Test bank for financial institutions and markets 11th edition rose

Functions and Roles of Financial Institutions and Markets in the Global Economy True / False Questions 1.. The term "financial system" refers to the collection of markets, individuals

Functions and Roles of Financial Institutions

and Markets in the Global Economy

True / False Questions

1 The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which securities are traded and interest rates

5 A market in which prices fully reflect the latest available information is an efficient

10 Spending by federal, state and local governments for public facilities is a form of government savings

15 Commercial banks and retail stores, but not credit unions, may issue plastic credit cards

19 The financial asset which generally earns the lowest rate of return in the financial system

is securities issued by the federal government which are presumed by investors to be free of credit risk

FALSE

Difficulty: Medium

20 A security evidencing a loan which matures within one year is a money market

23 The construction of office buildings, highways, schools and homes normally is financed

by loans from the capital market

25 The most important institution lending funds in the money market is the commercial bank

30 The fact that professional investors operate daily in the financial marketplace, watching for profitable opportunities arising from unusually attractive prices and interest rates on selected financial instruments and adjusting their portfolios accordingly is often referred to as the force of profit maximization

35 One way for the economy to expand is for households to set aside savings so that they willnot return to the spending stream

40 Speculators in securities are continually on the lookout for small differences in prices or interest rates attached to different securities

45 An example of a futures market transaction is to borrow money through a new mortgage

50 Current savings for business firms are equal to current retained earnings less operating expenses

FALSE

Difficulty: Hard

51 Current investment for households includes purchases of household durables by

individuals and families

55 A nation with a relatively low savings ratio will tend to have higher interest rates and more rapid inflation

60 When savings flows fall, living standards rise because people spend more

63 The financial services area where protection is provided from loss of income or property

in the event of death, disability, negligence or other adverse developments is known as hedging services

FALSE

Difficulty: Medium

64 The financial services area where payments accounts against which the customer can write checks or wire funds to pay for purchases of goods and services is known as thrift services

FALSE

Difficulty: Easy

65 Wealth holdings represent stored purchasing power that will be used in future periods to finance purchases of goods and services and increase society's standard of living

TRUE

Difficulty: Easy

66 Financial transactions between nations have increased faster in volume than has

international trade in goods and nonfinancial services

69 Accumulated savings built up over time is referred to as a flow of funds

71 The term "financial system" refers to the collection of markets, individuals and

institutions, laws, regulations and techniques through which cash is traded and interest rates determined

FALSE

Difficulty: Medium

72 The construction of office buildings, highways, schools and homes normally is financed

by loans from the money market

74 Arbitrageurs help to insure differentials between financial markets

FALSE

Difficulty: Medium

Multiple Choice Questions

75 The financial system determines:

A The cost of credit

B How much credit is available

C The prices of securities

D The quantity of securities issued by borrowers

E All of the above

Difficulty: Medium

76 According to your text, the nation's standard of living is increased through the mechanism

of the financial system by:

A Increasing interest rates

B Reducing the volume of spending for goods and services

C Lowering inflation

D Stabilizing the economy's rate of growth

E Making funds available

Difficulty: Medium

77 In general, when the cost of credit declines,

A Unemployment rises

B Total spending decreases

C Production is cut back

D More jobs are created

E The economy's rate of growth slows down

Difficulty: Hard

78 The role of markets in a market-oriented economy like the United States is to:

A Allocate resources

B Distribute income

C Produce needed goods and services

D All of the above

E None of the above

Difficulty: Easy

79 The markets that serve the financial system may be classified in several different ways, including:

A Money markets versus capital markets

B Open markets versus negotiated markets

C Primary markets versus secondary markets

D Spot markets versus futures markets

E All of the above

Difficulty: Easy

80 The financial system and financial markets are responsible for providing which of the following services?

A Credit services

B Payment services

C Liquidity

D Facilitating the flow of savings

E All of the above

Difficulty: Easy

81 According to the text, several different financial assets and instruments have served as a medium of exchange or means of making payments in recent years Which instrument listed below is not considered a means of making payments or a medium of exchange?

