Chapter 2 The Financial Market Environment

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Principles of Managerial Finance 13th Edition Gitman Test BankFull Download: apter 2 The Financial Market Environment2.1 Understand the role that financial institutions play in managerial finance.1) A financial institution is an intermediary that channels the savings of individuals, businesses,and governments into loans or investments.Answer: TRUETopic: Financial InstitutionsQuestion Status: Revised2) Loan transactions between commercial banks in which the federal government becomesinvolved are referred to as federal funds.Answer: FALSETopic: Financial InstitutionsQuestion Status: Revised3) The key participants in financial transactions are individuals, businesses, and governments.Individuals are net of funds, and businesses are net of funds.A) demanders; suppliersB) users; providersC) suppliers; demandersD) purchasers; sellersAnswer: CTopic: Financial InstitutionsQuestion Status: Revised4) Government usuallyA) is a net supplier of funds.B) is a net demander of funds.C) borrows funds directly from financial institutions.D) maintains permanent deposits with financial institutions.Answer: BTopic: Financial InstitutionsQuestion Status: Revised5) Firms that require funds from external sources can obtain them in one of the following waysEXCEPTA) financial institution.B) financial markets.C) government.D) private placement.Answer: CTopic: Financial Institutions and MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills1This sample only, Download all chapters at: alibabadownload.com

6) Firms that require funds from external sources can obtain them fromA) private placement.B) financial institutions.C) financial markets.D) all of the above.Answer: DTopic: Financial Institutions and MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills7) Which of the following is NOT a financial institution?A) A commercial bank.B) An insurance company.C) A pension fund.D) A newspaper publisher.Answer: DTopic: Financial InstitutionsQuestion Status: RevisedAACSB Guidelines: Analytic skills8) Which of the following serve as intermediaries channeling the savings of individuals,businesses and governments into loans and investments?A) Financial InstitutionsB) Financial MarketsC) Securities ExchangesD) OTC marketAnswer: ATopic: Financial InstitutionsQuestion Status: New2.2 Contrast the functions of financial institutions and financial markets.1) Primary and secondary markets are markets for short-term and long-term securities,respectively.Answer: FALSETopic: Financial MarketsQuestion Status: Revised2) Financial markets are intermediaries that channel the savings of individuals, businesses andgovernment into loans or investments.Answer: FALSETopic: Financial MarketsQuestion Status: Revised2

3) A public offering is the sale of a new security issue typically debt or preferredstock directly to an investor or group of investors.Answer: FALSETopic: Financial MarketsQuestion Status: Revised4) A primary market is a financial market in which pre-owned securities are traded.Answer: FALSETopic: Financial MarketsQuestion Status: Revised5) The Glass-Steagall Act was imposed to allow commercial and investment banks to combineand work together.Answer: FALSETopic: Corporate GovernanceQuestion Status: New6) The shadow banking system describes a group of institutions that engage in lending activities,much like traditional banks, but these institutions do not accept deposits and are therefore notsubject to the same regulations as traditional banks.Answer: TRUETopic: Financial MarketsQuestion Status: New7) Most businesses raise money by selling their securities in aA) public offering.B) private placement.C) direct placement.D) stock exchange.Answer: ATopic: Financial MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills8) The nonexclusive sale of either bonds or stocks to the general public is calledA) private placement.B) public offering.C) organized selling.D) none of the above.Answer: BTopic: Financial MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills3

9) Which of the following provide savers with a secure place to invest funds and offer bothindividuals and companies loans to finance investments?A) Investment BanksB) Securities ExchangesC) Mutual FundsD) Commercial BanksAnswer: DTopic: Financial Institutions and MarketsQuestion Status: NewAACSB Guidelines: Analytic skills10) Which of the following assist companies in raising capital, advise firms on majortransactions such as mergers or financial restructuring, and engage in trading and market makingactivities?A) Investment BanksB) Securities ExchangesC) Mutual FundsD) Commercial BanksAnswer: ATopic: Financial Institutions and MarketsQuestion Status: NewAACSB Guidelines: Analytic skills11) The Glass-Steagall ActA) allowed commercial and investment banks to engage in the same activities.B) created the Securities Exchange Commission.C) created the Federal Deposit Insurance program and separated the activities of commercial andinvestment banks.D) was intended to regulate the activities in the primary market.Answer: CTopic: Corporate GovernanceQuestion Status: NewAACSB Guidelines: Analytic skills12) Which of the following are forums in which suppliers and demanders of funds can transactbusiness directly?A) Shadow banking systemB) Financial MarketsC) Commercial BanksD) Financial InstitutionsAnswer: BTopic: Financial MarketsQuestion Status: NewAACSB Guidelines: Analytic skills4

