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Economics of Money, Banking, and Financial
Markets, 11e, Global Edition
(Mishkin)
Chapter 2 An Overview of the Financial
System
2.1
Function of Financial
Markets
1) Every financial
market has the following characteristic.
A) It determines the level of interest
rates.
B) It allows common stock to be
traded.
C) It allows loans to be made.
D) It channels funds from lenders-
savers to borrowers-spenders.
Answer:
D
AACSB:
Reflective Thinking
2) Financial markets have
the basic function of
A) getting people
with funds to lend together with people who want
to borrow funds.
B) assuring that the
swings in the business cycle are less pronounced.
C) assuring that governments need never
resort to printing money.
D) providing
a risk-free repository of spending power.
Answer:
A
AACSB:
Reflective Thinking
3) Financial markets improve economic
welfare because
A) they channel funds
from investors to savers.
B) they allow
consumers to time their purchase better.
C) they weed out inefficient firms.
D) they eliminate the need for indirect
finance.
Answer:
B
AACSB:
Reflective Thinking
4) Well-functioning financial markets
A) cause inflation.
B)
eliminate the need for indirect finance.
C) cause financial crises.
D) allow the economy to operate more
efficiently.
Answer:
D
AACSB:
Reflective Thinking
5) A breakdown of financial markets can
result in
A) financial stability.
B) rapid economic growth.
C)
political instability.
D) stable
prices.
Answer:
C
AACSB:
Reflective Thinking
1
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Ltd.
6) The principal lender-savers are
A) governments.
B)
businesses.
C) households.
D) foreigners.
Answer:
C
AACSB:
Application of Knowledge
7) Which of the following
can be described as direct finance?
A)
You take out a mortgage from your local bank.
B) You borrow $$2500 from a friend.
C) You buy shares of common stock in
the secondary market.
D) You buy shares
in a mutual fund.
Answer:
B
AACSB:
Analytical Thinking
8) Assume that you borrow $$2000 at 10%
annual interest to finance a new business project.
For
this loan to be profitable, the
minimum amount this project must generate in
annual earnings is
A) $$400.
B) $$201.
C) $$200.
D) $$199.
Answer:
B
AACSB:
Analytical Thinking
9) 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
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
Answer:
D
AACSB:
Analytical Thinking
10) Which of the following can be
described as involving direct finance?
A) A corporation issues new shares of
stock.
B) People buy shares in a mutual
fund.
C) A pension fund manager buys a
short-term corporate security in the secondary
market.
D) An insurance company buys
shares of common stock in the over-the-counter
markets.
Answer:
A
AACSB:
Analytical Thinking
2
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Ltd.
11) Which of the following can be
described as involving direct finance?
A) A corporation takes out loans from a
bank.
B) People buy shares in a mutual
fund.
C) A corporation buys a short-
term corporate security in a secondary market.
D) People buy shares of common stock in
the primary markets.
Answer:
D
AACSB:
Analytical Thinking
12) Which of the following
can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common
stock issued by another corporation in the primary
market.
C) You buy a U.S.
Treasury bill from the U.S. Treasury at .
D) You make a deposit at a bank.
Answer:
D
AACSB:
Analytical Thinking
13) Which of the following can be
described as involving indirect finance?
A) You make a loan to your neighbor.
B) You buy shares in a mutual fund.
C) You buy a U.S. Treasury bill from
the U.S. Treasury at Treasury .
D) You
purchase shares in an initial public offering by a
corporation in the primary market.
Answer:
B
AACSB:
Analytical Thinking
14) Securities are ________ for the
person who buys them, but are ________ for the
individual
or firm that issues them.
A) assets; liabilities
B)
liabilities; assets
C) negotiable;
nonnegotiable
D) nonnegotiable;
negotiable
Answer:
A
AACSB:
Reflective Thinking
15) With ________ finance, borrowers
obtain funds from lenders by selling them
securities in
the financial markets.
A) active
B) determined
C) indirect
D) direct
Answer:
D
AACSB:
Application of Knowledge
3
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16) With direct finance, funds are
channeled through the financial market from the
________
directly to the ________.
A) savers, spenders
B)
spenders, investors
C) borrowers,
savers
D) investors, savers
Answer:
A
AACSB:
Reflective Thinking
17) Distinguish between direct finance
and indirect finance. Which of these is the most
important
source of funds for
corporations in the United States?
Answer:
With
direct finance, funds flow directly from the
lender/saver to the borrower. With
indirect finance, funds flow from the
lender/saver to a financial intermediary who then
channels
the funds to the
borrower/investor. Financial intermediaries
(indirect finance) are the major
source
of funds for corporations in the U.S.
