Deck 1: Introduction

Question 1

Primary markets are markets in which users of funds raise cash by selling securities to funds suppliers.

Answer 1

True

Question 2

Corporate security issuers are always directly involved in funds transfers in the secondary market.

Answer 2

False

Question 3

Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period.

Answer 3

False

Question 4

Asset transformation by financial intermediaries involves increasing the risk attributes of securities such as mortgages,bonds,and stocks.

Question 5

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely

A)conduct an IPO with the assistance of an investment banker.
B)engage in a secondary market sale of equity.
C)conduct a private placement to a large number of potential buyers.
D)place an ad in the Wall Street Journal soliciting retail suppliers of funds.
E)issue bonds with the assistance of a dealer.

Question 6

There are three types of major financial markets today: primary,secondary,and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.

Question 7

Central governments sometimes indirectly intervene in foreign exchange markets by affecting foreign exchange rates through raising or lowering interest rates.

Question 8

The Volcker Rule prohibits U.S. depository institutions from engaging in proprietary trading.

Question 9

The NYSE is an example of a secondary market.

Question 10

In the United States the SEC provides deposit insurance for $250,000 per person per bank.

Question 11

Financial intermediation provides direct transfer of funds to the users.

Question 12

The largest capital market security outstanding in 2016 measured by market value was

A)securitized mortgages.
B)corporate bonds.
C)municipal bonds.
D)Treasury bonds.
E)corporate stocks.

Question 13

One of the factors responsible for globalization of financial markets and institutions is deregulation.

Question 14

What factors are encouraging financial institutions to offer overlapping financial services such as banking,investment banking,brokerage,etc.?
I. Regulatory changes allowing institutions to offer more services
II. Technological improvements reducing the cost of providing financial services
III. Increasing competition from full-service global financial institutions
IV. Reduction in the need to manage risk at financial institutions

A)I only
B)II and III only
C)I,II,and III only
D)I,II,and IV only
E)I,II,III,and IV

Question 15

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n)

A)primary market transaction.
B)asset transformation by Morgan Stanley.
C)money market transaction.
D)foreign exchange transaction.
E)forward transaction.

Question 16

Enterprise Risk Management (ERM)system is responsible for managing the totality of a firm's risk exposures.

Question 17

The average cost incurred by financial institutions to collect information is larger than that of individuals.

Question 18

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds.
Morgan Stanley is acting as a(n)

A)asset transformer.
B)asset broker.
C)government regulator.
D)foreign service representative.
E)derivatives trader.

Question 19

Money markets are the markets for securities with an original maturity of one year or less.

Question 20

Financial intermediaries rather than financial systems are the most common agents to channel funds from the suppliers to the users of funds.

Question 21

Financial intermediaries' ability to reduce the average cost of collecting information because of their efficient operations allows them to take advantage of

A)asset transformation.
B)economies of scale.
C)economies of scope.
D)transformational trading.
E)standardization.

Question 22

The Securities Exchange Commission (SEC)does not

A)decide whether a public issue is fairly priced.
B)decide whether a firm making a public issue has provided enough information for investors to decide whether the issue is fairly priced.
C)require exchanges to monitor trading to prevent insider trading.
D)attempt to reduce excessive price fluctuations.
E)monitor the major securities exchanges.

Question 23

Discuss how secondary markets benefit issuers and investors.

Question 24

Secondary markets help support primary markets because secondary markets
I. offer primary market purchasers liquidity for their holdings.
II. update the price or value of the primary market claims.
III. reduce the cost of trading the primary market claims.

A)I only
B)II only
C)I and II only
D)II and III only
E)I,II,and III

Question 25

The diagram below is a diagram of the

A)secondary markets.
B)primary markets.
C)money markets.
D)derivatives markets.
E)commodities markets.

Question 26

________ and ________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets.

A)Diversification; high equity returns
B)Price risk; collateral
C)Free riders; regulations
D)Monitoring; diversification
E)Primary markets; foreign exchange markets

Question 27

Match the intermediary with the characteristic that best describes its function.
I. Provide protection from adverse events.
II. Pool funds of small savers and invest in either money or capital markets.
III. Provide consumer loans and real estate loans funded by deposits.
IV. Accumulate and transfer wealth from work period to retirement period.
V. Underwrite and trade securities and provide brokerage services.
1. Thrifts
2. Insurers
3. Pension funds
4. Securities firms and investment banks
5. Mutual funds

A)1,3,2,5,4
B)4,2,3,5,1
C)2,5,1,3,4
D)2,4,5,3,1
E)5,1,3,2,4

Question 28

Financial intermediaries (FIs)can offer savers a safer,more liquid investment than a capital market security,even though the intermediary invests in risky illiquid instruments because

A)FIs can diversify away some of their risk.
B)FIs closely monitor the riskiness of their assets.
C)the federal government requires them to do so.
D)FIs can diversify away some of their risk and closely monitor the riskiness of their assets.
E)FIs can diversify away some of their risk and the federal government requires them to do so.

