Ch 2
55. T F "Direct finance" would occur in both of these situations—you borrow $200 from a friend—a corporation buys a short-term security issued by another corporation.
T
56. T F "Indirect finance" would occur in both of these situations—a corporation takes out a loan from a bank—people buy shares in a mutual fund.
T
57. T F Securities include corporate bonds, shares of Boeing stock, and Treasury bills.
T
61. T F The New York Stock Exchange is an example of a secondary market.
T
62. T F The higher a security's price in the secondary market, the more funds a firm can raise by selling securities in the primary market.
T
64. T F Boeing Co. acquires new funds when its securities are sold in the primary market by an investment bank.
T
66. T F Economies of scale allow financial intermediaries to decrease transactions costs.
T
67. T F A potential borrower generally has better information about the potential returns and risk of the investment project he/she plans to undertake than does the lender. This inequality of information is known as asymmetric information.
T
58. T F Debt is a claim on the issuer's assets while equity is a claim on the issuer's income.
F
59. T F Equities are debt securities that promise to make payments for a specified period of time. A bond is a debt security that makes periodic payments called dividends and are considered to be long-term securities because they have no maturity date.
F
60. T F Securities are liabilities for the person who purchases them, but are assets for the individual or firm that issue them.
F
63. T F A commercial bank assists in the initial sale of securities in the primary market.
F
65. T F Financial intermediaries reduce costs by spreading them over a large number of customers, thus taking advantage of transaction costs.
F
68. T F The problem created by asymmetric information before the transaction occurs is called moral hazard; the problem created after the transaction is called adverse selection.
F
71. T F Depository institutions include commercial banks, savings and loan associations, credit unions, and finance companies.
F
74. T F The so-called "thrift institutions" include commercial banks, pension funds, and fire/casualty insurance companies.
F
75. T F Banker's acceptances, U.S. Treasury bills, and commercial paper are traded in the capital market.
F
69. T F 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/her investment activities.
T
70. T F An example of moral hazard is when General Electric Inc. uses the finds raised from selling new shares of stock to pay for ski vacations for all of its employees.
T
72. T F A life insurance company is an example of a contractual savings institution.
T
73. T F A mutual fund is an example of an investment intermediary.
T
3. Which of the following is a short-term financial instrument? a U.S. Treasury bill. b. Share of IBM stock. c. New York City bond with a maturity of 2 years. d. Residential mortgage.
a U.S. Treasury bill.
51. When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation. a) bond; stock b) stock; bond c) stock; debt security d) bond; debt security
a) bond; stock
44. Contractual savings institutions include all of the following except a. Credit unions b. Pension funds, government retirement funds c. fire and casualty insurance companies d. life insurance companies
a. Credit unions
37. If you were going to get a loan to purchase a new car, which financial intermediary would you use? a. a credit union b. an investment bank c. a pension fund d. a mutual fund
a. a credit union
29. Suppose you buy a newly issued 10-year savings bond from the U.S. Treasury. This is an example of a _____ instrument bought in the _____. a. capital market, primary market b. capital market, secondary market c. money market, primary market d money market, secondary market
a. capital market, primary market
5. Suppose you wish to buy a clothes washer/dryer from ABC Appliance. Because you do not have $1,000 cash, you fill out a loan application with Miller Financial that allows you to pay off the washer/dryer in 30 monthly installments. Miller Financial is an example of a (an): a. consumer finance company b. savings and loan association c. brokerage company d. investment bank
a. consumer finance company
25. Suppose that Jim Miller receives a business loan to purchase equipment for his manufacturing company. After he receives the loan, he decides to go on a vacation with the money. This is an example of a. moral hazard b. adverse selection c. direct finance d. direct transformation
a. moral hazard
27. Investment banks facilitate the sale of securities in the a. primary market b. secondary market c. retail market d. wholesale market
a. primary market
20. General Motors Acceptance Corporation (GMAC) and the Ford Motor Credit Co. purchase the installment contracts of auto dealers. This an example of a a. sales finance company b. consumer finance company c. real estate finance company d. public finance company
a. sales finance company
34. U.S. government agency securities include long-term bonds issued by all of the following except a. the U.S. Treasury b. the Government National Mortgage Association (Ginnie Mae) c. the Federal Home Loan Mortgage Corporation (Freddie Mae) d. the Federal National Mortgage association (Fannie Mae)
a. the U.S. Treasury
2. Investment banks are characterized by all of the following except: a. they help businesses to raise capital in secondary markets b. they advise businesses on the best way to raise capital: issuing stocks or bonds c. they earn income by underwriting new issues of securities d. by underwriting, investment banks decrease the risk encountered by the issuing firm
a. they help businesses to raise capital in secondary markets
53. Financial institutions that accept deposits and make loans are called a) exchanges. b) banks. c) over-the-counter markets. d) finance companies.
b) banks.
