A) crisis B) deficit C) surplus D) revision
Answer: C Ques Status: New
20) Budgets deficits can be a concern because they might A) ultimately lead to higher inflation. B) lead to lower interest rates.
C) lead to a slower rate of money growth. D) lead to higher bond prices. Answer: A Ques Status: Revised
21) Budget deficits are important because deficits A) cause bank failures.
B) always cause interest rates to fall.
C) can result in higher rates of monetary growth. D) always cause prices to fall. Answer: C Ques Status: Revised
22)Between 1950 and 1980 in the U.S., interest rates trended upward. During this same time period, A) the rate of money growth declined. B) the rate of money growth increased.
C)the government budget deficit (expressed as a percentage of GNP) trended downward.
D) the aggregate price level declined quite dramatically. Answer: B Ques Status: Previous Edition
23)What happens to economic growth and unemployment during a business cycle recession?What is the relationship between the money growth rate and a business cycle recession?
Answer:During a recession, output declines and unemployment increases. Prior to everyrecession in the U.S. the money growth rate has declined, however, not every decline is followed by a recession. Ques Status: New
1.4 How We Will Study Money, Banking, and Financial Markets 1)There are no questions for section 1.4 How We Will Study Money, Banking, and Financial Markets
Answer: No Correct Answer Was Provided. 1.5 Concluding Remarks
1) There are no questions for section 1.5 Concluding Remarks Answer: No Correct Answer Was Provided. Chapter 2 An Overview of the Financial System 2.1 Function of Financial Markets
1) Every financial market has the following characteristic: A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders. Answer: D Ques Status: Previous Edition 2) Financial markets have the basic function of
A)getting people with funds to lend together with people who want t
o borrow funds.
B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power. Answer: A Ques Status: Revised
3) Financial markets improve economic welfare because A) they channel funds from investors to savers. B) they allow consumers to time their purchase better. C) they weed out inefficient firms. D) eliminate the need for indirect finance. Answer: B Ques Status: Revised 4) Well-functioning financial markets A) cause inflation.
B) eliminate the need for indirect finance. C) cause financial crises.
D) produce an efficient allocation of capital. Answer: D Ques Status: Revised
5) A breakdown of financial markets can result in A) financial stability. B) rapid economic growth. C) political instability. D) stable prices.
Answer: C Ques Status: Revised
6) Which of the following can be described as direct finance? A) You take out a mortgage from your local bank. B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market. D) You buy shares in a mutual fund. Answer: B Ques Status: Revised
7)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 A) $400. B) $201. C) $200. D) $199.
Answer: B Ques Status: Revised
8)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 A) 25%. B) 12.5%. C) 10%. D) 5%.
Answer: D Ques Status: Revised
9)Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock. B) People buy shares in a mutual fund.
C)A pension fund manager buys a short-term corporate security in the secondary market.
D)An insurance company buys shares of common stock in the over-the-counter markets.
Answer: A Ques Status: Previous Edition
10)Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund.
C)A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets. Answer: D Ques Status: Revised
11)Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B)A corporation buys a share of common stock issued by another corporation in the primary market.
C) You buy a U.S. Treasury bill from the U.S. Treasury. D) You make a deposit at a bank. Answer: D Ques Status: Revised
12)Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor. B) You buy shares in a mutual fund.
C) You buy a U.S. Treasury bill from the U.S. Treasury.
D)A corporation buys a short-term security issued by another corporation in the primary market. Answer: B Ques Status: Revised
13)Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them. A) assets; liabilities B) liabilities; assets C) negotiable; nonnegotiable D) nonnegotiable; negotiable
Answer: A Ques Status: Previous Edition
14)With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A) active B) determined C) indirect D) direct
Answer: D Ques Status: New
15)With direct finance funds are channeled through the financial market from the ________ directly to the ________. A) savers, spenders B) spenders, investors
C) borrowers, savers D) investors, savers Answer: A Ques Status: New
16)Distinguish between direct finance and indirect finance. Which of these is the most importantsource of funds for corporations in the United States?
Answer:With direct finance, funds flow directly from the lender/saver to the borrower . With
indirect finance, funds flow from the lender/saver to a financial intermediary who then
channels the funds to the borrower/investor. Financial intermediaries (indirect finance)
are the major source of funds for corporations in the U.S. Ques Status: New
2.2 Structure of Financial Markets
1)Which of the following statements about the characteristics of debt and equity is false? A)
They can both be long-term financial instruments. B) They can both be short-term financial instruments. C) They both involve a claim on the issuer?s income. D) They both enable a corporation to raise funds. Answer: B Ques Status: Revised
2)Which of the following statements about the characteristics of debt and equities is true?
