Money and capital markets

1. The bond markets are important becauseA) they are easily the most widely followed financial markets in the United States.B) they are the markets where interest rates are determined.C) they are the markets where foreign exchange rates are determined.D) all of the above.2. Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets.A) decreases; decreases B) increases; increasesC) decreases; increases D) increases; decreases3. Typically, increasing interest ratesA) discourages individuals from saving. B) discourages corporate investments.C) encourages corporate expansion. D) encourages corporate borrowing.4. Compared to interest rates on long-term U.S. government bonds, interest rates on ________ fluctuate more and are lower on average.A) medium-quality corporate bonds B) low-quality corporate bondsC) high-quality corporate bonds D) three-month Treasury bills5. Stock prices since the 1980s have beenA) relatively stable, trending upward at a steady pace.B) relatively stable, trending downward at a moderate rate.C) extremely volatile.D) unstable, trending downward at a moderate rate.6. A declining stock market index due to lower share pricesA) reduces people’s wealth and as a result may reduce their willingness to spend.B) increases people’s wealth and as a result may increase their willingness to spend.C) decreases the amount of funds that business firms can raise by selling newly issued stock.D) both A and C of the above.7. A stronger dollar benefits ________ and hurts ________.A) American businesses; American consumers B) American businesses; foreign businessesC) American consumers; American businesses D) foreign businesses; American consumers8. The organization responsible for the conduct of monetary policy in the United States is theA) Comptroller of the Currency. B) U.S. Treasury.C) Federal Reserve System. D) Bureau of Monetary Affairs.9. Monetary policy is chiefly concerned withA) how much money businesses earn.B) the level of interest rates and the nation’s money supply.C) how much money people pay in taxes.D) whether people have saved enough money for retirement.10. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediariesA) act as middlemen, borrowing funds from those who have saved and lending these funds to others.B) produce non-economic value and are therefore a drain on society’s resources.C) help promote a more efficient and dynamic economy.D) do only A and C of the above.11. Banks are important to the study of money and the economy because theyA) provide a channel for linking those who want to save with those who want to invest.B) have been a source of financial innovation that is expanding the alternatives available to those wanting to invest their money.C) are the only financial institution to play a role in determining the quantity of money in the economy.D) do only A and B of the above.12. The largest financial intermediaries areA) insurance companies. B) finance companies. C) banks. D) all of the above.13. Monetary policy affectsA) interest rates. B) inflation. C) business cycles. D) all of the above.Chapter 214. Every financial market performs the following function:A) It determines the level of interest rates.B) It allows common stock to be traded.C) It allows loans to be made.D) It channels funds from lenders-savers to borrowers-spenders.15. Which of the following can be described as involving direct finance?A) A corporation’s stock is traded in an over-the-counter (dealers) market.B) A corporation buys commercial paper issued by another corporation.C) A pension fund manager buys commercial paper from the issuing corporation.D) Both A and B of the above.16. Which of the following can be described as involving indirect finance?A) A corporation takes out loans from a bank.B) People buy shares in a mutual fund.C) A corporation buys commercial paper in a secondary market.D) Only A and B of the above.17. Which of the following statements about the characteristics of debt and equity are true?A) They both can be long-term financial instruments.B) They both involve a claim on the issuer’s income.C) They both enable a corporation to raise funds.D) All of the above.18. The money market is the market in which ________ are traded.A) new issues of securities B) previously issued securitiesC) short-term debt instruments D) long-term debt and equity instruments19. A corporation acquires new funds only when its securities are sold in theA) 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.20. Intermediaries who link buyers and sellers by buying and selling securities at stated prices (bid-ask price) are calledA) investment bankers. B) traders. C) brokers. D) dealers.21. Which of the following statements about financial markets and securities are true?A) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange.B) A corporation acquires new funds only when its securities are sold in the primary market.C) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.D) All of the above are true.22. Which of the following markets is sometimes organized as an over-the-counter market?A) The stock market B) The bond marketC) The foreign exchange market D) all of the above23. Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known asA) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars.24. The main sources of financing for businesses, in order of importance, areA) financial intermediaries, issuing bonds, issuing stocks.B) issuing bonds, issuing stocks, financial intermediaries.C) issuing stocks, issuing bonds, financial intermediaries.D) issuing stocks, financial intermediaries, issuing bonds.25. The presence of transaction costs in financial markets explains, in part, whyA) financial intermediaries and indirect finance play such an important role in financial markets.B) equity and bond financing play such an important role in financial markets.C) corporations get more funds through equity financing than they get from financial intermediaries.D) direct financing is more important than indirect financing as a source of funds.26. Through risk-sharing activities, a financial intermediary ________ its own risk and ________ the risks of its customers.A) reduces; increases B) increases; reduces C) reduces; reduces D) increases; increases27. Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage ofA) poorly informed consumers. B) standardization.C) economies of scale. D) their market power.28. When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ________ is said to exist.A) asymmetric information B) adverse selectionC) moral hazard D) fraud29. When the borrower engages in activities that make it less likely that the loan will be repaid, ________ is said to exist.A) asymmetric information B) adverse selectionC) moral hazard D) fraud30. The concept of adverse selection helps to explainA) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.B) why indirect finance is more important than direct finance as a source of business finance.C) why direct finance is more important than indirect finance as a source of business finance.D) only A and B of the above.31. Adverse selection is a problem associated with equity and debt contracts arising fromA) the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities.B) the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults.C) the borrower’s lack of incentive to seek a loan for highly risky investments.D) none of the above.32. When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to theA) moral hazard problem. B) adverse selection problem.C) shirking problem. D) free-rider problem.33. Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due toA) moral hazard. B) adverse selection. C) bad luck. D) financial panics.34. Which of the following financial intermediaries are depository institutions?A) A savings and loan association B) A commercial bankC) A credit union D) All of the above35. Which of the following is a contractual savings institution?A) A life insurance company B) A credit unionC) A savings and loan association D) A mutual fund36. Which of the following is not a regulator of part of the U.S. financial system?A) Securities and Exchange Commission B) Federal Reserve SystemC) Federal Deposit Insurance Corporation D) All of the above are regulators.37. The government regulates financial markets for two main reasons:A) to ensure soundness of the financial system and to increase the information available to investors.B) to improve control of monetary policy and to increase the information available to investors.C) to ensure that financial intermediaries do not earn more than the normal rate of return and to improve control of monetary policy.D) to ensure soundness of financial intermediaries and to prevent financial intermediaries from earning less than the normal rate of return.38. Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as aA) bank holiday. B) financial panic. C) financial disintermediation. D) financial collapse.39. The Federal Deposit Insurance Corporation (FDIC) insures each depositor at a commercial bank, savings and loan association, or mutual savings bank up to a loss of ________ per account.A) $100,000 B) $250,000 C) $500,000 D) $1,000,00040. The major differences between financial regulation in the United States and abroad relate to bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject banks to restrictions on ________.A) branching B) lendingC) assets they may hold D) the size they could grow to41. Foreign currencies that are deposited in banks outside the home country are known asA) foreign bonds. B) Eurobond. C) Eurocurrencies. D) Euro.42. U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. are referred to as _________A) Eurodollars. B) Eurocurrencies. C) Eurobonds. D) Yankee bonds.43. Banks providing depositors with checking accounts that enable them to pay their bills easily is known as _____________A) liquidity services. B) asset transformation.C) risk sharing. D) transaction costs.44. Fire and casualty insurance companies are what type of intermediary?A) Contractual savings institution B) Depository institutionsC) Investment intermediaries D) None of the above45. At the end of 2012, the value of debt instruments in the U.S. was around ________ trillion, and the value of equities was around ________ trillion.A) $38; $19 B) $20; $10 C) $19; $38 D) $10; $2046. The DAX (Germany) and the FTSE 100 (London) are examples of ________.A) foreign stock exchanges B) foreign currenciesC) foreign stock price indexes D) foreign mutual fundsTrue/False Questions:47. The New York Stock Exchange is an example of a primary market.48. A bond denominated in euros and issued in a country that uses the euro as its currency is an example of a Eurobond.49. A financial intermediary’s risk-sharing activities are also referred to as asset transformation.50. The process of financial intermediation is also known as direct finance.51. A mutual fund is not a depository institution.52. A pension fund is not a contractual savings institution.53. Equity represents an ownership interest in a firm and entitles the holder to the residual cash flows.54. Adverse selection refers to those with high credit risks, being most aggressive in their search for funds.55. The capital market is a financial market in which only short-term debt instruments (generally those with an original maturity of less than one year) are traded.56. Currently, over 80% of the new issues in the international bond market are Eurobonds.