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ECON302-FinalExam-Answers

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A bond with a maturity of less than one year is classified as which of the following? Choose one answer.

a. Money market instrument b. Shot-term market instrument c. Capital market instrument d. One year market instrument

2

A debt instrument can be issued by which of the following? Choose one answer.

a. Corporation b. Individual c. Government d. All of the above

3

A deposits funds with B for safekeeping. B lends the funds to C and charges C interest. Which of the following is true? Choose one answer.

a. C is a financial intermediary. b. B is a financial intermediary. c. A is a financial intermediary. d. A, B, and C do not fulfill any financial role.

4

A financial instrument that promises to pay the holder a certain fixed amount periodically, and upon maturity pays the face value of the instrument is called which of the following? Choose one answer.

a. Bond b. Equity c. Receivable d. Credit

5

A financial instrument which does not promise the holder any fixed payment but entitles him/her to a claim of the net income is called which of the following? Choose one answer.

a. Bond b. Equity c. Receivable d. Credit

6

A government issues securities with maturities of six months. These securities would be known as which of the following? Choose one answer.

a. Equity market instruments b. Capital Market instruments c. Short-term debt instruments d. Medium-term instruments

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A new ten-year bond will be bought and sold in what market? Choose one answer.

a. Primary market b. Ten-year market

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c. Short-term market d. Secondary market

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Complete the following statement. Adverse selection occurs when: Choose one answer.

a. borrowers get loans by falsely presenting how profitable their projects really are. b. borrowers do not get the loans, because they suffer discrimination. c. lenders do not lend to borrowers with bad credit. d. lenders lend only to borrowers with good credit.

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Complete the following statement. Capital market instruments have maturities of: Choose one answer.

a. Less than one year. b. More than one year. c. Any number of years. d. Usually ten years.

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Complete the following statement. Money market instruments have maturities of: Choose one answer.

a. Less than one year. b. More than one year. c. Any number of years. d. Usually ten years.

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Complete the following statement. The federal funds market is the market where: Choose one answer.

a. the federal government sells overnight securities. b. the federal government buys overnight securities. c. banks reserves at the Federal Reserve are bought and sold overnight. d. the Federal Reserve Bank loans overnight funds to banks.

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Complete the following statement. The problem of adverse selection in financial markets, which financial intermediaries have evolved to minimize, refers to the difficulty in: Choose one answer.

a. Separating creditworthy borrowers from non-credit worthy borrowers b. Not knowing borrowers who will take more risk after the loan contract than those who will not c. Providing incentives for borrowers to behave responsibly d. Punishing borrowers when they default on their loan contracts

13

Consider whether the following statement is true or false and how so. Money is useful only when it can be held in the hand. Choose one answer.

a. This is true, because that is only when you can use it to buy something. b. This is true, because money has to be a commodity. c. This is false, because money is an accounting device that does not need be tangible. d. None of the above

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Corporate bonds are issued by which of the following? Choose one answer.

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a. Any corporation looking for funds b. Corporations emerging from bankruptcy that need funds c. Corporations with strong credit ratings that need funds d. Corporations that have the approval of the Board of Directors

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Fill in the blanks. Financial intermediaries are the major means of moving funds from savers to borrowers, because they are able to provide financial services at ______ by taking advantage of ______. Choose one answer.

a. lower cost; economies of scale b. lower cost; adverse selection c. higher cost; economies of scale d. higher cost; adverse selection

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Fill in the blanks. Financial intermediaries are efficient at moving funds from savers to borrowers, because they ______ by ______. Choose one answer.

a. lower risk; spreading it among many b. lower risk: confining it to the very rich c. raise risk; charging higher interest rates d. raise risk; charging lower interest rates

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Fill in the blanks. In a world where there is only direct financing, small savers would be subject to ______, because their portfolios would not be sufficiently ______. Choose one answer.

a. high risks, diversified b. low risks, large to securitize c. no risk, diversified d. no risk, fully diversified

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Fill in the blanks. The presence of asymmetric information in financial markets leads to ______ as people with investment opportunities ______. Choose one answer.

a. less economic growth; will not borrow at low interest rates b. less economic growth; cannot have access to loans c. more economic growth; are force to used their own funds d. more economic growth; can borrow from banks

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Fill in the blanks. Underwriting is undertaken by __________ when they __________. Choose one answer.

a. commercial banks, give out loans b. commercial banks, foreclose on properties c. investment banks, guarantee security prices and buy them d. investment banks, guarantee security prices and sell them

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Fill in the blanks. When a company wants to raise money from financial markets, it may go to _________, which will help it issue a(n) __________. Choose one answer.

