Money Banking and Financial Markets Stephen Cecchetti 5th Edition- Test Bank
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Sample Test
Chapter03
FinancialInstruments,FinancialMarkets,andFinancialInstitutions
Multiple-ChoiceQuestions
1. A
financialintermediary:
a.is anagencythatguaranteesa loan.
1. is a
third-party that facilitates a transaction between a borrower and a lender.
c.wouldbeused indirectfinance.
1. mustbeadepositoryinstitution.
Ans:B
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:Reflective Thinking
Blooms: Remember
Topic:FinancialInstruments
2. Mostindividualsborrow:
a.directlywithouttheuseof afinancialintermediary.
1. usingafinancialintermediarybecauseitlowersthecostof
borrowing.
c.usinga financialintermediary,butwouldsave moneyif
theyfinanceddirectly.
1. withoutusingfinancialintermediaries,preferringcreditcards.
Ans:B
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:Reflective Thinking
Blooms: Remember
Topic:FinancialInstruments
3. Tomobtainsa
carloanfromOld TownBank.
a.Thecar loanis Tom’sassetandthebank’sliability.
1. Thecarloan
is Tom’sasset,buttheliabilitybelongstothebank’sdepositors.
c.Thecar loanis Tom’sliabilityandanassetfor Old TownBank.
1. Thecarloan
is Tom’sliabilityanda liabilityof thebank untilTompaysit off.
Ans:C
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking Blooms: Understand
Topic:FinancialInstruments
4. Theultimateroleof
thefinancialsystemof acountryis to:
a.provideaplacefor wealthyhouseholdstosave.
1. bea
low-costsourceof funds for government.
c.facilitateproduction,employment,andconsumption.
1. providejobs
in thefinancialsector.
Ans:C
Difficulty:01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking Blooms: Remember
Topic:FinancialInstruments
5. Loansmadebetweenborrowersand
lenders are:
a.liabilitiestothelendersandassets to
theborrowerssincetheborrowerobtainsthefunds.
1. assetsto
thelendersandliabilitiesof theborrowerssincethepromisesare madeto the lenders.
c.notpartof eitherparties’assetsor
liabilitiesuntiltheloansarerepaid.
1. liabilitiestoboththelendersandtheborrowers.
Ans:B
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:Reflective Thinking
Blooms: Understand
Topic:FinancialInstruments
6. Financialinstrumentsareused
tochannelfunds from:
a.saverstoborrowers
infinancialmarketsandviafinancialinstitutions.
1. saverstoborrowers
infinancialmarketsbutnotthroughfinancialinstitutions.
c.borrowers tosaversinfinancialmarketsbutnotthroughfinancialinstitutions.
1. borrowers
tosaversthroughfinancialinstitutions,butnotinfinancialmarkets.
Ans:A
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:Reflective Thinking
Blooms: Understand
Topic:FinancialInstruments
7. Loansmadebetweenborrowersand
lendersare:
a.usuallynottaxableatthefederallevel.
1. legalonlyin
thestateof origination.
c.assetsof thelenders.
1. assets
of theborrowers.
Ans:C
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
8. Loansmadebetweenlendersandborrowers
are:
a.assets to theborrowers.
1. liabilitiesof
thelenders.
c.nottaxableinthestateof origination.
1. liabilitiesof
theborrowers.
Ans:D
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
9. Theprocessof
financialintermediation:
a.createsanetcost toaneconomy.
1. increasestheeconomy’sabilitytoproduce.
c.is alwaysusedwhena borrowerneedstoobtainfunds.
d.is usedprimarilyinunderdevelopedcountries.
Ans:B
Difficulty:Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
10.
Whichof thefollowingstatementsismostcorrect?
a.Financialintermediariesarebanks.
1. A
bankisafinancialintermediary.
c.Financialintermediariesareinsurancecompanies.
