Financial Markets And Institutions Set 12 MCQs

Q1 | Investment banking was developed by

Japan

England

USA

None of the above

Q2 | The presence of transaction costs in financial markets explains, in part, why

financial intermediaries and indirect finance play such an important role in financial markets.

equity and bond financing play such an important role in financial markets.

corporations get more funds through equity financing than they get from financial intermediaries.

direct financing is more important than indirect financing as a source of funds.

Q3 | Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of

poorly informed consumers.

standardization.

economies of scale.

their market power.

Q4 | The presence of in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.

noncollateralized risk

free-riding

asymmetric information

costly state verification

Q5 | When the lender and the borrower have different amounts of information regarding a transaction,__________

asymmetric information

adverse selection

moral hazard

fraud

Q6 | When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, _ is said to exist.

asymmetric information

adverse selection

moral hazard

fraud

Q7 | When the borrower engages in activities that make it less likely that the loan will be repaid, is said to exist.

asymmetric information

adverse selection

moral hazard

fraud

Q8 | The concept of adverse selection helps to explain

which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.

why indirect finance is more important than direct finance as a source of business finance.

why direct finance is more important than indirect finance as a source of business finance.

only (A) and (B) of the above.

Q9 | Adverse selection is a problem associated with equity and debt contracts arising from

the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities.

the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults.

the borrower’s lack of incentive to seek a loan for highly risky investments.

none of the above.

Q10 | When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the

moral hazard problem.

adverse selection problem.

shirking problem.

free-rider problem.

Q11 | Financial institutions expect that

moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans.

opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans.

borrowers will commit moral hazard by taking on too much risk, and this is what drives financial institutions to take steps to limit moral haza

Q12 | Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to

moral hazard.

adverse selection.

bad luck.

financial panics.

Q13 | In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called

comparative informational disadvantage.

asymmetric information

variant information.

caveatvenditor.

Q14 | The largest depository institution at the end of 2001 was

life insurance companies.

pension funds.

state retirement funds.

none of the above.

Q15 | The value of assets held by commercial banks in 2001 was $6.7 trillion dollars, making commercial banks the

second most important sector of financial intermediaries after mutual funds.

second most important sector of financial intermediaries after lifeinsurance companies.

second most important sector of financial intermediaries after privatepension funds.

largest sector of financial intermediaries.

Q16 | Which of the following financial intermediaries are depository institutions?

A savings and loan association

A commercial bank

A credit union

All of the above

Q17 | Which of the following is a contractual savings institution?

A life insurance company

A credit union

A savings and loan association

A mutual fund

Q18 | Which of the following are not investment intermediaries?

A life insurance company

A pension fund

A mutual fund

Only (A) and (B) of the above

Q19 | The government regulates financial markets for three main reasons:

to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors.

to improve control of monetary policy, to ensure that financial intermediaries earn a normal rate of return, and to increase the information available to investors.

to ensure that financial intermediaries do not earn more than the normal rate of return, to ensure soundness of the financial system, and to improve control of monetary policy.

to ensure soundness of financial intermediaries, to increase the information available to investors, and to prevent financial intermediaries from earning less than the normal rate of return.

Q20 | Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a

bank holiday.

financial panic.

financial disintermediation.

financial collapse.

Q21 | The market value size of outstanding instruments of capital markets depends on factors

primary cash flows

number of issued securities

market prices of securities

both b and c

Q22 | When maturities of liabilities and assets are mismatched and risk incurred by financial intermediaries then this risk is classified as

interest rate risk

channel rate risk

economic risk

issuance risk

Q23 | The depository institutions includes

mutual funds

commercial banks and thrifts

savings banks

credit unions

Q24 | The major liabilities of the commercial banks are

junk bonds

deposits

loans

swap bonds

Q25 | The money market where securities are issued by governments to obtain funds for short term is classified as

money market instruments

capital market instruments

counter instruments

long term instruments