which are issued with longer maturities up to 20

years.
1. A strong financial system is a necessary ingredient A. True
for a growing and prosperous economy B. False
A. True 16. Interbank market exists in London in which major
B. False banks, other large financial institutions and some
2. Direct fund transfers are common among large financial institutions and non-financial
individuals and large-scale businesses and corporations negotiate short-term unsecured loan
economies where financial markets and agreements. The market is centered in London.
institutions are well developed. The interest rates set on these loans are called
A. True LIBOR rates. The LIBOR rate are used as
B. False benchmarks in other debt and capital investment
3. Physical assets are tangible or real asset market contracts as the bank financing costs spill over to
such as wheat, autos and real estate. these rates.
A. True A. True
B. False B. False
4. Future markets are markets in which participants 17. Long-term investors keep track of their risk
agree to buy only an asset at some future date. exposure through exposure to specific industries,
A. True ownership of bonds and stocks issued by different
B. False companies and macroeconomic factors: exposure
5. A bond is a security whose value derived from the to varied interest and foreign exchange rates.
price of some other “underlying asset”. A. True
A. True B. False
B. False 18. Financial markets are not only facilitating the
6. The different structures among nation’s banking transfer of resources but also ensuring that the
and securities is one factor that complicates capital flows to the most efficient projects.
coordination about globalization of regulators A. True
engage in Financial Market trading at international B. False
level. 19. Small investors can obtain an investment
A. True exposure to real estate markets without physically
B. False buying real properties. This type of investment is
7. Mutual savings bank accepts savings primarily called Real-Estate Investment Scheme.
from individuals and lending mainly on a long- A. True
term basis to buyers and consumers B. False
A. True 20. A stock is a security issued by a corporation. The
B. False holder of the ownership includes both cash flow
8. Financial services institutions help corporations tights and control rights. These privileges are
design securities with features that are attractive granted both to common and preference
to the investors shareholders.
A. True A. True
B. False B. False
9. Savings and loan associations traditionally served
individual savers, residential and commercial II. MULTIPLE CHOICE : Choose the letter of the
mortgage borrowers, taking the funds of many correct answer
small savers and lend this money to home buyers
and other types of borrowers 21. This is a trading exchange where transactions
A. True take place in a less organized market. Markets
B. False have been much less regulated than exchanges.
10. Primary markets trade securities to investors A. Over the counter market
which are already existing in the market. B. Primary market
A. True C. Secondary market
B. False D. Money market
11. Private markets engage in transactions that are 22. This is a type of derivative where parties engage
negotiated directly between two parties whereas a in a binding agreement to transact a given asset
public market trade standardized contracts in an at a pre-specified future point in time and at a pre-
organized exchange. specified price.
A. True A. Future contract
B. False B. Call Options
12. Capital markets engage in the trading of short- C. Forward contract
term highly liquid debt securities. D. Put Options
A. True 23. This type of government bond is issued by the US
B. False Department Treasury with a maturity between two
13. Derivatives can be used as an instrument to to ten years. They promise to pay interest at semi-
reduce risks and speculate. Speculation is done to annual basis which are considered as coupon
generate high returns but the investor faces high payments.
risk exposures. A. Treasury bills
A. True B. Treasury notes
B. False C. Treasury bonds
D. Bullet bonds
14. The first known security trading exchange was 24. This type of financial institution take savings in
established in 1531 at Antwerp Belgium. the form of annual premiums and further invest
A. True these funds in stocks, bonds, real estate and
B. False mortgages.
15. In the United States, government bonds are issued A. Mutual funds
by the Department of Treasury which are in the B. Savings and loan association
form of treasury bills issued with a maturity of one C. Life insurance companies
year or lesser than one year; Treasury bonds D. Pension funds
25.The following are the functions of the central C) A pension fund manager buys commercial paper from the
bank, EXCEPT: issuing corporation.
A. Decrease the money supply by offering D) Both A and B of the above.
commercial banks to deposit money at high E) Both B and C of the above.
interest rate
B. Reduce liquidity in the financial markets 5) Which of the following can be described as involving indirect
C. Push economic growth through enhancing finance?
lenders to engage more in borrowing funds of A) A corporation takes out loans from a bank.
loan financing B) People buy shares in a mutual fund.
