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CHAPTER 6
Financial Markets, Instruments, and Market Makers
1. The
is the price at which a market maker is willing to sell securities
a. bid price
b. primary market price
c. broker price
d. asked price
ANSWER d
2. The
is the price at which a market maker is willing to buy securities
a. bid price
b. primary market price
c. broker price
d. asked price
ANSWER a
3. The
is the market for financial assets with an original maturity of greater than one
year.
a. money market
b. commercial paper market
c. capital market
d. Eurodollar market
ANSWER: c
4. Stocks are traded in the
a. money market.
b. commercial paper market.
c. capital market.
d. Eurodollar market.
ANSWER: c
5. Commercial paper is traded in the
a. money market.
b. commercial paper market.
c. capital market.
d. Eurodollar market.
ANSWER: a
6. The
is the market for financial assets with an original maturity of one year or less.
a. money market
b. commercial paper market
c. capital market
d. Eurodollar market
ANSWER: a
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Financial Markets, Instruments, and Market Makers
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7. The borrowing and loaning of reserves among depository institutions, typically overnight, occurs
in the
a. money market.
b. fed funds market.
c. capital market.
d. Eurodollar market.
ANSWER: b
8. A person who arranges trades between buyers and sellers and who stands ready to be a principal
in the transaction is a
a. dealer.
b. broker.
c. market maker.
d. Both a and c
ANSWER: d
9. A person who for a fee arranges trades between buyers and sellers but does not act as a principal
in the transaction is a
a. dealer.
b. broker.
c. market maker.
d. Both a and c
ANSWER: b
10. Short-term debt instruments issued by corporations are called
a. revenue bonds.
b. corporate stocks.
c. corporate bonds.
d. commercial paper.
ANSWER: d
11. Long-term debt instruments issued by corporations are called
a. revenue bonds.
b. corporate stocks.
c. corporate bonds.
d. commercial paper.
ANSWER: c
12. Corporate bonds are traded in the
a. money market.
b. fed funds market.
c. capital market.
d. Eurodollar market.
ANSWER: c
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13. Money-market instruments created in the course of international trade to guarantee bank drafts
are called
a. revenue bonds.
b. corporate stocks.
c. bankers’ acceptances.
d. commercial paper.
ANSWER: c
14. Dollar-denominated deposits held abroad are called
a. Eurodollars.
b. corporate stocks.
c. banker’s acceptances.
d. commercial paper.
ANSWER: a
15. The
a. money
b. spot
c. primary
d. secondary
ANSWER: c
16.
market is where a security is sold for the first time.
markets are markets where the terms of a transaction, including price, are agreed
upon today for a transaction that will take place on a specified date in the future.
a. Money
b. Fed funds
c. Capital
d. Financial futures
ANSWER: d
17. The
instantaneously.
a. money
b. spot
c. primary
d. secondary
ANSWER: b
market is where the trading of financial securities takes place
18. The
sold.
a. money
b. spot
c. primary
d. secondary
ANSWER: d
market is where previously issued financial securities are bought and
Financial Markets, Instruments, and Market Makers
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19.
are municipal bonds paid out of the general revenues of the issuer and backed
by the full faith and credit of the issuer.
a. Negotiable certificates of deposit
b. General obligation bonds
c. Revenue bonds
d. Repurchase agreements
ANSWER: b
20.
are used to finance specific projects where the proceeds of those projects are
used to pay off holders of the security.
a. Negotiable certificates of deposit
b. General obligation bonds
c. Revenue bonds
d. Repurchase agreements
ANSWER: c
21.
are short-term debt instruments of the U.S. Government with typical maturities
of three to twelve months.
a. Treasury bills (T-Bills)
b. U.S. Government Bonds
c. U.S. Government Agency Securities
d. Asset-backed securities
ANSWER: a
22.
are long-term debt instruments of the U.S. government with original maturities
from two to thirty years.
a. T-Bills
b. General Revenue Bonds
c. U.S. Government Securities
d. Asset-backed securities
ANSWER: c
23. Short-term agreements, where the seller sells a government security to a buyer with the
simultaneous agreement to buy it back on a later date at a higher price, are called
a. negotiable certificates of deposit.
b. general revenue bonds.
c. repurchase agreements.
d. asset-backed securities.
ANSWER: c
24. The money market includes those markets that trade securities with original maturities of
__________.
a. 1 month or less
b. 6 months or less
c. 8 months or less
d. 12 months or less
ANSWER: d
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Chapter 5
25. Which of the following would not be traded in a money market?
a. Treasury bills
b. Mortgage notes
c. Commercial paper
d. Negotiable certificates of deposit
ANSWER: b
26. The capital market includes those markets that trade securities with original maturities of
__________.
a. 1 month or less
b. 6 months or less
c. 12 months or less
d. more than 1 year
ANSWER: d
27. Which of the following would be traded in the money market?
a. Corporate bonds
b. Stocks
c. Treasury bonds issued by the U.S. Treasury
d. Treasury bills (T-bills)
ANSWER: d
28. Which market is often referred to as the long-term market?
a. the capital market
b. the primary market
c. the money market
d. the discount market
ANSWER: a
29. Which market is often referred to as the short-term market?
a. the capital market
b. the primary market
c. the money market
d. the stock market
ANSWER: c
30. Term to maturity refers to which of the following?
a. The length of time from the issuance of a financial security to its maturity
b. Net present value from the issuance of a security
c. The length of time for expected depreciation of the security
d. The time remaining on a Fed Governor’s term
ANSWER: a
31. A security may be called which of the following?
a. A claim
b. An IOU
c. A financial instrument
d. All of the above
ANSWER: d
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32. A primary market is which of these?
a. Where stocks are sold
b. Where bonds are sold
c. Where intermediaries are the buyers and sellers
d. Where a security is initially sold for the first time
ANSWER: d
33. If Michelle wanted to purchase newly issued stock from a new computer company, she would
purchase this in a
a. primary market.
b. secondary market.
c. money market.
d. CD market.
ANSWER: a
34. Nearly all transactions in financial markets occur in the
a. money market.
b. secondary market.
c. CD market.
d. primary market.
ANSWER: b
35. The secondary market does not
a. have a strong effect on investment and economic growth.
b. have a strong effect on the primary market.
c. generate additional funds for the economy as a whole.
d. All of the above.
ANSWER: c
36. The spot market is where
a. future trading of financial instruments takes place.
b. future trading of options takes place.
c. instantaneous trading of financial instruments takes place.
d. All of the above.
ANSWER: c
37. Trading of financial securities for delivery on some date in the future at a price determined today
is done in the
a. spot markets.
b. financial futures market.
c. money market.
d. fed funds market.
ANSWER: b
38. Which of the following basic functions do financial futures markets fulfill?
a. They reduce risk connected with future price changes.
b. They reduce risk connected with prior price changes.
c. They allow for speculation.
d. Both a and c
ANSWER: d
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Chapter 5
39. Treasury bills (T-bills) are
a. long-term debt instruments with maturities of 6 to 24 months.
b. long-term debt instruments with maturities of 3 to 12 months.
c. short-term debt instruments with maturities of 3 to 12 months.
d. short-term debt instruments with maturities of 6 to 24 months.
ANSWER: c
40. Treasury bills (T-bills) pay
a. a fixed amount at maturity and no explicit interest payments; T-bills sell at a discount.
b. a fixed amount at maturity and explicit interest payments.
c. a fluctuating amount at maturity and no explicit interest payments.
d. a fluctuating amount at maturity and explicit interest payments.
ANSWER: a
41. Treasury bills (T-bills) are
a. the most liquid of all the money market instruments.
b. traded very actively in the secondary market.
c. the safest of all money market instruments.
d. All of the above
ANSWER: d
42. Treasury bills (T-bills) are initially sold
a. in the municipal securities market.
b. in the secondary market.
c. at a discount.
d. in the capital market.
ANSWER: c
43. Which does not characterize a certificate of deposit?
a. It is sold at a discount.
b. It is sold by a depository institution.
c. It pays annual interest payments.
d. At maturity, the original purchase price is returned.
ANSWER: a
44. Commercial paper was developed to
a. ease the wear and tear of paper currency.
b. interest consumers in the stock market.
c. finance corporations' short-term borrowing needs.
d. finance the government's short-term borrowing needs.
ANSWER: c
45. Since 1960, the growth of commercial paper has
a. fallen.
b. remained the same.
c. risen slightly.
d. risen sharply.
ANSWER: d
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46. Bankers' acceptances are used in financing which of these?
a. Interstate trade
b. Domestic trade
c. International trade
d. All of the above
ANSWER: c
47. Bankers' acceptances are
a. traded in secondary markets.
b. short term.
c. sold at a discount.
d. All of the above.
ANSWER: d
48. Since 1984, the trading of bankers' acceptances has
a. fallen.
b. remained the same.
c. risen slightly
d. remained the same, then risen sharply.
