Financial Institutions and Markets
FINANCIAL INSTITUTIONS AND MARKETS | MIDTERM EXAM
QUESTIONS AND CORRECT ANSWERS | LATEST VERSION
2026/2027
FINANCIAL INSTITUTIONS AND MARKETS
MIDTERM
1. What is the basic function of financial markets in an economy?
A. Setting the official interest rate that commercial banks charge one another
B. Channeling funds from households and firms with surplus funds to those
with productive uses for funds
C. Printing currency so that businesses have enough money to operate
D. Guaranteeing that every borrower will repay the full amount of a loan
B. Channeling funds from households and firms with surplus funds to
those with productive uses for funds
Financial markets move savings from lender-savers to borrower-spenders who
have productive investment opportunities, which raises output and efficiency.
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, Financial Institutions and Markets
2. When a corporation raises funds by selling its own bonds directly to
investors in the financial market, this is an example of:
A. Direct finance
B. Indirect finance
C. Asset transformation
D. Financial intermediation
A. Direct finance
In direct finance, borrowers obtain funds directly from lenders by selling them
securities; no intermediary stands between them.
3. A saver deposits money in a bank, and the bank lends those funds to a small
business. This process is called:
A. Direct finance
B. Underwriting
C. Secondary market trading
D. Indirect finance
D. Indirect finance
Funds pass through a financial intermediary (the bank) on their way from saver
to borrower, which is the definition of indirect finance.
4. Which of the following best describes a primary market?
A. A market in which only government securities are traded
B. A market in which newly issued securities are sold to initial buyers by the
issuer
C. A market limited to securities with maturities of less than one year
D. A market in which previously issued securities are resold among investors
B. A market in which newly issued securities are sold to initial buyers by
the issuer
The primary market is where a corporation or government agency first sells a
new issue of stocks or bonds.
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, Financial Institutions and Markets
5. In the primary market, the investment bank that guarantees the issuer a
price for its securities and then resells them to the public is acting as a(n):
A. Broker
B. Specialist
C. Underwriter
D. Market maker on an exchange
C. Underwriter
Underwriting means the investment bank buys the issue at a guaranteed price
and takes on the risk of reselling it to the public.
6. Trading of previously issued shares of Apple stock on the New York Stock
Exchange takes place in the:
A. Initial public offering market
B. Primary market
C. Secondary market
D. Money market
C. Secondary market
Shares that have already been issued change hands between investors in the
secondary market; Apple receives no new funds from these trades.
7. A financial agent who links buyers and sellers by buying and selling
securities for his or her own account at stated prices is a:
A. Underwriter
B. Trustee
C. Dealer
D. Broker
C. Dealer
Dealers hold an inventory and trade from their own account at quoted bid and
ask prices, unlike brokers who simply match buyers and sellers.
8. A broker in a secondary market earns income mainly by:
A. Guaranteeing the price of a new issue
B. Profiting from the spread between the bid and ask price on securities held in
inventory
C. Collecting interest on deposits
D. Charging commissions for matching buyers with sellers
D. Charging commissions for matching buyers with sellers
Brokers are agents of investors and are paid commissions; they do not take
ownership of the securities.
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, Financial Institutions and Markets
9. Why are secondary markets important to a corporation that issues
securities?
A. They are the main source of new funds for the corporation
B. They make securities more liquid and their prices determine the price the
issuer can get in the primary market
C. They eliminate the default risk of the corporation's bonds
D. They allow the corporation to collect a fee every time its stock is traded
B. They make securities more liquid and their prices determine the price
the issuer can get in the primary market
A firm earns nothing directly from secondary trading, but liquid secondary
markets make buyers willing to pay more for new issues.
10. An over-the-counter (OTC) market is best described as one in which:
A. Buyers and sellers meet in one central location to conduct trades
B. Dealers at different locations with inventories of securities stand ready to
trade with anyone who accepts their prices
C. Only newly issued securities can be traded
D. Trading is restricted to government agencies
B. Dealers at different locations with inventories of securities stand ready
to trade with anyone who accepts their prices
OTC markets are decentralized and connected by computer networks; the
market for U.S. government bonds is a well-known example.
11. The money market is the financial market in which:
A. Debt with maturities of ten years or longer is traded
B. Only short-term debt instruments with original maturities of less than one
year are traded
C. Only common stock is traded
D. Foreign currencies are exchanged
B. Only short-term debt instruments with original maturities of less than
one year are traded
Money market instruments are short-term debt securities, generally maturing in
less than one year.
