Deck 1: Introduction

Question 1

The financial asset is referred to as a ________ if the claim is a fixed dollar.

A) debt instrument.
B) common equity instrument.
C) derivative instrument.
D) preferred equity instrument.

Answer 1

A

Question 2

Which of the below is NOT a factor that has led to the integration of financial markets?

A) A factor is liberalization of markets and the activities of market participants in key financial centers of the world.
B) A factor is deregulation of markets and the activities of market participants in key financial centers of the world.
C) A factor is technological advances for monitoring world markets, executing orders, and analyzing financial opportunities.
D) A factor is decreased institutionalization of financial markets.

Answer 2

D

Question 3

Which of the below statements is TRUE?

A) Because of differences in culture and history, different countries regulate financial markets and financial institutions in varying ways, emphasizing some forms of regulation more than others.
B) The standard explanation or justification for governmental regulation of a market is that the market, left to itself, will produce its particular goods or services in an efficient manner and at the lowest possible cost.
C) Governments in most developed economies have created elaborate systems of regulation for financial markets, in part because the markets themselves are simple and in part because financial markets are unimportant to the general economies in which they operate.
D) Financial activity regulation are free of rules about traders of securities and trading on financial markets.

Answer 3

A

Question 4

Business entities include nonfinancial and financial enterprises. ________ manufacture products such as cars and computers and/or provide nonfinancial services such as transportation and utilities.

A) Financial enterprises
B) Nonfinancial enterprises
C) Both financial and nonfinancial enterprises
D) None of these

Question 5

Derivative instruments derive their value from ________.

A) market conditions at time of delivery.
B) market conditions at time of issue.
C) the underlying instruments to which they relate.
D) variations in the future claims conveyed from spot markets.

Question 6

A factor leading to the integration of financial markets is ________.

A) decreased institutionalization of financial markets.
B) increased monitoring of markets.
C) technological advances for monitoring domestic markets, executing orders, and analyzing financial opportunities.
D) technological advances for monitoring world markets, executing orders, and disregarding financial opportunities.

Question 7

An asset is a possession that has value in an exchange and can be classified as ________.

A) financial or intangible.
B) financial or variable.
C) tangible or intangible.
D) fixed or variable.

Question 8

Derivative markets may have at least three advantages over the corresponding cash (spot) market for the same financial asset. Which of the below is ONE of these advantages?

A) Transactions typically can be accomplished faster in the derivatives market.
B) It will always cost more to execute a transaction in the derivatives market in order to adjust the risk exposure of an investor's portfolio to new economic information than it would cost to make that adjustment in the cash market.
C) All derivative markets can absorb a greater dollar transaction without an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market.
D) Some derivative markets can absorb a greater dollar transaction but with an adverse effect on the price of the derivative instrument; that is, the derivative market may be more liquid than the cash market.

Question 9

From the perspective of a given country, financial markets can be classified as either internal or external. The internal market is composed of two parts: the domestic market and the foreign market. The domestic market is ________.

A) where the securities of issuers not domiciled in the country are sold and traded.
B) where issuers domiciled in a country issue securities and where those securities are subsequently traded.
C) where securities are offered simultaneously to investors in a number of countries.
D) where issuers domiciled in a country issue securities and where those securities are NOT subsequently traded.

Question 10

A(n) ________ such as plant or equipment purchased by a business entity shares at least one characteristic with a financial asset: Both are expected to generate future cash flow for their owner.

A) tangible asset
B) intangible asset
C) balance sheet asset
D) cash asset

Question 11

Financial assets have two principal economic functions. Which of the below is ONE of these?

A) A principal economic function is to transfer funds from those who have surplus funds to borrow to those who need funds to invest in intangible assets.
B) A principal economic function is to transfer funds in such a way as to redistribute the avoidable risk associated with the cash flow generated by intangible assets among those seeking and those providing the funds.
C) A principal economic function is to transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds.
D) A principal economic function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in intangible assets.

Question 12

Financial markets can be categorized as those dealing with newly issued financial claims that are called the ________, and those for exchanging financial claims previously issued that are called the ________.

A) secondary market; primary market.
B) financial market; secondary market.
C) OTC market; NYSE/AMEX market.
D) primary market; secondary market.

Question 13

Derivative contracts provide ________.

A) issuers and investors an expensive but efficient way of controlling some major risks.
B) issuers and investors an inexpensive way of controlling some major risks.
C) issuers and investors an inexpensive but inefficient way of controlling all major risks.
D) issuers and investors an expensive way of controlling some minor risks.

Question 14

The two basic types of derivative instruments are ________ and ________.

A) insurance contracts; options contracts
B) futures/forward contracts; indentures
C) futures/forward contracts; legal contracts
D) futures/forward contracts; options contracts

Question 15

A reason for a corporation using ________ is a desire by issuers to diversify their source of funding so as to reduce reliance on domestic investors.

A) Euromarkets
B) domestic equity markets
C) domestic government markets
D) None of these

Question 16

A principal economic function to transfer funds from those who have ________ to invest to those who need funds to invest in ________.

A) deficit funds; tangible assets.
B) surplus funds; intangible assets.
C) deficit funds; intangible assets.
D) surplus funds; tangible assets.

Question 17

Financial markets provide three economic functions. Which of the below is NOT one of these?

A) The interactions of buyers and sellers in a financial market determine the price of the traded asset.
B) Financial markets provide a mechanism for an investor to sell a financial asset.
C) Financial markets increases the cost of transacting.
D) The interactions of buyers and sellers in a financial market determine the required return on a financial asset.

