C2,An Overview of the Financial System

Chapter 2 An Overview of the Financial System � Multiple Choice 1) Every financial market has the following characteristic: (a) It determines the level of interest rates. (b) It allows common stock to be traded. (c) It allows loans to be made. (d) It channels funds from lenders-savers to borrowers-spenders. Answer: D Question Status: Previous Edition 2) Financial markets have the basic function of (a) getting people with funds to lend together with people who want to borrow funds. (b) assuring that the swings in the business cycle are less pronounced. (c) assuring that governments need never resort to printing money. (d) both (a) and (b) of the above. (e) both (b) and (c) of the above. Answer: A Question Status: Previous Edition 3) Financial markets improve economic welfare because (a) they allow funds to move from those without productive investment opportunities to those who have such opportunities. (b) they allow consumers to time their purchase better. (c) they weed out inefficient firms. (d) they do each of the above. (e) they do (a) and (b) of the above. Answer: E Question Status: Previous Edition 4) Well-functioning financial markets (a) cause inflation. (b) eliminate the need for indirect finance. (c) cause financial crises. (d) produce an efficient allocation of capital. (e) promote political instability. Answer: D Question Status: New Chapter 2 An Overview of the Financial System 27 5) A breakdown of financial markets can result in (a) an efficient allocation of capital. (b) rapid economic growth. (c) political instability. (d) stable prices. (e) financial stability. Answer: C Question Status: New 6) Which of the following can be described as direct finance? (a) You take out a mortgage from your local bank. (b) You borrow $2500 from a friend. (c) A pension fund lends money to General Motors. (d) You buy shares in a mutual fund. (e) None of the above. Answer: B Question Status: Study Guide 7) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is (a) $400. (b) $201. (c) $200. (d) $199. (e) $101. Answer: B Question Status: New 8) You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is (a) 25%. (b) 12.5%. (c) 10%. (d) 5%. (e) 0.5%. Answer: D Question Status: New 9) Which of the following can be described as involving direct finance? (a) A corporation takes out a loan from a bank. (b) People buy shares in a mutual fund. (c) A corporation buys a short-term security issued by another corporation. (d) An insurance company buys shares of common stock in the over-the-counter markets. (e) None of the above. Answer: C Question Status: Previous Edition 28 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 10) Which of the following can be described as involving direct finance? (a) A corporation issues new shares of stock. (b) People buy shares in a mutual fund. (c) A pension fund manager buys a short-term corporate security in the secondary market. (d) An insurance company buys shares of common stock in the over-the-counter markets. Answer: A Question Status: Previous Edition 11) Which of the following can be described as involving direct finance? (a) A corporation issues new shares of stock. (b) A corporation buys a short-term security issued by another corporation. (c) A pension fund manager buys commercial paper in the secondary market. (d) Both (a) and (b) of the above. (e) Both (b) and (c) of the above. Answer: D Question Status: Previous Edition 12) Which of the following can be described as involving direct finance? (a) A corporation issues new shares of stock through an investment bank. (b) A corporation buys a short-term security paper issued by another corporation. (c) A pension fund manager buys commercial paper in the primary market. (d) All of the above. (e) Both (b) and (c) of the above. Answer: D Question Status: Previous Edition 13) Which of the following can be described as involving direct finance? (a) A corporation takes out loans from a bank. (b) People buy shares in a mutual fund. (c) A corporation buys a short-term corporate security in a secondary market. (d) An insurance company buys shares of common stock in the primary markets. Answer: D Question Status: Previous Edition 14) Which of the following can be described as involving direct finance? (a) A corporation’s stock is traded in an over-the-counter market. (b) People buy shares in a mutual fund. (c) A pension fund manager buys a short-term corporate security in the secondary market. (d) An insurance company buys shares of common stock in the over-the-counter markets. (e) None of the above. Answer: E Question Status: Previous Edition Chapter 2 An Overview of the Financial System 29 15) Which of the following can be described as involving direct finance? (a) A corporation’s stock is traded in an over-the-counter market. (b) A corporation buys a short-term security issued by another corporation. (c) A pension fund manager buys a short-term corporate security from the issuing corporation. (d) Both (a) and (b) of the above. (e) Both (b) and (c) of the above. Answer: E Question Status: Previous Edition 16) Which of the following can be described as involving direct finance? (a) A corporation issues new shares of stock. (b) A corporation buys a short-term security issued by another corporation. (c) A pension fund manager buys a short-term security from the issuing corporation. (d) All of the above. (e) Both (b) and (c) of the above. Answer: D Question Status: Previous Edition 17) Which of the following can be described as involving indirect finance? (a) You make a loan to your neighbor. (b) A corporation buys a share of common stock issued by another corporation. (c) You buy a U.S. Treasury bill from the U.S. Treasury. (d) You make a deposit at a bank. Answer: D Question Status: Previous Edition 18) Which of the following can be described as involving indirect finance? (a) A corporation takes out loans from a bank. (b) People buy shares in a mutual fund. (c) A corporation buys a short-term security issued by another corporation. (d) Both (a) and (b) of the above. Answer: D Question Status: Previous Edition 19) Which of the