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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or
answers the question.
1) Every financial market has the following characteristic:
1) _______
A) It allows common stock to be traded.
B) It allows loans to be made.
C) It channels funds from lenders-savers to borrowers-spenders.
D) It determines the level of interest rates.
2) Financial markets have the basic function of
A) assuring that the swings in the business cycle are less pronounced.
B) assuring that governments need never resort to printing money.
C) getting people with funds to lend together with people who want
to borrow funds.
D) both A and B of the above.
2) _______
3) Financial markets improve economic welfare because
A) they allow funds to move from those without productive
investment opportunities to those who have such opportunities.
B) they allow consumers to time their purchase better.
C) they weed out inefficient firms.
D) they do A and B of the above.
3) _______
4) Securities are ________ for the person who buys them but ________ for
the individual or firm that sells (issues) them
A) liabilities, assets
B) cheap, expensive
C) expensive, cheap
D) assets, liabilities
4) _______
5) Well-functioning financial markets
A) cause inflation.
B) eliminate the need for indirect finance.
C) produce an efficient allocation of capital.
D) cause financial crises.
5) _______
6) Financial markets perform the function of channelling funds from
households, firms, governments to
A) those that have shortage of funds
B) finance government expenditure
C) the people in need
D) the stock market
6) _______
7) The most important borrowers in the financial markets are
A) businesses and the government
B) individuals and businesses
C) the consumers
D) the governments
7) _______
8) Financial markets are critical for producing
A) financial wealth
B) efficient allocation of capital
C) distribution of income
D) economic profits
8) _______
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9) The ________ of a debt is the number of years until that instrument's
expiration date
A) maturity
B) realization
C) expiration
D) size
9) _______
10) A debt instrument is short-term if its maturity is
A) certain
B) less than a year
C) passed
D) set a priori
10) ______
11) A debt instrument is ________ if its maturity is less than a year
A) short-term
B) on the money
C) a loan
D) secure
11) ______
12) Firms issue equities as a means of
A) raising funds
C) investment
12) ______
B) distributing dividends
D) distributing wealth
13) Equities often make periodic payments that are called
A) coupons
B) dividends
C) profits
D) shares
13) ______
14) Equities are considered ________ securities
A) short-term
B) long-term
C) profitable
D) consumption
14) ______
15) The directors in a corporation are elected
A) by the shareholders
B) for a period of 5 years
C) unanimously
D) both A and B
15) ______
16) The corporation must pay all its debt holders before it pays its
A) interest payments
B) loans
C) equity holders
D) dividends
16) ______
17) The financial market where a corporation or government issues
securities is called
A) a mercantile exchange
B) a money market
C) a primary market
D) a debt market
17) ______
18) The market in which previously issued securities can be resold is called
A) an exchange market
B) a resale market
C) a secondary market
D) a debt market
18) ______
19) A corporation in order to issue new shares will have to use
A) accumulated profits
B) an investment bank
C) financial leverage
D) both A and C
19) ______
20) The action of guaranteeing a price for a corporation's new issue of stocks
is called
A) intermediation
B) hedging
C) underwriting
D) securitization
20) ______
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21) The individuals that link buyers and sellers by buying and selling
securities are called
A) investors
B) stockholders
C) dealers
D) auditors
21) ______
22) The Toronto Stock Exchange (TSX) is
A) an commodities exchange
C) an investment bank
22) ______
B) a secondary market
D) both B and C
23) If you buy a security in the secondary market, the corporation that
issued the security
A) increases owners' equity
B) is benefited by an inflow of capital
C) is paying the transaction costs
D) acquires no new funds
23) ______
24) A corporation acquires new funds only when its securities
A) distribute dividends
B) are priced competitively
C) are sold in the primary market
D) are traded in the stock exchange
24) ______
25) The investors that buy securities in the primary market will pay
A) no more than the price they expect that the market will set in the
secondary market
B) a price less than what the issuing corporation expects
C) the price they expect that the market will set in the secondary
market
D) all the costs of the transactions in the primary and secondary
markets that pertain to this security
25) ______
26) The Canadian bond market is
A) an over-the-counter market
C) a secondary market
26) ______
27) Short-term securities are traded in the
A) money
C) money market
B) an organized exchange
D) both A and C
27) ______
B) foreign exchange market
D) capital market
28) Securities with original maturity of less than one year are traded in the
A) money market
B) foreign exchange market
C) both A and B
D) capital market
28) ______
29) The securities that are traded in the capital markets
A) have initial maturity of more than a year
B) are acquired by risk-averse investors
C) have no risk
D) both A and C
29) ______
30) Money market securities are traded more widely than capital market
securities thus, they tend to be
30) ______
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A) costly
C) riskier
B) very rare
D) more liquid
31) Corporations and banks use the money market to earn interest on funds
that they expect to have
A) permanently
B) only temporarily
C) in the future
D) both B and C
31) ______
32) Commercial paper is a ________ instrument
A) money market
B) liquid
C) capital market
D) both A and B
32) ______
33) Treasury bills are the most liquid money market instruments because
A) are the most actively traded
B) they have high risk
C) they have high interest rates
