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.
2)
Commercial banks advise firms on major transactions such as mergers or
financial restructurings.

3)
As a key participant in financial transactions, individuals are ________.
A)
net demanders of funds because they save more money than they borrow
B)
net users of funds because they save less money than they borrow
C)
net suppliers of funds because they save more money than they borrow
D)
net purchasers of funds because they save more money than they borrow

4)
Government is typically a ________.
A)
net provider of funds because it borrows more than it saves
B)
net demander of funds because it borrows more than it saves
C)
net provider of funds because it can print money at will
D)
net demander of funds because it saves more than it borrows
5) Government can obtain funds ________.
A)
by trading in equity market
B)
by issuing financial instruments such as futures and options
C)
through forex market
D)
by selling debt securities

6)
Firms that require funds from external sources can obtain them ________.
A)
through financial institutions
B)
from central bank directly
C)
through forex market
D)
by issuing T-bills

7)
Investment banks are institutions that ________.
A)
perform all activities of commercial banks and retail banks
B)
are exempted from Securities and Exchange Commission regulations
C)
engage in trading and market making activities
D)
are only limited to capital market activities

8)
Which of the following serves as an intermediary channeling the savings of
individuals, businesses, and governments into loans and investments?
A)
financial institutions
B)
financial markets
C)
Securities and Exchange Commission
D)
OTC market
9)
The shadow banking system describes a group of institutions that engage in
lending activities, much like traditional banks.

10)
Which of the following provides savers with a secure place to invest funds and
offer both individuals and companies loans to finance investments?
A)
investment banks
B)
securities exchanges
C)
mutual funds
D)
commercial banks

11)
Which of the following assists companies in raising capital, advise firms on
major transactions such as mergers or financial restructuring, and engage in
trading and market making activities?
A)
investment banks
B)
securities exchanges
C)
mutual funds
D)
commercial banks

2.2 Contrast the functions of financial
institutions and financial markets.

1)
Primary and secondary markets are markets for short-term and long-term
securities, respectively.

2)
Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
3)
A public offering is the sale of a new security issue—typically debt or
preferred stock—directly to an investor or group of investors.

4)
A primary market is a financial market in which pre-owned securities are
traded.

5)
The Glass-Steagall Act was imposed to allow commercial and investment banks to
combine and work together.

6)
Most businesses raise money by selling their securities in a ________.
A)
public offering
B)
forex market
C)
futures market
D)
commodities market
7)
Which of the following is a means of selling bonds or stocks to the public?
A)
private placement
B)
public offering
C)
organized selling
D)
direct placement

8)
Which of the following is a forum in which suppliers and demanders of funds can
transact business directly?
A)
shadow banking system
B)
financial markets
C)
commercial banks
D)
financial institutions

9)
The sale of a new security directly to an investor or a group of investors is
called ________.
A)
arbitraging
B)
short selling
C)
a capital market transaction
D)
a private placement

10)
The ________ market is where securities are initially issued and the ________
market is where pre-owned securities (not new issues) are traded.
A)
primary; secondary
B)
money; capital
C)
secondary; primary
D)
primary; money
2.3 Describe the differences between the capital
markets and the money markets.

1)
The over-the-counter (OTC) market is a market for trading smaller and unlisted
securities.

2)
NASDAQ is considered an OTC market since it is not recognized by the SEC as a
“listed exchange.”

3)
In the OTC market, the ask price is the highest price offered by a dealer to
purchase a given security.

4)
In the Eurobond market,corporations and governments typically issue
bonds denominated in dollars and sell them to investors located outside the
United States.

5)
Capital markets are for investors who want a safe temporary place to deposit
funds where they can earn interest and for borrowers who have a short-term need
for funds.
6)
Money markets are markets for long-term funds such as bonds and equity.
7)
An efficient market is a market that establishes correct prices for the
securities that firms sell and allocates funds to their most productive use as
a result of the intense competition among investors.

8)
Money markets involve the trading of securities with maturities of one year or
less.

9)
Eurocurrency deposits arise when a corporation or individual makes a deposit in
a bank in a currency other than the local currency of the country where the
bank is located.

10)
The Eurocurrency market is a market for short-term bank deposits denominated in
U.S. dollars or other easily convertible currencies.

11)
The money market is a financial relationship created by a number of
institutions and arrangements that allows suppliers and demanders of long-term
funds to make transactions.

12)
The over-the-counter (OTC) market is ________.
A)
a highly liquid market as compared to NASDAQ
B)
a market in which low risk-high return securities are traded
C)
an organized market in which all financial derivatives are traded
D)
a market where smaller, unlisted securities are traded
13)
Which of the following is true of a primary market?
A)
It is an organized market in which all financial derivatives are traded.
B)
It is regulated by The Sarbanes-Oxley Act.
C)
It is a market where smaller, unlisted securities are traded.
D)
It is the only market in which the issuer is directly involved in the
transaction.