Financial Markets

Quiz

1.) Which of the following financial intermediaries are depository institutions?

a.) A savings and loan association
b.) A commercial bank
c.) A credit union
d.) All of the choices

2.) Intermediaries who are agents of investors and match buyers with sellers of securities are called
a.) none of choices
b.) brokers
c.) traders
d.) investment bankers
e.) dealers

3.) Economies of scale enable financial institutions to

a.) avoid the asymmetric information problem
b.) avoid adverse selection problems
c.) reduce moral hazard
d.) eliminate the need to diversify
e.) reduce transactions costs

4.) Thrift institutions include

a.) finance companies, mutual funds, and money market funds
b.) savings and loan associations, mutual savings banks, and credit unions
c.) life insurance companies, fire and casualty companies, and pension funds
d.) banks, mutual funds, and insurance companies
e.) pension funds, mutual funds, and banks

5.) The presence of transaction costs in financial markets explains, in part, why
a.) corporations get more funds through equity financing than they get from financial intermediaries
b.) equity and bond financing play such an important role in financial markets
c.) direct financing is more important than indirect financing as a source of funds
d.) financial intermediaries and indirect finance play such an important role in financial markets
6.) Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called
a.) dealers
b.) investment bankers
c.) none of the above
d.) traders
e.) brokers

7.) Financial intermediaries

a.) are involved in the process of indirect finance
b.) exist because there are substantial information and transaction costs in the economy
c.) do all of the three other choices
d.) improve the lot of the small saver

8.) When the lender and the borrower have different amounts of information regarding a transaction,
______________ is said to exist.
a.) asymmetric information
b.) adverse selection
c.) moral hazard
d.) fraud

9.) Financial intermediaries lower costs by spreading them over a large number of customers, thereby
taking advantage of
a.) economies of scale
b.) diversification
c.) risk sharing
d.) asymmetric information
e.) transactions costs

10.) Financial intermediaries can substantially reduce transaction costs per dollar of transactions
because their large size allows them to take advantage of
a.) economies of scale
b.) standardization
c.) their market power
d.) poorly informed consumers

11.) The presence of _____ in financial markets leads to adverse selection and moral hazard problems
that interfere with the efficient functioning of financial markets.
a.) noncollateralized risk
b.) free-riding
c.) costly state verification
d.) asymmetric information

12.) This refers to the risk that an asset will decline in value in response to interest rate movements
while _____________ is the risk that a financial institution will not be able to get a rate comparable to
their current rate of return.
a.) Reinvestment risk; interest rate risk
b.) Investment risk; interest rate risk
c.) Interest rate risk; investment risk
d.) Interest rate risk; reinvestment risk

13.) Which of the following can be described as direct finance?

a.) A pension fund lends money to General Motors, Inc
b.) You take out a mortgage from your local bank
c.) You borrow P2,500 from a friend
d.) All choices are not direct finance
e.) You buy shares in a mutual fund

14.) Which of the following can be described as involving indirect finance?

a.) A corporation issues new shares of stock
b.) Both a corporation issuing new shares of stock and a corporation buying short term security issued
by another corporation
c.) A corporation buys a short-term security issued by another corporation
d.) A pension fund manager buys a short-term corporate security in the secondary market

15.) Securities are _____ for the person who buys them, but are generally _____ for the individual or
firm that issues them.
a.) assets; liabilities
b.) liabilities; assets
c.) nonnegotiable; negotiable
d.) negotiable; nonnegotiable

16.) The primary assets of money market mutual funds are

a.) deposits
b.) money market instruments
c.) municipal bonds
d.) bonds
e.) stocks

17.) An important financial institution that assists in the initial sale of securities in the primary market is
the
a.) investment bank
b.) commercial bank
c.) brokerage house
d.) stock exchange

18.) Which of the following are not investment intermediaries, or those which help potential investors?
a.) A mutual fund
b.) A pension fund
c.) All of the choices are not investment intermediaries
d.) A life insurance company
e.) A life insurance company and a pension fund

19.) An important financial institution that assists in the initial sale of securities in the primary market is
the
a.) investment bank
b.) stock exchange
c.) commercial bank
d.) brokerage house

20.) The primary liabilities of a credit union are

a.) commercial loans
b.) stocks
c.) bonds
d.) deposits
e.) mortgages

21.) The ________ facilitate the trading of short term instruments while ________ facilitate the trading
of long term instruments.
a.) OTC market, exchange market.
b.) Capital market, money market.
c.) Money market, capital market.
d.) Exchange market, OTC market.

