Chapter 2
An Overview of the Financial System
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.
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) providing a risk- free repository of spending power
3) The principal lender- savers are
A) governments.
B) businesses.
C) households.
D) foreigners.
4) 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) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
5) 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 in the primary market.
C) You buy a U.S. Treasury bill from the U.S. Treasury.
D) You make a deposit at a bank
6) Which of the following statements about the characteristics of debt and equity is false?
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 issuerʹ s income.
D) They both enable a corporation to raise funds.
7) Which of the following statements about financial markets and securities is true?
A) A bond is a long- term security that promises to make periodic payments called dividends to the firmʹ s residual
claimants.
B) A debt instrument is intermediate term if its maturity is less than one year.
C) A debt instrument is intermediate term if its maturity is ten years or longer.
D) The maturity of a debt instrument is the number of years (term) to that instrumentʹ s expiration date.
8) When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm
and to elect its directors.
A) bonds
B) bills
C) notes
D) stock
9) Which of the following benefit directly from any increase in the corporationʹ s profitability?
A) a bond holder
B) a commercial paper holder
C) a shareholder
D) a T- bill holder
10) A financial market in which previously issued securities can be resold is called a ________ market.
A) primary
B) secondary
C) tertiary
D) used securities
11) 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.
12) Which of the following is not a secondary market?
A) foreign exchange market
B) futures market
C) options market
D) IPO market
13) A corporation acquires new funds only when its securities are sold in the
A) primary market by an investment bank.
B) primary market by a stock exchange broker.
C) secondary market by a securities dealer.
D) secondary market by a commercial bank.
14) The higher a securityʹ s price in the secondary market the ________ funds a firm can raise by selling securities
in the ________ market.
A) more; primary
B) more; secondary
C) less; primary
D) less; secondary
15) Which of the following statements about financial markets and securities is 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 brokerʹ 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) Because of their short- terms to maturity, the prices of money market instruments tend to fluctuate wildly.
16) Equity instruments are traded in the ________ market.
A) money
B) bond
C) capital
D) commodities
17) 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
18) 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
19) A short- term debt instrument issued by well- known corporations is called
A) commercial paper.
B) corporate bonds.
C) municipal bonds.
D) commercial mortgages.
20) 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.
21) Bonds issued by state and local governments are called ________ bonds.
A) corporate
B) Treasury
C) municipal
D) commercial
22) 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.