Fin 4303 Quiz 2

8/27/2018 Chapter 2 Flashcards | Quizlet
Chapter 2 92 terms jhwdds
1) Every financial market D) It channels funds from lenders-savers to borrowers-

performs the following spenders.
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.
2) Financial markets A) bringing together people with funds to lend and

have the basic function people who want to borrow funds.
of
A) bringing together
people with funds to
lend and people who
want to borrow funds.
B) assuring that the
swings in the business
cycle are less
pronounced.
C) assuring that
governments need
https://quizlet.com/71390125/chapter-2-flash-cards/ 1/29
never resort to printing

money.
D) both A and B of the
above.
E) both B and C of the
above.
3) Which of the E) None of the above.

following can be
described as involving
direct finance?
A) A corporation's stock
is traded in an over-the-
counter market.
B) People buy shares in
a mutual fund.
C) A pension fund
manager buys
commercial paper in
the secondary market.
D) An insurance
company buys shares of
common stock in the
over-the-counter
markets.
E) None of the above.
4) Which of the B) A corporation buys commercial paper issued by another

following can be corporation.
direct finance?
A) A corporation's stock
is traded in an over-the-
counter 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.
E) Both B and C of the
above.
5) Which of the E) Only A and B of the above.

following can be
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) All of the above.
E) Only A and B of the
above.
6) Which of the D) Both A and C of the above.

following can be
indirect finance?
A) A bank buys a U.S.
Treasury bill from one
of its depositors.
B) A corporation buys
commercial paper
issued by another
corporation.
C) A pension fund
manager buys
commercial paper in
the primary market.

D) Both A and C of the
above.
7) Financial markets E) they do A and B of the above.

improve economic
welfare because
A) they allow funds to
move from those
without productive
investment
opportunities to those
who have such
opportunities.
B) they allow consumers
to time their purchases
better.
C) they weed out
inefficient firms.
D) they do all of the
above.
E) they do A and B of
the above.
8) A country whose C) experience economic hardship and financial crises.

financial markets
function poorly is likely
to
A) efficiently allocate its
capital resources.
B) enjoy high
productivity.
C) experience
economic hardship and
financial crises.
D) increase its standard
of living.
9) Which of the D) All of the above
following are
securities?
A) A certificate of
deposit
B) A share of Texaco
common stock
C) A Treasury bill
D) All of the above
above
10) Which of the D) All of the above.

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.
above.
11) The money market is C) short-term debt instruments

the market in which
________ are traded.
A) new issues of
securities
B) previously issued
securities
C) short-term debt
instruments
D) long-term debt and

equity instruments
12) Long-term debt and C) capital

equity instruments are
traded in the ________
market.
A) primary
B) secondary
C) capital
D) money
13) Which of the E) None of the above

following are primary
markets?
A) The New York Stock
Exchange
B) The U.S. government
bond market
C) The over-the-counter
stock market
D) The options markets
E) None of the above
14) Which of the E) All of the above

following are secondary
markets?
A) The New York Stock
Exchange
B) The U.S. government
bond market
C) The over-the-counter
stock market
D) The options markets
E) All of the above
15) A corporation B) primary market by an investment bank.

acquires new funds only
when its securities are
sold in the
A) 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.
16) Intermediaries who C) brokers.

are agents of investors
and match buyers with
sellers of securities are
called
A) investment bankers.
B) traders.
C) brokers.
D) dealers.
E) none of the above.
17) Intermediaries who D) dealers.

link buyers and sellers
by buying and selling
securities at stated
prices are called
A) investment bankers.
B) traders.
C) brokers.
D) dealers.
E) none of the above.
18) An important A) investment bank.

financial institution that
assists in the initial sale
of securities in the
primary market is the
A) investment bank.
B) commercial bank.
C) stock exchange.
D) brokerage house.
19) Which of the D) All of the above are true.