9. Which of the following is a depository institution? a. Life insurance company b. Credit union c. Pension fund d. Finance company
b. Credit union
19. Life insurance policies typically contain a clause stating that the company will not be required to pay death benefits in the event that the insured commits suicide. Life insurance companies include such clauses in insurance contracts to protect against the ________ problem a. time value of money b. adverse selection c. restrictive covenant d. defined contribution
b. adverse selection
16. U. S. Treasury bills a. are issued in three-, six-, nine-, and 24-month maturities. b. are the most liquid and safest of the money market instruments. c. are bought and sold on the capital market. d. provide dividend income to the purchaser.
b. are the most liquid and safest of the money market instruments.
15. Typically, lenders have inferior information relative to borrowers about the potential returns and risks associated with an investment project. This difference in information is called a. symmetric information b. asymmetric information c. adverse selection d. moral hazard
b. asymmetric information
28. Asymmetric inflation in financial markets exists because a. lenders know more about the likelihood of the repayment of a loan than do borrowers b. borrowers know more about the likelihood of the repayment of a loan than do lenders c. both borrowers and lenders have the same information about the likelihood of the repayment of a loan d.neither borrowers nor lenders have any information about the likelihood of the repayment of a loan
b. borrowers know more about the likelihood of the repayment of a loan than do lenders
30. In terms of asset value, _____ represent the largest of the financial intermediaries? a. mutual funds b. commercial banks c. pension funds d. mutual savings banks
b. commercial banks
21. Lisa, who is unable to get a bank loan, wants to purchase a new appliance for her house. What type of finance company will she deal with in getting the loan to finance the purchase? a. sales finance company b. consumer finance company c. business finance company d. real estate finance company
b. consumer finance company
35. In the _____, firms issue stocks which are claims to share the net income and assets of the firm. a. bond market b. equity market c. debt market d. credit market
b. equity market
36. In the _____, new issues of a security are sold, often to investment banks that underwrite the securities. a. primary market b. secondary market c. foreign exchange market d. spot market
b. equity market
38. When U.S. Bank borrows from Cindy Young to lend to Steve Brown, we have witnessed the occurrence of a. direct finance b. indirect finance c. moral hazard d. investment banking
b. indirect finance
14. Contractual savings institutions include: a. commercial banks b. life insurance companies and pension funds. c. finance companies and mutual funds. d. savings and loan associations and credit unions.
b. life insurance companies and pension funds.
17. Federal funds are loans made by the a. Federal Reserve System to commercial banks. b. one commercial bank to another. c. the U.S. Treasury to the Federal Reserve. d. the Federal Reserve to the U. S. Treasury.
b. one commercial bank to another.
40. Mutual funds such as Vanguard or Fidelity a. receive premiums from policies and buy corporate stock and bonds b. sell shares and use the proceeds to purchase portfolios of bonds and stocks c. collect deposits from investors in the fund and lend them for mortgages d. are organized around a common bond, such as religious affiliation or employment
b. sell shares and use the proceeds to purchase portfolios of bonds and stocks
6. When an investment bank ______, it guarantees a price for the securities that the issuing firm is selling. The bank then attempts to sell the issue at a higher price and capture the difference as profit. a. engages in price discrimination b. underwrites c. grant securitized real estate loans d. collateralizes an investment
b. underwrites
52. Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as a) barter. b) redistribution. c) financial intermediation. d) taxation.
c) financial intermediation.
48. Financial markets promote greater economic efficiency by channeling funds from ________ to ________. a) investors; savers b) borrowers; savers c) savers; borrowers d) savers; lenders
c) savers; borrowers
50. The bond markets are important because they are a) easily the most widely followed financial markets in the United States. b) the markets where foreign exchange rates are determined. c) the markets where interest rates are determined. d) the markets where all borrowers get their funds
c) the markets where interest rates are determined.
45. Which regulatory agency charters and examines the books of federally chartered commercial banks, such as Bank of America or U.S. Bank? a. Federal Deposit Insurance Corporation b. Federal Reserve System c. Office of the Comptroller of the Currency d. Commodities Futures Trading Commission
c. Office of the Comptroller of the Currency
33. Concerning securities issued by the U.S. Treasury, the security with the longest maturity is the a. Treasury bill b. Treasury note c. Treasury bond d. Treasury loan
c. Treasury bond
1. Which of the following cannot be described as indirect finance? a. You take out a mortgage from your bank. b. An insurance company lends money to General Motors Corporation. c. You borrow $1000 from your best friend. d. You buy shares in a mutual fund. e. None of the above.
c. You borrow $1000 from your best friend.