D) both A and B
33) ______
34) The most important lenders using repurchase agreements are
A) federal governments
B) provincial governments
C) large corporations
D) wealthy individuals
34) ______
35) In a ________ the structure or land serves as collateral
A) long-term bond
B) repurchase agreement
C) loan
D) mortgage
35) ______
36) Convertible bonds are ________
bonds
A) less desirable
C) riskier
36) ______
to investors than non-convertible
B) more desirable
D) both A and C
37) When a corporation needs to invest a short-term surplus it is going to
use
A) the capital market
B) the money market
C) stocks
D) the dividends
37) ______
38) Canada savings bonds are
A) floating-rate bonds
C) are very risky
38) ______
B) registered bonds
D) both A and B
39) Eurobonds are denominated
A) in a currency other than the euro
B) in a currency other than the currency of the country they are sold
C) in the currency of the country they are sold
D) in euros
39) ______
40) A Eurobond ________ denominated in euros
A) is never
B) is considered as
C) is always
D) is typically not
40) ______
41) A bond denominated in euros is called a Eurobond
A) only if it is sold outside the countries that adopted the euro
B) only if it is sold in one of the countries that adopted the euro
41) ______
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C) always
D) only if the issuer is located in a country that adopted the euro
42) The process of indirect finance using financial intermediaries is called
A) financial management
B) financial intermediation
C) hedging
D) investment management
42) ______
43) Diversification helps individuals and firms to
A) increase profits
B) reduce transaction costs
C) reduce risk
D) both A and B
43) ______
44) In a portfolio of assets where individual returns ________ move together
the overall risk is ________ than for individual assets
A) always, lower
B) do not always, higher
C) always, constant
D) do not always, lower
44) ______
45) The problem created by asymmetric information before a transaction
occurs is called
A) adverse selection
B) systematic risk
C) information hazard
D) moral hazard
45) ______
46) Financial institutions when deciding on whether to finance the business
plans of various firms that seek funding face the problem of
A) moral hazard
B) non-systematic risk
C) adverse selection
D) systematic risk
46) ______
47) ________ is a problem associated with asymmetric information in the
financial markets ________ a transaction occurs
A) adverse selection, after
B) adverse selection, before
C) moral hazard, after
D) both B and C
47) ______
48) ________ is a problem associated with asymmetric information in the
financial markets ________ a transaction occurs
A) low credit rating, after
B) adverse selection, before
C) moral hazard, before
D) adverse selection, after
48) ______
49) A breakdown of financial markets can result in
A) political instability.
B) rapid economic growth.
C) an efficient allocation of capital.
D) stable prices.
49) ______
50) Which of the following can be described as direct finance?
A) You buy shares in a mutual fund.
B) A pension fund lends money to General Motors.
C) You take out a mortgage from your local bank.
D) You borrow $2500 from a friend.
50) ______
51) Assume that you borrow $2000 at 10% annual interest to finance a new
business project. For this loan to be profitable, the minimum amount
this project must generate in annual earnings is
51) ______
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A) $200.
B) $400.
C) $101.
D) $201.
52) You can borrow $5000 to finance a new business venture. This new
venture will generate annual earnings of $251. The maximum interest
rate that you would pay on the borrowed funds and still increase your
income is
A) 10%.
B) 5%.
C) 25%.
D) 0.5%.
52) ______
53) Which of the following can be described as involving direct finance?
A) A corporation takes out a loan from a bank.
B) An insurance company buys shares of common stock in the
over-the-counter markets.
C) A corporation buys a short-term security issued by another
corporation.
D) People buy shares in a mutual fund.
53) ______
54) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) An insurance company buys shares of common stock in the
over-the-counter markets.
C) A pension fund manager buys a short-term corporate security in
the secondary market.
D) People buy shares in a mutual fund.
54) ______
55) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock.
B) A corporation buys a short-term security issued by another
corporation.
C) A pension fund manager buys commercial paper in the secondary
market.
D) Both A and B of the above.
55) ______
56) Which of the following can be described as involving direct finance?
A) A corporation issues new shares of stock through an investment
bank.
B) A pension fund manager buys commercial paper in the primary
market.
C) A corporation buys a short-term security paper issued by another
corporation.
D) All of the above.
56) ______
57) Which of the following can be described as involving direct finance?
A) People buy shares in a mutual fund.
B) A corporation buys a short-term corporate security in a secondary
market.
C) A corporation takes out loans from a bank.
D) A bank financing its reserves by a repurchase agreement from a
large corporation.
57) ______
58) Which of the following can be described as involving direct finance?
A)
58) ______
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A pension
buys a short-term corporate security in the secondary market.
fund manager
B) A bank financing its reserves by a repurchase agreement from a
large corporation.
C) A corporation's stock is traded in an over-the-counter market.
D) An insurance company buys shares of common stock in the
over-the-counter markets.
59) Which of the following cannot be described as involving direct finance? 59) ______
A) A bank financing its reserves by a repurchase agreement from a
large corporation.
B) A corporation's stock is traded in an over-the-counter market.
C) A pension fund manager buys a short-term corporate security
from the issuing corporation.
D) A corporation buys a short-term security issued by another
corporation.
