University of San Carlos - Main Campus

ACCTG 509

Chapter 1

True/False Questions

1)Primary markets are markets where users of funds raise cash by selling securities to funds suppliers.

2. Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period.

3. In a private placement, the issuer typically sells the entire issue to one or only a few institutional buyers.  

4. The NYSE is an example of a secondary market.  

5. The NASDAQ is an example of an over the counter market.   
6. Money markets are the markets for securities with an original maturity of 1 year or less.  

7. Eurodollar bonds are dollar denominated bonds issued outside the United States.  

8. Financial intermediaries such as banks often have assets that are riskier than their liabilities.  

9. As of 2001, the dollar amount of outstanding money market securities was substantially greater than the dollar amount of capital market securities.

10. A transaction that involves the exchange of currencies at a specified date in the future at terms agreed upon today is known as a forward foreign exchange transaction.

11. An individual buying an AT&T corporate bond in the secondary market is an example of a direct finance.

12. A bank incurs credit risk when its loans have a longer maturity than its deposits.  

Multiple Choice Questions

13. The best example of a foreign exchange spot transaction is
    1. Buying stock in an IPO
    2. Selling your AT&T bond through your broker
    3. Purchasing shares of Fidelity Magellan Mutual Fund

1. 4. Trading your dollars for yen at today's rate
   5. Promising to trade your dollars for British pounds in one month

Use the following to answer questions 14-15:

IBM creates and sells additional stock to the investment banker, Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public.

14. This transaction is an example of a(n)
    1. Primary market transaction
    2. Asset transformation by Morgan Stanley
    3. Money market transaction

15. Morgan Stanley is acting as a(n)
    1. Asset transformer
    2. Asset broker

16. As measured by total assets, the largest three private U.S. intermediaries are:

1. 1. banks, thrifts and insurers
   2. banks, insurers and investment companies
   3. insurers, thrifts and pension funds  

1. 4. Securities dealers, thrifts and banks
   5. Mortgage companies, investment companies and pension funds.

17. Advantages of putting your money in a bank deposit instead of directly buying capital market securities typically include

1. 1. Delegated monitoring

1. 2. Better liquidity
   3. Less price risk

1. 4. All of the above
   5. None of the above

18. A bank that makes a two year loan in yen and funds it with 6 month Eurodollar deposits incurs

1. 1. Foreign exchange risk

1. 2. Interest rate risk
   3. Liquidity risk

1. 4. All of the above
   5. None of the above

19. New Age Banking (NAB) recently invested heavily in Internet technology in order to offer on line services to corporate and individual customers. So far, only two corporate customers and very few individuals have begun using their Internet services. In addition, NAB lost an entire corporate payroll last month. These are examples of:

1. 1. Credit risk and market risk
   2. Country risk and

insolvency risk

1. 3. Technological risk and operational risk

1. 4. Liquidity risk and interest rate risk
   5. None of the above

20.                          and                             allow a financial intermediary to offer safe, liquid liabilities such as deposits while investing the depositors money in riskier, illiquid assets.

1. 1. Diversification ; high equity returns
   2. Price risk ; collateral
   3. Free riders ; regulations
   4. Monitoring ; diversification
   5. Primary markets ; foreign exchange

markets

21. Depository institutions include:
    1. Banks
    2. Thrifts
    3. Finance companies
    4. All of the above
    5. A and B only

Answer: E

22. Match the intermediary with the characteristic that best describes its function.

1. Provide protection from adverse events
2. Pool funds of small savers and invest in either money or capital markets
3. Provide consumer loans and real estate loans funded by deposits
4. Accumulate and transfer wealth from work period to retirement period
5. Underwrite and trade securities and provide brokerage services

1. Thrifts
2. Insurers
3. Pension funds
4. Securities firms and investment banks
5. Mutual funds

A) 1, 3, 2, 5, 4

B) 4, 2, 3, 5, 1

C) 2, 5, 1, 3, 4

D) 2, 4, 5, 3, 1

E) 5, 1, 3, 2, 4

23. As of 2001, in dollar terms, U.S. investors held over                                         trillion in foreign financial assets and foreign investors held over           trillion in U.S. financial assets.

A) $7.6 ; $6.5

B) $6.5 ; $7.6

C) $3.2 ; $5.2

D) $8.1 ; $5.5

E) $5.5 ; $8.1

Answer: E

24. Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because:
    1. FIs can diversify away some of their risk
    2. FIs closely monitor the riskiness of their assets
    3. The federal government requires them to do so
    4. Both a) and b)
    5. Both a) and c)

25. Households are increasingly likely to both directly purchase securities (perhaps via a broker) and also place some money with a bank or thrift to meet different needs. Match up the given investor's desire with the appropriate intermediary or direct security.

1. Money likely to be needed within 6 months
2. Money to be set aside for college in 10 years
3. Money to provide supplemental retirement income
4. Money to be used to provide for children in the event of death

1. Depository institutions
2. Insurer
3. Pension fund
4. Stocks or bonds

A) 2, 3, 4, 1

B) 1, 4, 2, 3

C) 3, 2, 1, 4

D) 1, 4, 3, 2

E) 4, 2, 1, 3

26. Which one of the following is a capital market instrument?
    1. Federal funds
    2. Treasury bills
    3. Commercial paper
    4. Common stock

27. Which of the following are money market instruments?
    1. Federal funds
    2. Treasury bills
    3. Commercial paper
    4. 4 year maturity corporate bond
    5. A, B and C are money market instruments

Answer: E

28. The Securities Exchange Commission (SEC) does not
    1. Decide whether a public issue is fairly priced
    2. Decide whether a firm making a public issue has provided enough information for investors to decide whether the issue is fairly priced
    3. Require exchanges to monitor trading to prevent insider trading
    4. Attempt to reduce excessive price fluctuations
    5. Monitor the major securities exchanges

29. Many households place funds with financial intermediaries (FIs) because many FI accounts provide
    1. Lower denominations than money market securities
    2. Better liquidity and less price risk than direct securities
    3. Shorter maturities than direct securities
    4. All of the above
    5. None of the above

30. In the U.S., savings institutions must concentrate their assets in                                    lending.
    1. mortgage
    2. commercial
    3. consumer
    4. government
    5. money market

31. Depository institutions (DIs) play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy because
    1. Loans to corporations are part of the money supply
    2. Bank and thrift loans are tightly regulated
    3. U.S. DIs compete with foreign financial institutions
    4. DI deposits are a major portion of the money supply
    5. Thrifts provide a large amount of credit to finance residential real estate  

32. According to a recent SIA survey, what percentage of retail stock transactions will be conducted online by 2003?

A) 30%

B) 40%

C) 50%

D) 60%

E) 70%