M&B Ch. 2

Which of the following is a depository institution? a pension fund a mutual fund a credit union a life insurance company

a credit union

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

adverse selection; moral hazard

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? $400. $201. $200. $199.

201

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 25%. 12.5%. 10%. 5%.

5%

The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets. Germany; Japan Germany; Great Britain Great Britain; Canada Canada; Japan

Germany; Japan

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

It channels funds from lenders-savers to borrowers-spenders

The agency that restricts insider trading is the Federal Reserve System. Federal Deposit Insurance Corporation. Securities and Exchange Commission. Office of the Comptroller of the Currency.

Securities and Exchange Commission.

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

You make a deposit at a bank

The primary assets of credit unions are business loans. consumer loans. mortgages. municipal bonds.

consumer loans.

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

corporate bonds

The primary assets of a pension fund are? mortgages. corporate bonds and stock. money market instruments. consumer and business loans.

corporate bonds and stock.

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. discount default premium collateral

discount

The concept of diversification is captured by the statement it never rains, but it pours. don't look a gift horse in the mouth. make hay while the sun shines. don't put all your eggs in one basket.

don't put all your eggs in one basket.

The principal lender-savers are foreigners. businesses. households. governments.

households.

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

investment bank.

Federal funds are? loans made by the Federal Reserve System to banks. loans made by banks to the Federal Reserve System. funds raised by the federal government in the bond market. loans made by banks to each other.

loans made by banks to each other.

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

more; primary

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

secondary

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

the Federal Reserve System.

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

underwriting.