ANSWER: a
49. Repurchase agreements are
a. long-term agreements to buy a government security that will then be sold back to the original
seller.
b. long-term agreements to buy a corporate bond that will then be sold back to the original
seller.
c. short term agreements in which the seller sells a government security with the simultaneous
agreement to buy the security back at a higher price on a later date.
d. short-term agreements to sell a corporate bond that will then be bought back by the original
buyer.
ANSWER: c
50. Overnight loans among depository institutions of their deposits at the Fed are called
a. discount loans.
b. federal funds transactions.
c. illegal.
d. repurchase agreements.
ANSWER: b
51. When participants in the financial market judge the tightness of credit market conditions, they
often analyze
a. capital markets.
b. spot markets.
c. money markets.
d. the federal funds market.
ANSWER: d
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52. The term Eurodollar refers to
a. any deposit made in Europe.
b. any deposit made in Europe denominated in the euro.
c. any deposit made in a foreign country where the deposit is denominated in the currency of
the country from which it came.
d. any deposit made in a foreign country where the deposit is denominated in the host's
currency.
ANSWER: c
53. Equity claims that represent ownership of the assets of a corporation and the net income are
called
a. bonds.
b. owners' equity.
c. stocks.
d. repurchase agreements.
ANSWER: c
54. Which of the following classification pairs best describes financial markets based on when the
transaction takes place?
a. Money vs. capital
b. Primary vs. secondary
c. Spot vs. future
d. Both a and b
ANSWER: c
55. Which of the following classification pairs best describes financial markets based on their term
to maturity?
a. Money vs. capital
b. Primary vs. secondary
c. Spot vs. future
d. Both a and b
ANSWER: a
56 Which of the following classification pairs best describes financial markets based on whether
they are “new” or “used” securities?
a. Money vs. capital
b. Primary vs. secondary
c. Spot vs. future
d. Both a and b
ANSWER: b
57. Which of the following consists only of debt instruments?
a. Capital market
b. Primary market
c. Spot market
d. Money market
ANSWER: d
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58. The capital market is notably important because
a. if properly run, the capital market increases the growth of the economy.
b. capital markets raise funds for DSUs.
c. capital markets help DSUs achieve investment plans.
d. All of the above
ANSWER: d
59. Income that is received from equity claims on corporations is called which of these?
a. Dividends
b. Interest
c. Net income
d. Incremental profit
ANSWER: a
60. Common stock holders are paid
a. before preferred stockholders.
b. regardless of profit and loss.
c. prior to the distribution of retained earnings.
d. None of the above
ANSWER: d
61. The Standard and Poor's Stock Index is based upon
a. 30 stocks.
b. 50 stocks.
c. 300 stocks.
d. 500 stocks.
ANSWER: d
62. As compared to the total value of shares outstanding, the amount of new stock issues in a typical
year is which of the following?
a. Relatively small
b. Relatively equal
c. Relatively large
d. Constantly changing
ANSWER: a
63. Loans to purchase housing, land, or other real structure are called which of the following?
a. Home equity loans
b. Mortgages
c. Variable rate loans
d. Fixed rate loans
ANSWER: b
64. Which of the following is not a characteristic of corporate bonds?
a. Short-term
b. Issued by corporations
c. Pay interest twice a year
d. Principal repaid at maturity
ANSWER: a
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65. U.S. government securities
a. are short-term debt instruments only.
b. have maturities ranging from 2 to 30 months only.
c. finance the deficits of the federal government.
d. All of the above
ANSWER: c
66. U.S. government bonds are considered the
a. least liquid security in the money market.
b. most liquid security in the money market.
c. least liquid security in the capital market.
d. most liquid security in the capital market.
ANSWER: d
67. An example of a U.S. government security is a
a. Treasury bill (T-bill).
b. student loan issued by a government agency.
c. bond issued by the State of South Dakota.
d. All of the above
ANSWER: a
68. For investors living in the issuing state, a positive aspect of municipal bonds is that
a. the interest they earn is taxed deferred.
b. they are considered tax-deductible losses.
c. they have zero tractability.
d. the interest they earn is exempt from federal and state income taxes.
ANSWER: d
69. Revenue bonds are
a. used to finance specified projects.
b. issued at yields that are usually below taxable bonds of similar maturity.
c. paid off with the proceeds of specific projects.
d. All of the above
ANSWER: d
70. Which are not considered capital market instruments?
a. Municipal bonds
b. Corporate bonds
c. Bankers' acceptances
d. Stocks
ANSWER: c
71. Which are not considered money market instruments?
a. Mortgages
b. Commercial paper
c. Fed funds
d. U.S. T-bills
ANSWER: a
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72. Which of the following are not capital market instruments?
a. Eurodollars
b. Stocks
c. Corporate bonds
d. Mortgages
ANSWER a
73. The text shows the amount and relative proportion of various money market instruments
outstanding. Which of the following ranks their relative importance from largest to smallest?
