5) If Microsoft sells a bond in London and it is denominated in dollars, the bond is a
A) Eurobond.
B) foreign bond.
C) British bond.
D) currency bond.
6) U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are
called
A) Atlantic dollars.
B) Eurodollars.
C) foreign dollars.
D) outside dollars.
7) If Toyota (headquarters in Japan) sells a $1,000 bond in the United States, the bond is a
A) foreign bond.
B) Eurobond.
C) Tokyo bond.
D) currency bond.
8) If Volkswagen, a German company, sells a euro-denominated bond in London, the bond is a
A) Eurobond.
B) foreign bond.
C) currency bond.
D) Duetsche bond.
9) Distinguish between a foreign bond and a Eurobond.
2.5 Function of Financial Intermediaries: Indirect Finance
1) The process of indirect finance using financial intermediaries is called
A) direct lending.
B) financial intermediation.
C) resource allocation.
D) financial liquidation.
2) In the United States, loans from ________ are far ________ important for corporate finance
than are securities markets.
A) government agencies; more
B) government agencies; less
C) financial intermediaries; more
D) financial intermediaries; less
3) The time and money spent in carrying out financial transactions are called
A) economies of scale.
B) financial intermediation.
C) liquidity services.
D) transaction costs.
4) Economies of scale enable financial institutions to
A) reduce transactions costs.
B) avoid the asymmetric information problem.
C) avoid adverse selection problems.
D) reduce moral hazard.
5) An example of economies of scale in the provision of financial services is
A) investing in a diversified collection of assets.
B) providing depositors with a variety of savings certificates.
C) hiring more support staff so that customers don’t have to wait so long for assistance.
D) spreading the cost of writing a standardized contract over many borrowers.
6) Financial intermediaries provide customers with liquidity services. Liquidity services
A) make it easier for customers to conduct transactions.
B) allow customers to have a cup of coffee while waiting in the lobby.
C) are a result of the asymmetric information problem.
D) are another term for asset transformation.
7) The process where financial intermediaries create and sell low-risk assets and use the proceeds
to purchase riskier assets is known as
A) risk sharing.
B) risk aversion.
C) risk neutrality.
D) risk selling.
8) The process of asset transformation refers to the conversion of
A) safer assets into risky assets.
B) safer assets into safer liabilities.
C) risky assets into safer assets.
D) risky assets into risky liabilities.
9) Reducing risk through the purchase of assets whose returns do not always move together is
A) diversification.
B) intermediation.
C) intervention.
D) discounting.
10) The concept of diversification is captured by the statement
A) don’t look a gift horse in the mouth.
B) don’t put all your eggs in one basket.
C) it never rains, but it pours.
D) make hay while the sun shines.
11) Risk sharing is profitable for financial institutions due to
A) low transactions costs.
B) asymmetric information.
C) adverse selection.
D) moral hazard.
12) Typically, borrowers have superior information relative to lenders about the potential returns
and risks associated with an investment project. The difference in information is called
A) moral selection.
B) risk sharing.
C) asymmetric information.
D) adverse hazard.
13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them
from financial intermediaries, then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection.
C) free-riding.
D) costly state verification.
14) The problem created by asymmetric information before the transaction occurs is called
________, while the problem created after the transaction occurs is called ________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification
15) Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender’s relative lack of information about the borrower’s potential returns and risks of his
investment activities.
B) the lender’s inability to legally require sufficient collateral to cover a 100% loss if the
borrower defaults.
C) the borrower’s lack of incentive to seek a loan for highly risky investments.
D) the borrower’s lack of good options for obtaining funds.
16) An example of the problem of ________ is when a corporation uses the funds raised from
selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees
and their families.
A) adverse selection
B) moral hazard
C) risk sharing
D) credit risk
17) Banks can lower the cost of information production by applying one information resource to
many different services. This process is called
A) economies of scale.
B) asset transformation.
C) economies of scope.
D) asymmetric information.
18) Conflicts of interest are a type of ________ problem that can happen when an institution
provides multiple services.