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
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.
above are true.
20) Which of the C) A debt instrument is long term if its maturity is ten years
following statements or longer.
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
long term if its maturity
is ten years or longer.
D) The maturity of a
debt instrument is the
time (term) that has
elapsed since it was
issued.
21) Which of the B) A corporation acquires new funds only when its
following statements securities are sold in the primary market.
A) Few common stocks
are traded over-the-
counter, although the
over-the-counter
markets have grown in
recent years.
B) A corporation
sold in the primary
market.
C) Capital 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.
above are true.
22) Which of the E) all of the above

following markets is
sometimes organized as
an over-the-counter
market?
A) The stock market
B) The bond market
C) The foreign
exchange market
D) The federal funds
market
E) all of the above
23) Bonds that are sold A) foreign bonds.

in a foreign country and
are denominated in that
country's currency are
known as
A) foreign bonds.
B) Eurobonds.
C) Eurocurrencies.
D) Eurodollars.
24) Bonds that are sold B) Eurobonds.

in a foreign country and
are denominated in a
currency other than that
of the country in which
they are sold are known
as
A) foreign bonds.
B) Eurobonds.
C) Eurocurrencies.
D) Eurodollars.
25) Financial D) do all of the above.

intermediaries
A) exist because there
are substantial
information and
transaction costs in the
economy.
B) improve the lot of
the small saver.
C) are involved in the
process of indirect
finance.
D) do all of the above.
E) do only A and B of
the above.
26) The main sources of A) financial intermediaries, issuing bonds, issuing stocks.
financing for
businesses, in order of
importance, are
A) 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.
27) The presence of A) financial intermediaries and indirect finance play such
transaction costs in an important role in financial markets.
financial markets
explains, in part, why

A) 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.
28) Financial C) economies of scale.

intermediaries can
substantially reduce
transaction costs per
dollar of transactions
because their large size
allows them to take
advantage of
A) poorly informed
consumers.
B) standardization.
C) economies of scale.
D) their market power.
29) The purpose of A) reduce the volatility of a portfolio's return.

diversification is to
A) reduce the volatility
of a portfolio's return.
B) raise the volatility of

a portfolio's return.
C) reduce the average
return on a portfolio.
D) raise the average
return on a portfolio.
30) An investor who B) decreases; diversification

puts all her funds into
one asset ________ her
portfolio's ________.
A) increases;
diversification
B) decreases;
diversification
C) increases; average
return
D) decreases; average
return
31) Through risk-sharing B) increases; reduces

activities, a financial
intermediary ________ its
own risk and ________ the
risks of its customers.
A) reduces; increases
B) increases; reduces
C) reduces; reduces
D) increases; increases
32) The presence of C) asymmetric information

________ in financial
markets leads to
adverse selection and
moral hazard problems
that interfere with the
efficient functioning of
financial markets.
A) noncollateralized
risk
B) free-riding
C) asymmetric
information
D) costly state
verification
33) When the lender A) asymmetric information

and the borrower have
different amounts of
information regarding a
transaction, ________ is
said to exist.
A) asymmetric
information
B) adverse selection
C) moral hazard
D) fraud
34) When the potential B) adverse selection

borrowers who are the
most likely to default
are the ones most
actively seeking a loan,
________ is said to exist.
A) asymmetric
information
C) moral hazard
D) fraud
35) When the borrower C) moral hazard

engages in activities
that make it less likely
that the loan will be
repaid, ________ is said to
exist.
A) asymmetric
information
C) moral hazard
D) fraud
36) The concept of D) only A and B of the above.

adverse selection helps
to explain
A) which firms are more
likely to obtain funds
from banks and other
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.
E) only A and C of the
above.
37) Adverse selection is A) the lender's relative lack of information about the
a problem associated borrower's potential returns and risks of his investment
with equity and debt activities.
contracts arising from
A) 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.
38) When the least B) adverse selection problem.

desirable credit risks
are the ones most likely
to seek loans, lenders
are subject to the
A) moral hazard
problem.
problem.
C) shirking problem.
D) free-rider problem.
E) principal-agent
problem.
39) Successful financial B) adverse selection.

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 to
A) moral hazard.
B) adverse selection.
C) bad luck.
D) financial panics.
40) In financial markets, B) asymmetric information.

lenders typically have
inferior information
about potential returns
and risks associated
with any investment
project. This difference
in information is called
A) comparative
informational
disadvantage.
B) asymmetric
information.
C) variant information.
D) caveat venditor.
41) Which of the D) All of the above

following financial
intermediaries are
depository institutions?
A) A savings and loan
association
B) A commercial bank
C) A credit union
D) All of the above
E) Only A and C of the
above
42) Which of the A) A life insurance company

following is a
contractual savings
institution?
A) A life insurance
company
B) A credit union
C) A savings and loan
association
D) A mutual fund
43) Which of the D) Only A and B of the above

following are not
investment
intermediaries?
A) A life insurance
company
B) A pension fund
C) A mutual fund
D) Only A and B of the
above
44) Which of the E) Only A and B of the above

following are
investment
intermediaries?
A) Finance companies
B) Mutual funds
C) Pension funds
D) All of the above
above
45) The government A) to ensure soundness of the financial system and to

regulates financial increase the information available to investors.
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.
46) Asymmetric B) financial panic.

