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Financial Markets and Institutions 11th Edition Jeff Madura – Test Bank 

 

Chapter 1—Role of Financial Markets and Institutions

 

  1. Financial market participants who provide funds are called
a. deficit units.
b. surplus units.
c. primary units.
d. secondary units.

 

 

 

 

 

 

  1. The main provider(s) of funds to the U.S. Treasury is (are)
a. households and businesses.
b. foreign financial institutions.
c. the Federal Reserve System.
d. foreign nonfinancial sectors.

 

 

 

 

 

 

  1. The largest deficit unit is (are)
a. households and businesses.
b. foreign financial institutions.
c. the U.S. Treasury.
d. foreign nonfinancial sectors.

 

 

 

 

 

 

  1. Those financial markets that facilitate the flow of short-term funds are known as
a. money markets.
b. capital markets.
c. primary markets.
d. secondary markets.

 

 

 

 

 

 

  1. Funds are provided to the initial issuer of securities in the
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.

 

 

 

 

 

 

  1. Which of the following is a capital market instrument?
a. a six-month CD
b. a three-month Treasury bill
c. a ten-year bond
d. an agreement for a bank to loan funds directly to a company for nine months

 

 

 

 

 

 

  1. Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. mortgage
d. commercial paper

 

 

 

 

 

 

  1. The creditors in the federal funds market are
a. households.
b. depository institutions.
c. firms.
d. government agencies.

 

 

 

 

 

 

  1. Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.
a. higher; higher
b. lower; lower
c. lower; higher
d. higher; lower

 

 

 

 

 

 

  1. Money market securities generally have ____. Capital market securities are typically expected to have a ____.
a. less liquidity; higher annualized return
b. more liquidity; lower annualized return
c. less liquidity; lower annualized return
d. more liquidity; higher annualized return

 

 

 

 

 

 

  1. If security prices fully reflect all available information, the markets for these securities are
a. efficient.
b. primary.
c. overvalued.
d. undervalued.

 

 

 

 

 

 

  1. If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
a. perfect
b. active
c. inefficient
d. in equilibrium

 

 

 

 

 

 

  1. If financial markets are efficient, this implies that all securities should earn the same return.
  2. True
  3. False

 

 

 

 

 

  1. The Securities Act of 1933
a. required complete disclosure of relevant financial information for publicly offered securities in the primary market.
b. declared trading strategies to manipulate the prices of public secondary securities illegal.
c. declared misleading financial statements for public primary securities illegal.
d. required complete disclosure of relevant financial information for securities traded in the secondary market.
e. all of the above

 

 

 

 

 

 

  1. The Securities Exchange Commission (SEC) was established by the
a. Federal Reserve Act.
b. McFadden Act.
c. Securities Exchange Act of 1934.
d. Glass-Steagall Act.
e. none of the above

 

 

 

 

 

 

  1. Common stock is an example of a(n)
a. debt security.
b. money market security.
c. equity security.
d. A and B

 

 

 

 

 

 

  1. If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.
a. efficient
b. inefficient
c. perfect
d. imperfect

 

 

 

 

 

 

  1. The typical role of a securities firm in a public offering of securities is to
a. purchase the entire issue for its own investment.
b. place the entire issue with a single large investor.
c. spread the issue across several investors until the entire issue is sold.
d. provide all large investors with loans so that they can invest in the offering.

 

 

 

 

 

 

  1. Without the participation of financial intermediaries in financial market transactions,
a. information and transaction costs would be lower.
b. transaction costs would be higher but information costs would be unchanged.
c. information costs would be higher but transaction costs would be unchanged.
d. information and transaction costs would be higher.

