EC 220: Quiz 2

Which of the following instruments are traded in a capital market? A) Corporate Bonds B) US Treasury Bills C) Negotiable bank CD D) repurchase agreements

A) Corporate Bonds

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) Eurobond.

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification

A) adverse selection; moral hazard

A short-term debt instrument issued by well-known corporations is called A) commercial paper. B) corporate bonds. C) municipal bonds. D) commercial mortgages.

A) commercial paper.

Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds.

A) foreign bonds.

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) investment bank.

The higher a security's price in the secondary market, the _____ funds a firm can raise by selling securities in the _____ market. A) more; primary B) more; secondary C) less; primary D) less; secondary

A) more; primary

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

A) primary market by an investment bank.

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) reduce transactions costs.

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as? A) risk-sharing. B) risk aversion. C) risk neutrality. D) risk selling.

A) risk-sharing.

With direct finance, funds are channeled through the financial market from the ________ directly to the ________. A) savers, spenders B) spenders, investors C) borrowers, savers D) investors, savers

A) savers, spenders

The regulatory agency that sets reserve requirements for all banks is A) the Federal Reserve System. B) the Federal Deposit Insurance Corporation. C) the Office of Thrift Supervision. D) the Securities and Exchange Commission.

A) the Federal Reserve System.

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) underwrites

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) A credit Union

Which of the following instruments are traded in a money market? A) Bank commercial loans B) Commercial paper C) State and local government bonds D) Residential mortgages

B) Commercial paper

U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called _____. A) Atlantic dollars B) Eurodollars C) foreign dollars D) outside dollars

B) Eurodollars

Which of the following are investment intermediaries? A) Life insurance companies B) Mutual funds C) Pension funds D) State and local government retirement funds

B) Mutual funds

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 issuerʹs income. D) They both enable a corporation to raise funds.

B) They can both be short-term financial instruments.

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) You borrow $2500 from a friend.

A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper. B) a negotiable certificate of deposit. C) a municipal bond. D) federal funds.

B) a negotiable certificate of deposit.

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) adverse selection.

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

B) capital

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) corporate bonds and stock

U.S. Treasury bills are considered the safest of all money market instruments because there is almost no risk of A) defeat. B) default. C) desertion. D) demarcation.

B) default.

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) money

The primary purpose of deposit insurance is to A) improve the flow of information to investors. B) prevent banking panics. C) protect bank shareholders against losses. D) protect bank employees from unemployment.

B) prevent banking panics.

A financial market in which previously issued securities can be resold is called a _____ market. A) primary B) secondary C) tertiary D) used securities

B) secondary

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) the ability to write checks against shareholdings.

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

C) Brokers

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) U.S. Treasury bonds.

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

C) consumer loans

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

C) depository

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

C) deposits.

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

C) finacial intermediaries; more

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) residual claimants

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

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) The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.

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) You make a deposit at a bank.

A goal of the Securities and Exchange Commission is to reduce problems arising from A) competition. B) banking panics. C) risk. D) asymmetric information.

D) asymmetric information.

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) discount

Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other.

D) loans made by banks to each other.

A restriction on bank activities that was repealed in 1999 was A) the prohibition of the payment of interest on checking deposits. B) restrictions on credit terms. C) minimum down payments on loans to purchase securities. D) separation of commercial banking from the securities industries.

D) separation of commercial banking from the securities industries.

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) ten years or longer.