Question 1

Intermediation in the financial system is the process of:

Accepted Answer

A)   bringing together buyers and sellers in a market.
B)   negotiating terms of repayment when agreements between buyers and sellers are in default.
C)   government intervention in a financial market.
D)   an arbitrator working with governments and private firms to create efficiency.E) A) and B)
F) B) and D)

Question 2

When markets are less liquid, people are _______ willing to save, which pushes interest rates _______.

Accepted Answer

A)   less; higher
B)   more; higher
C)   less; lower
D)   more; lowerE) None of the above
F) C) and D)

Question 3

A company's net present value:

Accepted Answer

A)   is the current value of the company's expected future cash flows.
B)   is a measure of the company's book value.
C)   tells you the "correct" price of company shares.
D)   adds up the value of all the assets the company currently owns.E) A) and B)
F) B) and D)

Question 4

The fact that U.S. citizens expect to receive retirement benefits through Social Security and Medicare causes the _______ loanable funds to be _______ than it would be if these programs did not exist.

Accepted Answer

A)   demand for; greater
B)   demand for; lesser
C)   supply of; greater
D)   supply of; lesserE) A) and B)
F) C) and D)

Question 5

In general, information asymmetries are _______ within financial markets.

Accepted Answer

A)   common
B)   not accounted for
C)   uncommon
D)   not easily accounted forE) None of the above
F) All of the above

Question 6

A capital inflow occurs when:

Accepted Answer

A)   money saved domestically is invested in another country.
B)   money saved in another country finances domestic investment.
C)   more money is invested abroad than invested domestically.
D)   money saved domestically is invested in a firm in the same industry.E) A) and B)
F) A) and D)

Question 7

In general, financial assets that have a _______ amount of risk have a _______ rate of return.

Accepted Answer

A)   higher; higher
B)   higher; lower
C)   lower; higher
D)   None of these are true.E) C) and D)
F) B) and D)

Question 8

Crowding out is a reduction in _______ borrowing caused by an increase in _______ borrowing.

Accepted Answer

A)   private; government
B)   government; private
C)   private; corporate
D)   corporate; privateE) B) and D)
F) All of the above

Question 9

The difference between the risk-free rate and the interest rate a particular investor has to pay is called the:

Accepted Answer

A)   credit risk.
B)   risk premium.
C)   default rate.
D)   interest rate arbitrage.E) C) and D)
F) None of the above

Question 10

A closed economy:

Accepted Answer

A)   does not interact with other economies.
B)   does not publish its financial information to the public.
C)   collects only income tax revenue.
D)   establishes tariffs with all countries it trades with.E) All of the above
F) A) and C)

Question 11

After the housing bubble popped in 2007, the U.S. government provided emergency funds that prevented banks from failing. Some argued this action caused:

Accepted Answer

A)   moral hazard.
B)   adverse selection.
C)   adverse decisions.
D)   moral consequence.E) A) and B)
F) None of the above

Question 12

Fundamental analysis involves looking at:

Accepted Answer

A)   how much profit a company will make in the future and using that to predict its present value.
B)   market fundamentals to gauge a company's future trends.
C)   a company's past performance to assess its overall worth.
D)   the value of comparable companies abroad to assess a company's value.E) C) and D)
F) B) and D)

Question 13

Which of the following is a derivative?

Accepted Answer

A)   A futures contract
B)   A stock
C)   A bond
D)   A fixed-income securityE) B) and C)
F) C) and D)

Question 14

The supply of loanable funds comes from all the following except:

Accepted Answer

A)   businesses.
B)   individuals.
C)   government.
D)   borrowers.E) C) and D)
F) B) and C)

Question 15

When markets are more liquid, people are _______ willing to save and the level of investment is _______.

Accepted Answer

A)   more; higher
B)   less; higher
C)   more; lower
D)   less; lowerE) None of the above
F) A) and B)

Question 16

The savings of individuals or corporations within a country are:

Accepted Answer

A)   private savings.
B)   public savings.
C)   national savings.
D)   real GDP.E) All of the above
F) B) and D)

Question 17

If the rate of return is higher than the cost of borrowing, the:

Accepted Answer

A)   investor will lose money after paying back the loan.
B)   investor will make money after paying back the loan.
C)   saver will make less money than the borrower.
D)   borrower will make more money than the saver.E) A) and B)
F) B) and D)

Question 18

In the market for loanable funds, the demand curve:

Accepted Answer

A)   represents savers.
B)   is downward-sloping.
C)   shows that more people will choose to save at higher interest rates.
D)   represents the amount of debt-backed securities the government is willing to provide at each interest rate.E) B) and C)
F) A) and B)

Question 19

Which of the following statements about the relationship between rate of return and risk is true?

Accepted Answer

A)   A portfolio often provides a higher rate of return for a given level of risk than any individual asset can offer.
B)   Individual assets typically provide higher rates of return than portfolios, given that portfolios are lower risk.
C)   A portfolio often provides a higher rate of return than any other type of savings.
D)   A portfolio is the safer choice and thus provides a lower rate of return than any other type of savings.E) All of the above
F) None of the above

Question 20

What are the three main roles of financial markets?

Accepted Answer

A)   Act as intermediaries between governments and firms, decrease liquidity, and diversify risk
B)   Act as intermediaries between buyers and sellers, provide liquidity, and integrate risk
C)   Act as intermediaries between governments and firms, provide liquidity, and integrate risk
D)   Act as intermediaries between buyers and sellers, provide liquidity, and diversify riskE) B) and C)
F) All of the above

Exam 14: Thebasics of Finance

What are the three main roles of financial markets?

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In the market for loanable funds, the demand curve:

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After the housing bubble popped in 2007, the U.S. government provided emergency funds that prevented banks from failing. Some argued this action caused:

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Fundamental analysis involves looking at:

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Which of the following statements about the relationship between rate of return and risk is true?

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A capital inflow occurs when:

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Crowding out is a reduction in _______ borrowing caused by an increase in _______ borrowing.

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The fact that U.S. citizens expect to receive retirement benefits through Social Security and Medicare causes the _______ loanable funds to be _______ than it would be if these programs did not exist.

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A company's net present value:

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The supply of loanable funds comes from all the following except:

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When markets are more liquid, people are _______ willing to save and the level of investment is _______.

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The savings of individuals or corporations within a country are:

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In general, information asymmetries are _______ within financial markets.

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Which of the following is a derivative?

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The difference between the risk-free rate and the interest rate a particular investor has to pay is called the:

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In general, financial assets that have a _______ amount of risk have a _______ rate of return.

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When markets are less liquid, people are _______ willing to save, which pushes interest rates _______.

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If the rate of return is higher than the cost of borrowing, the:

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Intermediation in the financial system is the process of:

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A closed economy:

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Crowding out is a reduction in _ borrowing caused by an increase in _ borrowing.

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The fact that U.S. citizens expect to receive retirement benefits through Social Security and Medicare causes the _ loanable funds to be _ than it would be if these programs did not exist.

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When markets are more liquid, people are _ willing to save and the level of investment is _.

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In general, financial assets that have a _ amount of risk have a _ rate of return.

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When markets are less liquid, people are _ willing to save, which pushes interest rates _.

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