Chapter 2

A liquid asset is A) an asset that can easily and quickly be sold to raise cash. B) a share of an ocean resort. C) difficult to resell. D) always sold in an over-the-counter market.

A

Which of the following is an example of an intermediate-term debt? A) A thirty-year mortgage. B) A sixty-month car loan. C) A six month loan from a finance company. D) A Treasury bond.

B

An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) spreading the cost of borrowed funds over many customers. D) spreading the cost of writing a standardized contract over many borrowers.

D

The primary assets of a pension fund are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages.

B

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

B

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

D

Contractual savings institutions include A) mutual savings banks. B) money market mutual funds. C) commercial banks. D) life insurance companies.

D

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

A

The primary assets of money market mutual funds are A) stocks. B) bonds. C) money market instruments. D) deposits.

C

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

C

Which of the following is not a secondary market? A) foreign exchange market B) futures market C) options market D) IPO market

D

Which of the following statements about the characteristics of debt and equities is true? A) They can both be long-term financial instruments. B) Bond holders are residual claimants. C) The income from bonds is typically more variable than that from equities. D) Bonds pay dividends.

A

A corporation acquires new funds only when its securities are sold in the A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank.

B

The principal lender-savers are A) governments. B) businesses. C) households. D) foreigners.

C

A breakdown of financial markets can result in A) financial stability. B) rapid economic growth. C) political instability. D) stable prices.

C

Banks can lower the cost of information production by applying one information resource to many different services. This process is called A) economies of scale. B) asset transformation. C) economies of scope. D) asymmetric information.

C

Bonds issued by state and local governments are called ________ bonds. A) corporate B) Treasury C) municipal D) commercial

C

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

C

Equity instruments are traded in the ________ market. A) money B) bond C) capital D) commodities

C

Equity of U.S. companies can be purchased by A) U.S. citizens only. B) foreign citizens only. C) U.S. citizens and foreign citizens. D) U.S. mutual funds only.

C

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

C

________ work in the secondary markets matching buyers with sellers of securities. A) Dealers B) Underwriters C) Brokers D) Claimants

C

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is A) 25%. B) 12.5%. C) 10%. D) 5%.

D

An investment bank helps ________ issue securities. A) a corporation B) the United States government C) the SEC D) foreign governments

A

Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the borrower's lack of good options for obtaining funds.

A

Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely. A) financial intermediaries; securities markets B) financial intermediaries; government agencies C) government agencies; financial intermediaries D) government agencies; securities markets

A

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

A

An important function of secondary markets is to A) make it easier to sell financial instruments to raise funds. B) raise funds for corporations through the sale of securities. C) make it easier for governments to raise taxes. D) create a market for newly constructed houses.

A

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

A

Equity and debt instruments with maturities greater than one year are called ________ market instruments. A) capital B) money C) federal D) benchmark

A

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.

A

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

A

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

A

When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public. A) underwrites B) undertakes C) overwrites D) overtakes

A

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

A

A financial market in which only short-term debt instruments are traded is called the ________ market. A) bond B) money C) capital D) stock

B

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

B

Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is A) $400. B) $201. C) $200. D) $199.

B

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

B

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

B

Which of the following can be described as direct finance? A) You take out a mortgage from your local bank. B) You borrow $2500 from a friend. C) You buy shares of common stock in the secondary market. D) You buy shares in a mutual fund.

B

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

B

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

B

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

B

The primary assets of credit unions are A) municipal bonds. B) business loans. C) consumer loans. D) mortgages.

C

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

C

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

C

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

C

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

C

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

D

Financial institutions that accept deposits and make loans are called ________ institutions. A) investment B) contractual savings C) depository D) underwriting

D

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. A) premium B) collateral C) default D) discount

D

Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) A corporation buys a share of common stock issued by another corporation in the primary market. C) You buy a U.S. Treasury bill from the U.S. Treasury. D) You make a deposit at a bank.

D

Which of the following statements about financial markets and securities is true? A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants. B) A debt instrument is intermediate term if its maturity is less than one year. C) A debt instrument is intermediate term if its maturity is ten years or longer. D) The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.

D

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A) active B) determined C) indirect D) direct

D