Student name:__________

1) What factors are encouraging financial institutions to

offer overlapping financial services such as banking,
investment banking, brokerage, etc.? 1.I. Regulatory changes
allowing institutions to offer more services
2.II. Technological improvements reducing the cost of
providing financial services
3.III. Increasing competition from full-service global
financial institutions
4.IV. Reduction in the need to manage risk at financial
institutions

D) I, II, and IV
A) I only only
B) II and III only E) I, II, III, and IV
C) I, II, and III only

2) IBM creates and sells additional stock to the

investment banker Morgan Stanley. Morgan Stanley then
resells the issue to the U.S. public through its mutual funds.

This transaction is an example of a(n):

E) forward
A) primary market transaction. transaction.
B) asset transformation by Morgan Stanley.
C) money market transaction.
D) foreign exchange transaction.

3) IBM creates and

Version 1 1
sells additional stock to the investment banker Morgan
Stanley. Morgan Stanley then resells the issue to the U.S. Morgan Stanley is acting
public through its mutual funds. as a(n)

E) derivatives
A) asset transformer. trader.
B) asset broker.
C) government regulator.
D) foreign service representative.

4) A corporation seeking to sell new equity securities to investment would most

the public for the first time in order to raise cash for capital likely:

retail suppliers of funds.

A) conduct an IPO with the assistance of an E) issue bonds
investment banker. with the assistance of a
B) engage in a secondary market sale of equity. dealer.
C) conduct a private placement to a large number of
potential buyers.
D) place an ad in the Wall Street Journal soliciting

5) The largest capital market security outstanding in

2019 measured by market value was:

E) corporate
A) securitized mortgages. stocks.
B) corporate bonds.
C) municipal bonds.
D) Treasury bonds.

6) The diagram below is a diagram of the:

A) secondary

Version 1 2
markets. E) commodities
B) primary markets. markets.
C) money markets.
D) derivatives markets.

7) _________ and __________ allow a financial

intermediary to offer safe liquid liabilities such as deposits
while investing the depositors' money in riskier illiquid assets.

E) Primary
A) Diversification; high equity returns markets; foreign exchange
B) Price risk; collateral markets
C) Free riders; regulations
D) Monitoring; diversification

8) Depository institutions include:

E) All of these
A) banks only. choices are correct.
B) thrifts only.
C) finance companies only.
D) banks and thrifts.

9) Match the intermediary with the characteristic that 5.V. Underwrite and
best describes its function. 1.I. Provide protection from trade securities and
adverse events provide brokerage services
2.II. Pool funds of small savers and invest in either money 1.Thrifts
or capital markets 2.Insurers
3.III. Provide consumer loans and real estate loans funded 3.Pension funds
by deposits 4.Securities firms and
4.IV. Accumulate and transfer wealth from work period to investment banks
retirement period 5.Mutual funds

A) 1, 3, 2, 5, 4

Version 1 3
 D) 2, 4, 5, 3, 1
B) 4, 2, 3, 5, 1 E) 5, 1, 3, 2, 4
C) 2, 5, 1, 3, 4

10) Secondary markets help support primary markets

because secondary markets: 1.I. offer primary market
purchasers liquidity for their holdings.
2.II. update the price or value of the primary market claims.
3.III. reduce the cost of trading the primary market claims.

D) II and III only

A) I only E) I, II, and III
B) II only
C) I and II only

11) Financial intermediaries (FIs) can offer savers a safer,

more liquid investment than a capital market security, even
though the intermediary invests in risky illiquid instruments
because:

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

12) Households are increasingly likely to both directly 3.III. Money to provide
purchase securities (perhaps via a broker) and also place some supplemental retirement
money with a bank or thrift to meet different needs. Match the income
given investor's desire with the appropriate intermediary or 4.IV. Money to be used
direct security. to provide for children in
1.I. Money likely to be needed within six months the event of death
2.II. Money to be set aside for college in 10 years 1.Depository institutions

Version 1 4
 2.Insurer 4.Stocks or bonds
3.Pension fund

D) 1, 4, 3, 2
A) 2, 3, 4, 1 E) 4, 2, 1, 3
B) 1, 4, 2, 3
C) 3, 2, 1, 4

13) As of 2019, which one of the following derivatives

instruments had the greatest amount of notional principal
outstanding?

