Sample Exam 1

1. Secondary markets help support primary markets because secondary markets I. Offer primary market purchasers liquidity for their holdings II. Update the price or value of the primary market claims III. Reduce the cost of trading the primary market claims A) I, II, and III B) I only C) II only D) II and III only E) I and II only

A) I, II, and III

3. A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely A) conduct an IPO with the assistance of an investment banker B) engage in a secondary market sale of equity C) conduct a private placement to a large number of potential buyers D) place an ad in the Wall Street Journal soliciting retail suppliers of funds E) none of the above

A) conduct an IPO with the assistance of an investment banker

7. Insolvency risk at a financial intermediary (FI) is the risk A) incurred by an FI when its investments in technology do not result in cost savings or revenue growth B) that promised cash flows from loans and securities held by FIs may not be paid in full C) incurred by an FI when the maturities of its assets and liabilities do not match D) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets E) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices

D) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets

6. Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period. True or False

False

4. Financial intermediaries such as banks typically have assets that are riskier than their liabilities. True or False

True

5. Money markets are the markets for securities with an original maturity of 1 year or less. True or False

True

9. Primary markets are markets where users of funds raise cash by selling securities to funds' suppliers. True or False

True

2. Depository institutions include: A) banks B) thrifts C) finance companies D) all of the above E) A and B only

E) A and B only

8. The Securities Exchange Commission (SEC) does not A) attempt to reduce excessive price fluctuations B) require exchanges to monitor trading to prevent insider trading C) monitor the major securities exchanges D) decide whether a firm making a public issue has provided enough information for investors to decide whether the issue is fairly priced E) decide whether a public issue is fairly priced

E) decide whether a public issue is fairly priced

10. Liquidity risk at a financial intermediary (FI) is the risk A) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets B) that promised cash flows from loans and securities held by FIs may not be paid in full C) incurred by an FI when its investments in technology do not result in cost savings or revenue growth D) incurred by an FI when the maturities of its assets and liabilities do not match E) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices

E) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices