FIN 3100 MIDTERM EXAM QUESTIONS WITH VERIFIED SOLUTIONS LATEST UPDATE 2026

FIN 3100 MIDTERM EXAM QUESTIONS WITH VERIFIED SOLUTIONS LATEST UPDATE 2026 What factors are encouraging financial institutions to offer overlapping financial services such as banking, investment banking, brokerage, etc.? I. Regulatory changes allowing institutions to offer more services II. Technological improvements reducing the cost of providing financial services III. Increasing competition from full-service global financial institutions IV. Reduction in the need to manage risk at financial institutions - Answers I. II. and III. only IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n) - Answers primary market transaction The largest capital market security outstanding in 2016 measured by market value was - Answers corporate stocks _________ and __________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets. - Answers monitoring and diversification Secondary markets help support primary markets because secondary markets I. offer primary market purchasers liquidity for their holdings. II. update the price or value of the primary market claims. III. reduce the cost of trading the primary market claims. - Answers I. II. and III onlt Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because - Answers FIs can diversify away some of their risk and closely monitor the riskiness of their assets The Securities Exchange Commission (SEC) does not - Answers decide whether a public issue is fairly priced. insolvency risk at a financial intermediary (FI) is the risk - Answers risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. Liquidity risk at a financial intermediary (FI) is the risk - Answers that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices Which of the following are capital market instruments? - Answers 10-year corporate bonds 30-year mortgages 20-year Treasury bonds 15-year U.S. government agency bonds the financial crisis of 2008 was triggered by - Answers problems in subprime mortgage markets 2 important characteristics of money markets are - Answers low interest rate risk maturity of one year or less the passage of the Securities act of 1933 designated that ___ would be the regulator of financial markets and exchanges in the U.S. - Answers Securities and Exchange Commission (SEC) in the "originate and hold" model, financial institutions are exposed to risks, including which of the following - Answers liquidity risk interest rate risk credit risk during the past 30 years, some of the trends that have reshaped the financial industry are - Answers financial innovation increased use of technology removal of regulatory barriers primary financial markets bring together ___ and ___ - Answers users of funds provider of funds when a financial institution accepts short-term deposits from investors and uses those funds to issue long-term loans to borrowers, they are engaging in - Answers asset transformation when a U.S. corporation or investor receives foreign currency cash flows, the U.S. dollar value of those cash flows will ___ if the foreign currency ___ against the U.S. dollar - Answers increase; appreciates decrease; depreciates financial institutions reduce individual investor's monitoring costs by - Answers pooling their funds and hiring employees to monitor the fund of users TorF: the original issuers of financial instruments obtain additional funds when those instruments are resold on the secondary market - Answers false major suppliers of securities for capital markets (i.e. users of funds are) - Answers governments corporations financial institutions average cost of monitoring is lower than the individual investor's due to - Answers economies of scale which of the following is not specified in the derivative security contract - Answers the final purpose for which the asset exchanged will be used as a result of increased globalization, movements in foreign financial markets now have ___ impact on U.S. financial markets - Answers a much greater financial institutions frequently pool small deposits from indiv. savers and invest the funds in large denomination securities. This is called... - Answers denomination intermediation two of the important payment services provided by the financial institutions of the economy are ___ and ___ - Answers wire transfers check clearing two important characteristics of capital market securities are - Answers maturity greater than one year wider price fluctuations than MM securities the first-time issue of stock by a corporation going public is called a - Answers initial public offering (IPO) traditional depository institutions find it difficult to compete with other financial institutions due to - Answers higher costs due to regulation financial institutions frequently transform short-maturity liabilities provided by investors into a portfolio of long-maturity assets. This is known as - Answers maturity intermediation the term "thrifts" refers to which of the following types of depository institution - Answers savings associations savings banks credit unions in a world w/o financial institutions where suppliers provided funds directly to users, suppliers of funds would face 3 types of risks/costs - Answers monitoring cost price risk liquidity cost the risk that a financial institution may have inadequate cash to meet requests for demand deposit withdrawal is called - Answers liquidity risk FIs are able to guarantee the liquidity and safety of investors' funds despite investing in risky assets by - Answers diversifying their investments across many uncorrelated assets from 1992 through 2015, U.S. investors' holdings of foreign financial market debt securities increased by a factor of - Answers 10x TorF: the originate and distribute model contributed to the financial crisis because it allowed FIs to issue risky mortgages knowing they could sell them before they defaulted - Answers True (moral hazard) The decline of the share of assets held by commercial banks between 1948 and 2016 is due to - Answers low interest rates strict capital regulations regulations imposed during the financial crisis in addition to the falling boundaries between traditional sectors of the financial industry, another factor which has recently contributed to change in the industry is - Answers the globalization of financial services most primary market transactions in the U.S are arranged through ___ who help reduce the cost and risk of the seller creating a a market for its securities on its own - Answers investment banks the Volcker rule was passed as part of what important act of Congress - Answers The Wall Street Reform and Consumer Protection Act of 2010 Secondary Markets offer buyers of securities the ability to convert them to cash quickly at fair market value, a characteristic known as - Answers liquidity Following the Brexit vote in June 2016, the British Pound dropped in value to its lowest point since 1985 due to - Answers investors selling off pound-denominated assets and investing in funds in safe assets like gold and U.S. govmt bonds the ___ the interest rate "r", the ___ the future value of the annuity - Answers higher; higher lower; lower short-term securities have a more active secondary market and hence are more ____ than long-term securities - Answers liquid ___ are regarded as having no default risk - Answers U.S. gov securities the diff between the nominal rate quoted on a security and the rate quoted on a treasury security with similar characteristics is called the - Answers credit risk premium default risk premium the theory that argues that investors have specific maturity preferences and must be paid a premium to hold securities of a different maturity is the - Answers market segmentation theory the fischer effect predicts that the ___ expected inflation, the ___ will be nominal interest rates - Answers higher; higher lower; lower the loanable funds theory views the level of interest rates as being determined by - Answers supply and demand for funds the equillibrium interest rate for a security is the interest rate where the ___ and ___ intersect - Answers supply and demand curve investors are willing to supply more funds at higher interest rates because - Answers their reward is higher businesses demand funds for which of the following reasons - Answers to invest in long-terms assets like plant and equipment to satisfy short-term working capital needs for inventory investors demand more funds at lower interest rates because - Answers the cost of borrowing funds is lower the financial sector of the U.S. business is the ___ provider of loanable funds and the ___ user of loanable funds - Answers largest; largest a single payment received at the beginning or end of an investment period is called a - Answers lump sum payment when local govmt temporarily invest tax revenues in financial markets until the funds are needed, they become a ___ of loanable funds - Answers supplier a highly liquid asset has which of the following characteristics - Answers predictable price low transaction cost can be sold quickly when economic conditions in a country ___, the supply of loanable funds will tend to ___ in that country - Answers improve; increase decline; decrease when non-price restrictions on borrowing are reduced, borrowers will demand___ funds and interest rates will ___ - Answers more; increase the most frequently reported and analyzed yield curve is the curve for - Answers U.S. Treasury securities long maturity securities have more ___ than short maturity securities - Answers price risk a consequence of the unbiased expectations theory is that if investors believe that short-term interest rates will __ in the future, the yield curve will be - Answers decreases; negatively increase; positively both the unbiased expectations theory and the liquidity premium theory ignore investor preferences regarding the ___ of the securities they hold - Answers maturity TorF: the default risk premium represents the additional return that investors must ear to forego risk-free securities and invest in risky securities - Answers true