Money and Banking

If you were going to get a loan to purchase a new car, which financial intermediary would you use?

A Credit Union

Prior to making a loan banks screen their prospective loan customers to avoid the problem of:

Adverse Selection

All of the following are financial intermediaries except: a. Commercial Banks b. Insurance Companies c. Pension Funds d. Mutual Funds

All of the Above

U.S. Treasury Bills

Are the most liquid and safest of the money market instruments.

Financial intermediaries promote efficiency and thereby people's wealth:

By reducing the transactions cost of linking together lender and borrowers. By the extent that they help solve problems created by adverse selection and moral hazard .

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 Corporations. C. You borrow $1,000 from your best friend. D. You buy shares in a mutual fund.

C. You borrow $1,000 from your best friend.

Which of the following is a depository institution?

Credit Union

ABC 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:

Economies of Scalr

In the _____________, firms issue stocks which are claims to share the net income and assets of the firm.

Equity Market

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as:

Financial Intermediation

The majority of funds that business raise comes from:

Issuing Stock

Contractual savings institution include:

Life insurance companies and pension funds.

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:

Moral Hazard

The primary assets of a savings and loan associates are:

Mortgages

Concerning securities issued by the U.S. Treasury, the security with the longest maturity is the:

Treasury Bond

A life insurance company is an example of a contractual savings institution.

True

When an investment bank purchase a new issue of securities in the hopes of making a profit, it is said to _________ the issue.

Underwrite

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.

Underwrites

Which of the following results in the movement of funds from lender/savers to borrowers/spenders?

- Bond Markets - Commercial Banks - Credit Unions

Contractual savings institutions include all of the following:

- Pension funds, Government retirement funds - Fire and Casualty Insurance Companies - Life Insurance Companies

Financial Intermediaries:

- Solve some of the problems associated with asymmetric information. - Decrease transaction costs for borrowers and lenders. - Allow borrowers and lenders to engage in risk sharing.

A commercial bank assists in the initial sale of securities are sold in the primary market by an investment bank.

False

Which regulatory agency charters and examines the books of federally chartered commercial banks, such as Bank of America or U.S Bank?

Office of the Comptroller of the Currency

Federal funds are loans made by the:

One commercial bank to another.

Savings and loan associations are regulated by the:

The Office of Thrift Supervision

U.S. government agency securities include long-term bonds issued by all of the following except:

The U.S. Treasury

Investment banks are characterized by all of the following except:

They help business to raise capital in secondary markets.

"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.

True

Mutual funds such as Vanguard or Fidelity

Sells shares and use the proceeds to purchase portfolios of bonds and stock.

_________ is/are a financial instruments of the capital market.

State and local government bonds

The bond markets are important because they are:

The markets where interest rates are determined.

"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.

True

A mutual fund is an example of an investment intermediary.

True

The higher a security's price in the secondary market, the more funds a firm can raise by selling securities in the primary market.

True

The so-called "thrift institutions" include commercial banks, pension funds, and fire/casualty insurance companies.

False

Which of the following is not a financial institution?

A business college.

Life insurance policies typically contain a clause stating that the company will not be required to pay death benefits int he event that the insured commits suicide. Life insurance companies include such clauses in insurance contracts to protect against the ______ problem.

Adverse Selections

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:

Asymmetric Information

When borrowers have superior information about the potential returns and risks associated with an investment project, it results in the problem, it results in the problem referred to as:

Asymmetric Information

Financial institutions that accept deposits and make loans are called:

Banks

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.

Bond; Stock

Which of the following statements about the characteristics of bonds is true?

Bonds pay interest while equities pay dividends.

Asymmetric inflation in financial markets exists because:

Borrowers know more about the likelihood of the repayment of a loan than do lenders.

Suppose you buy a newly issued 10-year savings bond from the U.S Treasury. This is an example of a _________ instruments bought in the ________.

Capital Market; Primary Market

In terms of asset value, ____________ represents the largest of the financial intermediaries?

Commercial Banks

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?

Consumer Finance Company

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(n):

Consumer Finance Company

The primary liabilities of a savings and loan associations are:

Deposits

When U.S. Bank borrows from Cindy Young to lend to Steve Brown, we have witnessed the occurrence of:

Indirect Finance

In the __________, new issues of a security are sol, often to investment banks that underwrite the securities.

Primary Market

Investment banks facilitate the sale of securities in the:

Primary Market

_____________ are short-term loans )usually with a maturity of less than 2 weeks) for which Treasury bill serve as collateral, an asset that the lender receives if the borrower does not pay back the loan.

Repurchase Agreement (Repos)

General Motors Acceptance Corporation (GMAC) and the Ford Motor Credit Co. purchase the installment contracts of auto dealers. This is an example of a:

Sales Finance Company

Financial markets promotes greater economic efficiency by channeling funds from __________ to ___________.

Savers; Borrowers

The so-ca;;ed "thrift institutions" include:

Savings and loan associations, credit unions, and mutual savings banks.

A potential borrower generally has better information about the potential return and risk of the investment project he/she plans to undertake than does the lender. This inequality of information is known as asymmetric information.

True

Adverse Selection is a problem is 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.

True

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.

True

Boeing Co. acquires new funds when its securities are sold in the primary market by an investment bank.

True

Economies of scale allow financial intermediaries to decrease transaction costs.

True

Securities include corporate bonds, shares of Boeing stock, and Treasury bills.

True

The New York Stock Exchange in as example of a secondary market.

True

Which of the following is a short-term financial instrument?

U.S. Treasury Bill

Bank of America serves both as 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:

Economies of Scope

Banker's acceptances, U.S Treasury bills, and commercial paper are traded in the capital market.

False

Debt is a claim on the issuer's asset while equity is a claim on the issuer's income.

False

Depository institutions include commercial banks, savings and loan associations, credit unions, and finance companies.

False

Equities are debt securities that promise to make payments for a specified period of time. A bond is a debt security that make periodic payments called dividends and are considered to be long-term securities because they have no maturity date.

False

Financial intermediaries reduce costs by spreading them over a large number of customers, thus taking advantage of transaction costs.

False

Securities are liabilities for the person who purchase them, but are assets for the individual or firm that issue them.

False

The problem created by asymmetric information before the transaction occurs is called moral hazard; the problem created after the transaction is called adverse selection.

False

The _________ protects depositors from failures of banks by guaranteeing repayment of deposits up to $250,000 per depositor at a bank:

Federal Deposit Insurance Corporation

Which of the following is traded in a money market?

Federal Funds

All of the following are depository institutions except:

Finance Companies

Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called:

Financial Markets