60) Which of the following can be described as involving indirect finance?
A) You make a loan to your neighbor.
B) A corporation buys a share of common stock issued by another
corporation.
C) You make a deposit at a bank.
D) You buy a treasury bill from the government.
60) ______
61) Which of the following can be described as involving indirect finance?
A) People buy shares in a mutual fund.
B) A corporation takes out loans from a bank.
C) A corporation buys a short-term security issued by another
corporation.
D) Both A and B of the above.
61) ______
62) Which of the following can be described as involving indirect finance?
A) A corporation buys a short-term security issued by another
corporation.
B) A corporation's stock is traded in an over-the-counter market.
C) A pension fund manager buys a short-term security from the
issuing corporation.
D) Both A and B of the above.
62) ______
63) Which of the following can be described as involving indirect finance?
A) A corporation buys a short-term security issued by another
corporation.
B) A corporation issues new shares of stock.
C) A bank buys a Canadian government treasury bill from one of its
depositors.
D) Both B and C of the above.
63) ______
64) Which of the following can be described as involving indirect finance?
A) You buy a Canadian government treasury bill from the
government.
B)
64) ______
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A corporation buys a short-term security issued by another corporation.
C) You buy a Canadian government treasury bill from the bank.
D) You make a loan to your neighbor.
65) Which of the following are securities?
A) A treasury bill
B) A corporate bond
C) A share of Nortel common stock
D) Each of the above
65) ______
66) Which of the following statements about the characteristics of debt and
equity is untrue?
A) They can both be short-term financial instruments.
B) They both enable a corporation to raise funds.
C) They can both be long-term financial instruments.
D) They both involve a claim on the issuer's income.
66) ______
67) Which of the following statements about the characteristics of debt and
equity are true?
A) They can both be long-term financial instruments.
B) They both enable a corporation to raise funds.
C) They both involve a claim on the issuer's income.
D) All of the above.
67) ______
68) Which of the following statements about the characteristics of debt and
equity are true?
A) They can both be short-term financial instruments.
B) They can both be long-term financial instruments.
C) Debt is a claim on the issuer's assets, but equity is a claim on the
issuer's income.
D) Both A and B of the above.
68) ______
69) Which of the following statements about financial markets and
securities are true?
A) The maturity of a debt instrument is the interest paid to that
instrument's expiration date.
B) A debt instrument is short term if its maturity is more than one
year.
C) A bond is a debt security that promises to make payments for a
specified period of time.
D) Both A and B.
69) ______
70) Which of the following statements about financial markets and
70) ______
securities are true?
A) A bond is a long-term security that promises to make periodic
payments called dividends to the firm's residual claimants.
B) The maturity of a debt instrument is the number of years (term) to
that instrument's expiration date.
C) A debt instrument is long term if its maturity is ten years or longer.
D) Both A and C are correct.
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71) Which of the following statements about financial markets and
71) ______
securities are true?
A) The maturity of a debt instrument is the number of years (term) to
that instrument's expiration date.
B) A bond is a long-term security that promises to make periodic
payments called dividends to the firm's residual claimants.
C) A debt instrument is intermediate term if its maturity is less than
one year.
D) A debt instrument is long term if its maturity is ten years or longer.
72) Which of the following statements about financial markets and
securities are true?
A) A debt instrument is long term if its maturity is more than one
year.
B) Equities often make periodic payments called dividends and are
considered to be long-term securities because they have no
maturity date.
C) A debt instrument is short term if its maturity is between one and
ten years.
D) Only B and C of the above are true.
72) ______
73) Which of the following are primary markets?
A) The Toronto Stock Exchange
B) The over-the-counter stock market
C) The Canada bond market
D) None of the above
73) ______
74) Which of the following are secondary markets?
A) The Toronto Stock Exchange
B) The market where a new issue of securities is first sold
C) The over-the-counter stock market
D) both A and C
74) ______
75) An important function of secondary markets is to
A) make it easier to sell financial instruments to raise cash.
B) create a market for newly constructed houses.
C) raise funds for corporations through the sale of securities.
D) make it easier for governments to raise taxes.
75) ______
76) Secondary markets make financial instruments more
A) fluid.
B) risky.
C) liquid.
76) ______
D) solid.
77) The higher a security's price in the secondary market
A) the less funds a firm can raise by selling securities in the primary
market.
B) the less funds a firm can raise by selling securities in the secondary
market.
C) the more funds a firm can raise by selling securities in the primary
market.
D) the more funds a firm can raise by selling securities in the
secondary market.
77) ______
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78) An important financial institution that assists in the initial sale of
securities in the primary market is the
A) commercial bank.
B) investment bank.
C) brokerage house.
D) stock exchange.
78) ______
79) A corporation acquires new funds only when its securities are sold
A) in the primary market by a stock exchange broker.
B) in the primary market by an investment bank.
C) in the secondary market by a securities dealer.
D) in the secondary market by a commercial bank.
79) ______
80) Which of the following assets is traded only in an over-the-counter
market?
A) Canada bonds
B) commodities
C) stocks
D) foreign exchange
80) ______
81) Which of the following statements about financial markets and
securities are true?
