Institutions Mid-term Practice Questions

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What is the primary function of financial institutions?

To provide insurance to borrowers

To facilitate the flow of funds between investors and borrowers (correct)

To sell shares to surplus units only

To provide loans to deficit units only

What type of financial institution includes commercial banks and thrift institutions?

Depository type (correct)

Mutual funds

Finance companies

Non-depository type

What is the role of interest rate in borrowing?

A reward for postponing current consumption

The price of borrowing money for the use of its purchasing power (correct)

A guarantee for repayment of loan

A penalty for consuming income before it is earned

What is the relationship between interest rate and the demand for loanable funds?

Inversely related Signup and view all the answers

What is the nominal interest rate if the real rate of interest is 7% and the expected inflation rate is 9%?

16% Signup and view all the answers

What happens to the nominal interest rate when the actual inflation rate is higher than the expected inflation rate?

It increases Signup and view all the answers

What is the realized rate of return if the real rate of interest is 5% and the actual inflation rate is 8%?

3% Signup and view all the answers

Which of the following economic units spend more money than they earn?

Deficit units Signup and view all the answers

What is the purpose of financial institutions in the economy?

To facilitate the flow of funds between investors and borrowers Signup and view all the answers

What is NOT true about financial claims?

They are issued by deficit units and sold to investors Signup and view all the answers

What is a written promise to pay a specific sum of money?

Debt security Signup and view all the answers

What is the type of financing where funds flow directly?

Direct financing Signup and view all the answers

What is NOT true about the secondary market?

It is a place where new financial securities are sold Signup and view all the answers

What are the economic units that receive more money than their expenditures?

Surplus units Signup and view all the answers

What is the term for the money borrowed plus a fee for the use of the money?

Debt security Signup and view all the answers

What happens in indirect financing?

Funds flow indirectly through financial intermediaries Signup and view all the answers

What is the value of 𝒓𝒓 in the equation 𝒓𝒓 = 𝒊 − 𝑨 𝑰𝑵𝑭?

12% Signup and view all the answers

What type of market is used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds?

Money markets Signup and view all the answers

Which of the following is NOT a true characteristic of money market securities?

Most of them are issued in very large denominations Signup and view all the answers

What is the term for the purchase of securities by one party from another with an agreement to sell them back?

Reverse repo Signup and view all the answers

If you purchased a $120,000 T-bill maturing in 4 months for $112,000, what is the T-bill yield?

15.6% Signup and view all the answers

What is the return on an investment if you purchase an NCD today for $485,000, and the certificate will mature 1 year from now at a price of $500,000 with an interest of $30,000?

9.3% Signup and view all the answers

What is the formula to calculate the yield on a T-bill?

𝒚𝒕 = (𝑷𝒂𝒓 − 𝑷𝑷) / 𝑷𝑷 × (1/n) × 100% Signup and view all the answers

What is the formula to calculate the discount rate on a T-bill?

𝒚𝒅 = (𝑷𝒂𝒓 − 𝑷𝑷) / 𝑷𝒂𝒓 × (1/n) × 100% Signup and view all the answers