Deck 2: The Financial Market Environment

Question 1

Which of the following is NOT a financial institution?

A) A commercial bank
B) An insurance company
C) A pension fund
D) A newspaper publisher

Answer 1

A newspaper publisher

Question 2

Financial markets are intermediaries that channel the savings of individuals, businesses and government into loans or investments.

Answer 2

False

Question 3

A public offering is the sale of a new security issuetypically debt or preferred stockdirectly to an investor or group of investors.

Answer 3

False

Question 4

A financial institution is an intermediary that channels the savings of individuals, businesses, and governments into loans or investments.

Question 5

Which of the following are forums in which suppliers and demanders of funds can transact business directly?

A) Shadow banking system
B) Financial Markets
C) Commercial Banks
D) Financial Institutions

Question 6

A primary market is a financial market in which pre-owned securities are traded.

Question 7

The Glass-Steagall Act

A) allowed commercial and investment banks to engage in the same activities.
B) created the Securities Exchange Commission.
C) created the Federal Deposit Insurance program and separated the activities of commercial and investment banks.
D) was intended to regulate the activities in the primary market.

Question 8

Primary and secondary markets are markets for short-term and long-term securities, respectively.

Question 9

The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ________ of funds, and businesses are net ________ of funds.

A) demanders; suppliers
B) users; providers
C) suppliers; demanders
D) purchasers; sellers

Question 10

The Glass-Steagall Act was imposed to allow commercial and investment banks to combine and work together.

Question 11

Most businesses raise money by selling their securities in a

A) public offering.
B) private placement.
C) direct placement.
D) stock exchange.

Question 12

The nonexclusive sale of either bonds or stocks to the general public is called

A) private placement.
B) public offering.
C) organized selling.
D) none of the above.

Question 13

Government usually

A) is a net supplier of funds.
B) is a net demander of funds.
C) borrows funds directly from financial institutions.
D) maintains permanent deposits with financial institutions.

Question 14

The shadow banking system describes a group of institutions that engage in lending activities, much like traditional banks, but these institutions do not accept deposits and are therefore not subject to the same regulations as traditional banks.

Question 15

Which of the following assist companies in raising capital, advise firms on major transactions such as mergers or financial restructuring, and engage in trading and market making activities?

A) Investment Banks
B) Securities Exchanges
C) Mutual Funds
D) Commercial Banks

Question 16

Loan transactions between commercial banks in which the federal government becomes involved are referred to as federal funds.

Question 17

Which of the following serve as intermediaries channeling the savings of individuals, businesses and governments into loans and investments?

A) Financial Institutions
B) Financial Markets
C) Securities Exchanges
D) OTC market

Question 18

Firms that require funds from external sources can obtain them from

A) private placement.
B) financial institutions.
C) financial markets.
D) all of the above.

Question 19

Which of the following provide savers with a secure place to invest funds and offer both individuals and companies loans to finance investments?

A) Investment Banks
B) Securities Exchanges
C) Mutual Funds
D) Commercial Banks

Question 20

Firms that require funds from external sources can obtain them in one of the following ways EXCEPT

A) financial institution.
B) financial markets.
C) government.
D) private placement.

Question 21

Trading is carried out in the Over-the-Counter (OTC) Exchange by

A) the competitive bid process.
B) the competitive bid process and the negotiation process.
C) the auction process.
D) an investment banker.

Question 22

The money market is a financial relationship created by a number of institutions and arrangements that allows suppliers and demanders of long-term funds to make transactions.

Question 23

In the OTC market, the ask price is the highest price offered by a dealer to purchase a given security.

Question 24

In the OTC market, the prices at which securities are traded result from both competitive bids and negotiation.

Question 25

The over-the-counter (OTC) market is

A) the New York Stock Exchange.
B) an organized stock exchange.
C) a place where securities are bought and sold.
D) an intangible market for unlisted securities.

Question 26

Eurocurrency deposits arise when a corporation or individual makes a deposit in a bank in a currency other than the local currency of the country where the bank is located.

Question 27

Capital markets are for investors who want a safe temporary place to deposit funds where they can earn interest and for borrowers who have a short term need for funds.

Question 28

All of the following are functions of security exchanges EXCEPT

A) allocating scarce capital.
B) aiding in new financing.
C) creating continuous markets.
D) holding demand deposits.

Question 29

The ________ stock exchange is a primary market where new public issues are sold.

A) regional
B) American
C) New York
D) over-the-counter

Question 30

The Over-the-Counter (OTC) exchange is not an organization but an intangible market for trading securities which are not listed by the organized exchanges.

Question 31

The sale of a new security directly to an investor or a group of investors is called

A) the secondary market.
B) the primary mark.et
C) the capital market.
D) the private placement market.

Question 32

Trading is carried out on the floor of the New York Stock Exchange by

A) the negotiation process.
B) the auction process.
C) a telecommunications network.
D) investment bankers.

Question 33

Money markets are markets for long term funds such as bonds and equity.

Question 34

All of the following are examples of organized stock exchanges EXCEPT

A) the New York Stock Exchange.
B) the American Stock Exchange.
C) the Pacific Stock Exchange.
D) the over-the-counter exchange.

Question 35

Money markets involve the trading of securities with maturities of one year or less while capital market involve the buying and selling of securities with maturities of more than one year.

Question 36

Unlike the organized exchanges, the OTC makes a market in both outstanding securities and new public issues, making it both a secondary and a primary market.

Question 37

An efficient market is a market that allocates funds to their most productive use as a result of competition among wealth-maximizing investors.

Question 38

The major securities traded in the capital markets are

A) commercial paper and Treasury bills.
B) Treasury bills and certificates of deposit.
C) stocks and bonds.
D) bonds and commercial paper.

Question 39

The ________ market is where securities are initially issued and the ________ market is where pre-owned securities (not new issues) are traded.

A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money

Question 40

The eurocurrency market is a market for short-term bank deposits denominated in U.S. dollars or other easily convertible currencies.

Question 41

An implication of the Efficient Market Hypothesis is that it is very hard for an actively managed mutual fund to earn above average returns. This is true for all of the following reasons EXCEPT

A) new information is predictable and therefore already incorporated into the stock prices.
B) new information is by definition unpredictable, thus hard to incorporate into stock prices.
C) actively managed mutual funds typically charge fees of about 1.5%.
D) index funds make no attempt to analyze stocks.

Question 42

In a ________ market, the buyer and seller are not brought together to trade securities directly but instead have their orders executed on the ________.

A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market

Question 43

Securities exchanges create efficient markets that do all of the following EXCEPT

A) ensure a market in which the price reflects the true value of the security.
B) allocate funds to the most productive uses.
C) control the supply and demand for securities through price.
D) allow the price to be determined by supply and demand of securities.

Question 44

In an efficient market if a company announced sales of a new product are lower than expected, what would you expect to happen to the stock price?

A) It would not change.
B) It would increase.
C) It would decrease.
D) It would move it the same direction as the market in general.

Question 45

The ________ is created by a number of institutions and arrangements that allow the suppliers and demanders of long-term funds to make transactions.

A) financial market
B) capital market
C) money market
D) credit market

Question 46

In a ________ market, the buyer and seller are brought together to trade securities in an organization called ________.

A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market

Question 47

Mortgage default rates were low from the mid 1990s through 2006 because home prices were rising and lenders allowed borrowers who were having difficulty making payments to refinance on the built up home equity.

Question 48

Mortgage-backed securities are securities that represent claims on the cash flows generated by a pool of mortgages.

Question 49

The ________ is created by a financial relationship between suppliers and demanders of short-term funds.

A) stock market
B) capital market
C) financial market
D) money market

Question 50

The process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary market is called

A) refinancing.
B) securitization.
C) private placement.
D) pooling.

Question 51

Long-term debt instruments used by both government and business are known as

A) stocks.
B) bills.
C) bonds.
D) equities.

Question 52

In efficient market is one where

A) prices of stocks move up and down widely without apparent reason.
B) prices of stocks remain steady for long periods of time.
C) prices of stocks are unaffected by market news.
D) prices of stocks incorporate new information quickly and adjust appropriately to their true value.

Question 53

Securitization made it harder for banks to lend money because they could not pass the risk on to other investors.

Question 54

In the year 2000, real estate loans accounted for less than 40% of the total loan portfolios of large banks, but by 2007 real estate loans grew to more than half of all loans made by large banks.

Question 55

Sub-prime mortgages are mortgage loans made to borrowers the high incomes and better than average credit histories.

Question 56

Securitization is the process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary market.

Question 57

A competitive market that allocates funds to their most productive use is called a(n)

A) liquid market.
B) middleman's market.
C) efficient market.
D) investor's market.