AACSB:
Reflective Thinking
2.2
Structure of Financial Markets
1) Which of the following
statements about the characteristics of debt and
equity is FALSE?
A) They can both be
long-term financial instruments.
B)
They can both be short-term financial instruments.
C) They both involve a claim on the
issuer's income.
D) They both enable a
corporation to raise funds.
Answer:
B
AACSB:
Reflective Thinking
2) Which of the following
statements about the characteristics of debt and
equities is TRUE?
A) They can both be
long-term financial instruments.
B)
Bond holders are residual claimants.
C)
The income from bonds is typically more variable
than that from equities.
D) Bonds pay
dividends.
Answer:
A
AACSB:
Reflective Thinking
3) Which of the following statements
about financial markets and securities is TRUE?
A) A bond is a long-term security that
promises to make periodic payments called
dividends to
the firm's residual
claimants.
B) A debt instrument is
intermediate term if its maturity is less than one
year.
C) A debt instrument is
intermediate term if its maturity is ten years or
longer.
D) The maturity of a debt
instrument is the number of years (term) to that
instrument's expiration
date.
Answer:
D
AACSB:
Reflective Thinking
4
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4) Which of the following is an
example of an intermediate-term debt?
A) a fifteen-year mortgage
B) a sixty-month car loan
C)
a six-month loan from a finance company
D) a thirty-year U.S. Treasury bond
Answer:
B
AACSB:
Analytical Thinking
5) If the maturity of a debt instrument
is less than one year, the debt is called
A) short-term.
B)
intermediate-term.
C) long-term.
D) prima-term.
Answer:
A
AACSB:
Application of Knowledge
6) Long-term debt has a
maturity that is
A) between one and ten
years.
B) less than a year.
C) between five and ten years.
D) ten years or longer.
Answer:
D
AACSB:
Application of Knowledge
7) When I purchase ________, I own a
portion of a firm and have the right to vote on
issues
important to the firm and to
elect its directors.
A) bonds
B) bills
C) notes
D) stock
Answer:
D
AACSB:
Application of Knowledge
8) Equity holders are a corporation's
________. That means the corporation must pay all
of its
debt holders before it pays its
equity holders.
A) debtors
B) brokers
C) residual
claimants
D) underwriters
Answer:
C
AACSB:
Reflective Thinking
5
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9) Which of the following benefits
directly from any increase in the corporation's
profitability?
A) a bond holder
B) a commercial paper holder
C) a shareholder
D) a T-bill
holder
Answer:
C
AACSB:
Reflective Thinking
10) A financial market in which
previously issued securities can be resold is
called a ________
market.
A)
primary
B) secondary
C)
tertiary
D) used securities
Answer:
B
AACSB:
Application of Knowledge
11) An important financial institution
that assists in the initial sale of securities in
the primary
market is the
A)
investment bank.
B) commercial bank.
C) stock exchange.
D)
brokerage house.
Answer:
A
AACSB:
Application of Knowledge
12) When an investment bank ________
securities, it guarantees a price for a
corporation's
securities and then sells
them to the public.
A) underwrites
B) undertakes
C) overwrites
D) overtakes
Answer:
A
AACSB:
Application of Knowledge
13) Which of the following
is NOT a secondary market?
A) foreign
exchange market
B) futures market
C) options market
D) IPO
market
Answer:
D
AACSB:
Reflective Thinking
6
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14) ________ work in the secondary
markets matching buyers with sellers of
securities.
A) Dealers
B)
Underwriters
C) Brokers
D)
Claimants
Answer:
C
AACSB:
Application of Knowledge
15) A corporation acquires new funds
only when its securities are sold in the
A) primary market by an investment
bank.
B) primary market by a stock
exchange broker.
C) secondary market by
a securities dealer.
D) secondary
market by a commercial bank.
Answer:
A
AACSB:
Reflective Thinking
16) A corporation acquires
new funds only when its securities are sold in the
A) secondary market by an investment
bank.
B) primary market by an
investment bank.
C) secondary market by
a stock exchange broker.
D) secondary
market by a commercial bank.
Answer:
B
AACSB:
Reflective Thinking
17) An important function
of secondary markets is to
A) make it
easier to sell financial instruments to raise
funds.
B) raise funds for corporations
through the sale of securities.
C) make
it easier for governments to raise taxes.
D) create a market for newly
constructed houses.
Answer:
A
AACSB:
Reflective Thinking
18) Secondary markets make financial
instruments more
A) solid.
B) vapid.
C) liquid.
D) risky.
