MONEY-BANKING – DIBA _ HUFLIT

Chapter 02 - 03
Money
Financial Instruments, Financial Markets, and Financial Institutions

1. A financial intermediary:
A. Is an agency that guarantees a loan
B. Is involved in indirect finance
C. Would be used in direct finance
D. Must be a depository institution

2. Most individuals borrow:

A. Directly without the use of a financial intermediary
B. Using a financial intermediary because it lowers the cost of borrowing
C. Using a financial intermediary, but would save money if they financed directly
D. Without using financial intermediaries, preferring credit cards

3. Tom obtains a car loan from Old Town Bank.

A. The car loan is Tom's asset and the bank's liability
B. The car loan is Tom's asset, but the liability belongs to the bank's depositors
C. The car loan is Tom's liability and an asset for Old Town Bank
D. The car loan is Tom's liability and a liability of the bank until Tom pays it off

4. The U.S. government finances its budget deficits:

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A. Using direct finance
B. By using a financial intermediary
C. Using indirect finance
D. Both through direct and indirect finance

5. The ultimate role of the financial system of a country is to:

A. Provide a place for wealthy households to save
B. Be a low-cost source of funds for government
C. Facilitate production, employment, and consumption
D. Provide jobs in the financial sector

6. 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 parties' assets or liabilities until the loans are repaid
D. Are liabilities to both the lenders and the borrowers

7. Financial instruments are used to channel funds from:

A. Savers to borrowers in financial markets and via financial institutions
B. Savers to borrowers in financial markets but not through financial institutions
C. Borrowers to savers in financial markets but not through financial institutions
D. Borrowers to savers through financial institutions, but not in financial markets

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8. Kate buys a share of Google. Google uses the funds raised from selling its stock to expand its operations into
Asia. This is an example of:
A. Direct finance
B. Indirect finance
C. Use of a financial institution
D. A loan

9. Loans made between borrowers and lenders are:

A. Usually not taxable at the federal level
B. Legal only in the state of origination
C. Assets of the lenders
D. Assets of the borrowers

10. Loans made between lenders and borrowers:

A. Are assets to the borrowers
B. Are assets of the lenders
C. Are not taxable in the state of origination
D. Are liabilities of the borrowers

11. The process of financial intermediation:

A. Creates a net cost to an economy
B. Increases the economy's ability to produce
C. Is always used when a borrower needs to obtain funds
D. Is used primarily in underdeveloped countries

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12. Which of the following statements is most correct?
A. Financial intermediaries are banks
B. A bank is a financial intermediary
C. Financial intermediaries are insurance companies
D. Financial intermediaries are essential to direct finance

13. Which of the following statements is most correct?

A. All banks are financial intermediaries, but not all financial intermediaries are banks
B. Financial intermediaries must be public corporations
C. All financial intermediaries are insurance companies
D. Financial intermediaries are government agencies

14. Which of the following is not a financial intermediary?

A. A bank
B. An insurance company
C. The New York Stock Exchange
D. A mutual fund

15. Mary purchases a U.S. Treasury bond; the bond is:

A. An asset of the U.S. government as well as an asset for Mary
B. A liability of the U.S. government and an asset for Mary
C. An asset for Mary but not a liability of the U.S. Government
D. An asset for the government but a liability for Mary

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16. A financial instrument would include:

A. Only a written obligation and a transfer of value
B. Only a written obligation and a specified date
C. A written obligation, a transfer of value, a future date, and certain conditions
D. A written obligation, a transfer of value, a specific date for payment, uncertain conditions

17. Which of the following is not a financial instrument?

A. A share of Microsoft stock
B. A U.S. Treasury Bond
C. An electric bill
D. A life insurance policy

18. Sue has a checking account at the First National Bank; her checking account:
A. Is an asset to the bank and a liability to Sue
B. Is an asset to Sue and a liability to the bank
C. Is an asset to Sue but actually a liability to the Federal Reserve
D. Is a liability to Sue until she spends the funds

