Deck 1: Introduction

Question 1

Which one of the following are examples of financial assets?

A) U.S. Treasury bonds.
B) Foreign bonds.
C) Home mortgage loan.
D) Common stock.
E) All of the above

Answer 1

All of the above

Question 2

Financial assets are referred to as debt instruments in the case of:

A) U.S. Treasury bonds.
B) Corporate bonds.
C) Corporate stock.
D) Municipal bonds.
E) a, b, and d only.

Answer 2

a, b, and d only.

Question 3

Financial assets represent a residual claim in the case of:

A) Preferred stock.
B) Common stock.
C) Partnership share.
D) b and c only.
E) All of the above.

Answer 3

b and c only.

Question 4

The process of valuing financial assets does not include:

A) Estimating the cash flows.
B) Determining the length of time the asset is held.
C) Determining the appropriate discount rate.
D) Discounting the expected cash flows.
E) All of the above.

Question 5

Which of the following risks are associated with realizing the expected cash flows?

A) Default risk.
B) Purchasing power risk.
C) Foreign-exchange risk.
D) All of the above.

Question 6

The principal economic functions of financial assets include:

A) The transfer of funds from those with surplus funds to those who need funds.
B) The transfer of ownership from seller to buyer.
C) The transfer of funds so as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and providing the funds.
D) a and c only.
E) All of the above.

Question 7

The length of time between the date the instrument was issued and is scheduled to make final payment is called:

A) Holding period.
B) Term to maturity.
C) Maturity.
D) b and c only.
E) All of the above.

Question 8

The price discovery process is an economic function, which refers to:

A) Financial markets that reduce the search and information costs.
B) Financial markets that signal how funds in the economy should be allocated among financial assets.
C) Financial markets that provide a mechanisms for an investor to sell a financial asset.
D) Financial markets that offer liquidity.
E) None of the above.

Question 9

Common stock issued by Digital Equipment Corporation is traded in which of the following markets?

A) Money market.
B) Debt market.
C) Derivatives market.
D) Capital market.
E) None of the above.

Question 10

When an issuer sells a new financial asset to the public, it is sold in the:

A) Primary market.
B) Intermediate market.
C) Secondary market.
D) Commodities market.
E) None of the above.

Question 11

Financial assets that are bought and sold amongst investors are traded in the:

A) Derivatives market.
B) Primary market.
C) Secondary market.
D) Commodities market.
E) None of the above.

Question 12

Securities with a maturity of less than one year are traded in the:

A) Bond market.
B) Money market.
C) Capital market.
D) Euromarket.
E) None of the above.

Question 13

Which of the following is not a factor in the integration of financial markets throughout the world?

A) Increased institutionalization of financial markets.
B) Advances in telecommunications and computer technologies.
C) Deregulation or liberalization of major financial markets.
D) Expanded role of the World Bank.
E) None of the above.

Question 14

Securities of issuers not domiciled in the country are traded in which market(s)?

A) Domestic market.
B) Foreign market.
C) International market.
D) Euromarket.
E) None of the above.

Question 15

Which of the following statements is incorrect?

A) Derivative instruments derive their value from the price of the underlying financial instrument.
B) Derivative instruments give the holder the right, but not the obligations, to buy or sell a financial assets.
C) Derivative instruments can be used for speculative purposes.
D) Derivative instruments can be used for accomplishing a specific financial objective.
E) None of the above.

Question 16

Two basic types of derivative instruments are:

A) Stocks and bonds.
B) Options and futures.
C) Bonds and swaps.
D) Forward contracts and stocks.
E) None of the above.

Question 17

The bid-ask spread:

A) Is the difference between the price the market maker is willing to sell a financial asset and the price the market maker is willing to buy a financial asset.
B) Reflects the amount of risk the market maker is assuming by making a market.
C) Is affected by the thickness of the market.
D) All of the above are correct.
E) None of the above.

Question 18

The risk attached to financial assets whose cash flows are not denominated in U.S. dollars is called:

A) Credit risk.
B) Inflation risk.
C) Foreign-exchange risk.
D) Market risk.
E) None of the above.

Question 19

Securities traded in the external market are distinguished by:

A) Being accessible only to foreign investors.
B) Being offered simultaneously to investors in a number of countries.
C) Being issued outside the jurisdiction of any single country.
D) Being traded in Europe only.
E) b and c only.

Question 20

Financial assets, financial instruments, or securities are intangible assets.

Question 21

The value of any financial asset is the present value of the expected cash flows.

Question 22

The financial markets in the U.S. and other major industrialized countries have shifted from being dominated by retail investors to being dominated by institutional investors.

Question 23

The Yankee market is the foreign market of the U.S. where the securities of issuers not domiciled in the U.S. are traded.

Question 24

The ownership of tangible assets is financed by the issuance of either debt or equity instruments.

Question 25

Explain the different ways to classify financial markets and give an example of each.

Question 26

Describe the properties of financial assets that determine or influence their attractiveness to different classes of investors.

Question 27

Distinguish between the role and function of financial assets and financial markets.