Financial Markets and Institutions – Exam 1, 2026 – Study Material
and Practice Questions
True or False: maturity intermediation refers to the ability of financial institutions to connect
suppliers of funds, who only want to lend out on a short-term basis, with users of funds who
want long-term loans - ANS✔✔ True
True or False: the markets in which users of funds raise cash by selling securities are called
primary markets. - ANS✔✔ True
True or False: the liquidity offered on secondary markets can affect the price of a security
offered in primary markets. - ANS✔✔ True
4) True or False: liquidity risk includes the risk that interest rates may suddenly fall. - ANS✔✔
False
True or False: real interest rates include anticipated inflation. - ANS✔✔ False
True or False: the equilibrium interest rate is where the demand and supply curves meet. -
ANS✔✔ True
True or False: the government increases taxes which reduce the ability of individuals to save
money. This should decrease interest rates. - ANS✔✔ False
True or False: the higher a bond's coupon payment, the more exposed it is to interest rate risk. -
ANS✔✔ False
True or False: money market instruments are generally low-risk investments, largely because
their duration is higher than other debt instruments - ANS✔✔ False
, True or false: a downward sloping yield curve is often interpreted as an indication that bond
traders think we are heading into a recession. - ANS✔✔ TRUE (Pure expectation theory)
True or False: a bond that has no collateral is called a debenture. - ANS✔✔ TRUE (Most have
collateral) Corporate
True or False: secondary markets for municipal bonds are highly liquid. - ANS✔✔ False
True or False: the federal funds market is very liquid and allows banks to get or make loans very
quickly. - ANS✔✔ TRUE(banks have to have reserves on hand) can get in trouble with
regulators)
True or False: certificates of deposit can be sold on secondary markets. - ANS✔✔ TRUE- they are
money market securities.
True or False: off-the-run Treasury bonds have higher prices than on-the-run Treasury bonds. -
ANS✔✔ FALSE On the run bond any bond that has been issued in the last six months. OFF the
run are older, higher yield.
True or False: general obligation municipal bonds are riskier than revenue bonds. - ANS✔✔
FALSE
True or False: all else being equal, investors would prefer a putable bond to a callable bond. -
ANS✔✔ TRUE why? Buy bonds when you think interest rates are going to decrease, can sell the
bond at a certain price, no matter how high interest rates increase.
True or False: because their interest payments are exempt from taxation, interest rates on
municipal bonds can be lower than US Treasury rates - ANS✔✔ TRUE
and Practice Questions
True or False: maturity intermediation refers to the ability of financial institutions to connect
suppliers of funds, who only want to lend out on a short-term basis, with users of funds who
want long-term loans - ANS✔✔ True
True or False: the markets in which users of funds raise cash by selling securities are called
primary markets. - ANS✔✔ True
True or False: the liquidity offered on secondary markets can affect the price of a security
offered in primary markets. - ANS✔✔ True
4) True or False: liquidity risk includes the risk that interest rates may suddenly fall. - ANS✔✔
False
True or False: real interest rates include anticipated inflation. - ANS✔✔ False
True or False: the equilibrium interest rate is where the demand and supply curves meet. -
ANS✔✔ True
True or False: the government increases taxes which reduce the ability of individuals to save
money. This should decrease interest rates. - ANS✔✔ False
True or False: the higher a bond's coupon payment, the more exposed it is to interest rate risk. -
ANS✔✔ False
True or False: money market instruments are generally low-risk investments, largely because
their duration is higher than other debt instruments - ANS✔✔ False
, True or false: a downward sloping yield curve is often interpreted as an indication that bond
traders think we are heading into a recession. - ANS✔✔ TRUE (Pure expectation theory)
True or False: a bond that has no collateral is called a debenture. - ANS✔✔ TRUE (Most have
collateral) Corporate
True or False: secondary markets for municipal bonds are highly liquid. - ANS✔✔ False
True or False: the federal funds market is very liquid and allows banks to get or make loans very
quickly. - ANS✔✔ TRUE(banks have to have reserves on hand) can get in trouble with
regulators)
True or False: certificates of deposit can be sold on secondary markets. - ANS✔✔ TRUE- they are
money market securities.
True or False: off-the-run Treasury bonds have higher prices than on-the-run Treasury bonds. -
ANS✔✔ FALSE On the run bond any bond that has been issued in the last six months. OFF the
run are older, higher yield.
True or False: general obligation municipal bonds are riskier than revenue bonds. - ANS✔✔
FALSE
True or False: all else being equal, investors would prefer a putable bond to a callable bond. -
ANS✔✔ TRUE why? Buy bonds when you think interest rates are going to decrease, can sell the
bond at a certain price, no matter how high interest rates increase.
True or False: because their interest payments are exempt from taxation, interest rates on
municipal bonds can be lower than US Treasury rates - ANS✔✔ TRUE
