CHAPTER 4: FINANCIAL MARKETS AND INTEREST RATES

PART A: FINANCIAL MARKETS

Question 1: Financial markets promote economic efficiency by:
A. channeling funds from investors to savers.
B. creating inflation.
C. channeling funds from savers to investors.
D. reducing investment.
Question 2: Financial markets promote greater economic efficiency by channeling
funds from _______ to _______:
A. investors; savers
B. borrowers; savers
C. savers; borrowers
D. savers; lenders
Question 3: Well-functioning financial markets promote:
A. inflation.
B. deflation.
C. unemployment.
D. growth.
Question 4: A key factor in producing high economic growth is:
A. eliminating foreign trade
B. well – functioning financial markets
C. high interest rates
D. stock market volatility
Question 5: Markets in which funds are transferred from those who have excess
funds available to those who have a shortage of available funds are called:
A. commodity markets.
B. fund-available markets.
C. derivative exchange markets.
D. financial markets.
Question 6: _______ markets transfer funds from people who have an excess of
available funds to people who have a shortage.
A. Commodity
B. Fund – available
C. Financial
D. Derivative exchange
Question 7: Poorly performing financial markets can be the cause of:
A. wealth.
B. poverty.
C. financial stability.
D. financial expansion. Mở rộng tài chính
Question 8: The bond markets are important because they are:
A. easily the most widely followed financial markets in the United States.
B. the markets where foreign exchange rates are determined.
C. the markets where interest rates are determined.
D. the markets where all borrowers get their funds.
Question 9: The price paid for the rental of borrowed funds (usually expressed as
a percentage of the rental of $100 per year) is commonly referred to as the:
A. inflation rate.
B. exchange rate.
C. interest rate.
D. aggregate price level.
Question 10: Compared to interest rates on long-term U.S. government bonds,
interest rates on three-month Treasury bills Tín phiếu Kho bạc 3 tháng fluctuate
_____ and are _____ on average.
A. more; lower
B. less; lower
C. more; higher
D. less; higher
Question 11: The interest rate on Baa (medium quality) corporate bonds is _____,
on average than other interest rates, and the spread between it and other rates
became _____ in the 1970s.
A. lower; smaller
B. lower; larger
C. higher; smaller
D. higher; larger
Question 12: Everything else held constant, a decline in interest rates will cause
spending on housing to:
A. fall
B. remained unchanged
C. either rise, fall, or remain the same
D. rise
Question 13: High interest rates might ______ purchasing a house or car but at
the same time high interest rates might _______ saving.
A. discourage; encourage
B. discourage; discourage
C. encourage; encourage
D. encourage; discourage
Question 14: An increase in interest rates might ______ saving because more can
be earned in interest income.
A. encourage
B. discourage
C. disallow
D. invalidate
Question 15: Everything else held constant, an increase in interest rates on
student loans:
A. increases the cost of a college education.
B. reduces the cost of a college education.
C. has no effect on educational costs.
D. increases costs for students with no loans.
Question 16: High interest rates might cause a corporation to ______ building a
new plant that would provide more jobs.
A. complete
B. consider
C. postpone
D. contemplate
Question 17: The stock market is:
A. where interest rates are determined.
B. the most widely followed financial market in the United States.
C. where foreign exchange rates are determined.
D. The market where most borrowers get their funds.
Question 18: Stock prices are:
A. Relatively stable trending upward at a steady pace.
B. Relatively stable trending downward at a moderate rate.
C. Extremely volatile.
D. Unstable trending downward at a moderate rate.
A rising stock market index due to higher share prices
(a) increases people’s wealth, but is unlikely to increase their willingness to
spend.
(b) increases people’s wealth and as a result may increase their willingness to
spend.
(c) increases the amount of funds that business firms can raise by selling newly-
issued stock.
(d) both (b) and (c) of the above.
Question 19: A rising stock market index due to higher share prices:
A. increases people’s wealth, but is unlikely to increase their willingness to spend.
B. increases people’s wealth and as a result may increase their willingness to
spend.
C. decreases the amount of funds that business firms can raise by selling newly-
issued stock.
D. decreases people’s wealth, but is unlikely to increase their willingness to
spend.
Question 20: When stock prices fall:
A. an individual’s wealth is not affected nor is their willingness to spend.
B. a business firm will be more likely to sell stock to finance investment spending.
C. an individual’s wealth may decrease but their willingness to spend is not
affected.
D. an individual’s wealth may decrease but their willingness to spend may
decrease.
Changes in stock prices
(a) affect people’s wealth and their willingness to spend
(b) affect firms’ decisions to sell stock to finance investment spending.
(c) are characterized by considerable fluctuations.
(d) all of the above
Question 21: Changes in stock prices
A. do not affect people’s wealth and their willingness to spend.
B. affect firms’ decisions to sell stock to finance investment spending.
C. occur in regular patterns.
D. are unimportant to decision makers.
Question 22: An increase in stock prices _______ the size of people’s wealth and
may ______ their willingness to spend, everything else held constant.