13) The sale of a new security directly to an investor or a group of investors is calledA) the secondary marketB) the primary marketC) the capital marketD) the private placement marketAnswer: DTopic: Financial MarketsQuestion Status: NewAACSB Guidelines: Analytic skills14) The market is where securities are initially issued and the market iswhere pre-owned securities (not new issues) are traded.A) primary; secondaryB) money; capitalC) secondary; primaryD) primary; moneyAnswer: ATopic: Financial MarketsQuestion Status: New2.3 Describe the differences between the capital markets and the money markets.1) The Over-the-Counter (OTC) exchange is not an organization but an intangible market fortrading securities which are not listed by the organized exchanges.Answer: TRUETopic: Financial MarketsQuestion Status: Revised2) Unlike the organized exchanges, the OTC makes a market in both outstanding securities andnew public issues, making it both a secondary and a primary market.Answer: TRUETopic: Financial MarketsQuestion Status: Revised3) In the OTC market, the ask price is the highest price offered by a dealer to purchase a givensecurity.Answer: FALSETopic: Financial MarketsQuestion Status: Revised4) In the OTC market, the prices at which securities are traded result from both competitive bidsand negotiation.Answer: TRUETopic: Financial MarketsQuestion Status: Revised5

5) Capital markets are for investors who want a safe temporary place to deposit funds where theycan earn interest and for borrowers who have a short term need for funds.Answer: FALSETopic: Financial MarketsQuestion Status: New6) Money markets are markets for long term funds such as bonds and equity.Answer: FALSETopic: Financial MarketsQuestion Status: New7) An efficient market is a market that allocates funds to their most productive use as a result ofcompetition among wealth-maximizing investors.Answer: TRUETopic: Financial MarketsQuestion Status: Revised8) Money markets involve the trading of securities with maturities of one year or less whilecapital market involve the buying and selling of securities with maturities of more than one year.Answer: TRUETopic: Financial MarketsQuestion Status: Revised9) Eurocurrency deposits arise when a corporation or individual makes a deposit in a bank in acurrency other than the local currency of the country where the bank is located.Answer: TRUETopic: Financial MarketsQuestion Status: Revised10) The eurocurrency market is a market for short-term bank deposits denominated in U.S.dollars or other easily convertible currencies.Answer: TRUETopic: Financial MarketsQuestion Status: Revised11) The money market is a financial relationship created by a number of institutions andarrangements that allows suppliers and demanders of long-term funds to make transactions.Answer: FALSETopic: Financial MarketsQuestion Status: Revised6

12) The over-the-counter (OTC) market isA) the New York Stock Exchange.B) an organized stock exchange.C) a place where securities are bought and sold.D) an intangible market for unlisted securities.Answer: DTopic: Financial MarketsQuestion Status: Revised13) Trading is carried out on the floor of the New York Stock Exchange byA) the negotiation process.B) the auction process.C) a telecommunications network.D) investment bankers.Answer: BTopic: Financial MarketsQuestion Status: Revised14) All of the following are functions of security exchanges EXCEPTA) allocating scarce capital.B) aiding in new financing.C) creating continuous markets.D) holding demand deposits.Answer: DTopic: Financial MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills15) All of the following are examples of organized stock exchanges EXCEPTA) the New York Stock Exchange.B) the American Stock Exchange.C) the Pacific Stock Exchange.D) the over-the-counter exchange.Answer: DTopic: Financial MarketsQuestion Status: Revised16) The major securities traded in the capital markets areA) commercial paper and Treasury bills.B) Treasury bills and certificates of deposit.C) stocks and bonds.D) bonds and commercial paper.Answer: CTopic: Financial MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills7

