries?

mutual funds

________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.

mutual funds

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

negotiable certificate of deposit

In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from

owning common stock

A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank

Well-functioning financial markets

produce an efficient allocation of capital

Equity holders are a corporationʹs ________. That means the corporation must pay all of its debt holders before it pays its equity holders.

residual claimants

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as

risk sharing

The process of asset transformation refers to the conversion of

risky assets into safer assets

A financial market in which previously issued securities can be resold is called a ________ market.

secondary

If the maturity of a debt instrument is less than one year, the debt is called ________.

short term

An example of economies of scale in the provision of financial services is

spreading the cost of writing a standardized contract over many borrowers.

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.

stock

An important feature of money market mutual fund shares is

the ability to write checks against shareholdings

The time and money spent in carrying out financial transactions are called

transaction costs

When an investment bank ________ securities, it guarantees a price for a corporationʹs securities and then sells them to the public.

underwrites

An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called

underwriting

Which of the following can be described as direct finance?

you borrow 2500 from a friend

Which of the following can be described as involving indirect finance?

you make a deposit at a bank OR you buy shares in a mutual fund

Which of the following is an example of an intermediate-term debt?

a sixty month car loan

The primary assets of credit unions are

consumer loans

Long-term debt has a maturity that is ________.

10 years or longer

Which of the following is not a secondary market?

IPO market

Every financial market has the following characteristic:

It channels funds from lenders-savers to borrowers-spenders.

Which of the following statements about financial markets and securities is true?

The maturity of a debt instrument is the number of years (term) to that instrumentʹs expiration date. AND 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.

Which of the following statements about the characteristics of debt and equities is true?

They can both be long-term financial instruments.

Which of the following statements about the characteristics of debt and equity is false?

They can both be short-term financial instruments.

Equity of U.S. companies can be purchased by

U.S. citizens and foreign citizens

Which of the following instruments are traded in a capital market?

U.S. government agency securities AND corporate bonds

Forty or so dealers establish a ʺmarketʺ in these securities by standing ready to buy and sell them.

U.S. government bonds

Which of the following instruments are traded in a money market?

U.S. treasury bills

Which of the following is a long-term financial instrument?

a U.S. treasury bond

An investment bank helps ________ issue securities.

a corporation

Which of the following can be described as involving direct finance?

a corporation issues new shares of stock OR people buy shares of common stock in the primary markets

Which of the following is a depository institution?

a credit union AND a mutual savings bank

An investment intermediary that lends funds to consumers is

a finance company

Which of the following financial intermediaries is NOT a depository institution?

a finance company

Which of the following is a contractual savings institution?

a life insurance company

Which of the following are short-term financial instruments?

a repurchase agreement

Which of the following benefit directly from any increase in the corporationʹs profitability?

a shareholder

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

adverse selection

Reducing risk through the purchase of assets whose returns do not always move together is

diversification

The concept of diversification is captured by the statement

don't put all your eggs in one basket

The principal lender-savers are

households

One reason for the extraordinary growth of foreign financial markets is

increase in the pool of savings in foreign countries AND the deregulation of foreign financial markets

The purpose of the disclosure requirements of the Securities and Exchange Commission is to

increase the information available to investors

An important financial institution that assists in the initial sale of securities in the primary market is the

investment bank

Federal funds are

loans made by banks to each other

Risk sharing is profitable for financial institutions due to

low transaction costs

An important function of secondary markets is to

make it easier to sell financial instruments to raise funds.

With direct finance funds are channeled through the financial market from the ________ directly to the ________.

savers, spenders

Thrift institutions include

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

Prices of money market instruments undergo the least price fluctuations because of

the short terms to maturity for the securities

Financial markets improve economic welfare because

they allow consumers to time their purchase better AND they channel funds from savers to investors

Government regulations to reduce the possibility of financial panic include all of the following except

transaction costs

A goal of the Securities and Exchange Commission is to reduce problems arising from

asymmetric information

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

adverse selection, moral hazard

Collateral is ________ the lender receives if the borrower does not pay back the loan.

an asset

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

assets, liabilities