ECON 353 Chapter 2

If Volkswagen, a German company, sells a euro-denominated bond in London, the bond is a A) Eurobond. B) foreign bond. C) Duetsche bond. D) currency bond

Eurobond

The most liquid securities traded in the capital market are A) mortgage-backed securities. B) U.S. Treasury bonds. C) municipal bonds. D) corporate bonds.

US treasury bonds

Federal funds are A) loans made by banks to each other. B) loans made by the Federal Reserve System to banks. C) funds raised by the federal government in the bond market. D) loans made by banks to the Federal Reserve System.

loans made by banks to each other

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

financial intermediaries; more

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

financial intermediation

If Toyota (headquarters in Japan) sells a $1,000 bond in the United States, the bond is a A) Tokyo bond. B) currency bond. C) Eurobond. D) foreign bond.

foreign bond

Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as A) Eurobonds. B) foreign bonds. C) equity bonds. D) country bonds.

foreign bonds

Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power.

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

One reason for the extraordinary growth of foreign financial markets is A) decreased trade. B) slower technological innovation in foreign markets. C) increases in the pool of savings in foreign countries. D) the recent introduction of the foreign bond.

increases in the pool of savings in foreign countries

An important financial institution that assists in the initial sale of securities in the primary market is the A) brokerage house. B) investment bank. C) stock exchange. D) commercial bank.

investment bank

Every financial market has the following characteristic. A) It allows common stock to be traded. B) It allows loans to be made. C) It channels funds from lenders-savers to borrowers-spenders. D) It determines the level of interest rates

it channels funs from lender-savers to borrowers-spenders

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

liquid

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

low transaction costs

Hedge funds require large minimum investments ranging from ________ to ________ or more. A) $100; $1,000 B) $100,000; $1 million C) $$10,000; $25,000 D) $1,000; $10,000

$100,000, $1 million

________ bonds allow the holder to change them into a specific number of shares of stock at any time up to the maturity date. A) Commercial B) Municipal C) Treasury D) Convertible

Convertible

Which of the following can be described as involving direct finance? A) A corporation takes out loans from a bank. B) A corporation buys a short-term corporate security in a secondary market. C) People buy shares of common stock in the primary markets. D) People buy shares in a mutual fund.

People buy shares of common stock in the primary markets.

Which of the following instruments are traded in a capital market? A) negotiable bank CDs B) repurchase agreements C) U.S. Treasury bills D) U.S. Government agency securities

U.S. Government agency securities

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

a credit union

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

a savings and loan association

Which of the following benefits directly from any increase in the corporation's profitability? A) a bond holder B) a shareholder C) a T-bill holder D) a commercial paper holder

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

adverse selection

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets. A) adverse selection; economies of scale B) adverse selection; risk sharing C) adverse selection; moral hazard D) moral hazard; transactions costs

adverse selection, moral hazard

Well-functioning financial markets A) cause inflation. B) allow the economy to operate more efficiently. C) cause financial crises. D) eliminate the need for indirect finance.

allow the economy to operate more efficiently.

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them. A) nonnegotiable; negotiable B) negotiable; nonnegotiable C) assets; liabilities D) liabilities; assets

assets, liabilities

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

asymmetric information

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

consumer and business loans

Well functioning financial markets benefit ________ by allowing them to time their purchases more efficiently. A) lenders B) consumers C) creditors D) cashiers

consumers

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

deposits

The concept of diversification is captured by the statement A) make hay while the sun shines. B) don't put all your eggs in one basket. C) don't look a gift horse in the mouth. D) it never rains, but it pours.

don't put all your eggs in one basket

If Microsoft sells a bond in London and it is denominated in dollars, the bond is a A) British bond. B) Eurobond. C) currency bond. D) foreign bond.

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 A) Eurobonds. B) foreign bonds. C) equity bonds. D) country bonds.

eurobonds

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

eurodollars

Financial intermediaries provide customers with liquidity services. Liquidity services A) are another term for asset transformation. B) allow customers to have a cup of coffee while waiting in the lobby. C) make it easier for customers to conduct transactions. D) are a result of the asymmetric information problem.

make it easier for customers to conduct transactions.

Because these securities are more liquid and generally have smaller price fluctuations, corporations and banks use the ________ securities to earn interest on temporary surplus funds. A) stock market B) capital market C) bond market D) money market

money market

Conflicts of interest are a type of ________ problem that can happen when an institution provides multiple services. A) moral hazard B) free-riding C) discounting D) adverse selection

moral hazard

________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds. A) Credit unions B) Finance companies C) Investment banks D) Mutual funds

mutual funds

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

owning common stock

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

prevent banking panics

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

reduce transaction costs

Which of the following are NOT traded in a capital market? A) corporate bonds B) state and local government bonds C) repurchase agreements D) U.S. government agency securities

repurchase agreements

________ are short-term loans in which Treasury bills serve as collateral. A) Negotiable certificates of deposit B) Federal funds C) Repurchase agreements D) U.S. government agency securities

repurchase agreements

Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders. A) underwriters B) brokers C) residual claimants D) debtors

residual claimants

With direct finance, funds are channeled through the financial market from the ________ directly to the ________. A) spenders; investors B) investors; savers C) borrowers; savers D) savers; spenders

savers, spenders

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

secondary

The agency that restricts insider trading is the A) Office of the Comptroller of the Currency. B) Securities and Exchange Commission. C) Federal Reserve System. D) Federal Deposit Insurance Corporation

securities and exchange commission

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

separation of commercial banking from the securities industries

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

ten years or longer

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

the ability to write checks against shareholdings.

Prices of money market instruments undergo the least price fluctuations because of A) the price ceiling imposed by government regulators. B) the lack of competition in the market. C) the short terms to maturity for the securities. D) the heavy regulations in the industry.

the short terms to maturity for the securities

Government regulations to reduce the possibility of financial panic include all of the following EXCEPT A) transactions costs. B) restrictions on assets and activities. C) deposit insurance. D) disclosure

transaction costs