 

 

 

 

 

 

  1. Which of the following is most likely to be described as a depository institution?
a. finance companies
b. securities firms
c. credit unions
d. pension funds
e. insurance companies

 

 

 

 

 

 

  1. In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.
a. commercial banks
b. savings banks
c. credit unions
d. S&Ls

 

 

 

 

 

 

  1. Which of the following is a nondepository financial institution?
a. savings banks
b. commercial banks
c. savings and loan associations
d. mutual funds

 

 

 

 

 

 

  1. Which of the following distinguishes credit unions from commercial banks and savings institutions?
a. Credit unions are non-profit
b. Credit unions accept deposits but do not make loans
c. Credit unions make loans but do not accept deposits
d. Savings institutions restrict their business to members who share a common bond

 

 

 

 

 

 

  1. When a securities firm acts as a broker, it
a. guarantees the issuer a specific price for newly issued securities.
b. makes a market in specific securities by adjusting its own inventory.
c. executes transactions between two parties.
d. purchases securities for its own account.

 

 

 

 

 

 

  1. When a securities firm acts as a(n) ____, it maintains a position in securities.
a. adviser
b. dealer
c. broker
d. none of the above

 

 

 

 

 

 

  1. ____ obtain funds by issuing securities, then lend the funds to individuals and small businesses.
a. Finance companies
b. Securities firms
c. Mutual funds
d. Insurance companies

 

 

 

 

 

 

  1. Households with ____ are served by ____.
a. deficient funds; depository institutions and finance companies
b. deficient funds; finance companies only
c. savings; finance companies only
d. savings; pension funds and finance companies

 

 

 

 

 

 

  1. ____ concentrate on mortgage loans.
a. Finance companies
b. Commercial banks
c. Savings institutions
d. Credit unions

 

 

 

 

 

 

  1. ____ securities have a maturity of one year or less; ____ securities are generally more liquid.
a. Money market; capital market
b. Money market; money market
c. Capital market; money market
d. Capital market; capital market

 

 

 

 

 

 

  1. Which of the following is not a major investor in stocks?
a. commercial banks
b. insurance companies
c. mutual funds
d. pension funds

 

 

 

 

 

 

  1. Which of the following financial intermediaries commonly invests in stocks and bonds?
a. pension funds
b. insurance companies
c. mutual funds
d. all of the above

 

 

 

 

 

 

  1. Securities are certificates that represent a claim on the issuer.
  2. True
  3. False

 

 

 

 

 

  1. Debt securities are certificates that represent debt (borrowed funds) by the issuer.
  2. True
  3. False

 

 

 

 

 

  1. A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.

 

 

 

 

 

 

  1. When security prices fully reflect all available information, the markets for these securities are said to be efficient.
  2. True
  3. False

 

 

 

 

 

  1. If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.
  2. True
  3. False

 

 

 

 

 

  1. A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.
  2. True
  3. False

 

 

 

 

 

  1. The euro increased business between European countries and created a more competitive environment in Europe.
  2. True
  3. False

 

 

 

 

 

  1. In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.
  2. True
  3. False

 

 

 

 

 

  1. Securities are certificates that represent a claim on the provider of funds.
  2. True
  3. False

 

 

 

 

 

  1. Debt securities include commercial paper, Treasury bonds, and corporate bonds.
  2. True
  3. False

 

 

 

 

 

  1. Common types of capital market securities include Treasury bills and commercial paper.
  2. True
  3. False

 

 

 

 

 

  1. Common types of money market securities include negotiable certificates of deposit and Treasury bills.
  2. True
  3. False

 

 

 

 

 

  1. Money market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
  2. True
  3. False

 

 

 

 

 

  1. The total asset value of savings institutions is larger than that of commercial banks.
  2. True
  3. False

 

 

 

 

 

  1. Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as
a. secondary markets.
b. capital markets.
c. primary markets.
d. money markets.
e. none of the above

 

 

 

 

 

 

  1. Which of the following transactions would not be considered a secondary market transaction?
a. An individual investor purchases some existing shares of stock in IBM through his broker.
b. An institutional investor sells some Disney stock through its broker.
c. A firm that was privately held engages in an offering of stock to the public.
d. All of the above are secondary market transactions.

