Test bank for financial markets institutions 6th

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,Financial Markets & Institutions 5th
Edition Test Bank
Chapter 01 Introduction Answer Key
True / False Questions

1. Primary markets are markets where users of funds raise cash by selling
securities to funds’ suppliers.
TRUE

2. Secondary markets are markets used by corporations to raise cash by issuing
securities for a short time period.
FALSE

3. In a private placement, the issuer typically sells the entire issue to one, or only
a few, institutional buyers.
TRUE

4. The NYSE is an example of a secondary market.
TRUE

5. Privately placed securities are usually sold to one or more investment bankers
and then resold to the general public.
FALSE

6. Money markets are the markets for securities with an original maturity of 1
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year or less.
TRUE

7. Financial intermediaries such as banks typically have assets that are riskier
than their liabilities.
TRUE

8. There are three types of major financial markets today: primary, secondary,
and derivatives markets. The NYSE and NASDAQ are both examples of
derivatives markets.
FALSE

Multiple Choice Questions

9. What factors are encouraging financial institutions to offer overlapping
financial services such as banking, investment banking, brokerage, etc.?

I. Regulatory changes allowing institutions to offer more services
II. Technological improvements reducing the cost of providing financial
services
III. Increasing competition from full service global financial institutions
IV. Reduction in the need to manage risk at financial institutions

, A.I only
B. II and III only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV

Figure 1-1

IBM creates and sells additional stock to the investment banker, Morgan Stanley.
Morgan Stanley then resells the issue to the U.S. public.

10. This transaction is an example of a(n)
A. primary market transaction
B. asset transformation by Morgan Stanley
C. money market transaction
D. foreign exchange transaction
E. forward transaction

11. Morgan Stanley is acting as a(n)
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A.asset transformer
B. asset broker
C. government regulator
D. foreign service representative

12. A corporation seeking to sell new equity securities to the public for the first
time in order to raise cash for capital investment would most likely
A.conduct an IPO with the assistance of an investment banker
B. engage in a secondary market sale of equity
C. conduct a private placement to a large number of potential buyers
D. place an ad in the Wall Street Journal soliciting retail suppliers of funds
E. none of the above

13. The largest capital market security outstanding in 2010 measured by market
value was
A. securitized mortgages
B. corporate bonds
C. municipal bonds
D. Treasury bonds
E. corporate stocks

14. The diagram below is a diagram of the
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A.secondary markets
B. primary markets
C. money markets
D. derivatives markets
E. commodities markets

15. and allow a financial intermediary to offer safe,
liquid liabilities such as deposits while investing the depositors’ money in
riskier, illiquid assets.

, A. Diversification; high equity returns y y y




B. Price risk; collateral y y




C. Free riders; regulations y y




D. Monitoring;diversification y




E. Primary markets; foreign exchange markets y y y y




16. Depositoryinstitutionsinclude: y y




A.banks
y




B. thrifts
C. finance companies y




D. all of the above y y y




E. A and B only y y y




17. Match the intermediary with the characteristic that best describes its function.
y y y y y y y y y y




I. Provide protection from adverse events y y JK y




II. Pool funds of small savers and invest in either money or capital markets
y y y y y y y y y y y y




III. Provide consumer loans and real estate loans funded by deposits y y y y y y y y y




IV. Accumulate and transfer wealth from work period to retirement period y y y y y y y y y




V. Underwrite and trade securities and provide brokerage services y y y y y y y




1. Thrifts
2. Insurers
3. Pension funds JK



4. Securities firms and investment banks y y y y




5. Mutual funds y




A. 1, 3, 2, 5, 4y y y y




B. 4, 2, 3, 5, 1 y y y y




C. 2, 5, 1, 3, 4 y y y y




D. 2, 4, 5, 3, 1 y y y y




E. 5, 1, 3, 2, 4 y y y y




18. Secondary markets help support primary markets because secondary markets y y y y y y y y




I. Offer primary market purchasers liquidity for their holdings y y y y y y y




II. Update the price or value of the primary market claims y y y y y y y y y




III. Reduce the cost of trading the primary market claims y y y y y y y y




A.Ionly y




B. IIonly y




C. Iand II only
y y y




D. IIand III only y y y




E. I, II, and III y y y




19. Financial intermediaries (FIs) can offer savers a safer, more liquid investment than y y y y y y y y y y y




a capital market security, even though the intermediary invests in risky illiquid
y y y y y JK y y y y y y




instruments because
y y




A. FIs can diversify away some of their risk
y y y y y y y




B. FIs closely monitor the riskiness oftheir assets
y y y y y y y




C. the federal government requires them to do so
y y y y y y y