Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
Multiple Choice Questions
1. A financial intermediary:
D. Must be a depository institution
2. Most individuals borrow:
D. Without using financial intermediaries, preferring credit cards
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
3. Tom obtains a car loan from Old Town Bank.
A. The car loan is Tom’s asset and the bank’s liability
4. The U.S. government finances its budget deficits:
D. Both through direct and indirect finance
5. The ultimate role of the financial system of a country is to:
A. Provide a place for wealthy households to save
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
6. Loans made between borrowers and lenders:
D. Are liabilities to both the lenders and the borrowers
7. Financial instruments are used to channel funds from:
D. Borrowers to savers through financial institutions, but not in financial markets
8. Kate buys a share of Google. Google uses the funds raised from selling its stock to expand
its operations into Asia. This is an example of:
D. A loan
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
9. Loans made between borrowers and lenders are:
A. Usually not taxable at the federal level
10. Loans made between lenders and borrowers:
D. Are liabilities of the borrowers
11. The process of financial intermediation:
D. Is used primarily in underdeveloped countries
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
12. Which of the following statements is most correct?
D. Financial intermediaries are essential to direct finance
D. Financial intermediaries are government agencies
14. Which of the following is not a financial intermediary?
A. A bank
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
15. Mary purchases a U.S. Treasury bond; the bond is:
D. An asset for the government but a liability for Mary
16. A financial instrument would include:
A. Only a written obligation and a transfer of value
17. Which of the following is not a financial instrument?
A. A share of Microsoft stock
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
18. Sue has a checking account at the First National Bank; her checking account:
D. Is a liability to Sue until she spends the funds
19. Financial instruments and money share which of the following characteristics?
D. Both can function as a store of value even though they do not allow for trading of risk
20. Financial instruments are different from money because:
A. They can act as a store of value and money cannot
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
21. Juan purchases automobile insurance; the insurance contract is:
D. A financial intermediary
22. Most funds that flow between lenders and borrowers:
A. Flow directly through financial intermediaries
23. A bank is a financial intermediary. Which of the following statements is most accurate?
A. The bank’s depositors are the ultimate lenders and the bank is the ultimate borrower
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
24. Which of the following statements is most correct?
D. Financial instruments eliminate the risk from uncertainty, they do not transfer it
25. Standardization of financial instruments has occurred as a result of:
A. The rule of 70
26. More detailed financial instruments tend to be:
D. Less costly because they can be standardized more easily
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
27. Many financial instruments are standardized because:
D. It is required by the government
28. A share of Ford Motor Company stock is an example of:
D. A financial instrument without risk
29. Financial institutions typically own assets equal to about 10 times their actual worth.
During the financial crisis of 2007-2009 some important financial firms were leveraged by
more than:
D. 75 times their net worth
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
30. A counterparty to a financial instrument is always:
31. The information concerning the issuer of a financial instrument:
A. Needs to be complete and closely monitored by the buyers of the instrument for change
32. Asymmetric information in financial markets is a potential problem usually resulting
from:
D. The uncertainty about Federal Reserve monetary policy
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
33. Agencies exist which rate bonds based on characteristics of the borrower. Such bond
rating agencies are an example of a financial market response designed to:
A. Increase information asymmetry
34. The better the information provided to financial markets:
A. The less the amount of funds transferred between savers and borrowers
35. Financial markets enable the transfer of risk by:
D. Enabling even unsophisticated investors to purchase highly complex financial instruments
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
36. A borrower has information that it does not make available to a prospective lender; this is
an example of:
37. Disability Income Insurance is:
A. Insurance borrowers can take out in case the company they invest in defaults.
38. Disability Income Insurance:
D. Is not a transfer of risk since it seeks to replace wages
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
39. The owner of a small business applies for a bank loan and tells the loan officer that the
funds will be used to expand inventory for the upcoming holiday season. The small business
finds itself in need of additional funds to meet the monthly rent for the next quarter and the
owner uses the loan proceeds to pay the rent. This is an example of:
A. Liquidity risk
40. A share of Microsoft stock would best be described as which of the following?
A. A derivative instrument
41. A derivative instrument:
A. Comes into existence after the underlying instrument is in default
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
42. One of the advantages of the financial system is:
D. It makes sure that all information communicated is truthful
D. A contract that is traded but is not a financial instrument
D. To add to the profits an investor obtains through information asymmetry
45. Which of the following is not one of fundamental characteristics that influence the value
of a financial instrument?
D. When the promised payment is to be made
46. Considering the value of a financial instrument, the bigger the size of the promised
payment:
A. The less valuable the financial instrument because risk must be greater
47. Considering the value of a financial instrument, the sooner the promised payment is
made:
A. The less valuable is the promise to make it since time is valuable
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
48. Considering the value of a financial instrument, the more likely it is the payment will be
made:
D. The greater the uncertainty; therefore the less valuable is the financial instrument
49. Considering the value of a financial instrument, the circumstances under which the
payment is to be made influence the value because:
D. We know when certain events are going to occur and that is when we want the payment
50. The fundamental characteristics influencing the value of a financial instrument include
each of the following except:
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
51. The value of a financial instrument rises as:
D. The payments are made when the prospective investor needs them least
52. Consider the price paid for debt issued by the State of California. Which of the following
would lead to a decrease in the value of State of California bonds?
A. The State of California bonds are in small dollar amounts
53. Financial instruments used primarily as stores of value include each of the following,
except:
D. Home mortgages
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
D. A home mortgage
55. Financial instruments used primarily to transfer risk would include all of the following,
except:
A. An insurance contract
56. Financial instruments used primarily to transfer risk would not include:
D. Home mortgages
Chapter 03 – Financial Instruments, Financial Markets, and Financial Institutions
57. Which of the following financial instruments is used mainly to transfer risk?
A. Asset-backed securities
58. Financial instruments used primarily as stores of value do not include:
A. Asset backed securities
59. The most prominent of asset-backed securities is:
D. Movie box-office receipts