Econ 353 Midterm 1

Which of the following is NOT a form of e-money? A) a debit card B) a credit card C) a stored-value card D) a smart card

B) credit card

You are provided a mortgage to buy a home by your local bank. A. Direct B. Indirect C. Neither

B) indirect

You buy shares of a mutual fund company. A. Direct B. Indirect C. Neither

B) indirect

Insider trading is detrimental to the interests of the small shareholders because A) it is not fair that some shareholders will know more about the company than others B) insider trading can move secondary market prices of securities C) most insiders are frauds D) none of the above

B) insider trading can move secondary market prices of securities

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

B) investment bank

Which of the following sequences accurately describes the evolution of the payments system? A) barter, coins made of precious metals, paper currency, checks, electronic funds transfers B) barter, coins made of precious metals, checks, paper currency, electronic funds transfers C) barter, checks, paper currency, coins made of precious metals, electronic funds transfers D) barter, checks, paper currency, electronic funds transfers

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) Assets; liabilities

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

A) US government agency bonds

Which of the following is a long-term financial instrument? A) a U.S. Treasury bond B) a negotiable certificate of deposit C) a repurchase agreement D) a U.S. Treasury bill

A) a US treasury bond

A debt instrument sold (issued) 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) a certificate of deposit. B) commercial paper. C) a municipal bond. D) federal funds.

A) a certificate of deposit

An investment intermediary that lends funds to consumers is A) a finance company. B) an investment bank. C) a finance fund. D) a consumer company.

A) a finance company

A bond issued by Hyundai (a Korean firm) sold in Germany and denominated in Euro is an example of A) a foreign bond B) a Eurobond C) neither a) nor b)

A) a foreign bond

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets. A) adverse selection; moral hazard B) adverse selection; risk sharing C) moral hazard; transactions costs D) adverse selection; economies of scale

A) adverse selection; moral hazard

________ money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry. A) Commodity B) Fiat C) Paper D) Electronic

A) commodity

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

A) corporate bonds and stock

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

A) credit union

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

A) depository

A corporation buys a share of common stock issued by another corporation in the primary market. A. Direct B. Indirect C. Neither

A) direct

You borrow $2500 from a friend. A. Direct B. Indirect C. Neither

A) direct

You buy a newly issued U.S. Treasury bill from a registered dealer of new Treasuries. A. Direct B. Indirect C. Neither

A) direct

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as A) Eurobonds. B) foreign bonds. C) equity bonds. D) country bonds.

A) eurobonds

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

A) financial intermediation

The purpose of the disclosure requirements of the Securities and Exchange Commission is to A) increase the information available to investors. B) prevent bank panics. C) improve monetary control. D) protect investors against financial losses.

A) increase information available to investors

Financial intermediaries provide customers with liquidity services. Liquidity services A) make it easier for customers to conduct transactions. B) allow customers to have a cup of coffee while waiting in the lobby. C) are a result of the asymmetric information problem. D) are another term for asset transformation.

A) make it easier for customers to conduct transactions

Which of the following statements about financial markets and securities is TRUE? A) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) As a corporation gets a share of the broker's commission, a corporation acquires new funds whenever its securities are sold. C) Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid. D) Prices of capital market securities are usually more stable than prices of money market securities, and so are often used to hold temporary surplus funds of corporations.

A) many common stocks are traded over the counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the NYSE

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

A) money

A driver with auto insurance has less incentive to drive carefully than a driver without. For an auto insurance company this poses a problem of A) moral hazard B) adverse selection C) both A) and B) D) neither A) nor B)

A) moral hazard

Company X (Arthur Anderson) is a public auditor as well as a tax consultant for Company Y (Enron). To continue to earn the hefty fees it gets for preparing tax returns for Company Y, Company X provides misleading information about the financial health of Company Y to its shareholders and to the Securities and Exchange Commission. To the shareholders of Company Y, this poses a special type of ________ problem. A) moral hazard B) adverse selection C) risk sharing D) liquidity

A) moral hazard

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

A) municipal

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

A) secondary

If the maturity of a debt instrument is less than one year, the debt is called A) intermediate-term. B) short-term. C) long-term. D) prima-term.