A) adverse selection
B) free-riding
C) discounting
D) moral hazard
19) Studies of the major developed countries show that when businesses go looking for funds to
finance their activities they usually obtain these funds from
A) government agencies.
B) equities markets.
C) financial intermediaries.
D) bond markets.
20) The countries that have made the least use of securities markets are ________ and ________;
in these two countries finance from financial intermediaries has been almost ten times greater
than that from securities markets.
A) Germany; Japan
B) Germany; Great Britain
C) Great Britain; Canada
D) Canada; Japan
21) Although the dominance of ________ over ________ is clear in all countries, the relative
importance of bond versus stock markets differs widely.
A) financial intermediaries; securities markets
B) financial intermediaries; government agencies
C) government agencies; financial intermediaries
D) government agencies; securities markets
22) Financial intermediaries are better equipped than individuals to screen out bad credit risks
from good ones, thus reducing losses due to
A) adverse selection.
B) moral hazard.
C) free-riding.
D) economies of scope.
23) Financial intermediaries have developed expertise in monitoring the parties they lend to, thus
reducing losses due to
A) moral hazard.
B) adverse selection.
C) free-riding.
D) economies of scope.
24) Because there is an imbalance of information in a lending situation, we must deal with the
problems of adverse selection and moral hazard. Define these terms and explain how financial
intermediaries can reduce these problems.
2.6 Types of Financial Intermediaries
1) Financial institutions that accept deposits and make loans are called ________ institutions.
A) investment
B) contractual savings
C) depository
D) underwriting
2) Thrift institutions include
A) banks, mutual funds, and insurance companies.
B) savings and loan associations, mutual savings banks, and credit unions.
C) finance companies, mutual funds, and money market funds.
D) pension funds, mutual funds, and banks.
3) Which of the following is a depository institution?
A) a life insurance company
B) a credit union
C) a pension fund
D) a mutual fund
4) Which of the following is a depository institution?
A) a life insurance company
B) a mutual savings bank
C) a pension fund
D) a finance company
5) Which of the following financial intermediaries is NOT a depository institution?
A) a savings and loan association
B) a commercial bank
C) a credit union
D) a finance company
6) The primary assets of credit unions are
A) municipal bonds.
B) business loans.
C) consumer loans.
D) mortgages.
7) The primary liabilities of a commercial bank are
A) bonds.
B) mortgages.
C) deposits.
D) commercial paper.
8) The primary liabilities of depository institutions are
A) premiums from policies.
B) shares.
C) deposits.
D) bonds.
9) ________ institutions are financial intermediaries that acquire funds at periodic intervals on a
contractual basis.
A) Investment
B) Contractual savings
C) Thrift
D) Depository
10) 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
11) Contractual savings institutions include
A) mutual savings banks.
B) money market mutual funds.
C) commercial banks.
D) life insurance companies.
12) Which of the following are NOT contractual savings institutions?
A) life insurance companies
B) credit unions
C) pension funds
D) state and local government retirement funds
13) Which of the following is NOT a contractual savings institution?
A) a life insurance company
B) a pension fund
C) a savings and loan association
D) a fire and casualty insurance company
14) The primary assets of a pension fund are
A) money market instruments.
B) corporate bonds and stock.
C) consumer and business loans.
D) mortgages.
15) Which of the following are investment intermediaries?
A) life insurance companies
B) mutual funds
C) pension funds
D) state and local government retirement funds
16) An investment intermediary that lends funds to consumers is
A) a finance company.
B) an investment bank.
C) a finance fund.
D) a consumer company.
17) The primary assets of a finance company are
A) municipal bonds.
B) corporate stocks and bonds.
C) consumer and business loans.
D) mortgages.
18) ________ are financial intermediaries that acquire funds by selling shares to many
individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.
A) Mutual funds
B) Investment banks
C) Finance companies
D) Credit unions
19) Money market mutual fund shares function like
A) checking accounts that pay interest.
B) bonds.
C) stocks.
D) currency.
20) An important feature of money market mutual fund shares is
A) deposit insurance.
B) the ability to write checks against shareholdings.
C) the ability to borrow against shareholdings.
D) claims on shares of corporate stock.
