Financial Markets & Instruments

Multiple choice question, choose the best answer.

1.The text authors liken the image of financiers in popular culture to:

a.Shakespeare's "Romeo and Juliet."

b.Shakespeare's "King Lear."

c.Shakespeare's "The Merchant of Venice."

d.Milton's "Paradise Lost."

e.Huxley's "Brave New World."

2.Finance can be said to suffer from the problem(s) of:

a.adverse selection, but not moral hazard.

b.moral hazard, but not adverse selection.

c.neither adverse selection nor moral hazard.

d.both adverse selection and moral hazard.

3.As a general rule one can say that as risk rises:

a.returns fall and liquidity falls.

b.returns fall and liquidity rises.

c.returns rise and liquidity rises.

d.returns rise and liquidity falls.

e.neither returns nor liquidity changes.

4.Unlike a hedge fund, a mutual fund:

a.is subject to very little government regulation and oversight.

b.can trade in derivative instruments.

c.caters to small individual savers.

d.All of the above.

e.None of the above.

5.A non-depository source of funds in the financial sector would include:

a.pensions.

b.insurance companies.

c.finance companies.

d.All of the above.

e.None of the above.

6.As of 2012, the value of capital instruments in the U.S. outstanding was about ___ the value of money market instruments outstanding.

a.half

b.double

c.ten times

d.twenty-two times

e.one hundred times

7.Which of the following is not a derivative financial instrument?

a.A 30 year mortgage.

b.A 60 day call option.

c.A 16 month futures contract to buy foreign currency.

d.A 16 month futures contract to sell foreign currency.

e.A credit default swap on a 15 year bond.

8.The futures market may be viewed as less risky than a forward contract as:

a.there is an active market.

b.defaults can't harm another party.

c.settlements are made at maturity.

d.All of the above.

e.Only A and B of the above.

9.If there were no secondary markets, we would likely see:

a.increased activity in primary markets.

b.holders of stock more willing to sell their shares.

c.increased activity in all financial markets.

d.an overall rise in investment, capital development and our standard of living.

e.None of the above.

10.Following the recession of 2007-2008 ____ was sold off to the Bank of America.

a.Bear Stearns.

b.Lehman Brothers.

c.Merrill Lynch.

d.Goldman Sachs.

e.None of the above.

11.As noted in the article about trading pits,

a.futures pits in Chicago were closing down.

b.futures pits in New York were closing down.

c.floor trading on the New York Stock Exchange were closing down.

d.All of the above.

e.Only A and B of the above.

12.Which of the following is/are true about credit default swaps?

a.They are essentially insurance policies on a bond in case the issuing firm goes bankrupt.

b.This is a very small market with little, to no, activity.

c.They can only be bought if you own the bonds that are being protected.

d.They require the seller to keep a 5% reserve against potential losses.

e.All of the above are true.

13.Which of the following is true about credit default swaps?

a.If sold, it must cover the entire duration of the instrument in question.

b.There are a minimum of three parties involved in situations involving CDS instruments.

c.CDS instruments can be traded in formal markets, subject to government oversight.

d.They were pioneered by J.P. Morgan

e.All of the above.

14.Among the reasons cited for why Black Rock is pursuing a revival of the single-name credit default swap market include:

a.many years of low interest rates that have kept returns to investors low.

b.the lack of precision that characterize index CDS instruments.

c.the desire to have more stable market given that there are other risky competitive derivatives available in the market.

d.All of the above.

e.None of the above.

15.As explained in the Kellogg study, AIG's involvement in securities lending was risky because:

a.these securities were lent out to companies with a high degree of risk.

b.they used income from this on high yield, and high risk, assets.

c.they lent out their most safe mortgage-backed securities.

d.those borrowing the securities would often not return them to AIG.

e.All of the above.

16.In critiquing AIG, Davidson notes that:

a.they typically only sold CDS instruments, while most banks both bought and sold them.

b.they had written CDS instruments to cover over $400 billion in bonds.

c.to improve their liquidity, they sold off profitable assets, weakening their stock price.

d.a decline in their bond rating automatically required them to boost their collateral as part of their guarantee on the CDS instruments that they sold.

e.All of the above.

17.Among the sources of AIG's problems were:

a.its heavy involvement in credit default swaps.

b.its heavy involvement in lending securities.

c.the downgrading of their credit rating.

d.All of the above.

e.Only A and B of the above.

18.As part of the deal to save AIG:

a.the Fed initially made available to them a loan for up to $85 billion.

b.the Fed took control of almost 80% of AIG.

c.the Treasury purchased $40 billion in AIG stock.

d.All of the above.

e.None of the above.

19.Which of the following is most important for providing liquidity to firms?

a.Capital markets.

b.Money markets.

c.Equity markets.

d.Stock markets.

e.None of the above.

20.Which of the following is a financial intermediary?

a.A mutual fund.

b.A pension fund.

c.An insurance company.

d.All of the above.

e.None of the above.

