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Indicate whether the statement is true or false.
1. Securities represent a claim on the provider of funds.
a. True
b. False
2. Bonds commonly have maturities of one to three years.
a. True
b. False
3. Most mutual funds raise funds by issuing securities and then lend the funds to individuals and small businesses.
a. True
b. False
4. Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as
capital markets, while those that facilitate the flow of long-term funds are known as money markets.
a. True
b. False
5. Debt securities include commercial paper, Treasury bonds, and corporate bonds.
a. True
b. False
6. Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with specific payments
at regular intervals.
a. True
b. False
7. Institutional investors not only provide financial support to companies but also exercise some degree of corporate
control over them.
a. True
b. False
8. In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.
a. True
b. False
9. Systemic risk is the risk that a large decline in one stock’s price could cause investors to sell their stock in other
companies.
a. True
b. False
10. By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.
a. True
b. False
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11. The adoption of the euro by 19 European countries has increased business between those countries and created a more
competitive environment in Europe.
a. True
b. False
12. The Sarbanes-Oxley Act requires firms to provide complete and accurate financial information and imposes penalties
on key executives of the firm if financial fraud is detected.
a. True
b. False
13. A broker executes securities transactions between two parties and charges a commission for the transaction.
a. True
b. False
14. Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns
than speculating in the underlying asset itself.
a. True
b. False
15. Securities represent a claim on the issuer.
a. True
b. False
16. Money market securities are commonly issued to finance the purchase of assets such as buildings, equipment, or
machinery.
a. True
b. False
17. Debt securities represent debt (borrowed funds) incurred by the issuer.
a. True
b. False
18. Common types of money market securities include negotiable certificates of deposit and Treasury bills.
a. True
b. False
19. Commercial banks in aggregate have more assets than credit unions.
a. True
b. False
20. The credit crisis in the 2008–2009 period was caused by weak economies in Asia.
a. True
b. False
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21. When a depository institution offers a loan, it is acting as a creditor.
a. True
b. False
22. When security prices fully reflect all available information, the markets for these securities are said to be efficient.
a. True
b. False
23. Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment,
or machinery.
a. True
b. False
24. Savings institutions are a type of nondepository institution.
a. True
b. False
25. Most of the funds that insurance companies receive from premiums are invested in short-run money market securities.
a. True
b. False
26. When security prices fully reflect all available information, the markets for these securities are said to be perfect.
a. True
b. False
27. The total asset value of savings institutions is larger than that of commercial banks.
a. True
b. False
28. Securities that are not as safe and liquid as other securities are never considered for investment by anyone.
a. True
b. False
29. Common types of capital market securities include Treasury bills and commercial paper.
a. True
b. False
30. Since markets are efficient, institutional and individual investors should ignore the various investment instruments
available.
a. True
b. False
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31. An asymmetric information problem arises when one party to a transaction has information that is not available to the
other party, as when a corporation fails to tell investors the full extent of its losses.
a. True
b. False
32. If financial markets are efficient, this implies that all securities should earn the same return.
a. True
b. False
33. If markets are perfect, securities buyers and sellers do not have full access to information and cannot always break
down securities to the precise size they desire.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
34. If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
a. perfect
b. active
c. inefficient
d. in equilibrium
35. Households with ____ are served by ____.
a. deficient funds; depository institutions and finance companies
b. deficient funds; finance companies only
c. savings; finance companies only
d. savings; pension funds and finance companies
36. If a security is undervalued, some investors will capitalize on this by purchasing that security. As a result, the
security’s price will ____, resulting in a ____ return for those investors.
a. rise; lower
b. fall; higher
c. fall; lower
d. rise; higher
37. ____ obtain funds by issuing securities and then lend the funds to individuals and small businesses.
a. Finance companies
b. Securities firms
c. Mutual funds
d. Insurance companies
38. Which of the following financial intermediaries commonly invest in stocks and bonds?
a. pension funds
b. insurance companies
c. mutual funds
d. All of these are correct.
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39. The main reason that depository institutions experienced financial problems during the credit crisis was their
investment in
a. mortgages.
b. money market securities.
c. stocks.
d. Treasury bonds.
40. Those participants who receive more money than they spend are referred to as
a. deficit units.
b. surplus units.
c. borrowing units.
d. government units.
41. Which of the following is NOT an issuer of bonds?
a. households
b. corporations
c. the U.S. Treasury
d. government agencies
42. Funds are provided to the initial issuer of securities in the
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.
