FIN 319 Ch 1&2

Interest rates are important to financial institutions since an interest rate ___________ the cost of acquiring funds and ___________ the income from assets.

increases; increases

Through risk-sharing activities, a financial intermediary ___________ its own risk and __________ the risks of its customers

increases; reduces

Monetary policy affects

interest rates, inflation, and business cycles

Banks providing depositors with checking accounts that enable them to pay their bills easily is known as ______________.

liquidity services

When the borrower engages in activities that make it less likely that the loan will be repaid, __________ is said to exist

moral hazard

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

primary market by and investment bank

Banks are important to the study of money and the economy because they

provide a channel for linking those who want to save with those who want to invest; have been a source of financial innovation that is expanding the alternatives available to those wanting to invest their money

A declining stock market index due to lower share prices A) reduces people's wealth and as a result may reduce their willingness to spend B) increases people's wealth and as a result may increase their willingness to spend C) decreases the amount of funds that business firms can raise by selling newly issued stock

reduces people's wealth and as a result may reduce their willingness to spend; increases people's wealth and as a result may increase their willingness to spend

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

the lender's relative lack of information about the borrower's potential returns and risks of his investment activities

Monetary policy is chiefly concerned with

the level of interest rates and the nation's money supply

The bond markets are important because

they are the markets where interest rates are determined.

The Federal Deposit Insurance Corporation (FDIC) insures each depositor at a commercial bank, savings and loan association, or mutual savings bank up to a loss of _________ per account.

$250,000

At the end of 2012, the value of debt instruments in the U.S. was around ____________ trillion, and the value of equities was around ___________ trillion.

$38; $19

Fire and casualty insurance companies are what type of intermediary?

Contractual savings institution

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as

Eurobonds

Foreign currencies that are deposited in banks outside the home country are known as

Eurocurrencies

U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as

Eurodollars

True or False: A bond denominated in euros and issued in a country that uses the euro as its currency is an example of a Eurobond.

False

True or False: A pension fund is not a contractual savings institution

False

True or False: The New York Stock Exchange is an example of a primary market.

False

True or False: The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year) are traded.

False

True or False: The process of financial intermediation is also known as direct finance.

False

The organization responsible for the conduct of monetary policy in the United States is the

Federal Reserve System

Every financial market performs the following function:

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

The money market is the market in which __________ are traded.

Short-term debt instruments

True or False: A financial intermediary's risk-sharing activities are also referred to as asset transformation.

True

The largest financial intermediaries are

banks.

Intermediaries who link buyers and sellers by buying and selling securities at stated prices (bid-ask price) are called

dealers

Typically, increasing interest rates

discourages corporate investments.

Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of

economies of scale

Stock prices since the 1980's have been

extremely volatile.

The presence of transaction costs in financial markets explains, in part, why

financial intermediaries and indirect finance play such an important role in financial markets

The main sources of financing for business, in order of importance are

financial intermediaries, issuing bonds, issuing stocks

Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a

financial panic

The DAX (Germany) and the FTSE 100 (London) are examples of ____________.

foreign stock price indexes

Compared to interest rates on long-term U.S. government bonds, interest rates on __________ fluctuate more and are lower on average.

three-month Treasury bills

Which of the following can be described as involving indirect finance: A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys commercial paper in a secondary market.

a corporation takes out loans from a bank, people buy shares in a mutual fund

Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries

act as middlemen, borrowing funds from those who have saved and lending these funds to others; help promote a more efficient and dynamic economy

Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to

adverse selection

When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, __________ is said to exist.

adverse selection

When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the

adverse selection problem

The concept of adverse selection helps to explain

which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets; why indirect finance is more important than direct finance as a source of business finance

Which of the following can be described as involving direct finance? A) A corporation's stock is traded in an over-the-counter (dealers) market. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper from the issuing corporation.

A corporation buys commercial paper issued by another corporation

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 life insurance company

Which of the following statements about the characteristics of debt and equity are true? A) They both can be long-term financial instruments. B) They both involve a claim on the issuer's income. C) They both enable a corporation to raise funds

All of the Above

Which of the following financial intermediaries are depository institutions? A) A savings and loan association B) A commercial bank C) A credit union

All of the above

Which of the following markets is sometimes organized as an over-the-counter market? A) The stock market B) The bond market C) The foreign exchange market

All of the above

Which of the following statements about financial markets and securities are true? A) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) A corporation acquires new funds only when its securities are sold in the primary market. C) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.

All of the above

Which of the following is not a regulator of part of the U.S. financial system? A) Securities and Exchange Commission B) Federal Reserve System C) Federal Deposit Insurance Corporation

All of the above are regulators

A stronger dollar benefits __________ and hurts ____________.

American consumers; American businesses

True or False: A mutual fund is not a depository institution.

True

True or False: Adverse selection refers to those with high credit risks, being most aggressive in their search for funds.

True

True or False: Currently, over 80% of the new issues in the international bond market are Eurobonds.

True

True or False: Equity represents an ownership interest in a firm and entitles the the holder to the residual cash flows.

True

The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject banks to restrictions on ___________.

branching

The government regulates financial markets for two main reasons:

to ensure soundness of the financial system and to increase the information available to investors