Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely.

12) Which of the following instruments are traded in a money market?
A) Bank commercial loans.
B) Commercial paper.
C) State and local government bonds.
D) Residential mortgages.
Answer: B
Ques Status: Revised
13) Which of the following instruments is not traded in a money market?
A) Residential mortgages.
B) U.S. Treasury Bills.
C) Negotiable bank certificates of deposit.
D) Commercial paper.
Answer: A
Ques Status: Revised
14) Bonds issued by state and local governments are called ________ bonds.
A) corporate
B) Treasury
C) municipal
D) commercial
Answer: C
Ques Status: Previous Edition
15) Equity and debt instruments with maturities greater than one year are called ________ market
instruments.
A) capital
B) money
C) federal
D) benchmark
Answer: A
Ques Status: New
16) Which of the following is a long-term financial instrument?
A) A negotiable certificate of deposit.
B) A repurchase agreement.
C) A U.S. Treasury bond.
D) A U.S. Treasury bill.
Answer: C
Ques Status: Revised
17) Which of the following instruments are traded in a capital market?
A) U.S. Government agency securities.
B) Negotiable bank CDs.
C) Repurchase agreements.
D) U.S. Treasury bills.
Answer: A
Ques Status: Revised
18) Which of the following instruments are traded in a capital market?
A) Corporate bonds.
B) U.S. Treasury bills.
C) Negotiable bank CDs.
D) Repurchase agreements.
Answer: A
Ques Status: Revised
19) Which of the following are not traded in a capital market?
A) U.S. government agency securities.
B) State and local government bonds.
C) Repurchase agreements.
D) Corporate bonds.
Answer: C
Ques Status: Previous Edition
2.4 Internationalization of Financial Markets
1) Equity of U.S. companies can be purchased by
A) U.S. citizens only.
B) foreign citizens only.
C) U.S. citizens and foreign citizens.
D) U.S. mutual funds only.
Answer: C
Ques Status: New
2) One reason for the extraordinary growth of foreign financial markets is
A) decreased trade.
B) increases in the pool of savings in foreign countries.
C) the recent introduction of the foreign bond.
D) slower technological innovation in foreign markets.
Answer: B
Ques Status: Revised
3) Bonds that are sold in a foreign country and are denominated in the countryʹs currency in which
they are sold are known as
A) foreign bonds.
B) Eurobonds.
C) equity bonds.
D) country bonds.
Answer: A
Ques Status: Previous Edition
4) Bonds that are sold in a foreign country and are denominated in a currency other than that of
the country in which it is sold are known as
A) foreign bonds.
B) Eurobonds.
C) equity bonds.
D) country bonds.
Answer: B
Ques Status: Previous Edition
5) If Microsoft sells a bond in London and it is denominated in dollars, the bond is a ________.
A) Eurobond
B) foreign bond
C) British bond
D) currency bond
Answer: A
Ques Status: Previous Edition
6) U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are
called ________.
A) Atlantic dollars
B) Eurodollars
C) foreign dollars
D) outside dollars
Answer: B
Ques Status: Previous Edition
7) Distinguish between a foreign bond and a Eurobond.
Answer: A foreign bond is sold in a foreign country and priced in that countryʹs currency. A
Eurobond is sold in a foreign country and priced in a currency that is not that countryʹs
currency.
Ques Status: New
2.5 Function of Financial Intermediaries: Indirect Finance
1) The process of indirect finance using financial intermediaries is called
A) direct lending.
B) financial intermediation.
C) resource allocation.
D) financial liquidation.
Answer: B
Ques Status: Previous Edition
2) In the United States, loans from ________ are far ________ important for corporate finance than
are securities markets.
A) government agencies; more
B) government agencies; less
C) financial intermediaries; more
D) financial intermediaries; less
Answer: C
Ques Status: Previous Edition
3) The time and money spent in carrying out financial transactions are called
A) economies of scale.
B) financial intermediation.
C) liquidity services.
D) transaction costs.
