Q&A Hero

Q: In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock.

Q: A restriction on bank activities that was repealed in 1999 was A) the prohibition of the payment of interest on checking deposits. B) restrictions on credit terms. C) minimum down payments on loans to purchase securities. D) separation of commercial banking from the securities industries.

Q: Which of the following do not provide charters? A) The Office of the Comptroller of the Currency B) The Federal Reserve System C) The National Credit Union Administration D) State banking and insurance commissions

Q: Government regulations to reduce the possibility of financial panic include all of the following except A) transactions costs. B) restrictions on assets and activities. C) disclosure. D) deposit insurance.

Q: The purpose of the disclosure requirements of the Securities and Exchange Commission is to A) increase the information available to investors. B) prevent bank panics. C) improve monetary control. D) protect investors against financial losses.

Q: A goal of the Securities and Exchange Commission is to reduce problems arising from A) competition. B) banking panics. C) risk. D) asymmetric information.

Q: Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets. A) adverse selection; moral hazard B) adverse selection; risk sharing C) moral hazard; transactions costs D) adverse selection; economies of scale

Q: Which of the following is not a goal of financial regulation? A) Ensuring the soundness of the financial system B) Reducing moral hazard C) Reducing adverse selection D) Ensuring that investors never suffer losses

Q: An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called A) underwriting. B) underhanded. C) understanding. D) undertaking.

Q: An investment bank helps ________ issue securities. A) a corporation B) the United States government C) the SEC D) foreign governments

Q: The primary assets of money market mutual funds are A) stocks. B) bonds. C) money market instruments. D) deposits.

Q: An important feature of money market mutual fund shares is A) deposit insurance. B) the ability to write checks against shareholdings. C) the ability to borrow against shareholdings. D) claims on shares of corporate stock.

Q: Money market mutual fund shares function like A) checking accounts that pay interest. B) bonds. C) stocks. D) currency.

Q: ________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds. A) Mutual funds B) Investment banks C) Finance companies D) Credit unions

Q: The primary assets of a finance company are A) municipal bonds. B) corporate stocks and bonds. C) consumer and business loans. D) mortgages.

Q: An investment intermediary that lends funds to consumers is A) a finance company. B) an investment bank. C) a finance fund. D) a consumer company.

Q: Which of the following are investment intermediaries? A) Life insurance companies B) Mutual funds C) Pension funds D) State and local government retirement funds

Q: The primary assets of a pension fund are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages.

Q: Which of the following is not a contractual savings institution? A) A life insurance company B) A pension fund C) A savings and loan association D) A fire and casualty insurance company

Q: Which of the following are not contractual savings institutions? A) Life insurance companies B) Credit unions C) Pension funds D) State and local government retirement funds

Q: Contractual savings institutions include A) mutual savings banks. B) money market mutual funds. C) commercial banks. D) life insurance companies.

Q: Which of the following is a contractual savings institution? A) A life insurance company B) A credit union C) A savings and loan association D) A mutual fund

Q: ________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis. A) Investment B) Contractual savings C) Thrift D) Depository

Q: The primary liabilities of depository institutions are A) premiums from policies. B) shares. C) deposits. D) bonds.

Q: The primary liabilities of a commercial bank are A) bonds. B) mortgages. C) deposits. D) commercial paper.

Q: The primary assets of credit unions are A) municipal bonds. B) business loans. C) consumer loans. D) mortgages.

Q: Which of the following financial intermediaries is not a depository institution? A) A savings and loan association B) A commercial bank C) A credit union D) A finance company

Q: Which of the following is a depository institution? A) A life insurance company B) A mutual savings bank C) A pension fund D) A finance company

Q: Which of the following is a depository institution? A) A life insurance company B) A credit union C) A pension fund D) A mutual fund

Q: Thrift institutions include A) banks, mutual funds, and insurance companies. B) savings and loan associations, mutual savings banks, and credit unions. C) finance companies, mutual funds, and money market funds. D) pension funds, mutual funds, and banks.

Q: Financial institutions that accept deposits and make loans are called ________ institutions. A) investment B) contractual savings C) depository D) underwriting

Q: Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems.

Q: Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely. A) financial intermediaries; securities markets B) financial intermediaries; government agencies C) government agencies; financial intermediaries D) government agencies; securities markets

Q: The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets. A) Germany; Japan B) Germany; Great Britain C) Great Britain; Canada D) Canada; Japan

Q: Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from A) government agencies. B) equities markets. C) financial intermediaries. D) bond markets.

Q: Conflicts of interest are a type of ________ problem that can happen when an institution provides multiple services. A) adverse selection B) free-riding C) discounting D) moral hazard

Q: Banks can lower the cost of information production by applying one information resource to many different services. This process is called A) economies of scale. B) asset transformation. C) economies of scope. D) asymmetric information.

Q: An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A) adverse selection B) moral hazard C) risk sharing D) credit risk

Q: Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the borrower's lack of good options for obtaining funds.

Q: The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification

Q: If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification.

Q: Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A) moral selection. B) risk sharing. C) asymmetric information. D) adverse hazard

Q: Risk sharing is profitable for financial institutions due to A) low transactions costs. B) asymmetric information. C) adverse selection. D) moral hazard.

