The Financial Market Environment Solutions

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1) A financial institution is an intermediary that channels the savings of individuals, businesses, and governments into loans or investments.

Answer:  TRUE

2) Commercial banks advise firms on major transactions such as mergers or financial restructurings.

Answer:  FALSE

3) As a key participant in financial transactions, individuals are ________.

  1. A) net demanders of funds because they save more money than they borrow
  2. B) net users of funds because they save less money than they borrow
  3. C) net suppliers of funds because they save more money than they borrow
  4. D) net purchasers of funds because they save more money than they borrow

Answer:  C

4) Government is typically a ________.

  1. A) net provider of funds because it borrows more than it saves
  2. B) net demander of funds because it borrows more than it saves
  3. C) net provider of funds because it can print money at will
  4. D) net demander of funds because it saves more than it borrows

Answer:  B

5)  Government can obtain funds ________.

  1. A) by trading in equity market
  2. B) by issuing financial instruments such as futures and options
  3. C) through forex market
  4. D) by selling debt securities

Answer:  D

6) Firms that require funds from external sources can obtain them ________.

  1. A) through financial institutions
  2. B) from central bank directly
  3. C) through forex market
  4. D) by issuing T-bills

Answer:  A

7) Investment banks are institutions that ________.

  1. A) perform all activities of commercial banks and retail banks
  2. B) are exempted from Securities and Exchange Commission regulations
  3. C) engage in trading and market making activities
  4. D) are only limited to capital market activities

Answer:  C

8) Which of the following serves as an intermediary channeling the savings of individuals, businesses, and governments into loans and investments?

  1. A) financial institutions
  2. B) financial markets
  3. C) Securities and Exchange Commission
  4. D) OTC market

Answer:  A

9) The shadow banking system describes a group of institutions that engage in lending activities, much like traditional banks.

Answer:  TRUE

10) Which of the following provides savers with a secure place to invest funds and offer both individuals and companies loans to finance investments?

  1. A) investment banks
  2. B) securities exchanges
  3. C) mutual funds
  4. D) commercial banks

Answer:  D

11) Which of the following assists companies in raising capital, advise firms on major transactions such as mergers or financial restructuring, and engage in trading and market making activities?

  1. A) investment banks
  2. B) securities exchanges
  3. C) mutual funds
  4. D) commercial banks

Answer:  A

2.2   Contrast the functions of financial institutions and financial markets.

1) Primary and secondary markets are markets for short-term and long-term securities, respectively.

Answer:  FALSE

2) Financial markets are intermediaries that channel the savings of individuals, businesses, and government into loans or investments.

Answer:  FALSE

3) A public offering is the sale of a new security issue—typically debt or preferred stock—directly to an investor or group of investors.

Answer:  FALSE

4) A primary market is a financial market in which pre-owned securities are traded.

Answer:  FALSE

5) The Glass-Steagall Act was imposed to allow commercial and investment banks to combine and work together.

Answer:  FALSE

6) Most businesses raise money by selling their securities in a ________.

  1. A) public offering
  2. B) forex market
  3. C) futures market
  4. D) commodities market

Answer:  A

7) Which of the following is a means of selling bonds or stocks to the public?

  1. A) private placement
  2. B) public offering
  3. C) organized selling
  4. D) direct placement

Answer:  B

8) Which of the following is a forum in which suppliers and demanders of funds can transact business directly?

  1. A) shadow banking system
  2. B) financial markets
  3. C) commercial banks
  4. D) financial institutions

Answer:  B

9) The sale of a new security directly to an investor or a group of investors is called ________.

  1. A) arbitraging
  2. B) short selling
  3. C) a capital market transaction
  4. D) a private placement

Answer:  D

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