ch 2 econ test questions
diversification
Reducing risk through the purchase of assets whose returns do not always move together is ________.
liquid
Secondary markets make financial instruments more ________.
assets; liabilities
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
banks
The Canada Deposit Insurance Corporation regulates ________.
financial intermediation
The process of indirect finance using financial intermediaries is called ________.
risk sharing
The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as ________.
transaction costs
The time and money spent in carrying out financial transactions are called ________.
asymmetric information
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 ________.
Eurodollars
U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________.
produce an efficient allocation of capital
Well-functioning financial markets ________.
stock
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.
underwrites
When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public.
A corporation issues new shares of stock.
Which of the following can be described as involving direct finance
You make a deposit at a bank.
Which of the following can be described as involving indirect finance
A sixty-month car loan
Which of the following is an example of an intermediate-term debt?
direct
With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.
depository
____ institutions include banks, trust and mortgage loan companies, and credit unions
Adverse Selection
_____ is a problem associated with equity and debt contracts arising from the lender's relative lack of information about the borrower's potential returns and risks of his investment activities
Brokers
________ work in the secondary markets matching buyers with sellers of securities.
secondary
A financial market in which previously issued securities can be resold is called a ________ market.
political instability
A breakdown of financial markets can result in ________.
asset
Collateral is an ________ the lender receives if the borrower does not pay back the loan.
reduce transactions costs
Economies of scale enable financial institutions to ________.
It channels funds from lenders-savers to borrowers-spenders
Every financial market has which of the following characteristics
depository
Financial institutions that accept deposits and make loans are called ________ institutions
they allow consumers to time their purchase better
Financial markets improve economic welfare because ________.
transactions costs
Government regulations to reduce the possibility of financial panic include all of the following except ________.
Eurobond
If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________.
adverse selection
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 ________.
short term
If the maturity of a debt instrument is less than one year, the debt is called ________.
10
Long-term debt has a maturity that is ________ years or longer
loans
Overnight funds are ________ made by banks to each other
the short terms to maturity for the securities
Prices of money market instruments undergo the least price fluctuations because of ________.
transaction costs
Risk sharing is profitable for financial institutions due to low ________.
Germany; Japan
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.
more; primary
The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.
consumer loans
The primary assets of credit unions are ________.
deposits
The primary liabilities of a chartered bank are ________.
households
The principal lender-savers are ________.
adverse selection; moral hazard
The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.
shareholder
who benefit directly from any increase in the corporation's profitability?
primary
A corporation acquires new funds only when its securities are sold in the ________ market by an investment bank
money
A financial market in which only short-term debt instruments are traded is called the ________ market.
moral hazard
An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
secondary
An important function of ____ markets is to make it easier to sell financial instruments to raise funds
Eurobonds
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 ________.
foreign bonds
Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as ________.