ECON 330 EXAM 1 CHAPTER 2
________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.
contractual savings
The process of indirect finance using financial intermediaries is called
financial intermediation
The British Bankerʹs Association average of interbank rates for dollar deposits in the London market is called the
libor rate
A breakdown of financial markets can result in
political instability
The primary purpose of deposit insurance is to
prevent banking panics
Economies of scale enable financial institutions to
reduce transaction costs
Which of the following are NOT traded in a capital market?
repurchase agreements
________ are short-term loans in which Treasury bills serve as collateral.
repurchase agreements
Which of the following instruments is NOT traded in a money market?
residential mortgages
Adverse selection is a problem associated with equity and debt contracts arising from
the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities.
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
asymmetric information
________ work in the secondary markets matching buyers with sellers of securities.
brokers
Equity and debt instruments with maturities greater than one year are called ________ market instruments.
capital
Equity instruments are traded in the ________ market.
capital
Money market mutual fund shares function like
checking accounts that pay interest
A short-term debt instrument issued by well-known corporations is called
commercial paper
The primary assets of a finance company are
consumer and business loans
The primary assets of a pension fund are
corporate bonds and stock
Which of the following are NOT contractual savings institutions?
credit unions AND a savings and loan association
U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________.
default
Financial institutions that accept deposits and make loans are called ________ institutions.
depository
The primary liabilities of a commercial bank are
deposits
With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.
direct
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
If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________.
eurobond
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
eurobonds
U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________.
eurodollars
When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n)
exchange
Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from
financial intermediaries
In the United States, loans from ________ are far ________ important for corporate finance than are securities markets.
financial intermediaries, more
Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely.
financial intermediaries, securities markets
Bonds that are sold in a foreign country and are denominated in the countryʹs currency in which they are sold are known as
foreign bonds
Financial markets have the basic function of
getting people with funds to lend together with people who want to borrow funds
Secondary markets make financial instruments more
liquid
Financial intermediaries provide customers with liquidity services. Liquidity services
make it easier for customers to conduct transactions.
A financial market in which only short-term debt instruments are traded is called the ________ market.
money
The primary assets of money market mutual funds are
money market instruments
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.
moral hazard
The higher a securityʹs price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.
more, primary
Bonds issued by state and local governments are called ________ bonds.
municipal
Which of the following are investment intermediaries?
mutual funds
________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.
mutual funds
A debt instrument sold 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
negotiable certificate of deposit
In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from
owning common stock
A corporation acquires new funds only when its securities are sold in the
primary market by an investment bank
Well-functioning financial markets
produce an efficient allocation of capital
Equity holders are a corporationʹs ________. That means the corporation must pay all of its debt holders before it pays its equity holders.
residual claimants
The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as
risk sharing
The process of asset transformation refers to the conversion of
risky assets into safer assets
A financial market in which previously issued securities can be resold is called a ________ market.
secondary
If the maturity of a debt instrument is less than one year, the debt is called ________.
short term
An example of economies of scale in the provision of financial services is
spreading the cost of writing a standardized contract over many borrowers.
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.
stock
An important feature of money market mutual fund shares is
the ability to write checks against shareholdings
The time and money spent in carrying out financial transactions are called
transaction costs
When an investment bank ________ securities, it guarantees a price for a corporationʹs securities and then sells them to the public.
underwrites
An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called
underwriting
Which of the following can be described as direct finance?
you borrow 2500 from a friend
Which of the following can be described as involving indirect finance?
you make a deposit at a bank OR you buy shares in a mutual fund
Which of the following is an example of an intermediate-term debt?
a sixty month car loan
The primary assets of credit unions are
consumer loans
Long-term debt has a maturity that is ________.
10 years or longer
Which of the following is not a secondary market?
IPO market
Every financial market has the following characteristic:
It channels funds from lenders-savers to borrowers-spenders.
Which of the following statements about financial markets and securities is true?
The maturity of a debt instrument is the number of years (term) to that instrumentʹs expiration date. AND 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.
Which of the following statements about the characteristics of debt and equities is true?
They can both be long-term financial instruments.
Which of the following statements about the characteristics of debt and equity is false?
They can both be short-term financial instruments.
Equity of U.S. companies can be purchased by
U.S. citizens and foreign citizens
Which of the following instruments are traded in a capital market?
U.S. government agency securities AND corporate bonds
Forty or so dealers establish a ʺmarketʺ in these securities by standing ready to buy and sell them.
U.S. government bonds
Which of the following instruments are traded in a money market?
U.S. treasury bills
Which of the following is a long-term financial instrument?
a U.S. treasury bond
An investment bank helps ________ issue securities.
a corporation
Which of the following can be described as involving direct finance?
a corporation issues new shares of stock OR people buy shares of common stock in the primary markets
Which of the following is a depository institution?
a credit union AND a mutual savings bank
An investment intermediary that lends funds to consumers is
a finance company
Which of the following financial intermediaries is NOT a depository institution?
a finance company
Which of the following is a contractual savings institution?
a life insurance company
Which of the following are short-term financial instruments?
a repurchase agreement
Which of the following benefit directly from any increase in the corporationʹs profitability?
a shareholder
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
adverse selection
Reducing risk through the purchase of assets whose returns do not always move together is
diversification
The concept of diversification is captured by the statement
don't put all your eggs in one basket
The principal lender-savers are
households
One reason for the extraordinary growth of foreign financial markets is
increase in the pool of savings in foreign countries AND the deregulation of foreign financial markets
The purpose of the disclosure requirements of the Securities and Exchange Commission is to
increase the information available to investors
An important financial institution that assists in the initial sale of securities in the primary market is the
investment bank
Federal funds are
loans made by banks to each other
Risk sharing is profitable for financial institutions due to
low transaction costs
An important function of secondary markets is to
make it easier to sell financial instruments to raise funds.
With direct finance funds are channeled through the financial market from the ________ directly to the ________.
savers, spenders
Thrift institutions include
savings and loan associations, mutual savings banks, and credit unions.
Prices of money market instruments undergo the least price fluctuations because of
the short terms to maturity for the securities
Financial markets improve economic welfare because
they allow consumers to time their purchase better AND they channel funds from savers to investors
Government regulations to reduce the possibility of financial panic include all of the following except
transaction costs
A goal of the Securities and Exchange Commission is to reduce problems arising from
asymmetric information
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
Collateral is ________ the lender receives if the borrower does not pay back the loan.
an asset
Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
assets, liabilities
