Economics of Money, Banking, And Financial Markets 9th Edition By Mishkin – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

Chapter 2

An Overview of the Financial System

2.1 Function of Financial Markets

Every financial market has the following characteristic:

It determines the level of interest rates.

It allows common stock to be traded.

It allows loans to be made.

It channels funds from lenders-savers to borrowers-spenders.

Answer: D

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Financial markets have the basic function of

getting people with funds to lend together with people who want to borrow funds.

assuring that the swings in the business cycle are less pronounced.

assuring that governments need never resort to printing money.

providing a risk-free repository of spending power.

Answer: A

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Financial markets improve economic welfare because

they channel funds from investors to savers.

they allow consumers to time their purchase better.

they weed out inefficient firms.

eliminate the need for indirect finance.

Answer: B

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Well-functioning financial markets

cause inflation.

eliminate the need for indirect finance.

cause financial crises.

produce an efficient allocation of capital.

Answer: D

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A breakdown of financial markets can result in

financial stability.

rapid economic growth.

political instability.

stable prices.

Answer: C

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Chapter 2  An Overview of the Financial System 21

The principal lender-savers are

governments.

businesses.

households.

foreigners.

Answer: C

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Which of the following can be described as direct finance?

You take out a mortgage from your local bank.

You borrow $2500 from a friend.

You buy shares of common stock in the secondary market.

You buy shares in a mutual fund.

Answer: B

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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

$400.

$201.

$200.

$199.

Answer: B

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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

25%.

12.5%.

10%.

5%.

Answer: D

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Which of the following can be described as involving direct finance?

A corporation issues new shares of stock.

People buy shares in a mutual fund.

A pension fund manager buys a short-term corporate security in the secondary market.

An insurance company buys shares of common stock in the over-the-counter markets.

Answer: A

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Which of the following can be described as involving direct finance?

A corporation takes out loans from a bank.

People buy shares in a mutual fund.

A corporation buys a short-term corporate security in a secondary market.

People buy shares of common stock in the primary markets.

Answer: D

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

Which of the following can be described as involving indirect finance?

You make a loan to your neighbor.

A corporation buys a share of common stock issued by another corporation in the primary market.

You buy a U.S. Treasury bill from the U.S. Treasury.

You make a deposit at a bank.

Answer: D

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Which of the following can be described as involving indirect finance?

You make a loan to your neighbor.

You buy shares in a mutual fund.

You buy a U.S. Treasury bill from the U.S. Treasury.

A corporation buys a short-term security issued by another corporation in the primary market.

Answer: B

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Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

assets; liabilities

liabilities; assets

negotiable; nonnegotiable

nonnegotiable; negotiable

Answer: A

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With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.

active

determined

indirect

direct

Answer: D

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With direct finance funds are channeled through the financial market from the ________ directly to the ________.

savers, spenders

spenders, investors

borrowers, savers

investors, savers

Answer: A

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Chapter 2  An Overview of the Financial System 23

Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States?

Answer: With direct finance, funds flow directly from the lender/saver to the borrower. With indirect finance, funds flow from the lender/saver to a financial intermediary who then channels the funds to the borrower/investor. Financial intermediaries (indirect finance) are the major source of funds for corporations in the U.S.

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2.2 Structure of Financial Markets

Which of the following statements about the characteristics of debt and equity is false?

They can both be long-term financial instruments.

They can both be short-term financial instruments.

They both involve a claim on the issuerʹs income.

They both enable a corporation to raise funds.

Answer: B

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Which of the following statements about the characteristics of debt and equities is true?

They can both be long-term financial instruments.

Bond holders are residual claimants.

The income from bonds is typically more variable than that from equities.

Bonds pay dividends.

Answer: A

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Which of the following statements about financial markets and securities is true?

A bond is a long-term security that promises to make periodic payments called dividends to the firmʹs residual claimants.

A debt instrument is intermediate term if its maturity is less than one year.

A debt instrument is intermediate term if its maturity is ten years or longer.

The maturity of a debt instrument is the number of years (term) to that instrumentʹs expiration date.

Answer: D

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Which of the following is an example of an intermediate-term debt?

A thirty-year mortgage.

A sixty-month car loan.

A six month loan from a finance company.

A Treasury bond.

