Question 1: Federal funds are

• Answer funds raised by the federal government in the bondmarket.
• 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.

Question 2: The problem created by asymmetric information before thetransaction occurs is called ________, while the problem createdafter the transaction occurs is called ________.

• Answer adverse selection; moral hazard
• moral hazard; adverse selection
• costly state verification; free-riding
• free-riding; costly state verification

Question 3: Equity of U.S. companies can be purchased by

• Answer U.S. citizens only.
• foreign citizens only.
• U.S. citizens and foreign citizens.
• U.S. mutual funds only.

Question 4: The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is knownas

• Answer risk sharing.
• risk aversion.
• risk neutrality.
• risk selling

Question 5:  Because these securities are more liquid and generally have smallerprice fluctuations, corporations and banks use the ________securities to earn interest on temporary surplus funds.

• Answer money market
• capital market
• bond market
• stock market

Question 6: A liquid asset is

• Answer an asset that can easily and quickly be sold to raisecash.
• a share of an ocean resort.
• difficult to resell.
• always sold in an over-the-counter market.

Question 7: Bonds that are sold in a foreign country and are denominated in acurrency other than that of the country in which it is sold areknown as

• Answer foreign bonds.
• Eurobonds.
• equity bonds.
• country bonds.

Question 8: Government regulations to reduce the possibility of financial panicinclude all of the following except

• Answer transactions costs.
• restrictions on assets and activities.
• disclosure.
• deposit insurance.

Question 9: U.S. Treasury bills pay no interest but are sold at a ________.That is, you will pay a lower purchase price than the amount youreceive at maturity.

• Answer premium
• collateral
• default
• discount

Question 10: In the United States, loans from ________ are far ________important for corporate finance than are securities markets.

• Answer government agencies; more
• government agencies; less
• financial intermediaries; more
• financial intermediaries; less

Question 11: The process of indirect finance using financial intermediaries iscalled

• Answer direct lending.
• financial intermediation.
• resource allocation.
• financial liquidation.

Question 12: An important feature of money market mutual fund shares is

• Answer deposit insurance.
• the ability to write checks against shareholdings.
• the ability to borrow against shareholdings.
• claims on shares of corporate stock.

Question 13: Adverse selection is a problem associated with equity and debtcontracts arising from

• Answer the lender's relative lack of information about theborrower's potential returns and risks of his investmentactivities.
• the lender's inability to legally require sufficient collateral tocover a 100% loss if the borrower defaults.
• the borrower's lack of incentive to seek a loan for highly riskyinvestments.
• the borrower's lack of good options for obtaining funds.

Question 14: Risk sharing is profitable for financial institutions due to

• Answer low transactions costs.
• asymmetric information.
• adverse selection.
• moral hazard.

Question 15: Studies of the major developed countries show that when businessesgo looking for funds to finance their activities they usuallyobtain these funds from

• Answer government agencies.
• equities markets.
• financial intermediaries.
• bond markets.

Question 16: A debt instrument sold by a bank to its depositors that pays annualinterest of a given amount and at maturity pays back the originalpurchase price is called

• Answer commercial paper.
• a negotiable certificate of deposit.
• a municipal bond.
• federal funds.

Question 17: Which of the following are investment intermediaries?

• Answer Life insurance companies
• Mutual funds
• Pension funds
• State and local government retirement funds

Question 18: The higher a security's price in the secondary market the ________funds a firm can raise by selling securities in the ________market.

• Answer more; primary
• more; secondary
• less; primary
• less; secondary

Question 19: The primary liabilities of a commercial bank are

• Answer bonds.
• mortgages.
• deposits.
• commercial paper.

Question 20: Every financial market has the following characteristic:

• Answer 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.

Question 21: With direct finance, funds are channeled through the financialmarket from the ________ directly to the ________.

• Answer savers, spenders
• spenders, investors
• borrowers, savers
• investors, savers

Question 22: The purpose of the disclosure requirements of the Securities andExchange Commission is to

• Answer increase the information available to investors.
• prevent bank panics.
• improve monetary control.
• protect investors against financial losses.

Question 23: An example of economies of scale in the provision of financialservices is

• Answer 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 manyborrowers.

Question 24: Savings and loan associations are regulated by the

• Answer Federal Reserve System.
• Securities and Exchange Commission.
• Office of the Comptroller of the Currency.
• Office of Thrift Supervision.

Question 25: The most liquid securities traded in the capital market are

• Answer corporate bonds.
• municipal bonds.
• U.S. Treasury bonds.
• mortgage-backed securities.