Question 1

Long-term debt has a maturity that is

Accepted Answer

A) between one and ten years. 
B) less than a year. 
C) between five and ten years. 
D) ten years or longer.

Question 2

Bonds issued by state and local governments are called ________ bonds.

Accepted Answer

A) corporate 
B) Treasury 
C) municipal 
D) commercial

Question 3

U.S.Treasury bills are considered the safest of all money market instruments because there is almost no risk of

Accepted Answer

A) defeat. 
B) default. 
C) desertion. 
D) demarcation.

Question 4

Because there is an imbalance of information in a lending situation,we must deal with the problems of adverse selection and moral hazard.Define these terms and explain how financial intermediaries can reduce these problems.

Accepted Answer

The answer of Because there is an imbalance of information...

Question 5

Which of the following is a depository institution?

Accepted Answer

A) A life insurance company 
B) A credit union 
C) A pension fund 
D) A mutual fund

Question 6

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

Accepted Answer

A) $400. 
B) $201. 
C) $200. 
D) $199.

Question 7

Thrift institutions include

Accepted Answer

A) banks,mutual funds,and insurance companies. 
B) savings and loan associations,mutual savings banks,and credit unions. 
C) finance companies,mutual funds,and money market funds. 
D) pension funds,mutual funds,and banks.

Question 8

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

Accepted Answer

A) commercial paper. 
B) a negotiable certificate of deposit. 
C) a municipal bond. 
D) federal funds.

Question 9

Which of the following is a contractual savings institution?

Accepted Answer

A) A life insurance company 
B) A credit union 
C) A savings and loan association 
D) A mutual fund

Question 10

Which of the following can be described as involving direct finance?

Accepted Answer

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.

Question 11

Which of the following instruments is not traded in a money market?

Accepted Answer

A) Residential mortgages 
B) U.S.Treasury Bills 
C) Negotiable bank certificates of deposit 
D) Commercial paper

Question 12

In order to reduce risk and increase the safety of financial institutions,commercial banks and other depository institutions are prohibited from

Accepted Answer

A) owning municipal bonds. 
B) making real estate loans. 
C) making personal loans. 
D) owning common stock.

Question 13

How do regulators help to ensure the soundness of financial intermediaries?

Accepted Answer

The answer of How do regulators help to ensure the...

Question 14

Financial markets have the basic function of

Accepted Answer

A) getting people with funds to lend together with people who want to 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.

Question 15

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as

Accepted Answer

A) risk sharing. 
B) risk aversion. 
C) risk neutrality. 
D) risk selling.

Question 16

________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.

Accepted Answer

A) Mutual funds 
B) Investment banks 
C) Finance companies 
D) Credit unions

Question 17

________ work in the secondary markets matching buyers with sellers of securities.

Accepted Answer

A) Dealers 
B) Underwriters 
C) Brokers 
D) Claimants

Question 18

The process of asset transformation refers to the conversion of

Accepted Answer

A) safer assets into risky assets. 
B) safer assets into safer liabilities. 
C) risky assets into safer assets. 
D) risky assets into risky liabilities.

Question 19

If Microsoft sells a bond in London and it is denominated in dollars,the bond is a

Accepted Answer

A) Eurobond. 
B) foreign bond. 
C) British bond. 
D) currency bond.

Question 20

Equity of U.S.companies can be purchased by

Accepted Answer

A) U.S.citizens only. 
B) foreign citizens only. 
C) U.S.citizens and foreign citizens. 
D) U.S.mutual funds only.

Exam 2: An Overview of the Financial System