19. Financial instruments and money share which of the following characteristics?
A. Both can function as a means of payment and a store of value
B. Both can function as a store of value and allow for trading of risk
C. Both can function by acting as a means of payment and allow for trading of risk
D. Both can function as a store of value even though they do not allow for trading of risk

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20. Financial instruments are different from money because:
A. They can act as a store of value and money cannot
B. They can't be a means of payment but money can
C. They can allow for the transfer of risk
D. They have greater liquidity

21. Juan purchases automobile insurance; the insurance contract is:

A. A financial instrument
B. A form of money
C. A transfer of risk from the insurance company to Juan
D. A financial intermediary

22. Most funds that flow between lenders and borrowers:

A. Flow directly through financial intermediaries
B. Flow through government agencies
C. Flow directly through financial instruments
D. Flow indirectly through financial intermediaries

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23. A bank is a financial intermediary. Which of the following statements is most accurate?
A. The bank's depositors are the ultimate lenders and the bank is the ultimate borrower
B. People seeking loans from the bank are the ultimate spenders while the bank is the ultimate lender
C. The bank's depositors are the ultimate lenders, while those seeking loans from the bank are the ultimate
spenders
D. Those seeking loans from the bank are the ultimate spenders; the bank's stockholders are the ultimate
lenders

24. Which of the following statements is most correct?

A. When a risk is difficult to predict, financial instruments are created to transfer these risks
B. Financial instruments are created to transfer risks that are relatively easy to predict
C. Financial instruments require certainty of an event to be able to transfer risk
D. Financial instruments eliminate the risk from uncertainty, they do not transfer it

25 Standardization of financial instruments has occurred as a result of:

A. The rule of 70
B. The law of demand
C. Economies of scale
D. The law of supply

26. More detailed financial instruments tend to be:

A. Less costly because all possible contingencies are covered
B. More costly because it will cost more to create
C. More desirable than less detailed ones, no matter what the price
D. Less costly because they can be standardized more easily
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27. Many financial instruments are standardized because:
A. It is believed that most parties to a contract do not read them anyway
B. Complexity is costly, the more complex a contract, the more it costs to create
C. The standardization of contracts makes them harder to understand
D. It is required by the government

28. A share of Ford Motor Company stock is an example of:

A. A non-standardized financial instrument
B. A standardized financial instrument
C. A non-standardized financial instrument since their prices can differ over time
D. A financial instrument without risk

29. Financial institutions typically own assets equal to about 10 times their actual worth. During the financial
crisis of 2007-2009 some important financial firms were leveraged by more than:
A. 20 times their net worth
B. 30 times their net worth
C. 50 times their net worth
D. 75 times their net worth

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30. A counterparty to a financial instrument is always:

A. The issuer of the financial instrument
B. The government agency guaranteeing the value of the instrument
C. The person or institution that purchases the financial instrument
D. The person or institution that is on the other side of the financial contract

31. The information concerning the issuer of a financial instrument:

A. Needs to be complete and closely monitored by the buyers of the instrument for change
B. Is somewhat non-standardized to minimize the cost of the instrument
C. Is usually standardized to the essential information required by the buyers
D. Is closely monitored by the buyers of these instruments for change

32. Asymmetric information in financial markets is a potential problem usually resulting from:
A. Borrowers having more information than the lenders, and not disclosing this information
B. Lenders having more information than borrowers and not disclosing this information
C. The fact that people are basically dishonest
D. The uncertainty about Federal Reserve monetary policy

33. Agencies exist which rate bonds based on characteristics of the borrower. Such bond rating agencies are an
example of a financial market response designed to:
A. Increase information asymmetry
B. Decrease the real return to bondholders
C. Provide a lower cost solution to the high cost of information
D. Transfer risk from the buyer to the rating agency