Answer: D
Ques Status: New
4) Economies of scale enable financial institutions to
A) reduce transactions costs.
B) avoid the asymmetric information problem.
C) avoid adverse selection problems.
D) reduce moral hazard.
Answer: A
Ques Status: Previous Edition
5) An example of economies of scale in the provision of financial services is
A) investing in a diversified collection of assets.
B) providing depositors with a variety of savings certificates.
C) spreading the cost of borrowed funds over many customers.
D) spreading the cost of writing a standardized contract over many borrowers.
Answer: D
Ques Status: Previous Edition
6) Financial intermediaries provide customers with liquidity services. Liquidity services
A) make it easier for customers to conduct transactions.
B) allow customers to have a cup of coffee while waiting in the lobby.
C) are a result of the asymmetric information problem.
D) are another term for asset transformation.
Answer: A
Ques Status: New
7) The process where financial intermediaries create and sell low-risk assets and use the proceeds
to purchase riskier assets is known as
A) risk sharing.
B) risk aversion.
C) risk neutrality.
D) risk selling.
Answer: A
Ques Status: Previous Edition
8) The process of asset transformation refers to the conversion of
A) safer assets into risky assets.
B) safer assets into safer liabilities.
C) risky assets into safer assets.
D) risky assets into risky liabilities.
Answer: C
Ques Status: Previous Edition
9) Reducing risk through the purchase of assets whose returns do not always move together is
A) diversification.
B) intermediation.
C) intervention.
D) discounting.
Answer: A
Ques Status: Previous Edition
10) The concept of diversification is captured by the statement
A) donʹt look a gift horse in the mouth.
B) donʹt put all your eggs in one basket.
C) it never rains, but it pours.
D) make hay while the sun shines.
Answer: B
Ques Status: Previous Edition
11) Risk sharing is profitable for financial institutions due to
A) low transactions costs.
B) asymmetric information.
C) adverse selection.
D) moral hazard.
Answer: A
Ques Status: Previous Edition
12) Typically, borrowers have superior information relative to lenders about the potential returns
and risks associated with an investment project. The difference in information is called
A) moral selection.
B) risk sharing.
C) asymmetric information.
D) adverse hazard
Answer: C
Ques Status: Revised
13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from
financial intermediaries, then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection.
C) free-riding.
D) costly state verification.
Answer: B
Ques Status: Previous Edition
14) The problem created by asymmetric information before the transaction occurs is called
________, while the problem created after the transaction occurs is called ________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification
Answer: A
Ques Status: Previous Edition
15) Adverse selection is a problem associated with equity and debt contracts arising from
A) the lenderʹs relative lack of information about the borrowerʹs potential returns and risks of
his investment activities.
B) the lenderʹs inability to legally require sufficient collateral to cover a 100% loss if the
borrower defaults.
C) the borrowerʹs lack of incentive to seek a loan for highly risky investments.
D) the borrowerʹs lack of good options for obtaining funds.
Answer: A
Ques Status: Previous Edition
16) An example of the problem of ________ is when a corporation uses the funds raised from selling
bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their
families.
A) adverse selection
B) moral hazard
C) risk sharing
D) credit risk
Answer: B
Ques Status: Previous Edition
17) Studies of the major developed countries show that when businesses go looking for funds to
finance their activities they usually obtain these funds from
A) government agencies.
B) equities markets.
C) financial intermediaries.
D) bond markets.
Answer: C
Ques Status: Previous Edition
18) The countries that have made the least use of securities markets are ________ and ________; in
these two countries finance from financial intermediaries has been almost ten times greater than
that from securities markets.
A) Germany; Japan
B) Germany; Great Britain
C) Great Britain; Canada
D) Canada; Japan
Answer: A
Ques Status: Previous Edition
19) Although the dominance of ________ over ________ is clear in all countries, the relative
importance of bond versus stock markets differs widely.
A) financial intermediaries; securities markets
B) financial intermediaries; government agencies
C) government agencies; financial intermediaries
D) government agencies; securities markets
Answer: A
Ques Status: Previous Edition