Financial Markets - Chapter 1 (PDF)

**CHAP 1** **1. \'Direct financing\" means that** **A.** No financial institutions are involved B. Borrowers borrow directly from lenders **C.** No financial markets are involved **D.** Investment banks lend directly to other financial institutions **2. Capital market is** **A.** An organized...

**CHAP 1** **1. \'Direct financing\" means that** **A.** No financial institutions are involved B. Borrowers borrow directly from lenders **C.** No financial markets are involved **D.** Investment banks lend directly to other financial institutions **2. Capital market is** **A.** An organized Exchange B. Place where medium and long-term financial instruments are traded **C.** Place where all financial instruments are traded **D.** An OTC market **3. To understand why financial intermediaries exist, we need to understand the role of** **A.** adverse selection and moral hazard **B.** supply and demand C. transactions costs and information costs **D.** debt and equity **E.** risk and return **4. Asymmetric information problems occur in two forms** **A.** information costs and bargaining costs B. adverse selection and moral hazard **C.** systematic risk and unsystematic risk **D.** monetary costs and opportunity costs **E.** market failure and transaction failure **5. The two fundamental reasons for heavily regulating the financial system are** **A.** protecting consumers and stabilizing the financial system B. stabilizing inflation and stabilizing interest rates **C.** promoting exports and protecting consumers **D.** strengthening the currency and stabilizing price levels **E.** promoting liquidity and eliminating risk **6. The Central Bank extends monetary base by** **A.** Selling on the open market B. Lending at the \"Discount Window\" **C.** Raising reserve requirements **D.** Paying interest on reserves **7. Which monetary policy action will immediately, directly, and predictably change the monetary base?** **A.** Discount Rate B. Open market operation **C.** Reserve requirements **D.** Taxes **8. Which following transaction takes place on the primary market?** A. The Ministry of Finance issued treasury bills **B.** Investors buy bonds via mutual funds **C.** Commercial banks sell bonds of other enterprises **D.** Both A, B and C are correct **9. Sources of demand for loanable funds do not include** **A.** business investment **B.** government budget deficit C. business savings **D.** consumer credit purchase **10. Sources of supply for loanable funds do not include** **A.** consumer saving B. business investment **C.** local government budget surpluses **D.** state government budget surpluses **11. If loan contracts are not adjusted to address it, inflation can transfer wealth from A.** borrowers to lenders **B.** businesses to households **C.** governments to businesses **D.** the financial sector to the real sector **E.** lenders to borrowers **12. Calculate the present value of a discount bond with five years to maturity if the yield to maturity is 7% and the face value is S1000. (** **A)** \$1403 **B)** \$1070 **C)** \$713 **D)** \$935 **13. The nominal rate can only equal the real rate if** **A.** general price levels are not expected to change **B.** the real rate is not expected to change **C.** the loanable funds market is in equilibrium **D.** the loan maturity does not exceed 1 year **E.** realized return is correctly predicted **14. Descending yield curves usually occur at or near** **A.** the end of the year **B.** the beginning of a recession **C.** the end of a recession **D.** equilibrium **15. Suppose the current 1-year rate is 2 percent. The market expects the 1-year rate to be 3 percent 1 year from now, and 5 percent 2 years from now. According to the term structure formula, the current 3-year rate should be** **A.** 10.000% **B.** 10.313% **C.** 3.326% **D.** 3.333% **16. The actual yield curve is usually more upward sloping then the one predicted by expectation theory because** **A.** interest rate forecasts are usually wrong **B.** investors are indifferent between short maturities and long maturities **C.** shorter-term securities are more volatile **D.** investors usually demand a liquidity premium on longer-term securities **17. The two theories of term structure in most direct conflict with each other are** **A.** market segmentation and expectation **B.** liquidity premium and market segmentation **C.** expectation and liquidity premium **D.** default premium and tax consideration **18. Securities with maturities of one year or less are classified as** **A.** capital market instruments. **B.** money market instruments. **C.** preferred stock. **D.** none of the above **19. You decides to lend Kate \$3000 at an 8% interest rate for 4 years. You want Kate to pay you back in 4 equal annual payments. What will be your annual payments?** **A.** \$905,76 **B.** \$750 **C.** \$1020,37 **D.