Lesson 2 Quiz - An Overview of the Financial System

Mortgage-backed securities are similar to ________ but the interest and principal payments are backed by the individual mortgages within the security. a. bonds b. stock c. repurchase agreements d. negotiable CDs

a. bonds

Which of the following instruments are traded in a capital market? a. corporate bonds b. negotiable bank CDs c. U.S. Treasury bills d. repurchase agreements

a. corporate bonds

Risk sharing is profitable for financial institutions due to a. low transactions costs. b. asymmetric information. c. adverse selection. d. moral hazard.

a. low transactions costs

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

a. make it easier for customers to conduct transactions

Thrift institutions include a. savings and loan associations, mutual savings banks, and credit unions. b. pension funds, mutual funds, and banks. c. finance companies, mutual funds, and money market funds. d. banks, mutual funds, and insurance companies.

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

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. stock b. bills c. bonds d. notes

a. stock

Government regulations to reduce the possibility of financial panic include all of the following EXCEPT a. transactions costs. b. disclosure. c. deposit insurance. d. restrictions on assets and activities.

a. transactions costs

________ work in the secondary markets matching buyers with sellers of securities. a. Underwriters b. Brokers c. Claimants d. Dealers

b. Brokers

Which of the following statements about financial markets and securities is TRUE? a. As a corporation gets a share of the broker's commission, a corporation acquires new funds whenever its securities are sold. b. 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. c. 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. d. Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid.

b. 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.

Forty or so dealers establish a "market" in these securities by standing ready to buy and sell them. a. common stocks b. U.S. government bonds c. secondary stocks d. surplus stocks

b. U.S. government bonds

Which of the following can be described as involving indirect finance? a. You purchase shares in an initial public offering by a corporation in the primary market. b. You buy shares in a mutual fund. c. You make a loan to your neighbor. d. You buy a U.S. Treasury bill from the U.S. Treasury at Treasury Direct.gov.

b. You buy shares in a mutual fund

U.S. Treasury bills are considered the safest of all money market instruments because there is a low probability of a. demarcation. b. default. c. desertion. d. defeat.

b. default

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

b. you make a deposit at a bank

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. a. moral hazard; adverse selection b. free-riding; costly state verification c. adverse selection; moral hazard d. costly state verification; free-riding

c. adverse selection; moral hazard

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

c. getting people with funds to lend together with people who want to borrow funds

The time and money spent in carrying out financial transactions are called a. liquidity services. b. financial intermediation. c. transaction costs. d. economies of scale.

c. transaction costs

Which of the following is NOT a secondary market? a. foreign exchange market b. options market c. futures market d. IPO market

d. IPO Market

A mutual fund that is organized as a limited partnership with high minimum investments is called a a. money market mutual fund. b. investment bank. c. mutual savings bank. d. hedge fund.

d. hedge fund

Economies of scale enable financial institutions to a. avoid adverse selection problems. b. avoid the asymmetric information problem. c. reduce moral hazard. d. reduce transactions costs.

d. reduce transactions costs

An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called a. undertaking. b. understanding. c. underhanded. d. underwriting.

d. underwriting