Financial Markets & Institutions – Exam 1, 2026 – Study Material and
Practice Questions
world with no banks: - correct answer ✔✔ hold cash (in a safe in your home) and direct lending
(lend your money to someone with the promise that he/she will repay you)
direct lending - correct answer ✔✔ lending your money to someone with the promise that he
or she will repay you
problems with direct lending - correct answer ✔✔ cost to monitoring borrower; length of time
to pay you back; risk that you cannot sell your investment without a significant loss in value
(liquidity risk)
liquidity risk - correct answer ✔✔ risk that you cannot sell your investment without a significant
loss in value
financial institutions - correct answer ✔✔ can monitor on behalf of a group of lenders; you can
get money out quickly
financial markets - correct answer ✔✔ provide buyers and sellers, potentially allowing you to
sell without a significant loss in value
savers - correct answer ✔✔ supply funds
borrowers - correct answer ✔✔ demand funds
financial system - correct answer ✔✔ transfers funds from savers to borrowers
, financial savers - correct answer ✔✔ financial intermediaries and markets who act as go-
betweens
borrowers rate - correct answer ✔✔ financial markets issue claims on borrowers
financial institution - correct answer ✔✔ delegated monitor that collects information on
borrowers for benefit of savers
diversification (benefit of financial system) - correct answer ✔✔ savers can be more diversified
by investing in banks or mutual funds
greater liquidity (benefit of financial system) - correct answer ✔✔ savers are able to cover their
investments more easily into cash
1792 - correct answer ✔✔ when New York Stock Exchange was created
were keys to success in NY stock exchange - correct answer ✔✔ freedom with boundaries &
correct incentives and standards
freedom with boundaries - correct answer ✔✔ by establishing financial markets to do business,
ultimately benefited world trade; individual is free to pursue the best for self and in doing so,
helps society; necessary restrictions on manipulative trading; yet most powerful discipline is if
do not horror contract, the no one lends new money
adam smith's invisible hand - correct answer ✔✔ individual is free to pursue the best for self
and in doing so, helps society
correct incentives and standards - correct answer ✔✔ if upfront incentives and standards are
correct, better outcomes
Practice Questions
world with no banks: - correct answer ✔✔ hold cash (in a safe in your home) and direct lending
(lend your money to someone with the promise that he/she will repay you)
direct lending - correct answer ✔✔ lending your money to someone with the promise that he
or she will repay you
problems with direct lending - correct answer ✔✔ cost to monitoring borrower; length of time
to pay you back; risk that you cannot sell your investment without a significant loss in value
(liquidity risk)
liquidity risk - correct answer ✔✔ risk that you cannot sell your investment without a significant
loss in value
financial institutions - correct answer ✔✔ can monitor on behalf of a group of lenders; you can
get money out quickly
financial markets - correct answer ✔✔ provide buyers and sellers, potentially allowing you to
sell without a significant loss in value
savers - correct answer ✔✔ supply funds
borrowers - correct answer ✔✔ demand funds
financial system - correct answer ✔✔ transfers funds from savers to borrowers
, financial savers - correct answer ✔✔ financial intermediaries and markets who act as go-
betweens
borrowers rate - correct answer ✔✔ financial markets issue claims on borrowers
financial institution - correct answer ✔✔ delegated monitor that collects information on
borrowers for benefit of savers
diversification (benefit of financial system) - correct answer ✔✔ savers can be more diversified
by investing in banks or mutual funds
greater liquidity (benefit of financial system) - correct answer ✔✔ savers are able to cover their
investments more easily into cash
1792 - correct answer ✔✔ when New York Stock Exchange was created
were keys to success in NY stock exchange - correct answer ✔✔ freedom with boundaries &
correct incentives and standards
freedom with boundaries - correct answer ✔✔ by establishing financial markets to do business,
ultimately benefited world trade; individual is free to pursue the best for self and in doing so,
helps society; necessary restrictions on manipulative trading; yet most powerful discipline is if
do not horror contract, the no one lends new money
adam smith's invisible hand - correct answer ✔✔ individual is free to pursue the best for self
and in doing so, helps society
correct incentives and standards - correct answer ✔✔ if upfront incentives and standards are
correct, better outcomes