Q: The concept of diversification is captured by the statement A) don't look a gift horse in the mouth. B) don't put all your eggs in one basket. C) it never rains, but it pours. D) make hay while the sun shines.

Q: Reducing risk through the purchase of assets whose returns do not always move together is A) diversification. B) intermediation. C) intervention. D) discounting.

Q: The process of asset transformation refers to the conversion of A) safer assets into risky assets. B) safer assets into safer liabilities. C) risky assets into safer assets. D) risky assets into risky liabilities.

Q: The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as A) risk sharing. B) risk aversion. C) risk neutrality. D) risk selling.

Q: Financial intermediaries provide customers with liquidity services. Liquidity services A) make it easier for customers to conduct transactions. B) allow customers to have a cup of coffee while waiting in the lobby. C) are a result of the asymmetric information problem. D) are another term for asset transformation.

Q: An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) spreading the cost of borrowed funds over many customers. D) spreading the cost of writing a standardized contract over many borrowers.

Q: Economies of scale enable financial institutions to A) reduce transactions costs. B) avoid the asymmetric information problem. C) avoid adverse selection problems. D) reduce moral hazard.

Q: The time and money spent in carrying out financial transactions are called A) economies of scale. B) financial intermediation. C) liquidity services. D) transaction costs.

Q: In the United States, loans from ________ are far ________ important for corporate finance than are securities markets. A) government agencies; more B) government agencies; less C) financial intermediaries; more D) financial intermediaries; less

Q: The process of indirect finance using financial intermediaries is called A) direct lending. B) financial intermediation. C) resource allocation. D) financial liquidation.

Q: U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called A) Atlantic dollars. B) Eurodollars. C) foreign dollars. D) outside dollars.

Q: If Microsoft sells a bond in London and it is denominated in dollars, the bond is a A) Eurobond. B) foreign bond. C) British bond. D) currency bond.

Q: Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds.

Q: Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds.

Q: One reason for the extraordinary growth of foreign financial markets is A) decreased trade. B) increases in the pool of savings in foreign countries. C) the recent introduction of the foreign bond. D) slower technological innovation in foreign markets.

Q: Equity of U.S. companies can be purchased by A) U.S. citizens only. B) foreign citizens only. C) U.S. citizens and foreign citizens. D) U.S. mutual funds only.

Q: The most liquid securities traded in the capital market are A) corporate bonds. B) municipal bonds. C) U.S. Treasury bonds. D) mortgage-backed securities.

Q: Which of the following are not traded in a capital market? A) U.S. government agency securities B) State and local government bonds C) Repurchase agreements D) Corporate bonds

Q: Which of the following instruments are traded in a capital market? A) Corporate bonds B) U.S. Treasury bills C) Negotiable bank CDs D) Repurchase agreements

Q: Which of the following instruments are traded in a capital market? A) U.S. Government agency securities B) Negotiable bank CDs C) Repurchase agreements D) U.S. Treasury bills

Q: Which of the following is a long-term financial instrument? A) A negotiable certificate of deposit B) A repurchase agreement C) A U.S. Treasury bond D) A U.S. Treasury bill

Q: Equity and debt instruments with maturities greater than one year are called ________ market instruments. A) capital B) money C) federal D) benchmark

Q: Bonds issued by state and local governments are called ________ bonds. A) corporate B) Treasury C) municipal D) commercial

Q: Which of the following instruments is not traded in a money market? A) Residential mortgages B) U.S. Treasury Bills C) Negotiable bank certificates of deposit D) Commercial paper

Q: Which of the following instruments are traded in a money market? A) Bank commercial loans B) Commercial paper C) State and local government bonds D) Residential mortgages

Q: Which of the following instruments are traded in a money market? A) State and local government bonds B) U.S. Treasury bills C) Corporate bonds D) U.S. government agency securities

Q: Which of the following are short-term financial instruments? A) A repurchase agreement B) A share of Walt Disney Corporation stock C) A Treasury note with a maturity of four years D) A residential mortgage

Q: The British Banker's Association average of interbank rates for dollar deposits in the London market is called the A) Libor rate. B) federal funds rate. C) prime rate. D) Treasury Bill rate.

Q: Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other.

Q: Collateral is ________ the lender receives if the borrower does not pay back the loan. A) a liability B) an asset C) a present D) an offering

Q: ________ are short-term loans in which Treasury bills serve as collateral. A) Repurchase agreements B) Negotiable certificates of deposit C) Federal funds D) U.S. government agency securities

Q: A short-term debt instrument issued by well-known corporations is called A) commercial paper. B) corporate bonds. C) municipal bonds. D) commercial mortgages.

Q: A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper. B) a negotiable certificate of deposit. C) a municipal bond. D) federal funds.

Q: U.S. Treasury bills are considered the safest of all money market instruments because there is almost no risk of A) defeat. B) default. C) desertion. D) demarcation.

Q: U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity. A) premium B) collateral C) default D) discount

Q: Prices of money market instruments undergo the least price fluctuations because of A) the short terms to maturity for the securities. B) the heavy regulations in the industry. C) the price ceiling imposed by government regulators. D) the lack of competition in the market.

Q: Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market?