following can be described as involving indirect finance? (a) A corporation issues new shares of stock. (b) People buy shares in a mutual fund. (c) A pension fund manager buys a short-term corporate security in the secondary market. (d) Both (a) and (b) of the above. (e) Both (b) and (c) of the above. Answer: E Question Status: Previous Edition 30 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 20) Which of the following can be described as involving indirect finance? (a) A corporation issues new shares of stock. (b) A corporation buys a short-term security issued by another corporation. (c) A pension fund manager buys a short-term corporate security in the secondary market. (d) Both (a) and (b) of the above. Answer: C Question Status: Previous Edition 21) Which of the following can be described as involving indirect finance? (a) A bank buys a U.S. Treasury bill from one of its depositors. (b) A corporation buys a short-term security issued by another corporation. (c) A pension fund manager buys a short-term corporate security the primary market. (d) Both (b) and (c) of the above. Answer: A Question Status: Previous Edition 22) Which of the following can be described as involving indirect finance? (a) A corporation takes out loans from a bank. (b) People buy shares in a mutual fund. (c) A corporation buys a short-term corporate security in a secondary market. (d) All of the above. (e) Only (a) and (b) of the above. Answer: D Question Status: Previous Edition 23) Which of the following can be described as involving indirect finance? (a) People buy shares in a mutual fund. (b) A pension fund manager buys a short-term corporate security in the secondary market. (c) A corporation’s stock is issued in an over-the-counter market. (d) All of the above. (e) Only (a) and (b) of the above. Answer: E Question Status: Previous Edition 24) Which of the following can be described as involving indirect finance? (a) A corporation’s stock is traded in an over-the-counter market. (b) A corporation buys a short-term security issued by another corporation. (c) A pension fund manager buys a short-term security from the issuing corporation. (d) Both (a) and (b) of the above. Answer: A Question Status: Previous Edition Chapter 2 An Overview of the Financial System 31 25) Which of the following can be described as involving indirect finance? (a) A corporation issues new shares of stock. (b) A corporation buys a short-term security issued by another corporation. (c) A bank buys a U.S. Treasury bill from one of its depositors. (d) All of the above. (e) Both (b) and (c) of the above. Answer: C Question Status: Previous Edition 26) Which of the following can be described as involving indirect finance? (a) You make a loan to your neighbor. (b) You buy a U.S. Treasury bill from the bank. (c) You buy a U.S. Treasury bill from the U.S. Treasury. (d) A corporation buys a short-term security issued by another corporation. Answer: B Question Status: Previous Edition 27) Which of the following are securities? (a) A corporate bond (b) A share of Texaco common stock (c) A Treasury bill (d) Each of the above (e) Only (a) and (b) of the above Answer: D Question Status: Previous Edition 28) Which of the following statements about the characteristics of debt and equity is untrue? (a) They can both be long-term financial instruments. (b) They can both be short-term financial instruments. (c) They both involve a claim on the issuer’s income. (d) They both enable a corporation to raise funds. (e) None of the above. Answer: B Question Status: Previous Edition 29) Which of the following statements about the characteristics of debt and equity are true? (a) They can both be long-term financial instruments. (b) They can both be short-term financial instruments. (c) They both involve a claim on the issuer’s income. (d) Both (a) and (b) of the above. (e) Both (a) and (c) of the above. Answer: E Question Status: Previous Edition 32 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 30) Which of the following statements about the characteristics of debt and equity are true? (a) They can both be long-term financial instruments. (b) They both involve a claim on the issuer’s income. (c) They both enable a corporation to raise funds. (d) All of the above. (e) Only (a) and (b) of the above. Answer: D Question Status: Previous Edition 31) Which of the following statements about the characteristics of debt and equity are true? (a) They can both be long-term financial instruments. (b) They can both be short-term financial instruments. (c) Debt is a claim on the issuer’s assets, but equity is a claim on the issuer’s income. (d) Both (a) and (b) of the above. (e) Both (a) and (c) of the above. Answer: A Question Status: Previous Edition 32) Which of the following statements about financial markets and securities are true? (a) A bond is a debt security that promises to make payments for a specified period of time. (b) The maturity of a debt instrument is the time (term) to that instrument’s expiration date. (c) A debt instrument is short term if its maturity is less than one year. (d) All of the above are true. Answer: D Question Status: Previous Edition 33) Which of the following statements about financial markets and securities are true? (a) A bond is a long-term security that promises to make periodic payments called dividends to the firm’s residual claimants. (b) A debt instrument is long term if its maturity is ten years or longer. (c) The maturity of a debt instrument is the number of years (term) to that instrument’s expiration date. (d) All of the above are true. (e) Both (a) and (c) are correct. Answer: E Question Status: Revised 34) Which of the following statements about the characteristics of debt and equities is true? (a) They can both be long-term financial instruments. (b) Bond holders are residual claimants. (c) The income from bonds is typically more variable than that from equities. (d) Bonds pay dividends. (e) None of the above. Answer: A Question Status: Study Guide Chapter 2 An Overview of the Financial System 33 35) Which of the following statements about financial markets and securities are true? (a) A bond is a long-term security that promises to make periodic payments called dividends to the firm’s residual claimants. (b) A debt instrument is intermediate term if its maturity is less than one year. (c) A debt instrument is long term if its maturity is ten years or longer. (d) The maturity of a debt instrument is the number of years (term) to that instrument’s expiration date. (e) Both (a) and (d) are correct. Answer: E Question Status: Revised 36) Which of the following statements about financial markets and securities are true? (a) A bond is a debt security that promises to make payments for a specified period of time. (b) Equities often make periodic payments called dividends and are considered to be long-term securities because they have no maturity date. (c) A debt instrument is short term if its maturity is less than ten years. