Question 1

Which of the following is an example of an intermediate-term debt?

Accepted Answer

A)   A thirty-year mortgage
B)   A sixty-month car loan
C)   A six month loan from a finance company
D)   A Treasury bond B

Question 2

The purpose of the disclosure requirements is to ________.

Accepted Answer

A)   increase the information available to investors
B)   prevent bank panics
C)   improve monetary control
D)   protect investors against financial losses A

Question 3

Assume that you borrow $2000 at 10 percent 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 B

Question 4

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 5

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 6

Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in Canada?

Accepted Answer

The answer of Distinguish between direct finance and indirect finance....

Question 7

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 8

The primary purpose of deposit insurance is to ________.

Accepted Answer

A)   improve the flow of information to investors
B)   prevent banking panics
C)   protect bank shareholders against losses
D)   protect bank employees from unemployment

Question 9

The primary assets of a pension fund are ________.

Accepted Answer

A)   money market instruments
B)   corporate bonds and stock
C)   consumer and business loans
D)   mortgages

Question 10

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

Question 11

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

Accepted Answer

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

Question 12

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of ________.

Accepted Answer

A)   moral hazard
B)   adverse selection
C)   free-riding
D)   costly state verification

Question 13

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 14

A goal of the Ontario Securities Commission is to reduce problems arising from ________.

Accepted Answer

A)   competition
B)   banking panics
C)   risk
D)   asymmetric information

Question 15

If the maturity of a debt instrument is less than one year, the debt is called ________.

Accepted Answer

A)   short-term
B)   intermediate-term
C)   long-term
D)   prima-term

Question 16

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 17

The liquidity of assets in contractual savings institutions ________.

Accepted Answer

A)   is an important consideration
B)   is not an important consideration
C)   is restricted
D)   is an undertaking

Question 18

A liquid asset is ________.

Accepted Answer

A)   an asset that can easily and quickly be sold to raise cash
B)   a share of an ocean resort
C)   difficult to resell
D)   always sold in an over-the-counter market

Question 19

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.

Accepted Answer

A)   adverse selection
B)   moral hazard
C)   risk sharing
D)   credit risk

Question 20

Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as ________.

Accepted Answer

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

Exam 2: An Overview of the Financial System