A) short-term

Which of the following instruments are traded in a money market? A) state and local government bonds B) U.S. Treasury bills C) corporate bonds D) U.S. government agency securities

B) US treasury bills

A bond issued by Hyundai (a Korean firm) sold in Germany and denominated in US $ is an example of A) a foreign bond B) a Eurobond C) neither a) nor b)

B) a eurobond

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

B) a sixty-month car loan

When paper currency is decreed by governments as legal tender, legally it must be A) paper currency backed by gold. B) accepted as payment for debts. C) a precious metal such as gold or silver. D) convertible into an electronic payment.

B) accepted as payment for debts

Suppose that a medical insurance company is willing to insure a healthy person for $100 a month and a person with pre-existing conditions for $500 a month. A healthy person has no incentive to pay $100 for medical insurance as he/she has a very low probability of falling sick. Consequently, most healthy people do not apply to buy medical insurance. For the insurance company, this poses a problem of A) moral hazard B) adverse selection C) both A) and B) D) neither A) nor B)

B) adverse selection

Collateral is ________ the lender receives if the borrower does not pay back the loan. A) a liability B) an asset C) a present D) an offering

B) an asset

A smart card is the equivalent of A) savings bonds. B) cash. C) savings deposits. D) certificates of deposit.

B) cash

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

B) commercial paper

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

B) consumer loans

If an individual moves money from a small-denomination time deposit to a demand deposit account A) M1 stays the same and M2 increases. B) M1 increases and M2 stays the same. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.

B) m1 increases; m2 stays the same

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

B) money market instruments

Mutual funds are usually amongst the largest stockholders of the company whose stocks they own and consequently have more voting power than small individual shareholders. For this reason, mutual funds are less exposed to _______ problems in financial markets compared to small investors. A) adverse selection B) moral hazard C) transactions costs D) risk sharing

B) moral hazard

Defining money becomes ________ difficult as the pace of financial innovation ________. A) less; quickens B) more; quickens C) more; slows D) more; stops

B) more, quickens

________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds. A) Investment banks B) Mutual funds C) Finance companies D) Credit unions

B) mutual funds

A state or the federal government issues charters to individuals or groups wanting to establish a bank primarily to A) increase the information available to investors. B) prevent bank panics. C) improve monetary control. D) protect investors against financial losses.

B) prevent bank panics

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

B) reduce transaction costs

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) residual claimants C) brokers D) underwriters

B) residual claimants

The currency component includes paper money and coins held in A) bank vaults. B) the hands of the nonbank public. C) ATMs. D) the central bank.

B) the hands of the nonbank public

Financial markets improve economic welfare because A) they channel funds from investors to savers. B) they allow consumers to time their purchase better. C) they weed out inefficient firms. D) they eliminate the need for indirect finance.

B) they allow consumers to time their purchase better

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

B) underwrites

If the exchange rate of US $ to Japanese Yen moves from $1 US = 100 Yen to $1 US = 95 Yen, then, A) The Dollar has appreciated against the Yen B) The Yen has depreciated against the Dollar C) The Dollar has depreciated against the Yen D) None of the above is true

C

If an individual moves money from a demand deposit account to a money market deposit account A) M1 stays the same and M2 increases. B) M1 stays the same and M2 stays the same. C) M1 decreases and M2 stays the same. D) M1 increases and M2 decreases.

C) M1 decreases; m2 stays the same

If an individual moves money from a savings deposit account to a money market deposit account A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases.

C) M1 stays the same and M2 stays the same

Of the following assets traded in the capital markets, the most liquid is A) corporate bonds. B) municipal bonds. C) U.S. Treasury bonds. D) mortgage-backed securities.