Answer: B

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

If the maturity of a debt instrument is less than one year, the debt is called ________.

short-term

intermediate-term

long-term

prima-term

Answer: A

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Long-term debt has a maturity that is ________.

between one and ten years.

less than a year.

between five and ten years.

ten years or longer.

Answer: D

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When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors.

bonds

bills

notes

stock

Answer: D

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Equity holders are a corporationʹs ________. That means the corporation must pay all of its debt holders before it pays its equity holders.

debtors

brokers

residual claimants

underwriters

Answer: C

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Which of the following benefit directly from any increase in the corporationʹs profitability?

a bond holder

a commercial paper holder

a shareholder

a T-bill holder

Answer: C

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A financial market in which previously issued securities can be resold is called a ________

market.

primary

secondary

tertiary

used securities

Answer: B

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Chapter 2  An Overview of the Financial System 25

An important financial institution that assists in the initial sale of securities in the primary market is the

investment bank.

commercial bank.

stock exchange.

brokerage house.

Answer: A

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When an investment bank ________ securities, it guarantees a price for a corporationʹs securities and then sells them to the public.

underwrites

undertakes

overwrites

overtakes

Answer: A

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Which of the following is not a secondary market?

foreign exchange market

futures market

options market

IPO market

Answer: D

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________ work in the secondary markets matching buyers with sellers of securities.

Dealers

Underwriters

Brokers

Claimants

Answer: C

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A corporation acquires new funds only when its securities are sold in the

primary market by an investment bank.

primary market by a stock exchange broker.

secondary market by a securities dealer.

secondary market by a commercial bank.

Answer: A

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A corporation acquires new funds only when its securities are sold in the

secondary market by an investment bank.

primary market by an investment bank.

secondary market by a stock exchange broker.

secondary market by a commercial bank.

Answer: B

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

An important function of secondary markets is to

make it easier to sell financial instruments to raise funds.

raise funds for corporations through the sale of securities.

make it easier for governments to raise taxes.

create a market for newly constructed houses.

Answer: A

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Secondary markets make financial instruments more

solid.

vapid.

liquid.

risky.

Answer: C

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A liquid asset is

an asset that can easily and quickly be sold to raise cash.

a share of an ocean resort.

difficult to resell.

always sold in an over-the-counter market.

Answer: A

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The higher a securityʹs price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market.

more; primary

more; secondary

less; primary

less; secondary

Answer: A

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When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n)

exchange.

over-the-counter market.

common market.

barter market.

Answer: A

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Forty or so dealers establish a ʺmarketʺ in these securities by standing ready to buy and sell them.

Secondary stocks

Surplus stocks

U.S. government bonds

Common stocks

Answer: C

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Chapter 2  An Overview of the Financial System 27

Which of the following statements about financial markets and securities is true?

Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange.

As a corporation gets a share of the brokerʹs commission, a corporation acquires new funds whenever its securities are sold.

Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid.

Because of their short-terms to maturity, the prices of money market instruments tend to fluctuate wildly.

Answer: A

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A financial market in which only short-term debt instruments are traded is called the ________

market.

bond

money

capital

stock

Answer: B

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Equity instruments are traded in the ________ market.

money

bond

capital

commodities

Answer: C

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Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market?

Answer: The existence of the secondary market makes their stock more liquid and the price in the secondary market sets the price that the corporation would receive if they choose to sell more stock in the primary market.

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Describe the two methods of organizing a secondary market.

Answer: A secondary market can be organized as an exchange where buyers and sellers meet in one central location to conduct trades. An example of an exchange is the New York Stock Exchange. A secondary market can also be organized as an over -the-counter market. In this type of market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. An example of an over -the-counter market is the federal funds market.

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

2.3 Financial Market Instruments

Prices of money market instruments undergo the least price fluctuations because of

the short terms to maturity for the securities.

the heavy regulations in the industry.

the price ceiling imposed by government regulators.

the lack of competition in the market.

Answer: A

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U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity.

premium

collateral

default

discount

Answer: D

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U.S. Treasury bills are considered the safest of all money market instruments because there is no risk of ________.

defeat

default

desertion

demarcation

Answer: B

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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

commercial paper.

a negotiable certificate of deposit.

a municipal bond.

federal funds.

Answer: B

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A short-term debt instrument issued by well-known corporations is called

commercial paper.

corporate bonds.

municipal bonds.

commercial mortgages.