D) Bonds
A) Futures E) Forwards
B) Swaps
C) Options

14) Which of the following is/are money market

instrument(s)?

E) Negotiable
A) Negotiable CDs CDs, common stock, and
B) Common stock T-bonds
C) T-bonds
D) 4-year maturity corporate bond

15) The Securities Exchange Commission (SEC) does

not:

D) attempt to
A) decide whether a public issue is fairly priced. reduce excessive price
B) decide whether a firm making a public issue has fluctuations.
provided enough information for investors to decide whether E) monitor the
the issue is fairly priced. major securities
C) require exchanges to monitor trading to prevent exchanges.
insider trading.

Version 1 5
16) The most diversified type of depository institutions is:

D) finance
A) credit unions. companies.
B) savings associations. E) mutual funds.
C) commercial banks.

17) Insolvency risk at a financial intermediary (FI) is the

risk:

technology do not result in

A) that promised cash flows from loans and cost savings or revenue
securities held by FIs may not be paid in full. growth.
B) incurred by an FI when the maturities of its assets E) that an FI may
and liabilities do not match. not have enough capital to
C) that a sudden surge in liability withdrawals may offset a sudden decline in
require an FI to liquidate assets quickly at fire sale prices. the value of its assets.
D) incurred by an FI when its investments in

18) Depository institutions (DIs) play an important role in to the rest of the economy
the transmission of monetary policy from the Federal Reserve because:

supply.
A) loans to corporations are part of the money E) thrifts provide
supply. a large amount of credit to
B) bank and thrift loans are tightly regulated. finance residential real
C) U.S. DIs compete with foreign financial estate.
institutions.
D) DI deposits are a major portion of the money

19) Liquidity risk at a

financial intermediary (FI)
is the risk:

Version 1 6
 technology do not result in
A) that promised cash flows from loans and cost savings or revenue
securities held by FIs may not be paid in full. growth.
B) incurred by an FI when the maturities of its assets E) that an FI may
and liabilities do not match. not have enough capital to
C) that a sudden surge in liability withdrawals may offset a sudden decline in
require an FI to liquidate assets quickly at fire sale prices. the value of its assets.
D) incurred by an FI when its investments in

20) Money markets trade securities that: 1.I. mature in

one year or less.
2.II. have little chance of loss of principal.
3.III. must be guaranteed by the federal government.

D) I and III only

A) I only E) I, II, and III
B) II only
C) I and II only

21) Which of the following are capital market

instruments?

E) All of these
A) 10-year corporate bonds choices are correct.
B) 30-year mortgages
C) 20-year Treasury bonds
D) 15-year U.S. government agency bonds

22) Commercial paper is a:

home, land, or other real

A) time draft payable to a seller of goods, with property.
payment guaranteed by a bank. C) short-term fund
B) loan to an individual or business to purchase a transferred between

Version 1 7
financial institutions usually for no more than one day. company to raise funds for
D) marketable bank-issued time deposit that specifies a short time period.
the interest rate earned and a fixed maturity date.
E) short-term unsecured promissory note issued by a

23) A negotiable CD is a:

the interest rate earned and

A) time draft payable to a seller of goods, with a fixed maturity date.
payment guaranteed by a bank. E) short-term
B) loan to an individual or business to purchase a unsecured promissory note
home, land, or other real property. issued by a company to
C) short-term fund transferred between financial raise funds for a short time
institutions usually for no more than one day. period.
D) marketable bank-issued time deposit that specifies

24) Financial intermediaries’ ability to reduce the average operations allows them to
cost of collecting information because of their efficient take advantage of:

E)
A) asset transformation. standardization.
B) economies of scale.
C) economies of scope.
D) transformational trading.

