Question 1

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?

Accepted Answer

The answer of Corporations receive funds when their stock is...

Question 2

An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called

Accepted Answer

A)  underwriting. 
B)  underhanded. 
C)  understanding. 
D)  undertaking.

Question 3

Which of the following is not a goal of financial regulation?

Accepted Answer

A)  Ensuring the soundness of the financial system 
B)  Reducing moral hazard 
C)  Reducing adverse selection 
D)  Ensuring that investors never suffer losses

Question 4

When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public.

Accepted Answer

A)  underwrites 
B)  undertakes 
C)  overwrites 
D)  overtakes

Question 5

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 6

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets.

Accepted Answer

A)  adverse selection; moral hazard 
B)  adverse selection; risk sharing 
C)  moral hazard; transactions costs 
D)  adverse selection; economies of scale

Question 7

Which of the following is not a secondary market?

Accepted Answer

A)  foreign exchange market 
B)  futures market 
C)  options market 
D)  IPO market

Question 8

Banks can lower the cost of information production by applying one information resource to many different services. This process is called

Accepted Answer

A)  economies of scale. 
B)  asset transformation. 
C)  economies of scope. 
D)  asymmetric information.

Question 9

Risk sharing is profitable for financial institutions due to

Accepted Answer

A)  low transactions costs. 
B)  asymmetric information. 
C)  adverse selection. 
D)  moral hazard.

Question 10

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 11

The primary assets of credit unions are

Accepted Answer

A)  municipal bonds. 
B)  business loans. 
C)  consumer loans. 
D)  mortgages.

Question 12

Which of the following instruments are traded in a capital market?

Accepted Answer

A)  Corporate bonds. 
B)  U.S. Treasury bills. 
C)  Negotiable bank CDs. 
D)  Repurchase agreements.

Question 13

The concept of diversification is captured by the statement

Accepted Answer

A)  don't look a gift horse in the mouth. 
B)  don't put all your eggs in one basket. 
C)  it never rains, but it pours. 
D)  make hay while the sun shines.

Question 14

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 15

The primary liabilities of a commercial bank are

Accepted Answer

A)  bonds. 
B)  mortgages. 
C)  deposits. 
D)  commercial paper.

Question 16

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

Accepted Answer

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.

Question 17

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 18

Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as

Accepted Answer

A)  foreign bonds. 
B)  Eurobonds. 
C)  equity bonds. 
D)  country bonds.

Question 19

The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.

Accepted Answer

A)  more; primary 
B)  more; secondary 
C)  less; primary 
D)  less; secondary

Question 20

A short-term debt instrument issued by well-known corporations is called

Accepted Answer

A)  commercial paper. 
B)  corporate bonds. 
C)  municipal bonds. 
D)  commercial mortgages.

Exam 2: An Overview of the Financial System