Chapter 3

A Financial Intermediary:
A) Is an agency that guarantees a loan.
B) Is involved in direct finance.
C) Would be used in indirect finance
D) None of the above.


2
John obtains a home improvement loan from New Town Bank:
A) The loan is John's asset and the bank's liability.
B) The loan is John's asset, but the liability belongs to the bank's depositors.
C) The loan is John's liability and an asset for New Town Bank.
D) The loan is John's liability and a liability of the bank until Tom pays it off.


3
The U.S. Government finances its budget deficits:
A) Using indirect finance.
B) By using a financial intermediary.
C) Using direct finance.
D) By printing money.


4
Economic research shows:
A) There is a strong inverse correlation between financial market development and economic growth.
B) There is positive correlation between financial market development and economic growth, but it is weak, around 0.25.
C) There is a relatively strong positive correlation between financial market development and economic growth.
D) There isn't any correlation between financial market development and economic growth.


5
The loans made between borrowers and lenders:
A) Are liabilities to the lenders and assets to the borrowers since the borrower obtains the funds.
B) Are assets to the lenders and liabilities of the borrowers since the promises are made to the lenders.
C) Are not part of either's assets or liabilities until the loans are repaid.
D) None of the above.


6
The process of financial intermediation:
A) Creates a net cost to an economy but is unavoidable.
B) Is used primarily in underdeveloped countries.
C) Is always used when a borrower needs to obtain funds.
D) Increases the economy's ability to produce.


7
Which of the following statements is incorrect:
A) Banks are financial intermediaries.
B) A savings and loan is a financial intermediary.
C) All financial intermediaries are insurance companies.
D) Financial intermediaries increase the efficiency of the economy..


8
Which of the following is NOT a financial instrument:
A) A share of General Motors stock.
B) A tuition bill.
C) A U.S. Treasury Bond.
D) A home insurance policy.
E) A life insurance policy.


9
Tom purchases automobile insurance; the insurance contract is:
A) A form of money.
B) A financial instrument.
C) A transfer of risk from the insurance company to Tom.
D) None of the above.


10
Which of the following statements is incorrect:
A) When a risk is easy to predict, are created to transfer these risks.
B) are created to transfer risks that are relatively difficult to predict.
C) do not require certainty of an event to be able to transfer risk.
D) do not eliminate the risk from uncertainty, they transfer it.


11
The shares of McDonald Corporation stock are examples of:
A) A standardized financial instrument.
B) A standardized financial liability instrument.
C) A non-standardized financial instrument since their prices can differ over time.
D) A means of payment.


12
Asymmetric Information in financial markets is a potential problem usually resulting from:
A) People basically being dishonest.
B) The lenders having more information than borrower.
C) The borrowers having more information than the lenders, and not disclosing this information.
D) The uncertainty of Federal Reserve monetary policy.


13
Financial markets enable the transfer of risk by:
A) Not allowing risk averse investors access to U.S. Treasury bond markets.
B) Making sure that higher default risk is offset by greater liquidity.
C) Allowing individuals and firms less willing to bear risk to transfer risk to other individuals and firms more willing to bear risk.
D) Enabling even unsophisticated investors to purchase highly complex


14
A derivative instrument:
A) Gets its value and payoff from the performance of the underlying instrument.
B) Is a high risk financial instrument used by highly risk averse savers.
C) Comes into existence after the underlying instrument is in default.
D) Should be purchased prior to purchasing the underlying security.


15
Considering the value of a financial instrument, the longer the time until the promised payment is made:
A) The less valuable is the promise to make it since time is valuable.
B) The greater the risk, therefore the promise has greater value.
C) The more valuable is the promise to make it.
D) None of the above.


16
Commissions paid to an insurance broker are an example of:
A) Risk transfer.
B) Information asymmetry.
C) Transaction costs.
D) All of the above.


17
Small savers would use financial intermediaries rather than lend directly to borrowers because:
A) Financial Intermediaries will offer the savers higher interest rates than the savers could obtain directly from borrowers.
B) Savers prefer to share risk.
C) Borrowers don't want to deal with small savers
D) The liquidity is lower with financial intermediaries but the return is higher.


18
A Market Order:
A) Is an order placed requiring the broker to buy only at a price specified by the buyer.
B) Places a minimum on the price a buyer will have to pay.
C) Executes an exchange at the most favorable price available.
D) Puts a maximum on the order a seller will accept

ANSWER
C.C.C.C.B.C.B.B.A.C.A.A.C.B.C.