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34. The better the information provided to financial markets:
A. The less the amount of funds transferred between savers and borrowers
B. The greater the amount of funds transferred between savers and borrowers, though risk increases
C. The higher the return required by lenders
D. The greater will be the flow of funds in these markets

35. Financial markets enable the transfer of risk by:

A. Requiring that risk-averse investors have access to U.S. Treasury bond markets
B. Allowing individuals and firms less willing to bear risk to transfer risk to other individuals and firms more
willing to bear risk
C. Making sure that higher default risk is offset by greater liquidity
D. Enabling even unsophisticated investors to purchase highly complex financial instruments

36. A borrower has information that it does not make available to a prospective lender; this is an example of:
A. A wise borrower and an unwise lender
B. A transfer of risk
C. Information asymmetry
D. Liquidity risk

37. Disability Income Insurance is:

A. Insurance borrowers can take out in case the company they invest in defaults.
B. Insurance that makes payments of wages to workers when the company they work for is disabled due to a
natural disaster.
C. Is insurance that makes payments to workers when they are unable to work due to an injury.
D. Is only available through the government as part of the Social Security System.

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38. Disability Income Insurance:

A. Is available only to people who have been at their jobs for more than 5 years
B. Is provided by the government through Social Security
C. Is not that critical since the odds are less than 1 in 10 working adults will be disabled for a period exceeding
90 days
D. Is not a transfer of risk since it seeks to replace wages

39. The owner of a small business applies for a bank loan and tells the loan officer that the funds will be used to
expand inventory for the upcoming holiday season. The small business finds itself in need of additional funds
to meet the monthly rent for the next quarter and the owner uses the loan proceeds to pay the rent. This is an
example of:
A. Liquidity risk
B. Default risk
C. A lack of diversification for the bank
D. Information asymmetry

40. A share of Microsoft stock would best be described as which of the following?
A. A derivative instrument
B. A means of payment
C. An underlying instrument
D. A debt instrument

41. A derivative instrument:

A. Comes into existence after the underlying instrument is in default
B. Is a low-risk financial instrument used by highly risk-averse savers

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C. Gets its value and payoff from the performance of the underlying instrument
D. Should be purchased prior to purchasing the underlying security

42. One of the advantages of the financial system is:

A. It gathers information about borrowers both before and after they obtain resources
B. It communicates more information to lenders than borrowers
C. It eliminates information asymmetry
D. It makes sure that all information communicated is truthful

43. A futures contract is an example of:

A. A derivative instrument
B. An instrument used solely by financial institutions
C. A high-risk security that will only have value if certain events occur
D. A contract that is traded but is not a financial instrument

44. The primary use of derivative contracts is:

A. For IRA and other pension plans since they only have value well into the future
B. To shift risk among investors
C. For investors seeking a greater return by taking greater risk
D. To add to the profits an investor obtains through information asymmetry

45. Which of the following is not one of fundamental characteristics that influence the value of a financial
instrument?
A. The current income tax rates
B. The size of the promised payment to be made
C. The likelihood that the payment will be made
D. When the promised payment is to be made
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46. Considering the value of a financial instrument, the bigger the size of the promised payment:
A. The less valuable the financial instrument because risk must be greater
B. The longer an investor has to wait for the payment
C. The more valuable the financial instrument
D. The greater the risk

47. Considering the value of a financial instrument, the sooner 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. The less relevant is the likelihood that the payment will be made

48. Considering the value of a financial instrument, the more likely it is the payment will be made:
A. The more valuable the financial instrument
B. The less valuable is the instrument because risk is lower
C. The less valuable is the financial instrument because it is highly liquid
D. The greater the uncertainty; therefore the less valuable is the financial instrument

49. Considering the value of a financial instrument, the circumstances under which the payment is to be made
influence the value because:
A. We like uncertain payoffs because this adds to the return
B. Payments that are made when we need them the most are more valuable
C. The sooner the payment is to be made the better
D. We know when certain events are going to occur and that is when we want the payment

