TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 2
OVERVIEW OF MARKET PARTICIPANTS AND FINANCIAL INNOVATION
MULTIPLE CHOICE
1. Financial institutions provide which of the following services:
a. Exchanging financial assets on behalf of customers.
2. Treasury securities are debt obligations that are issued by:
a. Municipal governments.
3. Depository institutions acquire the bulk of their funds by offering their liabilities to the
public in the form of deposits. The depository institutions are:
[E]
4. Which of the following transactions is an example of direct investment?
5. Financial intermediaries transfer financial assets that are less desirable into other
financial assets, which are more widely preferred by the public. This transformation
involves which of the following economic functions?
[E]
6. Maturity intermediation has implications for financial markets in that:
[M]
7. In contrast to individual investors, financial intermediaries will be willing to make longer
[D]
8. Investors who place their funds in an investment company, which in turn invests the
funds received in the stock of a large number of companies benefit from:
9. With a debit card,
[M]
10. Depository institutions seek to generate income by:
[M]
11. A fixed-rate deposit represents what type of liability to a financial institution?
12. Which of the following is true concerning a Type-II liability?
13. The advantage of liquidity which financial intermediaries offer savers means that savers
may:
14. A perfectly competitive market is characterized by:
[E]
15. “Market failure” is cited by economists as a reason for:
[E]
16. Government regulation of financial markets takes which of the following forms?
[E]
17. When financial institutions’ activities are restricted in the areas of lending, borrowing,
and funding, the regulation is referred to as:
[M]
18. Liquidity-generating innovations:
16
19. One of the results of the financial innovations, which have occurred since the 1960, has
been the introduction of market-broadening instruments, which increase the liquidity of
markets and the availability of funds by:
20. The ultimate causes of financial innovations include:
TRUE/FALSE
1. When financial intermediaries acquire financial resources in the market, they create
liabilities for themselves. They use those resources to create different and more widely
preferred types of securities, which become their assets.
[E]
2. The investments made by financial intermediaries in loans and/or securities are referred
to as direct investment.
3. As a result of the amount of funds managed by financial intermediaries, there are
economies of scale in contracting and processing information about financial assets.
4. The Securities Act of 193 and the Securities of Exchange Act of 1934 led to the creation
of the Federal Reserve.
5. Arbitraging instruments enable investors and borrowers to take advantage of differences
in costs and returns between markets.
ESSAY QUESTIONS
1. Explain how financial intermediaries provide at least one of four economic functions.
Key Issues:
2. Discuss the primary reasons for financial innovation.
Key Issues:
3. Describe the differences between direct and indirect investment and provide an example
of each.
Key Issues: