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Tute 1 Questions

This document provides an overview of the financial system through a tutorial with three parts. It begins with review questions about financial markets and instruments. The second part provides multiple choice questions covering topics like financial intermediaries, banks, stocks, bonds, and risks. The third part lists additional application questions about bond pricing, yields, and risk sharing through financial markets and intermediaries.

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Lê Thiên Giang 2KT-19
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78 views4 pages

Tute 1 Questions

This document provides an overview of the financial system through a tutorial with three parts. It begins with review questions about financial markets and instruments. The second part provides multiple choice questions covering topics like financial intermediaries, banks, stocks, bonds, and risks. The third part lists additional application questions about bond pricing, yields, and risk sharing through financial markets and intermediaries.

Uploaded by

Lê Thiên Giang 2KT-19
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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TUTORIAL 1

AN OVERVIEW OF THE FINANCIAL SYSTEM

Part 1. Questions for review


1. What is the main function of financial markets
2. Classify financial markets
3. List and distinguish the differences among financial instruments
4. Identify the differences among types of financial intermediaries (in terms of
primary liabilities and assets) using Table 3, page 40

Part 1. Multiple-choice questions

1. Economists group commercial banks, saving and loans associations, credit unions,
mutual funds, mutual savings banks, insurance companies, pension funds and finance
companies under the heading financial intermediaries. Financial intermediaries:
A. produce nothing of value and therefore a drain on society’s resources
B. provide a channel for linking between those who want to save and those who
want to spend
C. can hurt the performance of the economy
D. have been a source of slow and resistant financial innovation

2. What is the basic activity of banks?


A. To sell shares of corporations to the general public
B. To facilitate the transfer of money from savers to borrowers
C. To represent the interest of insurance companies
D. To ensure everyone who wants a loan gets one
E. To equate future consumption with current consumption

3. Banks, savings and loans associations, mutual savings banks and credit unions
A. are no longer important players in financial intermediation
B. have been adept at innovating in response to changes in regulatory
environment
C. produce nothing of value and therefore a drain on society’s resources
D. since deregulation now provide services only to small depositors

4. Why are financial markets important to the health of the economy?


A. They channel funds from investors to savers
B. They identify and shut down inefficient firms
C. They eliminate the needs for financial intermediaries
D. They allow consumers to time their purchase better

5. These financial institutions are very small cooperative lending institutions


organized around a particular group: union members, employees of a firm and so
forth. They acquire funds from deposits called shares and primarily make consumer
loans. They are
A. Credit unions
B. Commercial banks
C. Savings and loan associations
D. Mutual fund
6. These financial intermediaries raise funds primarily by issuing checkable deposits,
savings deposits and time deposits. They then use these funds to make commercial,
consumer and mortgage loans, and to buy US government securities and municipal
bonds. They are
A. Credit union
B. Commercial bank
C. Savings and loan
D. Mutual fund

7. These instruments are typically overnight loans between banks of their deposits at
Federal Reserve.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances

8. Short-term debt instruments issued by large banks and well-known corporations


A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances

9. These instruments are effectively short-term loans (usually with maturity of less
than two weeks) for which Treasury bills serve as collateral, which the lender receives
if the borrower does not pay back the loan.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances

10. A share of Microsoft common stock is:


A. a liability to the shareholder because it must be sold to realize a capital gain
B. an asset of Microsoft because it allows Microsoft to invest in capital
equipment or other companies
C. identical to a bond issued by Microsoft
D. an asset for its owner and a liability for Microsoft.

11. A share of common stock is a claim on a corporationʹs
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.

12. The price paid for the rental of borrowed funds (usually expressed as a percentage 
of the rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.

13. ___________ occurs when the potential borrowers who are the most likely to
produce an undesirable (adverse) outcome – the bad credit risks – are the ones who
most actively seek out a loan and are thus most likely to be selected.
A. Adverse selection
B. Asymmetric information
C. Moral hazard
D. Credit ratings

14. A situation where one party often does not know enough about the other party to
make accurate decisions
A. Adverse selection
B. Asymmetric information
C. Moral hazard
D. Credit ratings

15. A situation where the borrower might engage in activities that are undesirable
from the lender’s point of view because they make it less likely that the loan will be
paid back.
A. Adverse selection
B. Asymmetric information
C. Moral hazard
D. Credit ratings

16. Equity holders are a corporationʹs ________.  That means the corporation must
pay all of its debt holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters

17. A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.

18. Which of the following statements about financial markets and securities is true?
A) Many common stocks are traded over-the-counter, although the largest
corporations usually have their shares traded at organized stock exchanges such as
such as the New York Stock Exchange.
B)As a corporation gets a share of the brokerʹs commission, a corporation acquires
new funds whenever its securities are sold.
C) Capital market securities are usually more widely traded than shorter-
term securities and so tend to be more liquid.
D) Because of their short term to maturity, the prices of money market instruments
tend to fluctuate widely.
Part 2: Questions and applications
Chapter 2: Questions 3, 4, 6, 10

Question 3: Give at least three examples of a situation in which financial markets


allow consumers to better time their purchases.

Question 4: If you suspect that a company will go bankrupt next year, which would
you rather hold, bonds issued by the company or equities issued by the company?
Why?

Question 6: Describe who issues each of the following money market instruments:
a. Treasury bills
b. Certificates of deposit
c. Commercial paper
d. Repurchase agreement
e. Fed funds

Question 10: How does risk sharing benefit both financial intermediaries and private
investors?

Part 3: Additional questions:

1. You have just purchased a 10-year, $1,000 par value bond. The coupon rate on
this bond is 8 percent annually, with interest being paid each 6 months. If you
expect to earn a 10 percent yield on this bond, how much did you pay for it?
2. Callaghan Motors ‘bonds have 10 years remaining to maturity. Interest is paid
annually, they have a $1,000 par value, the coupon interest rate is 8%, and the
yield to maturity is 9%. What is the bond’s current market price?
3. 3. A bond has a $1,000 par value, 10 years to maturity, and a 7% annual coupon
and sells for $985.
a. What is its yield to maturity (YTM)?
b. Assume that the yield to maturity remains constant for the next 3 years. What
will the price be 3 years from today?

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