17) The stock exchange is a primary market where new public issues are sold.A) regionalB) AmericanC) New YorkD) over-the-counterAnswer: DTopic: Financial MarketsQuestion Status: Revised18) Trading is carried out in the Over-the-Counter (OTC) Exchange byA) the competitive bid process.B) the competitive bid process and the negotiation process.C) the auction process.D) an investment banker.Answer: BTopic: Financial MarketsQuestion Status: Revised19) Securities exchanges create efficient markets that do all of the following EXCEPTA) ensure a market in which the price reflects the true value of the security.B) allocate funds to the most productive uses.C) control the supply and demand for securities through price.D) allow the price to be determined by supply and demand of securities.Answer: CTopic: Financial MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills20) A competitive market that allocates funds to their most productive use is called a(n)A) liquid market.B) middleman's market.C) efficient market.D) investor's market.Answer: CTopic: Financial MarketsQuestion Status: Revised21) The is created by a financial relationship between suppliers and demanders ofshort-term funds.A) stock marketB) capital marketC) financial marketD) money marketAnswer: DTopic: Financial MarketsQuestion Status: Revised8

22) By definition, the money market involves the buying and selling ofA) stocks and bonds.B) short-term funds.C) funds that mature in more than one year.D) flows of funds.Answer: BTopic: Financial MarketsQuestion Status: Revised23) Most money market transactions are made inA) common stock.B) marketable securities.C) stocks and bonds.D) preferred stock.Answer: BTopic: Financial MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills24) The is created by a number of institutions and arrangements that allow thesuppliers and demanders of long-term funds to make transactions.A) financial marketB) capital marketC) money marketD) credit marketAnswer: BTopic: Financial MarketsQuestion Status: Revised25) Long-term debt instruments used by both government and business are known asA) stocks.B) bills.C) bonds.D) equities.Answer: CTopic: Financial MarketsQuestion Status: RevisedAACSB Guidelines: Analytic skills26) The two key financial markets areA) primary market and secondary market.B) primary market and money market.C) money market and capital market.D) capital market and secondary market.Answer: CTopic: Financial MarketsQuestion Status: Revised9

27) In a market, the buyer and seller are brought together to trade securities in anorganization called .A) dealer; securities marketB) broker; over-the -counter marketC) broker; securities marketD) dealer; over-the-counter marketAnswer: CTopic: Financial MarketsQuestion Status: New28) In a market, the buyer and seller are not brought together to trade securitiesdirectly but instead have their orders executed on the .A) dealer; securities marketB) broker; over-the -counter marketC) broker; securities marketD) dealer; over-the-counter marketAnswer: DTopic: Financial MarketsQuestion Status: New29) In efficient market is one whereA) prices of stocks move up and down widely without apparent reason.B) prices of stocks remain steady for long periods of time.C) prices of stocks are unaffected by market news.D) prices of stocks incorporate new information quickly and adjust appropriately to their truevalue.Answer: DTopic: Efficient Market TheoryQuestion Status: NewAACSB Guidelines: Analytic skills30) An implication of the Efficient Market Hypothesis is that it is very hard for an activelymanaged mutual fund to earn above average returns. This is true for all of the following reasonsEXCEPTA) new information is predictable and therefore already incorporated into the stock prices.B) new information is by definition unpredictable, thus hard to incorporate into stock prices.C) actively managed mutual funds typically charge fees of about 1.5%.D) index funds make no attempt to analyze stocks.Answer: ATopic: Efficient Market TheoryQuestion Status: NewAACSB Guidelines: Reflective thinking skills10

31) In an efficient market if a company announced sales of a new product are lower thanexpected, what would you expect to happen to the stock price?A) It would not change.B) It would increase.C) It would decrease.D) It would move it the same direction as the market in general.Answer: CTopic: Efficient Market TheoryQuestion Status: NewAACSB Guidelines: Reflective thinking skills2.4 Explain the root causes of the 2008 financial crisis and recession.1) Securitization is the process of pooling mortgages or other types of loans and selling theclaims or securities against that pool in the secondary market.Answer: TRUETopic: SecuritizationQuestion Status: New2) Securitization made it harder for banks to lend money because they could not pass the risk onto other investors.Answer: FALSETopic: SecuritizationQuestion Status: NewAACSB Guidelines: Reflective thinking skills3) Mortgage-backed securities are securities that represent claims on the cash flows generated bya pool of mortgages.Answer: TRUETopic: SecuritizationQuestion Status: New4) Mortgage default rates were low from the mid 1990's through 2006 because home prices wererising and lenders allowed borrowers who were having difficulty making payments to refinanceon the built up home equity.Answer: TRUETopic: Financial CrisisQuestion Status: NewAACSB Guidelines: Reflective thinking skills5) Sub-prime mortgages are mortgage loans made to borrowers the high incomes and better thanaverage credit histories.Answer: FALSETopic: Financial CrisisQuestion Status: New11