1. Financialintermediariesareessentialtodirectfinance.
Ans:B
Difficulty: 02 Medium
Learning Objective: 03-03
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstitutions
11.
Whichof thefollowingstatementsismostcorrect?
a.Allbanksarefinancialintermediaries,butnotallfinancialintermediariesarebanks.
1. Financialintermediariesmustbepubliccorporations.
c.Allfinancialintermediariesareinsurancecompanies.
1. Financialintermediariesaregovernmentagencies.
Ans:A
Difficulty:02 Medium
Learning Objective: 03-03
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstitutions
12.
Whichof thefollowingisnotafinancialintermediary?
a.Abank
1. An
insurancecompany
c.TheNewYork StockExchange
1. A
mutualfund
Ans:C
Difficulty: 01 Easy
Learning Objective: 03-03
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstitutions
13.
Marypurchasesa U.S. Treasurybond;thebond isa(n):
a.assetof theU.S. governmentaswellasanassetfor Mary.
1. liabilityof
theU.S. governmentandanassetfor Mary.
c.assetfor Marybutnota liabilityof theU.S. Government.
1. assetfor
thegovernmentbuta liabilityfor Mary.
Ans:B
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
14.
A financialinstrumentwouldinclude:
a.onlyawrittenobligationanda transferof value.
1. onlya
writtenobligationanda specifieddate.
c.awrittenobligation,a transferof
value,afuturedate,andcertainconditions.
1. a
writtenobligation,a transferof value,aspecificdatefor
payment,uncertainconditions.
Ans:C
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
15.
Whichof thefollowingisnotafinancialinstrument?
a.Ashareof Microsoftstock
1. A
U.S. TreasuryBond
c.An electricbill
1. A
lifeinsurancepolicy
Ans:C
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking Blooms: Understand
Topic:FinancialInstruments
16.
SuehasacheckingaccountattheFirstNationalBank;hercheckingaccount
isa(n):
a.assetto thebankanda liabilitytoSue.
1. assettoSueanda
liabilitytothebank.
c.assettoSuebutactuallya liabilityto theFederalReserve.
1. liabilitytoSueuntilshe
spendsthefunds.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
17.
Financialinstrumentsandmoneysharewhichof
thefollowingcharacteristics?
a.Bothcan functionasa meansof paymentandastoreof value.
1. Bothcanfunctionasastoreof
valueandallowfor tradingof risk.
c.Bothcan functionby actingasameansof paymentandallowfor
tradingof risk.
1. Bothcanfunctionasastoreof
valueeven though theydo notallow for tradingof risk.
Ans:A
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking Blooms: Understand
Topic:FinancialInstruments
18.
Financialinstrumentsaredifferentfrommoneybecause they:
a.can actasastoreof valueandmoneycannot.
1. can’tbeameansof
paymentbutmoneycan.
c.can allowfor thetransferof risk.
1. havegreaterliquidity.
Ans:C
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
19.
Juanpurchasesautomobileinsurance;theinsurancecontractis a:
a.financialinstrument.
1. formof
money.
c.transferof riskfromtheinsurancecompanytoJuan.
1. financialintermediary.
Ans:A
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
20.
A bankisafinancialintermediary.Whichof
thefollowingstatementsismostaccurate?
a.Thebank’sdepositorsaretheultimatelendersand thebankis
theultimateborrower.
1. Peopleseekingloansfromthebankaretheultimatespenderswhilethebankis
theultimate lender.
c.Thebank’sdepositorsaretheultimatelenders,whilethoseseekingloansfromthebank
arethe ultimatespenders.
1. Thoseseekingloansfromthebankaretheultimatespenders;thebank’sstockholdersarethe
ultimatelenders.
Ans:C
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
21.
Whichof thefollowingstatementsismostcorrect?
a.Whenarisk
isdifficulttopredict,financialinstrumentsarecreatedto transfertheserisks.
