2) Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to pr

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Economics of Money, Banking, and Fin. Mkts., 2e (B.S. Ed.) (Mish

2.1 Function of Financial Markets

1) Every financial market has the following characteristic:
A) It determines the level of interest rates.
B) It allows common stock to be traded.
C) It allows loans to be made.
D) It channels funds from lenders-savers to borrowers-
spenders. Answer: D
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2) Financial markets have the basic function of
A) getting people with funds to lend together with people who want to borrow funds.
B) assuring that the swings in the business cycle are less pronounced.
C) assuring that governments need never resort to printing money.
D) providing a risk-free repository of spending
power. Answer: A
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3) Financial markets improve economic welfare because
A) they channel funds from investors to savers.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) eliminate the need for indirect
finance. Answer: B
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4) Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) cause financial crises.
D) produce an efficient allocation of
capital. Answer: D
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,5) A breakdown of financial markets can result in
A) financial stability.
B) rapid economic growth.
C) political instability.
D) stable prices.
Answer: C
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,6) The principal lender-savers are
A) governments.
B) businesses.
C) households.
D) foreigners.
Answer: C
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7) Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual
fund. Answer: B
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8) Assume that you borrow $2000 at 10% annual interest to finance a new business project.
For this loan to be profitable, the minimum amount this project must generate in annual
earnings is
A) $400.
B) $201.
C) $200.
D) $199.
Answer: B
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9) You can borrow $5000 to finance a new business venture. This new venture will generate
annual earnings of $251. The maximum interest rate that you would pay on the borrowed
funds and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
Answer: D
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10) With finance, borrowers obtain funds from lenders by selling them securities in
the financial markets.
A) active
B) determined
C) indirect
D) direct
Answer: D
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, 11) With direct finance funds are channeled through the financial market from the
directly to the .
A) savers, spenders
B) spenders, investors
C) borrowers, savers
D) investors, savers
Answer: A
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12) Distinguish between direct finance and indirect finance. Which of these is the most
important source of funds for corporations in the United States?
Answer: With direct finance, funds flow directly from the lender/saver to the borrower . With
indirect finance, funds flow from the lender/saver to a financial intermediary who then channels
the funds to the borrower/investor. Financial intermediaries (indirect finance) are the major
source of funds for corporations in the U.S.
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2.2 Structure of Financial Markets

1) Which of the following statements about the characteristics of debt and equity is false?
A) They can both be long-term financial instruments.
B) They can both be short-term financial instruments.
C) They both involve a claim on the issuer's income.
D) They both enable a corporation to raise funds.
Answer: B
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2) Which of the following statements about the characteristics of debt and equities is true?
A) They can both be long-term financial instruments.
B) Bond holders are residual claimants.
C) The income from bonds is typically more variable than that from equities.
D) Bonds pay dividends.
Answer: A
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3) Which of the following statements about financial markets and securities is true?
A) A bond is a long-term security that promises to make periodic payments called dividends
to the firm's residual claimants.
B) A debt instrument is intermediate term if its maturity is less than one year.
C) A debt instrument is intermediate term if its maturity is ten years or longer.
D) The maturity of a debt instrument is the number of years (term) to that instrument's
expiration date.
Answer: D
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