23. Prior to making a loan, banks screen their prospective loan customers to avoid the problem of a. moral hazard b. diversification c. adverse selection d. direct finance
c. adverse selection
11. The primary liabilities of a savings and loan association are a. bonds. b. mortgages. c. deposits. d. commercial paper.
c. deposits.
32. ABC Bank know how to find a good lawyer to produce an airtight loan contract, and this contract can be used over and over again in its loan transactions, thus lowering the legal cost per transaction. Thus the bank benefits from a. economies of scope b. diseconomies of scope c. economies of scale d. diseconomies of scale
c. economies of scale
47. Bank of America serves both as a commercial bank (making loans to business customers) and as an investment bank (underwriting securities of business customers). When making a business loan, BOA can evaluate how good a credit risk the firm is, which then helps the bank decide whether it would be easy to underwrite the securities of this firm. This is known as a. economies of scale b. diseconomies of scale c. economies of scope d. diseconomies of scope
c. economies of scope
46. The so-called "thrift institutions" include a. credit unions, mutual funds, and money market mutual funds b. commercial banks, life insurance companies, and mutual savings banks c. savings and loan associations, credit unions, and mutual savings banks d. consumer and business finance companies, commercial banks, and mutual funds
c. savings and loan associations, credit unions, and mutual savings banks
54. Which of the following is NOT a financial institution? a) a life insurance company b) a pension fund c) a credit union d) a business college
d) a business college
49. Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called a) commodity markets. b) fund-available markets. c) derivative exchange markets. d) financial markets
d) financial markets
7. Which of the following statements about the characteristics of bonds is true? a. Bonds represent ownership/shares of a firm. b. Bond holders are a residual claimant on a firm's earnings. c. The income from bonds is typically more variable than that from equities (stock). d. Bonds pay interest while equities pay dividends.
d. Bonds pay interest while equities pay dividends.
41. The _____ protects depositors from failures of banks by guaranteeing repayment of deposits up to $250,000 per depositor at a bank a. Federal Reserve System b. Social Security System c. Securities and Exchange Commission d. Federal Deposit Insurance Corporation
d. Federal Deposit Insurance Corporation
8. Which of the following is traded in a money market? a. U.S. Treasury bonds b. Mortgages c. Common stocks d. Federal funds
d. Federal funds
42. ______ are short-term loans (usually with a maturity of less than 2 weeks) for which Treasury bills serve as collateral, an asset that the lender receives if the borrower does not pay back the loan. a. Negotiable bank certificates of deposit b. Commercial paper c. Federal funds d. Repurchase agreements (repos)
d. Repurchase agreements (repos)
43. _____ is/are a financial instrument of the capital market a. U.S. Treasury bill b. Commercial paper c. Federal funds d. State and local government bonds
d. State and local government bonds
12. Savings and loan associations are regulated by the a. Office of the Comptroller of the Currency. b. Federal Home Loan Bank System and FSLIC. c. Securities and Exchange Commission. d. The Office of Thrift Supervision.
d. The Office of Thrift Supervision.
26. Financial intermediaries a. solve some of the problems associated with asymmetric information b. decrease transaction costs for borrowers and lenders c. allow borrowers and lenders to engage in risk sharing d. all of the above
d. all of the above
31. Which of the following results in the movement of funds from lender/savers to borrowers/spenders? a. bond markets b. commercial banks c. credit unions d. all of the above
d. all of the above
24. When borrowers have superior information about the potential returns and risks associated with an investment project, it results in the problem referred to as a. direct finance b. indirect finance c. financial intermediation d. asymmetric information
d. asymmetric information
13. Financial intermediaries promote efficiency and thereby increase people's wealth a. by reducing the transaction cost of linking together lender and borrowers. b. to the extent that they help solve problems created by adverse selection and moral hazard. c. by providing additional jobs. d. because of only (a) and (b) of the above.
d. because of only (a) and (b) of the above.
39. All of the following are depository institutions except a. credit unions b. savings and loan associations c. commercial banks d. finance companies
d. finance companies
4. The majority of funds that businesses raise comes from: a. issuing bonds b. issuring commercial paper c. loans from financial institutions d. issuing stock
d. issuing stock
10. The primary assets of a savings and loan association are a. money market instruments. b. corporate bonds and stock. c. consumer and business loans. d. mortgages.
d. mortgages.
22. When an investment bank purchases a new issue of securities in the hopes of making a profit, it is said to ________ the issue. a. pawn b. backstock c. syndicate d. underwrite
d. underwrite
18. All of the following are financial intermediaries except a. commercial banks b. insurance companies c. pension funds d. mutual funds e. none of the above
e. none of the above