Question 1

The smallest component of the money market is
A)repurchase agreements.
B)small-denomination time deposits.
C)savings deposits.
D)money market mutual funds.
E)commercial paper

Accepted Answer

According to Table 2.1, small-denomination time deposits are the smallest component of the money market.

Question 2

Commercial paper is a short-term security issued by ________ to raise funds.
A)the Federal Reserve Bank
B)commercial banks
C)large, well-known companies
D)the New York Stock Exchange
E)state and local governments

Accepted Answer

Commercial paper is short-term unsecured financing issued directly by large, presumably safe corporations.

Question 3

The money market is a subsector of the
A)commodity market.
B)capital market.
C)derivatives market.
D)equity market.
E)None of the options

Accepted Answer

Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums.

Question 4

Which of the following is true regarding a firm's securities
A)Common dividends are paid before preferred dividends.
B)Preferred stockholders have voting rights.
C)Preferred dividends are usually cumulative.
D)Preferred dividends are contractual obligations.
E)Common dividends usually can be paid if preferred dividends have been skipped.

Accepted Answer

Preferred dividends must be paid first and any skipped preferred dividends must be paid before common dividends may be paid.

Question 5

The largest component of the bond market is _______ debt.
A)Treasury
B)asset-backed
C)corporate
D)tax-exempt
E)mortgage-backed

Accepted Answer

According to Table 2.7, Treasury debt is the largest component of the bond market.

Question 6

The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the
A)prime rate.
B)discount rate.
C)federal funds rate.
D)call money rate.
E)money market rate.

Accepted Answer

The federal funds are required for the bank to meet reserve requirements, which is a way of influencing the money supply.

Question 7

Which of the following indices is(are) market-value weighted
I. The New York Stock Exchange Composite Index
II. The Standard and Poor's 500 Stock Index
III. The Dow Jones Industrial Average
A)I only
B)I and II only
C)I and III only
D)I, II, and III
E)II and III only

Accepted Answer

The Dow Jones Industrial Average is a price-weighted index.

Question 8

Which one of the following is not a money market instrument
A)Treasury bill
B)Negotiable certificate of deposit
C)Commercial paper
D)Treasury bond
E)Eurodollar account

Accepted Answer

Money market instruments are instruments with maturities of one year or less, which applies to all of the options except Treasury bonds.

Question 9

Which of the following is not a characteristic of a money market instrument
A)Liquidity
B)Marketability
C)Long maturity
D)Liquidity premium
E)Long maturity and liquidity premium

Accepted Answer

Money market instruments are short-term instruments with high liquidity and marketability; they do not have long maturities nor pay liquidity premiums.

Question 10

The smallest component of the bond market is _______ debt.
A)Treasury
B)other asset-backed
C)corporate
D)tax-exempt
E)mortgage-backed

Accepted Answer

According to Table 2.7, other asset-backed debt is the smallest component of the bond market.

Question 11

The bid price of a T-bill in the secondary market is
A)the price at which the dealer in T-bills is willing to sell the bill.
B)the price at which the dealer in T-bills is willing to buy the bill.
C)greater than the asked price of the T-bill.
D)the price at which the investor can buy the T-bill.
E)never quoted in the financial press.

Accepted Answer

T-bills are sold in the secondary market via dealers; the bid price quoted in the financial press is the price at which the dealer is willing to buy the bill.

Question 12

Which of the following is not a component of the money market
A)Repurchase agreements
B)Eurodollars
C)Real estate investment trusts
D)Money market mutual funds
E)Commercial paper

Accepted Answer

Real estate investment trusts are not short-term investments.

Question 13

Which of the following statement(s) is(are) true regarding municipal bonds
I. A municipal bond is a debt obligation issued by state or local governments.
II. A municipal bond is a debt obligation issued by the federal government.
III. The interest income from a municipal bond is exempt from federal income taxation.
IV. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.
A)I and II only
B)I and III only
C)I, II, and III only
D)I, III, and IV only
E)I and IV only

Accepted Answer

State and local governments and agencies thereof issue municipal bonds on which the interest income is free from all federal taxes and is exempt from state and local taxation in the issuing state.

Question 14

Which one of the following terms best describes Eurodollars
A)Dollar-denominated deposits only in European banks.
B)Dollar-denominated deposits at branches of foreign banks in the U.S.
C)Dollar-denominated deposits at foreign banks and branches of American banks outside the U.S.
D)Dollar-denominated deposits at American banks in the U.S.
E)Dollars that have been exchanged for European currency.

