Chapter 01: Role of Financial Markets and Institutions
Chapter 01: Role of Financial Markets and Institutions
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b.
False
ANSWER:
a
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
54. Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment,
or machinery.
a.
True
b.
False
ANSWER:
a
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
55. Commercial banks in aggregate have more assets than credit unions.
a.
True
b.
False
ANSWER:
a
POINTS:
1
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
56. Those participants who receive more money than they spend are referred to as
a.
b.
c.
d.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
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: Knowledge
Chapter 01: Role of Financial Markets and Institutions
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57. Equity securities
a.
have a maturity.
b.
pay interest on a periodic basis.
c.
represent ownership in the issuer.
d.
repay the principal amount at maturity.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
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
58. ____ involve(s) decisions such as how much funding to obtain and what types of securities to issue when financing
operations.
a.
Corporate finance
b.
Investment management
c.
Financial markets and institutions
d.
none of the above
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
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: Knowledge
59. There is a ____ relationship between the risk of a security and the expected return from investing in the security.
a.
positive
b.
negative
c.
indeterminable
d.
none of the above
ANSWER:
a
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: Comprehension
60. If a security is undervalued, some investors would capitalize on this by purchasing that security. As a result, the
security’s price will ____, resulting in a ____ return for those investors.
a.
rise; lower
b.
fall; higher
c.
fall; lower
Chapter 01: Role of Financial Markets and Institutions
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d.
rise; higher
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
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: Comprehension
61. The credit crisis in the 2008–2009 period was caused by weak economies in Asia.
a.
True
b.
False
ANSWER:
b
POINTS:
1
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
62. ____ are classified as depository institutions.
a.
Credit unions
b.
Pension funds
c.
Finance companies
d.
Securities firms
ANSWER:
a
POINTS:
1
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
63. The main reason that depository institutions experienced financial problems during the credit crisis was their
investment in:
a.
mortgages
b.
money market securities.
c.
stock
d.
Treasury bonds.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.01.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
Chapter 01: Role of Financial Markets and Institutions
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STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
64. Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as
capital markets, while those that facilitate the flow of long-term funds are known as money markets.
a.
True
b.
False
ANSWER:
b
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
65. Bonds commonly have maturities of one to three years.
a.
True
b.
False
ANSWER:
b
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
66. Since markets are efficient, institutional and individual investors should ignore the various investment instruments
available.
a.
True
b.
False
ANSWER:
b
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: Comprehension
67. Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns
than speculating in the underlying asset itself.
a.
True
b.
False
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
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68. When security prices fully reflect all available information, the markets for these securities are said to be perfect.
a.
True
b.
False
ANSWER:
b
POINTS:
1
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
69. Securities that are not as safe and liquid as other securities are never considered for investment by anyone.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
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: Knowledge
70. By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.
a.
True
b.
False
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
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: Comprehension
71. When a depository institution offers a loan, it is acting as a creditor.
a.
True
b.
False
ANSWER:
a
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: Comprehension
Chapter 01: Role of Financial Markets and Institutions
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e.
They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
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: Analysis
76. Which of the following are not considered money market securities?
a.
Treasury bills
b.
mortgage-backed securities
c.
negotiable certificates of deposit
d.
commercial paper
ANSWER:
b
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
77. ____ are not considered capital market securities.
a.
Derivative securities
b.
Treasury bonds
c.
Corporate bonds
d.
Equity securities
e.
Mortgages
ANSWER:
a
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
78. ____ are long-term debt obligations issued by corporations and government agencies to support their operations.
a.
Common stock
b.
Derivative securities
c.
Bonds
d.
None of the above
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
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Page 23
79. Which of the following is an example of an asymmetric information problem?
a.
A corporation releases toxic wastes into a river.
b.
A corporation relocates to Ireland to take advantage of lower corporate tax rates.
c.
A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain
business from the corporation that issued the stock.
d.
A corporation manipulates its financial information to avoid disclosing a large loss from its operations in
China.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
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: Comprehension
80. If investors speculate in derivative contracts rather than in 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:
d
POINTS:
1
DIFFICULTY:
Moderate
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: Comprehension
81. When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by
investors.
a.
undervalued
b.
overvalued
c.
fairly priced
d.
efficient
e.
none of the above
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.01.02
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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82. Which of the following are not considered depository financial institutions?
a.
finance companies
b.
commercial banks
c.
savings institutions
d.
credit unions
e.
All of the above are depository financial institutions.
ANSWER:
a
POINTS:
1
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
83. The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main
use of funds is providing loans to households and businesses.
a.
savings institutions
b.
commercial banks
c.
mutual funds
d.
finance companies
e.
pension funds
ANSWER:
d
POINTS:
1
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
84. Which of the following statements is incorrect?
a.
Financial markets attract funds from investors and channel the funds to corporations.
b.
Money markets enable corporations to borrow funds on a short-term basis so that they can support their
existing operations.
c.
Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
d.
Investors seek to invest their funds in the stock of firms that are presently undervalued and have much
potential to improve.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.01.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
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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a.
Psychological marketing
b.
Behavioral finance
c.
Inefficient markets theory
d.
Financial psychology
ANSWER:
b
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
89. International integration of securities markets allows:
a.
governments and corporations to have easier access to funding from creditors and investors in other countries.
b.
investors and creditors to benefit from investment opportunities in other countries.
c.
one’s country’s financial problems to adversely affect other countries.
d.
All of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
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: Analysis
90. The foreign exchange market facilitates the exchange of:
a.
information between investors in different countries.
b.
debt securities.
c.
equity securities.
d.
currencies.
ANSWER:
d
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
91. Which of the following is not an example of the government’s recent increased role in financial markets?
a.
the Federal Reserve’s purchase of debt securities during the credit crisis
b.
regulations changing the way that the credit risk of bonds is assessed
c.
regulations setting maximum rates for Treasury securities
d.
increased monitoring of stock trading and prosecution of those who trade on inside information
ANSWER:
c
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92. Most of the funds that insurance companies receive from premiums are invested in short-run money market securities.
a.
True
b.
False
ANSWER:
b
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: Comprehension
93. The risk that financial problems could spread among financial institutions and across financial markets, causing a
collapse of the financial system, is known as:
a.
systemic risk.
b.
leverage risk.
c.
financial meltdown risk.
d.
credit risk.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.01.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
94. Systemic risk exists because:
a.
there is no government regulation of financial markets.
b.
financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices
of those securities.
c.
financial institutions borrow using long-term debt securities but lend their funds for short-term periods.
d.
financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the
government will default on its debts.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.01.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
POINTS:
1
DIFFICULTY:
Moderate
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: Comprehension
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Page 28