Deck 16: The Financial System

Question 1

The treasury sells bonds that mature in 2, 5, 10, and 30 years from the date of issue.

Answer 1

True

Question 2

Mortgage-backed corporate bonds are relatively safe, even when loans are made to borrowers with poor credit ratings.

Answer 2

True

Question 3

Secured bonds are backed by a specific pledge of company assets.

Answer 3

True

Question 4

Bonds are issued in various denominations-face values-usually between $100 and $2,500.

Question 5

Municipal bonds are bonds issued by the federal government.

Question 6

The credit crisis came about because of subprime mortgages.

Question 7

The vast majority of funds flow through direct transfers.

Question 8

Securities represent obligations on the part of issuers-businesses and governments-to provide purchasers with expected or stated returns on the funds invested or loaned.

Question 9

A town is considering putting in a toll road that will produce revenue for the town. To provide funding, the town plans to sell revenue bonds.

Question 10

Jeff wants to purchase a low-risk bond. Therefore, he should buy a government bond.

Question 11

Commercial paper is generally considered a very low-risk security.

Question 12

An indirect transfer of funds is through financial institutions-for example, through a commercial bank such as TD Canada Trust or Scotiabank.

Question 13

Treasury bills have a minimum denomination of $1,000.

Question 14

Money market instruments are generally high-risk securities and are purchased by investors when they are in need of a quick resell.

Question 15

The financial system describes the process by which funds flow from savers to users.

Question 16

Bondholders are creditors, therefore they have a claim on the firm's assets that must be satisfied before any claims of stockholders in the event of the firm's bankruptcy, reorganization, or liquidation.

Question 17

Businesses are net savers, while households are net users of funds.

Question 18

CDs with denominations of $1,000,000 or less per depositor are federally insured.

Question 19

A direct transfer means that the user raises the needed funds from an intermediary institution.

Question 20

Commercial paper is securities sold by corporations, such as General Electric, that mature from 1 to 270 months from the date of issue.

Question 21

Bonds vary considerably in terms of risk. One tool used by bond investors to assess the risk of a bond is its so-called risk rating.

Question 22

Bonds with ratings of BB and below are classified as speculative, or so-called junk, bonds.

Question 23

The market interest rate does NOT have any effect on bond prices.

Question 24

Convertible bonds pay lower interest rates than those lacking conversion features.

Question 25

The price of a bond is affected by its interest rate.

Question 26

Treasury bills are units of ownership in public corporations, such as Sun Life Financial, Hudson's Bay, and Bell Canada Enterprises.

Question 27

When a company offers stock for sale to the general public for the first time, it is called an initial public offering.

Question 28

Preferred shareholders receive fixed dividends.

Question 29

Bonds with the highest level of risk are rated AAA.

Question 30

All bonds are short-term securities issued by the Canadian Treasury and backed by the full faith and credit of the Canadian government.

Question 31

Purchasers of preferred shares are the true owners of a corporation.

Question 32

Owners of common shares expect returns on their investment in the form of cash dividend payments, expected price appreciation, or both.

Question 33

As market interest rates rise, bond prices fall.

Question 34

In the long run, stock prices tend to follow a company's revenues.

Question 35

In the secondary market, firms and governments issue securities and sell them initially to the public.

Question 36

Junk bonds pay about 70 percent more in interest than do investment-grade corporate bonds.

Question 37

Securities are sold to the investing public in two ways: in open auctions and through investment bankers.

Question 38

The market value of a share is the price at which the stock is currently selling.

Question 39

Sales of most corporate and municipal securities are made via auctions.

Question 40

Issuers tend to call bonds when market interest rates are declining.

Question 41

All trading on NASDAQ takes place through its intranet, NOT on a trading floor.

Question 42

Deposit insurance means that, in the event the bank fails, depositors are paid in full by the FDIC, up to $250,000.

Question 43

The Toronto Stock Exchange (TSX) is a secondary market.

Question 44

Most investors are members of the NYSE, or other stock markets, and therefore they do NOT need to use the services of a brokerage firm to buy or sell stocks.

Question 45

Both for-profit corporations and government agencies rely on primary markets to raise funds by issuing bonds.

Question 46

The NASDAQ is a computerized communications network that links member investment firms and is the world's largest intranet.

Question 47

In Canada, the 28 domestic banks and other foreign-based financial institutions manage assets of more than $4.0 trillion.

Question 48

Life insurance companies tend to invest excess funds in short-term securities, while pension funds tend to invest excess funds in long-term securities.

Question 49

Corporate bonds are traded on the Toronto Stock Exchange (TSX), but bond trading is more than 1 percent of the total value of securities traded on the TSX during a typical year.

Question 50

Credit union deposits are insured by private insurance companies.

Question 51

A commercial finance company supplies short-term funds to businesses that use their tangible assets as collateral.

Question 52

Underwriting is the process used by insurance companies to determine whom to insure and what to charge.

Question 53

Any firm can be listed on the Toronto Stock Exchange.

Question 54

The Canada Pension Plan fund has assets of over $148 billion.

Question 55

Virtually all developed countries and many developing countries have stock exchanges.

Question 56

Financial markets are where securities are issued and traded.

Question 57

In order to join a credit union, you have to share something in common with other credit union members.

Question 58

After the recent credit crisis, many small business owners have suffered because banks began pulling their lines of credit.

Question 59

Nondepository institutions include life insurance companies, such as Manulife Financial; pension funds, the Ontario Teachers' Pension Plan; and mutual funds.

Question 60

When evaluating loan applications, banks consider the borrower's ability and willingness to repay the loan.

Question 61

Open market operations is the buying and selling of government securities to increase or decrease bank reserves.

Question 62

Selling government securities reduces bank reserves and slows down the economy.

Question 63

The Investment Industry Regulatory Organization of Canada's purpose is to ensure that all equity trades comply with security trading rules.

Question 64

In 1992 the Bank of Canada removed the reserve requirement.

Question 65

Major Canadian banks-such as CIBC, RBC, and Scotiabank-have extensive international operations. They have offices, lend money, and accept deposits from customers throughout the world.

Question 66

M1 consists of currency in circulation and balances in bank checking accounts.

Question 67

Canadian banks make few foreign investments due to regulatory restrictions.

Question 68

The global financial institutions, including HBSC, Citigroup, and Lloyds Bank, have seen their assets grow at an annual rate of more than 20 percent in this emerging market.

Question 69

Raising the reserve requirement tends to increase the supply of money, thereby lowering interest rates.

Question 70

After the recent credit crisis, many small business owners have suffered because banks have begun pulling their lines of credit.

Question 71

The discount rate is the rate banks charge one another for short-term loans.

Question 72

At the provincial level, regulation of Canadian financial markets is primarily administered by organizations such as the Manitoba Securities Commission or the Ontario Securities Commission.

Question 73

The Toronto Stock Exchange (TSX) outsources market surveillance to an independent third party-the Investment Industry Regulatory Organization of Canada (IIROC).

Question 74

When the Bank of Canada buys government securities, it adds to the supply of money and credit, which causes a reduction in interest rates.

Question 75

Regulation of the Canadian financial markets is primarily a function of the federal government.

Question 76

Most nations do NOT have a central bank similar to the U.S. Federal Reserve.

Question 77

One of the Bank of Canada's most important responsibilities is to help facilitate the clearing of cheques.

Question 78

If the money supply grows too rapidly, inflationary pressures will begin to build.

Question 79

The TSX outsources market surveillance to the IIROC.

Question 80

Under the Bank Act the federal government is responsible for regulating the banking sector.