Chapters
| 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 borrowersspenders. |
| Answer» D. It channels funds from lenders-savers to borrowersspenders. | |
| 2. |
Financial markets have the basic function of |
| A. | bringing together people with funds to lend and people who want to borrow funds. |
| B. | assuring that the swings in the business cycle are less pronounced. assuring that governments need never resort to printing money. |
| C. | both (A) and (B) of the above. |
| D. | both (B) and (C) of the above. |
| Answer» A. bringing together people with funds to lend and people who want to borrow funds. | |
| 3. |
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 commercial paper in the secondary market. |
| D. | None of the above. |
| Answer» D. None of the above. | |
| 4. |
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 commercial paper issued by another corporation. |
| C. | A pension fund manager buys commercial paper from the issuing corporation. |
| D. | Both (B) and (C) of the above. |
| Answer» D. Both (B) and (C) of the above. | |
| 5. |
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 commercial paper in a secondary market. |
| D. | All of the above. |
| Answer» D. All of the above. | |
| 6. |
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 commercial paper issued by another corporation. |
| C. | A pension fund manager buys commercial paper in the primary market. |
| D. | Both (B) and (C) of the above. |
| Answer» A. A bank buys a U.S. Treasury bill from one of its depositors. | |
| 7. |
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 purchases better. |
| C. | they weed out inefficient firms. |
| D. | they do (A) and (B) of the above. |
| Answer» D. they do (A) and (B) of the above. | |
| 8. |
Which of the following are securities? |
| A. | A certificate of deposit |
| B. | A share of Texaco common stock |
| C. | A Treasury bill |
| D. | All of the above |
| Answer» D. All of the above | |
| 9. |
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 |
| Answer» D. All of the above | |
| 10. |
Which of the following are long-term financial instruments? |
| A. | A negotiable certificate of deposit |
| B. | A banker’s acceptance |
| C. | A U.S. Treasury bond |
| D. | A U.S. Treasury bill |
| Answer» C. A U.S. Treasury bond | |
| 11. |
Which of the following are short-term financial instruments? |
| A. | A negotiable certificate of deposit |
| B. | A banker’s acceptance |
| C. | A U.S. Treasury bond |
| D. | Both (A) and (B) of the above |
| Answer» D. Both (A) and (B) of the above | |
| 12. |
Which of the following are short-term financial instruments? |
| A. | A banker’s acceptance |
| B. | A share of Walt Disney Corporation stock |
| C. | A Treasury note with a maturity of 4 years |
| D. | All of the above |
| Answer» A. A banker’s acceptance | |
| 13. |
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. | None of the above |
| Answer» D. None of the above | |
| 14. |
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 markets |
| D. | All of the above |
| Answer» D. All of the above | |
| 15. |
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. in the primary market by an investment bank. | |
| 16. |
Intermediaries who are agents of investors and match buyers with sellers of securities are called |
| A. | investment bankers. |
| B. | traders |
| C. | brokers |
| D. | dealers. |
| Answer» D. dealers. | |
| 17. |
Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called |
| A. | investment bankers. |
| B. | traders |
| C. | brokers |
| D. | dealers |
| Answer» D. dealers | |
| 18. |
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. investment bank | |
| 19. |
Which of the following statements about financial markets and securities are true? |
| A. | Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the |
| B. | New York Stock Exchange. |
| C. | A corporation acquires new funds only when its securities are sold in the primary market. |
| D. | Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. |
| Answer» D. Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. | |
| 20. |
The lending ability of commercial bank increases when |
| A. | Reserve ratio is increased |
| B. | RBI credit is reduced |
| C. | RBI sells government securities |
| D. | None of the above |
| Answer» D. None of the above | |
| 21. |
RBI issues currency noted under |
| A. | Minimum reserve system |
| B. | Proportional reserve system |
| C. | Maximum issue system |
| D. | None of the above |
| Answer» A. Minimum reserve system | |
| 22. |
Which of the following markets is sometimes organized as an over-the-counter market? |
| A. | The stock markets |
| B. | The bond markets |