(Negotiable CDs are excluded)
a. Commercial paper, U.S. Treasury Bills, repurchase agreements and federal funds, bankers
acceptances, and Eurodollars
b. U.S. Treasury Bills, commercial paper, repurchase agreements and federal funds, bankers
acceptances and Eurodollars
c. Repurchase agreements and, federal funds, U.S. Treasury Bills, commercial paper,
Eurodollars, and bankers acceptances
d. Commercial paper, repurchase agreements and Fed Funds, U.S. Treasury Bills, Eurodollars,
and bankers Acceptances
ANSWER: d
74. The text shows the amount and relative proportions of various capital market instruments
outstanding. Which of the following choices ranks their relative importance from largest to
smallest?
a. Corporate stock, U.S. Government securities, corporate and foreign bonds, mortgages,
municipal securities, U.S. government agency securities
b. Corporate stock, municipal securities, U.S. Government securities, mortgages, corporate and
foreign bonds, U.S. government agency securities
c. Corporate stock, mortgages, corporate and foreign bonds, U.S. Government agency
securities, U.S. Government securities, municipal securities,
d. U.S. Government securities, corporate stock, mortgages, U.S. government agency securities,
corporate and foreign bonds, municipal securities.
ANSWER: c
75. Which of the following are not money market instruments?
a. Repurchase agreements
b. Mortgages
c. Bankers’ acceptances
d. Federal funds
ANSWER: b
76. Of the following, which are not money market instruments?
a. Negotiable CDs
b. Commercial paper
c. T-bills
d. Municipal bonds
ANSWER: d
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77. Market makers are which of the following?
a. Buyers
b. Sellers
c. Coordinators of buyers and sellers
d. All of the above
ANSWER: d
78. A broker
a. arranges transactions between buyers and sellers for a fee.
b. is a principal in a transaction.
c. holds an inventory of securities to be sold.
d. All of the above
ANSWER: a
79. Market makers
a. acquire information.
b. process information.
c. dissect information.
d. All of the above
ANSWER: d
80. Which of the following can change interest rates and the prices of stocks and bonds?
a. International economic conditions
b. Profits of individual firms
c. Analyses of trends and market shares in various industries
d. All of the above
ANSWER: d
81. The __________________________is the interbank rate for dollar-denominated deposits in the
London market among international bank and is the interest rate that serves as a basis for quoting
other international rates.
a.
Euro Interbank Offered Rates (EURIBOR)
b.
London Interbank Offered Rate (LIBOR)
c.
Discount rate
d.
Prime rate
82. The bid price refers to
a. the future selling price.
b. the previous selling price.
c. the price at which a market maker is willing to purchase a security.
d. the buying at one price and selling at a lower price.
ANSWER: c
83. The offer price is often called the
a. bid price.
b. asked price.
c. accepted price.
d. future price.
ANSWER: b
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84. The role of the market maker in facilitating the buying and selling of securities to the public
includes
a. stabilizing the market.
b. raising funds.
c. advising buyers.
d. All of the above
ANSWER: d
85. The information most analysts and traders consider important is
a. information about mergers and acquisitions by small firms.
b. information on Federal Reserve policy.
c. corresponding foreign market information.
d. the notion of substitutability.
ANSWER: b
86. According to the latest figures, the capital market instrument with the largest outstanding balance
was
a. corporate stock.
b. residential mortgages.
c. large denomination negotiable certificates of deposit.
d. bank commercial loans.
ANSWER: a
87. The prime rate is which of the following?
a. The cost of business borrowing from the Fed
b. An indicator of the cost of business borrowing from banks
c. The cost of consumer borrowing from banks
d. The cost of consumer borrowing from the Fed
ANSWER: b
88. Which of the following guarantees the payment of principal and interest to the lender that creates
a mortgage pool?
a. Freddie Mac
b. Fannie Mae
c. Ginnie Mae
d. Annie Mae
ANSWER: c
89. The text discusses some of the interest rates listed in the “Money Rates” column of The Wall
Street Journal. Which of the following is the best definition of prime rate?
a. The interest rate on Treasury Bills, an indicator of general levels of short-term interest rates
b. The interest rate which serves as a basis for quoting rates to customers; an indicator of the
cost of business borrowing from banks
c. The rate charged by the Federal Reserve Banks for loaning reserve asset deposits to
depository institutions
d. The interest rate charged on overnight loans in the federal funds market, a sensitive indicator
of the cost to banks of borrowing funds
ANSWER: b
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90. The international bond market consists of which of these?
a. Eurodollars
b. Eurobonds
c. Foreign bonds
d. Both b and c
ANSWER: d
91. Eurobonds are any
a. bonds that are denominated in a currency other than that of the country where they are
marketed.
b. bonds that are denominated in the currency of the country in which they are sold.
c. bonds that are denominated in the currency of a European country.
d. bonds that are denominated in United States dollars and sold only in European countries.
