Question 1

Federal funds are

Answer funds raised by the federal government in the bondmarket.

loans made by the Federal Reserve System to banks.

loans made by banks to the Federal Reserve System.

loans made by banks to each other.

.

2 points

Question 2

The problem created by asymmetric information before thetransaction occurs is called ________, while the problem createdafter the transaction occurs is called ________.

Answer adverse selection; moral hazard

moral hazard; adverse selection

costly state verification; free-riding

free-riding; costly state verification

.

2 points

Question 3

Equity of U.S. companies can be purchased by

Answer U.S. citizens only.

foreign citizens only.

U.S. citizens and foreign citizens.

U.S. mutual funds only.

.

2 points

Question 4

The process where financial intermediaries create and sell low-riskassets and use the proceeds to purchase riskier assets is knownas

Answer risk sharing.

risk aversion.

risk neutrality.

risk selling.

.

2 points

Question 5

Because these securities are more liquid and generally have smallerprice fluctuations, corporations and banks use the ________securities to earn interest on temporary surplus funds.

Answer money market

capital market

bond market

stock market

.

2 points

Question 6

A liquid asset is

Answer an asset that can easily and quickly be sold to raisecash.

a share of an ocean resort.

difficult to resell.

always sold in an over-the-counter market.

.

2 points

Question 7

Bonds that are sold in a foreign country and are denominated in acurrency other than that of the country in which it is sold areknown as

Answer foreign bonds.

Eurobonds.

equity bonds.

country bonds.

.

2 points

Question 8

Government regulations to reduce the possibility of financial panicinclude all of the following except

Answer transactions costs.

restrictions on assets and activities.

disclosure.

deposit insurance.

.

2 points

Question 9

U.S. Treasury bills pay no interest but are sold at a ________.That is, you will pay a lower purchase price than the amount youreceive at maturity.

Answer premium

collateral

default

discount

.

2 points

Question 10

In the United States, loans from ________ are far ________important for corporate finance than are securities markets.

Answer government agencies; more

government agencies; less

financial intermediaries; more

financial intermediaries; less

.

2 points

Question 11

The process of indirect finance using financial intermediaries iscalled

Answer direct lending.

financial intermediation.

resource allocation.

financial liquidation.

.

2 points

Question 12

An important feature of money market mutual fund shares is

Answer deposit insurance.

the ability to write checks against shareholdings.

the ability to borrow against shareholdings.

claims on shares of corporate stock.

.

2 points

Question 13

Adverse selection is a problem associated with equity and debtcontracts arising from

Answer the lender's relative lack of information about theborrower's potential returns and risks of his investmentactivities.

the lender's inability to legally require sufficient collateral tocover a 100% loss if the borrower defaults.

the borrower's lack of incentive to seek a loan for highly riskyinvestments.

the borrower's lack of good options for obtaining funds.

.

2 points

Question 14

Risk sharing is profitable for financial institutions due to

Answer low transactions costs.

asymmetric information.

adverse selection.

moral hazard.

.

2 points

Question 15

Studies of the major developed countries show that when businessesgo looking for funds to finance their activities they usuallyobtain these funds from

Answer government agencies.

equities markets.

financial intermediaries.

bond markets.

.

2 points

Question 16

A debt instrument sold by a bank to its depositors that pays annualinterest of a given amount and at maturity pays back the originalpurchase price is called

Answer commercial paper.

a negotiable certificate of deposit.

a municipal bond.

federal funds.

.

2 points

Question 17

Which of the following are investment intermediaries?

Answer Life insurance companies

Mutual funds

Pension funds

State and local government retirement funds

.

2 points

Question 18

The higher a security's price in the secondary market the ________funds a firm can raise by selling securities in the ________market.

Answer more; primary

more; secondary

less; primary

less; secondary

.

2 points

Question 19

The primary liabilities of a commercial bank are

Answer bonds.

mortgages.

deposits.

commercial paper.

.

2 points

Question 20

Every financial market has the following characteristic:

Answer It determines the level of interest rates.

It allows common stock to be traded.

It allows loans to be made.

It channels funds from lenders-savers to borrowers-spenders.

.

2 points

Question 21

With direct finance, funds are channeled through the financialmarket from the ________ directly to the ________.

Answer savers, spenders

spenders, investors

borrowers, savers

investors, savers

.

2 points

Question 22

The purpose of the disclosure requirements of the Securities andExchange Commission is to

Answer increase the information available to investors.

prevent bank panics.

improve monetary control.

protect investors against financial losses.

.

2 points

Question 23

An example of economies of scale in the provision of financialservices is

Answer investing in a diversified collection of assets.

providing depositors with a variety of savings certificates.

spreading the cost of borrowed funds over many customers.

spreading the cost of writing a standardized contract over manyborrowers.

.

2 points

Question 24

Savings and loan associations are regulated by the

Answer Federal Reserve System.

Securities and Exchange Commission.

Office of the Comptroller of the Currency.

Office of Thrift Supervision.

.

2 points

Question 25

The most liquid securities traded in the capital market are

Answer corporate bonds.

municipal bonds.

U.S. Treasury bonds.

mortgage-backed securities.