chapter 1 | mcq Flashcards
Financial market participants who provide funds are called
a. deficit units.
b. surplus units.
c. primary units.
d. secondary units.
b. surplus units
Which of the following is NOT an issuer of bonds?
a. households
b. corporations
c. the U.S. Treasury
d. government agencies
a. households
Behavioral finance
a. applies concepts from sociology and anthropology to the behavior of market participants.
b. studies the behavior of financial markets in response to changes in Federal Reserve policy.
c. applies psychology to financial decision making.
d. explains why markets are efficient.
c. applies psychology to financial decision making
Those financial markets that facilitate the flow of short-term funds are known as:
a. money markets
b. capital markets
c. primary markets
d. secondary markets
a. money markets
Funds are provided to the initial issuer of securities in the:
a. secondary market
b. primary market
c. deficit market
d. surplus market
b. primary market
Which of the following is a capital market instrument?
a. a six-month certificate of deposit
b. a three-month Treasury bill
c. a ten-year bond
d. an agreement for a bank to loan funds directly to a company for nine months
c. a ten-year bond
Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. mortgage
d. commercial paper
d. commercial paper
The creditors in the federal funds market are:
a. households
b. depository institutions
c. firms
d. government agencies
b. depository institutions
Investors in equity securities may earn a return from
a. coupon payments and the return of principal at the maturity date.
b. coupon payments and a capital gain when they sell the securities.
c. quarterly dividends (if paid) and a capital gain when they sell the securities.
d. quarterly dividends (if paid) and the return of principal at the maturity date.
c. quarterly dividends (if paid) and a capital gain when they sell the securities.
Money market securities generally have ____.
a. relatively low liquidity, low expected return, and a high degree of credit risk
b. relatively high liquidity, high expected return, and a high degree of credit risk
c. relatively low liquidity, high expected return, and a low degree of credit risk
d. relatively high liquidity, low expected return, and a low degree of credit risk
d. relatively high liquidity, low expected return, and a low degree of credit risk
If security prices fully reflect all available information, the markets for these securities are:
a. efficient
b. primary
c. overvalued
d. undervalued
a. efficient
If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
a. perfect
b. active
c. inefficient
d. in equilibrium
c. inefficient
If financial markets are efficient, this implies that all securities should earn the same return.
a. True
b. False
b. False
The Securities Act of 1933
a. required complete disclosure of relevant financial information for publicly offered securities
in the primary market.
b. declared trading strategies to manipulate the prices of public secondary securities illegal.
c. imposed heavy penalties for insider trading.
d. required complete disclosure of relevant financial information for securities traded in the secondary market.
e. All of these are correct.
a. required complete disclosure of relevant financial information for publicly offered securities
in the primary market.
The Securities and Exchange Commission (SEC) was established by the:
a. Federal Reserve Act
b. McFadden Act
c. Securities Exchange Act of 1934
d. Glass-Steagall Act
e. None of these are correct.
c. Securities Exchange Act of 1934
Stock issued by a corporation is an example of a(n):
a. debt security
b. money market security
c. equity security
d. debt security AND money market security
c. equity security
If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.
a. efficient
b. inefficient
c. perfect
d. imperfect
c. perfect
Which of the following is NOT a typical function of securities firms?
a. provide brokerage services
b. provide underwriting services
c. accept deposits that are insured by the federal government and use the funds to provide loans to corporations
d. offer advice on mergers and other corporate restructurings
c. accept deposits that are insured by the federal government and use the funds to provide loans to corporations
Without the participation of financial intermediaries in financial market transactions,
a. information and transaction costs would be lower.
b. transaction costs would be higher but information costs would be unchanged.
c. information costs would be higher but transaction costs would be unchanged.
d. information and transaction costs would be higher.
d. information and transaction costs would be higher.
Which of the following is most likely to be described as a depository institution?
a. finance companies
b. securities firms
c. credit unions
d. pension funds
e. insurance companies
c. credit unions
In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.
a. commercial banks
b. savings banks
c. credit unions
d. S&Ls
a. commercial banks
Which of the following is a non-depository financial institution?
a. savings bank
b. commercial bank
c. savings and loan association
d. mutual fund
d. mutual fund
Which of the following distinguishes credit unions from commercial banks and savings institutions?
a. Credit unions are nonprofit.
b. Credit unions accept deposits but do not make loans.
c. Credit unions make loans but do not accept deposits.
d. Savings institutions restrict their business to members who share a common bond.
a. Credit unions are nonprofit.
When a securities firm acts as a broker, it
a. guarantees the issuer a specific price for newly issued securities.
b. makes a market in specific securities by adjusting its own inventory.
c. executes securities transactions between two parties.
d. purchases securities for its own account.
c. executes securities transactions between two parties.
