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© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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. 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. 3. The largest deficit unit is (are) A) households and businesses. B) foreign financial institutions. C) the U.S. Treasury. D) foreign nonfinancial sectors. 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. 5. Funds are provided to the initial issuer of securities in the A) secondary market. B) primary market. C) deficit market. D) surplus market. 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. 7. Which of the following is a money market security? A) Treasury note B) municipal bond C) mortgage D) commercial paper 8. The most common investors in Federal funds are
Role of Financial Markets and Institutions  2 © 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. A) households. B) depository institutions. C) firms. D) government agencies. 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 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 11. If security prices fully reflect all available information, the markets for these securities are A) efficient. B) primary. C) overvalued. D) undervalued. 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 13. If financial markets are efficient, this implies that investors can ignore the various investment instruments available.  False 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 15. The Securities Exchange Commission (SEC) was established by the A) Federal Reserve Act. B) McFadden Act. C) Securities Exchange Act of 1934.
Role of Financial Markets and Institutions  3 © 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. D) Glass-Steagall Act. E) none of the above 16. Common stock is an example of a(n) A) debt security. B) money market security. C) equity security. D) A and B 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 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. 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. 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 21. In aggregate, ___________ are the most dominant depository institution. A) commercial banks B) savings banks C) credit unions D) S&Ls 22. Which of the following is a nondepository financial institution? A) savings banks B) commercial banks C) savings and loan associations D) mutual funds 23. Which of the following distinguishes credit unions from commercial banks and savings institutions? A) Credit unions are non-profit
Role of Financial Markets and Institutions  4 © 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 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 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. 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 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 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 28. _______________ concentrate on mortgage loans. A) Finance companies B) Commercial banks C) Savings institutions D) Credit unions 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 30. Which of the following is not a major investor in stocks? A) commercial banks B) insurance companies C) mutual funds D) pension funds 31. Which of the following financial intermediaries commonly invests in stocks and bonds? A) pension funds B) insurance companies