| C. | The foreign exchange markets |
| D. | all of the above |
| Answer» D. all of the above | |
| 23. |
Which of the following instruments is not traded in a money market? |
| A. | Banker’s acceptances |
| B. | U.S. Treasury Bills |
| C. | Eurodollars |
| D. | None of the above |
| Answer» D. None of the above | |
| 24. |
Which of the following instruments is not traded in a money market? |
| A. | Banker’s acceptances |
| B. | U.S. Treasury Bills |
| C. | Eurodollars |
| D. | Residential mortgages |
| Answer» D. Residential mortgages | |
| 25. |
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. | Eurodollars |
| Answer» A. U.S. government agency securities | |
| 26. |
Which of the following instruments are traded in a capital market? |
| A. | Corporate bonds |
| B. | U.S. Treasury bills |
| C. | Banker’s acceptances |
| D. | Repurchase agreements |
| Answer» A. Corporate bonds | |
| 27. |
Bonds that are sold in a foreign country and are denominated in that country’s currency are known as |
| A. | Foreign bonds. |
| B. | Eurobonds. |
| C. | Eurocurrencies. |
| D. | Eurodollars. |
| Answer» A. Foreign bonds. | |
| 28. |
Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as |
| A. | foreign bonds. |
| B. | Eurobonds. |
| C. | Euro-currencies. |
| D. | Eurodollars. |
| Answer» B. Eurobonds. | |
| 29. |
Financial intermediaries |
| A. | exist because there are substantial information and transaction costs in the economy. |
| B. | improve the lot of the small saver. |
| C. | are involved in the process of indirect finance. |
| D. | do all of the above. |
| Answer» D. do all of the above. | |
| 30. |
The main sources of financing for businesses, in order of importance, are |
| A. | financial intermediaries, issuing bonds, issuing stocks. |
| B. | issuing bonds, issuing stocks, financial intermediaries. |
| C. | issuing stocks, issuing bonds, financial intermediaries. |
| D. | issuing stocks, financial intermediaries, issuing bonds. |
| Answer» A. financial intermediaries, issuing bonds, issuing stocks. | |
| 31. |
In primary markets, the first time issued shares to be publicly traded in stock markets is considered as |
| A. | traded offering |
| B. | public markets |
| C. | issuance offering |
| D. | initial public offering |
| Answer» D. initial public offering | |
| 32. |
The transaction cost of trading of financial instruments in centralized market is classified as |
| A. | flexible costs |
| B. | low transaction costs |
| C. | high transaction costs |
| D. | constant costs |
| Answer» B. low transaction costs | |
| 33. |
The stocks or shares that are sold to investors without transacting through financial institutions are classified as |
| A. | direct transfer |
| B. | indirect transfer |
| C. | global transfer |
| D. | pension transfer |
| Answer» A. direct transfer | |
| 34. |
The type of financial security which have linked payoff to another issued security is classified as. |
| A. | linked security |
| B. | derivative security |
| C. | payable security |
| D. | non- issuing security |
| Answer» B. derivative security | |
| 35. |
In primary markets, the property of shares which made it easy to sell newly issued security is considered as |
| A. | increased liquidity |
| B. | decreased liquidity |
| C. | money flow |
| D. | large funds |
| Answer» A. increased liquidity | |
| 36. |
The depository institutions such as thrifts includes |
| A. | savings associations |
| B. | savings banks |
| C. | credit unions |
| D. | all of above |
| Answer» D. all of above | |
| 37. |
The money market where debt and stocks are traded and maturity period is more than a year is classified as |
| A. | shorter term markets |
| B. | capital markets |
| C. | counter markets |
| D. | longterm markets |
| Answer» B. capital markets | |
| 38. |
The example of derivative securities includes |
| A. | swap contract |
| B. | option contract |
| C. | futures contract |
| D. | all of above |
| Answer» D. all of above | |
| 39. |
In foreign financial markets, the growth is represented by the factors such as |
| A. | savings in foreign countries |
| B. | investment opportunities |
| C. | accessible information |
| D. | all of above |
| Answer» D. all of above | |
| 40. |
The authority which intervenes directly or indirectly in foreign exchange markets by Altering the interest rates is considered as |
| A. | centralized instruments |
| B. | centralized stocks |
| C. | central government |
| D. | central corporations |
| Answer» C. central government | |
| 41. |
Which of the following are functions of a financial system? 1. The operation of a payments system. 2. Providing the means of portfolio adjustment. 3. Helping to reduce unemployment. 4. Channelling funds between lenders and borrowers. 5. Helping speculators to bet on price movements. |
