FIN 306 MIDTERM Questions with Correct Solutions
Question:
1. True or False: Primary markets are markets in which corporations raise funds through new
issues of securities.
Answer:
True; can be IPOs, seasoned offerings, issued directly from corporation to the public, bonds
or debt instruments
Question:
2. Which of the following is/are money market instrument(s)?
a.) Certificate of Deposit (CD)
b.) Common stock
c.) T-bonds
d.) 4-year maturity corporate bond
Answer:
a.) Certificate of Deposit (CD) -can also be federal funs and repurchase agreements,
commercial paper, U.S. treasury bills, negotiable CDs, and banker's acceptances
Question:
3. What are the capital makers instruments?
Answer:
-common (corporate) stock -mortgages -corporate bonds -treasury securities (T-bonds) -state
and local government bonds -U.S. government agency bonds -consumer loans
,Question:
4. True or False: The derivative security market is very new - it developed within the last 10
years.
Answer:
False; it is the newest of financial security markets and grew tremendous between 1992 to
2013 & that are potentially the richest security
Question:
5. Bank of America (Merrill Lynch) carries out investment research on new issues and makes
recommendations to current clients at a lower average cost than an individual investor could
do for themselves. This is an example of what type of service performed by financial
institutions?
a.) Liquidity enhancement and price risk reduction
b.) Provides a conduit through which the Fed conducts monetary policy
c.) Monitoring costs economies of scale
d.) Maturity intermediation
Answer:
c.) Monitoring costs economies of scale
Question:
6. Financial institutions have a greater ability, compared to a small saver, to bear the risk of
mismatching the maturities of their assets and liabilities. What type of service performed by
financial institutions does this describe?
a.) Liquidity enhancement and price risk reduction
b.) Transaction cost services - economies of scale
c.) Monitoring costs economies of scale
d.) Maturity intermediation
Answer:
d.) Maturity intermediation
Question:
7. Depository institutions include all but the following:
a.) Commercial Banks
b.) Credit Unions
c.) Investment Banks
d.) Thrifts
Answer:
c.) Investment Banks; act like a bank because they provide loans but don't have deposits
,Question:
8. In terms of percentage shares of assets of financial institutions (table 1-7), the U.S. has
seen a (an) _______ in the share of investment companies and a (an) _______ in the total share
of commercial banks from 1929 to 2019.
a.) increase, increase
b.) decrease, decrease
c.) increase, decrease
d.) decrease, increase
Answer:
c.) increase, decrease
Question:
9. Recently, banks shifted from an "originate and hold" model to "originate to sell" model.
This had the effect of:
a.) Removing the risk from the balance sheet of financial institutions.
b.) Decreasing the incentive to screen and monitor borrower activities to whom they
originated loans.
c.) Reducing the financial institutions' exposure to credit, liquidity, and interest rate risks
inherent in traditional banking.
d.) all of the above
Answer:
d.) all of the above
Question:
10. True or False: Enterprise Risk Management recognizes the importance of managing the
combined impact of different risks as an interrelated portfolio.
Answer:
True
Question:
11. What country has the largest bank (by total assets) in the world? See Table 1-11.
Answer:
China
Question:
12. What are the primary channels through which capital is allocated in our society?
Answer:
markets and institutions
, Question:
13. This requires managers and individual investors to understand the flow of funds
throughout the economy.
Answer:
investment and financing decisions
Question:
14. Managers and individuals must also understand the operation and structure of _________
and ___________ financial markets.
Answer:
domestic and international
Question:
15. __________ __________ are the structures through which funds flow.
Answer:
financial markets
Question:
16. What are the 2 major dimensions of financial markets?
Answer:
-primary vs secondary markets -money vs capital markets
Question:
17. Is there a lot of overlap between primary and secondary markets?
Answer:
no
Question:
18. markets in which users of funds raise funds through new issues of financial instruments,
such as stocks and bonds
Answer:
primary market
Question:
19. issues of equity by firms initially going public are referred to as what and what market
does this occur in?
