Question 1

Financial intermediaries such as banks typically have assets that are riskier than their liabilities.

Accepted Answer

Financial intermediaries such as banks typically engage in activities that involve taking on risk. For example, banks make loans to borrowers who may not be able to repay them, and they invest in securities that may experience price fluctuations. These assets are riskier than their liabilities, which consist of deposits and other forms of funding that are more stable and low-risk. The difference between the riskiness of banks' assets and liabilities is known as their "net interest margin."

Question 2

_________ 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

Accepted Answer

Monitoring and diversification are key factors that allow financial intermediaries to offer safe and liquid liabilities while investing the depositors' money in riskier illiquid assets. Monitoring ensures that the risky investments are actively managed and diversified, while diversification reduces the overall risk of the portfolio.

Question 3

The diagram below is a diagram of the 
A)secondary markets.
B)primary markets.
C)money markets.
D)derivatives markets.
E)commodities markets.

Accepted Answer

B

Question 4

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

Accepted Answer

I. Money likely to be needed within six months: The best option would be to deposit the money in a depository institution such as a bank or thrift as they provide easy access to cash and low risk.
II. Money to be set aside for college in 10 years: Investing in stocks or bonds would be a good option as they provide higher returns over a longer period of time. 
III. Money to provide supplemental retirement income: Pension funds would be a good option as they focus on providing retirement income to members. 
IV. Money to be used to provide for children in the event of death: An insurer would be the best option as they facilitate the payment of benefits to beneficiaries in the event of death.

Question 5

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public. Morgan Stanley is acting as a(n)
A)asset transformer.
B)asset broker.
C)government regulator.
D)foreign service representative.

Accepted Answer

Morgan Stanley is acting as an asset broker because it is reselling the issue to the U.S. public.

Question 6

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

Accepted Answer

Corporate security issuers are not directly involved in funds transfers in the secondary market. The transactions are conducted between the buyers and sellers through intermediaries such as brokers or dealers.

Question 7

The largest capital market security outstanding in 2010 measured by market value was
A)securitized mortgages.
B)corporate bonds.
C)municipal bonds.
D)Treasury bonds.
E)corporate stocks.

Accepted Answer

In 2010, corporate stocks had the largest market value outstanding compared to other capital market securities.

Question 8

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.

Accepted Answer

Financial intermediaries are able to offer savers safer and more liquid investments compared to capital market securities because they are able to diversify their risks and closely monitor the riskiness of their assets. By diversifying their investments, FIs can spread their risk among different types of assets and therefore reduce the overall risk of their portfolio. Additionally, FIs have the resources to closely monitor the risk of their assets and adjust their investments accordingly. While government regulations may require FIs to maintain a certain level of risk management, this is not the main reason why FIs can offer safer and more liquid investments to savers.

Question 9

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)none of the options.

Accepted Answer

Conducting an IPO (initial public offering) with the assistance of an investment banker is the most common way for a corporation to sell new equity securities to the public for the first time. An investment banker would help the corporation navigate the legal and financial requirements of going public, and facilitate the sale of the securities to potential investors.

Question 10

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

Accepted Answer

Secondary markets are markets where already issued securities are traded among investors. Primary markets are the markets used by corporations to raise cash by issuing new securities.

Question 11

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

Accepted Answer

This statement is true - primary markets are where issuers sell securities to investors in order to raise cash.

Question 12

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

Accepted Answer

Money markets deal with short-term debt instruments that have a maturity of one year or less. Examples of money market instruments include treasury bills, commercial paper, certificates of deposit, and repurchase agreements.

Question 13

Depository institutions include
A)banks.
B)thrifts.
C)finance companies.
D)all of the options presented.
E)banks and thrifts.

Accepted Answer

The answer of Depository institutions include
A)banks.
B)thrifts.
C)finance companies.
D)all of the options...

Question 14

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

Accepted Answer

The NYSE and NASDAQ are both examples of primary and secondary markets, not derivatives markets. Derivatives markets would include options, futures and other financial instruments based on underlying assets.

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. 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.

Accepted Answer

This is a primary market transaction as IBM is creating and selling additional stock to Morgan Stanley, who is then reselling it to the U.S. public, making it the initial sale of securities.

Question 16

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

Accepted Answer

I matches Insurers as they provide protection from adverse events. II matches Mutual funds as they pool funds from small savers for investment. III matches Thrifts, which are known for providing consumer and real estate loans. IV is best associated with Pension funds, which help in transferring wealth to retirement. V describes the functions of Securities firms and investment banks, which underwrite, trade securities, and offer brokerage services.

Question 17

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

Accepted Answer

Secondary markets support primary markets in several ways: by providing liquidity to investors (allowing them to sell their holdings easily), updating the price or value of the securities (reflecting current market conditions and information), and reducing the cost of trading (through increased efficiency and competition).

Question 18

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

Accepted Answer

Regulatory changes have allowed institutions to offer more services, which has led to overlap in financial services such as banking, investment banking, and brokerage. Technological improvements have reduced the cost of providing financial services, making it possible for companies to offer multiple services without significant additional costs. Increasing competition from full-service global financial institutions has also encouraged firms to offer overlapping financial services to stay competitive. The reduction in the need to manage risk at financial institutions is not a significant factor in encouraging financial institutions to offer overlapping financial services.

Question 19

The New York Stock Exchange (NYSE)is an example of a secondary market.

Accepted Answer

The NYSE is a secondary market where stocks that have already been issued and are being traded between investors.

Question 20

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

Accepted Answer

The answer of Central governments sometimes intervene in foreign exchange...

Quiz 1: Introduction

Financial intermediaries such as banks typically have assets that are riskier than their liabilities.

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

The diagram below is a diagram of the

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

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

The largest capital market security outstanding in 2010 measured by market value was

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 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

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

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

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

Depository institutions include

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

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

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.

The New York Stock Exchange (NYSE)is an example of a secondary market.

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