Answer:
C
AACSB:
Reflective Thinking
19) A liquid asset is
A) an
asset that can easily and quickly be sold to raise
cash.
B) a share of an ocean resort.
C) difficult to resell.
D)
always sold in an over-the-counter market.
Answer:
A
AACSB:
Reflective Thinking
7
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20) The higher a
security's price in the secondary market the
________ funds a firm can raise by
selling securities in the ________
market.
A) more; primary
B) more; secondary
C) less;
primary
D) less; secondary
Answer:
A
AACSB:
Reflective Thinking
21) When secondary market buyers and
sellers of securities meet in one central location
to
conduct trades the market is called
a(n)
A) exchange.
B) over-the-counter market.
C) common market.
D) barter
market.
Answer:
A
AACSB:
Application of Knowledge
22) In a(n) ________ market, dealers in
different locations buy and sell securities to
anyone who
comes to them and is willing
to accept their prices.
A) exchange
B) over-the-counter
C)
common
D) barter
Answer:
B
AACSB:
Application of Knowledge
23) Forty or so dealers
establish a
them.
A)
secondary stocks
B) surplus stocks
C) U.S. government bonds
D)
common stocks
Answer:
C
AACSB:
Application of Knowledge
8
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Ltd.
24) Which of the following
statements about financial markets and securities
is TRUE?
A) Many common stocks are
traded over-the-counter, although the largest
corporations usually
have their shares
traded at organized stock exchanges such as the
New York Stock Exchange.
B) As a
corporation gets a share of the broker's
commission, a corporation acquires new funds
whenever its securities are sold.
C) Capital market securities are
usually more widely traded than shorter-term
securities and so
tend to be more
liquid.
D) Prices of capital market
securities are usually more stable than prices of
money market
securities, and so are
often used to hold temporary surplus funds of
corporations.
Answer:
A
AACSB:
Reflective Thinking
25) A financial market in which only
short-term debt instruments are traded is called
the
________ market.
A) bond
B) money
C) capital
D) stock
Answer:
B
AACSB:
Analytical Thinking
26) Equity instruments are traded in
the ________ market.
A) money
B) bond
C) capital
D) commodities
Answer:
C
AACSB:
Analytical Thinking
27) Because these
securities are more liquid and generally have
smaller price fluctuations,
corporations and banks use the ________
securities to earn interest on temporary surplus
funds.
A) money market
B) capital market
C) bond
market
D) stock market
Answer:
A
AACSB:
Reflective Thinking
28) Corporations receive funds when
their stock is sold in the primary market. Why do
corporations pay attention to what is
happening to their stock in the secondary market?
Answer:
The
existence of the secondary market makes their
stock more liquid and the price in
the
secondary market sets the price that the
corporation would receive if they choose to sell
more
stock in the primary market.
AACSB:
Reflective Thinking
9
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Ltd.
29) Describe the two methods of
organizing a secondary market.
Answer:
A secondary market can be
organized as an exchange where buyers and sellers
meet
in one central location to conduct
trades. An example of an exchange is the New York
Stock
Exchange. A secondary market can
also be organized as an over-the-counter market.
In this type
of market, dealers in
different locations buy and sell securities to
anyone who comes to them and
is willing
to accept their prices. An example of an over-the-
counter market is the federal funds
market.
AACSB:
Reflective Thinking
2.3
Financial Market Instruments
1) Prices of money market
instruments undergo the least price fluctuations
because of
A) the short
terms to maturity for the securities.
B) the heavy regulations in the
industry.
C) the price ceiling imposed
by government regulators.
D) the lack
of competition in the market.
Answer:
A
AACSB:
Reflective Thinking
2) U.S. 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.
A) premium
B) collateral
C) default
D) discount
Answer:
D
AACSB:
Analytical Thinking
3) U.S. Treasury bills are considered
the safest of all money market instruments because
there is
a low probability of
A) defeat.
B) default.
C) desertion.
D)
demarcation.
Answer:
B
AACSB:
Analytical Thinking
4) A debt instrument sold by a bank to
its depositors that pays annual interest of a
given amount
and at maturity pays back
the original purchase price is called
A) commercial paper.
B) a
certificate of deposit.
C) a municipal
bond.
D) federal funds.
Answer:
B
AACSB:
Analytical Thinking
10
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Ltd.
5) A short-term debt instrument
issued by well-known corporations is called
A) commercial paper.
B)
corporate bonds.
C) municipal bonds.
D) commercial mortgages.
Answer:
A
AACSB:
Analytical Thinking
6) ________ are short-term loans in
which Treasury bills serve as collateral.
