Economics 3100 Chapter 2 MCQ Exam: Understanding Financial Markets, Exams of Economics

Download Economics 3100 Chapter 2 MCQ Exam: Understanding Financial Markets and more Exams Economics in PDF only on Docsity! ECONOMICS 3100 Chapter 2 MCQ Exam Questions with Correct Answers Every financial market has the following characteristic: A) It channels funds from lenders-savers to borrowers-spenders. B) It allows common stock to be traded. C) It allows loans to be made. D) It determines the level of interest rates. - Correct Answers A) It channels funds from lenders-savers to borrowers-spenders. 2) Well-functioning financial markets A) Cause inflation. B) Eliminate the need for indirect finance. C) Produce an efficient allocation of capital. D) Cause financial crises. - Correct Answers C) produce an efficient allocation of capital. 3) Financial markets perform the function of channeling funds from households, firms, governments to A) Those that have shortage of funds B) Finance government expenditure C) The people in need D) The stock market - Correct Answers A) those that have shortage of funds 4) A debt instrument is short-term if its maturity is A) certain B) Less than a year C) Passed D) Set a priority - Correct Answers B) less than a year 5) Firms issue equities as a means of A) Raising funds B) Distributing dividends C) Investment D) Distributing wealth - Correct Answers A) raising funds 6) Equities are considered ________ securities A) Short-term B) Long-term C) Profitable D) Consumption - Correct Answers B) long-term 7) The financial market where a corporation or government issues securities is called A) A mercantile exchange B) A money market C) A primary market D) A debt market - Correct Answers C) a primary market 8) The market in which previously issued securities can be resold is called A) An exchange market B) A resale market C) A secondary market D) A debt market - Correct Answers C) a secondary market 9) A corporation in order to issue new shares will have to use A) Accumulated profits B) An investment bank C) Financial leverage D) Both A and C - Correct Answers B) an investment bank 10) The action of guaranteeing a price for a corporation's new issue of stocks is called A) Intermediation B) Hedging C) Underwriting D) Securitization - Correct Answers C) underwriting 11) The individuals that link buyers and sellers by buying and selling securities are called A) Investors B) Stockholders C) Dealers D) Auditors - Correct Answers C) dealers 12) If you buy a security in the secondary market, the corporation that issued the security A) Increases owners' equity B) Is benefited by an inflow of capital C) Is paying the transaction costs D) acquires no new funds - Correct Answers D) acquires no new funds 13) The investors that buy securities in the primary market will pay A) No more than the price they expect that the market will set in the secondary market B) A price less than what the issuing corporation expects C) The price they expect that the market will set in the secondary market D) All the costs of the transactions in the primary and secondary markets that pertain to this security - Correct Answers A) no more than the price they expect that the market will set in the secondary market 14) The Canadian bond market is 28) Which of the following can be described as involving indirect finance? A) A corporation buys a short-term security issued by another corporation. B) A corporation issues new shares of stock. C) A bank buys a Canadian government treasury bill from one of its depositors. D) Both B and C of the above. - Correct Answers C) a bank buys a Canadian government treasury bill from one of its depositors. 29) Which of the following statements about the characteristics of debt and equity are true? A) They can both be long-term financial instruments. B) They both enable a corporation to raise funds. C) They both involve a claim on the issuer's income. D) All of the above. - Correct Answers D) All of the above. 30) An important financial institution that assists in the initial sale of securities in the primary market is the A) Commercial bank. B) Investment bank. C) Brokerage house. D) Stock exchange. - Correct Answers B) investment bank. 31) A corporation acquires new funds only when its securities are sold A) In the primary market by a stock exchange broker. B) In the primary market by an investment bank. C) In the secondary market by a securities dealer. D) In the secondary market by a commercial bank. - Correct Answers B) in the primary market by an investment bank. 32) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as A) Country bonds. B) Foreign bonds. C) Equity bonds. D) Eurobonds. - Correct Answers D) Eurobonds. 33) The presence of transaction costs in financial markets explains, in part, why A) Financial intermediaries and indirect finance play such an important role in financial markets. B) Direct financing is more important than indirect financing as a source of funds. C) Corporations get more funds through equity financing than they get from financial intermediaries. D) Equity and bond financing play such an important role in financial markets. - Correct Answers A) financial intermediaries and indirect finance play such an important role in financial markets. 34) A potential borrower usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called A) Adverse selection. B) Moral hazard. C) Reverse causation. D) Asymmetric information. - Correct Answers D) asymmetric information. 35) The concept of adverse selection helps to explain A) Why indirect finance is more important than direct finance as a source of business finance. B) Which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets? C) Why direct finance is more important than indirect finance as a source of business finance. D) Both A and B of the above. - Correct Answers D) both A and B of the above. 36) In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called A) Asymmetric information. B) Variant information. C) Comparative informational disadvantage. D) Caveat editor. - Correct Answers A) asymmetric information. 37) A professional baseball player may be contractually restricted from skiing. The team owner includes this clause in the player's contract to protect against A) Moral hazard. B) Regulatory circumvention. C) Adverse selection. D) Fraud. - Correct Answers A) moral hazard. 38) An example of the problem of ________ is when a corporation uses the funds raised from selling new shares of stock to pay for Caribbean cruises for all of its employees and their families. A) Risk sharing B) Adverse selection C) Credit risk D) Moral hazard - Correct Answers D) moral hazard 39) A buyer of a used car faces the ________ problem that most of her choices are lemons. A) Moral hazard B) Free rider C) Diversification D) Adverse selection - Correct Answers D) adverse selection 40) In the early 1980s, a particular bank in Oklahoma developed a reputation of readily providing loans to borrowers for the purpose of exploring for oil deposits. Many of these loans were never repaid, because this bank failed to address the A) risk-sharing problem. B) Moral hazard problem. C) free-rider problem. D) Adverse selection problem. - Correct Answers D) adverse selection problem. 41) Canadian businesses get their external funds primarily from A) Other loans. B) Bonds and commercial paper issues. C) Bank loans. D) Stock issues. - Correct Answers C) bank loans. 42) Which of the following is the primary source of external funds used by Canadian businesses to finance their activities? A) Bank loans B) Bonds and commercial paper C) Stock D) Other loans - Correct Answers A) Bank loans 43) Studies of the major developed countries show that A) External financing for corporations is dominated by financial intermediaries. B) External financing for corporations is dominated by securities issues. C) Exchanges reduce liquidity. D) Financial intermediaries avoid lending to corporations. - Correct Answers A) external financing for corporations is dominated by financial intermediaries. 44) Not surprisingly, Canada and ________, which have the most developed securities markets in the world, also make the greatest use of them in financing corporations. A) Japan B) The United States C) Great Britain D) Germany - Correct Answers B) the United States 45) The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets. A) Canada; Japan B) Great Britain; Canada C) Germany; Japan D) Germany; Great Britain - Correct Answers C) Germany; Japan 46) Which of the following is a depository institution? A) A life insurance company