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Test bank 2doc - Multiple choice and true and false questions
Financial Markets and Institutions (FIN3017)
University of Technology Jamaica
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Chapter 1 Why Study Financial Markets and Institutions? !Multiple Choice Questions Financial markets and institutions (a) i nvolve the movement of huge quantities of money. (b) a ffect the profits of businesses. (c) a ffect the types of goods and services produced in an economy. (d) d o all of the above. (e) d o only (a) and (b) of the above. 1. Answer: D Financial market activities affect (a) p ersonal wealth. (b) s pending decisions by individuals and business firms. (c) t he economy’s location in the business cycle. (d) a ll of the above. Answer: D 2. 3. Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called (a) commodity markets. (b) funds markets. (c) derivative exchange markets. financial markets. Answer: D (d) 4. The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the (a) inflation rate. (b) exchange rate. interest rate. (c) (d) aggregate price level. Answer: C 5. The bond markets are important because (a) t hey are easily the most widely followed financial markets in the United States. (b) t hey are the markets where interest rates are determined. (c) they are the markets where foreign exchange rates are determined. (d) all of the above. Answer: B 6. Interest rates are important to financial institutions since an interest rate increase _________ the cost of acquiring funds and _________ the income from assets. (a) decreases; decreases (b) increases; increases (c) decreases; increases (d) increases; decreases Answer: B Typically, increasing interest rates (a) d iscourage individuals from saving. (b) d iscourage corporate investments. (c) e ncourage corporate expansion. (d) e ncourage corporate borrowing. (e) n one of the above. Answer: B 7. 8. Compared to interest rates on long-term U. government bonds, interest rates on _________ fluctuate more and are lower on average. (a) medium-quality corporate bonds (b) low-quality corporate bonds (c) high-quality corporate bonds (d) three-month Treasury bills (e) none of the above Answer: D 9. Compared to interest rates on long-term U. government bonds, interest rates on threemonth Treasury bills fluctuate _________ and are _________ on average. (a) more; lower (b) less; lower (c) more; higher (d) less; higher Answer: A 10. The stock market is important because (a) it is where interest rates are determined. (b) it is the most widely followed financial market in the United States. (c) it is where foreign exchange rates are determined. (d) all of the above. Answer: B 6. 7. Which of the following can be described as involving indirect finance? (a) A bank buys a U. Treasury bill from one of its depositors. (b) A corporation buys commercial paper issued by another corporation. (c) A pension fund manager buys commercial paper in the primary market. (d) B oth (a) and (c) of the above. Answer: D Financial markets improve economic welfare because (a) t hey allow funds to move from those without productive investment opportunities to those who have such opportunities. (b) they allow consumers to time their purchases better. (c) they weed out inefficient firms. (d) they do all of the above. they do (a) and (b) of the above. Answer: E (e) 8. 9. A country whose financial markets function poorly is likely to (a) e fficiently allocate its capital resources. (b) e njoy high productivity. (c) e xperience economic hardship and financial crises. (d) i ncrease its standard of living. Answer: C Which of the following are securities? (a) A certificate of deposit (b) A share of Texaco common stock (c) A Treasury bill (d) A ll of the above (e) O nly (a) and (b) of the above Answer: D 10. Which of the following statements about the characteristics of debt and equity are true? (a) They both can be long-term financial instruments. (b) They both involve a claim on the issuer’s income. (c) They both enable a corporation to raise funds. (d) All of the above. (e) Only (a) and (b) of the above. Answer: D 11. The money market is the market in which _________ are traded. (a) new issues of securities (b) previously issued securities (c) short-term debt instruments (d) long-term debt and equity instruments Answer: C 12. Long-term debt and equity instruments are traded in the _________ market. (a) primary (b) secondary (c) capital (d) money Answer: C 13. Which of the following are primary markets? (a) The New York Stock Exchange (b) The U. government bond market (c) The over-the-counter stock market (d) The options markets (e) None of the above Answer: E 14. Which of the following are secondary markets? (a) The New York Stock Exchange (b) The U. government bond market (c) The over-the-counter stock market (d) The options markets (e) All of the above Answer: E 15. A corporation acquires new funds only when its securities are sold in the (a) secondary market by an investment bank. primary market by an investment bank. (b) (c) secondary market by a stock exchange broker. (d) secondary market by a commercial bank. Answer: B 16. Intermediaries who are agents of investors and match buyers with sellers of securities are called (a) investment bankers. (b) traders. (c) brokers. (d) dealers. (e) none of the above. Answer: C 17. Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called (a) investment bankers. (b) traders. (c) brokers. (d) The federal funds market (e) all of the above Answer: E 23. Bonds that are sold in a foreign country and are denominated in that country’s currency are known as (a) foreign bonds. (b) Eurobonds. (c) Eurocurrencies. (d) Eurodollars. Answer: A 24. Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as (a) foreign bonds. (b) Eurobonds. (c) Eurocurrencies. (d) Eurodollars. Answer: B 25. Financial intermediaries (a) exist because there are substantial information and transaction costs in the economy. (b) improve the lot of the small saver. (c) are involved in the process of indirect finance. (d) do all of the above. (e) do only (a) and (b) of the above. Answer: D 26. The main sources of financing for businesses, in order of importance, are financial intermediaries, issuing bonds, issuing stocks. (a) (b) issuing bonds, issuing stocks, financial intermediaries. (c) issuing stocks, issuing bonds, financial intermediaries. (d) issuing stocks, financial intermediaries, issuing bonds. Answer: A 27. 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) equity and bond financing play such an important role in financial markets. (c) corporations get more funds through equity financing than they get from financial intermediaries. (d) direct financing is more important than indirect financing as a source of funds. Answer: A 28. Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of (a) poorly informed consumers. (b) standardization. economies of scale. (c) (d) their market power. Answer: C 29. The purpose of diversification is to reduce the volatility of a portfolio’s return. (a) (b) raise the volatility of a portfolio’s return. (c) reduce the average return on a portfolio. (d) raise the average return on a portfolio. Answer: A 30. An investor who puts all her funds into one asset _________ her portfolio’s _________. (a) increases; diversification decreases; diversification (b) (c) increases; average return (d) decreases; average return Answer: B 31. Through risk-sharing activities, a financial intermediary _________ its own risk and _________ the risks of its customers. (a) reduces; increases increases; reduces (b) (c) reduces; reduces (d) increases; increases Answer: B 32. The presence of _________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. (a) noncollateralized risk (b) free-riding asymmetric information (c) (d) costly state verification Answer: C 33. When the lender and the borrower have different amounts of information regarding a transaction, _________ is said to exist. (a) asymmetric information (b) adverse selection (c) moral hazard (d) fraud Answer: A 34. When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, _________ is said to exist. (a) asymmetric information (d) none of the above will occur. Answer: C 40. Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to (a) moral hazard. (b) adverse selection. (c) bad luck. (d) financial panics. Answer: B 41. 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) comparative informational disadvantage. asymmetric information. (b) (c) variant information. (d) caveat venditor. Answer: B 42. The largest depository institution at the end of 2004 was (a) life insurance companies. (b) pension funds. (c) state retirement funds. (d) none of the above. Answer: D 43. Which of the following financial intermediaries are depository institutions? (a) A savings and loan association (b) A commercial bank (c) A credit union (d) All of the above (e) Only (a) and (c) of the above Answer: D 44. Which of the following is a contractual savings institution? (a) A life insurance company (b) A credit union (c) A savings and loan association (d) A mutual fund Answer: A Chapter 3 What Do Interest Rates Mean and What Is Their Role in Valuation? 1 !Multiple Choice Questions A loan that requires the borrower to make the same payment every period until the 1. maturity date is called a (a) simple loan. (b) fixed-payment loan. (c) discount loan. (d) same-payment loan. (e) none of the above. Answer: B A coupon bond pays the owner of the bond (a) t he same amount every month until maturity date. (b) a fixed interest payment every period and repays the face value at the maturity 2. date. (c) the face value of the bond plus an interest payment once the maturity date has been reached. (d) the face value at the maturity date. (e) none of the above. Answer: B A bond’s future payments are called its (a) c ash flows. (b) m aturity values. (c) d iscounted present values. (d) y ields to maturity. Answer: A 3. A credit market instrument that pays the owner the face value of the security at the 4. maturity date and nothing prior to then is called a (a) simple loan. (b) fixed-payment loan. (c) coupon bond. (d) discount bond. Answer: D 5. (I) A simple loan requires the borrower to repay the principal at the maturity date along with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date. (a) (I) is true, (II) false. (b) (I) is false, (II) true. (c) Both are true. (d) Both are false. Answer: C 11. The concept of _________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. (a) present value (b) future value (c) interest (d) deflation Answer: A 12. Dollars received in the future are worth _________ than dollars received today. The process of calculating what dollars received in the future are worth today is called _________ (a) more; discounting. (b) less; discounting. (c) more; inflating. (d) less; inflating. Answer: B 13. The process of calculating what dollars received in the future are worth today is called (a) calculating the yield to maturity. (b) discounting the future. (c) compounding the future. (d) compounding the present. Answer: B 14. With an interest rate of 5 percent, the present value of $100 received one year from now is approximately (a) $100. (b) $105. (c) $95. (d) $90. Answer: C 15. With an interest rate of 10 percent, the present value of a security that pays $1,100 next year and $1,460 four years from now is approximately (a) $1,000. (b) $2,000 (c) $2,560. (d) $3,000. Answer: B 16. With an interest rate of 8 percent, the