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Financial Markets & Institutions 5th
Edition Test Bank
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Chapter 01 Introduction Answer Key
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True / False Questions
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1.v gPrimary markets are markets where users of funds raise cash by selling
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securities to funds’ suppliers. vg vg vg
TRUE
2.v gSecondary markets are markets used by corporations to raise cash by issuing
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securities for a short time period. vg vg vg vg vg
FALSE
3.v gIn 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.v gThe NYSE is an example of a secondary market.
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TRUE
5.v gPrivately 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.v gMoney markets are the markets for securities with an original maturity of 1
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year or less. vg vg
TRUE
7.v gFinancial intermediaries such as banks typically have assets that are riskier
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than their liabilities. vg vg
TRUE
8.v gThere 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. vg
FALSE
Multiple Choice Questions
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9.v g What factors are encouraging financial institutions to offer overlapping
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financial services such as banking, investment banking, brokerage, etc.?
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I. Regulatory changes allowing institutions to offer more services
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II. Technological improvements reducing the cost of providing financial
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services
III. Increasing competition from full service global financial institutions
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IV. Reduction in the need to manage risk at financial institutions
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A.I only vg
B. II and III only
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C. I, II, and III only
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D. I, II, and IV only
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E. I, II, III, and IV
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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 vg vg
B. asset transformation by Morgan Stanley
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C. money market transaction
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D. foreign exchange transaction
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E. forward transaction
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11. Morgan Stanley is acting as a(n)
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A.asset transformer vg
B. asset broker
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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 vg vg vg vg vg vg vg vg vg
B. engage in a secondary market sale of equity
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C. conduct a private placement to a large number of potential buyers
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D. place an ad in the Wall Street Journal soliciting retail suppliers of funds
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E. none of the above
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13. The largest capital market security outstanding in 2010 measured by market
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value was vg
A.securitized mortgages vg
B. corporate bonds
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C. municipal bonds
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D. Treasury bonds
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E. corporate stocks
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14. The diagram below is a diagram of the
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A.secondary markets vg
B. primary markets
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C. money markets
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D. derivatives markets
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E. commodities markets
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15. _________ and __________ allow a financial intermediary to offer safe,
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liquid liabilities such as deposits while investing the depositors’ money in
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riskier, illiquid assets. vg vg
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A.Diversification; high equity returns vg vg vg
B. Price risk; collateral
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C. Free riders; regulations
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D. Monitoring; diversification
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E. Primary markets; foreign exchange markets
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16. Depository institutions include:
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A.banks
B. thrifts
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C. finance companies
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D. all of the above
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E. A and B only
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17. Match the intermediary with the characteristic that best describes its function.
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I. Provide protection from adverse events
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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
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V. Underwrite and trade securities and provide brokerage services
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1. Thrifts
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2. Insurers
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3. Pension funds
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4. Securities firms and investment banks
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5. Mutual funds
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A.1, 3, 2, 5, 4 vg vg vg vg
B. 4, 2, 3, 5, 1
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C. 2, 5, 1, 3, 4
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D. 2, 4, 5, 3, 1
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E. 5, 1, 3, 2, 4
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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
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A.I only vg
B. II only
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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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than a capital market security, even though the intermediary invests in risky
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illiquid instruments because vg vg
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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Financial Markets & Institutions 5th
Edition Test Bank
,vg
Chapter 01 Introduction Answer Key
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True / False Questions
vg vg vg
1.v gPrimary markets are markets where users of funds raise cash by selling
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securities to funds’ suppliers. vg vg vg
TRUE
2.v gSecondary markets are markets used by corporations to raise cash by issuing
vg vg vg vg vg vg vg vg vg vg vg
securities for a short time period. vg vg vg vg vg
FALSE
3.v gIn a private placement, the issuer typically sells the entire issue to one, or only
vg vg vg vg vg vg vg vg vg vg vg vg vg vg
a few, institutional buyers.
vg vg vg
TRUE
4.v gThe NYSE is an example of a secondary market.
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TRUE
5.v gPrivately 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.v gMoney markets are the markets for securities with an original maturity of 1
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year or less. vg vg
TRUE
7.v gFinancial intermediaries such as banks typically have assets that are riskier
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than their liabilities. vg vg
TRUE
8.v gThere 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. vg
FALSE
Multiple Choice Questions
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9.v g What factors are encouraging financial institutions to offer overlapping
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financial services such as banking, investment banking, brokerage, etc.?
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I. Regulatory changes allowing institutions to offer more services
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II. Technological improvements reducing the cost of providing financial
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services
III. Increasing competition from full service global financial institutions
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IV. Reduction in the need to manage risk at financial institutions
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A.I only vg
B. II and III only
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C. I, II, and III only
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D. I, II, and IV only
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E. I, II, III, and IV
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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 vg vg
B. asset transformation by Morgan Stanley
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C. money market transaction
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D. foreign exchange transaction
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E. forward transaction
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11. Morgan Stanley is acting as a(n)
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A.asset transformer vg
B. asset broker
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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 vg vg vg vg vg vg vg vg vg
B. engage in a secondary market sale of equity
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C. conduct a private placement to a large number of potential buyers
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D. place an ad in the Wall Street Journal soliciting retail suppliers of funds
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E. none of the above
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13. The largest capital market security outstanding in 2010 measured by market
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value was vg
A.securitized mortgages vg
B. corporate bonds
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C. municipal bonds
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D. Treasury bonds
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E. corporate stocks
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14. The diagram below is a diagram of the
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A.secondary markets vg
B. primary markets
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C. money markets
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D. derivatives markets
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E. commodities markets
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15. _________ and __________ allow a financial intermediary to offer safe,
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liquid liabilities such as deposits while investing the depositors’ money in
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riskier, illiquid assets. vg vg
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A.Diversification; high equity returns vg vg vg
B. Price risk; collateral
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C. Free riders; regulations
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D. Monitoring; diversification
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E. Primary markets; foreign exchange markets
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16. Depository institutions include:
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A.banks
B. thrifts
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C. finance companies
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D. all of the above
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E. A and B only
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17. Match the intermediary with the characteristic that best describes its function.
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I. Provide protection from adverse events
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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
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V. Underwrite and trade securities and provide brokerage services
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1. Thrifts
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2. Insurers
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3. Pension funds
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4. Securities firms and investment banks
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5. Mutual funds
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A.1, 3, 2, 5, 4 vg vg vg vg
B. 4, 2, 3, 5, 1
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C. 2, 5, 1, 3, 4
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D. 2, 4, 5, 3, 1
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E. 5, 1, 3, 2, 4
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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
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A.I only vg
B. II only
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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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than a capital market security, even though the intermediary invests in risky
vg vg vg vg vg vg vg vg vg vg vg
illiquid instruments because vg vg
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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