Tutorial 1 Part 1. Questions For Review

TUTORIAL 1
OVERVIEW OF FINANCIAL SYSTEM
Part 1. Questions for review

1. What is the main function of financial markets
2. Classify financial markets
3. List and distinguish the differences among financial instruments
4. Identify the differences among types of financial intermediaries (in terms of
primary liabilities and assets) using Table 3, page 40
Part 1. Multiple-choice questions
1. Evidence from the United States and other foreign countries indicates that
A. Money growth is clearly unrelated to inflation
B. There is a strong positive association between inflation and growth rate of
money over long periods of times
C. Countries with low monetary growth rate tend to experience higher rates of
inflation, all else being constant
D. There is a little support for the assertion that “inflation is always and
everywhere a monetary phenomenon”
2. Economists group commercial banks, saving and loans associations, credit unions,
mutual funds, mutual savings banks, insurance companies, pension funds and finance
companies under the heading financial intermediaries. Financial intermediaries:
A. produce nothing of value and therefore a drain on society’s resources
B. provide a channel for linking between those who want to save and those who
want to spend
C. can hurt the performance of the economy
D. have been a source of slow and resistant financial innovation
3. What is the basic activity of banks?

A. To sell shares of corporations to the general public
B. To facilitate the transfer of money from savers to borrowers
C. To represent the interest of insurance companies
D. To ensure everyone who wants a loan gets one
E. To equate future consumption with current consumption
4. Banks, savings and loans associations, mutual savings banks and credit unions
A. are no longer important players in financial intermediation
B. have been adept at innovating in response to changes in regulatory
environment
C. produce nothing of value and therefore a drain on society’s resources
D. since deregulation now provide services only to small depositors
5. Why are financial markets important to the health of the economy?

A. They channel funds from investors to savers
B. They identify and shut down inefficient firms
C. They eliminate the needs for financial intermediaries
D. They allow consumers to time their purchase better
6. These financial institutions are very small cooperative lending institutions
organized around a particular group: union members, employees of a firm and so
forth. They acquire funds from deposits called shares and primarily make consumer
loans. They are
A. Credit unions
B. Commercial banks
C. Savings and loan associations
D. Mutual fund
7. These financial intermediaries raise funds primarily by issuing checkable deposits,

savings deposits and time deposits. They then use these funds to make commercial,
consumer and mortgage loans, and to buy US government securities and municipal
bonds. They are
A. Credit union
B. Commercial bank
C. Savings and loan
D. Mutual fund
8. These instruments are typically overnight loans between banks of their deposits at
Federal Reserve.
A. Commercial paper
B. Treasury bills
C. Repurchase agreement
D. Federal Funds
E. Banker’s acceptances
9. Short-term debt instruments issued by large banks and well-known corporations

A. Commercial paper
B. Treasury bills
D. Federal Funds
10. These instruments are effectively short-term loans (usually with maturity of less
than two weeks) for which Treasury bills serve as collateral, which the lender receives
if the borrower does not pay back the loan.
A. Commercial paper
B. Treasury bills
D. Federal Funds
11. A share of Microsoft common stock is:

A. a liability to the shareholder because it must be sold to realize a capital gain
B. an asset of Microsoft because it allows Microsoft to invest in capital
equipment or other companies
C. identical to a bond issued by Microsoft
D. an asset for its owner and a liability for Microsoft.
12. A share of common stock is a claim on a corporationʹs
A) debt.
B) liabilities.
C) expenses.
D) earnings and assets.
13. The price paid for the rental of borrowed funds (usually expressed as a percentage
of the rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
14. ___________ occurs when the potential borrowers who are the most likely to
produce an undesirable (adverse) outcome – the bad credit risks – are the ones who
most actively seek out a loan and are thus most likely to be selected.
A. Adverse selection
B. Asymmetric information
C. Moral hazard
D. Credit ratings
15. A situation where one party often does not know enough about the other party to
make accurate decisions
C. Moral hazard
D. Credit ratings
16. A situation where the borrower might engage in activities that are undesirable
from the lender’s point of view because they make it less likely that the loan will be
paid back.
C. Moral hazard
D. Credit ratings
17. Which of the following is a true statement?
A) Money or the money supply is defined as Federal Reserve notes.
B)The average price of goods and services in an economy is called the aggregate price
level
C)The inflation rate is measured as the rate of change in the federal government budget
deficit.
D) The aggregate price level is measured as the rate of change in the inflation rate.
18. Equity holders are a corporationʹs ________. That means the corporation must
pay all of its debt holders before it pays its equity holders.
A) debtors
B) brokers
C) residual claimants
D) underwriters
19. A corporation acquires new funds only when its securities are sold in the
A) secondary market by an investment bank.
B) primary market by an investment bank.
C) secondary market by a stock exchange broker.
D) secondary market by a commercial bank.
20. Which of the following statements about financial markets and securities is true?
A) Many common stocks are traded over-the-counter, although the largest
corpotations usually have their shares traded at organized stock exchanges such as
such as the New York Stock Exchange.
B)As a corporation gets a share of the brokerʹs commission, a corporation acquires
new funds whenever its securities are sold.
C) Capital market securities are usually more widely traded than shorter-
term securities and so tend to be more liquid.
D) Because of their short term to maturity, the prices of money market instruments
tend to fluctuate widely.
Part 2: Questions and applications

Chapter 2: Questions 3, 4, 6, 10
Question 3: Give at least three examples of a situation in which financial markets

allow consumers to better time their purchases.
Examples of how financial markets allow consumers to better time their purchases
include:
• The purchase of a durable good, like a car or furniture.
• Paying for tuition.
• Paying the cost of repairing a flooded basement.
In all three cases, consumers were able to pay for a good or service (education or the
reparation of a flooded basement) without having to wait to save enough and only
then being able to afford such goods and services.
Question 4: If you suspect that a company will go bankrupt next year, which
would you rather hold, bonds issued by the company or equities issued by the
company? Why?
You would rather hold bonds, because bondholders are paid off before equity holders,
who are the residual claimants.
Question 6: Describe who issues each of the following money market

instruments:
a. Treasury bills are short-term debt instruments issued by the government to cover
immediate spending obligations, i.e. finance deficit spending.
b. Certificates of deposit are issued (supplied) by banks.
c. Commercial paper is unsecured short-term debt instrument, issued by corporations
and large banks a method of short- term funding in debt markets.
d. Repurchase agreement is a form of collateralized loan issued primarily by banks.
e. Fed funds are issued by The Federal Reserve Bank (Fed).
Question 10: How does risk sharing benefit both financial intermediaries and
private investors?
Financial intermediaries benefit because they can earn profits on the spreads between
the returns they earn on risky assets and they payments they make on the assets they
have sold. Households and firms benefit because they can now own assets that have
lower risk

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TUTORIAL 1

OVERVIEW OF FINANCIAL SYSTEM

Part 1. Questions for review

Part 1. Multiple-choice questions

3. What is the basic activity of banks?

5. Why are financial markets important to the health of the economy?

7. These financial intermediaries raise funds primarily by issuing checkable deposits,

9. Short-term debt instruments issued by large banks and well-known corporations

11. A share of Microsoft common stock is:

Part 2: Questions and applications

Question 3: Give at least three examples of a situation in which financial markets

Question 6: Describe who issues each of the following money market

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