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: E Question Status: Previous Edition 37) Which of the following statements about financial markets and securities are true? (a) A debt instrument is short term if its maturity is between one and ten years. (b) Equities often make periodic payments called dividends and are considered to be long-term securities because they have no maturity date. (c) A debt instrument is long term if its maturity is more than one year. (d) Only (a) and (b) of the above are true. (e) Only (b) and (c) of the above are true. Answer: B Question Status: Previous Edition 38) Securities are _____ for the person who buys them, but are _____ for the individual or firm that issues them. (a) assets; liabilities (b) liabilities; assets (c) negotiable; nonnegotiable (d) nonnegotiable; negotiable Answer: A Question Status: Previous Edition 39) Forty or so dealers establish a “market” in these securities by standing ready to buy and sell them. (a) Secondary stocks (b) Surplus stocks (c) U.S. government bonds (d) Common stocks Answer: C Question Status: Previous Edition 34 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 40) Which of the following are primary markets? (a) The New York Stock Exchange (b) The U.S. government bond market (c) The over-the-counter stock market (d) The options markets (e) None of the above Answer: E Question Status: Previous Edition 41) Which of the following are secondary markets? (a) The New York Stock Exchange (b) The U.S. government bond market (c) The over-the-counter stock market (d) The options markets (e) All of the above Answer: E Question Status: Previous Edition 42) An important function of secondary markets is to (a) make it easier to sell financial instruments to raise cash. (b) raise funds for corporations through the sale of securities. (c) create a market for bank demand deposits. (d) create a market for newly constructed houses. (e) make it easier for governments to raise taxes. Answer: A Question Status: New 43) Secondary markets make financial instruments more (a) solid. (b) fluid. (c) liquid. (d) risky. (e) vapid. Answer: C Question Status: New 44) The higher a security’s price in the secondary market (a) the more funds a firm can raise by selling securities in the primary market. (b) the more funds a firm can raise by selling securities in the secondary market. (c) the less funds a firm can raise by selling securities in the primary market. (d) the less funds a firm can raise by selling securities in the secondary market. (e) secondary market prices have no effect on the funds a firm can raise. Answer: A Question Status: New Chapter 2 An Overview of the Financial System 35 45) An important financial institution that assists in the initial sale of securities in the primary market is the (a) investment bank. (b) commercial bank. (c) stock exchange. (d) brokerage house. Answer: A Question Status: Previous Edition 46) A corporation acquires new funds only when its securities are sold (a) in the primary market by an investment bank. (b) in the primary market by a stock exchange broker. (c) in the secondary market by a securities dealer. (d) in the secondary market by a commercial bank. Answer: A Question Status: Previous Edition 47) A corporation acquires new funds only when its securities are sold (a) in the secondary market by an investment bank. (b) in the primary market by an investment bank. (c) in the secondary market by a stock exchange broker. (d) in the secondary market by a commercial bank. Answer: B Question Status: Previous Edition 48) Which of the following assets is traded only in an over-the-counter market? (a) treasury bonds (b) stocks (c) commodities (d) all of the above (e) none of the above Answer: A Question Status: Study Guide 49) Which of the following markets is sometimes organized as an over-the-counter market? (a) The stock market (b) The bond market (c) The foreign exchange market (d) The federal funds market (e) Each of the above Answer: E Question Status: Previous Edition 36 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition 50) Which of the following statements about financial markets and securities are true? (a) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange. (b) A corporation acquires new funds only when its securities are first sold in the primary market. (c) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: D Question Status: Previous Edition 51) Which of the following statements about financial markets and securities are true? (a) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange. (b) As a corporation gets a share of the broker’s commission, a corporation acquires new funds whenever its securities are sold. (c) Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid. (d) All of the above are true. Answer: A Question Status: Previous Edition 52) Which of the following statements about financial markets and securities are true? (a) Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. (b) A corporation acquires new funds only when its securities are first sold in the primary market. (c) Capital market securities are usually more widely traded than longer-term securities and so tend to be more liquid. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: B Quest