Midterm1 practice MC

UCLA-SPR14-PRACTICE QUESTIONS-MIDTERM I

1. Financial markets contain people and firms that buy and sell two kinds of assets:
________ and ________.
A) travelers checks; insurance policies
B) currency; securities
C) dollars; euros
D) bonds; stocks

2. Which of the following best defines a security?
A) It is a claim on the past flow of income.
B) It is a claim on the depreciation of income.
C) It is a fixed payment.
D) It is a claim on the future flow of income.

3. A bond is an example of a:
A) fixed income security.
B) constant asset.
C) flexible income security.
D) security with an unknown payment.

4. To attract ________ of a zero coupon bond, the seller must ________ the bond at
________ its face value.
A) buyers; sell; less than
B) buyers; sell; greater than
C) sellers; buy; less than
D) sellers; buy; equal to

5. Which of the following arranges risk from least to most risky (left to right)?
A) large corporations, government, small corporations
B) small corporations, large corporations, government
C) government, small corporations, large corporations
D) government large corporations, small corporations

6. Financial markets help transfer funds from the ________ to the ________.
A) bankers; investors.
B) depositors; bankers
C) savers; investors
D) investors; savers

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7. The problem of adverse selection arises when the owners of a security have a(n):
A) incentive to misbehave after an asset purchase.
B) incentive to behave according to expectations.
C) incentive to give potential buyers bad information.
D) disincentive to give potential buyers bad information.

8. The problem of moral hazard arises when the owners of a security have:
A) an incentive to give potential buyers bad information.
B) little incentive to behave prudently after selling its asset.
C) a disincentive to give potential buyers bad information.
D) an incentive to behave according to expectations.

9. Banks reduce ________ by