CH 01
CH 01
TRUE/FALSE QUESTIONS
(T)
(F)
1.
2.
The purpose of the financial system is to bring savers and borrowers together.
(T)
3.
(T)
4.
Investment bankers help DSUs bring new primary security issues to market.
(F)
5.
(F)
6.
When an SSU owns a financial claim created by financial intermediation, its
residual claim is against a DSU.
(F)
7.
(F)
8.
Finance companies take small consumer deposits and make large consumer loans.
(T)
9.
(T)
10.
(F)
11.
(T)
12.
(T)
13.
DSU.
(T)
14.
Depository intermediaries issue claims that are for the most part highly liquid.
(T)
15.
(F)
16.
(T)
17.
DSU.
Financial claims or securities are written for the mutual benefit of both SSU and
(F)
18.
DSUs and SSUs always have some contact with each other in financial markets.
(T)
19.
(F)
20.
(T)
21.
(T)
22.
(F)
23.
Secondary markets are important because they provide funds directly to DSUs.
1
(F)
24.
Primary markets offer liquidity and ways for investors to alter the risk of their
portfolios.
(T)
25.
(T)
26.
The money market provides liquidity; the capital market finances economic
growth.
(T)
27.
(T)
28.
Competition among financial intermediaries tends to force interest rates
downward.
(T)
29.
(F)
30.
Every asset is someone elses liability, but not every liability is someone elses asset.
(T)
31.
(T)
33.
The money market is a dealer market, not an exchange, and has no specific
location.
(T)
34.
Money market borrowers are small in number compared to money market lenders.
(T)
35.
(T)
36.
Commercial banks are the major issuer and investor of money market securities.
()
37.
(F)
38.
(F)
39.
(T)
40.
When a stock is listed on an exchange, members may trade it on the floor of the
exchange.
1.
a.
b.
c.
d.
An SSUs
income and expenditures for the period are equal.
income for the period exceeds expenditures.
expenditures for the period exceed receipts.
spending is entirely financed by credit cards
(c)
2.
a.
b.
c.
d.
(d)
3.
a.
b.
c.
d.
(c)
4.
a.
b.
c.
d.
(c)
5.
a.
b.
c.
d.
(a)
6.
a.
b.
c.
d.
(d)
7.
a.
b.
c.
d.
(d)
8.
a.
b.
c.
d.
(d)
9.
a.
b.
c.
d.
(b)
10.
a.
b.
c.
d.
Which of the following best describes the "two faces of debt" concept?
DSUs are sometimes SSUs.
Every financial asset is someone elses liability.
Intermediaries may own both direct and indirect financial assets.
The government is unable to control its federal spending.
(a)
11.
A dealer offers to buy shares of IBM at $116 and sell to investors at $118. The
bid is
a. $116
b. $118c. $2
d. none of the preceding
(d)
(a)
12.
a.
b.
c.
d.
13.
(c)
14.
a.
b.
c.
d.
(a)
15.
a.
b.
c.
d.
(a)
16.
a.
b.
c.
d.
Which of the following would tend to hold corporate bonds in significant amounts?
life insurance company
credit union
mutual savings bank
commercial bank
(d)
17.
a.
b.
c.
d.
(a)
18.
a.
b.
c.
d.
(d)
19.
a.
b.
c.
d.
All of the following are terms for or examples of financial claims except
bonds.
money.
loans.
commodities.
(c)
20.
(a)
(c)
22.
Gutierrez
b.
c.
d.
21.
a.
b.
c.
d.
During 2008, Bob and Nancy Gutierrez expect total income of about $225,000 and are
budgeting total expenditures of about $180,000. For this budget period, the
family is most specifically a(n)
a.
DSU
b.
business
c.
SSU
d.
household
(c)
23.
a.
b.
c.
d.
(c)
24.
a.
b.
c.
d.
The flow of funds from saving to investment through direct financing involves
the saver holding the lender's IOU.
two separate contracts.
the lender holding the borrower's IOU.
several different financial institutions.
(a)
25.
DSU.
a.
b.
c.
d.
Intermediation, or ____ financing, involves ___ financial claim(s) linking SSU and
(d)
26.
a.
b.
c.
d.
(c)
27.
a.
b.
c.
d.
(b)
28.
a.
b.
c.
indirect; two
direct; two
indirect; one
direct; one
d.
(c)
29.
intermediation financing.
(d)
30.
______ merely execute buy or sell orders for their clients; _______ make
markets.
a.
dealers; brokers
b.
brokers; investment bankers
c.
dealers; financial institutions
d.
brokers; dealers
(a)
31.
Hammond Securities holds an inventory of ABC Corp. stock, buying at $65.00
and selling at $67.50. The bid is _____; the bid-ask spread is _____.
a.
$65.00; $2.50
b.
$67.50; $2.50
c.
lower than the ask price; higher than the bid price
d.
higher than the ask price; $2.50
(d)
32.
The _____ price is the highest price offered by the dealer to purchase a given
security.
a. market
b. ask
c. offering
d. bid
(c)
33.
Acting as matchmaker and earning a commission, the ______ is an important
component in direct financial markets.
a.
dealer
b.
investment banker
c.
broker
d.
seller
(d)
34.
a.
b.
c.
d.
(a)
35.
a.
b.
c.
d.
(b)
36.
Hollon Securities is underwriting an issue of Llamas Unlimited, Inc. common
stock. Hollon will pay LU $45.00 a share and offer the stock to the public at $48.00. The
direct cost of underwriting the issue is $1.00 per share. The underwriting spread is
a.