D. Supervise and regulate financial markets C) A corporation buys commercial paper in a secondary market.
D) All of the above.
QUIZ: E) Only A and B of the above.

1. Markets for short-term highly liquid securities 6) Which of the following can be described as involving indirect
Money market -A finance?
2. Markets where corporation raise new capital. - A) A bank buys a U.S. Treasury bill from one of its
C Primary Markets depositors.
3. This is a market where transactions are B) A corporation buys commercial paper issued by another
negotiated directly between two parties. F corporation.
Private Market C) A pension fund manager buys commercial paper in the primary
4. These are markets for intermediate and long- market.
term debt and corporate stocks -B Capital D) Both A and C of the above.
Markets
7) Financial markets improve economic welfare because
5. Market where standardized contracts are
A) they allow funds to move from those without productive
traded in an organized exchange. - E
investment opportunities to those who have
Secondary Markets
such opportunities.
B) they allow consumers to time their purchases better.
6. This is a type of derivative which represents a
C) they weed out inefficient firms.
binding agreement between two parties to
D) they do all of the above.
transact a given asset at a pre-specified future
E) they do A and B of the above
point in time and at a pre-specified price – A
Forward contract 8) A country whose financial markets function poorly is likely to
7. This refers to an agreement to exchange two A) efficiently allocate its capital resources.
specified streams of payments – B swap B) enjoy high productivity.
8. Institutional investors engage in buying futures C) experience economic hardship and financial crises.
or options on such commodity futures. Profits D) increase its standard of living.
from this investment are determined by the
evolution of price of the underlying 9) Which of the following are securities?
commodity. D Commodities A) A certificate of deposit
9. This is an asset giving the owner the right, but B) A share of Texaco common stock
not the obligation to perform certain C) A Treasury bill
transaction in the future at terms specified D) All of the above
today. C Options E) Only A and B of the above
10.This government bonds are issued at longer
maturities currently up to 30 years. F 10) Which of the following statements about the characteristics
Treasury bonds of debt and equity are true?
A) They both can be long-term financial instruments.
1) Every financial market performs the following function: B) They both involve a claim on the issuer's income.
C) They both enable a corporation to raise funds.
A) It determines the level of interest rates. D) All of the above.
B) It allows common stock to be traded. E) Only A and B of the above.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-spenders. 11) The money market is the market in which ________ are
traded.
2) Financial markets have the basic function of A) new issues of securities
A) bringing together people with funds to lend and people who B) previously issued securities
want to borrow funds. C) short-term debt instruments
B) assuring that the swings in the business cycle are less D) long-term debt and equity instruments
pronounced. 12) Long-term debt and equity instruments are traded in the
C) assuring that governments need never resort to printing money. ________ market.
D) both A and B of the above. A) primary
E) both B and C of the above B) secondary
3) Which of the following can be described as involving direct C) capital
finance? D) money
A) A corporation's stock is traded in an over-the-counter market. 13) Which of the following are primary markets?
B) People buy shares in a mutual fund. A) The New York Stock Exchange
C) A pension fund manager buys commercial paper in the B) The U.S. government bond market
secondary market. C) The over-the-counter stock market
D) An insurance company buys shares of common stock in the D) The options markets
over-the-counter markets. E) None of the above
E) None of the above.
14) Which of the following are secondary markets?
4) Which of the following can be described as involving direct A) The New York Stock Exchange
finance? B) The U.S. government bond market
A) A corporation's stock is traded in an over-the-counter market. C) The over-the-counter stock market
B) A corporation buys commercial paper issued by another D) The options markets
corporation. E) All of the above
15) A corporation acquires new funds only when its securities 23) Bonds that are sold in a foreign country and are
are sold in the denominated in that country's currency are known as
A) secondary market by an investment bank. A) foreign bonds.
B) primary market by an investment bank. B) Eurobonds.
C) secondary market by a stock exchange broker. C) Eurocurrencies.