Question 18

The shifting of the financial markets from dominance by retail investors to institutional investors is referred to as the ________ of financial markets.

A) globalization
B) institutionalization
C) securitization
D) diversification

Question 19

A basic economic principle is that the price of any financial asset ________ the present value of its expected cash flow, even if the cash flow is not known with certainty.

A) is greater than
B) is equal to
C) is less than
D) is equal to or greater than

Question 20

Which of the following statements is FALSE?

A) Because of the prominent role played by financial markets in economies, governments have long deemed it necessary to regulate certain aspects of these markets.
B) In their regulatory capacities, governments have had little influence on the development and evolution of financial markets and institutions.
C) It is important to realize that governments, markets, and institutions tend to behave interactively and to affect one another's actions in certain ways.
D) A sense of how the government can affect a market and its participants is important to an understanding of the numerous markets and securities.

Question 21

The proposal by the U.S. Department of the Treasury, popularly referred to as the "Blueprint for Regulatory Reform" or simply Blueprint, would replace the prevailing complex array of regulators with a regulatory system based on functions. More specifically, there would be three regulators. Which of the below is NOT one of these?

A) market stability regulator
B) prudential regulator
C) uninhibited regulator
D) business conduct regulator

Question 22

The three economic functions of financial markets are: to improve the price discovery process; to lessen liquidity; and, to reduce the cost of transacting.

Question 23

The market stability regulator would take on the traditional role of the Federal Reserve by giving it the responsibility and authority to ensure overall financial market stability.

Question 24

Globalization means the integration of financial markets throughout the world into an international financial market.

Question 25

There are two extreme views of financial innovation. Which of the below is ONE of these?

A) Some hold that the essence of innovation is the introduction of financial assets that are less efficient for redistributing risks among market participants.
B) There are some who believe that the minor impetus for innovation has been the endeavor to circumvent regulations and find loopholes in tax rules.
C) Some hold that the essence of innovation is the introduction of financial instruments that are more efficient for redistributing risks among market participants.
D) None of these

Question 26

When the option grants the owner of the option the right to buy a financial asset from the other party, the option is called a put option.

Question 27

An ultimate and important cause of financial innovation does not involve ________.

A) incentives to follow existing regulation and and tax laws.
B) increased volatility of interest rates, inflation, equity prices, and exchange rates.
C) changing global patterns of financial wealth.
D) financial intermediary competition.

Question 28

The regulatory structure in the United States is largely the result of ________.

A) the first IPO bubble in the 20th century.
B) the boom in the stock market experienced in the 1990s.
C) bull markets that have occurred at various times.
D) financial crises that have occurred at various times.

Question 29

Financial assets have two principal economic functions. One function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets.

Question 30

IBM pension fund owns a portfolio consisting of the common stock of a large number of companies. Suppose the pension fund knows that two months from now it must sell stock in its portfolio to pay beneficiaries $20 million. The risk that IBM pension fund faces is that two months from now when the stocks are sold, the price of most or all stocks may be higher than they are today.

Question 31

________ increase the liquidity of markets and the availability of funds by attracting new investors and offering new opportunities for borrowers.

A) Market-broadening instruments
B) Market-management instruments
C) Risk-management instruments
D) Arbitraging-broadening instruments

Question 32

Global competition has forced governments to exercise control various aspects of their financial markets so that their financial enterprises can compete effectively around the world.

Question 33

The Economic Council of Canada classifies financial innovations into three broad categories. Which of the below is NOT one of these?

A) market-broadening instruments
B) risk-management instruments
C) risk-broadening instruments
D) arbitraging instruments and processes

Question 34

The market participants include households, business entities, national governments, national government agencies, state and local governments, supranationals, and regulators.

Question 35

Derivative instruments play a critical role in global financial markets.

Question 36

Blueprint regulation is the form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors.

Question 37

One economic function of a financial market is to reduce the cost of transacting. There are two costs associated with transacting: search costs and information costs.

Question 38

An equity instrument (also called a residual claim) obligates the issuer of the financial asset to pay the holder an amount based on earnings, if any, after holders of debt instruments have been paid.

Question 39

The domestic market in any country is the market where the securities of issuers not domiciled in the
country are sold and traded.

Question 40

A intangible asset is one whose value depends on particular physical properties such as buildings, land, or machinery. Tangible assets, by contrast, represent legal claims to some future benefit.

Question 41

Governments in most developed economies have created elaborate systems of regulation for financial markets, in part because the markets themselves are complex and in part because financial markets are so important to the general economies in which they operate. The numerous rules and regulations are designed to serve several purposes. These rules and regulations fall into the various categories. Provide at least three of these categories.

Question 42

Name and describe some of the ways to classify financial markets.

Question 43

Describe at least two reasons why a corporation may seek to raise funds outside its domestic market.

Question 44

What are the two principal economic functions of financial assets? Give an illustration.

Question 45

The two basic types of derivative instruments are futures/forward contracts and options contracts. Describe these two basic types.

Question 46

Professor Stephen Ross suggests two classes of financial innovation. List these two classes.

Question 47

The third economic function of a financial market is that it reduces the cost of transacting. Name and describe the two costs associated with this economic function.

Question 48

No one holds the extreme view that the essence of innovation is the introduction of financial instruments that are more efficient for redistributing risks among market participants.

Question 49

Financial activity regulation is the form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors.

Question 50

Liquidity-generating innovations can increase the liquidity of the market, allow borrowers to draw upon new sources of funds, and permit market participants to circumvent capital constraints imposed by regulations.