A. increases; increase
B. increases; decrease
C. decreases; increase
D. decreases; decrease
Question 23: Low stock market prices might _____ consumers’ willingness to
spend and might _____ businesses willingness to undertake investment projects.
A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase
Fear of a major recession causes stock prices to fall, which in turn causes
consumer spending to
(a) increase.
(b) remain unchanged.
(c) decrease.
(d) cannot be determined.
(e) none of the above.
Answer: C
Question Status: Study Guide
28) A common stock is a claim on a corporation’s
(a) debt.
(b) liabilities.
(c) expenses.
(d) employees.
(e) earnings and assets.
Question 24: Fear of a major recession causes stock prices to fall, everything else
held constant, which in turn causes consumer spending to:
A. increase.
B. remain unchanged.
C. decrease.
D. cannot be determined.
Question 25: A share of common stock is a claim on a corporation’s
A. debt.
B. liabilities.
C. expenses.
D. earnings and assets.
Question 26: On ______, October 19, 1987, the stock market experienced its
worst one – day drop in its entire history with the DJIA falling by 22%.
A. “Terrible Tuesday”
B. “Woeful Wednesday”
C. “Freaky Friday”
D. “Black Monday”
Question 27: The decline in stock prices from 2000 through 2002
A. increased individuals’ willingness to spend.
B. had no effect on individual spending.
C. reduced individual’s willingness to spend.
D. increased individual wealth.
Question 28: The Dow reached a peak of over 11,000 before the collapse of the
_______ bubble in 2000.
A. housing
B. manufacturing
C. high – tech
D. banking
Question 29: When I purchase a corporate _______, I am lending the corporation
funds for a specific time. When I purchase a corporation’s _______, I become an
owner in the corporation.
A. bond; stock
B. stock; bond
C. stock; debt security
D. bond; debt security
Question 30: What is a stock? How do stocks affect the economy?
Answer: A stock represents a share of ownership of a corporation, or a claim on a
firm’s earnings/assets. Stocks are part of wealth, and changes in their value affect
people’s willingness to spend. Changes in stock prices affect a firm’s ability to
raise funds, and thus their investment.
Question 31: Why is it important to understand the bond market?
Answer: The bond market supports economic activity by enabling the
government and corporations to borrow to undertake their projects and it is the
market where interest rates are determined.
Question 32: Every financial market has the following characteristic.
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.
Question 33: 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.
Question 34: 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. they eliminate the need for indirect finance.
Question 35: Well-functioning financial markets:
A. cause inflation.
B. eliminate the need for indirect finance.
C. cause financial crises.
D. allow the economy to operate more efficiently.
Question 36: A breakdown of financial markets can result in:
A. financial stability.
B. rapid economic growth.
C. political instability.
D. stable prices.
Question 37: The principal lender-savers are:
A. governments.
B. businesses.
C. households.
D. foreigners.
Question 38: 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.
Question 39: Assume that you borrow $2000 at 10% 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.
Question 40: 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%.
B. 12.5%.
C. 10%.
D. 5%.
Question 41: 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
Question 42: 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.
Question 43: 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 U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov.
D. You make a deposit at a bank.
Question 44: Which of the following can be described as involving indirect
finance?
A. You make a loan to your neighbor.
B. You buy shares in a mutual fund.
C. You buy a U.S. Treasury bill from the U.S. Treasury at Treasury Direct.gov.
D. You purchase shares in an initial public offering by a corporation in the primary
market.
Question 45: 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
Question 46: With ________ finance, borrowers obtain funds from lenders by
selling them securities in the financial markets.
A. active
B. determined
C. indirect
D. direct
Question 47: With direct finance, funds are channeled through the financial
market from the ________ directly to the ________.
A. savers, spenders
B. spenders, investors
C. borrowers, savers
D. investors, savers
Question 48: Distinguish between direct finance and indirect finance. Which of
these is the most important source of funds for corporations in the United States?
Answer: With direct finance, funds flow directly from the lender/saver to the
borrower. With indirect finance, funds flow from the lender/saver to a financial
intermediary who then channels the funds to the borrower/investor. Financial
intermediaries (indirect finance) are the major source of funds for corporations in
the U.S.
Question 49: 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.
Question 50: 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.
Question 51: 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
Question 52: Which of the following is an example of an intermediate-term debt?
A. a fifteen-year mortgage
B. a sixty-month car loan
C. a six-month loan from a finance company
D. a thirty-year U.S. Treasury bond
Question 53: 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.
Question 54: 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.
Question 55: 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
Question 56: Equity holders are a corporation's ________. That means the
corporation must pay all of its debt holders before it pays its equity holders.
A. debtors
B. brokers
C. residual claimants
D. underwriters
Question 57: Which of the following benefits 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
Question 58: A financial market in which previously issued securities can be resold
is called a ________ market.
A. primary
B. secondary
C. tertiary
D. used securities
Question 59: An important financial institution that assists in the initial sale of
securities in the primary market is the:
A. investment bank.
B. commercial bank.
C. stock exchange.
D. brokerage house.
Question 60: 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
Question 61: Which of the following is NOT a secondary market?
