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Quiz 2
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1
Which of the following is the best example of indirect finance?
A)An insurance company buys stocks and bonds using funds collected from insurance premiums.
B)The U.S. Treasury sells bonds to the public.
C)A company provides its executives with stock options.
D)A company issues new stock.
2
Financial instruments:
A)may be used to transfer risk.
B)provide for the transfer of something of value to another party at a future date.
C)Both of the above are correct.
D)None of the above is correct.
3
Which of the following is an accurate description of a financial instrument?
A)A financial instrument involves a legal commitment to transfer something of value at a specified future date.
B)A financial instrument describes the conditions under which a future transfer occurs.
C)A financial instrument imposes legal obligations on the party that makes a promise to provide a transfer of something of value.
D)All of the above are correct.
4
Financial instruments are primarily used by the holder as a:
A)means of payment.
B)store of value.
C)unit of account.
D)None of the above is correct.
5
The use of standardized financial instruments and standardized reporting requirements:
A)lowers information costs.
B)reduces the problem of asymmetric information.
C)Both of the above are correct.
D)None of the above is correct.
6
Derivative instruments are financial instruments that have a value that is derived:
A)using the rules of differential calculus.
B)from the behavior of an underlying instrument.
C)solely in primary markets, not secondary markets.
D)None of the above is correct.
7
A financial instrument has a higher market value when:
A)the future payoff is smaller.
B)the probability of a future payment is greater.
C)the payment occurs further in the future.
D)All of the above are correct.
E)None of the above is correct.
8
An increase in the size of the promised future payment on a security, holding other things constant, will cause the price of the security to:
A)rise.
B)fall.
C)remain unchanged.
D)change in an unpredictable manner.
9
The price of a financial instrument will be higher when:
A)the promised payment is received later.
B)the promised payment is received sooner.
C)the probability of receiving the payment is reduced.
D)None of the above is correct.
10
Which of the following financial instruments is primarily used to transfer risk?
A)bonds
B)home mortgages
C)futures contracts
D)stocks
11
Which of the following is a correct statement about financial markets?
A)They offer both savers and borrowers liquidity.
B)They provide for the transfer of risk.
C)They pool and communicate information.
D)All of the above are correct.
E)None of the above is correct.
12
Newly issued securities are sold in:
A)primary markets.
B)secondary markets.
C)centralized exchanges only.
D)None of the above is correct.
13
The New York Stock exchange is a(n):
A)primary market.
B)secondary market.
C)over-the-counter market.
D)None of the above is correct.
14
An over-the-counter market is:
A)a form of centralized exchange.
B)a network of dealers connected electronically.
C)an illegal secondary market for stocks used primarily by those attempting to evade taxes.
D)a primary market for stocks.
15
What is the distinction between debt and equity markets?
A)Debt markets are those that are used only by individuals and firms that are on the verge of bankruptcy while equity markets provide more equitable borrowing terms to those borrowers that have sound credit ratings.
B)Debt markets are used primarily by those that are buying financial instruments using borrowed funds, while equity markets allow people to buy financial assets using only their own funds.
C)Debt markets are the market for mortgages, loans, and bonds while equity markets are the markets for stocks.
D)None of the above is correct.
16
Financial securities with a maturity of less than a year from their original issue date are sold in the:
A)money market.
B)bond market.
C)equity market.
D)None of the above is correct.
17
Depository institutions exist because they:
A)increase the transaction costs associated with borrowing and lending.
B)allow savers to give up the use of their funds for short periods and time and borrowers to borrow for long periods of time.
C)always offer higher interest rates to savers than would be received under direct finance.
D)always provide lower interest rates on loans to borrowers than would be received under direct finance.
18
The existence of depository institutions provides savers with:
A)more liquidity than they would have if they engaged in direct finance.
B)less liquidity than they would have if they engaged in direct finance.
C)the same liquidity that they would have if they engaged in direct finance.
D)a higher return than they could receive under direct finance.
19
Which of the following is not a depository institution?
A)commercial banks
B)credit unions
C)savings banks
D)insurance companies





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