A) Capital market securities are usually more widely traded than
shorter-term securities and so tend to be more liquid.
B) As a corporation gets a share of the broker's commission, a
corporation acquires new funds whenever its securities are sold.
C) Over the counter markets are primary markets
D) Many common stocks are traded over-the-counter, although the
largest corporations usually have their shares traded at organized
stock exchanges such as the Toronto Stock Exchange.
81) ______
82) Which of the following statements about financial markets and
securities are true?
A) Capital market securities are usually more widely traded than
short-term securities and so tend to be more liquid.
B) A corporation acquires new funds only when its securities are first
sold in the primary market.
C) Few common stocks are traded over-the-counter, although the
over-the-counter markets have grown in recent years.
D) Both B and C.
82) ______
83) Which of the following statements about financial markets and
securities are true?
A) Because of their short terms to maturity, the prices of money
market instruments tend not to fluctuate wildly.
B) As a corporation gets a share of the broker's commission, a
corporation acquires new funds whenever its securities are sold.
C) Many common stocks are traded over-the-counter, although the
largest corporations usually have their shares traded at organized
stock exchanges such as the Toronto Stock Exchange.
D) Both A and C are true.
83) ______
84) Bonds that are sold in a foreign country and are denominated in a
currency other than that of the country in which it is sold are known as
84) ______
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A) country bonds.
C) equity bonds.
B) foreign bonds.
D) Eurobonds.
85) The process of indirect finance using financial intermediaries is called
A) disintermediation.
B) direct lending.
C) financial liquidation.
D) financial intermediation.
85) ______
86) In Canada and the United States loans from ________ are far ________
important for corporate finance than are securities markets.
A) government agencies; less
B) financial intermediaries; less
C) financial intermediaries; more
D) government agencies; more
86) ______
87) Financial intermediaries lower costs by spreading them over a large
number of customers, thereby taking advantage of
A) risk sharing.
B) diversification.
C) asymmetric information.
D) economies of scale.
87) ______
88) Economies of scale enable financial institutions to
A) avoid the asymmetric information problem.
B) avoid adverse selection problems.
C) reduce transactions costs.
D) eliminate the need to diversify.
88) ______
89) An example of economies of scale in the provision of financial services is
A) investing in a diversified collection of assets.
B) spreading the cost of writing a standardized contract over many
borrowers.
C) spreading the cost of borrowed funds over many customers.
D) providing depositors with a variety of savings certificates.
89) ______
90) That depositors earn interest on chequing and savings accounts, and yet
withdraw their funds whenever necessary is possible because
A) government regulations mandate this policy.
B) financial intermediaries hold highly diversified asset portfolios.
C) financial intermediaries lower transaction costs.
D) financial intermediaries earn such large profits.
90) ______
91) The process where financial intermediaries create and sell low-risk
assets and use the proceeds to purchase riskier assets is known as
A) risk neutrality.
B) risk sharing.
C) risk aversion.
D) risk shedding.
91) ______
92) Risk sharing is also known as
A) asset discounting.
C) liability transformation.
92) ______
B) liability discounting.
D) asset transformation.
93) Reducing risk through the purchase of assets whose returns do not
always move together is
A) intervention.
B) intermediation.
93) ______
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C) diversification.
D) disintermediation.
94) The concept of diversification is captured by the statement
A) it never rains, but it pours.
B) don't put all your eggs in one basket.
C) don't look a gift horse in the mouth.
D) the only thing we have to fear is fear itself.
94) ______
95) The process of asset transformation refers to the conversion of
A) risky assets into safer assets.
B) safer assets into risky liabilities.
C) risky assets into risky liabilities.
D) safer assets into risky assets.
95) ______
96) Risk sharing is profitable for financial institutions due to
A) adverse selection.
B) low transactions costs.
C) asymmetric information.
D) moral hazard.
96) ______
97) The benefit of risk sharing to customers of financial institutions is
A) reduced risk.
B) reduced diversification.
C) reduced liability.
D) reduced liquidity.
97) ______
98) The presence of transaction costs in financial markets explains, in part,
why
A) financial intermediaries and indirect finance play such an
important role in financial markets.
B) direct financing is more important than indirect financing as a
source of funds.
C) corporations get more funds through equity financing than they
get from financial intermediaries.
D) equity and bond financing play such an important role in financial
markets.
98) ______
99) Financial intermediaries promote economic efficiency and thereby
increase people's wealth
A) by increasing the transactions cost of linking together borrowers
and lenders.
B) to the extent that they help solve the problems due adverse
exchange rates.
C) by reducing the exposure of investors to risk.
D) because of A and C of the above.
99) ______
100) Typically, borrowers have superior information relative to lenders about
the potential returns and risks associated with an investment project.
The difference in information is called ________, and it creates the
________ problem.
A) moral hazard; adverse selection
B) adverse selection; risk sharing
C) asymmetric information; adverse selection
D) asymmetric information; risk sharing
100) _____
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101) A potential borrower usually has better information about the potential
returns and risk of the investment projects he plans to undertake than
does the lender. This inequality of information is called
A) adverse selection.
B) moral hazard.
C) reverse causation.