information can lead to
widespread collapse of
referred to as a
A) bank holiday.
B) financial panic.
C) financial
disintermediation.
D) financial collapse.
47) Which of the E) All of the above are regulators.

following is not a
regulator of part of the
U.S. financial system?
A) National Credit
Union Administration
B) Securities and
Exchange Commission
C) Federal Reserve
System
D) Federal Deposit
Insurance Corporation
E) All of the above are

regulators.
48) Asymmetric A) panic

information can lead to
the widespread
collapse of financial
intermediaries, referred
as financial ________.
A) panic
B) bubble
C) asset
D) transaction
49) The SEC restricts A) insiders

trading by the largest
stockholders (known as
________) in corporations
issuing securities.
A) insiders
B) members of the
board
C) hedge funds
D) intermediaries
50) The Federal Deposit B) $250,000

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) $1,000,000
51) The major A) branching

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) lending
C) assets they may hold
D) the size they could
grow to
52) Foreign currencies C) Eurocurrencies.

that are deposited in
banks outside the home
country are known as
A) foreign bonds.
B) Eurobond.
C) Eurocurrencies.
D) Eurodollars.
53) U.S. dollars A) Eurodollars.

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) foreign bonds.
54) Banks providing A) liquidity services.
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.
55) A ________ is when one C) conflict of interest

party in a financial
contract has incentives
to act in its own interest
rather than in the
interests of the other
party.
A) moral hazard
B) risk
C) conflict of interest
D) financial panic
56) Fire and casualty A) Contractual savings institution

insurance companies
are what type of
intermediary?
A) Contractual savings
institution
B) Depository
institutions
C) Investment
intermediaries
D) None of the above
57) The country whose D) the United States.

banks are the most
restricted in the range
of assets they may hold
is
A) Japan.
B) Canada.
C) Germany.
D) the United States.
58) The largest A) commercial banks.

depository institution
(value of assets) at the
end of 2012 was
A) commercial banks.
B) pension funds.
C) credit unions.
D) mutual funds.
59) At the end of 2012, A) $38; $19

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; $20
60) The DAX (Germany) C) foreign stock price indexes

and the FTSE 100
(London) are examples
of ________.
A) foreign stock
exchanges
B) foreign currencies
C) foreign stock price
indexes
D) foreign mutual funds
1) Every financial market Answer: FALSE

allows loans to be
made.
2) An example of direct Answer: TRUE

financing is if you were
to lend money to your
neighbor.
3) The New York Stock Answer: FALSE

Exchange is an example
of a primary market.
4) A bond denominated Answer: FALSE

in euros and issued in a
country that uses the
euro as its currency is
an example of a
Eurobond.
5) Most people's Answer: TRUE

involvement with the
financial system is
through financial
intermediaries rather
than financial markets.
6) A financial Answer: TRUE

intermediary's risk-
sharing activities are
also referred to as asset
transformation.
7) The process of Answer: FALSE

financial intermediation
is also known as direct
finance.
8) A mutual fund is not a Answer: TRUE

depository institution.
9) A pension fund is not Answer: FALSE

a contractual savings
institution.
10) Equity represents an Answer: TRUE

ownership interest in a
firm and entitles the
holder to the residual
cash flows.
11) Adverse selection Answer: TRUE

refers to those with high
credit risks, being most
aggressive in their
search for funds.
12) The capital market is Answer: FALSE

a financial market in
which only short-term
debt instruments
(generally those with an
original maturity of less
than one year) are
traded.
13) American investors Answer: FALSE

pay attention to only
the Dow Jones
Industrial Average.
14) The government Answer: FALSE

agency that insures
each depositor at a
commercial bank,
savings and loan
association, or mutual
savings bank up to a
loss of $100,000 per
account ($250,000 for
individual retirement
accounts) is the
Securities and
Exchange Commission
(SEC).
15) Many common Answer: TRUE
stocks are traded over
the counter, although a
majority of the largest
corporations have their
shares traded at
organized stock
exchanges.
16) Many common Answer: FALSE

stocks are traded at
organized exchanges,
although a majority of
the largest corporations
have their shares traded
over the counter.
17) Corporations that Answer: TRUE

issue new securities to
raise capital now
conduct more of this
business in financial
markets in Europe and
Asia than in the U.S.
18) Currently, over 80% Answer: TRUE

of the new issues in the
international bond
market are Eurobonds.
19) In the U.S., financial Answer: TRUE

intermediaries are
restricted in what they
are allowed to do and
what assets they can
hold.
20) Unlike regulations in Answer: FALSE

other countries, there
are very few federal

regulations governing
who is allowed to set up
a financial intermediary.
1) Distinguish between ...

