FIN 3400 Chapter 06 Assignment Questions and Answers- Florida International University
How is a primary market defined?
Multiple choice question.
A
... [Show More] primary market is the market in which a handful of institutions purchase
an entire issue of securities.
A primary market is the sale of any security that has been registered with
the SEC.
A primary market is a market in which corporations and other fund
demanders obtain funds by issuing new securities.
The primary market is defined as the market where only IPOs can occur.
What key role does an investment bank play?
Multiple choice question.
Investment banks serve as an intermediary between the issuer of a
security and the underwriter of that security.
Investment banks maintain a liquid secondary securities market.
Investment banks arrange primary market transactions for business
entities.
Investment banks purchase all private placements.
How many initial public offerings can a corporation issue?
Multiple choice question.
Maximum of ten
One
Two; one for bonds and one for stocks
Unlimited
Select all that apply
Which of these fits the definition of a secondary market transaction? Select
all that apply.
Multiple select question.
The Bolt Co. purchased 300 shares of Metals, Inc. stock in an IPO.
The Feel Good Co. sold 500 shares of ABC, Inc. to The Better Health Co.
The Excel Co. sold 1,000 shares of its stock to Fred Stone.
Martha sold 100 shares of stock to her son.
Select all that apply
The sale of which of these securities matches the definition of a money
market transaction? Select all that apply.
Multiple select question.
6-month U. S. Treasury security
90-day U. S. Treasury bill
5-year corporate bond
2-year U. S. Treasury note
True or false: The issuer of the security will receive the proceeds of a
security's sale if that sale occurs in the primary market.
True false question.
True
False
Which one of these sets of characteristics applies to money market
securities?
Multiple choice question.
Short-term, low price volatility, high risk
High risk, high price volatility, long-term
Short-term, low risk, high price volatility
Low risk, low price volatility, short-term
Which one of these best defines the role of investment banks?
Multiple choice question.
Investment banks are the primary suppliers of mortgage funds.
Investment banks are financial intermediaries between demanders and
suppliers of funds.
Investment banks are the primary suppliers of funds.
Investment banks are the primary demanders of funds.
Which money market security involves a sale, generally at a discounted
price, that includes a promise to reverse the sale at a specified price on a
specified date?
Multiple choice question.
Banker's acceptance (BA)
Repurchase agreement (repo)
Treasury bill
Negotiable certificate of deposit
What is the definition of an initial public offering (IPO)?
Multiple choice question.
An IPO is the first offering of financial securities by a firm to the general
public.
An IPO is any sale of newly issued securities by a firm to the general
public.
An IPO is any sale of securities by a firm in the primary market.
An IPO is any sale of newly issued securities by a corporation.
True or false: Capital markets are defined by the type of securities traded
rather than the maturity of those securities.
True false question.
True
False
Select all that apply
Which of these defines a secondary market? Select all that apply.
Multiple select question.
A secondary market is a market in which the seller is also the issuer.
A secondary market is a market where previously issued securities are
traded.
The secondary market refers to all security transactions that involve
individual investors.
The secondary market involves the resale of a stock by a shareholder.
Which one of these is the best definition of foreign exchange markets?
Multiple choice question.
Foreign exchange markets are markets in which foreign currency is traded
for immediate or future delivery.
Foreign exchange markets are markets outside of the U. S. in which
financial transactions occur.
Foreign exchange markets are markets in which foreign currency is traded
for immediate delivery.
Foreign exchange markets are markets in which agreements are made for
goods to be imported from or exported to non-U. S. firms.
What is the definition of a money market?
Multiple choice question.
A money market is a market that trades securities that mature in one
year or less.
A money market is a security where the funds are invested solely in cash.
A money market is a market that trades newly issued securities where
the issuer is also the seller.
A money market is a market where securities are traded for cash.
Select all that apply
Which of these parties are affected by foreign exchange risk? Select all that
apply.
Multiple select question.
Individual who invests in overseas markets
U. S. importer of clothing from Asia
U. S. exporter of goods to Canada
New Englander exporter of fish to Iowa
Which one of these characteristics applies to money market securities?
Multiple choice question.
