1. The financial system consists of
a. all the securities, intermediaries, and markets that exist to match savers and borrowers.
b. all transactions occurring in the goods market during a financial year.
c. all markets that exist to match the buyers and suppliers of various factors of production.
d. all transactions involving the government.
2. Which of the following will be included in the financial system of a country?
a. Labor Unions
b. Banks
c. Factor markets
d. Markets for raw materials
3. In the financial system, savers transfer funds to borrowers in exchange for
a. cash.
b. gold.
c. financial securities.
d. derivative securities.
4. A contract whereby a borrower, who seeks to obtain money from someone, promises to compensate the lender in
the future is known as
a. a warrant.
b. an exchange rate.
c. a derivative security.
d. a financial security.
5. A contract that promises to pay a given amount of money to the owner of a security at specific dates in the future
is known as
a. a debt security.
b. an equity security.
c. stock.
d. an option.
6. A contract that makes the owner of a security a part owner of the company that issued the security is known as
a. a debt security.
b. an equity security.
c. a bond.
d. an option.
7. Another name for an equity security is
a. bond.
b. debt.
c. option.
d. stock.
8. The amount of debt and equity outstanding in the United States is more than times the nation’s GDP.
a. 2
b. 3
c. 4
d. 5
9. The ratio of debt to equity in the United States is about
a. 2.
b. 2.5.
c. 3.
d. 3.5.
10. In the United States, the biggest issuers of securities are
a. households.
b. business firms.
c. governments.
d. financial intermediaries.
11. In the United States, the biggest issuers of debt securities are
a. households.
b. business firms.
c. governments.
d. financial intermediaries.
12. In the United States, the biggest issuers of equity securities are
a. households.
b. business firms.
c. governments.
d. financial intermediaries.
13. When a household borrows to buy a home, the resulting security is referred to as
a. a discount bond.
b. a Treasury bill.
c. mortgage debt.
d. consumer credit.
14. When a household borrows using credit cards and by taking out loans for large purchases (such as automobiles),
the resulting security is known as
a. a discount bond.
b. a Treasury bill.
c. mortgage debt.
d. consumer credit.
15. The owner of a financial security is known as
a. an investor.
b. a debtor.
c. a broker.
d. a securitor.
16. In the United States, the biggest investors in equity securities are
a. households.
b. business firms.
c. governments.
d. financial intermediaries.
17. In the United States, the biggest investors in debt securities are
a. households.
b. business firms.
c. governments.
d. financial intermediaries.
18. Maturity is
a. the time until borrowed funds are repaid.
b. the total interest accumulated on a financial security.
c. a situation in which equity becomes worthless.
d. the principal amount invested in a financial security.
19. Principal is
a. the amount of interest accumulated on a bond.
b. the amount of dividends paid each year on a stock.
c. the original amount invested in a security.
d. the time until a borrowed fund is repaid.
20. The periodic payments on debt securities are called
a. interest payments.
b. dividends.
c. debt swaps.
d. subordinations.
21. The periodic payments on equity securities are called
a. interest payments.
b. dividends.
c. equity shares.
d. stock repurchases.
22. Which of the following is true of debt securities?
a. The periodic payment on a debt security is known as dividend.
b. A debt security specifies a particular maturity date.
c. The original amount invested in a referred to as interest.
d. The amount of payment on a debt security depends on the company’s profits.
23. Which of the following is true of an equity?
a. Equity securities can be bought and sold.
b. The periodic payment on an equity security is called the interest.
c. An equity promises to pay a fixed amount periodically.
d. An equity security has a specific date of maturity.
24. A treasury bond issued by the U.S. government
a. does not have a maturity date.
b. makes periodic payments of specific amounts.
c. pays dividends to the bond holders.
d. is a short-term debt security.
25. Treasury bills issued by the U.S. government
a. do not have a specific period of maturity.
b. promises to pay dividends to its owners.
c. are long term debt securities.
d. are short term debt securities.
26. Which of the following is true of dividends?
a. The amount of dividends paid to stock owners depends on the company’s performance.
b. The timing of dividend payments is the same across all companies.
c. Dividends are tax-free payments from insurance companies.
d. Dividends are tax-free social security payments.