Answer: A

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Chapter 2  An Overview of the Financial System 29

________ are short-term loans in which Treasury bills serve as collateral.

Repurchase agreements

Negotiable certificates of deposit

Federal funds

U.S. government agency securities

Answer: A

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Collateral is ________ the lender receives if the borrower does not pay back the loan.

a liability

an asset

a present

an offering

Answer: B

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Federal funds are

funds raised by the federal government in the bond market.

loans made by the Federal Reserve System to banks.

loans made by banks to the Federal Reserve System.

loans made by banks to each other.

Answer: D

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The British Bankerʹs Association average of interbank rates for dollar deposits in the London market is called the

Libor rate.

federal funds rate.

prime rate.

Treasury Bill rate.

Answer: A

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Which of the following are short-term financial instruments?

A repurchase agreement.

A share of Walt Disney Corporation stock.

A Treasury note with a maturity of four years.

A residential mortgage.

Answer: A

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Which of the following instruments are traded in a money market?

State and local government bonds.

U.S. Treasury bills.

Corporate bonds.

U.S. government agency securities.

Answer: B

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

Which of the following instruments are traded in a money market?

Bank commercial loans.

Commercial paper.

State and local government bonds.

Residential mortgages.

Answer: B

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Which of the following instruments is not traded in a money market?

Residential mortgages.

U.S. Treasury Bills.

Negotiable bank certificates of deposit.

Commercial paper.

Answer: A

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Bonds issued by state and local governments are called ________ bonds.

corporate

Treasury

municipal

commercial

Answer: C

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Equity and debt instruments with maturities greater than one year are called ________ market instruments.

capital

money

federal

benchmark

Answer: A

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Which of the following is a long-term financial instrument?

A negotiable certificate of deposit.

A repurchase agreement.

A U.S. Treasury bond.

A U.S. Treasury bill.

Answer: C

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Which of the following instruments are traded in a capital market?

U.S. Government agency securities.

Negotiable bank CDs.

Repurchase agreements.

U.S. Treasury bills.

Answer: A

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Chapter 2  An Overview of the Financial System 31

Which of the following instruments are traded in a capital market?

Corporate bonds.

U.S. Treasury bills.

Negotiable bank CDs.

Repurchase agreements.

Answer: A

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Which of the following are not traded in a capital market?

U.S. government agency securities.

State and local government bonds.

Repurchase agreements.

Corporate bonds.

Answer: C

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2.4 Internationalization of Financial Markets

Equity of U.S. companies can be purchased by

U.S. citizens only.

foreign citizens only.

U.S. citizens and foreign citizens.

U.S. mutual funds only.

Answer: C

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One reason for the extraordinary growth of foreign financial markets is

decreased trade.

increases in the pool of savings in foreign countries.

the recent introduction of the foreign bond.

slower technological innovation in foreign markets.

Answer: B

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Bonds that are sold in a foreign country and are denominated in the countryʹs currency in which they are sold are known as

foreign bonds.

Eurobonds.

equity bonds.

country bonds.

Answer: A

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

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

foreign bonds.

Eurobonds.

equity bonds.

country bonds.

Answer: B

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If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________.

Eurobond

foreign bond

British bond

currency bond

Answer: A

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U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called ________.

Atlantic dollars

Eurodollars

foreign dollars

outside dollars

Answer: B

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Distinguish between a foreign bond and a Eurobond.

Answer: A foreign bond is sold in a foreign country and priced in that countryʹs currency. A Eurobond is sold in a foreign country and priced in a currency that is not that countryʹs currency.

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2.5 Function of Financial Intermediaries: Indirect Finance

The process of indirect finance using financial intermediaries is called

direct lending.

financial intermediation.

resource allocation.

financial liquidation.

Answer: B

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In the United States, loans from ________ are far ________ important for corporate finance than are securities markets.

government agencies; more

government agencies; less

financial intermediaries; more

financial intermediaries; less

Answer: C

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Chapter 2  An Overview of the Financial System 33

The time and money spent in carrying out financial transactions are called

economies of scale.

financial intermediation.

liquidity services.

transaction costs.

Answer: D

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Economies of scale enable financial institutions to

reduce transactions costs.

avoid the asymmetric information problem.

avoid adverse selection problems.

reduce moral hazard.