** \$930 **20. Which of the following \$6.000 face-value securities has the highest yield to maturity?** **A.** A 10 percent coupon bond selling for \$6.000 **B.** A 6 percent coupon bond selling for \$6.500 **C.** A 6 percent coupon bond selling for \$6.000 **D.** A 10 percent coupon bond selling for \$5.500 **CHAP 2** **CHAP 3** **1. A private investor purchases a Treasury bill with a \$10,000 par value for \$9,645. One hundred days later, he sells the T-bill for \$9,719. What is his annualized rate of return?** **A.** 13.43 percent **B.** 2.78 percent **C.** 10.55 percent **D.** 2.80 percent **E.** none of the above **2. At any given time, the yield on commercial paper is \_\_\_\_\_\_\_\_\_\_ the yield on a T-bill with the same maturity** **A.** slightly less than **B.** slightly higher than **C.** equal to **D.** A and B both occur with about equal frequency **3. Money market instruments share all the following features except** **A.** small denominations **B.** low default risk **C.** low price risk **D.** high liquidity **4. The difference between a \"discount\" instrument and an \"add-on\" instrument is chiefly a matter of** **A.** When interest is paid **B.** How interest is paid **C.** Where interest is paid **D.** Regulation **5. Which of the following money market instruments does not have a secondary market?** **A.** repurchase agreements **B.** T-bills **C.** commercial paper **D.** bankers\' acceptances **6. T-bills are auctioned to the bidders who offer the** A. highest premiums over par B. highest volumes of orders C. lowest discounts from par D. highest discount from par **7. A \"repo\" transaction is essentially** **A.** an unsecured short-term loan **B.** an option transaction **C.** riskiest **D.** a secured short-term loan **8. Which of the following is not a money market instrument?** **A.** banker\'s acceptance **B.** municipal bonds **C.** negotiable certificate of deposits **D.** repurchase agreements **9. Firms issue securities in the capital markets in order to** **A.** hedge against falling interest rates **B.** finance capital goods **C.** earn liquidity premiums **D.** avoid taxes **10. The municipal bond market is unique among the capital markets because it has** **A.** so many issuers **B.** such light volume **C.** so much risk **D.** so few participants **11. The yield curve for AAA-rated municipal bonds should plot** **A.** above that of U.S. Treasuries but below that of AAA-rated corporate bonds **B.** below that of U.S. Treasuries but above that of AAA-rated corporate bonds **C.** above that of both U.S. Treasuries and AAA corporates **D.** below that of both U.S. Treasuries and AAA corporates **12. Yield differences among debt instruments with different credit ratings are called A.** arbitrage **B.** default premiums **C.** liquidity premiums **D.** anomalies **13. Federal funds** **A.** are U.S. dollars deposited in the U.S. by European investors **B.** are short term funds on interbank markets **C.** indicate banks accept responsibilities for future payments **D.** Have slightly lower interest rates than Treasury Bills **14. The most unfavored feature of common stock is that it** **A.** pays dividends **B.** carries limited liability **C.** is the residual claim against the firm\'s cash flows or assets **D.** trades on an organized exchange **15. A difference between common and prefered stocks is:** **A.** preferred dividends are payable only after ordinary dividends have been paid **B.** preference dividends are a fixed amount **C.** ordinary shares are less risky **D.** preference shares have greater potential for capital gains. **16. \"Nonparticipating\" means that** **A.** preferred shareholders do not vote **B.** the preferred stock dividend is fixed **C.** preferred shareholders share the \"\'residual claim\" **D.** shareholders do not direct day-to-day activities **17. Which of the following is not true with respect to preferred stock?** **A.** Preferred stock usually does not allow for significant voting rights. **B.** If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy. **C.** Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend. **D.** Payment of preferred dividends is not a tax-deductible expense. **E.** All of the above are true. **18. IPO stands for** **A.** Investor Preferred Option **B.** Internally Profitable °operations **C.** Initial Public Offering **D.** Initial Private Offering **19. The process of conducting an IPO:** **A.** is typically handled by an investment bank or stockbroking firm engaged by the firm **B.** requires a prospectus that is meant to overcome the problem of information asymmetry **C.** requires the firm satisfy the requirements of SEC **D.** requires stock price evaluation process **E.** All of these above. **20. An order to buy or sell a stock means to execute the transaction at the best possible price.** **A.** market **B.** limit **C.** stop-loss **D.** stop-buy **CHAP 4** **CHAP 5** **CHAP 6** **CHAP 7**