Chapter 01: Role of Financial Markets and Institutions
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1. Financial market participants who provide funds are called
a.
deficit units.
b.
surplus units.
c.
primary units.
d.
secondary units.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.01.01
NATIONAL STANDARDS:
United States – OH –
BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – HO – 15.02 – DISC.FMAI.MADU.
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
2. Which of the following is not an issuer of bonds?
a.
households
b.
corporations
c.
the U.S. Treasury
d.
government agencies
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
KEYWORDS:
3. Behavioral finance
a.
applies concepts from sociology and anthropology to the behavior of market participants.
b.
studies the behavior of financial markets in response to changes in Federal Reserve policy.
c.
applies psychology to financial decision making.
d.
explains why markets are efficient.
ANSWER:
POINTS:
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4. Those financial markets that facilitate the flow of short-term funds are known as
a.
money markets.
b.
capital markets.
c.
primary markets.
Chapter 01: Role of Financial Markets and Institutions
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Page 2
d.
secondary markets.
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
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5. Funds are provided to the initial issuer of securities in the
a.
secondary market.
b.
primary market.
c.
deficit market.
d.
surplus market.
ANSWER:
POINTS:
DIFFICULTY:
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STATE STANDARDS:
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6. Which of the following is a capital market instrument?
a.
a six-month certificate of deposit
b.
a three-month Treasury bill
c.
a ten-year bond
d.
an agreement for a bank to loan funds directly to a company for nine months
ANSWER:
POINTS:
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7. Which of the following is a money market security?
a.
Treasury note
b.
municipal bond
c.
mortgage
d.
commercial paper
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
Chapter 01: Role of Financial Markets and Institutions
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Page 4
a.
efficient.
b.
primary.
c.
overvalued.
d.
undervalued.
ANSWER:
POINTS:
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12. If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
a.
perfect
b.
active
c.
inefficient
d.
in equilibrium
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
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13. financial markets are efficient, this implies that all securities should earn the same return.
a.
True
b.
False
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
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14. The Securities Act of 1933
a.
required complete disclosure of relevant financial information for publicly offered securities in the primary
market.
b.
declared trading strategies to manipulate the prices of public secondary securities illegal.
c.
imposed heavy penalties for insider trading.
d.
required complete disclosure of relevant financial information for securities traded in the secondary market.
e.
all of the above
ANSWER:
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15. The Securities and Exchange Commission (SEC) was established by the
a.
Federal Reserve Act.
b.
McFadden Act.
c.
Securities Exchange Act of 1934.
d.
Glass-Steagall Act.
e.
none of the above
ANSWER:
POINTS:
DIFFICULTY:
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NATIONAL STANDARDS:
STATE STANDARDS:
KEYWORDS:
16. Stock issued by a corporation is an example of a(n)
a.
debt security.
b.
money market security.
c.
equity security.
d.
A and B
ANSWER:
POINTS:
DIFFICULTY:
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17. If financial markets were ____, all information about any securities for sale in primary and secondary markets would
be continuously and freely available to investors.
a.
efficient
b.
inefficient
c.
perfect
d.
imperfect
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.01.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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18. Which of the following is not a typical function of securities firms?
a.
provide brokerage services
b.
provide underwriting services
c.
accept deposits that are insured by the federal government and use the funds to provide loans to corporations
d.
offer advice on mergers and other corporate restructurings.
ANSWER:
POINTS:
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KEYWORDS:
19. Without the participation of financial intermediaries in financial market transactions,
a.
information and transaction costs would be lower.
b.
transaction costs would be higher but information costs would be unchanged.
c.
information costs would be higher but transaction costs would be unchanged.
d.
information and transaction costs would be higher.
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
KEYWORDS:
20. Which of the following is most likely to be described as a depository institution?
a.
finance companies
b.
securities firms
c.
credit unions
d.
pension funds
e.
insurance companies
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
KEYWORDS:
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
Chapter 01: Role of Financial Markets and Institutions
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d.
purchases securities for its own account.
ANSWER:
POINTS:
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25. When a securities firm acts as a(n) ____, it makes a market in specific securities by maintaining an inventory of those
securities.
a.
adviser
b.
dealer
c.
broker
d.
none of the above
ANSWER:
POINTS:
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26. ____ obtain funds by issuing securities and then lend the funds to individuals and small businesses.
a.
Finance companies
b.
Securities firms
c.
Mutual funds
d.
Insurance companies
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
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STATE STANDARDS:
KEYWORDS:
27. Households with ____ are served by ____.
a.
deficient funds; depository institutions and finance companies
b.
deficient funds; finance companies only
c.
savings; finance companies only
d.
savings; pension funds and finance companies
ANSWER:
POINTS:
DIFFICULTY:
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28. ____ concentrate on mortgage loans.
a.
Finance companies
b.
Commercial banks
c.
Savings institutions
d.
Credit unions
ANSWER:
POINTS:
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29. ____ securities have a maturity of one year or less; ____ securities generally have relatively high liquidity.
a.
Money market; capital market
b.
Money market; money market
c.
Capital market; money market
d.
Capital market; capital market
ANSWER:
POINTS:
DIFFICULTY:
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30. Which of the following are not major investors in stocks?
a.
commercial banks
b.
insurance companies
c.
mutual funds
d.
pension funds
ANSWER:
POINTS:
DIFFICULTY:
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
STATE STANDARDS:
KEYWORDS:
LEARNING OBJECTIVES:
FMAI.MADU.15.01.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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Page 11
35. When security prices fully reflect all available information, the markets for these securities are said to be efficient.
a.
True
b.
False
ANSWER:
POINTS:
DIFFICULTY:
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36. If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break
down securities to the precise size they desire.
a.
True
b.
False
ANSWER:
POINTS:
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KEYWORDS:
37. A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.
a.
True
b.
False
ANSWER:
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38. The adoption of the euro increased business between European countries and created a more competitive environment
in Europe.
a.
True
b.
False
ANSWER:
POINTS:
LEARNING OBJECTIVES:
FMAI.MADU.15.01.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
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Page 12
39. In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.
a.
True
b.
False
ANSWER:
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40. Securities represent a claim on the provider of funds.
a.
True
b.
False
ANSWER:
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41. Debt securities include commercial paper, Treasury bonds, and corporate bonds.
a.
True
b.
False
ANSWER:
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KEYWORDS:
42. Common types of capital market securities include Treasury bills and commercial paper.
a.
True
b.
False
ANSWER:
POINTS:
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.01.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 01: Role of Financial Markets and Institutions
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Page 14
e.
none of the above
ANSWER:
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KEYWORDS:
47. Which of the following transactions would not be considered a secondary market transaction?
a.
An individual investor purchases some existing shares of stock in Apple through her broker.
b.
An institutional investor sells some Disney stock through its broker.
c.
A firm that was privately held engages in an offering of stock to the public.
d.
All of the above are secondary market transactions.
ANSWER:
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KEYWORDS:
48. If investors speculate in the underlying asset rather than in derivative contracts on the underlying asset, they will
probably achieve ____ returns, and they are exposed to relatively ____ risk.
a.
lower; lower
b.
lower; higher
c.
higher; lower
d.
higher; higher
ANSWER:
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KEYWORDS:
49. ____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.
a.
Finance companies
b.
Mutual funds
c.
Life insurance companies
d.
Securities firms
ANSWER:
POINTS:
DIFFICULTY: