Multiple Choice

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Chapter 2 Overview of the Financial System 2.1 Multiple Choice Questions 1) Every financial market has the following characteristic: A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. Answer: D 2) Financial markets have the basic function of A) bringing together people with funds to lend and people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) both (A) and (B) of the above. E) both (B) and (C) of the above. Answer: A 3) Which of the following can be described as involving direct finance? A) A corporation’s stock is traded in an over-the-counter market. B) People buy shares in a mutual fund. C) A pension fund manager buys commercial paper in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets. E) None of the above. Answer: E 4) Which of the following can be described as involving direct finance? A) A corporation’s stock is traded in an over-the-counter market. B) A corporation buys commercial paper issued by another corporation. C) A pension fund manager buys commercial paper from the issuing corporation. D) Both (A) and (B) of the above. E) Both (B) and (C) of the above. Answer: E 5) Which of the following can be described as involving indirect finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys commercial paper in a secondary market. D) All of the above. E) Only (A) and (B) of the above. Answer: D

6) Which of the following can be described as involving indirect finance? A) A bank buys a U.S. 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) Both (B) and (C) of the above. Answer: A 7) Financial markets improve economic welfare because A) they 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. E) they do (A) and (B) of the above. Answer: E 8) Which of the following are securities? A) A certificate of deposit B) A share of Texaco common stock C) A Treasury bill D) All of the above E) Only (A) and (B) of the above Answer: D 9) Which of the following statements about the characteristics of debt and equity are true? A) They can both 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 10) Which of the following are long-term financial instruments? A) A negotiable certificate of deposit B) A banker’s acceptance C) A U.S. Treasury bond D) A U.S. Treasury bill Answer: C 11) Which of the following are short-term financial instruments? A) A negotiable certificate of deposit B) A banker’s acceptance C) A U.S. Treasury bond D) Both (A) and (B) of the above E) Both (B) and (C) of the above Answer: D 10

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12) Which of the following are short-term financial instruments? A) A banker’s acceptance B) A share of Walt Disney Corporation stock C) A Treasury note with a maturity of 4 years D) All of the above Answer: A 13) Which of the following are primary markets? A) The New York Stock Exchange B) The U.S. 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.S. 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 A) in the secondary...
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