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Chapter 01: Role of Financial Markets and Institutions Page 1 Financial Markets and Institutions 13th Edition Madura Test Bank 1. Financial market participants who provide funds are called a. deficit units. b. surplus units. c. primary units. d. secondary units. ANSWER: b 2. Which of the following is NOT an issuer of bonds? a. households b. corporations c. the U.S. Treasury d. government agencies ANSWER: a 3. Behavioral finance a applies concepts from sociology and anthropology to the behavior of market participants. b. studies the behavior of financial markets in response to changes in Federal Reserve policy. c. applies psychology to financial decision making. d. explains why markets are efficient. ANSWER: c 4. The financial markets that facilitate the flow of short -term funds are known as a. money markets. b. capital markets. c. primary markets. d. secondary markets. ANSWER: a 5. Funds are provided to the initial issuer of securities in the a. secondary market. b. primary market. c. deficit market. d. surplus market. ANSWER: b 6. Which of the following is a capital market instrument? a a six-month certificate of deposit b. a three -month Treasury bill c. a ten-year bond d. an agreement for a bank to loan funds directly to a company for nine months ANSWER: c 7. Which of the following is a money market security? Chapter 01: Role of Financial Markets and Institutions Page 2 Financial Markets and Institutions 13th Edition Madura Test Bank a. Treasury note b. municipal bond c. mortgage d. commercial paper ANSWER: d 8. The creditors in the federal funds market are a. households. b. depository institutions. c. firms. d. government agencies. ANSWER: b 9. Investors in equity securities may earn a return from a coupon payments and the return of principal at the maturity date. b. coupon payments and a capital gain when they sell the securities. c. quarterly dividends (if paid) and a capital gain when they sell the securities. d. quarterly dividends (if paid) and the return of principal at the maturity date. ANSWER: c 10. Money market securities generally have . a relatively low liquidity, low expected return, and a high degree of credit risk b. relatively high liquidity, high expected return, and a high degree of credit risk c. relatively low liquidity, high expected return, and a low degree of credit risk d. relatively high liquidity, low expected return, and a low degree of credit risk ANSWER: d 11. If security prices fully reflect all available information, the markets for these securities are a. efficient. b. primary. c. overvalued. d. undervalued. ANSWER: a 12. If markets are , investors could use available information ignored by the market to earn abnormally high returns. a. perfect b. active c. inefficient d. in equilibrium ANSWER: c 13. If financial markets are efficient, this implies that all securities should earn the same return. a. True Chapter 01: Role of Financial Markets and Institutions Page 3 Financial Markets and Institutions 13th Edition Madura Test Bank b. False ANSWER: False 14. The Securities Act of 1933 a required complete disclosure of relevant financial information for publicly offered securities in the primary market. b. declared trading strategies to manipulate the prices of public secondary securities illegal. c. imposed heavy penalties for insider trading. d. required complete disclosure of relevant financial information for securities traded in the secondary market. e. All of these are correct. ANSWER: a 15. The Securities and Exchange Commission (SEC) was established by the a. Federal Reserve Act. b. McFadden Act. c. Securities Exchange Act of 1934. d. Glass -Steagall Act. e. None of these are correct. ANSWER: c 16. Stock issued by a corporation is an example of a(n) a debt security. . b. money market security. c. equity security. d. debt security AND money market security. ANSWER: c 17. If financial markets were , all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors. a. efficient b. inefficient c. perfect d. imperfect ANSWER: c 18. Which of the following is NOT a typical function of securities firms? a provide brokerage services b. provide underwriting services c. accept deposits that are insured by the federal government and use the funds to provide loans to corporations d. offer advice on mergers and other corporate restructurings ANSWER: c 19. Without the participation of financial intermediaries in financial market transactions, Chapter 01: Role of Financial Markets and Institutions Page 4 Financial Markets and Institutions 13th Edition Madura Test Bank a information and transaction costs would be lower. b. transaction costs would be higher but information costs would be unchanged. c. information costs would be higher but transaction costs would be unchanged. d. information and transaction costs would be higher. ANSWER: d 20. Which of the following is most likely to be described as a depository institution? a. finance companies b. securities firms c. credit unions d. pension funds e. insurance companies ANSWER: c 21. In aggregate, are the most dominant depository institution, with more total assets than other depository institutions. a. commercial banks b. savings banks c. credit unions d. S&Ls ANSWER: a 22. Which of the following is a nondepository financial institution? a. savings bank b. commercial bank c. savings and loan association d. mutual fund ANSWER: d 23. Which of the following distinguishes credit unions from commercial banks and savings institutions? a Credit unions are nonprofit. b. Credit unions accept deposits but do not make loans. c. Credit unions make loans but do not accept deposits. d. Savings institutions restrict their business to members who share a common bond. ANSWER: a 24. When a securities firm acts as a broker, it a guarantees the issuer a specific price for newly issued securities. b. makes a market in specific securities by adjusting its own inventory. c. executes securities transactions between two parties. d. purchases securities for its own account. ANSWER: c
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