D) secondary market by a commercial bank. D) Eurodollars
16) Intermediaries who are agents of investors and match 24) Bonds that are sold in a foreign country and are
buyers with sellers of securities are called denominated in a currency other than that of the
A) investment bankers. country in which they are sold are known as
B) traders. A) foreign bonds.
C) brokers. B) Eurobonds.
D) dealers. C) Eurocurrencies.
E) none of the above. D) Eurodollars
17) Intermediaries who link buyers and sellers by buying and 25) Financial intermediaries
selling securities at stated prices are called A) exist because there are substantial information and transaction
A) investment bankers. costs in the economy.
B) traders. B) improve the lot of the small saver.
C) brokers. C) are involved in the process of indirect finance.
D) dealers. D) do all of the above.
E) none of the above E) do only A and B of the above.
18) An important financial institution that assists in the initial 26) The main sources of financing for businesses, in order of
sale of securities in the primary market is importance, are
the A) financial intermediaries, issuing bonds, issuing stocks.
A) investment bank. B) issuing bonds, issuing stocks, financial intermediaries.
B) commercial bank. C) issuing stocks, issuing bonds, financial intermediaries.
C) stock exchange. D) issuing stocks, financial intermediaries, issuing bonds.
D) brokerage house.
27) The presence of transaction costs in financial markets
19) Which of the following statements about financial markets explains, in part, why
and securities are true? A) financial intermediaries and indirect finance play such an
A) Most common stocks are traded over-the-counter, although the important role in financial markets.
largest corporations have their shares B) equity and bond financing play such an important role in
traded at organized stock exchanges such as the New York Stock financial markets.
Exchange. C) corporations get more funds through equity financing than they
B) A corporation acquires new funds only when its securities are get from financial intermediaries.
sold in the primary market. D) direct financing is more important than indirect financing as a
C) Money market securities are usually more widely traded than source of funds.
longer-term securities and so tend to be
more liquid. 28) Financial intermediaries can substantially reduce
D) All of the above are true. transaction costs per dollar of transactions because
E) Only A and B of the above are true. their large size allows them to take advantage of
A) poorly informed consumers.
20) Which of the following statements about financial markets B) standardization.
and securities are true? C) economies of scale.
A) A bond is a long-term security that promises to make periodic D) their market power
payments called dividends to the firm's 29) The purpose of diversification is to
residual claimants. A) reduce the volatility of a portfolio's return.
B) A debt instrument is intermediate term if its maturity is less than B) raise the volatility of a portfolio's return.
one year. C) reduce the average return on a portfolio.
C) A debt instrument is long term if its maturity is ten years or D) raise the average return on a portfolio.
longer.
D) The maturity of a debt instrument is the time (term) that has 30) An investor who puts all her funds into one asset ________
elapsed since it was issued her portfolio's ________.
A) increases; diversification
21) Which of the following statements about financial markets B) decreases; diversification
and securities are true? C) increases; average return
A) Few common stocks are traded over-the-counter, although the D) decreases; average return
over-the-counter markets have grown
in recent years. 31) Through risk-sharing activities, a financial intermediary
B) A corporation acquires new funds only when its securities are ________ its own risk and ________ the
sold in the primary market. risks of its customers.
C) Capital market securities are usually more widely traded than A) reduces; increases
longer-term securities and so tend to be B) increases; reduces
more liquid. C) reduces; reduces
D) All of the above are true. D) increases; increases
E) Only A and B of the above are true.
32) The presence of ________ in financial markets leads to
22) Which of the following markets is sometimes organized as adverse selection and moral hazard
an over-the-counter market? problems that interfere with the efficient functioning of
A) The stock market financial markets.
B) The bond market A) noncollateralized risk
C) The foreign exchange market B) free-riding
D) The federal funds market C) asymmetric information
E) all of the above D) costly state verification
33) When the lender and the borrower have different amounts 42) Which of the following is a contractual savings institution?
of information regarding a transaction, A) A life insurance company
________ is said to exist. B) A credit union
A) asymmetric information C) A savings and loan association
B) adverse selection D) A mutual fund
C) moral hazard
D) fraud 43) Which of the following are not investment intermediaries?