27. Most commonly, companies issue a(n) dividend.
a. quarterly
b. semiannual
c. annual
d. monthly
28. Interest payments are
a. the periodic payments on equity securities.
b. made by the borrower to the investor along with the principal.
c. tax–free payments from insurance companies.
d. taxable Social Security payments.
29. In the event that a firm goes bankrupt and is liquidated, who is paid off first, second, and third between workers,
debt holders, and stockholders?
a. (1) debt holders; (2) workers; (3) stockholders
b. (1) stockholders; (2) workers; (3) debt holders
c. (1) workers; (2) debt holders; (3) stockholders
d. (1) workers; (2) stockholders; (3) debt holders
30. Four friends- Phillips, Eliza, John, and Jacob are associated with Redhood Ltd. in different ways. Phillips is the
CEO of Redhood Ltd., Melissa works as an accountant while John owns some shares of Redhood Ltd. and Jacob
has some debt securities issued by the company. Who is likely to be paid last in case of a bankruptcy?
a. John b.
Jacob c.
Phillips
d. Melissa
31. Andy keeps his savings in a money market mutual fund, Ben keeps his savings invested in U.S. savings bonds,
Charlie keeps his in a bank, and Beth uses her savings to buy the stocks of a company. Given this information, who
among the following individuals is using direct finance?
a. Andy
b. Ben
c. Charlie
d. Beth
32. Andy keeps his savings in a certificate of deposit at a bank, Ben keeps his savings invested in U.S. savings bonds,
Beth keeps her savings in the form of liquid cash in her vault, and Charlie uses his to buy stock on the New York
Stock Exchange. Given this information, who among the following individuals is using indirect finance?
a. Andy
b. Ben
c. Charlie
d. Beth
33. A company that transfers funds from savers to borrowers by receiving funds from savers and investing in securities
issued by borrowers is known as a(n)
a. broker.
b. financial intermediary.
c. stock exchange.
d. venture capitalist.
34. When savers buy securities from borrowers without the assistance of any third-party, they are using
a. direct finance.
b. indirect finance.
c. a secondary market.
d. a financial intermediary.
35. When savers invest through financial intermediaries, they are said to engage in
a. direct finance.
b. indirect finance.
c. a secondary market.
d. a tertiary market.
36. Mary used her savings to buy some stocks of a company in the secondary market while Jane sold some stocks she
owned through a stock broker. George invested his savings in a bank while Tom bought treasury bills of the U.S.
government. Who among the following is using direct finance?
a. Mary
b. Jane
c. George
d. Tom
37. Mr.Smith bought stocks of several companies from the secondary market. He used
a. micro finance.
b. public finance.
c. direct finance.
d. indirect finance.
38. A company that takes short term deposits and makes long term loans is a
a. a financial intermediary.
b. a brokerage.
c. an investment bank.
d. a secondary market maker.
39. A financial intermediary
a. is a government-owned acceptor of deposits.
b. pools the funds of many people.
c. speculates in the stock market.
d. advances loans but does not accept deposits.
40. When a country’s financial system is young, it usually relies more on finance.
a. micro
b. direct
c. nonintermediary
d. indirect
41. Which of the following is NOT a financial intermediary?
a. A commercial bank.
b. A savings institution.
c. A government treasury.
d. A mutual fund.
42. Commercial banks, savings institutions, and mutual funds are all
a. financial intermediaries.
b. secondary market organizations.
c. owned by the government.
d. institutions that people use to engage in direct finance.
43. Which of the following is NOT a financial intermediary?
a. A credit union.
b. A life insurance company.
c. A mutual fund.
d. A labor union.
44. Investors who wish to reduce their risk should
a. buy stocks of small companies.
b. diversify.
c. buy stocks of large companies.
d. keep large amounts of cash.
45. Owning a variety of securities means engaging in
a. securitization.
b. sterilization.
c. diversification.
d. free-riding.
46. Beth‘s financial adviser has asked her to invest in a number of securities rather than investing in one. This is an
example of
a. securitization.
b. free-riding.
c. sterilization.
d. diversification.