1. Financialinstrumentsarecreatedto
transferrisks thatarerelativelyeasytopredict.
c.Financialinstrumentsrequirecertaintyof
aneventtobeabletotransferrisk.
1. Financialinstrumentseliminatetheriskfromuncertainty,theydo
nottransferit.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
22.
Standardizationof financialinstrumentshasoccurredasaresultof:
a.theruleof 70.
1. thelawof
demand.
c.economiesof scale.
1. thelawof
supply.
Ans:C
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
23.
Moredetailedfinancialinstrumentstendtobe:
a.lesscostlybecauseallpossiblecontingenciesarecovered.
1. morecostlybecauseit
willcost moretocreate.
c.moredesirablethanlessdetailedones,no matterwhattheprice.
1. lesscostlybecausetheycan
bestandardizedmoreeasily.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
24.
Manyfinancialinstrumentsarestandardizedbecause:
a.itisbelievedthatmost partiestoacontractdo notreadthemanyway.
1. complexityiscostly,themorecomplexacontract,themoreitcoststocreate.
c.thestandardizationof contractsmakesthemhardertounderstand.
1. it
isrequiredbythegovernment.
Ans:B
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
25.
A shareof Ford MotorCompanystock isanexampleof:
a.anon-standardizedfinancialinstrument.
1. a
standardizedfinancialinstrument.
c.anon-standardizedfinancialinstrumentsincetheirpricescandifferovertime.
1. a
financialinstrumentwithoutrisk.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:Reflective Thinking
Blooms:Understand
Topic:FinancialInstruments
26.
A counterpartytoafinancialinstrumentisalways the:
a.issuerof thefinancialinstrument.
1. governmentagencyguaranteeingthevalueof
theinstrument.
c.personor institution thatpurchasesthefinancialinstrument.
1. personor
institutionthatison theothersideof thefinancialcontract.
Ans:D
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
27.
Theinformationconcerningtheissuerof afinancialinstrument:
a.needstobecompleteandclosely monitoredbythebuyersof
theinstrumentfor change.
1. is
somewhatnon-standardizedtominimizethecostof theinstrument.
c.is usuallystandardizedtotheessentialinformationrequiredby
thebuyers.
1. is
closely monitoredbythebuyersof theseinstrumentsfor change.
Ans:C
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:Analytical Thinking
Blooms:Analyze
Topic:FinancialInstruments
28.
Asymmetricinformationinfinancialmarketsisapotentialproblemusuallyresultingfrom:
a.borrowershavingmoreinformationthan thelenders.
1. lendershavingmoreinformationthanborrowers.
c.thefactthatpeoplearebasicallydishonest.
1. theuncertaintyaboutFederalReservemonetarypolicy.
Ans:A
Difficulty:02 Medium
Learning Objective: 03-02
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialMarkets
29.
Agenciesexistwhichratebonds basedon characteristicsof
theborrower.Suchbond rating agenciesareanexampleof a
financialmarketresponsedesignedto:
a.increaseinformationasymmetry.
1. decreasetherealreturn
tobondholders.
c.providea lower costsolutionto thehigh costof information.d.
transferriskfromthebuyerto theratingagency.
Ans:C
Difficulty:03 Hard
Learning Objective: 03-02
AACSB:Analytical Thinking
Blooms: Evaluate
Topic:FinancialMarkets
30.
Thebettertheinformationprovidedtofinancialmarkets the:
a.lesstheamountof funds transferredbetweensaversandborrowers.
1. greatertheamountof
funds transferredbetweensaversandborrowers, thoughrisk increases.
c.higherthereturnrequiredby lenders.
1. greaterwillbetheflowof
funds in these markets.
Ans:D
Difficulty:02 Medium
Learning Objective: 03-02
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialMarkets
31.
Financialmarketsenablethetransferof riskby:
a.requiringthatrisk-averseinvestorshaveaccesstoU.S. Treasurybond
markets.
