978-0133427073 Test Bank Chapter 2 Part 2

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39) Successful financial intermediaries have higher earnings on their investments because they

are better equipped than individuals to screen out good from bad risks, thereby reducing losses

due to

A) moral hazard.

B) adverse selection.

C) bad luck.

D) financial panics.

40) In financial markets, lenders typically have inferior information about potential returns and

risks associated with any investment project. This difference in information is called

A) comparative informational disadvantage.

B) asymmetric information.

C) variant information.

D) caveat venditor.

41) 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 above

E) Only A and C of the above

42) Which of the following is a contractual savings institution?

A) A life insurance company

B) A credit union

C) A savings and loan association

D) A mutual fund

43) Which of the following are not investment intermediaries?

A) A life insurance company

B) A pension fund

C) A mutual fund

D) Only A and B of the above

44) Which of the following are investment intermediaries?

A) Finance companies

B) Mutual funds

C) Pension funds

D) All of the above

E) Only A and B of the above

45) The government regulates financial markets for two main reasons:

A) to ensure soundness of the financial system and to increase the information available to

investors.

B) to improve control of monetary policy and to increase the information available to investors.

C) to ensure that financial intermediaries do not earn more than the normal rate of return and to

improve control of monetary policy.

D) to ensure soundness of financial intermediaries and to prevent financial intermediaries from

earning less than the normal rate of return.

46) Asymmetric information can lead to widespread collapse of financial intermediaries, referred

to as a

A) bank holiday.

B) financial panic.

C) financial disintermediation.

D) financial collapse.

47) Which of the following is not a regulator of part of the U.S. financial system?

A) National Credit Union Administration

B) Securities and Exchange Commission

C) Federal Reserve System

D) Federal Deposit Insurance Corporation

E) All of the above are regulators.

48) Asymmetric information can lead to the widespread collapse of financial intermediaries,

referred as financial ________.

A) panic

B) bubble

C) asset

D) transaction

49) The SEC restricts trading by the largest stockholders (known as ________) in corporations

issuing securities.

A) insiders

B) members of the board

C) hedge funds

D) intermediaries

50) The Federal Deposit Insurance Corporation (FDIC) insures each depositor at a commercial

bank, savings and loan association, or mutual savings bank up to a loss of ________ per account.

A) $100,000

B) $250,000

C) $500,000

D) $1,000,000

51) The major differences between financial regulation in the United States and abroad relate to

bank regulation. Specifically, in the past, the U.S. was the only industrialized country to subject

banks to restrictions on ________.

A) branching

B) lending

C) assets they may hold

D) the size they could grow to

52) Foreign currencies that are deposited in banks outside the home country are known as

A) foreign bonds.

B) Eurobond.

C) Eurocurrencies.

D) Eurodollars.

53) U.S. dollars deposited in foreign banks outside the United States or in foreign branches of

U.S. are referred to as

A) Eurodollars.

B) Eurocurrencies.

C) Eurobonds.

D) foreign bonds.

54) Banks providing depositors with checking accounts that enable them to pay their bills easily

is known as

A) liquidity services.

B) asset transformation.

C) risk sharing.

D) transaction costs.

55) A ________ is when one party in a financial contract has incentives to act in its own interest

rather than in the interests of the other party.

A) moral hazard

B) risk

C) conflict of interest

D) financial panic

56) Fire and casualty insurance companies are what type of intermediary?

A) Contractual savings institution

B) Depository institutions

C) Investment intermediaries

D) None of the above

57) The country whose banks are the most restricted in the range of assets they may hold is

A) Japan.

B) Canada.

C) Germany.

D) the United States.

58) The largest depository institution (value of assets) at the end of 2012 was

A) commercial banks.

B) pension funds.

C) credit unions.

D) mutual funds.

59) At the end of 2012, the value of debt instruments in the U.S. was around ________ trillion,

and the value of equities was around ________ trillion.

A) $38; $19

B) $20; $10

C) $19; $38

D) $10; $20

60) The DAX (Germany) and the FTSE 100 (London) are examples of ________.

A) foreign stock exchanges

B) foreign currencies

C) foreign stock price indexes

D) foreign mutual funds

1) Every financial market allows loans to be made.

2) An example of direct financing is if you were to lend money to your neighbor.

3) The New York Stock Exchange is an example of a primary market.

4) A bond denominated in euros and issued in a country that uses the euro as its currency is an

example of a Eurobond.

5) Most people’s involvement with the financial system is through financial intermediaries rather

than financial markets.

6) A financial intermediary’s risk-sharing activities are also referred to as asset transformation.

7) The process of financial intermediation is also known as direct finance.

8) A mutual fund is not a depository institution.

9) A pension fund is not a contractual savings institution.

10) Equity represents an ownership interest in a firm and entitles the holder to the residual cash

flows.

11) Adverse selection refers to those with high credit risks, being most aggressive in their search

for funds.

12) The capital market is a financial market in which only short-term debt instruments (generally

those with an original maturity of less than one year) are traded.

13) American investors pay attention to only the Dow Jones Industrial Average.

14) The government agency that insures each depositor at a commercial bank, savings and loan

association, or mutual savings bank up to a loss of $100,000 per account ($250,000 for

individual retirement accounts) is the Securities and Exchange Commission (SEC).

15) Many common stocks are traded over the counter, although a majority of the largest

corporations have their shares traded at organized stock exchanges.

16) Many common stocks are traded at organized exchanges, although a majority of the largest

corporations have their shares traded over the counter.

17) Corporations that issue new securities to raise capital now conduct more of this business in

financial markets in Europe and Asia than in the U.S.

18) Currently, over 80% of the new issues in the international bond market are Eurobonds.

19) In the U.S., financial intermediaries are restricted in what they are allowed to do and what

assets they can hold.

20) Unlike regulations in other countries, there are very few federal regulations governing who is

allowed to set up a financial intermediary.

1) Distinguish between direct financing and indirect financing.

Topic: Chapter 2.1 Function of Financial Markets