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50. The fundamental characteristics influencing the value of a financial instrument include each of the
following except:
A. The size of the payment promised
B. When the promised payment will be made
C. Where the instrument is traded
D. The likelihood of payment

51. The value of a financial instrument rises as:

A. The size of the payment promised decreases
B. The promised payment is made sooner rather than later
C. It is less likely the payment will be made
D. The payments are made when the prospective investor needs them least

52. Consider the price paid for debt issued by the State of California. Which of the following would lead to a
decrease in the value of State of California bonds?
A. The State of California bonds are in small dollar amounts
B. The State of California bonds have a longer maturity
C. The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest
payments
D. The State of California pays back its previous bonds ahead of schedule

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53. Financial instruments used primarily as stores of value include each of the following, except:
A. Bonds
B. Futures contracts
C. Stocks
D. Home mortgages

54. Financial instruments used primarily as stores of value would not include:
A. A car insurance policy
B. A U.S. Treasury bond
C. Shares of General Motors stock
D. A home mortgage

55. Financial instruments used primarily to transfer risk would include all of the following, except:
A. An insurance contract
B. A futures contract
C. Options
D. A bank loan

56. Financial instruments used primarily to transfer risk would not include:
A. A bank loan
B. Options
C. An insurance policy
D. Home mortgages

57. Which of the following financial instruments is used mainly to transfer risk?
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A. Asset-backed securities
B. Bonds
C. Options
D. Stocks

58. Financial instruments used primarily as stores of value do not include:

A. Asset backed securities
B. U.S. Treasury bonds
C. A car insurance policy
D. A bank loan

59. The most prominent of asset-backed securities is:

A. Shares of stock in corporations since stockholders own the assets
B. Securities backed by home mortgages
C. U.S. Treasury bonds since they are backed by all public assets
D. Movie box-office receipts

60. Roles served by financial markets include the following, except:

A. Eliminating risk
B. Providing liquidity
C. Pooling and communicating information
D. Sharing of risk

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61. Which of the following is not a reason why interbank lending dried up during the financial crisis of 2007-
2009?
A. Banks preferred to hold on to their liquid assets in case their own need for them increased
B. Banks grew increasingly concerned about the ability of their trading partners to repay the loans
C. The increased cost of loans
D. The Fed grew increasingly wary of making liquidity available to banks

62. If financial markets didn't exist:

A. Required returns would be lower since fewer instruments would trade
B. Liquidity would diminish and returns would be lower
C. More funds would flow directly between borrowers and savers
D. Liquidity would diminish, reducing the flow of funds between borrowers and savers

63. The high volume of shares of stock that are traded on a normal day on stock markets reflects:
A. The high transaction costs associated with these financial markets
B. The low transaction costs and high liquidity associated with these markets
C. The low transaction costs and low liquidity associated with these markets
D. The high transactions costs and low liquidity associated with these markets

64. The pool of information collected by financial markets is usually:

A. Only available to lenders
B. Summarized in the form of a price
C. Valuable and not made available until the parties pay for it
D. More than a borrower needs to make a loan

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65. Financial markets:
A. Enable buyers and sellers to exchange financial instruments but not risk
B. Enable buyers and sellers to exchange risk by buying and selling financial instruments
C. Only allow the transfer of risk through derivative securities
D. Do not allow for the transfer of risk but do help reduce it

66. Commissions paid to a stock broker are an example of:

A. Risk transfer
B. Transaction costs
C. Information asymmetry
D. Liquidity

67. Brokerage commissions:

A. Are set by government regulators so they cannot vary across firms for the same services
B. Can vary but typically don't because firms tend to set them at the same levels
C. Can differ reflecting the different services being offered
D. Are always a percentage of the amount of the trade

68. A primary financial market is:

A. A market just for corporate stocks
B. A market only for AAA rated Securities
C. The New York Stock Exchange
D. Is one in which newly issued securities are sold

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69.A primary financial market is:

A. Located only in New York, London, and Tokyo but can handle transactions anywhere in the world
B. One where the borrower obtains funds directly from the lender for newly issued securities
C. A market where U.S. Treasury bonds are traded
D. One that can only deal in the highest investment grade securities

70. Newly issued U.S. Treasury Securities are sold in:

A. The primary financial market
B. Only to the Federal Reserve who then resells them
C. The secondary market since bonds cannot be sold in the primary market
D. Secondary markets but only using registered bond dealers

71. Most of the buying and selling in primary markets:

A. Is in the public view
B. Is highly transparent and closely monitored by the SEC
C. Involve an investment bank
D. Is done by the Federal Reserve

72. Secondary financial markets:

A. Are financial markets for all financial instruments rated less than investment grade
B. Are financial markets where existing securities are bought and sold
C. Eliminate the transaction costs for buyers and sellers
D. Are only for stock

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73. A primary financial market is a market:
A. Where only corporate bonds are sold
B. Where only corporate and government bonds are sold
C. Where newly issued securities are sold by savers to borrowers
D. Where investment banks assist companies in raising cash

74. A collection of assets is known as a(n):

A. Asset-backed security
B. Derivative
C. Futures contract
D. Portfolio

75. One benefit of centralized exchanges compared to over-the-counter (OTC) markets is that:
A. OTC markets require specialists, whereas centralized exchanges do not
B. Mistakes in placing orders are more likely in OTC markets
C. Centralized exchanges do not require physical access, whereas OTC markets do
D. Centralized exchanges make use of electronic communications networks (ECNs), whereas OTC markets do
not

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76. Which of the following would not be an example of a secondary financial market transaction?
A. You call a broker and purchase 100 shares of McDonald's Corp. stock
B. You go to the bank and purchase a $5000 certificate of deposit
C. You call a broker and purchase a U.S. Treasury bond
D. You call a broker and purchase a bond issued by General Motors

77. Which of the following is likely to be a primary financial market transaction?

A. You cash the check your grandmother sent you for your birthday
B. You call a broker and purchase bonds for your retirement fund
C. A city issues bonds to finance new road construction
D. A supermarket needs to borrow the funds for a second location and takes out a loan from a commercial bank
to pay for it

78. An over-the-counter (OTC) market is:

A. Made up of dealers who only sell government bonds
B. An example of a centralized market
C. Made up of dealer who buy and sell only for their own accounts
D. Made up of dealers who buy and sell for their customers and for their own accounts

79. The New York Stock Exchange (NYSE) is:

A. A decentralized electronic market made up of dealers all over the world
B. An example of a centralized exchange
C. A financial market where nearly 100 million shares of stock are traded every business day
D. The only centralized stock exchange in the world

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80. Over-the-counter (OTC) markets:
A. Employ specialists to minimize price volatility
B. Are centralized exchanges but you must be a dealer to be part of an exchange
C. Only deal in the stocks of companies with over $100 million in capital
D. Are networks of security dealers linked electronically

81. Checks are:

A. Not a means of payment
B. Not money
C. Not a promise of any kind
D. Not acceptable by the U.S. Government for payment of taxes

82. One major difference between a debit card and a credit card is:
A. Only the debit card helps you to build a credit history
B. The debit card has lower minimum monthly payments
C. You do not need to actually have the funds in your account when you use a debit card
D. Debit cards have no late fees

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83. One major difference between a debit and credit card is:
A. You can build a credit history with the credit card but not with the debit card
B. You have to pay interest on your purchases if you use a credit card
C. Credit cards are money and the debit card is not
D. Debit cards charge late fees

84. To say an asset is liquid implies that:

A. We are focusing on a category of assets that are in a physically liquid form, like oil
B. We are considering assets that may be readily converted into a means of payment
C. We are considering any asset that can be sold
D. We are only considering U.S. currency