High level of risk
Issued solely by the U. S. Treasury
Potentially large fluctuations in value
Short maturities
Select all that apply
Which of the following affect the dollar-yuan exchange rate? Select all that
apply.
Multiple select question.
Demand for and supply of Chinese yuan
Demand for and supply of Mexican pesos
Chinese government intervention
Demand for and supply of U. S. dollars
Which money market security is defined as short-term funds transferred
between financial institutions, often for no more than one day?
Multiple choice question.
Commercial paper
Negotiable certificates of deposit
Banker's acceptances
Federal funds
Which one of these is a characteristic of a derivative security?
Multiple choice question.
Risk-free security
Informal agreement
Price of asset exchanged determined when exchange occurs
Value dependent on underlying security
What is the definition of a capital market?
Multiple choice question.
A capital market is a market that trades securities with maturities in
excess of one year.
A capital market is a market that trades only securities issued by
governmental entities.
A capital market is a market that deals only with primary issues.
A capital market is a market that trades securities amongst financial
institutions.
Select all that apply
Multiple select question.
Hedging a position to lock in the price of cotton
Hedging a position to lock in an interest rate
Hedging a position to lock in a dollar/peso exchange rate
Hedging a position to lock in the price of corn
According to the definition of a foreign exchange market, what good or
commodity is exchanged in these markets?
Multiple choice question.
Foreign-produced goods
Domestic-produced
Foreign currency only
Foreign services
Which one of the following terms best defines the role of a financial
institution?
Multiple choice question.
Direct lender
Market analyst
Market regulator
Financial intermediary
A firm produces goods in the U. S. and receives euros in Germany when the
goods are sold. Which particular aspect of this firm's operations exposes the
firm to foreign exchange risk?
Multiple choice question.
Paying German salesmen in euros
Paying American workers in dollars
Converting the euros into dollars
Paying American suppliers in dollars
Which one of the following is a key factor that makes direct investments
unpopular with investors?
Multiple choice question.
Financial intermediary costs
Costs of holding cash
Monitoring costs
Banker's fees
True or false: U. S. interest rates can affect all exchange rates involving U. S.
dollars.
True false question.
True
False
The risk that an asset's value may be less than its purchase price is referred
to as which type of risk?
Multiple choice question.
Liquidity risk
Inflation risk
Default risk
Price risk
Which set of characteristics best applies to a derivative security agreement?
Multiple choice question.
Standardized quantity, predetermined price of exchanged asset, specified
exchange date, high degree of leverage
Variable quantity, specified price of exchanged asset,and specified
exchange date, high degree of leverage
Variable quantity, predetermined price of exchanged asset, variable
exchange date, low degree of leverage
Standardized quantity, unspecified price of exchanged asset, and
unspecified exchange date, low degree of leverage.
Which term is used to designate an economic agent appointed to act on
behalf of smaller investors in collecting information?
Multiple choice question.
Asset transformer
Free agent
Delegated monitor
Security issuer
Which one of the following parties is most apt to hedge a position to lock in
the price at which they can sell milk in the future?
Multiple choice question.
Dairy farmer
Ice cream maker
Cheese producer
Retail grocer
Which one of these is a common feature of a secondary security as
compared to the primary claim?
Multiple choice question.
Less attractive to investors
Increased liquidity
Decreased marketability
Less accessibility to funds
What is the primary function of financial institutions?
Multiple choice question.
Issuing securities
Spreading risk among market participants
Creating and distributing derivative securities
Channeling funds from those with surplus funds to those who need funds
Which one of these defines an asset transformer?
Multiple choice question.
A financial institution that issues primary equity securities
A financial institution which issues secondary securities to investors
A corporation that repurchases outstanding shares of stock
An economic agent appointed to act on behalf of investors
Select all that apply
Which three of the following are key factors that limit direct investment in
financial claims? Select three.
Multiple select question.
Price risk
Liquidity costs
Monitoring costs
Inflation risk
Select all that apply
Which of the following contributed to the mortgage crisis in the late 2000s?
Select all that apply.
Multiple select question.
