Question 1

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 ________.

Accepted Answer

A)   moral selection
B)   risk sharing
C)   asymmetric information
D)   adverse hazardE) All of the above
F) C) and D)

Question 2

You can borrow $5000 to finance a new business venture.This new venture will generate annual earnings of $251.The maximum interest rate that you would pay on the borrowed funds and still increase your income is ________.

Accepted Answer

A)   25 percent
B)   12.5 percent
C)   10 percent
D)   5 percentE) None of the above
F) All of the above

Question 3

Which of the following financial intermediaries is not a depository institution?

Accepted Answer

A)   A savings and loan association
B)   A commercial bank
C)   A credit union
D)   A finance companyE) A) and C)
F) A) and B)

Question 4

Which of the following is not a secondary market?

Accepted Answer

A)   Foreign exchange market
B)   Futures market
C)   Options market
D)   Primary marketE) C) and D)
F) B) and D)

Question 5

If the maturity of a debt instrument is less than one year,the debt is called ________.

Accepted Answer

A)   short-term
B)   intermediate-term
C)   long-term
D)   prima-termE) B) and C)
F) B) and D)

Question 6

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.

Accepted Answer

Adverse selection is the asymmetric info...

Question 7

Government regulations to reduce the possibility of financial panic include all of the following except ________.

Accepted Answer

A)   transactions costs
B)   restrictions on assets and activities
C)   disclosure
D)   deposit insuranceE) All of the above
F) A) and B)

Question 8

An example of economies of scale in the provision of financial services is ________.

Accepted Answer

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 borrowersE) None of the above
F) A) and D)

Question 9

Describe the difference between the money market and the capital market.

Accepted Answer

The money market in which shor...

Question 10

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.

Accepted Answer

A)   adverse selection
B)   moral hazard
C)   risk sharing
D)   credit riskE) A) and B)
F) C) and D)

Question 11

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets.

Accepted Answer

A)   adverse selection; moral hazard
B)   adverse selection; risk sharing
C)   moral hazard; transactions costs
D)   adverse selection; economies of scaleE) All of the above
F) A) and B)

Question 12

When an investment bank ________ securities,it guarantees a price for a corporation's securities and then sells them to the public.

Accepted Answer

A)   underwrites
B)   undertakes
C)   overwrites
D)   overtakesE) None of the above
F) All of the above

Question 13

An important feature of money market mutual fund shares is ________.

Accepted Answer

A)   deposit insurance
B)   they offer deposit-type accounts
C)   the ability to borrow against shareholdings
D)   claims on shares of corporate stockE) B) and C)
F) A) and B)

Question 14

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as ________.

Accepted Answer

A)   risk sharing
B)   risk aversion
C)   risk neutrality
D)   risk sellingE) A) and D)
F) None of the above

Question 15

Treasury bills are considered the safest of all money market instruments because there is no risk of ________.

Accepted Answer

A)   defeat
B)   default
C)   desertion
D)   demarcationE) All of the above
F) B) and C)

Question 16

Financial institutions that accept deposits and make loans are called ________ institutions.

Accepted Answer

A)   investment
B)   contractual savings
C)   depository
D)   underwritingE) A) and B)
F) B) and C)

Question 17

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.

Accepted Answer

A)   Germany; Japan
B)   Germany; Great Britain
C)   Great Britain; Canada
D)   Canada; JapanE) A) and C)
F) None of the above

Question 18

Risk sharing is profitable for financial institutions due to ________.

Accepted Answer

A)   low transactions costs
B)   asymmetric information
C)   adverse selection
D)   moral hazardE) A) and D)
F) A) and C)

Question 19

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.

Accepted Answer

A)   premium
B)   collateral
C)   default
D)   discountE) None of the above
F) A) and D)

Question 20

Adverse selection is a problem associated with equity and debt contracts arising from ________.

Accepted Answer

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)   the borrower's lack of good options for obtaining fundsE) B) and C)
F) None of the above

Exam 2: An Overview of the Financial System

If the maturity of a debt instrument is less than one year,the debt is called ________.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

An example of economies of scale in the provision of financial services is ________.

Correct AnswerverifiedShow Answer

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

An important feature of money market mutual fund shares is ________.

Correct AnswerverifiedShow Answer

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 ________.

Correct AnswerverifiedShow Answer

Adverse selection is a problem associated with equity and debt contracts arising from ________.

Correct AnswerverifiedShow Answer

Government regulations to reduce the possibility of financial panic include all of the following except ________.

Correct AnswerverifiedShow Answer

You can borrow $5000 to finance a new business venture.This new venture will generate annual earnings of $251.The maximum interest rate that you would pay on the borrowed funds and still increase your income is ________.

Correct AnswerverifiedShow Answer

Treasury bills are considered the safest of all money market instruments because there is no risk of ________.

Correct AnswerverifiedShow Answer

Describe the difference between the money market and the capital market.

Correct AnswerverifiedThe money market in which shor...View AnswerShow Answer

Which of the following financial intermediaries is not a depository institution?

Correct AnswerverifiedShow Answer

Financial institutions that accept deposits and make loans are called ________ institutions.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedAdverse selection is the asymmetric info...View AnswerShow Answer

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as ________.

Correct AnswerverifiedShow Answer

When an investment bank ________ securities,it guarantees a price for a corporation's securities and then sells them to the public.

Correct AnswerverifiedShow Answer

Risk sharing is profitable for financial institutions due to ________.

Correct AnswerverifiedShow Answer

Which of the following is not a secondary market?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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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.

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Increasing the amount of information available to investors helps to reduce the problems of and in the financial markets.

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The money market in which shor...
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Adverse selection is the asymmetric info...
View Answer

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