D) asymmetric information.
101) _____
102) If bad credit risks are the ones who most actively seek loans and,
therefore, receive them from financial intermediaries, then financial
intermediaries face the problem of
A) free-riding.
B) moral hazard.
C) adverse selection.
D) costly state verification.
102) _____
103) The presence of ________ in financial markets leads to adverse selection
and moral hazard problems that interfere with the efficient functioning
of financial markets.
A) asymmetric information
B) costly state verification
C) noncollateralized risk
D) free-riding
103) _____
104) Adverse selection is a problem associated with equity and debt contracts
arising from
A) the lender's relative lack of information about the borrower's
potential returns and risks of his investment activities.
B) the borrower's lack of incentive to seek a loan for highly risky
investments.
C) noncollateralized risk.
D) the lender's inability to legally require sufficient collateral to cover
a 100% loss if the borrower defaults.
104) _____
105) The concept of adverse selection helps to explain
A) why indirect finance is more important than direct finance as a
source of business finance.
B) which firms are more likely to obtain funds from banks and other
financial intermediaries, rather than from the securities markets.
C) why direct finance is more important than indirect finance as a
source of business finance.
D) both A and B of the above.
105) _____
106) That only large, well-established corporations have access to securities
markets
A) explains why indirect finance is such an important source of
external funds for businesses.
B) can be explained by the existence of recessions.
C) can be explained by government regulations that prohibit small
firms from acquiring funds in securities markets.
D) can be explained by A and B.
106) _____
107) In financial markets, lenders typically have inferior information about
potential returns and risks associated with any investment project. This
difference in information is called
A) asymmetric information.
B) variant information.
107) _____
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C) comparative informational disadvantage.
D) caveat venditor.
108) A professional baseball player may be contractually restricted from
skiing. The team owner includes this clause in the player's contract to
protect against
A) moral hazard.
B) regulatory circumvention.
C) adverse selection.
D) fraud.
108) _____
109) An example of the problem of ________ is when a corporation uses the
funds raised from selling new shares of stock to pay for Caribbean
cruises for all of its employees and their families.
A) risk sharing
B) adverse selection
C) credit risk
D) moral hazard
109) _____
110) A buyer of a used car faces the ________ problem that most of her
choices are lemons.
A) moral hazard
B) free rider
C) diversification
D) adverse selection
110) _____
111) In the early 1980s, a particular bank in Oklahoma developed a
reputation of readily providing loans to borrowers for the purpose of
exploring for oil deposits. Many of these loans were never repaid,
because this bank failed to address the
A) risk-sharing problem.
B) moral hazard problem.
C) free-rider problem.
D) adverse selection problem.
111) _____
112) Canadian businesses get their external funds primarily from
A) other loans.
B) bonds and commercial paper issues.
C) bank loans.
D) stock issues.
112) _____
113) Which of the following is the primary source of external funds used by
Canadian businesses to finance their activities?
A) Bank loans
B) Bonds and commercial paper
C) Stock
D) Other loans
113) _____
114) Studies of the major developed countries show that
A) external financing for corporations is dominated by financial
intermediaries.
B) external financing for corporations is dominated by securities
issues.
C) exchanges reduce liquidity.
D) financial intermediaries avoid lending to corporations.
114) _____
115) Not surprisingly, Canada and ________, which have the most developed
securities markets in the world, also make the greatest use of them in
financing corporations.
115) _____
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A) Japan
C) Great Britain
B) the United States
D) Germany
116) The countries that have made the least use of securities markets are
________ and ________; in these two countries finance from financial
intermediaries has been almost ten times greater than that from
securities markets.
A) Canada; Japan
B) Great Britain; Canada
C) Germany; Japan
D) Germany; Great Britain
116) _____
117) The countries that have made the least use of securities markets are
Germany and Japan; in these two countries finance from financial
intermediaries has been almost ________ times greater than that from
securities markets.
A) five
B) ten
C) four
D) three
117) _____
118) Although the dominance of ________ over ________ is clear in all
countries, the relative importance of bond versus stock markets differs
widely.
A) financial intermediaries; securities markets
B) government agencies; securities markets
C) government agencies; financial intermediaries
D) financial intermediaries; government agencies
118) _____
119) Studies of the major developed countries show that when businesses go
looking for funds to finance their activities they usually obtain these
funds from
A) equities markets.
B) government agencies.
C) financial intermediaries.
D) bond markets.
119) _____
120) Which of the following financial intermediaries is not a depository
institution?
A) A credit union
B) A finance company
C) A commercial bank
D) A trust and mortgage loan company
120) _____
121) Which of the following is a contractual savings institution?
A) A credit union
B) A life insurance company
C) A mutual fund
D) A trust and mortgage loan company
121) _____
122) Which of the following are not contractual savings institutions?
A) Provincial and municipal government retirement funds
B) Credit unions
C) Life insurance companies
D) Pension funds
122) _____
123) Which of the following are not contractual savings institutions?
A) A mutual fund
B) A pension fund
123) _____
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C) A life insurance company
D) Only A and B of the above
124) Which of the following are investment intermediaries?
