Question 1

In the United States, the biggest investors in debt securities are

Accepted Answer

A) households. 
B) business firms. 
C) governments. 
D) financial intermediaries.

Question 2

A U.S.government savings bond is an example of a

Accepted Answer

A) marketable security. 
B) nonmarketable security. 
C) secondary security. 
D) primary security.

Question 3

Everything else remaining unchanged, an increase in the supply of security A and an increase in the demand for security B causes the price of security A to_____ and the price of security B to_____ .

Accepted Answer

A) fall; fall 
B) fall; rise 
C) rise; fall 
D) rise; rise

Question 4

A financial intermediary

Accepted Answer

A) is a government-owned acceptor of deposits. 
B) pools the funds of many people. 
C) speculates in the stock market. 
D) advances loans but does not accept deposits.

Question 5

If a stock's price is $20 at the beginning of a year and $17 at the end of the year, and it pays a dividend of $2 during the year, then the stock's current yield is_____ percent.

Accepted Answer

A) ?15 
B) ?5 
C) 5 
D) 10

Question 6

GLTP Inc.transformed from a private company into a public company after offering its shares in a securities exchange for the first time.Such transactions take place in a

Accepted Answer

A) tertiary market. 
B) closed market. 
C) secondary market. 
D) primary market.

Question 7

In the United States, the biggest investors in equity securities are

Accepted Answer

A) households. 
B) business firms. 
C) governments. 
D) financial intermediaries.

Question 8

The situation when the issuer of a security fails to make the payment promised is referred to as

Accepted Answer

A) default. 
B) deviation. 
C) failure. 
D) defect.

Question 9

Joe E.Conomist purchased 100 shares of IBM corporation in 2011 for $10,000.In 2014, Joe sold these shares to Sally Forth for $15,000.How would this sale of stock in 2014 affect IBM corporation?

Accepted Answer

A) IBM makes $5,000 in profit. 
B) IBM invests $5,000 in capital equipment. 
C) IBM suffers a loss of $5,000. 
D) IBM is unaffected.

Question 10

The ease with which you can buy or sell a security in the secondary market when you want to without incurring significant costs is known as

Accepted Answer

A) liquidity. 
B) risk. 
C) secondary marketization. 
D) secondary market penetration.

Question 11

The amount of debt and equity outstanding in the United States is more than_____ times the nation's GDP.

Accepted Answer

A) 2 
B) 3 
C) 4 
D) 5

Question 12

When savers buy securities from borrowers without the assistance of any third-party, they are using

Accepted Answer

A) direct finance. 
B) indirect finance. 
C) a secondary market. 
D) a financial intermediary.

Question 13

Suppose the quantity demanded for a security is BD = 150 − 0.1b,
And the quantity supplied of the security is
BS = 50 + 0.1b,
Where b is the price of the security in dollars.The equilibrium price of the security is

Accepted Answer

A) $50. 
B) $125. 
C) $250. 
D) $500.

Question 14

Andy keeps his savings in a certificate of deposit at a bank, Ben keeps his savings invested in U.S.savings bonds, Beth keeps her savings in the form of liquid cash in her vault, and Charlie uses his to buy stock on the New York Stock Exchange.Given this information, who among the following individuals is using indirect finance?

Accepted Answer

A) Andy 
B) Ben 
C) Charlie 
D) Beth

Question 15

Suppose you are an investor with a choice between three securities that are identical in every way except in terms of their rates of return and risk.Which security has the least risk? Note: You can answer this question intuitively, without calculating the standard deviation.However, if you want to calculate the standard deviation, the equation is: Standard deviation = S = $$\left\{ p _ { 1 } \left( X _ { 1 } - E \right) ^ { 2 } + p _ { 2 } \left( X _ { 2 } - E \right) ^ { 2 } + \ldots + p _ { N } \left( X _ { N } - E \right) ^ { 2 } \right\} ^ { \frac { 1 } { 2 } }$$ 
Investment A: $\quad $total return = 10 percent with probability 50 percent
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $Total return = 20 percent with probability 50 percent

Investment B: $\quad $total return = 12 percent with probability 50 percent
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $ total return = 20 percent with probability 50 percent

Investment C:$\quad $ total return = 5 percent with probability 60 percent 
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $total return = 25 percent with probability 40 percent

Investment D: $\quad $total return = 5 percent with probability 60 percent 
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $total return = 7 percent with probability 40 percent

Accepted Answer

A) Investment A 
B) Investment B 
C) Investment C 
D) Investment D

Question 16

Everything else remaining unchanged, a decrease in the supply of security A and an increase in the demand for security B will cause the price of security A to _____and the price of security B to____ .

Accepted Answer

A) fall; fall 
B) fall; rise 
C) rise; fall 
D) rise; rise

Question 17

In the event that a firm goes bankrupt and is liquidated, who is paid off first, second, and third between workers, debt holders, and stockholders?

Accepted Answer

A) (1) debt holders; (2) workers; (3) stockholders 
B) (1) stockholders; (2) workers; (3) debt holders 
C) (1) workers; (2) debt holders; (3) stockholders 
D) (1) workers; (2) stockholders; (3) debt holders

Question 18

You buy a bond for $1,000 today that promises interest of $50 in one year plus the return of your principal. However, the probability that the company will default and not pay you either interest nor repay your principal is 1 percent.The expected return on the bond is _____percent.

Accepted Answer

A) 3.95 
B) 4.00 
C) 4.95 
D) 5.00

Question 19

Consider three alternative bonds that you might invest in, each of which matures in one year.The following table shows the probability that you will receive each possible return.For example, if you buy bond A, the probability is
90 percent that your return will be 20 percent and the probability is 10 percent that your return will be ?100 percent
(in other words, you lose the entire amount invested). $$\begin{array} { l l l } 
\text { Band } & \text { Prabability } & \text { Roturn } \
\text { Bund A } & 90 \% & 20 \% \
& 10 \% & - 100 \% \
& & \
\text { Band B } & 75 \% & 40 \% \
& 25 \% & - 40 \% \
& & \
\text { Bund C } & 60 \% & 10 \% \
&40\%&-10\%
\end{array}$$ 
a.Calculate the expected return for all three bonds in percentage terms.
b.The standard deviations of the returns on these bonds are: Bond A, 36.0 percent; Bond B,
34.6 percent; Bond C, 9.8 percent.If you are extremely risk averse, which of the three bonds would you buy? Why?
c.Would a risk-averse investor ever buy Bond A instead of one of the other bonds? Why or why not?
Explain and show all your work.In your calculations, you may round after three significant digits.

Accepted Answer

The answer of Consider three alternative bonds that you might...

Question 20

Another name for an equity security is

Accepted Answer

A) bond. 
B) debt. 
C) option. 
D) stock.

Exam 2: The Financial System and the Economy