present value of $100 received one year from now is approximately (a) $93. (b) $96. (c) $100. $108. Answer: A (d) 17. With an interest rate of 6 percent, the present value of $100 received one year from now is approximately (a) $106. (b) $100. (c) $94. (d) $92. Answer: C 18. The interest rate that equates the present value of the cash flow received from a debt instrument with its market price today is the (a) simple interest rate. (b) discount rate. (c) yield to maturity. (d) real interest rate. Answer: C 19. The interest rate that financial economists consider to be the most accurate measure is the (a) current yield. (b) yield to maturity. (c) yield on a discount basis. (d) coupon rate. Answer: B 20. Financial economists consider the _________ to be the most accurate measure of interest rates. (a) simple interest rate (b) discount rate (c) yield to maturity (d) real interest rate Answer: C 21. For a simple loan, the simple interest rate equals the (a) real interest rate. (b) nominal interest rate. (c) current yield. (d) yield to maturity. Answer: D 22. For simple loans, the simple interest rate is _________ the yield to maturity. (a) greater than (b) less than (c) equal to (d) not comparable to Answer: C 23. The yield to maturity of a one-year, simple loan of $500 that requires an interest payment 29. Which of the following are true for a coupon bond? (a) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. (b) The price of a coupon bond and the yield to maturity are negatively related. (c) The yield to maturity is greater than the coupon rate when the bond price is above the par value. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: E 30. Which of the following are true for a coupon bond? (a) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. (b) The price of a coupon bond and the yield to maturity are positively related. (c) The yield to maturity is greater than the coupon rate when the bond price is above the par value. (d) All of the above are true. (e) Only (a) and (b) of the above are true. Answer: A 31. A consol bond is a bond that (a) pays interest annually and its face value at maturity. (b) pays interest in perpetuity and never matures. (c) pays no interest but pays face value at maturity. (d) rises in value as its yield to maturity rises. Answer: B 32. The yield to maturity on a consol bond that pays $100 yearly and sells for $500 is (a) 5 percent. (b) 10 percent. (c) 12 percent. (d) 20 percent. (e) 25 percent. Answer: D 33. The yield to maturity on a consol bond that pays $200 yearly and sells for $1000 is (a) 5 percent. (b) 10 percent. (c) 20 percent. (d) 25 percent. Answer: C 34. A frequently used approximation for the yield to maturity on a long-term bond is the (a) coupon rate. (b) current yield. (c) cash flow interest rate. (d) real interest rate. Answer: B 35. The current yield on a coupon bond is the bond’s _________ divided by its _________. (a) annual coupon payment; price (b) annual coupon payment; face value (c) annual return; price (d) annual return; face value Answer: A 36. When a bond’s price falls, its yield to maturity _________ and its current yield _________. (a) falls; falls (b) rises; rises (c) falls; rises (d) rises; falls Answer: B 37. The yield to maturity for a one-year discount bond equals (a) the increase in price over the year, divided by the initial price. (b) the increase in price over the year, divided by the face value. (c) the increase in price over the year, divided by the interest rate. (d) none of the above. Answer: A 38. If a $10,000 face value discount bond maturing in one year is selling for $8,000, then its yield to maturity is (a) 10 percent. (b) 20 percent. (c) 25 percent. (d) 40 percent. Answer: C 39. If a $10,000 face value discount bond maturing in one year is selling for $9,000, then its yield to maturity is (a) 9 percent. (b) 10 percent. (c) 11 percent. (d) 12 percent. Answer: C 40. If a $10,000 face value discount bond maturing in one year is selling for $5,000, then its yield to maturity is (a) 5 percent. (b) 10 percent. (c) 50 percent. 46. The nominal interest rate minus the expected rate of inflation (a) defines the real interest rate. (b) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. (c) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. (d) defines the discount rate. Answer: A 47. In which of the following situations would you prefer to be making a loan? (a) The interest rate is 9 percent and the expected inflation rate is 7 percent. (b) The interest rate is 4 percent and the expected inflation rate is 1 percent. (c) The interest rate is 13 percent and the expected inflation rate is 15 percent. (d) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: B 48. In which of the following situations would you prefer to be borrowing? (a) The interest rate is 9 percent and the expected inflation rate is 7 percent. (b) The interest rate is 4 percent and the expected inflation rate is 1 percent. (c) The interest rate is 13 percent and the expected inflation rate is 15 percent. (d) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: D 49. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later? (a) 5 percent (b) 10 percent (c) –5 percent (d) 25 percent (e) None of the above Answer: D 50. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 one year later? (a) 5 percent (b) 10 percent (c) –5 percent (d) –10 percent (e) None of the above Answer: C 51. The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,100 one year later is (a) 5 percent. (b) 10 percent. (c) 14 percent.
Test bank 2doc - Multiple choice and true and false questions
Course: Financial Markets and Institutions (FIN3017)
University: University of Technology Jamaica
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