83 The is designed to finance long-term investments, making possible the

construction of factories, office buildings, highways, bridges, schools, homes and apartments

B Corporate bond market

C Municipal bond market

D Commercial paper market

E Stock market

Difficulty: Medium

85 One of the financial markets listed below is not part of the money market Which one is not?

A U.S Treasury bill market

B Market for negotiable CDs of $100,000 or more

C Market for federal funds

D Market for Eurodollar deposits

E Market for consumer installment loans

Difficulty: Medium

86 The financial markets that provide for the immediate delivery of securities are known as:

90 The circular flow of funds includes which of the following:

A Consumer units

B Households

C Government

D All of the above

E None of the above

94 The largest borrower in the money market is:

95 To gain access to the money market an institution must:

A Have an excellent credit rating

B Be well known

C Be large

D All of the above

E None of the above

Difficulty: Medium

96 The largest market in the world for a single security is:

A The capital market

B The money market

C The treasury bill market

D The federal funds market

E None of the above

Difficulty: Medium

97 Arbitrage occurs when:

A A new security is issued

B A company is in need of funds

C A large institution faces default

98 The function of the financial system that consists of providing a channel through which the government can promote the goals of high employment and low inflation is called the:

100 The market for delivery of securities usually within one or two business days is known as

A The spot market

B The forward market

C The futures market

D The primary market

E None of the above

Difficulty: Medium

101 According to the text speculators perform an important function in the financial markets They:

A Create underpricing of certain securities, generating more attractive investment

opportunities

B Cause some securities to be overpriced which tends to drive out those securities

C Level out the prices of securities

D Help to prevent security fraud

E None of the above

A High proportion of young adults in the U.S population

B Large government budget deficits

C Tax structure which favors consumption and borrowing over savings

D All of the above

E None of the above

Difficulty: Hard

104 Current savings for a business firm is measured by:

A Total business sales receipts less business operating expenses (including business taxes)

B Current budget receipts less current budgetary expenditures

C Purchases of plant and equipment and inventory and residential construction

D Construction of new public facilities

E None of the above

Difficulty: Hard

105 Current savings for a household is measured by:

A Current consumption spending (including personal taxes) subtracted from personal income

B Current budget receipts less current budgetary expenditures

C Current retained earnings and noncash expenses

D Purchases of household durable goods

E None of the above

Difficulty: Hard

106 The most significant barriers to 24-hour worldwide trading of securities include:

A Lack of adequate prestige or stature by most companies and governments

B Lack of common operating rules and regulations among different exchanges and nations

C Delays in payment for and delivery of securities

D Lack of open access to membership on all exchanges

E All of the above

108 A(n) _ market exists if the market is fully competitive and the same information is available to all participants

109 _ risk refers to the risk that you will not receive securities that you have purchased

or that you will not receive payment for securities you have sold

111 Net wealth for an economic unit equals:

A Total assets plus equity capital

B Total assets less real (nonfinancial) assets

C Total assets minus total liabilities

D Total savings plus holding of financial assets

E None of the above

114 Providing loanable funds to supplement current income in order to sustain current living standards represents what financial service area?

117 A household which consumes assets or increases debt during the year is a condition sometimes referred to as:

120 Two areas that are major sources of funding for loans are:

A Personal savings and taxes

B Business savings and taxes

C Taxes and net profit

D Profits and bonds

E Personal savings and business earnings

Difficulty: Hard

B Usually generate income

C Risk of loss is lower than other forms of stored to wealth

D Are negotiable

E All of the above

Difficulty: Hard

122 For any business, individual or government, wealth is:

A Assets we have managed to accumulate and hold up to the present

B The sum of the value of all assets we hold at any given time

125 Every year the volume of financial wealth is growing in the United States In 2009 the total securities, deposits and other financial assets held by domestic nonfinancial businesses, households, the US government and foreign investors was

