Financial Markets

1 Financial markets help transfer funds from ________ units to ________ units.

1. deficit; surplus
2. surplus; deficit
3. both a and b
4. none of the answers are correct

2 ________ markets facilitate the flow of short-term funds while ________ markets facilitate the flow of long-term funds.

1. Money; capital
2. Capital; money
3. Primary; secondary
4. Bond; stock

3 Which of the following does NOT characterize the primary market?

1. Funds provided directly to the issuing company.
2. New securities are issued.
3. Federal Government is involved.
4. All of the above are characteristics of the primary market.

4 Which of the following does NOT characterize the money market?

1. high liquidity
2. securities are debt
3. short maturity
4. high expected returns

5 Which is NOT a capital market security?

1. stock
2. bond
3. mortgage
4. Treasury Bills

6 ________ represent partial ownership of a corporation.

1. Mortgages
2. Stocks
3. Debts
4. Certificates of deposit

7 When securities prices reflect all available information, the markets are:

1. efficient.
2. transparent.
3. liquid.
4. none of the answers are correct.

8 Asymmetric information says that ________ has (have) information about a company's financial condition that is not available to ________.

1. investors; the company's managers
2. the government; investors
3. the company's managers; investors
4. the IRS; the company's managers

9 The ________ established the Securities and Exchange Commission to oversee securities markets.

1. Securities Act of 1933
2. Securities Exchange Act of 1934
3. Glass-Steagall Act
4. Financial Services Modernization Act

10 If all financial markets were ________, all information about securities would be freely available to investors and there would be no transactions costs.

1. deregulated
2. insured
3. perfect
4. balanced

11 Which of the following is a characteristic of depository institutions?

1. They repackage funds to match the sizes of borrowers and lenders.
2. They provide expertise on analyzing credit quality of borrowers.
3. They offer many loans to diversify the risk of loan defaults.
4. All of the above are characteristics of depository institutions.

12 Savings and loans have concentrated on ________ loans while commercial banks have concentrated on ________ loans.

1. residential mortgage; business-related
2. business-related; government
3. government; individual
4. business-related; personal

13 The dominant depository institution is _______, while the dominant non-depository institution is ________.

1. savings banks; insurance companies
2. credit unions; pension funds
3. commercial banks; mutual funds
4. thrifts; finance companies

14 A ________ makes a market in specific securities by building and trading inventory.

1. broker
2. dealer
3. mutual fund
4. finance company

15 Which of the following is commonly used to alter the risk of investments?

1. debt
2. equity
3. derivatives
4. all of the answers are correct

16 Governments are the main supplier of surplus funds. False   

17 The primary market is where new issues of stock are sold. True   

18 Liquidity is the ability to sell a security quickly at close to the true market value. True   

19 The New York Stock Exchange is a primary market. False   

20 The value of derivative securities is dependent on the value of other securities. True   

21 Derivative securities have a high degree of leverage, which results in magnified returns for investors. True   

22 The value of securities is the present value of expected cash flows, discounted at the risk free rate.  False   

23 A security is said to be in equilibrium if the demand for the security is equal to the supply available for sale. True   

24 Privatization is the process of selling government-owned firms to individuals. True   

25 Savings institutions are also called thrifts. True   

26 Credit unions are usually much larger than commercial banks.  False   

27 A broker assists in executing trades between two parties. True   

28 The Securities Act of 1933 required specific disclosures by a company prior to offering securities to the public. True   

29 An insurance company is a non-depository institution. True   

30 Recent activity in the U.S. shows that insurance and banking services are becoming significantly more segregated from each other. False