direct financing and
indirect financing.
Topic: Chapter 2.1
Function of Financial
Markets

primary markets and
secondary markets.
Topic: Chapter 2.2
Structure of Financial
Markets

money markets and
capital markets.
Topic: Chapter 2.2
Markets
4) Why is it so important ...

for an economy to have
fully developed
financial markets?
Topic: Chapter 2.1
Markets
5) Why are financial ...

intermediaries so
important to an
economy?
Topic: Chapter 2.4
Intermediaries: Indirect
Finance
6) Describe how over- ...

the-counter markets
work.
Topic: Chapter 2.2
Markets
7) What are adverse ...

selection and moral
hazard?
Topic: Chapter 2.4
Finance
8) Why can a financial ...

intermediary's risk-
sharing activities be
described as asset
transformation?
Topic: Chapter 2.4
Finance
9) Discuss the ...

differences between
depository institutions,
contractual savings
institutions, and
investment
intermediaries.
Topic: Chapter 2.5
Types of Financial
Intermediaries
10) What are some of ...

the differences
between an organized
exchange and an over-
the-counter market?
Topic: Chapter 2.2
Markets
11) Why do corporations ...

that issue new securities
to raise capital now
conduct more of this
business in
financial markets in
Europe and Asia than in
the United States?
Topic: Chapter 2.3
Internationalization of
Financial Markets
12) What are some of ...

the major foreign stock
exchanges? Is following
their returns important
to U.S. investors? Why
or why not?
Topic: Chapter 2.3
Internationalization of
Financial Markets

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8/27/2018 Chapter 2 Flashcards | Quizlet

Chapter 2 92 terms jhwdds

1) Every financial market D) It channels funds from lenders-savers to borrowers-

2) Financial markets A) bringing together people with funds to lend and

never resort to printing

3) Which of the E) None of the above.

4) Which of the B) A corporation buys commercial paper issued by another

5) Which of the E) Only A and B of the above.

6) Which of the D) Both A and C of the above.

the primary market.

7) Financial markets E) they do A and B of the above.

8) A country whose C) experience economic hardship and financial crises.

9) Which of the D) All of the above

10) Which of the D) All of the above.

11) The money market is C) short-term debt instruments

D) long-term debt and

12) Long-term debt and C) capital

13) Which of the E) None of the above

14) Which of the E) All of the above

15) A corporation B) primary market by an investment bank.

16) Intermediaries who C) brokers.

17) Intermediaries who D) dealers.

18) An important A) investment bank.

19) Which of the D) All of the above are true.

term security that

22) Which of the E) all of the above

23) Bonds that are sold A) foreign bonds.

24) Bonds that are sold B) Eurobonds.

25) Financial D) do all of the above.

explains, in part, why

28) Financial C) economies of scale.

29) The purpose of A) reduce the volatility of a portfolio's return.

B) raise the volatility of

30) An investor who B) decreases; diversification

31) Through risk-sharing B) increases; reduces

32) The presence of C) asymmetric information

33) When the lender A) asymmetric information

34) When the potential B) adverse selection

35) When the borrower C) moral hazard

36) The concept of D) only A and B of the above.

38) When the least B) adverse selection problem.

39) Successful financial B) adverse selection.

40) In financial markets, B) asymmetric information.

41) Which of the D) All of the above

42) Which of the A) A life insurance company

43) Which of the D) Only A and B of the above

44) Which of the E) Only A and B of the above

45) The government A) to ensure soundness of the financial system and to

46) Asymmetric B) financial panic.

47) Which of the E) All of the above are regulators.

E) All of the above are

48) Asymmetric A) panic

49) The SEC restricts A) insiders

50) The Federal Deposit B) $250,000

51) The major A) branching

52) Foreign currencies C) Eurocurrencies.

53) U.S. dollars A) Eurodollars.

54) Banks providing A) liquidity services.

55) A ________ is when one C) conflict of interest