Question 58

The two key financial markets are

A) primary market and secondary market.
B) primary market and money market.
C) money market and capital market.
D) capital market and secondary market.

Question 59

Most money market transactions are made in

A) common stock.
B) marketable securities.
C) stocks and bonds.
D) preferred stock.

Question 60

By definition, the money market involves the buying and selling of

A) stocks and bonds.
B) short-term funds.
C) funds that mature in more than one year.
D) flows of funds.

Question 61

A crisis in the financial sector often spills over into other industries because when financial institutions ________ borrowing, activity in most other industries also ________.

A) increase; slows down
B) contract; slows down
C) increase; increases
D) contract; increases

Question 62

Tax laws often are used to accomplish economic goals such as providing incentives for corporate investment in certain types of assets.

Question 63

The marginal tax rate represents the rate at which additional income is taxed.

Question 64

Which of the follow regulates the secondary market and created the Securities Exchange Commission (SEC)?

A) The Securities Act of 1933
B) The Gramm-Leach-Biley Act
C) The Securities Exchange Act of 1934
D) The Glass--Steagall Act

Question 65

The tax liability of a corporation with ordinary income of $105,000 is ________.

A) $42,000
B) $35,700
C) $23,950
D) $24,200

Question 66

Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax rate for Jennings, Inc.?

A) 34 percent
B) 46 percent
C) 25 percent
D) 40 percent

Question 67

The tax deductibility of various expenses such as general and administrative expenses ________ their after-tax cost.

A) increases
B) reduces
C) has no effect on
D) has an undetermined effect on

Question 68

All dividend income received by one corporation from an investment in the common and preferred stock of another corporation is excluded from taxation.

Question 69

All of the following are true about mortgage-backed securities EXCEPT:

A) They represent claims on the cash flows generated by a pool of mortgages.
B) All of the cash flows from these securities are guaranteed by the U.S. government.
C) They can be purchased by individual investors, pension funds, and mutual funds.
D) The primary risk associated with them is that homeowners may not be able or may not choose to repay the loan.

Question 70

The primary risk of mortgage-backed securities is that

A) the prices of housing will go down.
B) the prices of housing will increase.
C) the government will not be able to meet the guarantees on the cash flows.
D) homeowners may not be able to, or choose not to, repay their loans.

Question 71

Because of the dividend exclusion only 70 percent of intercorporate dividend dividend income is included as ordinary income.

Question 72

The Gramm-Leach-Biley Act

A) does not allows business combinations between commercial banks, investment banks and insurance companies.
B) allows business combinations between commercial banks and investment banks, but not insurance companies.
C) allows business combinations between commercial banks, investment banks and insurance companies.
D) was signed during the Great Depression because of the financial crisis.

Question 73

The ordinary income of a corporation is income earned through the sale of a firm's goods and services and is currently taxed subject to the individual income tax rates.

Question 74

Which of the follow regulates the primary market in which securities are originally issued to the public?

A) The Securities Act of 1933
B) The Gramm-Leach-Biley Act
C) The Securities Exchange Act of 1934
D) The Glass-Steagall Act

Question 75

When home prices are falling we would expect

A) high mortgage default rates.
B) low mortgage default rates.
C) unchanged mortgage default rates.
D) a higher percentage of owner home equity.

Question 76

Dividends received by a corporation on an investment in the common and preferred stock of another corporation (where ownership in the dividend paying corporation is less than 20%) is subject to 70 percent exclusion for tax purposes.

Question 77

The Federal Deposit Insurance Corporation (FDIC):

A) guarantees individuals will not lose any money held at a bank that fails.
B) guarantees individuals will not lose any money, up to a specified amount, held at a bank that fails.
C) guarantees individuals will not lose any money held at any type of financial institution that fails.
D) guarantees individuals will not lose any money, up to a specified amount, held at any type of financial institution that fails.

Question 78

The Securities Act of 1933 focuses on regulating the sale of securities in the primary market, whereas the 1934 Act deal with the regulations governing the transactions in the secondary market.

Question 79

The tax liability of a corporation with ordinary income of $1,500,000 is ________.

A) $498,250
B) $510,000
C) $585,000
D) $690,000

Question 80

The tax liability of a corporation with ordinary income of $1,100,000 is ________.

A) $362,250
B) $340,000
C) $374,000
D) $390,000