A) Life insurance companies
B) Provincial and municipal government retirement funds
C) Pension funds
D) Mutual funds
124) _____
125) Which of the following financial intermediaries are depository
institutions?
A) A pension fund
B) A commercial bank
C) A money market mutual fund
D) both A and B
125) _____
126) Which of the following are depository institutions?
A) Pension funds
B) Mutual funds
C) Credit unions
D) Only A and B of the above
126) _____
127) Which of the following is a depository institution?
A) A life insurance company
B) A trust and mortgage loan company
C) A finance company
D) A pension fund
127) _____
128) Which of the following are not investment intermediaries?
A) A pension fund
B) A life insurance company
C) A mutual fund
D) Only A and B of the above
128) _____
129) Which of the following are investment intermediaries?
A) Credit unions
B) Pension funds
C) Finance companies
D) Only A and B of the above
129) _____
130) The primary assets of a trust and mortgage loan company are
A) commercial loans.
B) bonds.
C) deposits.
D) mortgages.
130) _____
131) The primary liabilities of a credit union are
A) bonds.
B) mortgages.
C) deposits.
D) stocks.
131) _____
132) The primary assets of a pension fund are
A) money market instruments.
B) mortgages.
C) corporate bonds and stock.
D) consumer and business loans.
132) _____
133) The primary assets of a trust and mortgage loan company are
A) mortgages.
B) corporate bonds and stock.
C) consumer and business loans.
133) _____
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D) money market instruments.
134) The primary assets of credit unions are
A) consumer loans.
B) mortgages.
C) municipal bonds.
D) business loans.
134) _____
135) The primary assets of a finance company are
A) mortgages.
B) consumer and business loans.
C) corporate stocks and bonds.
D) municipal bonds.
135) _____
136) The primary assets of commercial banks include
A) mortgages.
B) consumer and business loans.
C) stocks
D) only A and B of the above.
136) _____
137) The primary source of funds of fire and casualty insurance companies
include
A) commercial paper, stocks, and bonds.
B) premiums from policies.
C) savings deposits.
D) both A and C.
137) _____
138) The primary liabilities of a commercial bank are
A) commercial paper.
B) mortgages.
C) deposits.
D) bonds.
138) _____
139) The primary liabilities of depository institutions are
A) premiums from policies.
B) deposits.
C) stocks.
D) bonds.
139) _____
140) The primary assets of money market mutual funds are
A) money market instruments.
B) municipal bonds.
C) stocks.
D) bonds.
140) _____
141) Near banks include
A) life insurance companies, fire and casualty companies, and
pension funds.
B) banks, mutual funds, and insurance companies.
C) trust and mortgage loan companies and credit unions and caisses
populaires.
D) finance companies, mutual funds, and money market funds.
141) _____
142) Which of the following is not a goal of financial regulation?
A) Reducing moral hazard
B) Ensuring the soundness of the financial system
C) Ensuring that investors never suffer losses
D) Reducing adverse selection
142) _____
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143) The Canada Deposit Insurance Corporation (CDIC) regulates
A) commercial banks.
B) trust and mortgage loan companies.
C) credit unions.
D) only A and B of the above.
143) _____
144) Regulations that protect against financial panics include
A) restrictions on entry.
B) diversification.
C) health insurance.
D) both A and B.
144) _____
145) The agency that was created to protect Canadian depositors is the
A) Department of Finance.
B) Bank of Canada.
C) Canada Deposit Insurance Corporation.
D) Canadian Mint.
145) _____
146) An important restriction on bank activities that was recently repealed
was
A) the prohibition of the payment of interest on chequing deposits.
B) separation of commercial banking from the securities industries.
C) restrictions on credit terms.
D) minimum down payments on loans to purchase securities.
146) _____
147) A goal of the Ontario Securities Commission is to reduce problems
arising from
A) banking panics.
B) risk.
C) competition.
D) asymmetric information.
147) _____
148) Asymmetric information is a universal problem. This would suggest
that
A) financial regulation exists only in Canada.
B) financial regulations in industrial countries are an unqualified
failure.
C) financial regulations in industrialized nations are similar.
D) financial regulations differ significantly around the world.
148) _____
149) The purpose of the disclosure requirements of the Ontario Securities
Commission is to
A) improve monetary control.
B) prevent bank panics.
C) protect investors against financial losses.
D) increase the information available to investors.
149) _____
150) The primary purpose of deposit insurance is to
A) prevent banking panics.
B) improve the flow of information to investors.
C) protect bank employees from unemployment.
D) protect bank shareholders against losses.
150) _____
151) In order to reduce risk and increase the safety of financial institutions,
commercial banks and other financial institutions are prohibited from
151) _____
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A) making personal loans.
C) owning municipal bonds.
B) owning common stock.
D) making real estate loans.
152) Canadian government treasury bills
A) are the least liquid of the money market securities.
B) are riskier than corporate bonds.
C) are the safest of all money market instruments.
D) sell at a discount because they have no interest payments.
152) _____
153) Canadian government treasury bills are issued in
A) three-, six-, nine-, and twelve-month maturities.
B) one-, three-, six-, and twelve-month maturities.
C) three-, nine-, and twelve-month maturities.
