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Consider a typical individual who owns the following financial instruments: A life insurance policy for $250,000; a certificate of deposit for $10,000; homeowner's and auto insurance policies; $50,000 in a mutual fund, and $150,000 in her pension fund at work.Which of these are instruments used primarily as stores of value and which are being used to transfer risk?

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The life insurance policy, the homeowner...

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If financial markets didn't exist:


A) required returns would be lower since fewer instruments would trade.
B) liquidity would diminish and returns would be lower.
C) more funds would flow directly between borrowers and savers.
D) liquidity would diminish, reducing the flow of funds between borrowers and savers.

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The New York Stock Exchange (NYSE) originated as:


A) a decentralized electronic market made up of dealers all over the world.
B) an example of a centralized exchange.
C) a financial market where nearly 100 million shares of stock are traded every business day.
D) the only centralized stock exchange in the world.

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Asymmetric information in financial markets is a potential problem usually resulting from:


A) borrowers having more information than the lenders.
B) lenders having more information than borrowers.
C) the fact that people are basically dishonest.
D) the uncertainty about Federal Reserve monetary policy.

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Which of the following is not true of over-the-counter markets?


A) Traders are linked by computer.
B) Dealers buy and sell only for their customers.
C) Trading does not take place in one physical location.
D) Traders are willing to buy and sell stocks and bonds at posted prices.

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Financial intermediaries pool funds of:


A) many small savers and provide it to a few large borrowers.
B) few large savers and provide it to many small borrowers.
C) few large savers a few large borrowers.
D) many small savers and provide it to many borrowers.

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Explain how the introduction of asset-backed securities has allowed investors to take advantage of higher returns from loans that most investors could never make on their own.

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Asset-backed securities are instruments ...

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Newly issued U.S.Treasury Securities are sold in:


A) the primary financial market.
B) only to the Federal Reserve who then resells them.
C) the secondary market since bonds cannot be sold in the primary market.
D) secondary markets but only using registered bond dealers.

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Financial instruments used primarily as stores of value include each of the following, except:


A) bonds.
B) futures contracts.
C) stocks.
D) home mortgages.

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Financial instruments and money share which of the following characteristics?


A) Both can function as a means of payment and a store of value.
B) Both can function as a store of value and allow for trading of risk.
C) Both can function by acting as a means of payment and allow for trading of risk.
D) Both can function as a store of value even though they do not allow for trading of risk.

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Why didn't the over-the-counter (OTC) exchanges suffer the disruption of service that the New York Stock Exchange did after the terrorist attacks of September 11, 2001?

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The New York Stock Exchange is a central...

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Sue has a checking account at the First National Bank; her checking account is a(n) :


A) asset to the bank and a liability to Sue.
B) asset to Sue and a liability to the bank.
C) asset to Sue but actually a liability to the Federal Reserve.
D) liability to Sue until she spends the funds.

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As we saw in the chapter, some financial instruments are used primarily to transfer risk.Explain how a bread maker can use a financial instrument to transfer the following risk: the bread maker has the opportunity to provide bread to a local army base.The base figures they will need 10,000 loaves of bread each week, or roughly 500,000 for a year.The problem is the baker must quote a price for the entire year.The baker would really like to have this contract but he realizes that fluctuating input prices (specifically wheat) could result in significant losses.

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The baker could quote a price for bread ...

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The better the information provided to financial markets the:


A) less the amount of funds transferred between savers and borrowers.
B) greater the amount of funds transferred between savers and borrowers though risk increases.
C) higher the return required by lenders.
D) greater will be the flow of funds in these markets.

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Today the primary distinction between direct and indirect finance is in:


A) direct finance the asset holder has a claim on a financial institution while in indirect finance the asset holder has a direct claim on the borrower.
B) indirect finance the lender has a direct claim on the borrower while in direct finance the lender has a claim on a financial institution.
C) direct finance the asset holder has a direct claim on the borrower while in indirect finance the asset holder has a claim on a financial institution.
D) indirect finance the asset holder has a claim on the government while in direct finance the asset holder has a direct claim on a private sector corporation.

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Credit cards usually charge higher rates of interest than most other forms of lending.In terms of information, collateral and monitoring, how might these higher rates be explained?

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When providing credit cards to customers...

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Is the obtaining of a car loan a primary or secondary market transaction?

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The obtaining of a car loan is...

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A financial intermediary:


A) is an agency that guarantees a loan.
B) is a third-party that facilitates a transaction between a borrower and a lender.
C) would be used in direct finance.
D) must be a depository institution.

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Which of the following is not a financial intermediary?


A) A bank
B) An insurance company
C) The New York Stock Exchange
D) A mutual fund

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Why might a life insurance company insist on an individual having a physical exam before agreeing to provide life insurance to the individual?

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The life insurance policy is a contract ...

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