$4.00 per share.
b.
$3.00 per share.
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c.
d.
37.
by
a.
b.
c.
d.
Most of the financial claims issued by U.S. financial intermediaries are purchased
(d)
38.
a.
b.
c.
d.
(b)
39.
An S&L taking short-term deposits and financing local land development is
engaging in
a.
speculation.
b.
maturity intermediation.
c.
denomination intermediation.
d.
currency transformation
(c)
40.
a.
b.
c.
d.
(a)
(c)
41.
(d)
42.
a.
b.
c.
d.
(c)
43.
a.
b.
c.
d.
(b)
44.
The only deposit-type institutions that do not operate for profit are
a.
thrift institutions
b.
credit unions
c.
pension funds
d.
commercial banks
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(a)
45.
a.
b.
c.
d.
Credit unions are _____ institutions; pension funds are _______ institutions.
depository; contractual
contractual; depository
federal ; investment
depository; depository
(b)
46.
a.
b.
c.
d.
(d)
47.
a.
b.
c.
d.
(c)
48.
Federal agencies issue high quality securities and invest primarily in claims issued by
a.
businesses that are too big to fail.
b.
the U.S. Treasury to finance government deficits.
c.
agricultural or housing-related sectors which have limited access to private credit.
d.
foreign governments
(d)
49.
(d)
50.
Potential effects of yield fluctuations on security prices and reinvestment income
represent
a.
credit risk.
b.
liquidity risk.
c.
foreign exchange risk.
d.
interest rate risk.
(c)
51.
a.
b.
c.
d.
(d)
52.
a.
b.
c.
d.
Secondary capital markets have promoted economic growth in the U.S. because
they have increased marketability of stocks and bonds.
they have increased the public's access to investment.
they have helped investors diversify.
all of the above
(b)
53.
a.
b.
c.
d.
(d)
54.
The difference between capital spending and real investment is chiefly a difference in
8
a.
b.
c.
d.
(a)
55.
a.
b.
c.
d.
(d)
56.
a.
b.
c.
d.
The household sector is the largest surplus sector and invests in the capital market
directly by purchasing stocks and bonds.
indirectly through mutual funds.
indirectly through pension funds
all of the above
(d)
57.
(c)
58.
A standardized, exchange-backed contract to deliver assets 3 months from today is
a:
a. forward contract. b. securitized asset. c. futures contract. d. option contract.
(d)
59.
A conditional contract granting its holder the right to buy assets in the future is a:
a. put. b. forward contract. c. futures contract. d. call.
(c)
60.
a.
b.
c.
d.
(d)
61.
a.
b.
c.
d.
The DSU receives the funds in the primary market; the SSU sells the claim in the
intermediation market.
direct financial market.
federal funds market.
secondary market.
(b)
62.
a.
b.
c.
d.
(d)
63.
___
a.
b.
c.
d.
(a)
64.
through __
a.
b.
c.
d.
(a)
65.
a.
b.
c.
d.
(d)
66.
a.
b.
c.
d.
(d)
67.
a.
b.
c.
d.
(d)
68.
a.
b.
c.
d.
The money market security represented by the largest dollar amount outstanding is
commercial paper.
federal agency issues.
negotiable CDs.
Treasury bills.
(c)
69.
Which of the following bank money market securities is backed by specified
collateral?
a.
negotiable CDs
b.
banker's acceptances
c.
repurchase agreements
d.
commercial paper(d)
(d)
70.
(d)
71.
a.
b.
c.
d.
(d)
72.
a.
b.
c.
(b)
d.
73.
a.
b.
c.
d.
1.
into
Denomination Divisibility. DSUs prefer to borrow the full funding need all at once.
SSUs tend to save small amounts periodically. Intermediaries pool small savings
large investments.
Currency Transformation. Intermediaries can buy claims denominated in one currency
while issuing claims denominated in another. This is difficult for an ordinary SSU.
Maturity Flexibility. DSUs generally prefer longer-term financing. SSUs generally prefer
shorter-term investments. Intermediaries can offer different ranges of maturities to both.
Credit Risk Diversification. Intermediaries manage risk by evaluating and holding many
different securities. SSUs on their own would have to leave more eggs in one
basket.
Liquidity. Many claims issued by intermediaries are highly liquid because intermediaries
substitute their own liquidity for that of DSUs.
Without financial intermediation, funds would flow only when preferences of SSUs and DSUs
match closely. DSUs would not always obtain timely financing for attractive projects; SSUs would
under-utilize savings. Societys production possibilities frontier would be smaller.
2.
Explain how and why the secondary capital markets play an important role in our economy. How
do secondary markets assist the primary market?
Answer: Secondary markets provide investors with liquidity and the ability to re-balance
their portfolios at any time. Constant trading provides a base for selling additional securities
(primary issue) into the market and constant price discovery promotes continuing evaluation and
feedback. Secondary markets also enable investors to choose their own holding periods
3.
List and briefly describe the main risks managed by financial intermediaries.
Answer:
Credit Risk (or default risk) is the possibility that a borrower may not pay as agreed.
Interest Rate Risk is the likelihood that interest rate fluctuations will change a
securitys price and reinvestment income.
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Liquidity Risk is the possibility that a financial institution may be unable to pay required
cash outflows.
Foreign Exchange Risk is the possibility of loss on fluctuations in exchange rates.
Political Risk is the possibility that government action will harm an institutions interests.
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