Non-participation by financial intermediaries
Delinquent mortgages
Derivative securities
Declining housing values
Which one of these price changes meets the definition of price risk?
Multiple choice question.
Audry purchased a building for $267,000. That building is still worth
$267,000.
Willis purchased a lot for $120,000. That lot is now worth $89,000.
Jamie purchased a store for $389,000. That store is now worth $415,000.
Theo purchased land for $539,000 and later sold it for $541,000.
What is a nominal interest rate?
Multiple choice question.
A nominal interest rate is the rate on a default-free loan minus the
inflation premium.
A nominal interest rate is the base rate excluding inflation, default risk,
and liquidity risk.
A nominal interest rate is the market rate of interest minus the inflation
premium.
A nominal interest rate is the rate observed in the financial markets.
Anna withdrew funds from her bank and purchased 500 shares of ABC stock
at the recommendation of her broker. Which one of these parties meets the
definition of a delegated monitor?
Multiple choice question.
ABC Company
Anna's broker
Anna's bank
Anna
The largest supplier of loanable funds in the United States is
Multiple choice question.
U.S. banks
Corporate investments
The household sector
Which one of these statements is correct?
Multiple choice question.
Secondary securities represent direct transfers of funds.
Secondary securities are additional offerings of stock issued by
corporations.
Secondary securities tend to be more liquid than primary securities.
Secondary securities are primarily owned by financial institutions.
The United States government is a large borrower - partly to finance past
deficits. The national debt, as of 2018, is
Multiple choice question.
$21.05 trillion
$32.05 trillion
$2.05 trillion
$5.02 trillion
The Corner Bank packaged a pool of home mortgages and sold mortgagebacked securities to the Uptown Insurance Co. to fund the monies loaned to
the home owners. Which party(ies) meet the definition of asset transformer?
Multiple choice question.
Uptown Insurance Co.
Corner Bank and Uptown Insurance Co.
Homeowners with Corner Bank mortgages
Corner Bank only
Select all that apply
Which of the following are specific factors that affect nominal interest rates?
Select all that apply.
Multiple select question.
Liquidity risk
Term to maturity
Default risk
Exchange rate risk
Which category of mortgages presented the most problems during the
financial crisis of the late 2000s?
Multiple choice question.
Subprime mortgages
Business mortgages
Prime mortgages
Commercial mortgages
Which one of these terms best describes the relationship between the rate of
inflation and the rate of interest?
Multiple choice question.
Indirect relationship
No relationship
Direct relationship
Exponential relationship
Which one of these is the definition of a nominal interest rate?
Multiple choice question.
A nominal interest rate is the rate of interest which excludes any special
provisions.
A nominal interest rate is the rate of interest that excludes all risk
premiums.
A nominal interest rate is the rate of interest that excludes the inflation
premium.
A nominal interest rate is the rate of interest that includes all risk
premiums.
Which one of these is the definition of a real risk-free rate?
Multiple choice question.
Interest rate that reflects annualizing with compounding figured in
Continual increase in the price level of a basket of goods
Interest rate actually observed in financial markets
Rate that would exist on a default-free security if no inflation were
expected
Generally, the quantity of loanable funds supplied increases as interest
rates (rise/fall).
What is the best definition of default risk?
Multiple choice question.
Default risk is defined as paying off a loan prior to maturity to avoid
incurring future interest.
Default risk is defined as non-repayment of the principal value of a loan.
Default risk is the potential for an issuer to never pay the interest or
principal payments on a debt security.
Default risk is the possibility that an issuer may pay late or miss an
interest or principal payment.
rise
True or false: In general, the quantity of loanable funds demanded drops as
interest rates fall.
True false question.
True
False
Which one of these best defines liquidity risk?
Multiple choice question.
Liquidity risk is the possibility that an asset will sell immediately at fair
market value.
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.
Liquidity risk is the risk that an issuer will repay a security prior to the
original maturity date.
Liquidity risk is the risk that a security issuer will have insufficient funds
to make timely payments.
Which of these factors affecting nominal rates is the risk that a security
cannot be sold quickly at full value?
Multiple choice question.
Inflation risk
Special provision
Liquidity risk
Default risk
Which of these is the special provision that grants an issuer the right to retire
a security prior to maturity?