C) US Treasury Bonds

Which of the following is a contractual savings institution? A) a credit union B) a savings and loan association C) a life insurance company D) a mutual fund

C) a life insurance company

Which of the following benefits 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) a shareholder

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

C) an asset that can easily and quickly by sold to raise cash

Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A) moral selection. B) risk sharing. C) asymmetric information. D) adverse hazard.

C) 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) discount

C) discount

Reducing risk through the purchase of assets whose returns do not always move together is A) intermediation. B) intervention. C) diversification. D) discounting.

C) diversification

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) foreign dollars. C) Eurodollars. D) outside dollars.

C) eurodollars

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) Eurobonds. B) equity bonds. C) foreign bonds. D) country bonds.

C) foreign bonds

Which of the following are investment intermediaries? A) life insurance companies B) pension funds C) mutual funds D) state and local government retirement funds

C) mutual funds

An important source of short-term funds for commercial banks are ________ which can be resold on the secondary market. A) commercial paper B) mortgage-backed securities C) negotiable CDs D) municipal bonds

C) negotiable CDs

You buy shares of Microsoft from a registered NASDAQ dealer. A. Direct B. Indirect C. Neither

C) neither

n a(n) ________ market, dealers in different locations buy and sell securities online to anyone who comes to them and is willing to accept their posted prices. A) exchange B) common C) over-the-counter D) barter

C) over-the-counter

________ are short-term loans in which Treasury bills serve as collateral. A) Negotiable certificates of deposit B) Federal funds C) Repurchase agreements D) U.S. government agency securities

C) repurchase agreements

Choose the appropriate combination to fill in the blanks. In the above example, Wells Fargo has converted a __________ asset into a ___________ asset. A) risky; risky B) risky; safe C) safe; risky D) safe; safe

C) safe; risky

When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. A) bonds B) bills C) stock D) notes

C) stock

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

C) ten years or longer

Which of the following best orders assets from highest to lowest liquidity? A) US T-notes, Municipal Bonds, US T-bills, Corporate Bonds B) US T-bills, Municipal Bonds, US T-notes, Corporate Bonds C) US T-notes, US T-Bills, Municipal Bonds, Corporate Bonds D) US T-Bills, US T-notes, Municipal Bonds, Corporate Bonds

D) T bills, t notes, municipal bonds, corporate bonds

Which of the following are short-term financial instruments? A) a share of Walt Disney Corporation stock B) a Treasury note with a maturity of four years C) a residential mortgage D) a repurchase agreement

D) a repurchase agreement

Mortgage-backed securities are similar to ________ but the interest and principal payments are backed by the individual mortgages within the security. A) stock B) repurchase agreements C) negotiable CDs D) bonds

D) bonds

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

D) capital

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

D) consumer and business loans

________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis. A) Investment B) Thrift C) Depository D) Contractual savings

D) contractual savings

The primary liabilities of depository institutions are A) premiums from policies. B) shares. C) bonds. D) deposits.

D) deposits

Which of the following is NOT a goal of financial regulation? A) ensuring the soundness of the financial system B) reducing moral hazard C) reducing adverse selection D) ensuring that investors never suffer losses

D) ensuring that investors never suffer losses

When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) A) over-the-counter market. B) common market. C) barter market. D) exchange.

D) exchange

Financial markets have the basic function of A) assuring that the swings in the business cycle are less pronounced. B) assuring that governments need never resort to printing money. C) providing a risk-free repository of spending power. D) getting people with funds to lend, together with people who want to borrow funds.