1. allowing
individualsandfirmslesswilling tobearrisk totransferrisk tootherindividualsand
firms morewilling tobearrisk.
c.makingsurethathigherdefaultrisk isoffsetby greaterliquidity.
1. enablingevenunsophisticatedinvestorstopurchasehighlycomplexfinancialinstruments.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-02
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialMarkets
32.
A borrowerhasinformationthatis not available to a prospective
lender; this is an example of:
a.awiseborrowerandanunwise lender.
1. atransferof
risk.
c.informationasymmetry.
1. liquidityrisk.
Ans:C
Difficulty:02 Medium
Learning Objective: 03-02
AACSB:Reflective Thinking
Blooms:Understand
Topic:FinancialMarkets
33.
Disabilityincomeinsuranceis:
a.insuranceborrowerscantakeoutincasethecompanytheyinvestindefaults.
1. insurancethat
makespaymentsof wagestoworkerswhen thecompanytheywork for is
disabledduetoanaturaldisaster.
c.insurancethat makespaymentstoworkerswhentheyareunabletowork
duetoan injury.
1. onlyavailablethroughthegovernmentaspartof
theSocialSecuritySystem.
Ans:C
Difficulty:01 Easy
Learning Objective: 03-01
AACSB:Reflective Thinking
Blooms: Remember
Topic:FinancialInstruments
34.
Theowner of asmallbusinessappliesfor a bankloanandtells
theloanofficerthatthefunds willbeused toexpandinventoryfor
theupcomingholidayseason.Thesmallbusinessfinds itself inneedof additionalfunds
tomeetthemonthlyrentfor thenextquarterandtheowneruses the
loanproceedstopaytherent.Thisisanexampleof:
a.liquidityrisk.
1. defaultrisk.
c.a lackof diversificationfor thebank.
1. informationasymmetry.
Ans:D
Difficulty: 02 Medium
Learning Objective: 03-02
AACSB:Analytical Thinking
Blooms:Apply
Topic:FinancialMarkets
35.
A shareof Microsoftstock wouldbestbedescribedas whichof
thefollowing?
a.Aderivativeinstrument
1. A
meansof payment
c.An underlyinginstrument
1. A debtinstrument
Ans:C
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:Reflective Thinking
Blooms: Understand
Topic:FinancialInstruments
36.
A derivativeinstrument:
a.comesintoexistenceaftertheunderlyinginstrumentis indefault.
1. is a
low-riskfinancialinstrumentusedbyhighlyrisk-aversesavers.
c.getsitsvalueandpayoff fromtheperformanceof
theunderlyinginstrument. d.
shouldbepurchasedpriortopurchasingtheunderlyingsecurity.
Ans:C
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking Blooms: Understand
Topic:FinancialInstruments
37.
A futurescontractisanexampleof:
a.aderivativeinstrument.
1. an
instrumentusedsolelyby financialinstitutions.
c.ahigh-risksecuritythatwillonlyhavevalueifcertaineventsoccur.
1. a
contractthatis tradedbutisnotafinancialinstrument.
Ans:A
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
38.
Theprimaryuse of derivativecontractsis:
a.for IRA andotherpensionplanssincetheyonlyhavevaluewell into
thefuture.
1. toshiftriskamong
investors.
c.for investorsseekinga greaterreturnbytakinggreaterrisk.
1. toadd
to theprofitsan investorobtainsthroughinformationasymmetry.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
39.
Consideringthevalueof a financialinstrument,thebiggerthesizeof
thepromised payment the:
a.lessvaluablethefinancialinstrumentbecauseriskmustbegreater.
1. longeraninvestorhastowaitfor
thepayment.
c.morevaluablethefinancialinstrument.
1. greatertherisk.
Ans:C
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
40.
Consideringthevalueof a
financialinstrument,thesoonerthepromisedpaymentismade:
a.thelessvaluableis thepromisetomakeit sincetimeisvaluable.
