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.
ANSWER: B
2. 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.
ANSWER: A
3. The largest deficit unit is (are):
A) households and businesses.
B) foreign financial institutions.
C) the U.S. Treasury.
D) foreign nonfinancial sectors.
ANSWER: C
4. 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.
ANSWER: A
5. Funds are provided to the initial issuer of securities in the:
A) secondary market.
B) primary market.
C) deficit market.
D) surplus market.
ANSWER: B
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6. 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
ANSWER: C
7. Which of the following is a money market security?
A) Treasury note
B) municipal bond
C) mortgage
D) commercial paper
ANSWER: D
8. The most common investors in federal funds are:
A) households.
B) depository institutions.
C) firms.
D) government agencies.
ANSWER: B
9. 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
ANSWER: A
10. Money market securities generally have _______ liquidity. Capital market securities are typically
expected to have a _______ annualized return.
A) less; higher
B) more; lower
C) less; lower
D) more; higher
ANSWER: D
11. If security prices fully reflect all available information, the markets for these securities are:
A) efficient.
B) primary.
C) overvalued.
D) undervalued.
ANSWER: A
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12. If markets were _______, investors could use available information ignored by the market to earn
abnormally high returns.
A) perfect
B) active
C) inefficient
D) in equilibrium
ANSWER: C
13. 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) did all of these.
ANSWER: A
14. 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 these.
ANSWER: C
15. Common stock is an example of a(n):
A) debt security.
B) money market security.
C) equity security.
D) debt security and money market security
ANSWER: C
16. 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
ANSWER: C
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17. 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.
ANSWER: C
18. 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.
ANSWER: D
19. 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
ANSWER: C
20. In aggregate, _______ are the most dominant depository institution.
A) commercial banks
B) savings banks
C) credit unions
D) S&Ls
ANSWER: A
21. Which of the following is a nondepository financial institution?
A) savings banks
B) commercial banks
C) savings and loan associations
D) mutual funds
ANSWER: D
22. 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.
ANSWER: A
_____________________________________________________
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.
ANSWER: B
2. 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.
ANSWER: A
3. The largest deficit unit is (are):
A) households and businesses.
B) foreign financial institutions.
C) the U.S. Treasury.
D) foreign nonfinancial sectors.
ANSWER: C
4. 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.
ANSWER: A
5. Funds are provided to the initial issuer of securities in the:
A) secondary market.
B) primary market.
C) deficit market.
D) surplus market.
ANSWER: B
259
,260 Chapter 1/Role of Financial Markets and Institutions
6. 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
ANSWER: C
7. Which of the following is a money market security?
A) Treasury note
B) municipal bond
C) mortgage
D) commercial paper
ANSWER: D
8. The most common investors in federal funds are:
A) households.
B) depository institutions.
C) firms.
D) government agencies.
ANSWER: B
9. 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
ANSWER: A
10. Money market securities generally have _______ liquidity. Capital market securities are typically
expected to have a _______ annualized return.
A) less; higher
B) more; lower
C) less; lower
D) more; higher
ANSWER: D
11. If security prices fully reflect all available information, the markets for these securities are:
A) efficient.
B) primary.
C) overvalued.
D) undervalued.
ANSWER: A
, Chapter 1/Role of Financial Markets and Institutions 261
12. If markets were _______, investors could use available information ignored by the market to earn
abnormally high returns.
A) perfect
B) active
C) inefficient
D) in equilibrium
ANSWER: C
13. 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) did all of these.
ANSWER: A
14. 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 these.
ANSWER: C
15. Common stock is an example of a(n):
A) debt security.
B) money market security.
C) equity security.
D) debt security and money market security
ANSWER: C
16. 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
ANSWER: C
, 262 Chapter 1/Role of Financial Markets and Institutions
17. 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.
ANSWER: C
18. 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.
ANSWER: D
19. 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
ANSWER: C
20. In aggregate, _______ are the most dominant depository institution.
A) commercial banks
B) savings banks
C) credit unions
D) S&Ls
ANSWER: A
21. Which of the following is a nondepository financial institution?
A) savings banks
B) commercial banks
C) savings and loan associations
D) mutual funds
ANSWER: D
22. 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.
ANSWER: A
