Money And Banking [ch. 2]

35 Questions

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Money Quizzes & Trivia

An Overview of the Financial System


Questions and Answers
  • 1. 
    Financial markets improve efficiency by channeling funds to those with productive uses for them from those with no investments opportunities.
    • A. 

      True

    • B. 

      False

  • 2. 
    When an individual buys a bond issued by General Motors through a Merrill Lynch bond dealer, we have sen a demonstration of indirect finance.
    • A. 

      True

    • B. 

      False

  • 3. 
    Securities are liabilities for the person that buys them, but assets for the individual or company that issues them.
    • A. 

      True

    • B. 

      False

  • 4. 
    The primary market is where new issues of securities are sold, and the secondary market is where previously issued securities are resold.
    • A. 

      True

    • B. 

      False

  • 5. 
    Bonds are sold in the equity market while stocks are sold in the debt market
    • A. 

      True

    • B. 

      False

  • 6. 
    Stocks are a less risky investment for savers than bonds because stockholders are residual claimants
    • A. 

      True

    • B. 

      False

  • 7. 
    Commercial paper is considered to be the most liquid money market instrument
    • A. 

      True

    • B. 

      False

  • 8. 
    Eurodollars are dollars denominated deposits in foreign banks that are outside the United States or in foreign branches of U.S. banks.
    • A. 

      True

    • B. 

      False

  • 9. 
    Individuals may find it efficient to save their funds in a financial intermediary because financial intermediaries have lower transaction costs when making loans due to economies of scale in making loans.
    • A. 

      True

    • B. 

      False

  • 10. 
    Moral hazard occurs when risky individuals that are least likely to repay their loans and therefore have the most to gain from getting the loan are the ones that tend to actively seen loans.
    • A. 

      True

    • B. 

      False

  • 11. 
    Asymmetric information in financial markets exists because borrowers know more about the true likelihood of the repayment of the loan than do lenders.
    • A. 

      True

    • B. 

      False

  • 12. 
    More funds flow to corporations through the corporate bond market than through financial intermediaries.
    • A. 

      True

    • B. 

      False

  • 13. 
    Life insurance companies are the largest financial intermediaries in the United States when measured by the size of their assets
    • A. 

      True

    • B. 

      False

  • 14. 
    Mutual funds sell shares and use the funds to buy diversified portfolios of stocks and bonds.
    • A. 

      True

    • B. 

      False

  • 15. 
    To increase information available to investors and to insure the soundness of the financial system, the government heavily regulates the financial system.
    • A. 

      True

    • B. 

      False

  • 16. 
    Which of the following would be considered direct finance?
    • A. 

      You pay life insurance premiums to Franklin Life and Franklin Life makes a mortage to a homebuyer

    • B. 

      You buy a bond issued by General Electric through a broker at Smith Barney.

    • C. 

      You deposit $100,000 in First National Bank and First National Bank lends $100,000 to Ace Hardware

    • D. 

      None of the above would be considered direct finance.

  • 17. 
    Which of the following statements regarding direct finance is true?
    • A. 

      Direct finance occurs when borrowers sell securities directly to lenders.

    • B. 

      Direct finance requires the use of financial intermediaries

    • C. 

      In the United States, more funds flow through the direct financial channels than through indirect financial channels

    • D. 

      Securities are assets for the firm that issues them and liabilities for the individual that buys them.

  • 18. 
    Which of the following is true regarding primary and secondary markets?
    • A. 

      Primary markets are for stocks while secondary markets are for bonds

    • B. 

      Primary markets are for long-term securities while secondary markets are for short-term securities.

    • C. 

      Primary markets are where new issues of securities are sold while secondary markets are where previously issued securities are resold

    • D. 

      Primary markets are exchanges while secondary markets are over-the-counter

  • 19. 
    Investment banks facilitate the sale of securities in the
    • A. 

      Over-the-counter market

    • B. 

      Stock exchange

    • C. 

      Secondary market

    • D. 

      Primary market

  • 20. 
    Which of the following is an example of a money market instrument?
    • A. 

      A mortgage

    • B. 

      A share of stock in IBM

    • C. 

      A John Deere bond with 20 years to maturity

    • D. 