Answer: A

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An example of economies of scale in the provision of financial services is

investing in a diversified collection of assets.

providing depositors with a variety of savings certificates.

spreading the cost of borrowed funds over many customers.

spreading the cost of writing a standardized contract over many borrowers.

Answer: D

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Financial intermediaries provide customers with liquidity services. Liquidity services

make it easier for customers to conduct transactions.

allow customers to have a cup of coffee while waiting in the lobby.

are a result of the asymmetric information problem.

are another term for asset transformation.

Answer: A

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The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as

risk sharing.

risk aversion.

risk neutrality.

risk selling.

Answer: A

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The process of asset transformation refers to the conversion of

safer assets into risky assets.

safer assets into safer liabilities.

risky assets into safer assets.

risky assets into risky liabilities.

Answer: C

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

Reducing risk through the purchase of assets whose returns do not always move together is

diversification.

intermediation.

intervention.

discounting.

Answer: A

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The concept of diversification is captured by the statement

donʹt look a gift horse in the mouth.

donʹt put all your eggs in one basket.

it never rains, but it pours.

make hay while the sun shines.

Answer: B

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Risk sharing is profitable for financial institutions due to

low transactions costs.

asymmetric information.

adverse selection.

moral hazard.

Answer: A

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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

moral selection.

risk sharing.

asymmetric information.

adverse hazard

Answer: C

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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

moral hazard.

adverse selection.

free-riding.

costly state verification.

Answer: B

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The problem created by asymmetric information before the transaction occurs is called

________, while the problem created after the transaction occurs is called ________.

adverse selection; moral hazard

moral hazard; adverse selection

costly state verification; free-riding

free-riding; costly state verification

Answer: A

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Chapter 2  An Overview of the Financial System 35

Adverse selection is a problem associated with equity and debt contracts arising from

the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of his investment activities.

the lenderʹs inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.

the borrowerʹs lack of incentive to seek a loan for highly risky investments.

the borrowerʹs lack of good options for obtaining funds.

Answer: A

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An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.

adverse selection

moral hazard

risk sharing

credit risk

Answer: B

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Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from

government agencies.

equities markets.

financial intermediaries.

bond markets.

Answer: C

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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.

Germany; Japan

Germany; Great Britain

Great Britain; Canada

Canada; Japan

Answer: A

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Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely.

financial intermediaries; securities markets

financial intermediaries; government agencies

government agencies; financial intermediaries

government agencies; securities markets

Answer: A

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems.

Answer: Adverse selection is the asymmetric information problem that exists before the transaction occurs. For lenders, it is the difficulty in judging a good credit risk from a bad credit risk. Moral hazard is the asymmetric information problem that exists after the transaction occurs. For lenders, it is the difficulty in making sure the borrower uses the funds appropriately. Financial intermediaries can reduce adverse selection through intensive screening and can reduce moral hazard by monitoring the borrower.

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2.6 Types of Financial Intermediaries

Financial institutions that accept deposits and make loans are called ________ institutions.

investment

contractual savings

depository

underwriting

Answer: C

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Thrift institutions include

banks, mutual funds, and insurance companies.

savings and loan associations, mutual savings banks, and credit unions.

finance companies, mutual funds, and money market funds.

pension funds, mutual funds, and banks.

Answer: B

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Which of the following is a depository institution?

A life insurance company

A credit union

A pension fund

A mutual fund

Answer: B

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Which of the following is a depository institution?

A life insurance company

A mutual savings bank

A pension fund

A finance company

Answer: B

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Chapter 2  An Overview of the Financial System 37

Which of the following financial intermediaries is not a depository institution?

A savings and loan association

A commercial bank

A credit union

A finance company

Answer: D

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The primary assets of credit unions are

municipal bonds.

business loans.

consumer loans.

mortgages.

Answer: C

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The primary liabilities of a commercial bank are

bonds.

mortgages.

deposits.

commercial paper.

Answer: C

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The primary liabilities of depository institutions are

premiums from policies.

shares.

deposits.

bonds.

Answer: C

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________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.

Investment

Contractual savings

Thrift

Depository

Answer: B

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Which of the following is a contractual savings institution?

A life insurance company

A credit union

A savings and loan association

A mutual fund

Answer: A

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

Contractual savings institutions include

mutual savings banks.

money market mutual funds.

commercial banks.

life insurance companies.

Answer: D

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Which of the following are not contractual savings institutions?