43. Which of the following is NOT a typical function of securities firms?
a. provide brokerage services
b. provide underwriting services
c. accept deposits that are insured by the federal government and use the funds to provide loans to corporations
d. offer advice on mergers and other corporate restructurings
44. Investors in equity securities may earn a return from
a. coupon payments and the return of principal at the maturity date.
b. coupon payments and a capital gain when they sell the securities.
c. quarterly dividends (if paid) and a capital gain when they sell the securities.
d. quarterly dividends (if paid) and the return of principal at the maturity date.
45. The risk that financial problems could spread among financial institutions and across financial markets, causing a
collapse of the financial system, is known as
a. systemic risk.
b. leverage risk.
c. financial meltdown risk.
d. credit risk.
46. Equity securities
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a. have a maturity.
b. pay interest on a periodic basis.
c. represent ownership in the issuer.
d. repay the principal amount at maturity.
47. Which of the following distinguishes credit unions from commercial banks and savings institutions?
a. Credit unions are nonprofit.
b. Credit unions accept deposits but do not make loans.
c. Credit unions make loans but do not accept deposits.
d. Savings institutions restrict their business to members who share a common bond.
48. If investors speculate in the underlying asset rather than in derivative contracts on the underlying asset, they will
probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
49. Behavioral finance
a. applies concepts from sociology and anthropology to the behavior of market participants.
b. studies the behavior of financial markets in response to changes in Federal Reserve policy.
c. applies psychology to financial decision making.
d. explains why markets are efficient.
50. The creditors in the federal funds market are
a. households.
b. depository institutions.
c. firms.
d. government agencies.
51. When a securities firm acts as a(n) ____, it makes a market in specific securities by maintaining an inventory of those
securities.
a. adviser
b. dealer
c. broker
d. None of these are correct.
52. Financial market participants who provide funds are called
a. deficit units.
b. surplus units.
c. primary units.
d. secondary units.
53. The financial markets that facilitate the flow of short-term funds are known as
a. money markets.
b. capital markets.
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c. primary markets.
d. secondary markets.
54. The Securities and Exchange Commission (SEC) was established by the
a. Federal Reserve Act.
b. McFadden Act.
c. Securities Exchange Act of 1934.
d. Glass-Steagall Act.
e. None of these are correct.
55. Financial markets facilitating the flow of short-term debt securities with maturities of one year or less are known as
a. secondary markets.
b. capital markets.
c. primary markets.
d. money markets.
e. None of these are correct.
56. Which of the following is an example of an asymmetric information problem?
a. A corporation releases toxic wastes into a river.
b. A corporation relocates to Ireland to take advantage of lower corporate tax rates.
c. A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain
business from the corporation that issued the stock.
d. A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.
57. ____ are not considered capital market securities.
a. Derivative securities
b. Treasury bonds
c. Corporate bonds
d. Equity securities
e. Mortgages
58. Which of the following statements is incorrect?
a. Financial markets attract funds from investors and channel the funds to corporations.
b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing
operations.
c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
d. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to
improve.
59. Which of the following are NOT considered depository financial institutions?
a. finance companies
b. commercial banks
c. savings institutions
d. credit unions
e. All of these are depository financial institutions.
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60. The foreign exchange market facilitates the exchange of
a. information between investors in different countries.
b. debt securities.
c. equity securities.
d. currencies.
61. There is a ____ relationship between the risk of a security and the expected return from investing in the security.
a. positive
b. negative
c. indeterminable
d. None of these are correct.
62. When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by
investors.
a. undervalued
b. overvalued
c. fairly priced
d. efficient
e. None of these are correct.
63. ____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.
a. Finance companies
b. Mutual funds
c. Life insurance companies
d. Securities firms
64. Stock issued by a corporation is an example of a(n)
a. debt security.
b. money market security.
c. equity security.
d. debt security AND money market security.
65. A five-year security was purchased two years ago by an investor who plans to resell it. The investor will sell the
security in the
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.
66. Which of the following are NOT considered money market securities?
a. Treasury bills
b. mortgage-backed securities
c. negotiable certificates of deposit
d. commercial paper
67. International integration of securities markets allows
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a. governments and corporations to have easier access to funding from creditors and investors in other countries.
b. investors and creditors to benefit from investment opportunities in other countries.
c. one country’s financial problems to adversely affect other countries.
d. All of these are correct.
68. Without the participation of financial intermediaries in financial market transactions,
a. information and transaction costs would be lower.
b. transaction costs would be higher but information costs would be unchanged.
c. information costs would be higher but transaction costs would be unchanged.
d. information and transaction costs would be higher.