| A. | 1 and 5 |
| B. | 2, 3 and 5 |
| C. | 1, 2 and 4 |
| D. | 2 to 5 |
| Answer» C. 1, 2 and 4 | |
| 42. |
The regulation of the banking industry is of particular importance in modern economies because: |
| A. | banks are large and very profitable. |
| B. | everyone in the economy has a bank account. |
| C. | banks employ many people. |
| D. | banks provide the principal means of payment for the economy. |
| Answer» D. banks provide the principal means of payment for the economy. | |
| 43. |
Statutory regulation is likely to create larger compliance costs than self-regulation because: |
| A. | self-regulation does not involve lawyers and the courts. |
| B. | consumers are better able to assess risk under self-regulation. |
| C. | statutory regulators are often over-cautious. |
| D. | statutory regulation is controlled by consumers. |
| Answer» C. statutory regulators are often over-cautious. | |
| 44. |
Moral hazard caused by regulation can only be removed from financial transactions if: |
| A. | regulations are regularly revised to keep pace with the changing circumstances of the market. |
| B. | the regulations prevent agency capture. |
| C. | all regulation is self-regulation. |
| D. | participants in the finance industry do not feel protected by the regulations. |
| Answer» D. participants in the finance industry do not feel protected by the regulations. | |
| 45. |
The public debt of a country is not necessarily a burden on the economy to the extent that: |
| A. | it grows less rapidly than GDP. |
| B. | people receive good public services. |
| C. | people are happy to hold government bonds. |
| D. | it can be financed without adding to inflation. |
| Answer» A. it grows less rapidly than GDP. | |
| 46. |
If the public debt can be financed without adding to inflation or causing interest rates to rise, it is said to be: |
| A. | only a burden on future generations. |
| B. | following the golden rule of the public finances. |
| C. | in primary balance. |
| D. | sustainable |
| Answer» D. sustainable | |
| 47. |
Interest rate expectations have been thought to be an important influence on bond sales because: |
| A. | government bond-holders are, by and large, are income risk averse. |
| B. | interest rates have always been very unstable. |
| C. | the bond market is dominated by people interested mainly in capital gains. |
| D. | government bond-holders hold extrapolative expectations. |
| Answer» C. the bond market is dominated by people interested mainly in capital gains. | |
| 48. |
The sale of government bonds overseas: |
| A. | causes a fall in the domestic money supply. |
| B. | causes a deficit in the balance of payments. |
| C. | causes a smaller increase in interest rates than the sale of bonds to the domestic banking sector. |
| D. | causes a smaller increase in interest rates than the sale of bonds to the domestic private sector. |
| Answer» D. causes a smaller increase in interest rates than the sale of bonds to the domestic private sector. | |
| 49. |
In indirect finance: |
| A. | lenders loan to borrowers. |
| B. | an institution borrows from the lender and provides funds to the borrower. |
| C. | occurs between a borrower and lender, with or without an intermediary. |
| D. | the borrower is required to have collateral. |
| Answer» B. an institution borrows from the lender and provides funds to the borrower. | |
| 50. |
Aloan: |
| A. | is an asset for both the lender and the borrower. |
| B. | is an asset for the lender and a liability for the borrower. |
| C. | is a liability for the lender and an asset for the borrower |
| D. | is a liability for both the lender and the borrower. |
| Answer» B. is an asset for the lender and a liability for the borrower. | |
| 51. |
Which of the following is not a characteristic of a financial instrument? |
| A. | The financial instrument is always issued by a bank. |
| B. | A financial instrument is a written legal obligation of one party to transfer something of value, usually money. |
| C. | The transaction in a financial instrument is specified to take place at a future date. |
| D. | A financial instrument specifies certain conditions. |
| Answer» A. The financial instrument is always issued by a bank. | |
| 52. |
Securities backed by _______ layed an important role in the financial crisis of 2007- 2009? |
| A. | asset backed securities. |
| B. | bonds. |
| C. | sub-prime mortgages. |
| D. | small business loans |
| Answer» C. sub-prime mortgages. | |
| 53. |
Financial instruments are used |
| A. | as a unit of account, as a store of value, and as a means of payment. |
