PHINMA ARAULLO UNIVERSITY

COLLEGE OF MANAGEMENT AND ACCOUNTANCY

FIN 072 FINANCIAL MARKETS FIRST QUIZ

Part I. ( Multiple Choice) Write your answer on the space provided before the given
number.

1. Every financial market has the following characteristic:

(a) It determines the level of interest rates.
(b) It allows common stock to be traded.
(c) It allows loans to be made.
(d) It channels funds from lenders-savers to borrowers-spenders.

2. Financial markets have the basic function of

(a) getting people with funds to lend together with people who want to borrow funds.
(b) assuring that the swings in the business cycle are less pronounced.
(c) assuring that governments need never resort to printing money.
(d) both (a) and (b) of the above.
(e) both (b) and (c) of the above.

3. Financial markets improve economic welfare because

(a) they allow funds to move from those without productive investment opportunities to those
who
have such opportunities.
(b) they allow consumers to time their purchase better.
(c) they weed out inefficient firms.
(d) they do each of the above.
(e) they do (a) and (b) of the above.

4. Well-functioning financial markets

(a) cause inflation.
(b) eliminate the need for indirect finance.
(c) cause financial crises.
(d) produce an efficient allocation of capital.
(e) promote political instability.

5. A breakdown of financial markets can result in

(a) an efficient allocation of capital.
(b) rapid economic growth.
(c) political instability.
(d) stable prices.
(e) financial stability.

6. Type of market in which securities with less than one year maturity are traded, is classified
(a) money market
(b) capital market
(c) transaction market
(d) global market
(e) central market

7. In capital markets, major suppliers of trading instruments are

(a) government and corporations
(b) liquid corporations
(c) instrumental corporations
(d) manufacturing corporations

8. Stock with less volatility, reputed company, long history of growth and earnings is called as
(a) growth stock
(b) large capital stock
(c) performing stock
(d) blue chip stock
(e) value stock

9. Which of the following can be described as direct finance?

(a) You take out a mortgage from your local bank.
(b) You borrow $2500 from a friend.
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(c) A pension fund lends money to General Motors.
(d) You buy shares in a mutual fund.
(e) None of the above.

10. Which of the following can be described as involving direct finance?

(a) A corporation takes out a loan from a bank.
(b) People buy shares in a mutual fund.
(c) A corporation buys a short-term security issued by another corporation.
(d) An insurance company buys shares of common stock in the over-the-counter markets.
(e) None of the above.

11. Which of the following statements about the characteristics of debt and equity is untrue?
(a) They can both be long-term financial instruments.
(b) They can both be short-term financial instruments.
(c) They both involve a claim on the issuer’s income.
(d) They both enable a corporation to raise funds.
(e) None of the above.

12. Which of the following statements about financial markets and securities are true?
(a) A bond is a long-term security that promises to make periodic payments called dividends to
the
firm’s residual claimants.
(b) A debt instrument is long term if its maturity is ten years or longer.
(c) The maturity of a debt instrument is the number of years (term) to that instrument’s
expiration
date.
(d) All of the above are true.
(e) Both (a) and (c) are correct.

13. Securities are _____ for the person who buys them, but are _____ for the individual or firm
that issues them.
(a) assets; liabilities
(b) liabilities; assets
(c) negotiable; nonnegotiable
(d) nonnegotiable; negotiable

14. An important function of secondary markets is to

(a) make it easier to sell financial instruments to raise cash.
(b) raise funds for corporations through the sale of securities.
(c) create a market for bank demand deposits.
(d) create a market for newly constructed houses.
(e) make it easier for governments to raise taxes.

15. An important financial institution that assists in the initial sale of securities in the primary
market is the
(a) investment bank.
(b) commercial bank.
(c) stock exchange.
(d) brokerage house.
(c) organized security exchange

16. Which of the following assets is traded only in an over-the-counter market?

(a) treasury bonds
(b) stocks
(c) commodities
(d) all of the above
(e) none of the above

17. Which of the following statements about financial markets and securities are 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 the Philippine Stock Exchange.
(b) A corporation acquires new funds only when its securities are first sold in the primary
market.
(c) Money market securities are usually more widely traded than longer-term securities and so
tend to be more liquid.
(d) All of the above are true.
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(e) Only (a) and (b) of the above are true.

18. Which of the following statements about financial markets and securities are 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 the New York Stock Exchange.
(b) As a corporation gets a share of the broker’s commission, a corporation acquires new funds
whenever its securities are sold.
(c) Because of their short terms to maturity, the prices of money market instruments tend not to
fluctuate wildly.
(d) Only (a) and (b) of the above are true.
(e) Only (a) and (c) of the above are true.

19. The process of indirect finance using financial intermediaries is called

(a) direct lending.
(b) financial intermediation.
(c) disintermediation.
(d) financial liquidation.
(e) resource allocation.

20. Financial intermediaries lower costs by spreading them over a large number of customers,
thereby taking advantage of
(a) risk sharing.
(b) diversification.
(c) economies of scale.
(d) asymmetric information.
(e) transactions costs.

21. That depositors earn interest on checking and savings accounts, and yet withdraw their funds
whenever necessary is possible because
(a) government regulations mandate this policy.
(b) financial intermediaries earn such large profits.
(c) financial intermediaries lower transaction costs.
(d) financial intermediaries hold highly diversified asset portfolios.

22. Reducing risk through the purchase of assets whose returns do not always move together is
(a) disintermediation.
(b) intermediation.
(c) intervention.
(d) discounting.
(e) diversification.

23. The concept of diversification is captured by the statement

(a) don’t look a gift horse in the mouth.
(b) don’t put all your eggs in one basket.
(c) it never rains, but it pours.
(d) the only thing we have to fear is fear itself.
(e) make hay while the sun shines.

24. Which of the following are functions of a financial system?

1. The operation of a payments system.
2. Providing the means of portfolio adjustment.
3. Helping to reduce unemployment.
4. Channelling funds between lenders and borrowers.
5. Helping speculators to bet on price movements.

(a) 1 and 5 (b) 2 to 5 (c) 1, 2 and 4 (d) All of the above

25. Which of the following are characteristic of a financial intermediary?

1. It introduces borrowers to lenders.

2. It has assets which exceed liabilities.
3. It increases liquidity for lenders.
4. It reduces transaction costs for borrowers and lenders.
5. It makes excess profit.

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(a) 1, 4, and 5 (b) 1 to 3 (c) 3 and 4 (d) 1 only

26. In primary markets, first time issued shares to be publicly traded, in stock markets is
considered as
(a) traded offering
(b) public markets
(c) issuance offering
(d) initial public offering
(e) primary market offering

27. Money market where debt and stocks are traded and maturity period is more than a year is
classified as
(a) shorter term markets
(b) capital markets
(c) counter markets
(d) long-term markets
(e) money markets

28. Example of derivative securities include

(a) swap
(b) option
(c) financial instruments
(d) a and b
(e) all of the above

29. The benefit of risk sharing to customers of financial institutions is

(a) reduced liquidity.
(b) reduced diversification.
(c) reduced liability.
(d) reduced risk.
(e) reduced return.

30. Financial intermediaries

(a) exist because there are substantial information and transactions costs in the economy.
(b) improve the lot of the small saver.
(c) are involved in the process of indirect finance.
(d) do each of the above.
(e) do only (a) and (b) of the above.

“Rather failed with honor than succeed by fraud.”