      U.S. government treasury bill with 6 months to mature

  • 21. 
    Which of the follwoing is likely to generate the least risk to the purchaser?
    • A. 

      A 30-year mortgage

    • B. 

      A share of stock in IBM

    • C. 

      A short-term bond

    • D. 

      A long-term bond

  • 22. 
    Which of the following is true regarding the characteristics of debt and equity?
    • A. 

      Equity holders are residual claimants.

    • B. 

      Bond holders receive dividends

    • C. 

      Equity securities are considered short term

    • D. 

      A bond is an asset to the firm that issues it

  • 23. 
    When a bond denominated in dollars is sold in Great Britain, it is known as 
    • A. 

      A foreign bond

    • B. 

      A Eurobond

    • C. 

      Eurodollars

    • D. 

      Foreign exchange

  • 24. 
    FInancial intermediaries
    • A. 

      Reduce transaction costs for lender-savers and borrower-spenders

    • B. 

      Allow for risk sharing for the lender-savers

    • C. 

      Solve some of the problems caused by asymmetric information

    • D. 

      Achieve all of the above

  • 25. 
    Which of the following is an example of indiriect finance?
    • A. 

      You pay life insurance premiums to Franklin Life, and Franklin Life makes a mortgage to a homebuyer.

    • B. 

      You buy a bond issued by General Electric through a broker at Smith Barney.

    • C. 

      You buy stock in Microsoft through a local OTC dealer

    • D. 

      None of the above would be considered indirect finance.

  • 26. 
    In a given year, corporations raise the greatest amount of funds through which of the following instruments?
    • A. 

      Corporatate socks

    • B. 

      Commercial paper

    • C. 

      Corporate bonds

    • D. 

      Repurchase agreement

  • 27. 
    Before a loan is made, banks screen their prospective loan customers to avoid the problem of
    • A. 

      Risk sharing.

    • B. 

      Adverse selection

    • C. 

      Moral hazard

    • D. 

      Asset transformation

  • 28. 
    Rick Smith just received an auto loan for $5,000. After he received the loan, he decided to gamble with the moeny at a nearby casino instead of buying a car.  This is an example of
    • A. 

      Diversification

    • B. 

      Asset transformation

    • C. 

      Adverse selection

    • D. 

      Moral hazard

  • 29. 
    When a financial intermediary such as a bank borrows from one person and lends to another, we have observed a demonstration of
    • A. 

      Indirect finance

    • B. 

      Direct finance

    • C. 

      Foreign finance

    • D. 

      Investment banking

  • 30. 
    When lenders have inferior knowledge relative to borrowers about the potential returns and risks associated with an investment project, it gives rise to the problem known as
    • A. 

      Financial intermediation

    • B. 

      Transaction costs

    • C. 

      Asset transformation

    • D. 

      Asymmetric information

  • 31. 
    Which of the following is a depository institution?
    • A. 

      Pension fund

    • B. 

      Life insurance company

    • C. 

      Credit union

    • D. 

      Finance company

  • 32. 
    Which of the following institutions holds mortgages as their primary asset?
    • A. 

      Banks

    • B. 

      Savings and loan association

    • C. 

      Money market mutual funds

    • D. 

      Credit unions

  • 33. 
    Mutual funds
    • A. 

      Collect deposits and lends for mortgages

    • B. 

      Are organized around some common bond, usually employment.

    • C. 

      Sell shares and use the proceeds to buy diversified portfolios of stocks and bonds

    • D. 

      Receive premiums from policies and purchase corporate bonds and stock

  • 34. 
    Which of the following regulatory agencies protects depositors from bank failures by guaranteeing repayment of deposits up to $100,000 per depositor at a bank?
    • A. 

      Securities and Exchange Commission (SEC)

    • B. 

      Federal Reserve System

    • C. 

      Office of Thrift Supervision

    • D. 

      Federal Deposit Insurance Corporation (FDIC)

  • 35. 
    Prior of 1986, Regulation Q gave the Federal Reserve the power to
    • A. 

      Limit competition between banks by placing a ceiling on the interest rates banks could pay on savings deposits

    • B. 

      Limit competition between banks by restricting interstate branching

    • C. 

      Increase competition among banks by expanding entry into the banking industry

    • D. 

      Increase competition among banks by imposing stringent reporting requirement for disclosure of information to the public