Financial Markets and Institutions Madura 11th Edition Test Bank

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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.

ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

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.

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

3. The largest deficit unit is (are)
a. households and businesses.
b. foreign financial institutions.
c. the U.S. Treasury.
d. foreign nonfinancial sectors.

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

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.

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.02 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

5. Funds are provided to the initial issuer of securities in the
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.

ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

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

ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

7. Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. mortgage
d. commercial paper

ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

8. The creditors in the federal funds market are
a. households.
b. depository institutions.
c. firms.
d. government agencies.

ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

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

ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

10. Money market securities generally have ____. Capital market securities are typically expected to have a ____.
a. less liquidity; higher annualized return
b. more liquidity; lower annualized return
c. less liquidity; lower annualized return
d. more liquidity; higher annualized return

ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

11. If security prices fully reflect all available information, the markets for these securities are
a. efficient.
b. primary.
c. overvalued.
d. undervalued.

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

12. If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
a. perfect
b. active
c. inefficient
d. in equilibrium

ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

13. If financial markets are efficient, this implies that all securities should earn the same return.
a. True
b. False

ANS: F PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

14. 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. all of the above

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

15. 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 the above

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

16. Common stock is an example of a(n)
a. debt security.
b. money market security.
c. equity security.
d. A and B

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

17. 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

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

18. 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.

ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

19. 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.

ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

20. 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

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

21. In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.
a. commercial banks
b. savings banks
c. credit unions
d. S&Ls

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

22. Which of the following is a nondepository financial institution?
a. savings banks
b. commercial banks
c. savings and loan associations
d. mutual funds

ANS: D PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

23. 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

ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

24. When a securities firm acts as a broker, it
a. guarantees the issuer a specific price for newly issued securities.
b. makes a market in specific securities by adjusting its own inventory.
c. executes transactions between two parties.
d. purchases securities for its own account.

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

25. When a securities firm acts as a(n) ____, it maintains a position in securities.
a. adviser
b. dealer
c. broker
d. none of the above

ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

26. ____ obtain funds by issuing securities, then lend the funds to individuals and small businesses.
a. Finance companies
b. Securities firms
c. Mutual funds
d. Insurance companies

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

27. Households with ____ are served by ____.
a. deficient funds; depository institutions and finance companies
b. deficient funds; finance companies only
c. savings; finance companies only
d. savings; pension funds and finance companies

ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

28. ____ concentrate on mortgage loans.
a. Finance companies
b. Commercial banks
c. Savings institutions
d. Credit unions

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

29. ____ securities have a maturity of one year or less; ____ securities are generally more liquid.
a. Money market; capital market
b. Money market; money market
c. Capital market; money market
d. Capital market; capital market

ANS: B PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

30. Which of the following is not a major investor in stocks?
a. commercial banks
b. insurance companies
c. mutual funds
d. pension funds

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

31. Which of the following financial intermediaries commonly invests in stocks and bonds?
a. pension funds
b. insurance companies
c. mutual funds
d. all of the above

ANS: D PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

32. Securities are certificates that represent a claim on the issuer.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

33. Debt securities are certificates that represent debt (borrowed funds) by the issuer.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

34. A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.

ANS: A PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

35. When security prices fully reflect all available information, the markets for these securities are said to be efficient.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

36. If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.
a. True
b. False

ANS: F PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

37. A broker executes securities transactions between two parties and charges a fee reflected in the bid-ask spread.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

38. The euro increased business between European countries and created a more competitive environment in Europe.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

39. In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

40. Securities are certificates that represent a claim on the provider of funds.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

41. Debt securities include commercial paper, Treasury bonds, and corporate bonds.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

42. Common types of capital market securities include Treasury bills and commercial paper.
a. True
b. False

ANS: F PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

43. Common types of money market securities include negotiable certificates of deposit and Treasury bills.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

44. Money market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
a. True
b. False

ANS: F PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

45. The total asset value of savings institutions is larger than that of commercial banks.
a. True
b. False

ANS: F PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

46. Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as
a. secondary markets.
b. capital markets.
c. primary markets.
d. money markets.
e. none of the above

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

47. Which of the following transactions would not be considered a secondary market transaction?
a. An individual investor purchases some existing shares of stock in IBM through his broker.
b. An institutional investor sells some Disney stock through its broker.
c. A firm that was privately held engages in an offering of stock to the public.
d. All of the above are secondary market transactions.

ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

48. If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

49. ____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.
a. Finance companies
b. Mutual funds
c. Life insurance companies
d. Securities firms

ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

50. A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies

ANS: C PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

51. Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher

ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

52. Common types of capital market securities include Treasury bills and commercial paper.
a. True
b. False

ANS: F PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

53. Common types of money market securities include negotiable certificates of deposit and Treasury bills.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

54. Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

55. Commercial banks in aggregate have more assets than credit unions.
a. True
b. False

ANS: T PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

56. Those participants who receive more money than they spend are referred to as
a. deficit units.
b. surplus units.
c. borrowing units.
d. government units.

ANS: B PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

57. Equity securities
a. have a maturity.
b. pay interest on a periodic basis.
c. represent ownership in the issuer.
d. repay the principal amount at maturity.

ANS: C PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

58. The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.
a. corporate finance
b. investment management
c. financial markets and institutions
d. none of the above

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.01
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge

59. There is a ____ relationship between the risk of a security and the expected return from investing in the security.
a. positive
b. negative
c. indeterminable
d. none of the above

ANS: A PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

60. If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security’s price will ____, resulting in a ____ return for those investors.
a. rise; lower
b. fall; higher
c. fall; lower
d. rise; higher

ANS: D PTS: 1 DIF: Moderate OBJ: FMAI.MADU.15.01.02
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Comprehension

61. The credit crisis in the 2008-2009 period was caused by weak economies in Asia.
a. True
b. False

ANS: F PTS: 1 DIF: Easy OBJ: FMAI.MADU.15.01.03
NAT: BUSPROG.FMAI.MADU.15.03 STA: DISC.FMAI.MADU.15.02
KEY: Bloom’s: Knowledge