Life insurance companies

Credit unions

Pension funds

State and local government retirement funds

Answer: B

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Which of the following is not a contractual savings institution?

A life insurance company

A pension fund

A savings and loan association

A fire and casualty insurance company

Answer: C

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The primary assets of a pension fund are

money market instruments.

corporate bonds and stock.

consumer and business loans.

mortgages.

Answer: B

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Which of the following are investment intermediaries?

Life insurance companies

Mutual funds

Pension funds

State and local government retirement funds

Answer: B

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An investment intermediary that lends funds to consumers is

a finance company.

an investment bank.

a finance fund.

a consumer company.

Answer: A

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Chapter 2  An Overview of the Financial System 39

The primary assets of a finance company are

municipal bonds.

corporate stocks and bonds.

consumer and business loans.

mortgages.

Answer: C

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________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.

Mutual funds

Investment banks

Finance companies

Credit unions

Answer: A

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Money market mutual fund shares function like

checking accounts that pay interest.

bonds.

stocks.

currency.

Answer: A

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An important feature of money market mutual fund shares is

deposit insurance.

the ability to write checks against shareholdings.

the ability to borrow against shareholdings.

claims on shares of corporate stock.

Answer: B

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The primary assets of money market mutual funds are

stocks.

bonds.

money market instruments.

deposits.

Answer: C

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An investment bank helps ________ issue securities.

a corporation

the United States government

the SEC

foreign governments

Answer: A

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called

underwriting.

underhanded.

understanding.

undertaking.

Answer: A

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2.7 Regulation of the Financial System

Which of the following is not a goal of financial regulation?

Ensuring the soundness of the financial system

Reducing moral hazard

Reducing adverse selection

Ensuring that investors never suffer losses

Answer: D

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Increasing the amount of information available to investors helps to reduce the problems of

________ and ________ in the financial markets.

adverse selection; moral hazard

adverse selection; risk sharing

moral hazard; transactions costs

adverse selection; economies of scale

Answer: A

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A goal of the Securities and Exchange Commission is to reduce problems arising from

competition.

banking panics.

risk.

asymmetric information.

Answer: D

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The purpose of the disclosure requirements of the Securities and Exchange Commission is to

increase the information available to investors.

prevent bank panics.

improve monetary control.

protect investors against financial losses.

Answer: A

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Chapter 2  An Overview of the Financial System 41

Government regulations to reduce the possibility of financial panic include all of the following except

transactions costs.

restrictions on assets and activities.

disclosure.

deposit insurance.

Answer: A

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Which of the following do not provide charters?

The Office of the Comptroller of the Currency

The Federal Reserve System

The National Credit Union Administration

State banking and insurance commissions

Answer: B

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A restriction on bank activities that was repealed in 1999 was

the prohibition of the payment of interest on checking deposits.

restrictions on credit terms.

minimum down payments on loans to purchase securities.

separation of commercial banking from the securities industries.

Answer: D

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In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from

owning municipal bonds.

making real estate loans.

making personal loans.

owning common stock.

Answer: D

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The primary purpose of deposit insurance is to

improve the flow of information to investors.

prevent banking panics.

protect bank shareholders against losses.

protect bank employees from unemployment.

Answer: B

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The agency that was created to protect depositors after the banking failures of 1930 -1933 is the

Federal Reserve System.

Federal Deposit Insurance Corporation.

Treasury Department.

Office of the Comptroller of the Currency.

Answer: B

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Mishkin · The Economics of Money, Banking, and Financial Markets, 9^th Edition

Savings and loan associations are regulated by the

Federal Reserve System.

Securities and Exchange Commission.

Office of the Comptroller of the Currency.

Office of Thrift Supervision.

Answer: D

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The regulatory agency that sets reserve requirements for all banks is

the Federal Reserve System.

the Federal Deposit Insurance Corporation.

the Office of Thrift Supervision.

the Securities and Exchange Commission.

Answer: A

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Asymmetric information is a universal problem. This would suggest that financial regulations

in industrial countries are an unqualified failure.

differ significantly around the world.

in industrialized nations are similar.

are unnecessary.

Answer: C

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How do regulators help to ensure the soundness of financial intermediaries?

Answer: Regulators restrict who can set up a financial intermediary, conduct regular examinations, restrict assets, and provide insurance to help ensure the soundness of financial intermediaries.

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