Question 1

Describe at least two reasons why a corporation may seek to raise funds outside its domestic market.

Accepted Answer

There are several reasons why a corporation may seek to raise funds outside its domestic market.
First, in some countries, large corporations seeking to raise a substantial amount of funds may have no choice but to obtain financing in either the foreign market sector of another country or the Euromarket. This is because the fund-seeking corporation's domestic market is not fully developed and cannot satisfy its demand for funds on globally competitive terms. Governments of developing countries have used these markets in seeking funds for government-owned corporations that they are privatizing.
The second reason is that there may be opportunities for obtaining a lower cost of funding than is available in the domestic market, although with the integration of capital markets throughout the world, such opportunities have diminished. Nevertheless, there are still some imperfections in capital markets throughout the world that may permit a reduced cost of funds. The causes of these imperfections are discussed throughout the book.
A third reason for using foreign or Euromarkets is a desire by issuers to diversify their source of funding so as to reduce reliance on domestic investors.

Question 2

The Economic Council of Canada classifies financial innovations into three broad categories. Which of the below is NOT one of these?

Accepted Answer

A)  market-broadening instruments 
B)  risk-management instruments 
C)  risk-broadening instruments 
D)  arbitraging instruments and processes 
A)  market-broadening instruments 
B)  risk-management instruments 
C)  risk-broadening instruments 
D)  arbitraging instruments and processes C

Question 3

One economic function of a financial market is to reduce the cost of transacting. There are two costs associated with transacting: search costs and information costs.

Accepted Answer

A) True 
 B)False  True

Question 4

Name and describe some of the ways to classify financial markets.

Accepted Answer

There are many ways to classify financia

Question 5

Financial assets have two principal economic functions. One function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets.

Accepted Answer

A) True 
 B)False

Question 6

Derivative markets may have at least three advantages over the corresponding cash (spot) market for the same financial asset. Which of the below is ONE of these advantages?

Accepted Answer

A)  Transactions typically can be accomplished faster in the derivatives market. 
B)  It will always cost more to execute a transaction in the derivatives market in order to adjust the risk exposure of an investor's portfolio to new economic information than it would cost to make that adjustment in the cash market. 
C)  All derivative markets can absorb a greater dollar transaction without an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market. 
D)  Some derivative markets can absorb a greater dollar transaction but with an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market. 
A)  Transactions typically can be accomplished faster in the derivatives market. 
B)  It will always cost more to execute a transaction in the derivatives market in order to adjust the risk exposure of an investor's portfolio to new economic information than it would cost to make that adjustment in the cash market. 
C)  All derivative markets can absorb a greater dollar transaction without an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market. 
D)  Some derivative markets can absorb a greater dollar transaction but with an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market.

Question 7

IBM pension fund owns a portfolio consisting of the common stock of a large number of companies. Suppose the pension fund knows that two months from now it must sell stock in its portfolio to pay beneficiaries $20 million. The risk that IBM pension fund faces is that two months from now when the stocks are sold, the price of most or all stocks may be higher than they are today.

Accepted Answer

A) True 
 B)False

Question 8

A(n) ________ such as plant or equipment purchased by a business entity shares at least one characteristic with a financial asset: Both are expected to generate future cash flow for their owner.

Accepted Answer

A)  tangible asset 
B)  intangible asset 
C)  balance sheet asset 
D)  cash asset 
A)  tangible asset 
B)  intangible asset 
C)  balance sheet asset 
D)  cash asset

Question 9

________ increase the liquidity of markets and the availability of funds by attracting new investors and offering new opportunities for borrowers.

Accepted Answer

A)  Market-broadening instruments 
B)  Market-management instruments 
C)  Risk-management instruments 
D)  Arbitraging-broadening instruments 
A)  Market-broadening instruments 
B)  Market-management instruments 
C)  Risk-management instruments 
D)  Arbitraging-broadening instruments

Question 10

Professor Stephen Ross suggests two classes of financial innovation. List these two classes.

Accepted Answer

Professor Stephen Ross suggests these tw

Question 11

There are two extreme views of financial innovation. Which of the below is ONE of these?

Accepted Answer

A)  Some hold that the essence of innovation is the introduction of financial assets that are less efficient for redistributing risks among market participants. 
B)  There are some who believe that the minor impetus for innovation has been the endeavor to circumvent regulations and find loopholes in tax rules. 
C)  Some hold that the essence of innovation is the introduction of financial instruments that are more efficient for redistributing risks among market participants. 
D)  None of these 
A)  Some hold that the essence of innovation is the introduction of financial assets that are less efficient for redistributing risks among market participants. 
B)  There are some who believe that the minor impetus for innovation has been the endeavor to circumvent regulations and find loopholes in tax rules. 
C)  Some hold that the essence of innovation is the introduction of financial instruments that are more efficient for redistributing risks among market participants. 
D)  None of these

Question 12

Which of the following statements is FALSE?

Accepted Answer

A)  Because of the prominent role played by financial markets in economies, governments have long deemed it necessary to regulate certain aspects of these markets. 
B)  In their regulatory capacities, governments have had little influence on the development and evolution of financial markets and institutions. 
C)  It is important to realize that governments, markets, and institutions tend to behave interactively and to affect one another's actions in certain ways. 
D)  A sense of how the government can affect a market and its participants is important to an understanding of the numerous markets and securities. 
A)  Because of the prominent role played by financial markets in economies, governments have long deemed it necessary to regulate certain aspects of these markets. 
B)  In their regulatory capacities, governments have had little influence on the development and evolution of financial markets and institutions. 
C)  It is important to realize that governments, markets, and institutions tend to behave interactively and to affect one another's actions in certain ways. 
D)  A sense of how the government can affect a market and its participants is important to an understanding of the numerous markets and securities.

