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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 2 An Overview of the Financial System

2.1 Function of Financial Markets

1) Every financial market has which of the following characteristics?

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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

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) eliminate the need for indirect finance
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

1
Copyright © 2017 Pearson Canada, Inc.
4) Well-functioning financial markets .
A) cause inflation
B) eliminate the need for indirect finance
C) cause financial crises
D) produce an efficient allocation of capital
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

2
Copyright © 2017 Pearson Canada, Inc.
5) A breakdown of financial markets can result in .
A) financial stability
B) rapid economic growth
C) political instability
D) stable prices
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

6) The principal lender-savers are .

A) governments
B) businesses
C) households
D) foreigners
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

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
Diff: 2 Type: MC
Skill: Applied
Objective: 2.1 Compare and contrast direct and indirect finance

8) Assume that you borrow $2000 at 10 percent 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
Diff: 2 Type: MC
Skill: Applied
Objective: 2.1 Compare and contrast direct and indirect finance

3
Copyright © 2017 Pearson Canada, Inc.
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 percent
B) 12.5 percent
C) 10 percent
D) 5 percent
Answer: D
Diff: 3 Type: MC
Skill: Applied
Objective: 2.1 Compare and contrast direct and indirect finance

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
Diff: 3 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

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
Diff: 3 Type: MC
Skill: Applied
Objective: 2.1 Compare and contrast direct and indirect finance

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 Canadian Treasury bill from the Bank of Canada.
D) You make a deposit at a bank.
Answer: D
Diff: 3 Type: MC
Skill: Applied
Objective: 2.1 Compare and contrast direct and indirect finance

4
Copyright © 2017 Pearson Canada, Inc.
13) 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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

14) 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
Diff: 2 Type: MC
Skill: Applied
Objective: 2.1 Compare and contrast direct and indirect finance

15) How do financial intermediaries play an important role in the economy?

Answer: Financial intermediaries play an important role in the economy because they provide
liquidity services, they lower transaction costs through economies of scale, they reduce the risk
exposure of investors through risk sharing, and they solve the asymmetric information
problems of adverse selection and moral hazard. By doing this, they allow small savers and
borrowers to benefit from the existence of financial markets and its instruments. They also
improve economic efficiency because they help financial markets to channel funds from
lenders-savers to people with productive investment opportunities.
Diff: 3 Type: ES
Skill: Recall
Objective: 2.1 Compare and contrast direct and indirect finance

5
Copyright © 2017 Pearson Canada, Inc.
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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

4) Which of the following is an example of an intermediate-term debt?

A) A thirty-year mortgage
B) A sixty-month car loan
C) A six month loan from a finance company
D) A Treasury bond
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

6
Copyright © 2017 Pearson Canada, Inc.
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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets
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
Diff: 1 Type: MC
Skill: Applied
Objective: 2.2 Identify the structure and components of financial markets

8) Which of the following benefit 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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

7
Copyright © 2017 Pearson Canada, Inc.
9) 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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

10) 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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

11) Which of the following is not a secondary market?

A) Foreign exchange market
B) Futures market
C) Options market
D) Primary market
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

12) work in the secondary markets matching buyers with sellers of securities.
A) Dealers
B) Underwriters
C) Brokers
D) Claimants
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

8
Copyright © 2017 Pearson Canada, Inc.
13) 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
Diff: 2 Type: MC
Skill: Applied
Objective: 2.2 Identify the structure and components of financial markets

14) 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
Diff: 2 Type: MC
Skill: Applied
Objective: 2.2 Identify the structure and components of financial markets

15) 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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

16) Secondary markets make financial instruments more .

A) solid
B) vapid
C) liquid
D) risky
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

9
Copyright © 2017 Pearson Canada, Inc.
17) 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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

18) 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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

19) 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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

20) 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.
Diff: 2 Type: ES
Skill: Applied
Objective: 2.2 Identify the structure and components of financial markets

10
Copyright © 2017 Pearson Canada, Inc.
21) 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.
Diff: 2 Type: ES
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

22) Describe the difference between the money market and the capital market.
Answer: The money market in which short-term debt instruments are traded. The capital
market is the market in which longer-term debt is traded.
Diff: 1 Type: ES
Skill: Recall
Objective: 2.2 Identify the structure and components of financial markets

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
Diff: 3 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

2) 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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

10
Copyright © 2017 Pearson Canada, Inc.
3) Treasury bills are considered the safest of all money market instruments because there is no
risk of .
A) defeat
B) default
C) desertion
D) demarcation
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

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 negotiable certificate of deposit
C) a municipal bond
D) federal funds
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

6) are short-term loans in which Treasury bills serve as collateral.

A) Repurchase agreements
B) Negotiable certificates of deposit
C) Overnight funds
D) Government agency securities
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

11
Copyright © 2017 Pearson Canada, Inc.
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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

8) Overnight funds are _ .

A) funds raised by the federal government in the bond market
B) loans made by the Bank of Canada to banks
C) loans made by banks to the Bank of Canada
D) loans made by banks to each other
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

9) 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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

10) Which of the following instruments are traded in a money market?

A) Provincial government bonds
B) Treasury bills
C) Corporate bonds
D) Government agency securities
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

12
Copyright © 2017 Pearson Canada, Inc.
11) Which of the following instruments are traded in a money market?
A) Bank commercial loans
B) Commercial paper
C) Provincial government bonds
D) Residential mortgages
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

12) Which of the following instruments is not traded in a money market?

A) Residential mortgages
B) Treasury Bills
C) Negotiable bank certificates of deposit
D) Commercial paper
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments
13) Bonds issued by corporations are called bonds.
A) corporate
B) Treasury
C) municipal
D) commercial
Answer: A
Diff: 1 Type: MC
Skill: Recall

Objective: 2.3 List and describe the different types of financial market instruments

14) Equity and debt instruments with maturities greater than one year are called
market instruments.
A) capital
B) money
C) federal
D) benchmark
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

13
Copyright © 2017 Pearson Canada, Inc.
15) Explain why Government of Canada Treasury Bills are considered as a financial instrument
with very low risk.
Answer: Government of Canada Treasury Bills are considered low risk, because they are the
most actively traded money market instruments; their original maturity is no more than 12
months. Moreover, there is almost no probability of default. The federal government is always
able to meet its debt obligations as it can raise taxes to service its debt.
Diff: 2 Type: ES
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

16) Explain why only the largest and most trustworthy corporations issue the financial
instruments known as commercial paper?
Answer: Commercial paper is an unsecured short-term debt instrument issued either in
Canadian dollars or other currencies. Since it is unsecured, only the largest corporations and
banks are able to issue commercial paper so that the market can trust them and invest in their
issue. It is highly unlikely that an investor would trust a small unknown firm and finance it with
an unsecured loan.
Diff: 2 Type: ES
Skill: Recall
Objective: 2.3 List and describe the different types of financial market instruments

2.4 Internationalization of Financial Markets

1) 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
Diff: 2 Type: MC
Skill: Recall
Objective: 2.4 Recognize the international dimensions of financial markets

2) 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
Diff: 1 Type: MC
Skill: Recall
Objective: 2.4 Recognize the international dimensions of financial markets

14
Copyright © 2017 Pearson Canada, Inc.
Other documents randomly have
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THE ROWS AT BISHOP LLOYD’S PALACE.
THE ROWS, WATERGATE STREET.
THE OLD STANLEY PALACE.
THE FIREPLACE AT STANLEY PALACE.
OLD HOUSES WATERGATE St "UNCLE TOM’S CABIN."
GOLD’S PROVIDENCE HOUSE.
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SOUTH AISLE St JOHN’S CHURCH.
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