A) A life insurance company
34) When the potential borrowers who are the most likely to B) A pension fund
default are the ones most actively seeking a C) A mutual fund
loan, ________ is said to exist. D) Only A and B of the above
A) asymmetric information
B) adverse selection 44) Which of the following are investment intermediaries?
C) moral hazard A) Finance companies
D) fraud B) Mutual funds
C) Pension funds
35) When the borrower engages in activities that make it less D) All of the above
likely that the loan will be repaid, E) Only A and B of the above
________ is said to exist.
A) asymmetric information 45) The government regulates financial markets for two main
B) adverse selection reasons:
C) moral hazard A) to ensure soundness of the financial system and to increase the
D) fraud information available to investors.
B) to improve control of monetary policy and to increase the
36) The concept of adverse selection helps to explain information available to investors.
A) which firms are more likely to obtain funds from banks and C) to ensure that financial intermediaries do not earn more than the
other financial intermediaries, rather than normal rate of return and to improve
from the securities markets. control of monetary policy.
B) why indirect finance is more important than direct finance as a D) to ensure soundness of financial intermediaries and to prevent
source of business finance. financial intermediaries from earning
C) why direct finance is more important than indirect finance as a less than the normal rate of return
source of business finance.
D) only A and B of the above. 46) Asymmetric information can lead to widespread collapse of
E) only A and C of the above. financial intermediaries, referred to as a
A) bank holiday.
37) Adverse selection is a problem associated with equity and B) financial panic.
debt contracts arising from C) financial disintermediation.
A) the lender's relative lack of information about the borrower's D) financial collapse
potential returns and risks of his
investment activities. 47) Foreign currencies that are deposited in banks outside the
B) the lender's inability to legally require sufficient collateral to home country are known as
cover a 100 percent loss if the borrower A) foreign bonds.
defaults. B) Eurobond.
C) the borrower's lack of incentive to seek a loan for highly risky C) Eurocurrencies.
investments. D) Eurodollars.
D) none of the above 48) U.S. dollars deposited in foreign banks outside the United
38) When the least desirable credit risks are the ones most likely States or in foreign branches of U.S. are
to seek loans, lenders are subject to the referred to as
A) moral hazard problem. A) Eurodollars.
B) adverse selection problem. B) Eurocurrencies.
C) shirking problem. C) Eurobonds.
D) free-rider problem. D) foreign bonds.
E) principal-agent problem. 49) Banks providing depositors with checking accounts that
39) Successful financial intermediaries have higher earnings on enable them to pay their bills easily is
their investments because they are better known as
equipped than individuals to screen out good from bad risks, A) liquidity services.
thereby reducing losses due to B) asset transformation.
A) moral hazard. C) risk sharing.
B) adverse selection. D) transaction costs.
C) bad luck. 50) A ________ is when one party in a financial contract has
D) financial panics. incentives to act in its own interest rather than in the interests
40) In financial markets, lenders typically have inferior of the other party.
information about potential returns and risks associated with A) moral hazard
any investment project. This difference in information is called B) risk
A) comparative informational disadvantage. C) conflict of interest
B) asymmetric information. D) financial panic
C) variant information. 51) Fire and casualty insurance companies are what type of
D) caveat venditor intermediary?
41) Which of the following financial intermediaries are A) Contractual savings institution
depository institutions? B) Depository institutions
A) A savings and loan association C) Investment intermediaries
B) A commercial bank D) None of the above
C) A credit union 52) The country whose banks are the most restricted in the
D) All of the above range of assets they may hold is
E) Only A and C of the above A) Japan.
B) Canada. 17) Corporations that issue new securities to raise capital now
C) Germany. conduct more of this business in financial
D) the United States. markets in Europe and Asia than in the U.S.
Answer: TRUE
53) The largest depository institution (value of assets) at the end
of 2009 was 1. What market facilitates the flow of long-term funds
A) commercial banks. with maturities of more than one year?
B) pension funds. Capital market
C) credit unions.
D) mutual funds. 2. What market facilitates the issuance of new
securities?