22.) Which of the following is a money market security?

a.) Corporate bond
b.) mortgage
c.) six-month treasury bill
d.) municipal bond

23.) The ________ are used for the issuance of new securities while ________ are used for the trading
of existing securities.
a.) Exchange market, OTC market.
b.) Secondary market, primary market.
c.) Primary market, secondary market.
d.) OTC market, exchange market.

24.) Those financial markets that facilitate the flow of long-term funds are known as
a.) Money markets
b.) Primary markets
c.) Capital markets
d.) Secondary markets

25.) Titanium Unlimited needs to raise money to finance its new manufacturing facility, but their CFO
does not want to part with any of the firm's equity. Which of the following is not a way for Titanium
Unlimited to obtain funds to finance the expansion of its operations, given its stated preference?
a.) Issue corporate bonds.
b.) All of the three other choices are ways to finance the expansion given its preference.
c.) Issue commercial paper.
d.) Issue common and preferred stocks.

26.) West Philippines Bank purchased corporate bonds with a 10-year maturity 3 years ago. If it now
needs funds, it could sell those bonds in the ______ market.
a.) Primary
b.) Secondary
c.) Deficit
d.) Surplus

27.) Which of the following is not a key role of financial markets?_ _

a.) Preventing one country's economic problems from spilling over into other countries during economic
downturns
b.) Serving as a mechanism for surplus units to purchase securities from deficit units
c.) Facilitating the trading of existing securities
d.) Allowing deficit units easier access to funding from surplus units outside of their own country

28.) Which of the following are secondary markets?

a.) All of the four other choices
b.) The over-the-counter market
c.) The options market
d.) The Philippine Stock Exchange
e.) The government bond market

29.) Which of the following are long-term financial instruments?

a.) A banker's acceptance
b.) A negotiable certificate of deposit
c.) A treasury bond
d.) A treasury bill

30.) The __________ include households with savings, while the ________ include firms or government
agencies that borrow funds.
a.) Deficit units, surplus units.
b.) Deficit units, deficit units.
c.) Surplus units, deficit units.
d.) Surplus units, surplus units.

31.) Which of the following instruments is not traded in a money market?

a.) Treasury Bills
b.) Eurodollars
c.) Residential mortgages
d.) Commercial paper
e.) Banker's acceptances

32.) Which of the following are primary markets?

a.) The Philippine Stock Exchange
b.) None of the four other choices
c.) The over-the-counter stock market
d.) The Philippine government bond market
e.) The options markets

33.) Financial markets have the basic function of

a.) bringing together people with funds to lend and people who want to borrow funds
b.) assuring that governments need never resort to printing money.
c.) assuring that the swings in the business cycle are less pronounced.

34.) If a corporation wants to borrow funds, it can issue bonds in the ______ market.
a.) Surplus
b.) Primary
c.) Secondary
d.) Deficit

35.) Money market instruments are securities

a.) with maturities of more than one year.
b.) with maturities of less than one year
c.) with maturities of one year or less
d.) represent ownership of publicly traded companies

36.) Which of the following statements about the characteristics of debt and equity are true?
a.) They both involve a claim on the issuer's income.
b.) They can both be long-term financial instruments
c.) None of the choices
d.) They both enable a corporation to raise funds.
e.) All of the three other choices

37.) Financial market participants who borrow funds are called

a.) Primary units
b.) Surplus units
c.) Secondary units
d.) Deficit units

38.) Which of the following statements about financial markets and securities are true?
a.) All of the choices are false.
b.) A corporation acquires new funds only when its securities are sold in the primary market
c.) All of the three other choices are true.
d.) Money market securities are usually more widely traded than longer-term securities and so tend to
be more liquid.
e.) Most common stocks are traded over-the-counter, although the largest corporations have their
shares traded at organized stock exchanges.

39.) Because financial markets are ____, securities buyers and sellers do not have full access to
information and cannot always break down securities to the precise size they desire
a.) inefficient
b.) perfect
c.) efficient
d.) imperfect

40.) A corporation acquires new funds only when its securities are sold
a.) in the secondary market by a commercial bank.
b.) in the secondary market by a stock exchange broker
c.) in the secondary market by an investment bank.
d.) in the primary market by an investment bank.