a. the stock market, loan b. the capital market, equity c. an investment bank, initial public offering (IPO) d. commercial bank, initial public offering (IPO)

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Financial intermediaries succeed in lending and borrowing by doing which of the following? Choose one answer.

a. Reducing moral hazard b. Increasing moral hazard c. Withholding information from borrowers d. Paying attention to borrowers

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First All Bank is a financial intermediary. This means that First All Bank does which of the following? Choose one answer.

a. Lends its own funds money to borrowers b. Holds deposits for depositors and charges fees for the service c. Takes deposits from depositors and lends them to borrowers d. Seeks borrowers for depositors

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How do financial markets promote economic development? Choose one answer.

a. They enable entrepreneurs without funds to have access to funds. b. They make the wealthy wealthier. c. They enable investment bankers to earn higher salaries. d. They make people with capital gains income pay lower taxes.

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How do financial markets promote economic efficiency? Choose one answer.

a. They match borrowers who have productive business ideas with savers. b. They enable lenders to minimize the time it takes to find a borrower. c. They enable borrowers to minimize the time it takes to find a lender. d. All of the above

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I lend funds to Jake, who has a reputation of being trustworthy. He turns around and lends the funds to Jane, whom I do not know. Which of the following characterizes Jake’s role? Choose one answer.

a. Money lender b. Intermediary c. Broker d. Dealer

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If money is a unit of account, then which of the following is true? Choose one answer.

a. Money stores value. b. Money is used to measure the value of things. c. Money is used to buy goods and services. d. Money has no value.

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In a certain society, people use shells as a means of payment and store of value. The unit of account is gold. Which of the following is true of this economy? Choose one answer.

a. This economy is not a monetary economy, because shells are not money. b. This economy is not a monetary economy, because there are no denominations. c. This economy is a monetary economy, because all the functions of money are being performed.

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d. This economy is a monetary economy, because they use gold.

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In a public school, everybody will accept a bubblegum as payment for goods or services rendered, even if they do not like bubblegum. Bubblegum in this school is considered which of the following? Choose one answer.

a. Income b. Money c. Insurance for when you want to chew gum d. Something to barter with

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In direct finance, as opposed to indirect finance, the transaction is between what entities? Choose one answer.

a. The lender and the borrower b. The lender the borrower and the intermediary c. The borrower and the bank d. The lender and the bank

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James, John, and Kojo buy houses with funds from First All Bank. First All Bank puts all three loan agreements together, divides them into one hundred pieces of financial instruments, and sells them to several investors. The one hundred financial instruments can be accurately described as which of the following? Choose one answer.

a. Financial liabilities b. Financial assets c. Bank securities d. Mortgage-backed securities

31

Joan borrows $100.00 from her sister with the promise to repay at the end of the month. Her sister goes to the bank to withdraw $100.00 from her bank account to give it to her. This is an instance of which of the following? Choose one answer.

a. Direct borrowing b. Direct financing c. Direct lending d. Indirect financing

32

Loans to households to buy houses generate which of the following? Choose one answer.

a. Money market instruments b. Equity market instruments c. Mortgage-backed securities d. Commercial papers

33

Money functions as which of the following? Choose one answer.

a. Medium of exchange, store of value, and unit of account b. Medium of exchange, store of value, and income c. Store of value and income d. Store of value and a payment mechanism

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Moral hazard occurs when a borrower does which of the following?

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ECON302-FinalExam-Answers

Choose one answer.

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a. Undertakes a less risky business venture after obtaining a loan b. Undertakes a more risky business venture after obtaining a loan c. Absconds with the loan proceeds and does not repay d. Suffers a setback through no fault of his/hers and is unable to repay

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Pam asks her mother for a loan. Her mother does not have it, so she borrows from her sister, and gives it to Pam. This transaction can be described as which of the following? Choose one answer.

a. Refinance b. Direct finance c. Indirect finance d. Financial market transaction

36

Repurchase agreements (repos) can be classified as which of the following type of economic instrument? Choose one answer.

a. Short-term debt instruments b. Capital market instruments c. Equity market instruments d. Long-term debt instruments

37

Stocks are issued by which of the following? Choose one answer.

a. Individuals b. Partnerships c. Corporations d. Governments

38

The payment you receive for working is called which of the following? Choose one answer.

a. Money b. Income c. Interest d. Rents

39

Treasury bills are issued by which of the following? Choose one answer.

a. Domestic corporations b. Individuals c. Governments d. Foreign corporations

40

What are commercial papers? Choose one answer.