Question 13

A basic economic principle is that the price of any financial asset ________ the present value of its expected cash flow, even if the cash flow is not known with certainty.

Accepted Answer

A)  is greater than 
B)  is equal to 
C)  is less than 
D)  is equal to or greater than 
A)  is greater than 
B)  is equal to 
C)  is less than 
D)  is equal to or greater than

Question 14

An asset is a possession that has value in an exchange and can be classified as ________.

Accepted Answer

A)  financial or intangible. 
B)  financial or variable. 
C)  tangible or intangible. 
D)  fixed or variable. 
A)  financial or intangible. 
B)  financial or variable. 
C)  tangible or intangible. 
D)  fixed or variable.

Question 15

The three economic functions of financial markets are: to improve the price discovery process; to lessen liquidity; and, to reduce the cost of transacting.

Accepted Answer

A) True 
 B)False

Question 16

An ultimate and important cause of financial innovation does not involve ________.

Accepted Answer

A)  incentives to follow existing regulation and and tax laws. 
B)  increased volatility of interest rates, inflation, equity prices, and exchange rates. 
C)  changing global patterns of financial wealth. 
D)  financial intermediary competition. 
A)  incentives to follow existing regulation and and tax laws. 
B)  increased volatility of interest rates, inflation, equity prices, and exchange rates. 
C)  changing global patterns of financial wealth. 
D)  financial intermediary competition.

Question 17

Financial markets can be categorized as those dealing with newly issued financial claims that are called the ________, and those for exchanging financial claims previously issued that are called the ________.

Accepted Answer

A)  secondary market; primary market. 
B)  financial market; secondary market. 
C)  OTC market; NYSE/AMEX market. 
D)  primary market; secondary market. 
A)  secondary market; primary market. 
B)  financial market; secondary market. 
C)  OTC market; NYSE/AMEX market. 
D)  primary market; secondary market.

Question 18

A reason for a corporation using ________ is a desire by issuers to diversify their source of funding so as to reduce reliance on domestic investors.

Accepted Answer

A)  Euromarkets 
B)  domestic equity markets 
C)  domestic government markets 
D)  None of these 
A)  Euromarkets 
B)  domestic equity markets 
C)  domestic government markets 
D)  None of these

Question 19

The financial asset is referred to as a ________ if the claim is a fixed dollar.

Accepted Answer

A)  debt instrument. 
B)  common equity instrument. 
C)  derivative instrument. 
D)  preferred equity instrument. 
A)  debt instrument. 
B)  common equity instrument. 
C)  derivative instrument. 
D)  preferred equity instrument.

Question 20

A principal economic function to transfer funds from those who have ________ to invest to those who need funds to invest in ________.

Accepted Answer

A)  deficit funds; tangible assets. 
B)  surplus funds; intangible assets. 
C)  deficit funds; intangible assets. 
D)  surplus funds; tangible assets. 
A)  deficit funds; tangible assets. 
B)  surplus funds; intangible assets. 
C)  deficit funds; intangible assets. 
D)  surplus funds; tangible assets.

Exam 1: Introduction

Describe at least two reasons why a corporation may seek to raise funds outside its domestic market.

The Economic Council of Canada classifies financial innovations into three broad categories. Which of the below is NOT one of these?

One economic function of a financial market is to reduce the cost of transacting. There are two costs associated with transacting: search costs and information costs.

Name and describe some of the ways to classify financial markets.

Financial assets have two principal economic functions. One function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets.

Derivative markets may have at least three advantages over the corresponding cash (spot) market for the same financial asset. Which of the below is ONE of these advantages?

A(n) ________ such as plant or equipment purchased by a business entity shares at least one characteristic with a financial asset: Both are expected to generate future cash flow for their owner.

________ increase the liquidity of markets and the availability of funds by attracting new investors and offering new opportunities for borrowers.

Professor Stephen Ross suggests two classes of financial innovation. List these two classes.

There are two extreme views of financial innovation. Which of the below is ONE of these?

Which of the following statements is FALSE?

A basic economic principle is that the price of any financial asset ________ the present value of its expected cash flow, even if the cash flow is not known with certainty.

An asset is a possession that has value in an exchange and can be classified as ________.

The three economic functions of financial markets are: to improve the price discovery process; to lessen liquidity; and, to reduce the cost of transacting.

An ultimate and important cause of financial innovation does not involve ________.

Financial markets can be categorized as those dealing with newly issued financial claims that are called the ________, and those for exchanging financial claims previously issued that are called the ________.

A reason for a corporation using ________ is a desire by issuers to diversify their source of funding so as to reduce reliance on domestic investors.

The financial asset is referred to as a ________ if the claim is a fixed dollar.

A principal economic function to transfer funds from those who have ________ to invest to those who need funds to invest in ________.

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

Financial markets can be categorized as those dealing with newly issued financial claims that are called the , and those for exchanging financial claims previously issued that are called the .

A principal economic function to transfer funds from those who have to invest to those who need funds to invest in .