Lecture1 Fin2Fii

Topics: Monetary policy, Interest rate, Bond Pages: 87 (18979 words) Published: August 16, 2013
100% (15 out of 15 correct)| Responses to questions are indicated by the symbol.|
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| 1.| An SSU's A. | income and expenditures for the period are equal.| B. | income for the period exceeds expenditures.|
C. | expenditures for the period exceed receipts.|
D. | spending is entirely financed by credit cards|

A surplus position is when income for the period exceeds planned expenditures. (see page 7).|

| 2.| Which of the following is an example of indirect financing? A. | an SSU purchasing a financial claim from a DSU| B. | an SSU purchasing a financial claim from a dealer|
C. | an SSU purchasing a financial claim from a commercial bank| D. | an SSU purchasing a financial claim from an underwriter|

Intermediaries transform direct claims sold by DSUs and make them more attractive to SSUs, helping DSUs find financing and SSUs find appropriate investments. (see page 12).|

| 3.| An efficient financial system A. | eliminates search and transactions costs| B. | is a mere theoretical possibility|
C. | promotes economic growth and social progress|
D. | depends on high volumes of “direct” transactions|

An efficient financial system consists of financial markets and institutions. It is concerned with funnelling moment from SSUs to DSUs. (see page 32).|

| 4.| Financial institutions facilitate the flow of investment funds A. | from savers to borrowers| B. | from SSUs to DSUs|
C. | from the household sector to the business sector|
D. | any of the above|

Financial institutions facilitates the flow of funds from SSUs to DSUs. DUSs include some households, some state and local governments, and a large number of businesses. (see page 23).|

| 5.| Which of the following are “economic units”? A. | households| B. | businesses|
C. | governments|
D. | all of the above|

All economic units can be classified as either households, business firms or governments. (see page 7).|

| 6.| Which of the following best describes the "two faces of debt" concept? A. | DSUs are sometimes SSUs.| B. | Every financial asset is someone else's liability.|
C. | Intermediaries may own both direct and indirect financial assets.| D. | The government is unable to control its federal spending.|

To DSUs, financial claims are liabilities and to SSUs they are assets. (see page 8).|

| 7.| Profitability of financial intermediaries derives from all of the following except A. | government regulation of interest rates| B. | economies of scale|
C. | ability to manage credit risk|
D. | control of transactions costs|

Financial intermediaries transform claims in between DSUs and SSUs into profits. Financial intermediaries are able to do this because: (a)of economies of scale of production, (b) they reduce search costs for both DSUs and SSUs, and (c) they are able to obtain sensitive information, which allows them to manage credit risk better. (see page 17).|

| 8.| All but one of the following is comparative advantage of financial intermediaries: A. | ability to finance businesses and governments.| B. | ability to achieve economies of scale.|
C. | ability to reduce transaction costs.|
D. | ability to find confidential information.|

The job of financial intermediaries is to bring SSUs and DSUs together at the least possible cost and with the least inconvenience. (see page 16).|

| 9.| Which of the following would tend to hold corporate bonds in significant amounts? A. | life insurance company| B. | credit union|
C. | mutual savings bank|
D. | commercial bank|

Life insurance companies have a predictable inflow and outflows of funds thus they are able to invest in higher yielding, long-term assets, such as corporate bonds and stocks. (see page 30).|

| 10.| Direct finance is best exemplified by A. | the purchase of mutual fund shares.| B. | depositing in a credit union.|
C. |...
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