1. thegreatertherisk,
thereforethepromisehasgreatervalue.
c.themorevaluableis thepromisetomakeit.
1. thelessrelevantis
thelikelihoodthatthepaymentwillbemade.
Ans:C
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
41.
Consideringthevalueof a financialinstrument,the morelikelyit is
thepaymentwillbe made:
a.themorevaluablethefinancialinstrument.
1. thelessvaluableis
theinstrumentbecauserisk is lower.
c.thelessvaluableis thefinancialinstrumentbecauseit
ishighlyliquid.
1. thegreatertheuncertainty;thereforethelessvaluableis
thefinancialinstrument.
Ans:A
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
42.
Consideringthevalueof a
financialinstrument,thecircumstancesunderwhichthepayment is
tobemadeinfluencethevaluebecause:
a.welikeuncertainpayoffs becausethisadds tothereturn.
1. paymentsthatare
madewhenweneedthemthemostaremorevaluable.
c.thesoonerthepaymentis tobemadethebetter.
1. weknow
whencertaineventsaregoingtooccurand thatiswhenwewantthepayment.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
43.
Thefundamentalcharacteristicsinfluencingthevalueof
afinancialinstrumentincludeeach of thefollowingexcept:
a.thesizeof thepaymentpromised.
1. whenthepromisedpaymentwillbemade.
c.wheretheinstrumentis traded.
1. thelikelihoodof
payment.
Ans:C
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
44.
Thevalueof afinancialinstrumentrisesas:
a.thesizeof thepaymentpromiseddecreases.
1. thepromisedpaymentismadesoonerratherthan
later.c.itis lesslikelythepaymentwillbemade.
2. thepaymentsare
madewhentheprospectiveinvestorneedsthemleast.
Ans:B
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
45.
Consider thepricepaidfor debtissuedbytheStateof
California.Whichof thefollowing wouldlead toa decreasein thevalueof Stateof
Californiabonds?
a.TheStateof Californiabonds areinsmalldollaramounts.
1. TheStateof
Californiabonds havea shorter maturity.
c.TheStateof Californiaexperiencesafiscalcrisisthat
makesitlesslikelyitwillbeableto honor itsinterestpayments.
1. TheStateof
Californiapaysback itspreviousbonds aheadof schedule.
Ans:C
Difficulty:03 Hard
Learning Objective: 03-01
AACSB:Analytical Thinking
Blooms:Analyze
Topic:FinancialInstruments
46.
Financialinstrumentsusedprimarilyasstoresof valueincludeeachof
thefollowing, except:
a.bonds.
1. futurescontracts.
c.stocks.
1. homemortgages.
Ans:B
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
47.
Financialinstrumentsusedprimarilyasstoresof
valuewouldnotinclude:
a.a car insurancepolicy.
1. a
U.S. Treasurybond.
c.sharesof GeneralMotorsstock.
1. a
homemortgage.
Ans:A
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Remember
Topic:FinancialInstruments
48.
Financialinstrumentsusedprimarilytotransferriskwouldincludeallof
thefollowing, except:
a.an insurancecontract.
1. a
futurescontract.
c.options.
1. a
bankloan.
Ans:D
Difficulty:02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
49.
Financialinstrumentsusedprimarilytotransferriskwouldnotinclude:
a.a bank loan.
1. options.
c.an insurancepolicy.
1. homemortgages.
Ans:A
Difficulty: 02 Medium
Learning Objective: 03-01
AACSB:ReflectiveThinking
Blooms: Understand
Topic:FinancialInstruments
50.
Whichof thefollowingfinancialinstrumentsisusedmainlyto
transferrisk?
a.Asset-backedsecurities
1. Bonds
c.Options
1. Stocks
Ans:C
Difficulty: 01 Easy
Learning Objective: 03-01
AACSB:Knowledge Application
Blooms: Remember
Topic:FinancialInstruments
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