D) three-, and six-month maturities.
153) _____
154) Canadian government treasury bills
A) are issued in one-, three-, six-, and twelve-month maturities.
B) sell at a discount because they have no risk.
C) are the least liquid of the money market securities.
D) are only A and B of the above.
154) _____
155) A debt instrument sold by a bank to its depositors that pays annual
interest of a given amount and at maturity pays back the original
purchase price is called
A) commercial paper.
B) overnight funds.
C) a negotiable certificate of deposit.
D) a banker's acceptance.
155) _____
156) Overnight funds are
A) funds raised by the federal government in the bond market.
B) loans made by banks to the Bank of Canada.
C) loans made by banks to each other.
D) loans made by the Bank of Canada to banks.
156) _____
157) Which of the following are short-term financial instruments?
A) A negotiable certificate of deposit
B) A 10-year bond
C) A stock
D) both A and C
157) _____
158) Which of the following are short-term financial instruments?
A) A bankers acceptance
B) A negotiable certificate of deposit
C) A Canada bond
D) Both A and B of the above
158) _____
159) Which of the following are short-term financial instruments?
A) A share of Nortel Corporation stock
B) A banker's acceptance
C) A Canada bond with a maturity of four years
159) _____
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D) Each of the above
160) Which of the following instruments are traded in a money market?
A) Long-term bonds
B) Provincial and municipal government bonds
C) Corporate bonds
D) Canadian government treasury bills
160) _____
161) Which of the following instruments are traded in a money market?
A) Bank commercial loans
B) Provincial and municipal government bonds
C) Residential mortgages.
D) Banker's acceptances
161) _____
162) Which of the following instruments is not traded in a money market?
A) Banker's acceptances
B) Canadian government treasury bills
C) Sasktel stock
D) Eurodollars
162) _____
163) Which of the following instruments is not traded in a money market?
A) Residential mortgages
B) Eurodollars
C) Banker's acceptances
D) Canadian government treasury bills
163) _____
164) Which of the following are long-term financial instruments?
A) A SaskTel stock
B) A negotiable certificate of deposit
C) A six-month loan
D) A Canadian government treasury bill
164) _____
165) Which of the following are long-term financial instruments?
A) A banker's acceptance
B) A negotiable certificate of deposit
C) A Canadian government treasury bill
D) A Canada bond
165) _____
166) Which of the following instruments are traded in a capital market?
A) Canadian government agency securities
B) Banker's acceptances
C) Negotiable bank CDs
D) Repurchase agreements
166) _____
167) Which of the following instruments are traded in a capital market?
A) Canadian government treasury bills
B) Corporate bonds
C) Banker's acceptances
D) Repurchase agreements
167) _____
ESSAY.
Write your answer in the space provided or on a separate sheet of paper.
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168) Explain the difference between direct and indirect finance. What role do financial
intermediaries and financial markets play in this process? Explain whether direct or
indirect finance is a more important source of funds and why this is the case.
169) Explain the concepts of asymmetric information, adverse selection, and moral
hazard. When do adverse selection and moral hazard become relevant to the
lending process? How has the financial system developed to deal with these
problems?
170) Why does the government regulate the financial system? How does regulation
reduce the problems of adverse selection and moral hazard? What regulations are or
have been used to protect the public from panics?
171) What is moral hazard and how it can affect financial markets?
172) What is adverse selection and hot it can affect financial markets?
173) Give an example of asymmetric information in the financial markets.
174) Explain the differences between exchanges and over-the-counter markets.
175) How are money and capital markets distinguished?
176) Explain why the Government of Canada Treasury Bills are considered as a financial
instrument with very low risk.
177) Why only the largest and most trustworthy corporations issue the financial
instruments known as commercial paper?
178) How do foreign bonds and Eurobonds differ? provide an example of each.
179) How does the internationalization of financial markets affect Canada?
180) Why financial intermediaries play an important role in the economy?
181) What is financial panic? How can adverse selection in financial intermediaries lead to
financial panic?
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1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)
26)
27)
28)
29)
30)
31)
32)
33)
34)
35)
36)
37)
38)
39)
40)
41)
42)
43)
44)
45)
46)
47)
48)
49)
50)
C
C
D
D
C
A
A
B
A
B
A
A
B
B
A
C
C
C
B
C
C
B
D
C
A
D
C
A
A
D
B
D
A
C
D
B
B
D
B
D
A
B
C
D
A
C
D
B
A
D
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51) D
52) B
53) C
54) A
55) D
56) D
57) D
58) B
59) B
60) C
61) D
62) B
63) C
64) C
65) D
66) A
67) D
68) B
69) C
70) B
71) A
72) B
73) D
74) D
75) A
76) C
77) C
78) B
79) B
80) A
81) D
82) B
83) D
84) D
85) D
86) C
87) D
88) C
89) B
90) C
91) B
92) D
93) C
94) B
95) A
96) B
97) A
98) A
99) C
100) C
101) D
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102) C
103) A
104) A
105) D
106) A
107) A
108) A
109) D
110) D
111) D
112) C
113) A
114) A
115) B
116) C
117) B
118) A
119) C
120) B
121) B
122) B
123) A
124) D
125) B
126) D
127) B
128) D
129) C
130) D
131) C
132) C
133) A
134) A
135) B
136) D
137) B
138) C
139) B
140) A
141) C
142) C
143) D
144) A
145) C
146) B
147) D
148) C
149) D
150) A
151) B
152) C
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153) B
154) A
155) C
156) C
157) A
158) D
159) B
160) D
161) D
162) C
163) A
164) A
165) D
166) A
167) B
168) Students should explain that direct finance involves transfer of funds directly from
borrowers to lenders, while for indirect finance, funds are channelled from borrowers to
lenders through intermediaries.