When a securities firm acts as a(n) ____, it makes a market in specific securities by maintaining an inventory of those securities.
a. adviser
b. dealer
c. broker
d. None of these are correct.
b. dealer
____ obtain funds by issuing securities and then lend the funds to individuals and small businesses.
a. Finance companies
b. Securities firms
c. Mutual funds
d. Insurance companies
a. Finance companies
Households with ____ are served by ____.
a. deficient funds; depository institutions and finance companies
b. deficient funds; finance companies only
c. savings; finance companies only
d. savings; pension funds and finance companies
a. deficient funds; depository institutions and finance companies
____ concentrate on mortgage loans.
a. Finance companies
b. Commercial banks
c. Savings institutions
d. Credit unions
c. Savings institutions
____ securities have a maturity of one year or less; ____ securities generally have relatively high liquidity.
a. Money market; capital market
b. Money market; money market
c. Capital market; money market
d. Capital market; capital market
b. Money market; money market
Which of the following are NOT major investors in stocks?
a. commercial banks
b. insurance companies
c. mutual funds
d. pension funds
a. commercial banks
Which of the following financial intermediaries commonly invests in stocks and bonds?
a. pension funds
b. insurance companies
c. mutual funds
d. All of these are correct.
d. All of these are correct
Securities represent a claim on the issuer.
a. True
b. False
a. True
Debt securities represent debt (borrowed funds) incurred by the issuer.
a. True
b. False
a. True
A five-year security was will sell the security r in the: a. secondary market
b. primary market
c. deficit market
d. surplus market
a. secondary market
When security prices fully reflect all available information, the markets for these securities are said to be efficient.
a. True
b. False
a. True
If markets are perfect, securities buyers and sellers do not have full access to information and cannot always break down securities to the precise size they desire.
a. True
b. False
b. False
A broker executes securities transactions between two parties and charges a fee reflected in the bid- ask spread.
a. True
b. False
a. True
The adoption of the euro increased business between European countries and created a more competitive environment in Europe.
a. True
b. False
a. True
In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.
a. True
b. False
a. True
Securities represent a claim on the provider of funds. a. True
b. False
b. False
Debt securities include commercial paper, Treasury bonds, and corporate bonds.
a. True
b. False
a. True
Common types of capital market securities include Treasury bills and commercial paper.
a. True
b. False
b. False
Common types of money market securities include negotiable certificates of deposit and Treasury bills.
a. True
b. False
a. True
Money market securities are commonly issued to finance the purchase of assets such as buildings, equipment, or machinery.
a. True
b. False
b. False
The total asset value of savings institutions is larger than that of commercial banks.
a. True
b. False
b. False
Financial markets facilitating the flow of short-term debt securities with maturities of less than one year are known as:
a. secondary markets
b. capital markets
c. primary markets
d. money markets
e. None of these are correct.
a. secondary markets
Which of the following transactions would NOT be considered a secondary market transaction?
a. An individual investor purchases some existing shares of stock in Apple through her broker.
b. An institutional investor sells some Disney stock through its broker.
c. A firm that was privately held engages in an offering of stock to the public.
d. All of these are correct.
c. A firm that was privately held engages in an offering of stock to the public.
If investors speculate in the underlying asset rather than in derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
a. lower; lower
____ maintain a larger amount of assets in aggregate than the other types of non-depository institutions.
a. Finance companies
b. Mutual funds
c. Life insurance companies
d. Securities firms
b. Mutual funds
An asymmetric information problem arises when one party to a transaction has information that is not available to the other party, as when a corporation fails to tell investors the full extent of its losses.
a. True
b. False
a. True
Bonds issued by corporations have a ____ expected return and ____ risk than Treasury bonds.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
d. higher; higher
Systemic risk is the risk that a large decline in one stock’s price could cause investors to sell their stock in other companies.
a. True
b. False
b. False
The Sarbanes-Oxley Act requires firms to provide complete and accurate financial information and imposes penalties on key executives of the firm if financial fraud is detected.
a. True
b. False
a. True
Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
a. True
b. False
a. True
Commercial banks in aggregate have more assets than credit unions.
a. True
b. False
a. True
Those participants who receive more money than they spend are referred to as:
a. deficit units
b. surplus units
c. borrowing units
d. government units
b. surplus units
Equity securities
a. have a maturity.
b. pay interest on a periodic basis.
c. represent ownership in the issuer.
d. repay the principal amount at maturity.
c. represent ownership in the issuer.