21.Which of the following involves a financial intermediary?

a.A credit card purchase.

b.Buying stock online.

c.Buying renter's insurance.

d.All of the above.

e.None of the above.

22.Which are examples of external finance?

a.Issuing commercial paper.

b.Stock sales.

c.Issuing bonds.

d.All of the above

e.None of the above.

23.Which of the following is an example of a source of internal finance?

a.Corporate bonds.

b.Withheld earnings.

c.Commercial loans.

d.Commercial paper.

e.None of the above.

24.When a corporation forgoes paying a dividend to expand its business, it is engaging in:

a.internal finance.

b.external finance.

c.hybrid finance.

d.international finance.

e.All of the above.

25.Which of the following will facilitate your purchase of McDonald's shares in the secondary market?

a.An employee of McDonald.

b.A loan officer.

c.An investment bank.

d.A broker.

e.All of the above.

26.Which of the following are traded in capital markets?

a.T-bills that have terms to maturity of 182 days.

b.Shares of Ford Motor Company.

c.Three month commercial paper.

d.Federal funds.

e.All commercial paper.

27.A newly issued 10-year corporate bond is traded in:

a.both the secondary market and the capital market.

b.both the secondary market and the money market.

c.both the primary market and the money market.

d.both the primary market and the capital market.

28.U.S. equities are traded in all following except the:

a.New York Stock Exchange.

b.federal funds market.

c.NASDAQ.

d.American Stock Exchange.

e.The OTC exchange.

29.Depository institutions include all of the following except:

a.banks.

b.mutual funds.

c.credit unions.

d.thrifts.

e.savings banks.

30.In the 2000s, the value of money market instruments outstanding peaked at about:

a.$4 billion.

b.$40 billion.

c.$400 billion.

d.$4 trillion.

e.$40 trillion.

31.All of the following are non-depository institutions except:

a.pension companies.

b.insurance companies.

c.mortgage brokers.

d.savings and loans.

e.investment bankers.

32.Long term capital markets:

a.are used to facilitate liquidity demands.

b.trade instruments that mature within one year.

c.generally involve loans from one bank to another bank.

d.raise funds used for capital purchases.

e.All of the above.

33.Which of the following is an example of direct finance?

a.A home buyer takes a mortgage through their bank.

b.You borrow money from a friend for lunch.

c.Your parents buy life insurance for you.

d.All of the above.

e.None of the above.

34.All of the following are money market instruments except for:

a.6 month certificates of deposit.

b.3 month T-bills.

c.10 year municipal bonds.

d.repurchase agreements.

e.federal funds.

35.An example of instruments that are sold in primary markets include:

a.newly issued Dell Computer stocks.

b.newly constructed houses.

c. IBM stocks sold by a current investor.

d.retail store sales over a fiscal quarter (i.e., three months).

e.All of the above.

36.Short term money market instruments include:

a.commercial paper.

b.repurchase agreements.

c.federal funds.

d.bankers' acceptances

e.All of the above.

37.You have $25 million worth of U.S. Treasuries that will mature in three years, but you only want to hold them for one more year.You face the risk that interest rates will _____ and so you are inclined to execute a forward contract to _____ these bonds at a predetermined price in one year.

a.rise;sell

b.rise;buy

c.fall;sell

d.fall;buy

e.remain unchanged;lower the interest rate of

38.A six month Treasury bill that was issued one month ago is now traded in:

a.wholesale markets.

b.discount markets.

c.primary markets.

d.secondary markets.

e.capital markets.

39.Among the purposes of hedging is/are:

a.to speculate on anticipated changes in prices.

b.to reduce one's exposure to risk due to price fluctuations.

c.to increase market liquidity.

d.All of the above.

e.None of the above.

40.The difference between a futures contract and a forward contract is:

a.the futures contract is a commitment to deliver the commodity while the forward contract is an option to buy or sell the futures contract.

b.the former is conducted in a market, while the latter is a party-to-party transaction.

c.the former is used for hedging while the latter is used for speculating.

d.strictly a matter of the duration involved in the instruments.

e.All of the above.

41.The Google IPO was conducted as a Dutch auction, meaning that:

a.prices were bid up from a predetermined floor.

b.prices were bid down from a predetermined ceiling.

c.prices were randomly selected.

d.every time you bid you had to increase your offer by 10%.

e.every time you were outbid, to re-enter you had to increase your offer by 25%.

42.The Google IPO:

a.proved that investment banks were unfairly keeping stock prices low.

b.raised about $1.7 billion for the firm.

c.was wildly successful, with the stock selling for a hefty 20% premium over expectations.

d.was conducted through an auction at Sotheby's in Amsterdam.

e.All of the above.

43.One of the most devastating losses in the derivatives market lead to the bankruptcy of the:

a.Barings Bank.

b.Bank of Singapore.

c.Leeson exchange.

d.SIMEX.

e.Conex-Killeen.