Answer:
IPOS and primary markets
Question:
1. True or False: Primary markets are markets in which corporations raise funds through new
issues of securities.
Answer:
True; can be IPOs, seasoned offerings, issued directly from corporation to the public, bonds
or debt instruments
Question:
2. Which of the following is/are money market instrument(s)?
a.) Certificate of Deposit (CD)
b.) Common stock
c.) T-bonds
d.) 4-year maturity corporate bond
Answer:
a.) Certificate of Deposit (CD) -can also be federal funs and repurchase agreements,
commercial paper, U.S. treasury bills, negotiable CDs, and banker's acceptances
Question:
3. What are the capital makers instruments?
Answer:
-common (corporate) stock -mortgages -corporate bonds -treasury securities (T-bonds) -state
and local government bonds -U.S. government agency bonds -consumer loans
,Question:
4. True or False: The derivative security market is very new - it developed within the last 10
years.
Answer:
False; it is the newest of financial security markets and grew tremendous between 1992 to
2013 & that are potentially the richest security
Question:
5. Bank of America (Merrill Lynch) carries out investment research on new issues and makes
recommendations to current clients at a lower average cost than an individual investor could
do for themselves. This is an example of what type of service performed by financial
institutions?
a.) Liquidity enhancement and price risk reduction
b.) Provides a conduit through which the Fed conducts monetary policy
c.) Monitoring costs economies of scale
d.) Maturity intermediation
Answer:
c.) Monitoring costs economies of scale
Question:
6. Financial institutions have a greater ability, compared to a small saver, to bear the risk of
mismatching the maturities of their assets and liabilities. What type of service performed by
financial institutions does this describe?
a.) Liquidity enhancement and price risk reduction
b.) Transaction cost services - economies of scale
c.) Monitoring costs economies of scale
d.) Maturity intermediation
Answer:
d.) Maturity intermediation
Question:
7. Depository institutions include all but the following:
a.) Commercial Banks
b.) Credit Unions
c.) Investment Banks
d.) Thrifts
Answer:
c.) Investment Banks; act like a bank because they provide loans but don't have deposits
,Question:
8. In terms of percentage shares of assets of financial institutions (table 1-7), the U.S. has
seen a (an) _______ in the share of investment companies and a (an) _______ in the total share
of commercial banks from 1929 to 2019.
a.) increase, increase
b.) decrease, decrease
c.) increase, decrease
d.) decrease, increase
Answer:
c.) increase, decrease
Question:
9. Recently, banks shifted from an "originate and hold" model to "originate to sell" model.
This had the effect of:
a.) Removing the risk from the balance sheet of financial institutions.
b.) Decreasing the incentive to screen and monitor borrower activities to whom they
originated loans.
c.) Reducing the financial institutions' exposure to credit, liquidity, and interest rate risks
inherent in traditional banking.
d.) all of the above
Answer:
d.) all of the above
Question:
10. True or False: Enterprise Risk Management recognizes the importance of managing the
combined impact of different risks as an interrelated portfolio.
Answer:
True
Question:
11. What country has the largest bank (by total assets) in the world? See Table 1-11.
Answer:
China
Question:
12. What are the primary channels through which capital is allocated in our society?
Answer:
markets and institutions
, Question:
13. This requires managers and individual investors to understand the flow of funds
throughout the economy.
Answer:
investment and financing decisions
Question:
14. Managers and individuals must also understand the operation and structure of _________
and ___________ financial markets.
Answer:
domestic and international
Question:
15. __________ __________ are the structures through which funds flow.
Answer:
financial markets
Question:
16. What are the 2 major dimensions of financial markets?
Answer:
-primary vs secondary markets -money vs capital markets
Question:
17. Is there a lot of overlap between primary and secondary markets?
Answer:
no
Question:
18. markets in which users of funds raise funds through new issues of financial instruments,
such as stocks and bonds
Answer:
primary market
Question:
19. issues of equity by firms initially going public are referred to as what and what market
does this occur in?
Answer:
IPOS and primary markets