D 30 year U.S Treasury bonds

E None of the above

Difficulty: Easy

127 When a purchaser is issued a bill online and can make payments online, this is referred toas:

A Stored value cards

B Contactless payment devices

C Electronic bill presentment

D ATM card

E Credit card

Difficulty: Medium

128 In the financial marketplace, secondary markets provide:

A Similar returns to the primary market

B Support for new investment

B Long periods of prosperity

C No direct experience of the Great Depression

D Value of homes has risen substantially

E All of the above

Difficulty: Hard

System Input in the economic system 10

Interest Difference between current income and currentconsumption 4

13 Debit Cards Loan of funds in return for a promise of future payment 8

System Ability to raise cash quickly with little risk of loss 12

17 Terms All assets held by an economic unit minus the debts itowes 1

Difficulty: Medium

131 Choose the definition or descriptive phrase on the right which best describes the term on the left

1 Credit Definitions or Descriptive Phrases 11

2 Personal savings Market for loans maturing in one year or less 6

3 Primary Market Possesses perfect liquidity 7

4 Liquidity Market for loans with maturities longer than one year 13

5 Arbitrage Securities Traded for immediate delivery 12

Transfer of funds between markets in response to

attractive prices and rates 5

12 Spot Market stored purchasing power 15

13 Capital Market readily spendable assets 4

14 Negotiated

Market after-tax income not consumed 2

15 Wealth stocks, bonds, financial instruments 10

17 Secondary

Difficulty: Medium

Short Answer Questions

132 Please classify the following financial transactions as to whether they fit in (a) the money

market or the capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or futures/forward market (Note: The transactions below may fit in more than one of the above categories of markets Be sure to include all the appropriate types

of markets that each transaction fits.)

a You visit a local bank today and secure a three-year loan to finance the purchase of a new

car and some furniture Capital; primary; negotiated; spot.

b You purchase a new U.S Treasury bill through the Federal Reserve bank in a neighboring

city for delivery today Money; primary; open; spot.

c Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that company's stock through a phone call to your broker who is linked to a major

stock exchange Capital; secondary; open; spot

Difficulty: Easy

133 Please classify the following financial transactions as to whether they fit in (a) the money

market or the capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or futures/forward market (Note: The transactions below may fit in more than one of the above categories of markets Be sure to include all the appropriate types

of markets that each transaction fits.)

a You visit a local bank today and secure a three-year loan to finance the purchase of a new

car and some furniture Capital; primary; negotiated; spot.

b You purchase a new U.S Treasury bill through the Federal Reserve bank in a neighboring

city for delivery today Money; primary; open; spot.

c Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that company's stock through a phone call to your broker who is linked to a major

stock exchange Capital; secondary; open; spot

Difficulty: Easy

134 What functions of the financial system of markets and institutions do the following

transactions illustrate or represent? (Note: Some transactions may involve more than one function Be sure to identify all the financial system functions involved in each transaction.)

a James Rhodes purchases health and accident insurance policies through the company where

he works Risk protection; payments.

b Sharon MacArthur uses her credit card to purchase wallpaper for a home remodeling

project Payments; credit.

c Fearing a slowdown in the rate of economic growth and increased joblessness, the Federal

Reserve System and the Bank of England move to lower interest rates Policy

Difficulty: Easy

135 What functions of the financial system do the following transactions illustrate or

represent? (Note: Some transactions may involve more than one function Be sure to identify all the financial system functions involved in each transaction.)

a Dynamic Corporation places some of its current earnings in a bank CD, anticipating a need

for funds in about a year in order to build a new warehouse Savings; wealth.

b The Italian government sells new bonds in the open market to cover a large budget deficit

Credit; policy.

c Cal and Jane Lewis hope to put their three young children through college someday

Accordingly, they begin buying U.S savings bonds Savings; wealth; liquidity, risk

protection.

d Needing immediate spending power, Hillcrest Corporation sells its holdings of Denton

County bonds through a security broker Liquidity

Difficulty: Easy