25) Discuss how secondary markets benefit issuers and

investors.

Version 1 8
26) How can brokers and dealers make money? Which activity is riskier? Why?

27) What does an asset transformer do? Why is asset

transformation a risky activity?

28) How can using indirect finance rather than direct associated with monitoring
finance reduce agency costsfor users of funds that is funds?

29) What have been the major factors contributing to

growth in the foreign financial markets?

30) You are a corporate treasurer seeking to raise funds

for your firm. What are some advantages of raising funds via
a financial intermediary (FI) rather than by selling securities
to the public?

Version 1 9
31) How can a depository intermediary (DI) afford to denomination deposits?
purchase long-term risky direct claims from users of funds What can go wrong in this
and finance these purchases with safe, liquid, short-term, low- process?

32) Discuss the benefits to funds suppliers of using a

financial intermediary asset transformer in place of directly
purchasing claims such as stocks or bonds. What is the major
disadvantage?

33) Discuss the major macro benefits of financial

intermediaries. What role does the government have in the
credit allocation process?

34) What determines the price of financial instruments?

Which are riskier, capital market instruments or money
market instruments? Why?

Version 1 10
35) Explain how the credit crunch originating in the their loans and investments
mortgage markets hurt financial intermediaries' attempts to while offering more liquid
use diversification and monitoring to limit the riskiness of claims to savers.

36) Primary markets are markets in which users of funds

raise cash by selling securities to funds suppliers.

⊚ true
⊚ false

37) Secondary markets are markets used by corporations

to raise cash by issuing securities for a short time period.

⊚ true
⊚ false

38) Corporate security issuers are always directly involved

in funds transfers in the secondary market.

⊚ true
⊚ false

39) The NYSE is an example of a secondary market.

⊚ true
⊚ false

Version 1 11
40) Central governments sometimes indirectly intervene in through raising or lowering
foreign exchange markets by affecting foreign exchange rates interest rates.

⊚ true
⊚ false

41) Money markets are the markets for securities with an

original maturity of one year or less.

⊚ true
⊚ false

42) Financial intermediaries rather than financial systems suppliers to the users of
are the most common agents to channel funds from the funds.

⊚ true
⊚ false

43) There are three types of major financial markets today:

primary, secondary, and derivatives markets. The NYSE and
NASDAQ are both examples of derivatives markets.

⊚ true
⊚ false

44) Asset
transformation by financial

Version 1 12
intermediaries involves increasing the risk attributes of
securities such as mortgages, bonds, and stocks.

⊚ true
⊚ false

45) One of the factors responsible for globalization of

financial markets and institutions is deregulation.

⊚ true
⊚ false

46) The average cost incurred by financial institutions to

collect information is larger than that of individuals.

⊚ true
⊚ false

47) The Volcker Rule prohibits U.S. depository

institutions from engaging in proprietary trading.

⊚ true
⊚ false

48) Financial intermediation provides direct transfer of

funds to the users.

⊚ true ⊚ false

Version 1 13
49) In the United States, the SEC provides deposit
insurance for $250,000 per person per bank.

⊚ true
⊚ false

50) An Enterprise Risk Management (ERM) system is

responsible for managing the totality of a firm’s risk
exposures.

⊚ true
⊚ false

Version 1 14
Answer Key

Test name: chapter 1

1) C
2) A
3) A
4) A
5) E
6) B
7) D
8) D
9) C
10) E
11) D
12) D
13) B
14) A
15) A
16) C
17) E
18) D
19) C

Version 1 15
20) C
21) E
22) E
23) D
24) B
36) TRUE
37) FALSE
38) FALSE
39) TRUE
40) TRUE
41) TRUE
42) TRUE
43) FALSE
44) FALSE
45) TRUE
46) FALSE
47) TRUE
48) FALSE
49) FALSE
50) TRUE

Version 1 16