Question 1

The primary assets of credit unions are

Accepted Answer

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

Question 2

One reason for the extraordinary growth of foreign financial markets is

Accepted Answer

A)  decreased trade. 
B)  increases in the pool of savings in foreign countries. 
C)  the recent introduction of the foreign bond. 
D)  slower technological innovation in foreign markets.

Question 3

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 4

Conflicts of interest are a type of ________ problem that can happen when an institution provides multiple services.

Accepted Answer

A)  adverse selection 
B)  free-riding 
C)  discounting 
D)  moral hazard

Question 5

Which of the following statements about financial markets and securities is true?

Accepted Answer

A)  A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants. 
B)  A debt instrument is intermediate term if its maturity is less than one year. 
C)  A debt instrument is intermediate term if its maturity is ten years or longer. 
D)  The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.

Question 6

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

Accepted Answer

A)  Bank commercial loans 
B)  Commercial paper 
C)  State and local government bonds 
D)  Residential mortgages

Question 7

An investment intermediary that lends funds to consumers is

Accepted Answer

A)  a finance company. 
B)  an investment bank. 
C)  a finance fund. 
D)  a consumer company.

Question 8

The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets.

Accepted Answer

A)  Germany; Japan 
B)  Germany; Great Britain 
C)  Great Britain; Canada 
D)  Canada; Japan

Question 9

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 10

________ are short-term loans in which Treasury bills serve as collateral.

Accepted Answer

A)  Repurchase agreements 
B)  Negotiable certificates of deposit 
C)  Federal funds 
D)  U.S. government agency securities

Question 11

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 12

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

Exam 2: An Overview of the Financial System