,TABLE OF CONTENTS
• Chapter 1 – Role of Financial Markets and Institutions
• Chapter 2 – Determination of Interest Rates
• Chapter 3 – Efficiency of Financial Markets
• Chapter 4 – Functions of the Federal Reserve
• Chapter 5 – Monetary Policy
• Chapter 6 – Money Markets
• Chapter 7 – Bond Markets
• Chapter 8 – Mortgage Markets
• Chapter 9 – Stock Valuation and Risk
• Chapter 10 – Stock Offerings and Investor Monitoring
• Chapter 11 – Stock Market Structure
• Chapter 12 – Market Microstructure and Strategies
• Chapter 13 – Financial Futures Markets
• Chapter 14 – Options Markets
• Chapter 15 – Interest Rate Swaps
• Chapter 16 – Credit Derivatives
• Chapter 17 – Commercial Bank Operations
• Chapter 18 – Regulation of Banks
• Chapter 19 – Nonbank Operations
• Chapter 20 – Credit Union Operations
• Chapter 21 – Thrift Operations
• Chapter 22 – Finance Operations
• Chapter 23 – Mutual Fund Operations
• Chapter 24 – Securities Operations
• Chapter 25 – Insurance and Pension Fund Operations
, Chapter 1
Role of Financial Markets and Institutions
Q1.
Which participants in financial markets are considered deficit units?
A) Households that save
B) Businesses issuing bonds
C) Commercial banks accepting deposits
D) Mutual funds pooling investors’ funds
Answer: B) Businesses issuing bonds
Rationale: Deficit units are those who spend more than they save and thus require external
financing. Businesses issuing bonds are borrowing from surplus units, making them deficit units.
Households and mutual funds typically act as surplus units by supplying funds, while banks act as
intermediaries.
Q2.
Which of the following transactions takes place in the primary market?
A) Investor A sells shares of Tesla to Investor B
B) A company issues new bonds for the first time
C) A hedge fund trades derivatives on existing stock
D) A bank resells mortgage-backed securities
Answer: B) A company issues new bonds for the first time
Rationale: The primary market deals with newly issued securities directly from the issuer to
investors. All other choices describe secondary market or derivative transactions.
Q3.
What is the main function of financial markets?
A) Eliminate investment risk
B) Facilitate the flow of funds from surplus units to deficit units
C) Guarantee high returns for all investors
D) Regulate interest rates and monetary supply
Answer: B) Facilitate the flow of funds from surplus units to deficit units
Rationale: The key role of financial markets is channeling funds from those with extra savings
(surplus units) to those needing capital (deficit units). Risk elimination and guaranteed returns are
impossible; monetary policy is handled by central banks, not markets themselves.
, Q4.
Which of the following best describes money markets?
A) They trade long-term securities with maturities greater than one year.
B) They facilitate trading of short-term debt instruments such as Treasury bills.
C) They provide permanent equity financing for corporations.
D) They are exclusively regulated by the SEC.
Answer: B) They facilitate trading of short-term debt instruments such as Treasury bills.
Rationale: Money markets are designed for short-term, highly liquid instruments like T-bills, CDs,
and commercial paper. Long-term securities are traded in capital markets.
Q5.
Which statement about capital market securities is TRUE?
A) They usually mature in less than one year.
B) They are less risky than money market securities.
C) They are used to finance long-term investments like buildings and equipment.
D) They are always more liquid than money market securities.
Answer: C) They are used to finance long-term investments like buildings and equipment.
Rationale: Capital market instruments include bonds, stocks, and mortgages that fund long-term
projects. They generally carry higher risk and lower liquidity compared to money market securities.
Q6.
An investor buying shares of Apple stock on the NASDAQ is participating in the:
A) Primary market
B) Secondary market
C) Money market
D) Capital inflow market
Answer: B) Secondary market
Rationale: The investor is purchasing existing shares from another investor, not directly from
Apple. That makes it a secondary market transaction.
Q7.
Which U.S. law established the Securities and Exchange Commission (SEC) to enforce fair
securities trading?
A) Glass-Steagall Act of 1933
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) Federal Reserve Act of 1913
Answer: C) Securities Exchange Act of 1934
Rationale: The 1933 Act required disclosure in primary markets, while the 1934 Act created the
SEC to regulate secondary market activities and prevent fraud.
