Chapter 2

The Financial Market Environment

True or False
1) A financial institution is an intermediary that channels the savings of individuals, businesses,
and governments into loans or investments.

2) Primary and secondary markets are markets for short-term and long-term securities,
respectively.

3) Financial markets are intermediaries that channel the savings of individuals, businesses and
government into loans or investments.

4) A public offering is the sale of a new security issue typically debt or preferred stock directly
to an investor or group of investors.

5) A primary market is a financial market in which pre-owned securities are traded.

6) The Over-the-Counter (OTC) exchange is not an organization but an intangible market for
trading securities which are not listed by the organized exchanges.

7) Unlike the organized exchanges, the OTC makes a market in both outstanding securities and
new public issues, making it both a secondary and a primary market.

8) In the OTC market, the ask price is the highest price offered by a dealer to purchase a given
security.

9) In the OTC market, the prices at which securities are traded result from both competitive
bids and negotiation.

10) Capital markets are for investors who want a safe temporary place to deposit funds where
they can earn interest and for borrowers who have a short term need for funds.

11) Money markets are markets for long term funds such as bonds and equity.

12) An efficient market is a market that allocates funds to their most productive use as a result of
competition among wealth-maximizing investors.

13) Money markets involve the trading of securities with maturities of one year or less while
capital market involve the buying and selling of securities with maturities of more than one
year.

MCQs
1) The key participants in financial transactions are individuals, businesses, and governments.
Individuals are net ________ of funds, and businesses are net ________ of funds.
A) demanders; suppliers
B) users; providers
C) suppliers; demanders
D) purchasers; sellers

Chapter 2 Test Bank 1

2) Government usually
A) is a net supplier of funds.
B) is a net demander of funds.
C) borrows funds directly from financial institutions.
D) maintains permanent deposits with financial institutions.

3) Firms that require funds from external sources can obtain them in one of the following ways
EXCEPT
A) financial institution.
B) financial markets.
C) government.
D) private placement.

4) Firms that require funds from external sources can obtain them from
A) private placement.
B) financial institutions.
C) financial markets.
D) all of the above.

5) Which of the following is NOT a financial institution?

A) A commercial bank.
B) An insurance company.
C) A pension fund.
D) A newspaper publisher.

6) Which of the following serve as intermediaries channeling the savings of individuals,

businesses and governments into loans and investments?
A) Financial Institutions
B) Financial Markets
C) Securities Exchanges
D) OTC market

7) Most businesses raise money by selling their securities in a

A) public offering.
B) private placement.
C) direct placement.
D) stock exchange.

8) The nonexclusive sale of either bonds or stocks to the general public is called
A) private placement.
B) public offering.
C) organized selling.
D) none of the above.

9) Which of the following provide savers with a secure place to invest funds and offer both
individuals and companies loans to finance investments?
A) Investment Banks
B) Securities Exchanges
C) Mutual Funds
D) Commercial Banks

Chapter 2 Test Bank 2

10) Which of the following assist companies in raising capital, advise firms on major transactions
such as mergers or financial restructuring, and engage in trading and market making
activities?
A) Investment Banks
B) Securities Exchanges
C) Mutual Funds
D) Commercial Banks

11) Which of the following are forums in which suppliers and demanders of funds can transact
business directly?
A) Shadow banking system
B) Financial Markets
C) Commercial Banks
D) Financial Institutions

12) The sale of a new security directly to an investor or a group of investors is called
A) the secondary market
B) the primary market
C) the capital market
D) the private placement market

13) The ________ market is where securities are initially issued and the ________ market is
where pre-owned securities (not new issues) are traded.
A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money

14) The over-the-counter (OTC) market is

A) the New York Stock Exchange.
B) an organized stock exchange.
C) a place where securities are bought and sold.
D) an intangible market for unlisted securities.

15) Trading is carried out on the floor of the New York Stock Exchange by
A) the negotiation process.
B) the auction process.
C) a telecommunications network.
D) investment bankers.

16) All of the following are functions of security exchanges EXCEPT

A) allocating scarce capital.
B) aiding in new financing.
C) creating continuous markets.
D) holding demand deposits.

17) All of the following are examples of organized stock exchanges EXCEPT
A) the New York Stock Exchange.
B) the American Stock Exchange.
C) the Pacific Stock Exchange.
D) the over-the-counter exchange.
Chapter 2 Test Bank 3
18) The major securities traded in the capital markets are
A) commercial paper and Treasury bills.
B) Treasury bills and certificates of deposit.
C) stocks and bonds.
D) bonds and commercial paper.

19) The ________ stock exchange is a primary market where new public issues are sold.
A) regional
B) American
C) New York
D) over-the-counter

20) Trading is carried out in the Over-the-Counter (OTC) Exchange by

A) the competitive bid process.
B) the competitive bid process and the negotiation process.
C) the auction process.
D) an investment banker.

21) Securities exchanges create efficient markets that do all of the following EXCEPT
A) ensure a market in which the price reflects the true value of the security.
B) allocate funds to the most productive uses.
C) control the supply and demand for securities through price.
D) allow the price to be determined by supply and demand of securities.

22) A competitive market that allocates funds to their most productive use is called a(n)
A) liquid market.
B) middleman's market.
C) efficient market.
D) investor's market.

23) The ________ is created by a financial relationship between suppliers and demanders of
short-term funds.
A) stock market
B) capital market
C) financial market
D) money market

24) By definition, the money market involves the buying and selling of
A) stocks and bonds.
B) short-term funds.
C) funds that mature in more than one year.
D) flows of funds.

25) Most money market transactions are made in

A) common stock.
B) marketable securities.
C) stocks and bonds.
D) preferred stock.

Chapter 2 Test Bank 4

26) The ________ is created by a number of institutions and arrangements that allow the
suppliers and demanders of long-term funds to make transactions.
A) financial market
B) capital market
C) money market
D) credit market

27) Long-term debt instruments used by both government and business are known as
A) stocks.
B) bills.
C) bonds.
D) equities.

28) The two key financial markets are

A) primary market and secondary market.
B) primary market and money market.
C) money market and capital market.
D) capital market and secondary market.

29) In a ________ market, the buyer and seller are brought together to trade securities in an
organization called ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market

30) In a ________ market, the buyer and seller are not brought together to trade securities
directly but instead have their orders executed on the ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
Answer Key
True or False MCQs
1. TRUE 1) C 16) D
2. FALSE 2) B 17) D
3. FALSE 3) C 18) C
4. FALSE 4) D 19) D
5. FALSE 5) D 20) B
6. TRUE 6) A 21) C
7. TRUE 7) A 22) C
8. FALSE 8) B 23) D
9. TRUE 9) D 24) B
10. FALSE 10) A 25) B
11. FALSE 11) B 26) B
12. TRUE 12) D 27) C
13. TRUE 13) A 28) C
14) D 29) C
15) B 30) D

Chapter 2 Test Bank 5