Accepted Answer

Although originally Eurodollars were used to describe dollar-denominated deposits in European banks, today the term has been extended to apply to any dollar-denominated deposit outside the U.S.

Question 15

In the event of the firm's bankruptcy
A)the most shareholders can lose is their original investment in the firm's stock.
B)common shareholders are the first in line to receive their claims on the firm's assets.
C)bondholders have claim to what is left from the liquidation of the firm's assets after paying the shareholders.
D)the claims of preferred shareholders are honored before those of the common shareholders.
E)the most shareholders can lose is their original investment in the firm's stock and the claims of preferred shareholders are honored before those of the common shareholders.

Accepted Answer

Shareholders have limited liability and have residual claims on assets.Bondholders have a priority claim on assets, and preferred shareholders have priority over common shareholders.

Question 16

T-bills are financial instruments initially sold by ________ to raise funds.
A)commercial banks
B)the U.S.government
C)state and local governments
D)agencies of the federal government
E)the U.S.government and agencies of the federal government

Accepted Answer

Only the U.S.government sells T-bills in the primary market.

Question 17

Which of the following is true of the Dow Jones Industrial Average
A)It is a value-weighted average of 30 large industrial stocks.
B)It is a price-weighted average of 30 large industrial stocks.
C)The divisor must be adjusted for stock splits.
D)It is a value-weighted average of 30 large industrial stocks and the divisor must be adjusted for stock splits.
E)It is a price-weighted average of 30 large industrial stocks and the divisor must be adjusted for stock splits.

Accepted Answer

The Dow Jones Industrial Average is a price-weighted index of 30 large industrial firms, and the divisor must be adjusted when any of the stocks on the index split.

Question 18

Treasury Inflation-Protected Securities (TIPS)
A)pay a fixed interest rate for life.
B)pay a variable interest rate that is indexed to inflation, but maintain a constant principal.
C)provide a constant stream of income in real (inflation-adjusted) dollars.
D)have their principal adjusted in proportion to the Consumer Price Index.
E)provide a constant stream of income in real (inflation-adjusted) dollars and have their principal adjusted in proportion to the Consumer Price Index.

Accepted Answer

TIPS provide a constant stream of income in real (inflation-adjusted) dollars because their principal is adjusted in proportion to the Consumer Price Index.

Question 19

Deposits of commercial banks at the Federal Reserve Bank are called
A)bankers' acceptances.
B)repurchase agreements.
C)time deposits.
D)federal funds.
E)reserve requirements.

Accepted Answer

The federal funds are required for the bank to meet reserve requirements, which is a way of influencing the money supply.No substitutes for fed funds are permitted.

Question 20

Which of the following statements is true regarding a corporate bond
A)A corporate callable bond gives the holder the right to exchange it for a specified number of the company's common shares.
B)A corporate debenture is a secured bond.
C)A corporate indenture is a secured bond.
D)A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares.
E)Holders of corporate bonds have voting rights in the company.

Accepted Answer

"A corporate convertible bond gives the holder the right to exchange the bond for a specified number of the company's common shares" is the only true statement; all other statements describe something other than the term specified.

Quiz 2: Asset Classes and Financial Instruments

The smallest component of the money market is

Commercial paper is a short-term security issued by ________ to raise funds.

The money market is a subsector of the

Which of the following is true regarding a firm's securities

The largest component of the bond market is _______ debt.

The interest rate charged by banks with excess reserves at a Federal Reserve Bank to banks needing overnight loans to meet reserve requirements is called the

Which of the following indices is(are) market-value weighted I. The New York Stock Exchange Composite Index II. The Standard and Poor's 500 Stock Index III. The Dow Jones Industrial Average

Which one of the following is not a money market instrument

Which of the following is not a characteristic of a money market instrument

The smallest component of the bond market is _______ debt.

The bid price of a T-bill in the secondary market is

Which of the following is not a component of the money market

Which one of the following terms best describes Eurodollars

In the event of the firm's bankruptcy

T-bills are financial instruments initially sold by ________ to raise funds.

Which of the following is true of the Dow Jones Industrial Average

Treasury Inflation-Protected Securities (TIPS)

Deposits of commercial banks at the Federal Reserve Bank are called

Which of the following statements is true regarding a corporate bond