• Chapter 1 – Role of Financial Markets and Institutions
• Chapter 2 – Determination of Interest Rates
• Chapter 3 – Efficiency of Financial Markets
• Chapter 4 – Functions of the Federal Reserve
• Chapter 5 – Monetary Policy
• Chapter 6 – Money Markets
• Chapter 7 – Bond Markets
• Chapter 8 – Mortgage Markets
• Chapter 9 – Stock Valuation and Risk
• Chapter 10 – Stock Offerings and Investor Monitoring
• Chapter 11 – Stock Market Structure
• Chapter 12 – Market Microstructure and Strategies
• Chapter 13 – Financial Futures Markets
• Chapter 14 – Options Markets
• Chapter 15 – Interest Rate Swaps
• Chapter 16 – Credit Derivatives
• Chapter 17 – Commercial Bank Operations
• Chapter 18 – Regulation of Banks
• Chapter 19 – Nonbank Operations
• Chapter 20 – Credit Union Operations
• Chapter 21 – Thrift Operations
• Chapter 22 – Finance Operations
• Chapter 23 – Mutual Fund Operations
• Chapter 24 – Securities Operations
• Chapter 25 – Insurance and Pension Fund Operations
, Chapter 1
Role of Financial Markets and Institutions
Q1.
Which participants in financial markets are considered deficit units?
A) Households that save
B) Businesses issuing bonds
C) Commercial banks accepting deposits
D) Mutual funds pooling investors’ funds
Answer: B) Businesses issuing bonds
Rationale: Deficit units are those who spend more than they save and thus require external
financing. Businesses issuing bonds are borrowing from surplus units, making them deficit units.
Households and mutual funds typically act as surplus units by supplying funds, while banks act as
intermediaries.
Q2.
Which of the following transactions takes place in the primary market?
A) Investor A sells shares of Tesla to Investor B
B) A company issues new bonds for the first time
C) A hedge fund trades derivatives on existing stock
D) A bank resells mortgage-backed securities
Answer: B) A company issues new bonds for the first time
Rationale: The primary market deals with newly issued securities directly from the issuer to
investors. All other choices describe secondary market or derivative transactions.
Q3.
What is the main function of financial markets?
A) Eliminate investment risk
B) Facilitate the flow of funds from surplus units to deficit units
C) Guarantee high returns for all investors
D) Regulate interest rates and monetary supply
Answer: B) Facilitate the flow of funds from surplus units to deficit units
Rationale: The key role of financial markets is channeling funds from those with extra savings
(surplus units) to those needing capital (deficit units). Risk elimination and guaranteed returns are
impossible; monetary policy is handled by central banks, not markets themselves.
, Q4.
Which of the following best describes money markets?
A) They trade long-term securities with maturities greater than one year.
B) They facilitate trading of short-term debt instruments such as Treasury bills.
C) They provide permanent equity financing for corporations.
D) They are exclusively regulated by the SEC.
Answer: B) They facilitate trading of short-term debt instruments such as Treasury bills.
Rationale: Money markets are designed for short-term, highly liquid instruments like T-bills, CDs,
and commercial paper. Long-term securities are traded in capital markets.
Q5.
Which statement about capital market securities is TRUE?
A) They usually mature in less than one year.
B) They are less risky than money market securities.
C) They are used to finance long-term investments like buildings and equipment.
D) They are always more liquid than money market securities.
Answer: C) They are used to finance long-term investments like buildings and equipment.
Rationale: Capital market instruments include bonds, stocks, and mortgages that fund long-term
projects. They generally carry higher risk and lower liquidity compared to money market securities.
Q6.
An investor buying shares of Apple stock on the NASDAQ is participating in the:
A) Primary market
B) Secondary market
C) Money market
D) Capital inflow market
Answer: B) Secondary market
Rationale: The investor is purchasing existing shares from another investor, not directly from
Apple. That makes it a secondary market transaction.
Q7.
Which U.S. law established the Securities and Exchange Commission (SEC) to enforce fair
securities trading?
A) Glass-Steagall Act of 1933
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) Federal Reserve Act of 1913
Answer: C) Securities Exchange Act of 1934
Rationale: The 1933 Act required disclosure in primary markets, while the 1934 Act created the
SEC to regulate secondary market activities and prevent fraud.
