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ECON worksheet 2
Terms in this set (38)
1) Which of the following can be described as involving direct finance?
A) A pension fund manager buys a short-term corporate security in the secondary market.
B) People buy shares in a mutual fund.
C) A corporation issues new shares of stock.
D) An insurance company buys shares of common stock in the over-the-counter markets.
2) Which of the following can be described as involving indirect finance?
A) You buy a U.S. Treasury bill from the U.S. Treasury.
B) You make a loan to your neighbor.
C) A corporation buys a share of common stock issued by another corporation in the primary market.
D) You make a deposit at a bank.
3) Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.
A) assets; liabilities
B) nonnegotiable; negotiable
C) negotiable; nonnegotiable
D) liabilities; assets
4) Which of the following statements about financial markets and securities is true?
A) A debt instrument is intermediate term if its maturity is ten years or longer.
B) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants.
C) A debt instrument is intermediate term if its maturity is less than one year.
D) The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.
5) Which of the following is an example of an intermediate-term debt?
A) A six month loan from a finance company.
B) A Treasury bond.
C) A thirty-year mortgage.
D) A sixty-month car loan.
6) 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.
7) A corporation acquires new funds only when its securities are sold in the
A) primary market by a stock exchange broker.
B) secondary market by a commercial bank.
C) secondary market by a securities dealer.
D) primary market by an investment bank.
8) Secondary markets make financial instruments more
10) Equity instruments are traded in the ________ market.
11) U.S. 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.
12) ________ are short-term loans in which Treasury bills serve as collateral.
A) U.S. government agency securities
B) Federal funds
C) Repurchase agreements
D) Negotiable certificates of deposit
13) Collateral is ________ the lender receives if the borrower does not pay back the loan.
A) a present
B) an offering
C) an asset
D) a liability
15) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.
A) adverse selection; moral hazard
B) costly state verification; free-riding
C) moral hazard; adverse selection
D) free-riding; costly state verification
16) The process of asset transformation refers to the conversion of
A) risky assets into safer assets.
B) safer assets into risky assets.
C) safer assets into safer liabilities.
D) risky assets into risky liabilities.
17) In the United States, loans from ________ are far ________ important for corporate finance than are securities markets.
A) government agencies; more
B) financial intermediaries; less
C) financial intermediaries; more
D) government agencies; less
18) Equity and debt instruments with maturities greater than one year are called ________ market instruments.
19) An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
A) credit risk
B) risk sharing
C) adverse selection
D) moral hazard
20) Adverse selection is a problem associated with equity and debt contracts arising from
A) the borrower's lack of incentive to seek a loan for highly risky investments.
B) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.
C) the borrower's lack of good options for obtaining funds.
D) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.
21) Which of the following is a contractual savings institution?
A) A mutual fund
B) A credit union
C) A savings and loan association
D) A life insurance company
22) In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from
A) making personal loans.
B) owning municipal bonds.
C) making real estate loans.
D) owning common stock.
23) The purpose of the disclosure requirements of the Securities and Exchange Commission is to
A) protect investors against financial losses.
B) prevent bank panics.
C) improve monetary control.
D) increase the information available to investors.
24) A goal of the Securities and Exchange Commission is to reduce problems arising from
A) asymmetric information.
D) banking panics.
25) An investment bank helps ________ issue securities.
A) the United States government
B) a corporation
C) foreign governments
D) the SEC
26) The agency that was created to protect depositors after the banking failures of 1930-1933 is the
A) Federal Deposit Insurance Corporation.
B) Treasury Department.
C) Federal Reserve System.
D) Office of the Comptroller of the Currency.
27) Even economists have no single, precise definition of money because
A) the "moneyness" or liquidity of an asset is a matter of degree.
B) economists find disagreement interesting and refuse to agree for ideological reasons.
C) the Federal Reserve does not employ or report different measures of the money supply.
D) money supply statistics are a state secret.
28) The total collection of pieces of property that serve to store value is a person's
29) The difference between money and income is that
A) money is a stock and income is a flow.
B) money is a flow and income is a stock.
C) there is no difference money and income are both stocks.
D) there is no difference money and income are both flows.
30) The conversion of a barter economy to one that uses money
A) increases efficiency by reducing the need to exchange goods and services.
B) increases efficiency by reducing the need to specialize.
C) does not increase economic efficiency.
D) increases efficiency by reducing transactions costs.
31) Money ________ transaction costs, allowing people to specialize in what they do best.
32) Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a
A) unit of account.
B) medium of exchange.
C) store of value.
D) unit of specialization.
33) ________ is the relative ease and speed with which an asset can be converted into a medium of exchange.
34) Increasing transactions costs of selling an asset make the asset
A) more moneylike.
B) less liquid.
C) more valuable.
D) more liquid.
35) Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset.
36) Ranking assets from most liquid to least liquid, the correct order is
A) savings bonds; house; currency.
B) currency; house; savings bonds.
C) currency; savings bonds; house.
D) house; savings bonds; currency.
37) If the price level doubles, the value of money
A) falls by 50 percent.
B) more than doubles, due to scale economies.
D) rises but does not double, due to diminishing returns.
38) Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.
39) Compared to an electronic payments system, a payments system based on checks has the major drawback that
A) checks are less costly to process.
B) legal liability is more clearly defined.
C) fraud may be more difficult to commit when paper receipts are eliminated.
D) checks take longer to process, meaning that it may take several days before the depositor can get her cash.
40) An important characteristic of the modern payments system has been the rapidly increasing use of
A) checks and decreasing use of currency.
B) fiat money.
C) electronic fund transfers.
D) commodity monies.
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