1. A firm made up of two or more owners who share the equity in the business is called a:
   1. Sole Proprietorship
   2. Partnership
   3. Limited Liability Company
   4. Corporation
2. In a corporation, the ultimate goal of management is to:
   1. Maximize the profits of the corporation
   2. Serve the best interests of the stakeholders
   3. Maximize the wealth of shareholders
   4. Follow the directives of the CEO
3. Which of the following types of entities are not players in the financial system?
   1. Households
   2. Business Firms
   3. Governments
   4. All of the above are players in the financial system
4. What would always be an example of an investment decision by a household?
   1. How much money to save in mutual funds every month
   2. What type of loan to take out for the purchase of a new car
   3. How much life insurance needs to be purchased on the primary breadwinner
   4. How much money to save toward retirement every year
5. What are the six core functions performed by the financial system? (6 pts.)

1. Provide ways to transfer economic resources through time, across borders, and among industries
2. To provide ways of managing risk
3. To provide ways of clearing and settling payments to facilitate trade
4. To provide a mechanism for the pooling of resources and for the subdividing of ownership in various enterprises
5. To provide price information to help coordinate decentralized decision making in various sectors of the economy
6. To provide ways of dealing with the incentive problems created when one party to a transaction has information that the other party does not or when one party acts as an agent for another

6. Malcolm just purchased theft insurance for his business. Since he has the peace of mind of knowing that any business losses from theft will be covered, he does not install a surveillance camera or alarm system on the premises of his business. The incentive problem illustrated by this example is ______________.
   1. Adverse selection
   2. Principal-agent problem
   3. Moral hazard
   4. Collateralization
7. Interest rates on bonds depend on all of the following except:
   1. The currency or commodity in which payments on the instrument are denominated
   2. The time at which the bond matures
   3. The possibility that some part of the principal or interest on the bond may not be repaid
   4. The ease with which the bond can be readily converted to cash
8. Circle the correct answer from the answer choices given. When it comes to determining rates of return in a market economy such as the United States, the greater the degree of risk aversion of the population, the _higher/lower_ the risk premium required, and the _higher/lower_ the risk-free rate of interest. (2 pts.)
9. A city government looking to raise funds for a public works project by means of underwriting and issuing municipal bonds would most likely turn to a(n):
   1. Mutual Fund
   2. Investment Bank
   3. Brokerage
   4. Commercial Bank
10. _____________ is the general term for financial instruments whose value depends on the price of one or more other assets.
    1. Bonds
    2. Derivatives
    3. Options
    4. Futures contracts