| B. | as a unit of account, as a means of payment, and to transfer risk. |
| C. | as a store of value, as a means of payment, and to transfer risk. |
| D. | as a unit of account, as a store of value, and to transfer risk. |
| Answer» C. as a store of value, as a means of payment, and to transfer risk. | |
| 54. |
Two important characteristics of financial instruments are: |
| A. | information communication and risk neutrality. |
| B. | risk neutrality and liquidity. |
| C. | standardization and information communication. |
| D. | liquidity and standardization. |
| Answer» C. standardization and information communication. | |
| 55. |
Benefits of the merger between the NYSE and Paris-based Euronext, a pan European stock exchange include: |
| A. | lower costs and speedier transactions for international financial markets. |
| B. | foreign ownership of domestic assets. |
| C. | international consolidation of financial services. |
| D. | greater the uncertainty. |
| Answer» A. lower costs and speedier transactions for international financial markets. | |
| 56. |
Which of the following increases the value of a financial instrument? |
| A. | smaller payments. |
| B. | payments made further in the future. |
| C. | payments that are made when we need them. |
| D. | payments that are less likely to be made. |
| Answer» C. payments that are made when we need them. | |
| 57. |
An example of financial instruments that are primarily used as stores of value is: |
| A. | insurance contracts. |
| B. | home mortgages. |
| C. | options. |
| D. | futures contracts. |
| Answer» B. home mortgages. | |
| 58. |
Financial markets serve which three purposes? |
| A. | Financial markets allow-risk sharing, pool and communicate information, and offer stability. |
| B. | Financial markets allow risk sharing, offer stability, and offer liquidity. |
| C. | Financial markets offer stability, pool and communicate information, and offer liquidity. |
| D. | Financial markets allow-risk sharing, pool and communicate information, and offer liquidity. |
| Answer» D. Financial markets allow-risk sharing, pool and communicate information, and offer liquidity. | |
| 59. |
Which of the following is not a function of SEBI: |
| A. | Development of the Securities market |
| B. | Investor Protection |
| C. | Making the Rules and Regulation for the securities market |
| D. | Framing policies for central government operations |
| Answer» B. Investor Protection | |
| 60. |
SEBI operates to fulfill the needs of these three groups, choose the one which is not in those three: |
| A. | the issuers of securities |
| B. | the police |
| C. | the investors |
| D. | the market intermediaries |
| Answer» B. the police | |
| 61. |
SEBI has not been vested with the following powers: |
| A. | to approve by−laws of stock exchanges. |
| B. | to require the stock exchange to amend their by−laws. |
| C. | inspect the books of accounts and call for periodical returns from recognized stock exchanges. |
| D. | inspect the books of accounts of financial intermediaries. |
| Answer» B. to require the stock exchange to amend their by−laws. | |
| 62. |
SEBI signs MoUs with different country’s financial jurisdictions who are not a signatory to the multilateral MoU of International Organization of Securities Commissions (IOSCO). |
| A. | True |
| B. | False |
| C. | all |
| D. | none |
| Answer» B. False | |
| 63. |
Which of the following is the disadvantage of SEBI |
| A. | Ease of Trading |
| B. | Tax saving |
| C. | Money Laundering |
| D. | All of them |
| Answer» A. Ease of Trading | |
| 64. |
The difference between a primary market and a secondary market is |
| A. | primary market is the stock market and secondary market is the market for second hand sale of securities |
| B. | a primary market helps in long-term credit and secondary market offers short-term credit |
| C. | a primary market helps in the issue of new securities those which are offered for the first time and the secondary market is for second hand sale of securities listed on the stock exchange |
| D. | a primary market is the unorganized sector and the secondary market is the organized sector for sale and purchase of securities. |
| Answer» C. a primary market helps in the issue of new securities those which are offered for the first time and the secondary market is for second hand sale of securities listed on the stock exchange | |
| 65. |
The function of a financial system is to |
| A. | establish a link between savers and investors |
| B. | link commercial banks with the Central Bank of a country |
| C. | create regulators for influencing the intermediaries |
| D. | help traders and moneylenders in the capital market |