6) In the year 2000, real estate loans accounted for less than 40% of the total loan portfolios oflarge banks, but by 2007 real estate loans grew to more than half of all loans made by largebanks.Answer: TRUETopic: Financial CrisisQuestion Status: New7) The process of pooling mortgages or other types of loans and selling the claims or securitiesagainst that pool in the secondary market is calledA) refinancingB) securitizationC) private placementD) poolingAnswer: BTopic: SecuritizationQuestion Status: New8) The primary risk of mortgage-backed securities isA) that the prices of housing will go down.B) that the prices of housing will increase.C) that the government will not be able to meet the guarantees on the cash flows.D) that homeowners may not be able to, or choose not to, repay their loans.Answer: DTopic: SecuritizationQuestion Status: NewAACSB Guidelines: Reflective thinking skills9) All of the following are true about mortgage-backed securities EXCEPTA) They represent claims on the cash flows generated by a pool of mortgages.B) All of the cash flows from these securities are guaranteed by the U.S. government.C) They can be purchased by individual investors, pension funds, and mutual funds.D) The primary risk associated with them is that homeowners may not be able or may not chooseto repay the loan.Answer: BTopic: SecuritizationQuestion Status: NewAACSB Guidelines: Reflective thinking skills10) When home prices are falling we would expectA) high mortgage default rates.B) low mortgage default rates.C) unchanged mortgage default rates.D) a higher percentage of owner home equity.Answer: ATopic: Financial CrisisQuestion Status: NewAACSB Guidelines: Reflective thinking skills12

11) A crisis in the financial sector often spills over into other industries because when financialinstitutions borrowing, activity in most other industries also .A) increase; slows downB) contract; slows downC) increase; increasesD) contract; increasesAnswer: ATopic: Financial CrisisQuestion Status: NewAACSB Guidelines: Analytic skills2.5 Understand the major regulations and regulatory bodies that affect financial institutions andmarkets.1) The Securities Act of 1933 focuses on regulating the sale of securities in the primary market,whereas the 1934 Act deal with the regulations governing the transactions in the secondarymarket.Answer: TRUETopic: RegulationsQuestion Status: New2) The Federal Deposit Insurance Corporation (FDIC)A) guarantees individuals will not lose any money held at a bank that fails.B) guarantees individuals will not lose any money, up to a specified amount, held at a bank thatfails.C) guarantees individuals will not lose any money held at any type of financial institution thatfails.D) guarantees individuals will not lose any money, up to a specified amount, held at any type offinancial institution that fails.Answer: BTopic: RegulationsQuestion Status: New3) The Gramm-Leach-Biley ActA) does not allows business combinations between commercial banks, investment banks andinsurance companies.B) allows business combinations between commercial banks and investment banks, but notinsurance companies.C) allows business combinations between commercial banks, investment banks and insurancecompanies.D) was signed during the Great Depression because of the financial crisis.Answer: CTopic: RegulationsQuestion Status: New13

4) Which of the follow regulates the secondary market and created the Securities ExchangeCommission (SEC)?A) The Securities Act of 1933B) The Gramm-Leach-Biley ActC) The Securities Exchange Act of 1934D) The Glass--Steagall ActAnswer: CTopic: RegulationsQuestion Status: New5) Which of the follow regulates the primary market in which securities are originally issued tothe public?A) The Securities Act of 1933B) The Gramm-Leach-Biley ActC) The Securities Exchange Act of 1934D) The Glass-Steagall ActAnswer: ATopic: RegulationsQuestion Status: New2.6 Discuss business taxes and their importance in financial decisions.1) The ordinary income of a corporation is income earned through the sale of a firm's goods andservices and is currently taxed subject to the individual income tax rates.Answer: FALSETopic: Business TaxesQuestion Status: Revised2) The marginal tax rate represents the rate at which additional income is taxed.Answer: TRUETopic: Business TaxesQuestion Status: Revised3) All dividend income received by one corporation from an investment in the common andpreferred stock of another corporation is excluded from taxation.Answer:

Chapter 2 The Financial Market Environment 2.1 Understand the role that financial institutions play in managerial finance. 1) A financial institution is an intermediary that channels the savings of individuals, businesses, and governments into loans or investments. Answer: TRUE Topic: Financial Institutions Question Status: Revised 2) Loan transactions between commercial banks in which the .

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