Fundamentals of Corporate Finance 3e Test Bank
Chapter 2: The Financial System and the Level of Interest Rates
1.
The role of the financial system is to gather money from people, businesses and government
that have funds to invest and to channel that money to those who need it.
A)
True
B)
False
Ans:
A
2.
The financial system is nothing more than a collection of financial markets.
A)
True
B)
False
Ans:
B
3.
Without a financial market, purchasing a house would require a cash purchase.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
4.
Governments are the principal lender-savers in the economy.
A)
True
B)
False
Ans:
B
5.
Businesses are the principal borrower-spenders in the economy.
A)
True
B)
False
Ans:
A
6.
Direct financial markets could be broadly labeled as wholesale markets for funding.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
7.
A privately held corporation securing a loan from its regional commercial bank is an example
of a direct market transaction.
A)
True
B)
False
Ans:
8.
The law that prohibited commercial banks from engaging investment banking activities is the
Financial Services Modernization Act of 1999.
A)
True
B)
False
Ans:
B
9.
Today, major money center banks in U.S have been allowed back to provide investment
banking services.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
10.
A primary market is any financial market in which owners of outstanding securities can resell
them to other investors.
A)
True
B)
False
Ans:
B
11.
The vast preponderance of securities sales on the New York Stock Exchange are secondary
market transactions.
A)
True
B)
False
Ans:
A
12.
The existence of an active secondary market for a security will help to enhance the price of that
particular security in the primary market.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
13.
The downside to a private placement transaction is that, it does not require the fees and
expenses associated with an SEC registration.
A)
True
B)
False
Ans:
B
14.
Brokers are market specialists who do not bear risk of ownership of securities.
A)
True
B)
False
Ans:
A
15.
The term money market reflects the idea that the instruments traded in the money market are
highly marketable and easily converted into cash.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
16.
Equities with maturity of greater than one year are generally traded in the capital market.
A)
True
B)
False
Ans:
A
17.
Most companies use indirect market from a financial institution to fund their needs.
A)
True
B)
False
Ans:
A
18.
Business finance companies obtain the majority of their funds by selling equity.
A)
True
B)
False
Ans:
B
19.
The nominal rate of interest is the rate of interest that is adjusted for inflation.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
20.
Real rates of interest are perfectly observable.
A)
True
B)
False
Ans:
B
21.
It is impossible for the nominal rate of interest to be below the real rate of interest.
A)
True
B)
False
Ans:
B
22.
An economy with a large flow of funds requires:
A)
a lot of gold reserves.
B)
a frictionless market.
C)
an efficient financial system.
D)
all of the above.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
23.
Financial markets and financial institutions are both part of:
A)
the U.S. Treasury.
B)
the financial system.
C)
the SEC.
D)
none of the above.
Ans:
B
24.
Savings by _____ in small dollar amounts is the origin of much of the money that funds
business loans in an economy.
A)
consumers
B)
the U.S. government
C)
small businesses
D)
none of the above
Ans:
A
25.
A financial system’s primary concern is funneling money from:
A)
wealthy individuals to non-wealthy individuals.
B)
lender-savers to borrower-spenders.
C)
borrower-spenders to lender-savers.
D)
the government to wealthy individuals.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
26.
_____ are the principal lender-savers in the economy.
A)
Households
B)
Investment banks
C)
State governments
D)
Businesses
Ans:
A
27.
An important function of the financial system is:
A)
to direct money to the best investment opportunities in the economy.
B)
to allow the federal government to view all financial transactions.
C)
to help state governments to coordinate state tax levies.
D)
to direct the money from borrower-lenders to lender-savers.
Ans:
A
28.
Direct financing occurs when:
A)
a lender-savers borrows directly from a borrower-spenders.
B)
a borrower-spenders borrows directly from a lender-savers.
C)
a lender-savers borrows from the federal government.
D)
a borrower-spenders borrows from the federal government.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
29.
Which of the following is a major participant in the direct financial market?
A)
Large corporations.
B)
Wealthy individuals.
C)
Investment banks.
D)
All of the above.
Ans:
D
30.
The major players in the direct financial markets are:
A)
investment banks.
B)
money center banks.
C)
regional banks.
D)
both A and B.
Ans:
D
31.
What is the typical minimum denominated transaction size in the direct financial markets?
A)
$10,000.
B)
$100,000.
C)
$1,000,000.
D)
$10,000,000.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
32.
Which of the following act is responsible for rolling back many of the rules against commercial
banks offering investment banking activities?
A)
The Securities Act of 1933.
B)
The Securities Exchange Act of 1934.
C)
The Glass-Steagall Act of 1933.
D)
The Financial Services Modernization Act of 1999.
Ans:
D
33.
Which of the following is a process by which investment bankers purchase new securities
directly from the issuing company and resell them to the investors?
A)
Agency marketing.
B)
Underwriting.
C)
Distribution.
D)
Private placement.
Ans:
B
34.
Stocks that are traded in the _____ are typically those of smaller and lesser known firms.
A)
National Stock Exchange
B)
New York Stock Exchange
C)
American Stock Exchange
D)
over-the-counter
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
35.
The financial market where a new security is sold for the first time is:
A)
a primary market.
B)
a secondary market.
C)
an indirect financial market.
D)
none of the above.
Ans:
A
36.
Secondary financial markets are similar to:
A)
direct auction markets.
B)
new-car markets.
C)
used-car markets.
D)
direct financial market.
Ans:
C
37.
If you just purchased a share of IBM through a New York Stock Exchange-based transaction,
you participated in:
A)
a primary market transaction.
B)
a secondary market transaction.
C)
a futures market transaction.
D)
none of the above.
Ans:
B