| Answer» A. establish a link between savers and investors | |
| 66. |
As a part of the capital adequacy requirement, the base minimum capital prescribed by SEBI: |
| A. | varies from exchange to exchange. |
| B. | is based on the recommendations of the Kaul committee. |
| C. | is based on the recommendations of the Justice Bhagwati Committee. |
| D. | is the same across members of all exchanges. |
| Answer» A. varies from exchange to exchange. | |
| 67. |
Primary and secondary markets: |
| A. | Compete with each other |
| B. | Complement each other |
| C. | Function independently |
| D. | Control each other |
| Answer» B. Complement each other | |
| 68. |
Clearing and settlement operations of NSE are carried out by: |
| A. | NSDL |
| B. | NSCCL |
| C. | SBI |
| D. | CDSL |
| Answer» B. NSCCL | |
| 69. |
The liquidity status of certificate of deposit which is more negotiable is considered as |
| A. | certified liquidity |
| B. | term liquidity |
| C. | more liquid |
| D. | less liquid |
| Answer» A. certified liquidity | |
| 70. |
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 time (term) to that instrument’s expiration date. |
| Answer» C. A debt instrument is long term if its maturity is ten years or longer. | |
| 71. |
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 sold in the primary market. |
| C. | Capital market securities are usually more widely traded than longer term securities and so tend to be more liqu |
| Answer» A. Few common stocks are traded over-the-counter, although the over-the-counter markets have grown in recent years. | |
| 72. |
At present, the apex institution with regard to rural credit is |
| A. | RBI |
| B. | NABARD |
| C. | ARDC |
| D. | SBI |
| Answer» B. NABARD | |
| 73. |
Which of the following in India is an exchange bank? |
| A. | ICICI bank |
| B. | CITI bank |
| C. | EXIM bank |
| D. | UCO bank |
| Answer» B. CITI bank | |
| 74. |
Exchange banks specialize in: |
| A. | Financing foreign trade |
| B. | Promoting foreign investment |
| C. | Financing domestic trade |
| D. | All the above |
| Answer» A. Financing foreign trade | |
| 75. |
The IDBI was started in |
| A. | 1949 |
| B. | 1964 |
| C. | 1982 |
| D. | 1962 |
| Answer» B. 1964 | |
| 76. |
The declining profits made banks to undertake the business of: |
| A. | Merchant banking |
| B. | Mutual funds |
| C. | Venture capital |
| D. | all of the above |
| Answer» D. all of the above | |
| 77. |
Retail banking means granting loans for: |
| A. | Construction of houses |
| B. | Purchases of consumer durables |
| C. | Educational purposes |
| D. | All of these |
| Answer» D. All of these | |
| 78. |
Investment banking was developed by |
| A. | Japan |
| B. | England |
| C. | USA |
| D. | None of the above |
| Answer» B. England | |
| 79. |
The presence of transaction costs in financial markets explains, in part, why |
| A. | financial intermediaries and indirect finance play such an important role in financial markets. |
| B. | equity and bond financing play such an important role in financial markets. |
| C. | corporations get more funds through equity financing than they get from financial intermediaries. |
| D. | direct financing is more important than indirect financing as a source of funds. |
| Answer» A. financial intermediaries and indirect finance play such an important role in financial markets. | |
| 80. |
Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of |
| A. | poorly informed consumers. |
| B. | standardization. |
| C. | economies of scale. |
| D. | their market power. |
| Answer» C. economies of scale. | |
| 81. |
The presence of in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. |
| A. | noncollateralized risk |
| B. | free-riding |
| C. | asymmetric information |
| D. | costly state verification |
| Answer» C. asymmetric information | |
| 82. |
When the lender and the borrower have different amounts of information regarding a transaction,__________ |
| A. | asymmetric information |
| B. | adverse selection |
| C. | moral hazard |
| D. | fraud |
| Answer» A. asymmetric information | |
| 83. |
When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, _ is said to exist. |
| A. | asymmetric information |
| B. | adverse selection |
| C. | moral hazard |
| D. | fraud |
| Answer» B. adverse selection | |
| 84. |
When the borrower engages in activities that make it less likely that the loan will be repaid, is said to exist. |
| A. | asymmetric information |
| B. | adverse selection |
| C. | moral hazard |
| D. | fraud |
| Answer» C. moral hazard | |
| 85. |
The concept of adverse selection helps to explain |
| A. | which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. |
| B. | why indirect finance is more important than direct finance as a source of business finance. |
| C. | why direct finance is more important than indirect finance as a source of business finance. |
| D. | only (A) and (B) of the above. |
| Answer» D. only (A) and (B) of the above. | |
| 86. |
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 percent loss if the borrower defaults. |
| C. | the borrower’s lack of incentive to seek a loan for highly risky investments. |
| D. | none of the above. |
| Answer» A. the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities. | |
| 87. |
When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the |
| A. | moral hazard problem. |
| B. | adverse selection problem. |
| C. | shirking problem. |
| D. | free-rider problem. |
| Answer» B. adverse selection problem. | |
| 88. |
Financial institutions expect that |
| A. | moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans. |
| B. | opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans. |
| C. | borrowers will commit moral hazard by taking on too much risk, and this is what drives financial institutions to take steps to limit moral haza |
| Answer» B. opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans. | |
| 89. |
Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to |
| A. | moral hazard. |
| B. | adverse selection. |
| C. | bad luck. |
| D. | financial panics. |
| Answer» B. adverse selection. | |
| 90. |
In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called |
| A. | comparative informational disadvantage. |
| B. | asymmetric information |
| C. | variant information. |
| D. | caveatvenditor. |
| Answer» B. asymmetric information | |
| 91. |
The largest depository institution at the end of 2001 was |
| A. | life insurance companies. |
| B. | pension funds. |
| C. | state retirement funds. |
| D. | none of the above. |
| Answer» D. none of the above. | |
| 92. |
The value of assets held by commercial banks in 2001 was $6.7 trillion dollars, making commercial banks the |
| A. | second most important sector of financial intermediaries after mutual funds. |
| B. | second most important sector of financial intermediaries after lifeinsurance companies. |
| C. | second most important sector of financial intermediaries after privatepension funds. |
| D. | largest sector of financial intermediaries. |
| Answer» D. largest sector of financial intermediaries. | |
| 93. |
Which of the following financial intermediaries are depository institutions? |
| A. | A savings and loan association |
| B. | A commercial bank |
| C. | A credit union |
| D. | All of the above |
| Answer» D. All of the above | |
| 94. |
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 |
| Answer» A. A life insurance company | |
| 95. |
Which of the following are not investment intermediaries? |
| A. | A life insurance company |
| B. | A pension fund |
| C. | A mutual fund |
| D. | Only (A) and (B) of the above |
| Answer» D. Only (A) and (B) of the above | |
| 96. |
The government regulates financial markets for three main reasons: |
| A. | to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors. |
| B. | to improve control of monetary policy, to ensure that financial intermediaries earn a normal rate of return, and to increase the information available to investors. |
| C. | to ensure that financial intermediaries do not earn more than the normal rate of return, to ensure soundness of the financial system, and to improve control of monetary policy. |
| D. | to ensure soundness of financial intermediaries, to increase the information available to investors, and to prevent financial intermediaries from earning less than the normal rate of return. |
| Answer» A. to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors. | |
| 97. |
Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a |
| A. | bank holiday. |
| B. | financial panic. |
| C. | financial disintermediation. |
| D. | financial collapse. |
| Answer» B. financial panic. | |
| 98. |
The market value size of outstanding instruments of capital markets depends on factors |
| A. | primary cash flows |
| B. | number of issued securities |
| C. | market prices of securities |
| D. | both b and c |
| Answer» D. both b and c | |
| 99. |
When maturities of liabilities and assets are mismatched and risk incurred by financial intermediaries then this risk is classified as |
| A. | interest rate risk |
| B. | channel rate risk |
| C. | economic risk |
| D. | issuance risk |
| Answer» A. interest rate risk | |
| 100. |
The depository institutions includes |
| A. | mutual funds |
| B. | commercial banks and thrifts |
| C. | savings banks |
| D. | credit unions |
| Answer» B. commercial banks and thrifts | |