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FNCE 3050 CHAPTER 6 UNDERSTANDING FINANCIAL MARKETS AND INSTITUTIONS EXAM
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FNCE 3050 CHAPTER 6 UNDERSTANDING FINANCIALMARKETS AND INSTITUTIONS EXAM 2024-2025
Which three of the following are key factors that limit direct investment in financial
claims? - ANSWER Liquidity costs; price risk; monitoring costs
The risk that an asset's value may be less than its purchase price is referred to as
which type of risk? - ANSWER Price risk
Identify the sequence of events from the terrorist attacks in 2001 to the financial
crisis of 2008. Start with the earliest event. - ANSWER 1. Federal Reserve lowered
short-term interest rates; 2. Increased debt financing and lower credit standards; 3.
Increased interest rates on adjustable-rate mortgages; 4. Mortgage defaults and
foreclosures
Which one of these is the definition of a nominal interest rate? - ANSWER A
nominal interest rate is the rate of interest that includes all risk premiums.
Which of these fits the definition of a secondary market transaction? Select all that
apply. - ANSWER The Feel Good Co. sold 500 shares of ABC, Inc. to the Better
Health Co.; Martha sold 100 shares of stock to her son.
What key role does an investment bank play? - ANSWER Investment banks
arrange primary market transactions for business entities.
The Fisher effect is based on the theory that investors must be compensated for
which two of the following factors? Select two. - ANSWER Premium for forgoing
present consumption; Lost purchasing power on loaned funds
Which one of the following is a key factor that makes direct investments unpopular
with investors? - ANSWER Monitoring costs
Which of the following are specific factors that affect nominal interest rates? Select
all that apply. - ANSWER Term to maturity; Default risk; Liquidity risk
What is a nominal interest rate? - ANSWER A nominal interest rate is the rate
observed in the financial markets.
,Which of these defines a secondary market? Select all that apply. - ANSWER The
secondary market involves the resale of a stock by a shareholder; A secondary
market is a market where previously issued securities are traded.
To minimize liquidity risk which three factors must exist? Select three. - ANSWER
Low transaction costs; Predictable sale price; Sale on short notice
What does it mean if the nominal rate of interest, i, is less than the real rate, RIR? -
ANSWER The expected rate of inflation is negative indicating deflation.
How is a primary market defined? - ANSWER A primary market is a market in
which corporations and other fund demanders obtain funds by issuing new
securities.
Which of these factors affecting nominal rates is the risk that a security cannot be
sold quickly at full value? - ANSWER Liquidity risk
Which one of these best defines the role of investment banks? - ANSWER
Investment banks are financial intermediaries between demanders and suppliers of
funds.
Which of the following contributed to the mortgage crisis in the late 2000s? Select
all that apply. - ANSWER Declining housing values; Derivative securities;
Delinquent mortgages
Which one of these is the best definition of inflation? - ANSWER Inflation is the
continual increase in the price level of a basket of goods or services.
How will an expected increase in the rate of inflation affect interest rates? -
ANSWER Interest rates will increase.
Default risk is the risk associated with either late or missed payments on which of
these securities? - ANSWER Bonds and preferred stock
The sale of which of these securities matches the definition of a money market
transaction? Select all that apply. - ANSWER 90-day U.S. Treasury bill; 6-month
U.S. Treasury security
Which of the following affect the dollar-yuan exchange rate? Select all that apply. -
ANSWER Chinese government intervention; Demand for and supply of Chinese
yuan; Demand for and supply of U.S. dollars
, What is the definition of a real risk-free rate? - ANSWER A real risk-free rate is
the rate that would exist on a risk-free security if no inflation were expected over its
holding period.
Which type of bond will generally pay the lowest rate of interest based on its
taxability provision? - ANSWER Municipal bond
Which one of these best defines liquidity risk? - ANSWER Liquidity risk is the
possibility that an asset's price must be lowered below fair market value in order to
sell the asset on short notice.
Which three of the following are key factors that limit direct investment in financial
claims? Select three. - ANSWER Price risk; Liquidity costs; Monitoring costs
Which of these statements is (are) correct regarding the liquidity premium formula?
Select all that apply. - ANSWER The liquidity premium increases the current rate
on a long-term security; The liquidity premium increases the tendency for the yield
curve to be upward-sloping.
You are a U.S. cereal maker who buys corn in the U.S. and sells cereal in Mexico.
Which of these options would be of interest to you? Select all that apply. -
ANSWER Hedging a position to lock in a dollar/peso exchange rate; Hedging a
position to lock in the price of corn
Due to a shift in the banking model from that of "originate and hold" to "originate
to distribute," the financial market faced - ANSWER a dramatic increase in
systematic risk
How many initial public offerings can a corporation issue? - ANSWER One
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