A) They can both be long-term financial instruments. B) Bond holders are residual claimants.
C)The income from bonds is typically more variable than that from equities.
D) Bonds pay dividends. Answer: A Ques Status: Revised
3) Which of the following statements about financial markets and securities is true?
A)A bond is a long-term security that promises to make periodic payments called dividends to the firm?s residual claimants.
B)A debt instrument is intermediate term if its maturity is less than one year.
C)A debt instrument is intermediate term if its maturity is ten years or longer.
D)The maturity of a debt instrument is the number of years (term) to that instrument?s expiration date. Answer: D Ques Status: Revised 4) Forty or so dealers establish a ?market
? in these securities by standing ready to buy and sell them. A) Secondary stocks B) Surplus stocks C) U.S. government bonds D) Common stocks
Answer: C Ques Status: Previous Edition
5) An important function of secondary markets is to
A) make it easier to sell financial instruments to raise funds. B) raise funds for corporations through the sale of securities. C) make it easier for governments to raise taxes. D) create a market for newly constructed houses. Answer: A Ques Status: Revised
6) Secondary markets make financial instruments more A) solid. B) vapid. C) liquid. D) risky.
Answer: C Ques Status: Revised 7) The higher a security?
s price in the secondary market the _________ funds a firm can raise by selling securities in the _________ market. A) more; primary B) more; secondary C) less; primary D) less; secondary
Answer: A Ques Status: Revised
8)An important financial institution that assists in the initial sale of securities in the primary market is the A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house.
Answer: A Ques Status: Previous Edition
9)A corporation acquires new funds only when its securities are sold in the
A) primary market by an investment bank. B) primary market by a stock exchange broker. C) secondary market by a securities dealer. D) secondary market by a commercial bank. Answer: A Ques Status: Previous Edition
10)A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank. Answer: B Ques Status: Previous Edition
11) Which of the following statements about financial markets and securities is true?
A)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.
B) As a corporation gets a share of the broker?s commission, a corporation acquires new funds whenever its securities are sold.
C)Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid.
D)Because of their short-terms to maturity, the prices of money market instruments tend to fluctuate wildly. Answer: A Ques Status: Revised 12) Equity holders are a corporation?
s ________. That means the corporation must pay all of its debt holders before it pays its equity holders. A) debtors B) brokers
C) residual claimants D) underwriters
Answer: C Ques Status: New
13)Which of the following is an example of an intermediate-term debt? A) A thirty-year mortgage. B) A sixty-month car loan. C) A six month loan from a finance company. D) A Treasury bond. Answer: B Ques Status: New
14)If the maturity of a debt instrument is less than one year, the debt is called ________. A) short-term B) intermediate-term C) long-term D) prima-term
Answer: A Ques Status: New
15) Long-term debt has a maturity that is __________. A) between one and ten years. B) less than a year.
C) between five and ten years. D) ten years or longer. Answer: D Ques Status: New
16)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) bonds B) bills C) notes D) stock
Answer: D Ques Status: New
17)A financial market in which previously issued securities can be resold is called a _________ market. A) primary B) secondary C) tertiary D) used securities
Answer: B Ques Status: New
18)When an investment bank ________ securities, it guarantees a price for a corporation?s securities and then sells them to the public. A) underwrites B) undertakes C) overwrites D) overtakes
Answer: A Ques Status: New
19)_______ work in the secondary markets matching buyers with sellers of securities. A) Dealers B) Underwriters C) Brokers D) Claimants
Answer: C Ques Status: New
20)A financial market in which only short-term debt instruments are traded is called the ________ market. A) bond B) money C) capital D) stock
Answer: B Ques Status: New
21) Equity instruments are traded in the ________ market. A) money B) bond C) capital D) commodities
Answer: C Ques Status: New
22)Corporations receive funds when their stock is sold in the primary market. Why do
corporations pay attention to what is happening to their stock in the secondary market?
Answer:The existence of the secondary market makes their stock more liquid and the price in
the secondary market sets the price that the corporation would receive if they choose to sell more stock in the primary market. Ques Status: New
2.3 Financial Market Instruments
1)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 A) commercial paper.