Multiple choice question.
Exchange provision
Convertibility
Term structure
Call option
How will an expected increase in the rate of inflation affect interest rates?
Multiple choice question.
Interest rates will decrease.
Interest rates will change but the direction of the change is unpredictable.
Interest rates will remain unchanged.
Interest rates will increase.
The term structure of interest rates compares similar bonds based on which
variable?
Multiple choice question.
Time to maturity
Degree of liquidity
Taxability provision
Level of default risk
What is the definition of a real interest rate?
Multiple choice question.
A real interest rate is the rate that would exist on a default-free security if
no inflation were expected.
A real interest rate is the rate designated as (i) in the Fisher effect
formula.
A real interest rate is the rate an investor actually earns on an
investment.
A real interest rate is the guaranteed rate that a bank pays on a
certificate of deposit
Which one of the following best explains the concept of the unbiased
expectations theory?
Multiple choice question.
The current yield curve is the market's expectations of current and future
long-term rates.
Current long-term interest rates are arithmetic averages of current and
future expected short-term rates.
Current long-term interest rates are geometric averages of current and
future expected short-term rates.
The long term N-year rate is simply the current 1-year rate raised to the
Nth power.
Default risk is the risk associated with either late or missed payments on
which of these securities?
Multiple choice question.
Preferred stock only
Treasury bonds only
Bonds only
Bonds and preferred stock
What can you determine with certainty about an upward-sloping yield curve
according to the liquidity premium theory?
Multiple choice question.
Future 1-year rates will be higher than today's 1-year rate
Future 1-year rates will be lower than today's 1-year rate
Longer-term rates are higher than shorter-term rates today
Future 1-year rates will be the same as today's 1-year rate
Select all that apply
To minimize liquidity risk which three factors must exist? Select three.
Multiple select question.
Low transaction costs
Predictable sale price
Sale at a reasonable profit
Sale on short notice
Which one of these statements correctly applies to the market segmentation
theory?
Multiple choice question.
Individual investors prefer longer-term securities and must be
compensated to switch to shorter-term securities.
The maturity preferences of individual investors are directly offset by the
maturity preferences of financial intermediaries (FIs).
Financial intermediaries (FIs) are neutral in respect to security maturities.
Each individual investor has a preferred maturity based on his or her own
financial situation.
Which type of bond will generally pay the lowest rate of interest based on its
taxability provision?
Multiple choice question.
U. S. Treasury note
Corporate bond
U. S. Treasury bond
Municipal bond
What is a forward rate?
Multiple choice question.
A forward rate is a real rate of interest that has been adjusted for
inflation.
A forward rate is an implied rate on a short-term security that will
originate sometime in the future.
A forward rate is a real rate that has been adjusted for all the risks
associated with an individual security j.
A forward rate is a rate on a security that will mature sometime in the
future.
The term structure of interest rates is derived from which one of these?
Multiple choice question.
Default risk concept
Consumer price index
Time value of money
Fisher effect
Which one of these is a basic premise of the unbiased expectations theory?
Multiple choice question.
The current yield curve must be flat for the market to be in equilibrium.
Interest rates balance the expected demand and supply for securities of
varying maturities.
Long-term rates must exceed short-term rates to compensate for greater
market risk.
Long-term rates consist of a series of successive short-term rates.
What is the basic premise of the liquidity theory?
Multiple choice question.
Investors are indifferent to liquidity.
Investors must be paid a premium to hold more liquid securities.
Investors demand a premium that is inversely related to the term to
maturity.
Investors must be paid a premium to offset increased future uncertainty.
What is the key premise of the market segmentation theory?
Multiple choice question.
The key premise is that a segmented market will yield a flat yield curve.
Investors do not consider securities with different maturities as perfect
substitutes.
Investors require a premium in direct relation to the term of a security.
The key premise is that the yield curve must be upward-sloping in order
for demand to equal supply in each segment.
What is the interest rate called that is derived from existing spot rates on
similar securities with varying terms?
Multiple choice question.
Compounded rate
Effective annual rate
Forward rate
Real rate [Show Less]