Question 29

Depository institutions (DIs)play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy because

A)loans to corporations are part of the money supply.
B)bank and thrift loans are tightly regulated.
C)U.S. DIs compete with foreign financial institutions.
D)DI deposits are a major portion of the money supply.
E)thrifts provide a large amount of credit to finance residential real estate.

Question 30

Money markets trade securities that
I. mature in one year or less.
II. have little chance of loss of principal.
III. must be guaranteed by the federal government.

A)I only
B)II only
C)I and II only
D)I and III only
E)I,II,and III

Question 31

The most diversified type of depository institutions is

A)credit unions.
B)savings associations.
C)commercial banks.
D)finance companies.
E)mutual funds.

Question 32

Depository institutions include

A)banks.
B)thrifts.
C)finance companies.
D)all of these choices are correct.
E)banks and thrifts.

Question 33

Commercial paper is

A)a time draft payable to a seller of goods,with payment guaranteed by a bank.
B)a loan to an individual or business to purchase a home,land,or other real property.
C)short-term funds transferred between financial institutions usually for no more than one day.
D)a marketable bank-issued time deposit that specifies the interest rate earned and a fixed maturity date.
E)a short-term unsecured promissory note issued by a company to raise funds for a short time period.

Question 34

Which of the following are capital market instruments?

A)10-year corporate bonds
B)30-year mortgages
C)20-year Treasury bonds
D)15-year U.S. government agency bonds
E)All of these choices are correct

Question 35

Insolvency risk at a financial intermediary (FI)is the risk

A)that promised cash flows from loans and securities held by FIs may not be paid in full.
B)incurred by an FI when the maturities of its assets and liabilities do not match.
C)that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.
D)incurred by an FI when its investments in technology do not result in cost savings or revenue growth.
E)risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.

Question 36

Liquidity risk at a financial intermediary (FI)is the risk

A)that promised cash flows from loans and securities held by FIs may not be paid in full.
B)incurred by an FI when the maturities of its assets and liabilities do not match.
C)that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.
D)incurred by an FI when its investments in technology do not result in cost savings or revenue growth.
E)risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.

Question 37

Which of the following is/are money market instrument(s)?

A)Negotiable CDs
B)Common stock
C)T-bonds
D)4-year maturity corporate bond
E)Negotiable CDs,common stock,and T-bonds

Question 38

Households are increasingly likely to both directly purchase securities (perhaps via a broker)and also place some money with a bank or thrift to meet different needs. Match up the given investor's desire with the appropriate intermediary or direct security.
I. Money likely to be needed within six months
II. Money to be set aside for college in 10 years
III. Money to provide supplemental retirement income
IV. Money to be used to provide for children in the event of death
1. Depository institutions
2. Insurer
3. Pension fund
4. Stocks or bonds

A)2,3,4,1
B)1,4,2,3
C)3,2,1,4
D)1,4,3,2
E)4,2,1,3

Question 39

A negotiable CD is

A)a time draft payable to a seller of goods,with payment guaranteed by a bank.
B)a loan to an individual or business to purchase a home,land,or other real property.
C)a short-term fund transferred between financial institutions usually for no more than one day.
D)a marketable bank-issued time deposit that specifies the interest rate earned and a fixed maturity date.
E)a short-term unsecured promissory note issued by a company to raise funds for a short time period.

Question 40

As of 2016,which one of the following derivatives instruments had the greatest amount of notional principal outstanding?

A)Futures
B)Swaps
C)Options
D)Bonds
E)Forwards

Question 41

Discuss the major macro benefits of financial intermediaries. What role does the government have in the credit allocation process?

Question 42

Discuss the benefits to funds suppliers of using a financial intermediary asset transformer in place of directly purchasing claims such as stocks or bonds. What is the major disadvantage?
What is the downside of putting your money in an intermediary?

Question 43

What have been the major factors contributing to growth in the foreign financial markets?

Question 44

What determines the price of financial instruments? Which are riskier,capital market instruments or money market instruments? Why?

Question 45

How can brokers and dealers make money? Which activity is riskier? Why?

Question 46

How can using indirect finance rather than direct finance reduce agency costs associated with monitoring funds demanders?

Question 47

You are a corporate treasurer seeking to raise funds for your firm. What are some advantages of raising funds via a financial intermediary (FI)rather than by selling securities to the public?

Question 48

What does an asset transformer do? Why is asset transformation a risky activity?

Question 49

Explain how the credit crunch originating in the mortgage markets hurt financial intermediaries' attempts to use diversification and monitoring to limit the riskiness of their loans and investments while offering more liquid claims to savers.

Question 50

How can a depository intermediary afford to purchase long-term risky direct claims from funds demanders and finance these purchases with safe,liquid,short-term,low-denomination deposits? What can go wrong in this process?