Ch.1 Institutions and Markets

Financial market participants who provide funds are called

Surplus Units

The main provider(s) of funds to the U.S. Treasury is (are)

Households and businesses

The largest deficit unit is (are)

US Treasury

Those financial markets that facilitate the flow of short-term funds are known as

money markets

Funds are provided to the initial issuer of securities in the

primary market

Which of the following is a capital market instrument?

a ten-year bond

Which of the following is a money market security?

commercial paper

The creditors in the federal funds market are

depository institutions

Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.

higher, higher

Equity securities have a ____ expected return than most long-term debt securities, and they exhibit a ____ degree of risk.

more liquidity; higher annualized return

If security prices fully reflect all available information, the markets for these securities are

efficient

If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.

inefficient

required complete disclosure of relevant financial information for publicly offered securities in the primary market.

The Securities Act of 1933

The Securities Exchange Commission (SEC) was established by the

Securities Exchange Act of 1934.

Common stock is an example of a(n)

equity security

If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.

perfect

The typical role of a securities firm in a public offering of securities is to

spread the issue across several investors until the entire issue is sold.

Without the participation of financial intermediaries in financial market transactions,

information and transaction costs would be higher

Which of the following is most likely to be described as a depository institution?

credit unions

In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.

commercial banks

Which of the following is a nondepository financial institution?

mutual funds

Which of the following distinguishes credit unions from commercial banks and savings institutions?

credit unions are non-profit

When a securities firm acts as a broker, it

executes transactions between two parties.

When a securities firm acts as a(n) ____, it maintains a position in securities.

dealer

____ obtain funds by issuing securities, then lend the funds to individuals and small businesses.

finance companies

Households with ____ are served by ____.

deficient funds; depository institutions and finance companies

____ concentrate on mortgage loans.

savings institutions

____ securities have a maturity of one year or less; ____ securities are generally more liquid.

money market, money market

Which of the following is not a major investor in stocks?

commercial banks

Which of the following financial intermediaries commonly invests in stocks and bonds?

pension funds, insurance companies, mutual funds

A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called

secondary market

Financial markets facilitating the flow of short-term funds with maturities of less than one year are known as

secondary markets

Which of the following transactions would not be considered a secondary market transaction?

A firm that was privately held engages in an offering of stock to the public.

If investors speculate in the underlying asset rather than derivative contracts on the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

lower, lower

____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.

mutual funds

A common use of funds for ____ is investment in stocks and businesses, while their main use of funds is providing loans to households and businesses.

mutual funds

Long-term debt securities tend to have a ____ expected return and ____ risk than money market securities

higher, higher

Those participants who receive more money than they spend are referred to as

surplus units

_______ repay the principal amount at maturity.

Equity securities

The term ____ involves decisions such as how much funding to obtain, and how to invest the proceeds to expand operations.

corporate finance

There is a ____ relationship between the risk of a security and the expected return from investing in the security.

positive

If a security is undervalued, some investors would capitalize from this by purchasing that security. As a result, the security's price will ____, resulting in a ____ return for those investors.

rise, higher

____ are classified as a depository institution.

credit unions

The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:

mortgages

Which of the following is not a reason why depository financial institutions are popular?

They use their information resources to act as a broker, executing securities transactions between two parties.

According to your text, which of the following is not considered a money market security?

treasury notes

____ are not considered capital market securities.

repurchase agreements

____ are long-term debt obligations issued by corporations and government agencies to support their operations.

bonds

Equity securities should normally have a ____ expected return and ____ risk than money market securities.

higher, higher

If investors speculate in derivative contracts rather than the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.

higher, higher

When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.

overvalued

Which of the following are not considered depository financial institutions?

finance companies

The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.

finance companies

Which of the following statements is incorrect?

Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.

Which of the following is not a typical money market security?

treasury bonds