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FINANCIAL INSTITUTIONS AND MARKETS | MIDTERM EXAM
QUESTIONS AND CORRECT ANSWERS | LATEST VERSION
2026/2027
FINANCIAL INSTITUTIONS AND MARKETS
MIDTERM
1. What is the basic function of financial markets in an economy?
A. Setting the official interest rate that commercial banks charge one another
B. Channeling funds from households and firms with surplus funds to those
with productive uses for funds
C. Printing currency so that businesses have enough money to operate
D. Guaranteeing that every borrower will repay the full amount of a loan
B. Channeling funds from households and firms with surplus funds to
those with productive uses for funds
Financial markets move savings from lender-savers to borrower-spenders who
have productive investment opportunities, which raises output and efficiency.
Page 1 of 60
, Financial Institutions and Markets
2. When a corporation raises funds by selling its own bonds directly to
investors in the financial market, this is an example of:
A. Direct finance
B. Indirect finance
C. Asset transformation
D. Financial intermediation
A. Direct finance
In direct finance, borrowers obtain funds directly from lenders by selling them
securities; no intermediary stands between them.
3. A saver deposits money in a bank, and the bank lends those funds to a small
business. This process is called:
A. Direct finance
B. Underwriting
C. Secondary market trading
D. Indirect finance
D. Indirect finance
Funds pass through a financial intermediary (the bank) on their way from saver
to borrower, which is the definition of indirect finance.
4. Which of the following best describes a primary market?
A. A market in which only government securities are traded
B. A market in which newly issued securities are sold to initial buyers by the
issuer
C. A market limited to securities with maturities of less than one year
D. A market in which previously issued securities are resold among investors
B. A market in which newly issued securities are sold to initial buyers by
the issuer
The primary market is where a corporation or government agency first sells a
new issue of stocks or bonds.
Page 2 of 60
, Financial Institutions and Markets
5. In the primary market, the investment bank that guarantees the issuer a
price for its securities and then resells them to the public is acting as a(n):
A. Broker
B. Specialist
C. Underwriter
D. Market maker on an exchange
C. Underwriter
Underwriting means the investment bank buys the issue at a guaranteed price
and takes on the risk of reselling it to the public.
6. Trading of previously issued shares of Apple stock on the New York Stock
Exchange takes place in the:
A. Initial public offering market
B. Primary market
C. Secondary market
D. Money market
C. Secondary market
Shares that have already been issued change hands between investors in the
secondary market; Apple receives no new funds from these trades.
7. A financial agent who links buyers and sellers by buying and selling
securities for his or her own account at stated prices is a:
A. Underwriter
B. Trustee
C. Dealer
D. Broker
C. Dealer
Dealers hold an inventory and trade from their own account at quoted bid and
ask prices, unlike brokers who simply match buyers and sellers.
8. A broker in a secondary market earns income mainly by:
A. Guaranteeing the price of a new issue
B. Profiting from the spread between the bid and ask price on securities held in
inventory
C. Collecting interest on deposits
D. Charging commissions for matching buyers with sellers
D. Charging commissions for matching buyers with sellers
Brokers are agents of investors and are paid commissions; they do not take
ownership of the securities.
Page 3 of 60
, Financial Institutions and Markets
9. Why are secondary markets important to a corporation that issues
securities?
A. They are the main source of new funds for the corporation
B. They make securities more liquid and their prices determine the price the
issuer can get in the primary market
C. They eliminate the default risk of the corporation's bonds
D. They allow the corporation to collect a fee every time its stock is traded
B. They make securities more liquid and their prices determine the price
the issuer can get in the primary market
A firm earns nothing directly from secondary trading, but liquid secondary
markets make buyers willing to pay more for new issues.
10. An over-the-counter (OTC) market is best described as one in which:
A. Buyers and sellers meet in one central location to conduct trades
B. Dealers at different locations with inventories of securities stand ready to
trade with anyone who accepts their prices
C. Only newly issued securities can be traded
D. Trading is restricted to government agencies
B. Dealers at different locations with inventories of securities stand ready
to trade with anyone who accepts their prices
OTC markets are decentralized and connected by computer networks; the
market for U.S. government bonds is a well-known example.
11. The money market is the financial market in which:
A. Debt with maturities of ten years or longer is traded
B. Only short-term debt instruments with original maturities of less than one
year are traded
C. Only common stock is traded
D. Foreign currencies are exchanged
B. Only short-term debt instruments with original maturities of less than
one year are traded
Money market instruments are short-term debt securities, generally maturing in
less than one year.
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