Direct finance occurs in financial markets, while indirect finance involves financial
intermediaries.
Indirect finance is more important, because transactions costs and asymmetric information
make direct finance costly in many cases.
169) Asymmetric information is uneven information, which creates the problems of adverse
selection and moral hazard. Adverse selection is having a disproportionate number of
high-risk loan applications. Moral hazard is the risk that the borrower will engage in risky
behavior after the loan is made. Adverse selection is a problem before a loan is made, and
moral hazard is a problem that exists after a loan is made. Financial intermediaries develop
the expertise to screen and monitor loans, overcoming these problems. Regulations require
timely provision of information.
170) Regulation attempts to reduce asymmetric information and financial instability. The
Ontario Securities Commission requires timely provision of information. Financial stability
is promoted by regulations restricting entry, disclosure and/or examination, restrictions on
assets and risk taking, deposit insurance, limits on competition, and interest rate controls.
171) Moral hazard is the problem created by asymmetric information in financial markets after a
transaction has occurred. It is the risk faced by the lender -a financial institution- that the
borrower after receiving the funds might engage in activities that are undesirable (or
immoral) from the lender's point of view because these activities increase the probability
that the borrower will not be able to pay back. Because of this uncertainty lenders may
decide that they would rather not make a loan.
172) Adverse selection is the problem created by asymmetric information before a transaction
occurs. Adverse selection occurs in financial markets since the borrowers that are most
likely to produce an undesirable result -the bad credit risk- are the one who most actively
seek out a loan and thus, they are more likely to be selected by the lenders. Because this
makes it more likely that loans will be made to bad credit risks, lenders may decide not to
make any loans even though there are good credit risks in the market.
173) The students may answer either with an example of adverse selection or an example of
moral hazard.
Adverse selection: a firm that is actively seeking a loan to finance its new investment plans is
in a better position to estimate the risks involved in this project. The firm has better
information than the prospective lenders on the viability of the investment plan.
Information is unequal between the lender and the borrower or in other words it is
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asym Moral hazard: an individual or firm after securing a loan from a financial institution may
metri engage in activities that are undesirable to the lender, increasing the risk of default. In this
c.
case the information about the activities of the borrower is asymmetric.
174) In the exchanges, buyers and sellers of securities, or their agents or brokers meet in one
central location to conduct trades. In the over-the-counter markets, dealers is different
locations have an inventory of securities and are ready to buy or sell securities
"over-the-counter" to anyone that accepts their price.
175) Money markets are the financial markets where only short-term instruments -generally
those with initial maturity less than one year- are traded. Capital markets are the financial
markets where longer term securities -generally those with original maturity greater than
one year- are traded.
176) Government of Canada Treasury Bills are considered low risk, because they are the most
actively traded money market instruments; their original maturity is no more than 12
months. Moreover, there is almost no probability of default. The federal government is
always able to meet its debt obligations as it can raise taxes to service its debt.
177) Commercial paper is an unsecured short-term debt instrument issued either in Canadian
dollars or other currencies. Since it is unsecured, only the largest corporations and banks
are able to issue commercial paper so that the market can trust them and invest in their
issue. It is highly unlikely that an investor would trust a small unknown firm and finance it
with an unsecured loan.
178) Foreign bonds are sold in a foreign country and are denominated in that countries currency.
For example a bond by SaskTel issued in the U.S. in U.S. dollars. Eurobonds are bonds that
are issued in a currency other than that of the country they are sold. For example a bond
issued in Canada and denominated in euros.
179) The internationalization of financial markets has profound effects on Canada. Foreign
funds are not only financing Canadian corporations, but they are financing the federal and
provincial governments as well. Without these funds the Canadian economy would have
grown far less rapidly in the last twenty years.
180) Financial intermediaries play an important role in the economy because they provide
liquidity services, they lower transaction costs through economies of scale, they reduce the
risk exposure of investors through risk sharing, and they solve the asymmetric information
problems of adverse selection and moral hazard. By doing this they allow small savers and
borrowers to benefit from the existence of financial markets and its instruments. They also
improve economic efficiency because they help financial markets to channel funds from
lenders-savers to people with productive investment opportunities.
181) Financial panic is the widespread collapse of financial intermediaries. Providers of funds to
financial intermediaries may not be in a position to assess the whether the institutions
holding their funds are sound or not. Thus, there may exist asymmetric information. If they
have doubts about the overall health of the financial intermediaries they may want to pull
out their funds from both sound and unsound institutions. The probable outcome is a
financial panic that harms the public and damages the economy.