____ involve(s) decisions such as how much funding to obtain and what types of securities to issue when financing operations.
a. Corporate finance
b. Investment management
c. Financial markets and institutions
d. None of these are correct.
a. Corporate finance
There is a ____ relationship between the risk of a security and the expected return from investing in the security.
a. positive
b. negative
c. indeterminable
d. None of these are correct.
a. positive
If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the security’s price will ____, resulting in a ____ return for those investors.
a. rise; lower
b. fall; higher
c. fall; lower
d. rise; higher
d. rise; higher
The credit crisis in the 2008–2009 period was caused by weak economies in Asia.
a. True
b. False
b. False
____ are classified as depository institutions.
a. Credit unions
b. Pension funds
c. Finance companies
d. Securities firms
a. Credit unions
The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:
a. mortgages
b. money market securities
c. stocks
d. Treasury bonds
a. mortgages
Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets.
a. True
b. False
b. False
Bonds commonly have maturities of one to three years.
a. True
b. False
b. False
Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.
a. True
b. False
b. False
Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.
a. True
b. False
a. True
When security prices fully reflect all available information, the markets for these securities are said to be perfect.
a. True
b. False
b. False
Securities that are not as safe and liquid as other securities are never considered for investment by anyone.
a. True
b. False
b. False
By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.
a. True
b. False
b. False
When a depository institution offers a loan, it is acting as a creditor.
a. True
b. False
a. True
Savings institutions are a type of nondepository institution.
a. True
b. False
b. False
Most mutual funds raise funds by issuing securities and then lend the funds to individuals and small businesses.
a. True
b. False
b. False
Institutional investors not only provide financial support to companies but also exercise some degree of governance over them.
a. True
b. False
a. True
Which of the following is NOT a reason why depository financial institutions are popular?
a. They offer deposit accounts that can accommodate the amount and liquidity characteristics
desired by most surplus units.
b. They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
c. They accept the risk on loans provided.
d. They use their information resources to act as a broker, executing securities transactions between two parties.
e. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.
d. They use their information resources to act as a broker, executing securities transactions between two parties.
Which of the following are NOT considered money market securities?
a. Treasury bills
b. mortgage-backed securities
c. negotiable certificates of deposit
d. commercial paper
b. mortgage-backed securities
____ are not considered capital market securities.
a. Derivative securities
b. Treasury bonds
c. Corporate bonds
d. Equity securities
e. Mortgages
a. Derivative securities
____ are long-term debt obligations issued by corporations and government agencies to support their operations.
a. Common stock
b. Derivative securities
c. Bonds
d. None of these are correct.
c. Bonds
Which of the following is an example of an asymmetric information problem?
a. A corporation releases toxic wastes into a river.
b. A corporation relocates to Ireland to take advantage of lower corporate tax rates.
c. A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock.
d. A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.
d. A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.
If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
d. higher; higher
When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.
a. undervalued
b. overvalued
c. fairly priced
d. efficient
e. None of these are correct.
b. overvalued
Which of the following are NOT considered depository financial institutions?
a. finance companies
b. commercial banks
c. savings institutions
d. credit unions
e. All of these are depository financial institutions.
a. finance companies
The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies
e. pension funds
d. finance companies
Which of the following statements is incorrect?
a. Financial markets attract funds from investors and channel the funds to corporations.
b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
d. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.
c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
Which of the following requires mortgage lenders to verify the income, job status, and credit history of mortgage applicants before extending a mortgage?
a. Mortgage Lenders Reform Act
b. Financial Reform Act of 2010
c. Securities Act of 1933
d. Sarbanes-Oxley Act
b. Financial Reform Act of 2010
Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities.
a. liquid; many
b. liquid; not many
c. illiquid; not many
d. illiquid; many
c. illiquid; not many
Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with
specific payments at regular
a. True
b. False
b. False
____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient.
a. Psychological marketing
b. Behavioral finance
c. Inefficient markets theory
d. Financial psychology
b. Behavioral finance
International integration of securities markets allows
a. governments and corporations to have easier access to funding from creditors and investors in
other countries.
b. investors and creditors to benefit from investment opportunities in other countries.
c. one’s country’s financial problems to adversely affect other countries.
d. All of these are correct.
d. All of these are correct.
The foreign exchange market facilitates the exchange of:
a. information between investors in different countries
b. debt securities
c. equity securities
d. currencies
d. currencies
Which of the following is NOT an example of the government’s recent increased role in financial markets?
a. the Federal Reserve’s purchase of debt securities during the credit crisis
b. regulations changing the way that the credit risk of bonds is assessed
c. regulations setting maximum rates for Treasury securities
d. increased monitoring of stock trading and prosecution of those who trade on inside information
c. regulations setting maximum rates for Treasury securities
Most of the funds that insurance companies receive from premiums are invested in short-run money market securities.
a. True
b. False
b. False
The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as:
a. systemic risk
b. leverage risk
c. financial meltdown risk
d. credit risk
a. systemic risk
Systemic risk exists because
a. there is no government regulation of financial markets.
b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities.
c. financial institutions borrow using long-term debt securities but lend their funds for short-term periods.
d. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.
b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities.
