Question 1

Stocks that are traded in the _____ are typically those of smaller and less known firms.

Accepted Answer

A)  National Stock Exchange 
B)  New York Stock Exchange 
C)  American Stock Exchange 
D)  over-the-counter market

Question 2

The term money market is used because:

Accepted Answer

A)  firms that issue securities in this market are in dire need of cash. 
B)  it is a market where stocks are converted into money. 
C)  the instruments traded in this market are close substitutes for cash. 
D)  none of the above.

Question 3

If a small business chooses not to borrow funds from a commercial bank, then what will probably be its next best alternative?

Accepted Answer

A)  An insurance company. 
B)  A pension. 
C)  An investment fund. 
D)  A business finance company.

Question 4

An economy with a large flow of funds requires:

Accepted Answer

A)  a lot of gold reserves. 
B)  a frictionless market. 
C)  an efficient financial system. 
D)  all of the above.

Question 5

Casualty insurance companies sell:

Accepted Answer

A)  protection against loss of income in the event of the death of the insured. 
B)  protection against loss of property from fire, theft, accidents, and other predictable causes. 
C)  protection against a loss of pension revenue for retirees. 
D)  all of the above.

Question 6

A line of credit to a corporation is like _____ to an individual.

Accepted Answer

A)  a term loan 
B)  a bond 
C)  a credit card 
D)  a debit card

Question 7

If your firm obtains most of its financing from commercial banks, then it primarily accesses the capital markets through:

Accepted Answer

A)  direct financing. 
B)  indirect financing. 
C)  a legal loophole that allows all commercial banks the ability to underwrite securities. 
D)  none of the above.

Question 8

The downside to a private placement transaction is that, it does not require the fees and expenses associated with an SEC registration.

Accepted Answer

A) True 
 B)False

Question 9

Today, major money center banks in U.S have been allowed back to provide investment banking services.

Accepted Answer

A) True 
 B)False

Question 10

In the United States, the real rate of interest has historically been around:

Accepted Answer

A)  1 percent. 
B)  3 percent. 
C)  5 percent. 
D)  7 percent.

Question 11

Which of the following is when a firm sells common stock to the public for the very first time?

Accepted Answer

A)  an underwriting 
B)  an initial public offering 
C)  a financial intermediation 
D)  an origination

Question 12

Money market instruments are generally issued by:

Accepted Answer

A)  firms in dire need of cash to maintain their credit rating. 
B)  firms of the highest credit rating. 
C)  firms of the lower credit ratings. 
D)  all of the above.

Question 13

The term money market reflects the idea that the instruments traded in the money market are highly marketable and easily converted into cash.

Accepted Answer

A) True 
 B)False

Question 14

If the supply of loanable funds decreases relative to the demand for those funds, then we would expect:

Accepted Answer

A)  interest rates to remain unchanged. 
B)  interest rates to increase. 
C)  interest rates to decrease. 
D)  the cost of money to remain unchanged.

Question 15

Why do interest rates follow the business cycle?

Accepted Answer

A)  Typically, the Fed tightens credit to stimulate the economy, which puts further downward pressure on interest rates. 
B)  Interest rates tend rise during economic expansion and decline during recessions. 
C)  During an expansion, there is downward pressure on interest rates as businesses begin to grow and borrow more money. 
D)  During a recession, the demand for goods and services is lower, businesses borrow more, and as a result the economy slows down and the interest rates decline.

Question 16

If inflation is anticipated to be 6 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?

Accepted Answer

A)  6% 
B)  11% 
C)  5% 
D)  12%

Question 17

The major players in the direct financial markets are:

Accepted Answer

A)  investment banks. 
B)  money center banks. 
C)  regional banks. 
D)  both A and B.

Question 18

An important function of financial intermediation is:

Accepted Answer

A)  To convert financial securities with one set of characteristics into securities with another set of characteristics. 
B)  To direct the money from lenders to borrowers 
C)  To direct the money from borrowers to savers. 
D)  For commercial banks to use consumer CD deposits to make deposits to small businesses.

Question 19

The nominal rate of interest is made up of:

Accepted Answer

A)  the real rate of interest. 
B)  compensation for inflation. 
C)  a commodity cross-index return. 
D)  both A and B .

Question 20

It is impossible for the nominal rate of interest to be less than real rate of interest.

Accepted Answer

A) True 
 B)False

Exam 2: The Financial System and the Level of Interest Rates

Stocks that are traded in the _____ are typically those of smaller and less known firms.

The term money market is used because:

If a small business chooses not to borrow funds from a commercial bank, then what will probably be its next best alternative?

An economy with a large flow of funds requires:

Casualty insurance companies sell:

A line of credit to a corporation is like _____ to an individual.

If your firm obtains most of its financing from commercial banks, then it primarily accesses the capital markets through:

The downside to a private placement transaction is that, it does not require the fees and expenses associated with an SEC registration.

Today, major money center banks in U.S have been allowed back to provide investment banking services.

In the United States, the real rate of interest has historically been around:

Which of the following is when a firm sells common stock to the public for the very first time?

Money market instruments are generally issued by:

The term money market reflects the idea that the instruments traded in the money market are highly marketable and easily converted into cash.

If the supply of loanable funds decreases relative to the demand for those funds, then we would expect:

Why do interest rates follow the business cycle?

If inflation is anticipated to be 6 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?

The major players in the direct financial markets are:

An important function of financial intermediation is:

The nominal rate of interest is made up of:

It is impossible for the nominal rate of interest to be less than real rate of interest.