chapter 3

Question 1

underlying instruments

Answer 1

(primitive securities), are used by savers/lenders to transfer resources directly to investors/borrowers

Question 2

Bonds

Answer 2

make payments depending on the solvency of the firm that issued them.

Question 3

derivatives

Answer 3

specify a payment to be made between the person who sells the instrument and the person who buys it.

Question 4

As the historical gap between direct and indirect finance has narrowed,

Answer 4

intermediaries are generally involved on some level.

Question 5

Financial instruments obligate one party to transfer something of value to another party. Good example of this include

Answer 5

a music publisher pays royalties for music that you wrote and they published.

you car insurance company paying to repair you car after an accident.

your monthly car payment.

Question 6

Which of the following does not correctly describe financial instruments?

Answer 6

They are written in specialized language that varies from contract to contract.

It has to be the same standardized language

Question 7

The fundamental distinction between direct and indirect finance involves

Answer 7

who owns the asset

Question 8

Which of the following is true about financial instruments?

Answer 8

They are legally enforceable.

Question 9

Of the economic entities listed, which tends to be most highly leveraged?

Answer 9

financial institutions

Question 10

When a standardized financial instrument summarizes essential details about the issuer, the information communicated is designed to

Answer 10

eliminate the expensive and time-consuming process of collecting detailed information.

Question 11

As firms borrow more, they become _______ highly leveraged and their net worth ________.

Answer 11

more, falls

Question 12

The two fundamental classes of financial instruments are _____.

Answer 12

derivative instruments and underlying instruments

Question 13

You purchase a financial instrument that allows - but does not require - you to purchase some asset in the future. You have purchased __________, and this type of financial instrument is used primarily _________.

Answer 13

an options contract; to transfer risk

Question 14

Which of the following is true about the value of a financial payment, all else equal?

Answer 14

Payments made when needed most are more valuable.

Question 15

Indicate which of the following financial instruments are used primarily as stores of value.

Answer 15

Stocks

Home mortgages

Asset-backed securities

Question 16

An asset-backed security is used primarily

Answer 16

to store value

Question 17

primary markets

Answer 17

Markets where newly issued securities are sold.

Question 18

secondary markets

Answer 18

Markets where existing securities are traded.

Question 19

An IPO (initial public offering) refers to the first issue of new stock. This new stock would be bought and sold in the

Answer 19

primary market

Question 20

An example of a financial instrument that ensures payments are made under specific conditions is ________.

Answer 20

insurance contract

Question 21

In general, a well-run financial market is characterized by which of the following?

Answer 21

Accurate and available information

Investor protection

Low transaction costs

Question 22

Why are financial intermediaries crucial to healthy financial markets?

Answer 22

They bring borrowers and lenders together.

They reduce transaction costs.

Question 23

When dealers and brokers trade securities in the same physical location, as with the New York Stock Exchange, _________ exists.

Answer 23

centralized exchange

Question 24

major financial institutions

Answer 24

Pension funds

Securities firms

Depository institutions

Insurance companies

Question 25

Which of the following determines whether debt is traded in money markets versus bond markets?

Answer 25

The time until the debt is fully repaid

Question 26

How are governments crucial to a well-run financial market?

Answer 26

they enforce the rules of the game

Question 27

An institution that gives households and corporations access to direct finance is called ________.

Answer 27

brokerage

Question 28

Securities firms

Answer 28

Investment banks and mutual funds companies

Question 29

Government-sponsored enterprises

Answer 29

Federal credit agencies that directly provide loans

Question 30

Depository institutions

Answer 30

banks and credit unions