 

 

 

 

 

 

  1. If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher

 

 

 

 

 

 

  1. ____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.
a. Finance companies
b. Mutual funds
c. Life insurance companies
d. Securities firms

 

 

 

 

 

 

  1. A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies

 

 

 

 

 

 

  1. Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher

 

 

 

 

 

 

  1. Common types of capital market securities include Treasury bills and commercial paper.
  2. True
  3. False

 

 

 

 

 

  1. Common types of money market securities include negotiable certificates of deposit and Treasury bills.
  2. True
  3. False

 

 

 

 

 

  1. Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
  2. True
  3. False

 

 

 

 

 

  1. Commercial banks in aggregate have more assets than credit unions.
  2. True
  3. False

 

 

 

 

 

  1. Those participants who receive more money than they spend are referred to as
a. deficit units.
b. surplus units.
c. borrowing units.
d. government units.

 

 

 

 

 

 

  1. Equity securities
a. have a maturity.
b. pay interest on a periodic basis.
c. represent ownership in the issuer.
d. repay the principal amount at maturity.

 

 

 

 

 

 

  1. The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.
a. corporate finance
b. investment management
c. financial markets and institutions
d. none of the above

 

 

 

 

 

 

  1. There is a ____ relationship between the risk of a security and the expected return from investing in the security.
a. positive
b. negative
c. indeterminable
d. none of the above

 

 

 

 

 

 

  1. If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security’s price will ____, resulting in a ____ return for those investors.
a. rise; lower
b. fall; higher
c. fall; lower
d. rise; higher

 

 

 

 

 

 

  1. The credit crisis in the 2008-2009 period was caused by weak economies in Asia.
  2. True
  3. False

 

 

 

 

 

  1. ____ are classified as a depository institution.
a. Credit unions
b. Pension funds
c. Finance companies
d. Securities firms

 

 

 

 

 

 

  1. The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:
a. mortgages.
b. money market securities.
c. stock.
d. Treasury bonds.

 

 

 

 

 

 

  1. Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets.
  2. True
  3. False

 

 

 

 

 

  1. Treasury bonds have a maturity of one to three years.
  2. True
  3. False

 

 

 

 

 

  1. Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.
  2. True
  3. False

 

 

 

 

 

  1. Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.
  2. True
  3. False

 

 

 

 

 

  1. When security prices fully reflect all available information, the markets for these securities are said to be perfect.
  2. True
  3. False

 

 

 

 

 

  1. Securities that are not as safe and liquid as other securities are never considered for investment by anyone.
  2. True
  3. False

 

 

 

 

 

  1. By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.
  2. True
  3. False

 

 

 

 

 

  1. When a depository institution offers a loan, it is acting as a creditor.
  2. True
  3. False

 

 

 

 

 

  1. Savings institutions represent a nondepository institution.
  2. True
  3. False

 

 

 

 

 

  1. Most mutual funds obtain funds by issuing securities, then lend the funds to individuals and small businesses.
  2. True
  3. False

 

 

 

 

 

  1. Institutional investors not only provide financial support to companies but exercise some degree of corporate control over them.
  2. True
  3. False

 

 

 

 

 

  1. Which of the following is not a reason why depository financial institutions are popular?
a. They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
b. They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
c. They accept the risk on loans provided.
d. They use their information resources to act as a broker, executing securities transactions between two parties.
e. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.