ANSWER: a
92. The market in which previously issued financial assets are sold is the
a. money market.
b. primary market.
c. secondary market.
d. capital market.
ANSWER: c
93. An agreement to sell a government security today and buy it back at a later date for a higher price
is a
a. bankers’ acceptance.
b. Fed funds transaction.
c. reverse repurchase agreement.
d. repurchase agreement.
ANSWER: d
94. The interest rate that serves as a basis for quoting rates to customers is which of these?
a. The fed funds rate
b. The discount rate
c. The securitized rate
d. The prime rate
ANSWER: d
95. The earnings from which of the following financial instruments are tax exempt?
a. U.S. Government bonds
b. Treasury bills
c. State and local bonds (municipals)
d. The bonds of all publicly held corporations
ANSWER: c
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96. What is the difference between a broker and a dealer?
a. There is no difference.
b. The broker takes a position in a transaction while a dealer for a fee merely arranges trades
between buyers and sellers.
c. The broker sells stocks and bonds, whereas the dealer only deals in bonds.
d. The dealer sometimes takes a position (becomes a principal) in a transaction, in addition to
arranging trades; the dealer only arranges trades for a fee.
ANSWER: d
97. A deposit that is denominated in Japanese yen in a Mexican bank is which of these?
a. A Eurodollar deposit
b. A Yenopeso deposit
c. A foreign deposit
d. Insured
ANSWER: a
98. The rate for borrowing reserves in the overnight market among depository institutions is which
of these?
a. The prime rate
b. The discount rate
c. A bond rate
d. The fed funds rate
ANSWER: d
99. A short-term IOU usually issued by a large, credit-worthy, corporate borrower is which of these?
a. A corporate bond
b. Commercial paper
c. A highly liquid instrument
d. A bank note
ANSWER: b
100. The earnings from municipal bonds are which of the following?
a. Exempt from federal taxes and generally exempt from state taxes in the issuing state
b. Exempt from state taxes
c. Exempt from local taxes
d. Exempt from federal taxes only
ANSWER: a
101. Which of the following is false?
a. Financial forward agreements are transactions that are consummated today for the purchase
or sale of financial instruments on a date in the future where the quantities and delivery
dates are standardized.
b. Financial futures can be used to hedge or speculate.
c. The money market is where securities with original maturities of one year or less are
traded.
d. The spot market is the market for the purchase or sale of securities for immediate delivery.
ANSWER: a
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Chapter 5
102. If interest rates increase, then bond prices
a. increase.
b. remain the same.
c. can increase, decrease, or remain the same.
d. decrease.
ANSWER: d
103. The interest earned from which of the following instruments is exempt from taxes?
a. Government securities
b. Money market mutual funds
c. Municipal securities
d. Casualty insurance claims
ANSWER: c
104. Suppose that a particular stock closes at 30 1/8 and is paying a dividend of 30 cents a share.
How much is its current yield?
a. 1.0%
b. 0.1%
c. 10.0%
d. 100.43%
ANSWER: a
105. Assume you bought a one-year Treasury bill in June, 2003 for $9,789 that can be redeemed for
$10,000 in June, 2004. What is the yield on this purchase?
a. $211.00
b. 2.11%
c. 2.16%
d. $46.39
ANSWER: c
106. Which of the following is/are most responsible for linking together the separate markets for
individual financial instruments?
a. The activities of market makers
b. The willingness of traders to substitute among the alternative instruments available
c. The Federal Reserve System
d. Both a and b
ANSWER: d
107. What is the price on a discount basis of a 90-day bill with a bid yield of 4.2% on an annual
basis, and face value of $1,000?
a. $994.87
b. $995.90
c. $997.86
d. $998.50
ANSWER: d
Financial Markets, Instruments, and Market Makers
108. What is the price on a discount basis of a 90-day bill with a bid yield of 3.2% on an annual
basis, and face value of $100?
a. $98.6
b. $98.9
c. $99.2
d. $99.7
ANSWER: c
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