a. Long-term instruments issued by large banks and well-known corporations b. Short-term instruments issued by large banks and well-known corporations c. Medium-term instruments issued by corporations who cannot borrow from banks d. Long-term instruments issued by corporation who do not want to borrow from banks

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What are convertible corporate bonds? Choose one answer.

a. Corporate bonds that allow the holder to convert them into shares b. Corporate bonds that can be converted into cash at any time c. Corporate bonds that have no maturity dates d. Corporate bonds that have maturity dates determined by the bondholder

42

What are equities? Choose one answer.

a. Capital market instruments b. Money market instruments c. Short-term market instruments d. Over-the-counter market instruments

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What are Eurodollars? Choose one answer.

a. U.S. dollars which an individual takes on vacation to Europe b. Bonds issued in Europe but denominated in U.S. dollars c. U.S. dollar deposits owned by Europeans d. U.S. dollars deposited in banks outside the United States

44

What are treasury bills? Choose one answer.

a. Capital market instruments b. Money market instruments c. Over-the-market instruments d. Equity market instrument

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What is a Eurobond? Choose one answer.

a. A bond issued and sold in the UK but denominated in U.S. dollars b. A bond issued by the European Union c. Any bond issued by any country in Europe d. A bond issued in the U.S. in dollars but bought by Europeans

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What is a secondary market? Choose one answer.

a. A market where new securities are bought and sold b. A market where U.S. government treasuries are bought and sold c. A market where newly issued and outstanding securities are bought and sold d. A market where outstanding securities are bought and sold

47

What is an asset-backed security? Choose one answer.

a. A loan to buy an asset b. A loan with an asset as collateral c. A loan with no asset as collateral d. A loan with a co-signer

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What is the Federal Funds rate? Choose one answer.

a. The Federal Funds rate is the interest rate on loans the Federal Reserve Bank makes to banks. b. The Federal Funds rate is the interest rate on loans made in the federal funds market. c. The Federal Funds rate is the interest rate on loans the Federal Reserve Bank makes to the government. d. The Federal Funds rate is the interest rate on loans banks make to the Federal Reserve Bank.

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What would be a consequence of the failure of financial markets? Choose one answer.

a. There will be no savings. b. There will be no income earned. c. There will be no money in the economy. d. Economic activity will decline.

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When a business borrows directly from a saver, the business incurs which of the following? Choose one answer.

a. Liability b. A credit c. Equity d. An asset

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When a business borrows directly from financial markets, it issues which of the following? Choose one answer.

a. Securities b. Equities c. Dividends d. Credits

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When a person lends to a business in the financial market, the person acquires which of the following? Choose one answer.

a. An asset b. A liability c. A debt d. A credit

53

When an individual takes out a loan from a bank to buy a car, the individual issues which of the following? Choose one answer.

a. Security b. Equity c. Commercial paper d. Certificate of deposit

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Which of the following is a main reason for the dominance of financial intermediaries in the economy? Choose one answer.

a. They are able to reduce transaction costs through economies of scale. b. They are able to lend large sums of money to those who need it. c. They employ of a lot of people to market their loans. d. They have good management skills.

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Which of the following is the best functional definition of money? Choose one answer.

a. Anything that the government says is money b. Anything that provides utility for people c. Anything that is generally acceptable as a medium of exchange d. Anything that is desirable, because it can be consumed

56

Which scenario best describes direct finance and not indirect finance? Choose one answer.

a. ABC Corporation uses its retained earnings to finance a new project. b. ABC Corporation sells its old equipment to finance a new project. c. ABC Corporation raises funds by selling commercial paper to DEF Finance Company. d. ABC Corporation raises funds by borrowing from its bank.

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Who are the participants in financial markets? Choose one answer.

a. Households b. Households and businesses c. Households, businesses, and governments d. Households, businesses, governments, and foreigners

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Why are bonds issued by municipalities to finance large projects attractive to investors? Choose one answer.

a. Because the interest rates on them are higher than the interest rate on corporate bonds b. Because the interest rates are exempt from federal income tax c. Because they are short-term instruments and therefore very liquid d. Because the capital gains on them are higher than on many securities

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Why are financial markets important in the economy? Choose one answer.

a. They can make a lot of people wealthy. b. They can make businesses and people wealthy. c. They make it possible to transfer savings to borrowers. d. They make it possible for governments to borrow.

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Why is an efficient secondary market essential for an efficient financial market? Choose one answer.

a. It makes it easier for firms to sell new bonds in the primary market. b. It makes it easier for firms to sell new bonds in the secondary market. c. It makes it easier for firms to sell new bonds in both the secondary and primary markets. d. It makes it easier for firms to buy and sell new bonds in the secondary and a primary marke...