 

 

 

 

 

 

  1. According to your text, which of the following is not considered a money market security?
a. Treasury bills
b. Treasury notes
c. retail CD
d. banker’s acceptance
e. commercial paper

 

 

 

 

 

 

  1. ____ are not considered capital market securities.
a. Repurchase agreements
b. Municipal bonds
c. Corporate bonds
d. Equity securities
e. Mortgages

 

 

 

 

 

 

  1. ____ are long-term debt obligations issued by corporations and government agencies to support their operations.
a. Common stock
b. Derivative securities
c. Bonds
d. None of the above

 

 

 

 

 

 

  1. Equity securities should normally have a ____ expected return and ____ risk than money market securities.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher

 

 

 

 

 

 

  1. If investors speculate in derivative contracts rather than the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher

 

 

 

 

 

 

  1. When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.
a. undervalued
b. overvalued
c. fairly priced
d. efficient
e. none of the above

 

 

 

 

 

 

  1. Which of the following are not considered depository financial institutions?
a. finance companies
b. commercial banks
c. savings institutions
d. credit unions
e. All of the above are depository financial institutions.

 

 

 

 

 

 

  1. The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies
e. pension funds

 

 

 

 

 

 

  1. Which of the following statements is incorrect?
a. Financial markets attract funds from investors and channel the funds to corporations.
b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
d. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.

 

 

 

 

 

 

  1. Which of the following is not a typical money market security?
a. Treasury bills
b. Treasury bonds
c. Commercial paper
d. Negotiable certificates of deposit

 

 

 

 

 

 

  1. Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities.
a. a.   liquid; many
b. a.   liquid; not many
c. a.   illiquid; not many
d. a.   illiquid; many

 

 

 

 

 

 

  1. Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with specific payments at regular intervals.
  2. True
  3. False

 

 

 

 

 

  1. ____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient.
a. a.   Psychological marketing
b. a.   Behavioral finance
c. a.   Inefficient markets theory
d. a.   Financial psychology

 

 

 

 

 

 

  1. International integration of securities markets allows:
a. a.   governments and corporations to have easier access to funding from creditors and investors in other countries.
b. a.   investors and creditors to benefit from investment opportunities in other countries.
c. a.   one’s country’s financial problems to adversely affect other countries.
d. a.   All of the above

 

 

 

 

 

 

  1. The foreign exchange market facilitates the exchange of:
a. a.   information between investors in different countries.
b. a.   debt securities.
c. a.   equity securities.
d. a.   currencies.

 

 

 

 

 

 

  1. Which of the following is not an example of the government’s recent increased role in financial markets?
a. a.   the Federal Reserve’s purchase of debt securities during the credit crisis
b. a.   regulations changing the way that the credit risk of bonds is assessed
c. a.   regulations setting maximum rates for Treasury securities
d. a.   increased monitoring of stock trading and prosecution of those who trade on inside information

 

 

 

 

 

 

  1. Commercial paper represents long-term debt obligations created to finance the purchase of commercial property.
  2. True
  3. False

 

 

 

 

 

  1. The risk that financial problems could spread among financial institutions and across financial markets, causing a collapse of the financial system, is known as:
a. a.   systemic risk.
b. a.   leverage risk.
c. a.   financial meltdown risk.
d. a.   credit risk.

 

 

 

 

 

 

  1. Systemic risk exists because:
a. a.   there is no government regulation of financial markets.
b. a.   financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities.
c. a.   financial institutions borrow using long-term debt securities but lend their funds for short-term periods.
d. a.   financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.

 

 

 

 

Chapter 2—Determination of Interest Rates

 

MULTIPLE CHOICE

 

  1. The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.
a. higher
b. lower
c. zero
d. negative

 

 

 

 

 

 

  1. At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.
a. greater; higher
b. greater; lower
c. smaller; lower
d. none of the above

 

 

 

 

 

 

  1. Businesses demand loanable funds to
a. finance installment debt.
b. subsidize other companies.
c. invest in fixed and short-term assets.
d. none of the above

 

 

 

 

 

 

  1. The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.
a. greater; lower
b. lower; greater
c. lower; lower
d. greater; greater

 

 

 

 

 

 

  1. If interest rates are ____, ____ projects will have positive NPVs.
a. higher; more
b. lower; more
c. lower; no
d. none of the above

 

 

 

 

 

 

  1. The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.
a. inversely; positively
b. positively; inversely
c. inversely; inversely
d. positively; positively