B) a negotiable certificate of deposit. C) a banker? acceptance. D) federal funds.
Answer: B Ques Status: Previous Edition 2) Federal funds are
A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other. Answer: D Ques Status: Revised
3) Which of the following are short-term financial instruments? A) A banker?s acceptance.
B) A share of Walt Disney Corporation stock. C) A Treasury note with a maturity of four years.
D) A residential mortgage. Answer: A Ques Status: Revised
4) Which of the following instruments are traded in a money market? A) State and local government bonds. B) U.S. Treasury bills. C) Corporate bonds.
D) U.S. government agency securities. Answer: B Ques Status: Revised
5) Which of the following instruments are traded in a money market? A) Bank commercial loans. B) Banker?s acceptances.
C) State and local government bonds. D) Residential mortgages.
Answer: B Ques Status: Previous Edition
6)Which of the following instruments is not traded in a money market?
A) Residential mortgages. B) U.S. Treasury Bills. C) Eurodollars. D) Commercial paper.
Answer: A Ques Status: Revised
7) Which of the following are long-term financial instruments? A) A negotiable certificate of deposit. B) A banker?s acceptance. C) A U.S. Treasury bond. D) A U.S. Treasury bill.
Answer: C Ques Status: Previous Edition
8) Which of the following instruments are traded in a capital market? A) U.S. Government agency securities. B) Negotiable bank CDs. C) Repurchase agreements. D) Banker?s acceptances. Answer: A Ques Status: Revised
9) Which of the following instruments are traded in a capital market? A) Corporate bonds. B) U.S. Treasury bills. C) Banker?s acceptances. D) Repurchase agreements.
Answer: A Ques Status: Previous Edition
10) Which of the following are not traded in a capital market? A) U.S. government agency securities. B) State and local government bonds. C) Repurchase agreements. D) Corporate bonds. Answer: C Ques Status: New
11)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. A) premium
B) collateral C) default D) discount
Answer: D Ques Status: New
12)U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________. A) defeat B) default C) desertion D) demarkation
Answer: B Ques Status: New
13)The money market instruments that were created to assist in carrying out international trade are called ________. A) negotiable CDs. B) banker?s acceptances. C) repurchase agreements. D) federal funds.
Answer: B Ques Status: New
14)Collateral is ________ the lender receives if the borrower does not pay back the loan. A) a liability B) an asset C) a present D) an offering
Answer: B Ques Status: New
15)Bonds issued by state and local governments are called ________ bonds. A) corporate B) Treasury C) municipal D) commercial
Answer: C Ques Status: New
2.4 Internationalization of Financial Markets
1)Bonds that are sold in a foreign country and are denominated in the country?s currency in which they are sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds.
Answer: A Ques Status: Previous Edition
2)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 A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds.
Answer: B Ques Status: Previous Edition
3)If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________.
A) Eurobond B) foreign bond C) British bond D) currency bond
Answer: A Ques Status: New
4)U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________. A) Atlantic dollars B) Eurodollars C) foreign dollars D) outside dollars
Answer: B Ques Status: New
5)One reason for the extraordinary growth of foreign financial markets is
A) decreased trade.
B) lack of savings in foreign countries. C) the recent introduction of the foreign bond. D) deregulation of foreign financial markets. Answer: D Ques Status: New
2.5 Function of Financial Intermediaries: Indirect Finance
1)The process of indirect finance using financial intermediaries is called
A) direct lending.
B) financial intermediation. C) resource allocation. D) financial liquidation. Answer: B Ques Status: Revised
2)In the United States, loans from ________ are far ________ important for corporate finance than are securities markets. A) government agencies; more B) government agencies; less C) financial intermediaries; more D) financial intermediaries; less Answer: C Ques Status: Previous Edition
3) Economies of scale enable financial institutions to A) reduce transactions costs.
B) avoid the asymmetric information problem. C) avoid adverse selection problems. D) reduce moral hazard. Answer: A Ques Status: Revised
4)An example of economies of scale in the provision of financial services is
A) investing in a diversified collection of assets.
B) providing depositors with a variety of savings certificates. C) spreading the cost of borrowed funds over many customers. D)spreading the cost of writing a standardized contract over many borrowers.
Answer: D Ques Status: Revised
5)The process where financial intermediaries create and sell low-risk