69. ____ are classified as depository institutions.
a. Credit unions
b. Pension funds
c. Finance companies
d. Securities firms
70. Systemic risk exists because
a. there is no government regulation of financial markets.
b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of
those securities.
c. financial institutions borrow using long-term debt securities but lend their funds for short-term periods.
d. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the
government will default on its debts.
71. The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main
use of funds is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies
e. pension funds
72. Which of the following is a capital market instrument?
a. a six-month certificate of deposit
b. a three-month Treasury bill
c. a ten-year bond
d. an agreement for a bank to loan funds directly to a company for nine months
73. In aggregate, ____ are the most dominant depository institution, with more total assets than other depository
institutions.
a. commercial banks
b. savings banks
c. credit unions
d. S&Ls
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74. Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. mortgage
d. commercial paper
75. ____ concentrate on mortgage loans.
a. Finance companies
b. Commercial banks
c. Savings institutions
d. Credit unions
76. When a securities firm acts as a broker, it
a. guarantees the issuer a specific price for newly issued securities.
b. makes a market in specific securities by adjusting its own inventory.
c. executes securities transactions between two parties.
d. purchases securities for its own account.
77. If security prices fully reflect all available information, the markets for these securities are
a. efficient.
b. primary.
c. overvalued.
d. undervalued.
78. Which of the following is NOT a reason why depository financial institutions are popular?
a. They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most
surplus units.
b. They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
c. They accept the risk on loans that they provide.
d. They use their information resources to act as brokers, executing securities transactions between two parties.
e. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.
79. Money market securities generally have ____.
a. relatively low liquidity, low expected return, and a high degree of credit risk
b. relatively high liquidity, high expected return, and a high degree of credit risk
c. relatively low liquidity, high expected return, and a low degree of credit risk
d. relatively high liquidity, low expected return, and a low degree of credit risk
80. If a depository institution is experiencing more deposits than it needs to make loans or invest in securities, it can lend
its excess funds to another depository institution through the
a. Federal Reserve’s trading desk.
b. options market.
c. federal funds market.
d. federal exchange market.
81. ____ securities have a maturity of one year or less; ____ securities generally have relatively high liquidity.
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a. Money market; capital market
b. Money market; money market
c. Capital market; money market
d. Capital market; capital market
82. ____________ applies psychology to financial decisions and offers an explanation for why markets are not always
efficient.
a. Psychological marketing
b. Behavioral finance
c. Inefficient markets theory
d. Financial psychology
83. ____ are long-term debt obligations issued by corporations and government agencies to support their operations.
a. Common stock
b. Derivative securities
c. Bonds
d. None of these are correct.
84. If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve ____
returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
85. Which of the following is a nondepository financial institution?
a. savings bank
b. commercial bank
c. savings and loan association
d. mutual fund
86. If financial markets were ____, all information about any securities for sale in primary and secondary markets would
be continuously and freely available to investors.
a. efficient
b. inefficient
c. perfect
d. imperfect
87. Bonds issued by corporations have a ____ expected return and ____ risk than Treasury bonds.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
88. Which of the following facilitates the exchange of currencies?
a. money market
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b. foreign exchange market
c. New York Stock Exchange
d. federal funds market
89. Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those
securities.
a. liquid; many
b. liquid; not many
c. illiquid; not many
d. illiquid; many
90. Which of the following transactions would NOT be considered a secondary market transaction?
a. An individual investor purchases some existing shares of stock in Apple through her broker.
b. An institutional investor sells some Disney stock through its broker.
c. A firm that was privately held engages in an offering of stock to the public.
d. All of these are correct.
91. ____ involve(s) decisions such as how much funding to obtain and what types of securities to issue when financing
operations.
a. Corporate finance
b. Investment management
c. Financial markets and institutions
d. None of these are correct.
92. Which of the following are NOT major investors in stocks?
a. commercial banks
b. insurance companies
c. mutual funds
d. pension funds
93. Which of the following is most likely to be described as a depository institution?
a. finance companies
b. securities firms
c. credit unions
d. pension funds
e. insurance companies
94. The Securities Act of 1933
a. required complete disclosure of relevant financial information for publicly offered securities in the primary
market.
b. declared trading strategies to manipulate the prices of public secondary securities illegal.
c. imposed heavy penalties for insider trading.
d. required complete disclosure of relevant financial information for securities traded in the secondary market.
e. All of these are correct.
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Answer Key
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