21) The primary assets of money market mutual funds are
A) stocks.
B) bonds.
C) money market instruments.
D) deposits.
22) An investment bank helps ________ issue securities.
A) a corporation
B) the United States government
C) the SEC
D) foreign governments
23) An investment bank purchases securities from a corporation at a predetermined price and
then resells them in the market. This process is called
A) underwriting.
B) underhanded.
C) understanding.
D) undertaking.
24) A mutual fund that is organized as a limited partnership with high minimum investments is
called a
A) hedge fund.
B) investment bank.
C) mutual savings bank.
D) money market mutual fund.
25) Hedge funds require large minimum investments ranging from ________ to ________ or
more.
A) $100,000; $1 million
B) $1,000; $10,000
C) $100; $1,000
D) $$10,000; $25,000
26) The limited memberships and high dollar minimums for hedge funds means that these funds
are
A) subject to weaker regulation than other mutual funds.
B) more stringently regulated for fear of collapse.
C) limited in the types of assets they can purchase.
D) under the control of the U.S. Treasury.
27) Life insurance companies and fire and casualty insurance companies are both examples of
contractual savings institutions. Because fire and casualty insurance companies have a greater
possibility of loss of funds if disasters occur, they tend to hold more ________ assets than life
insurance companies.
A) liquid
B) real
C) long-term
D) consumer loans
2.7 Regulation of the Financial System
1) Which of the following is NOT a goal of financial regulation?
A) ensuring the soundness of the financial system
B) reducing moral hazard
C) reducing adverse selection
D) ensuring that investors never suffer losses
2) Increasing the amount of information available to investors helps to reduce the problems of
________ and ________ in the financial markets.
A) adverse selection; moral hazard
B) adverse selection; risk sharing
C) moral hazard; transactions costs
D) adverse selection; economies of scale
3) A goal of the Securities and Exchange Commission is to reduce problems arising from
A) competition.
B) banking panics.
C) risk.
D) asymmetric information.
4) The purpose of the disclosure requirements of the Securities and Exchange Commission is to
A) increase the information available to investors.
B) prevent bank panics.
C) improve monetary control.
D) protect investors against financial losses.
5) Government regulations to reduce the possibility of financial panic include all of the following
EXCEPT
A) transactions costs.
B) restrictions on assets and activities.
C) disclosure.
D) deposit insurance.
6) Which of the following do NOT provide charters?
A) the Office of the Comptroller of the Currency
B) the Federal Reserve System
C) the National Credit Union Administration
D) state banking and insurance commissions
7) A restriction on bank activities that was repealed in 1999 was
A) the prohibition of the payment of interest on checking deposits.
B) restrictions on credit terms.
C) minimum down payments on loans to purchase securities.
D) separation of commercial banking from the securities industries.
8) In order to reduce risk and increase the safety of financial institutions, commercial banks and
other depository institutions are prohibited from
A) owning municipal bonds.
B) making real estate loans.
C) making personal loans.
D) owning common stock.
9) The primary purpose of deposit insurance is to
A) improve the flow of information to investors.
B) prevent banking panics.
C) protect bank shareholders against losses.
D) protect bank employees from unemployment.
10) The agency that was created to protect depositors after the banking failures of 1930-1933 is
the
A) Federal Reserve System.
B) Federal Deposit Insurance Corporation.
C) Treasury Department.
D) Office of the Comptroller of the Currency.
11) The agency that restricts insider trading is the
A) Federal Reserve System.
B) Securities and Exchange Commission.
C) Office of the Comptroller of the Currency.
D) Federal Deposit Insurance Corporation.
12) The regulatory agency that sets reserve requirements for all banks is
A) the Federal Reserve System.
B) the Federal Deposit Insurance Corporation.
C) the Office of Thrift Supervision.
D) the Securities and Exchange Commission.
13) Asymmetric information is a universal problem. This would suggest that financial
regulations
A) in industrial countries are an unqualified failure.
B) differ significantly around the world.
C) in industrialized nations are similar.
D) are unnecessary.
14) How do regulators help to ensure the soundness of financial intermediaries?