Question 1

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 2

Which of the following statements about the characteristics of debt and equities is true?

Accepted Answer

A)  They can both be long-term financial instruments. 
B)  Bond holders are residual claimants. 
C)  The income from bonds is typically more variable than that from equities. 
D)  Bonds pay dividends.

Question 3

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 4

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 5

The problem created by asymmetric information before the transaction occurs is called ________,while the problem created after the transaction occurs is called ________.

Accepted Answer

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

Question 6

Which of the following financial intermediaries is not a depository institution?

Accepted Answer

A)  A savings and loan association 
B)  A commercial bank 
C)  A credit union 
D)  A finance company

Question 7

You can borrow $5000 to finance a new business venture.This new venture will generate annual earnings of $251.The maximum interest rate that you would pay on the borrowed funds and still increase your income is

Accepted Answer

A)  25%. 
B)  12.5%. 
C)  10%. 
D)  5%.

Question 8

Distinguish between a foreign bond and a Eurobond.

Accepted Answer

The answer of Distinguish between a foreign bond and a...

Question 9

A restriction on bank activities that was repealed in 1999 was

Accepted Answer

A)  the prohibition of the payment of interest on checking deposits. 
B)  restrictions on credit terms. 
C)  minimum down payments on loans to purchase securities. 
D)  separation of commercial banking from the securities industries.

Question 10

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 11

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.

Question 12

A corporation acquires new funds only when its securities are sold in the

Accepted Answer

A)  secondary market by an investment bank. 
B)  primary market by an investment bank. 
C)  secondary market by a stock exchange broker. 
D)  secondary market by a commercial bank.

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

Which of the following is not a contractual savings institution?

Accepted Answer

A)  A life insurance company 
B)  A pension fund 
C)  A savings and loan association 
D)  A fire and casualty insurance company

Question 15

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 16

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 17

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 18

An example of economies of scale in the provision of financial services is

Accepted Answer

A)  investing in a diversified collection of assets. 
B)  providing depositors with a variety of savings certificates. 
C)  spreading the cost of borrowed funds over many customers. 
D)  spreading the cost of writing a standardized contract over many borrowers.

Question 19

A financial market in which previously issued securities can be resold is called a ________ market.

Accepted Answer

A)  primary 
B)  secondary 
C)  tertiary 
D)  used securities

Question 20

The primary assets of money market mutual funds are

Accepted Answer

A)  stocks. 
B)  bonds. 
C)  money market instruments. 
D)  deposits.

Exam 2: An Overview of the Financial System