85. One advantage of using checks over a debit card is:

A. Checks can be replaced if lost or stolen, a debit card cannot
B. The bank is responsible if someone steals your checks and uses them; this isn't the case with debit cards
C. A cancelled paper check is the only generally accepted proof of payment
D. The person has "float," meaning time between writing the check and depositing funds to cover it

86. Checks and currency function similarly, however:

A. Currency is a more effective means of payment
B. Carrying currency entails greater risk, because it cannot be replaced if lost or stolen
C. Currency is a better store of value than checking deposits
D. Checks are not included in measures of money, whereas currency is

87. Money aggregates can best be defined as a set of measures of the amount of:
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A. Money that exists at a particular point in time
B. Money the Federal Reserve has on deposit as reserves
C. Money available to the economy over a year
D. U.S. currency the Bureau of Printing and Engraving has produced

88. The money aggregate M1 includes each of the following, except:

A. Currency in the hands of the public
B. Travelers checks that have been issued
C. Currency in the vaults of commercial banks
D. Demand deposits at commercial banks

89. The amount of currency in the hands of the public is approximately what percentage of M1?
A. 50%
B. 25%
C. 30%
D. 90%

90. The money aggregate M2 includes:

A. Large denomination time deposits
B. Stock and bond mutual fund shares
C. Savings deposits but not money market deposit accounts
D. M1

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91. The most commonly quoted monetary aggregate is:

A. Money-market mutual fund shares
B. M1 since it is the most liquid
C. Public currency
D. M2 since its movement is most closely related to interest rates and economic growth

92. An automobile is an asset, but it is not liquid because:

A. The transactions costs for the used automobile market are high
B. The owner may still be making payments on the loan
C. The automobile may not be in good repair
D. The automobile cannot be sold without a loss in value

93. Which of the following lists correctly orders assets from most liquid to least liquid?
A. Stocks¼house¼paper currency¼savings deposits
B. Stocks¼paper currency¼house¼savings deposits
C. Savings deposits¼paper currency¼house¼stocks
D. Paper currency¼ savings deposits¼stocks¼house

94. Which of the following assets is the most liquid?

A. Art
B. Demand deposits
C. Houses
D. Stocks

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95. Considering the roughly $880 billion in U.S. currency held by the public:
A. Over 90% of the amount is held in the form of $1 bills
B. Nearly 80% is held in the form of $100 bills
C. Over half of the currency held in the form of $20 bills
D. The Federal Reserve distributes the amount equally across all denominations of bills

96. Ava buys a $2,000 computer using a paper check. At which step does $2,000 get recorded in M1?
A. When Ava hands the $2,000 check to the computer merchant
B. Once the $2000 is credited to the merchant bank's reserve account and is debited from Ava's bank account
C. Once the Federal Reserve sends the paper check (or an electronic image) to Ava's bank
D. The check is never M1. The $2000 is M1 both in Ava's bank account and, later, in the merchant's account. It
is the deposit balance that is counted

97. Sophia receives a $400 gift card for her campus bookstore from her parents. Which of the following is true
regarding the $400 gift card?
A. It is counted only in M1
B. It is included in both M1 and M2
C. It is counted in only M2
D. Stored-value cards are not counted in either M1 or M2

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98. Which of the following would not be considered a characteristic of money?

A. It is a store of value
B. It is a means of payment
C. It must have intrinsic value
D. It is a unit of account

99. A society without any money:

A. Could never exchange goods and/or services
B. Would find people doing everything for themselves
C. Would have to rely strictly on barter
D. Would be more efficient since people would be more self-sufficient

100. The use of money makes us more efficient because:

A. We spend more time trading and more time producing
B. People can specialize in what they do well
C. With money we borrow less
D. Money increases in value over time

101. The unit of account characteristic of money:

A. Makes it difficult to compare the relative prices of goods and services
B. Refers to how we use money to transfer purchasing power over time
C. Means all prices are expressed in terms of money
D. Means that money finalizes payments

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