Financial Markets & Institutions 6th Edition Test Bank

JK

,FinancialMarkets&Institutions5th Edition c c c c c




Test Bank
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Chapter 01 Introduction Answer Key
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True / False Questions
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1. Primary markets are markets where users of funds raise cash by selling
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securities to funds’ suppliers.
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TRUE

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

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

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

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

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

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


TRUE

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

Multiple Choice Questions
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9. What factors are encouraging financial institutions to offer overlapping
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c financial services such as banking, investment banking, brokerage, etc.?
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I. Regulatory changes allowing institutions to offer more services c c c c c c c


II. Technological improvements reducing the cost of providing financial c c c c c c c


services
c


III. Increasing competition from full service global financial institutions c c c c c c c


IV. Reduction in the need to manage risk at financial institutions c c c c c c c c c

, A.I only c


B. II and III only c c c


C. I, II, and III only c c c c


D. I, II, and IV only c c c c


E. I, II, III, and IV c c c c




Figure 1-1
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IBM creates and sells additional stock to the investment banker, Morgan Stanley.
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Morgan Stanley then resells the issue to the U.S. public.
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10. This transaction is an example of a(n)
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A. primary market transaction c c


B. asset transformation by Morgan Stanley c c c c


C. money market transaction c c


D. foreign exchange transaction c c


E. forward transaction c




11. Morgan Stanley is acting as a(n) JK c c c c


A.asset transformer
c c


B. asset broker c c


C. government regulator
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D. foreign service representative
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12. A corporation seeking to sell new equity securities to the public for the first
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time in order to raise cash for capital investment would most likely
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A.conduct an IPO with the assistance of an investment banker
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B. engage in a secondary market sale of equity c c c c c c c


C. conduct a private placement to a large number of potential buyers c c c c c c c c c c


D. place an ad in the Wall Street Journal soliciting retail suppliers of funds
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E. none of the above c c c




13. The largest capital market security outstanding in 2010 measured by market
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value was
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A. securitized mortgages c


B. corporate bonds c


C. municipal bonds c


D. Treasury bonds c


E. corporate stocks c




14. The diagram below is a diagram of the
c JK c c c c c


A.secondary markets
c c


B. primary markets c


C. money markets c


D. derivatives markets c


E. commodities markets c




15. c and allow a financial intermediary to offer safe, c c c c c c c


c liquid liabilities such as deposits while investing the depositors’ money in
c c c c c c c c c c


c riskier, illiquid assets. c c

, A. Diversification; high equity returns c c c


B. Price risk; collateral c c


C. Free riders; regulations c c


D. Monitoring; diversification c


E. Primary markets; foreign exchange markets c c c c




16. Depository institutions include: c c


cA.banks
B. thrifts
C. finance companies c


D. all of the above c c c


E. A and B onlyc c c




17. Match the intermediary with the characteristic that best describes its function.
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I. Provide protection from adverse events c c JK c


II. Pool funds of small savers and invest in either money or capital markets
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III. Provide consumer loans and real estate loans funded by deposits
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IV. Accumulate and transfer wealth from work period to retirement period c c c c c c c c c


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




1. Thrifts
2. Insurers
3. Pension funds JK



4. Securities firms and investment banks c c c c


5. Mutual funds c


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


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


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


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


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




18. Secondary markets help support primary markets because secondary markets
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I. Offer primary market purchasers liquidity for their holdings
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II. Update the price or value of the primary market claims
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III. Reduce the cost of trading the primary market claims c c c c c c c c


A.I only
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B. II only c


C. I and II only
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D. II and III only
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E. I, II, and III
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19. Financial intermediaries (FIs) can offer savers a safer, more liquid investment
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cthan a capital market security, even though the intermediary invests in risky
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cilliquid instruments because c c


A. FIs can diversify away some of their risk
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B. FIs closely monitor the riskiness of their assets
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C. the federal government requires them to do so
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