47. A financial intermediary specializes in knowing about people who apply for loans. The intermediary knows how to
evaluate credit histories and the probabilities that borrowers will repay. These facts are examples of which of the
following functions of financial intermediaries?
a. Gathering information
b. Helping savers diversify
c. Pooling funds
d. Taking short-term deposits in order to make long-term loans
48. Joe E. Conomist purchased 100 shares of IBM corporation in 2011 for $10,000. In 2014, Joe sold these shares to
Sally Forth for $15,000. How would this sale of stock in 2014 affect IBM corporation?
a. IBM makes $5,000 in profit.
b. IBM invests $5,000 in capital equipment.
c. IBM suffers a loss of $5,000.
d. IBM is unaffected.
49. The market for new securities is known as:
a. the closed market.
b. the primary market.
c. the secondary market.
d. the open market.
50. Suppose the quantity demanded for a security is
BD = 150 − 0.1b,
and the quantity supplied of the security is
BS = 50 + 0.1b,
where b is the price of the security in dollars. The equilibrium price of the security is
a. $50.
b. $125.
c. $250.
d. $500.
51. A financial market is
a. a place or a mechanism by which borrowers, savers, and financial intermediaries trade.
b. an electronic means of transacting.
c. a place where people engage in indirect finance.
d. a secondary market.
52. Which of the following is true of a financial market?
a. Only new securities can be traded in a financial market.
b. Some financial markets are local.
c. All financial markets have a central physical location.
d. All financial markets are secondary markets.
53. The market in which a security is sold from one investor to another is known as
a. the closed market.
b. the primary market.
c. the secondary market.
d. the open market.
54. GLTP Inc. transformed from a private company into a public company after offering its shares in a securities
exchange for the first time. Such transactions take place in a
a. tertiary market.
b. closed market.
c. secondary market.
d. primary market.
55. Phillips regularly invests in the securities of established companies. However, he does not invest in new securities
issued by companies. His transactions take place in the
a. closed market.
b. open market.
c. secondary market.
d. primary market.
56. The U.S. government borrows by auctioning its bonds in the
a. primary market.
b. stock market.
c. secondary market.
d. derivative market.
57. Mobi’s is a new company that manufactures premium apparel for men. It needs fund for expanding its production
units and is planing to issue the first lot of shares. These shares will be traded in the .
a. primary market
b. secondary market
c. tertiary market
d. closed market
58. Everything else remaining unchanged, an increase in the supply of security A and a decrease in the demand for
security B will cause the price of security A to and the price of security B to .
a. fall; fall
b. fall; rise
c. rise; fall
d. rise; rise
59. Everything else remaining unchanged, an increase in the supply of security A and an increase in the demand for
security B causes the price of security A to and the price of security B to .
a. fall; fall
b. fall; rise
c. rise; fall
d. rise; rise
60. Everything else remaining unchanged, a decrease in the supply of security A and a decrease in the demand for
security B will cause the price of security A to and the price of security B to .
a. fall; fall
b. fall; rise
c. rise; fall
d. rise; rise
61. Everything else remaining unchanged, a decrease in the supply of security A and an increase in the demand for
security B will cause the price of security A to and the price of security B to .
a. fall; fall
b. fall; rise
c. rise; fall
d. rise; rise
62. If the demand for a company’s stock decreases, supply remaining unchanged,
a. both its equilibrium price and quantity will rise.
b. both its equilibrium price and quantity will fall.
c. its equilibrium price will rise while its equilibrium quantity will fall.
d. its equilibrium price will fall while its equilibrium quantity will rise.
63. Suppose the quantity demanded for a security is
BD = 150 − 0.1b,
and the quantity supplied of the security is
BS = 50 + 0.1b,
where b is the price of the security in dollars. The equilibrium quantity of the security is
a. 100.
b. 125.
c. 145.
d. 500.
64. Suppose the quantity demanded for a security is
BD = 150 − 0.1b,
and the quantity supplied of the security is
BS = 50 + 0.1b,
where b is the price of the security in dollars. Suppose that the supply curve shifts to
BS = 75 + 0.1b.
The equilibrium price of the security
a. rises by $50.
b. rises by $125.
c. falls by $125.
d. falls by $50.
65. The quantity demanded of a security is QD= 220 – 0.2b and the quantity supplied of it is QS=100 + 0.2b. The
equilibrium price of the security is .
a. $300
b. $280
c. $420
d. $500