D) getting people with funds to lend, together with people who want to borrow funds

he M2 monetary aggregate contains everything that is in M1 plus other assets that are close (but not perfect) substitutes of assets in M1 because of their ________. A) stability B) consistency C) efficiency D) liquidity

D) liquidity

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

Introduction of checks into the payments system reduced the costs of exchanging goods and services because, A) they reduced the cost of transporting large amounts of currency. B) they can be written up to any denomination C) they are more widely accepted than currency. D) both A) and B)

D) reduced the cost of transporting large amounts of currency, they can be written in any denomination

Thrift institutions include A) banks, mutual funds, and insurance companies. B) finance companies, mutual funds, and money market funds. C) pension funds, mutual funds, and banks. D) savings and loan associations, mutual savings banks, and credit unions.

D) savings and loan associations, mutual savings banks, and credit unions

An example of economies of scale in the provision of financial services (by financial intermediaries) is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized loan contract over many borrowers.

D) spreading the cost of writing a standardized loan contract over many borrowers

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

D) the ability to write checks against shareholdings

Rosa has deposited $2500 in a money market mutual fund. She benefits because A) the fund provides her liquidity services. B) the fund effectively allows her to hold a diversified portfolio. C) the fund is insured by the FED. D) both A) and B) are true. E) A), B) and C) are true.

D) the fund provides her liquidity services, the fund effectively allows her to hold a diversified portfolio

Which of the following best explains why a typical household pays attention to prices of stocks and bonds in secondary markets? A) These prices determine the market value of the assets they own. B) By following stock and bond prices closely, they can time their purchase and sale of these assets better. C) The price of a security in the secondary market is a good indicator of the price the firm may get if it were to issue new securities and sell them in primary markets. D) A) and B) above E) All of the above.

D) these prices determine the market value of the assets they own, by following stock and bond prices closely they can time their purchase and sale of these assets better

The time and money spent in carrying out financial transactions are called A) economies of scale. B) financial intermediation. C) liquidity services. D) transaction costs.

D) transaction costs

Which of the following best explains why a company CEO may pay attention to prices of A) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange. stocks and bonds in secondary markets? A) These prices determine the market value of the assets he/she owns. B) By following stock and bond prices closely, he/she can time his/her purchase and sale of these assets better. C) The price of a security in the secondary market is a good indicator of the price the firm may get if it were to issue new securities and sell them in primary markets. D) A) and B) above E) All of the above.

E) all of the above

A goal of the Securities and Exchange Commission is to reduce problems arising from A) competition amongst financial intermediaries. B) insider trading C) risky securities. D) asymmetric information. E) both B) and D)

E) insider trading, asymmetric information

Which of the following instrument(s) is(are) NOT traded in a money market? A) residential mortgages B) U.S. Treasury Bills C) non-negotiable certificates of deposit D) commercial paper E) Both A) and C)

E) residential mortgages and non negotiable CD's

Which of the following statements about the characteristics of debt and equity are true? A. They can both be short-term financial assets. B. They can both be long-term financial assets. C. They are both claims on the issuer's income. D. They are both claims on the issuer's residual income. E. b) and c) above F. b) and d) above

E) they can both be long term financial assets; they are both claims on the issuer's income

A US T-bill must pay a higher interest rate to the investor than a US T-note. A) True B) False C) Impossible to say whether true or false

False, t bill is shorter term so less risky so it would have a lower interest rate

Wells Fargo allows households to invest in small CDs and then uses the funds thus acquired to provide loans to small businesses that are subject to significant default risks. The process can be best described as A) risk sharing B) asset transformation C) diversification D) both A) and B)

Risk sharing and asset transformation

A 10-year Corporate bond must pay a higher interest rate than a 10-year T-note. A) True B) False C) Impossible to say whether true or false

True; government securities are less risky

Lending companies must earn a higher interest rate on home mortgages than on consumer loans to buy appliances. A) True B) False C) Impossible to say whether true or false

false

A repurchase agreement must pay a higher interest rate than a commercial paper A) True B) False C) Impossible to say whether true or false

false; a commercial paper is more risky than a repurchase agreement

A negotiable CD must pay a higher interest rate than a non-negotiable CD A) True B) False C) Impossible to say whether true or false

true; negotiable CDs are more risky than non negotiable CDs