1) Every financial market allows loans to be made. Primary market
Answer: FALSE 3. What financial contracts derive their value from an
underlying asset?
2) An example of direct financing is if you were to lend money to Derivatives
your neighbour.
Answer: TRUE 4. What is a less organized and less regulated trading
exchange compared to formal exchanges?
3) The New York Stock Exchange is an example of a primary Over-the-counter (OTC) market
market.
Answer: FALSE 5. What derivative involves a binding agreement to
transact an asset at a future date and price?
4) A bond denominated in euros and issued in a country that uses Forward contract
the euro as its currency is an example
of a Eurobond. 6. What U.S. government bond matures in 2–10 years
Answer: FALSE and pays semi-annual coupon payments?
Treasury notes
5) Most people's involvement with the financial system is through
financial intermediaries rather than 7. What financial institution takes savings as annual
financial markets. premiums and invests in stocks, bonds, real estate,
Answer: TRUE and mortgages?
Life insurance companies
6) A financial intermediary's risk-sharing activities are also referred
to as asset transformation. 8. Which is NOT a function of the central bank?
Answer: TRUE Reduce liquidity in financial markets
7) The process of financial intermediation is also known as direct
finance.
Answer: FALSE Characteristics of Financial Markets
8) A mutual fund is not a depository institution. 9. What is the common function of every financial
Answer: TRUE market?
Channels funds from savers to borrowers
9) A pension fund is not a contractual savings institution.
Answer: FALSE 10. What is the basic function of financial markets?
Bringing together lenders and borrowers
10) Equity represents an ownership interest in a firm and entitles the
holder to the residual cash flows. 11. What is an example of indirect finance?
Answer: TRUE All of the above (bank loans, mutual funds,
commercial paper buying)
11) Adverse selection refers to those with high credit risks, being
most aggressive in their search for 12. Who are agents of investors that match buyers
funds. with sellers?
Answer: TRUE Brokers
12) The capital market is a financial market in which only short- 13. Who links buyers and sellers by buying and
term debt instruments (generally those selling securities at stated prices?
with an original maturity of less than one year) are traded. Dealers
Answer: FALSE
14. How do financial markets improve welfare?
13) American investors pay attention to only the Dow Jones They move funds to productive opportunities
Industrial Average. and help consumers time purchases
Answer: FALSE
15. Why do financial intermediaries exist?
14) The government agency that insures each depositor at a To reduce info/transaction costs, help small
commercial bank, savings and loan association, or mutual savings savers, and enable indirect finance
bank up to a loss of $100,000 per account ($250,000 for individual
retirement accounts) is the Securities and Exchange Commission
(SEC).
Answer: FALSE True or False Section

15) Many common stocks are traded over the counter, although a 16. A strong financial system is necessary for a
majority of the largest corporations have their shares traded at prosperous economy.
organized stock exchanges. True
Answer: TRUE
17. Direct fund transfers are common in developed
16) Many common stocks are traded at organized exchanges, financial markets.
although a majority of the largest True
corporations have their shares traded over the counter.
18. Physical assets like wheat, autos, and real estate
Answer: FALSE
are tangible assets.
True
19. Futures markets only involve buying assets at a
future date.
False (They involve buying or selling at a future date)
20. Bonds are securities whose value is derived from
underlying assets.
False (That’s derivatives; bonds have their own cash
flows)
21. Differences in banking systems complicate global
financial market regulation.
True
22. Mutual savings banks accept deposits from
individuals and lend long-term.
True
23. Financial services institutions help corporations
design investor-attractive securities.
False
24. Savings and loan associations traditionally serve
savers and mortgage borrowers.
True
25. Primary markets trade securities that already
exist in the market.
False (That’s secondary markets)
26. Private markets involve direct negotiation, while
public markets are organized exchanges.
False
27. Capital markets deal in short-term highly liquid
debt securities.
False (That’s money markets; capital markets are
long-term)
28. Derivatives can reduce risks and also be used for
speculation.
True
29. Long-term investors track exposure across
industries, bonds, stocks, and macroeconomic factors.
True
30. Financial markets transfer resources and ensure
capital flows to efficient projects.
True