A) Repurchase agreements
B)
Negotiable certificates of deposit
C)
Federal funds
D) U.S. government agency
securities
Answer:
A
AACSB:
Analytical Thinking
7) Collateral is ________ the lender
receives if the borrower does not pay back the
loan.
A) a liability
B) an
asset
C) a present
D) an
offering
Answer:
B
AACSB:
Analytical Thinking
8) Federal funds are
A)
funds raised by the federal government in the bond
market.
B) loans made by the Federal
Reserve System to banks.
C) loans made
by banks to the Federal Reserve System.
D) loans made by banks to each other.
Answer:
D
AACSB:
Analytical Thinking
9) An important source of short-term
funds for commercial banks are ________ which can
be
resold on the secondary market.
A) negotiable CDs
B)
commercial paper
C) mortgage-backed
securities
D) municipal bonds
Answer:
A
AACSB:
Application of Knowledge
11
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Ltd.
10) Which of the following are
short-term financial instruments?
A) a
repurchase agreement
B) a share of Walt
Disney Corporation stock
C) a Treasury
note with a maturity of four years
D) a
residential mortgage
Answer:
A
AACSB:
Analytical Thinking
11) Which of the following
instruments are traded in a money market?
A) state and local government bonds
B) U.S. Treasury bills
C)
corporate bonds
D) U.S. government
agency securities
Answer:
B
AACSB:
Analytical Thinking
12) Which of the following instruments
are traded in a money market?
A) bank
commercial loans
B) commercial paper
C) state and local government bonds
D) residential mortgages
Answer:
B
AACSB:
Analytical Thinking
13) Which of the following instruments
is NOT traded in a money market?
A)
residential mortgages
B) U.S. Treasury
Bills
C) negotiable bank certificates
of deposit
D) commercial paper
Answer:
A
AACSB:
Analytical Thinking
14) Bonds issued by state and local
governments are called ________ bonds.
A) corporate
B) Treasury
C) municipal
D) commercial
Answer:
C
AACSB:
Application of Knowledge
12
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Ltd.
15) Equity and debt instruments
with maturities greater than one year are called
________
market instruments.
A) capital
B) money
C) federal
D) benchmark
Answer:
A
AACSB:
Application of Knowledge
16) Which of the following is a long-
term financial instrument?
A) a
negotiable certificate of deposit
B) a
repurchase agreement
C) a U.S. Treasury
bond
D) a U.S. Treasury bill
Answer:
C
AACSB:
Analytical Thinking
17) Which of the following instruments
are traded in a capital market?
A) U.S.
Government agency securities
B)
negotiable bank CDs
C) repurchase
agreements
D) U.S. Treasury bills
Answer:
A
AACSB:
Analytical Thinking
18) Which of the following instruments
are traded in a capital market?
A)
corporate bonds
B) U.S. Treasury bills
C) negotiable bank CDs
D)
repurchase agreements
Answer:
A
AACSB:
Analytical Thinking
19) Which of the following
are NOT traded in a capital market?
A)
U.S. government agency securities
B)
state and local government bonds
C)
repurchase agreements
D) corporate
bonds
Answer:
C
AACSB:
Analytical Thinking
13
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Ltd.
20) The most liquid securities
traded in the capital market are
A)
corporate bonds.
B) municipal bonds.
C) U.S. Treasury bonds.
D)
mortgage-backed securities.
Answer:
C
AACSB:
Reflective Thinking
21) Mortgage-backed
securities are similar to ________ but the
interest and principal payments
are
backed by the individual mortgages within the
security.
A) bonds
B) stock
C) repurchase agreements
D)
negotiable CDs
Answer:
A
AACSB:
Application of Knowledge
2.4
Internationalization of Financial
Markets
1) Equity of U.S.
companies can be purchased by
A) U.S.
citizens only.
B) foreign citizens
only.
C) U.S. citizens and foreign
citizens.
D) U.S. mutual funds only.
Answer:
C
AACSB:
Diverse
and multicultural work environments
2) One reason for the extraordinary
growth of foreign financial markets is
A) decreased trade.
B)
increases in the pool of savings in foreign
countries.
C) the recent introduction
of the foreign bond.
D) slower
technological innovation in foreign markets.
Answer:
B
AACSB:
Diverse
and multicultural work environments
3) Bonds that are sold in a foreign
country and are denominated in the country's
currency in
which they are sold are
known as
A) foreign bonds.
B) Eurobonds.
C) equity
bonds.
D) country bonds.
Answer:
A
AACSB:
Application of Knowledge
14
Copyright ? 2016 Pearson Education,
Ltd.
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