A. foreign exchange market
B. futures market
C. options market
D. IPO market
Question 62: ________ work in the secondary markets matching buyers with
sellers of securities.
A. Dealers
B. Underwriters
C. Brokers
D. Claimants
Question 63: 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.
Question 64: 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.
Question 65: 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.
Question 66: Secondary markets make financial instruments more:
A. solid.
B. vapid.
C. liquid.
D. risky.
Question 67: 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.
Question 68: 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
Question 69: When secondary market buyers and sellers of securities meet in one
central location to conduct trades the market is called a(n):
A. exchange.
B. over-the-counter market.
C. common market.
D. barter market.
Question 70: In a(n) ________ market, dealers in different locations buy and sell
securities to anyone who comes to them and is willing to accept their prices.
A. exchange
B. over-the-counter
C. common
D. barter
Question 71: Forty or so dealers establish a "market" in these securities by
standing ready to buy and sell them.
A. secondary stocks
B. surplus stocks
C. U.S. government bonds
D. common stocks
Question 72: Which of the following statements about financial markets and
securities is TRUE?
A. Many common stocks are traded over-the-counter, although the largest
corporations usually have their shares traded at organized stock exchanges
such as the New York Stock Exchange.
B. As a corporation gets a share of the broker's commission, a corporation
acquires new funds whenever its securities are sold.
C. Capital market securities are usually more widely traded than shorter-term
securities and so tend to be more liquid.
D. Prices of capital market securities are usually more stable than prices of money
market securities, and so are often used to hold temporary surplus funds of
corporations.
Question 73: A financial market in which only short-term debt instruments are
traded is called the ________ market.
A. bond
B. money
C. capital
D. stock
Question 74: Equity instruments are traded in the ________ market.
A. money
B. bond
C. capital
D. commodities
Question 75: Because these securities are more liquid and generally have smaller
price fluctuations, corporations and banks use the ________ securities to earn
interest on temporary surplus funds.
A. money market
B. capital market
C. bond market
D. stock market
Question 76: 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.
Question 77: 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.
Question 78: 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.
Question 79: 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.
A. premium
B. collateral
C. default
D. discount
Question 80: U.S. Treasury bills are considered the safest of all money market
instruments because there is a low probability of:
A. defeat.
B. default.
C. desertion.
D. demarcation.
Question 81: 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 certificate of deposit.
C. a municipal bond.
D. federal funds.
Question 82: A short-term debt instrument issued by well-known corporations is
called:
A. commercial paper.
B. corporate bonds.
C. municipal bonds.
D. commercial mortgages.
Question 83: ________ are short-term loans in which Treasury bills serve as
collateral.
A. Repurchase agreements
B. Negotiable certificates of deposit
C. Federal funds
D. U.S. government agency securities
Question 84: 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
Question 85: Federal funds are:
A. funds raised by the federal government in the bond market.
B. loans made by the Federal Reserve System to banks.
C. loans made by banks to the Federal Reserve System.
D. loans made by banks to each other.
Question 86: An important source of short-term funds for commercial banks are
________ which can be resold on the secondary market.
A. negotiable CDs
B. commercial paper
C. mortgage-backed securities
D. municipal bonds
Question 87: 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
Question 88: Which of the following instruments are traded in a money market?
A. state and local government bonds
B. U.S. Treasury bills
C. corporate bonds
D. U.S. government agency securities
Question 89: Which of the following instruments are traded in a money market?
A. bank commercial loans
B. commercial paper
C. state and local government bonds
D. residential mortgages
Question 90: Which of the following instruments is NOT traded in a money
market?
A. residential mortgages
B. U.S. Treasury Bills
C. negotiable bank certificates of deposit
D. commercial paper
Question 91: Bonds issued by state and local governments are called ________
bonds.
A. corporate
B. Treasury
C. municipal
D. commercial
Question 92: Equity and debt instruments with maturities greater than one year
are called ________ market instruments.
A. capital
B. money
C. federal
D. benchmark
Question 93: Which of the following is a long-term financial instrument?
A. a negotiable certificate of deposit
B. a repurchase agreement
C. a U.S. Treasury bond
D. a U.S. Treasury bill
Question 94: Which of the following instruments are traded in a capital market?
A. U.S. Government agency securities
B. negotiable bank CDs
C. repurchase agreements
D. U.S. Treasury bills
Question 95: Which of the following instruments are traded in a capital market?
A. corporate bonds
B. U.S. Treasury bills
C. negotiable bank CDs
D. repurchase agreements
Question 96: Which of the following are NOT traded in a capital market?
A. U.S. government agency securities
B. state and local government bonds
C. repurchase agreements
D. corporate bonds
Question 97: The most liquid securities traded in the capital market are
A. corporate bonds.
B. municipal bonds.
C. U.S. Treasury bonds.
D. mortgage-backed securities.
Question 98: Mortgage-backed securities are similar to ________ but the interest
and principal payments are backed by the individual mortgages within the
security.
A. bonds
B. stock
C. repurchase agreements
D. negotiable CDs