FIN 3404 Chapter Two

According to the Fisher equation, if the real rate of interest is 2.5% and the nominal rate of interest is 5.3%, the rate of inflation is forecast to be approximately 2.7%. 7.8%. 5.3%. 2.8%

2.8%

Which of the following statements is CORRECT? Capital market instruments include both long-term debt and common stocks. If your uncle in New York sold 100 shares of Apple through his broker to an investor in New York, this would be a primary market transaction. Money market instruments are illiquid and have high default risk. An example of a primary market transaction would be inheriting 1000 shares of GE from your grandfather.

Capital market instruments include both long-term debt and common stocks.

Which of the following is a financial institution involved in indirect financing in a financial system? Capital markets Investment banks Commercial banks Futures and options markets

Commercial banks

Which of the following securities is sold in the money market? Mortgage backed securities Foreign currency derivatives U.S. Treasury bonds Commercial papers

Commercial papers

Which of the following services does an investment banker provide? Auditing Money lending Distribution Insurance

Distribution

Which of the following transactions is a secondary market transaction? MicroChip Computers selling $1,000,000 worth of bonds directly to AIG Corp. Mary receiving dividends from IBM Johnny Appleseed buying 1,000 shares of Dell through NYSE IBM issuing 100,000 shares on the NYSE for the first time

Johnny Appleseed buying 1,000 shares of Dell through NYSE

Which of the following is true of an efficient market? Market prices of securities of companies in the same industry are all same. Securities have no systematic risk. Market prices adjust quickly to new information as it becomes available. All information contained in past prices of a security is reflected in its current price but that there is both public and private information that is not.

Market prices adjust quickly to new information as it becomes available.

Which form of the efficient market hypothesis states that security prices reflect all public information, but not all private information? Strong Very weak Semistrong Weak

Semistrong

Who is considered to be the second most powerful person in the United States, after the President? The Secretary of Defense The Federal Reserve Board Chairman The Vice-President of the USA The US Attorney- General

The Federal Reserve Board Chairman

Which of the following statements is incorrect? Life insurance companies are major buyers of securities in the direct financial markets The retail individual investor is a common direct participant in the direct financial markets Hedge funds are major buyers and sellers of securities in the direct financial markets Direct transactions in wholesale markets have a typical minimum transaction size of $1 million

The retail individual investor is a common direct participant in the direct financial markets

Compared with money market instruments, capital market instruments are less marketable. have lower default risk. are not affected by inflation. have shorter maturities.

are less marketable.

Participants in direct financing include borrower-spenders. pension funds. central banks. credit unions.

borrower-spenders.

Brokers bear the risk of loss from trading securities. "make markets" for securities. bring buyers and sellers together, usually for a commission. buy and sell securities from their own inventory.

bring buyers and sellers together, usually for a commission.

A primary market is a market for companies to buy back their own previously issued shares. investors to sell stocks to other investors. companies to sell new securities directly to investors. companies to trade the financial derivatives such as futures and options.

companies to sell new securities directly to investors.

The two methods by which funds are transferred from savers to borrowers within an economy's financial system include wholesale and retail transfers. primary and secondary transfers. direct and indirect transfers. short-term and long-term transfers.

direct and indirect transfers.

Within a financial system, money flows indirectly through: financial institutions. financial markets. stock exchanges. the SEC.

financial institutions.

The critical role of the financial system in an economy is to gather money from savers and channel it to borrowers. provide the President with information regarding the debt level in the country. regulate the operations of the commercial banks. provide managers with incentives to increase capital spending.

gather money from savers and channel it to borrowers.

Underwriting is the process by which an investment banker provides seed capital to new start-ups. markets and resells a company's securities to investors. helps a company sell its new security issue. lends funds to new companies.

helps a company sell its new security issue.

Individual investors can trade securities in money markets. in primary markets. through discount windows. in secondary markets.

in secondary markets.

When a corporation sells its stock to the public for the first time, it is known as an initial direct financing. initial private placement. initial underwriting. initial public offering.

initial public offering.

An investment banker is responsible for assisting the company in preparing the financial statements. preparing a security issue for sale. making loans to needy businesses. taking deposits from investors.

preparing a security issue for sale.

The _____ measures the inflation-adjusted cost of borrowing. real interest rate market rate nominal interest rate inflation rate

real interest rate

The level of interest rates tends to _____ during periods of economic expansion and _____ during periods of economic contraction. rise; stay the same rise; decline decline; rise decline; stay the same

rise; decline

Money markets are markets where futures and options are traded. foreign currencies are traded. stocks are sold for immediate delivery of cash. short-term financial instruments are traded

short-term financial instruments are traded

Investment banking firms provide underwriting services. insurance. overdraft facility. auditing services.

underwriting services.