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ECON CH-11 FINANCIAL MARKETS

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 1. 
All of the following are examples of financial intermediaries EXCEPT
a.
a credit union.
c.
a finance company.
b.
a stock certificate.
d.
a life insurance company.
 

 2. 
The main advantage of diversification as an investment policy is that it
a.
reduces risk to investors.
b.
increases investors’ access to their money.
c.
offsets the effects of inflation on investments.
d.
guarantees a fixed rate of return on an investment.
 

 3. 
An accurate statement about bonds would be that
a.
they are insured by the FDIC.
b.
they are generally held for 3 or 6 months.
c.
they are usually a low-risk investment.
d.
they entitle the holder to a share of ownership in a corporation.
 

 4. 
The interest rate the bond issuer pays to the bondholder is called the
a.
coupon rate.
c.
discount rate.
b.
maturity rate.
d.
value rate.
 

 5. 
Savings bonds differ from most other bonds in that
a.
they provide a higher rate of return.
b.
they are held for a shorter time.
c.
the buyer does not receive periodic interest payments in exchange for a lower purchase price.
d.
they are issued in fairly large denominations in exchange for a lower purchase price.
 

 6. 
To finance the building of a new police station, a local government is most likely to issue a
a.
junk bond.
c.
municipal bond.
b.
treasury bond.
d.
money market bond.
 

 7. 
Investing in a money market mutual fund is a higher risk than investing in a certificate of deposit because unlike CDs, money market funds
a.
are not insured by the FDIC.
b.
are not protected by the Securities and Exchange Commission.
c.
do not earn a fixed interest rate.
d.
must be held for a preset amount of time.
 

 8. 
An example of equity is
a.
a treasury bond.
c.
a treasury bill.
b.
a share of stock.
d.
a long-term certificate of deposit.
 

 9. 
An example of blue chip stock might be
a.
a new start-up firm.
b.
a foreign-owned company that operates in another country.
c.
an established company that is traded over the Internet.
d.
a large, well-known company traded on the NYSE.
 

 10. 
The Dow Jones Industrial Average consists of
a.
500 different stocks that change annually.
b.
30 stocks that are considered representative of the market as a whole.
c.
the top-selling 250 stocks over a 10-year period.
d.
60 stocks selected from the NYSE, the NASDAQ-AMEX, and the OTC market.
 

 11. 
When you invest in a mutual fund,
a.
your money is invested in a variety of insurance policies.
b.
you have easier access to your money than in a savings account.
c.
your money is invested in a variety of stocks and bonds.
d.
you are guaranteed a fixed return on your investment.
 

 12. 
You do not have to pay state taxes on interest earned on
a.
corporate bonds.
c.
money market mutual funds.
b.
treasury bills.
d.
junk bonds.
 

 13. 
All of the following are low-risk investments EXCEPT
a.
junk bonds.
c.
municipal bonds.
b.
treasury bonds.
d.
savings bonds.
 

 14. 
All of the following are basic components of bonds EXCEPT
a.
maturity.
c.
par value.
b.
liquidity.
d.
coupon rate.
 

 15. 
A stock split is most likely to occur when
a.
a company is losing money.
b.
stockholders demand higher dividends.
c.
the price of a stock becomes too high.
d.
the stock market as a whole is doing poorly.
 

 16. 
A stock that reinvests its earnings in the business instead of paying regular dividends is called
a.
an income stock.
c.
preferred stock.
b.
common stock.
d.
a growth stock.
 

 17. 
The most trades are made
a.
on the New York Stock Exchange.
c.
on the NASDAQ-AMEX.
b.
at the Chicago Board of Trade.
d.
on the OTC market.
 

 18. 
You realize that many students who come to early morning hockey practice do not get up early enough to eat breakfast. You borrow $500 from your parents to start a bagel delivery service to the hockey rink in the early mornings. You are acting as
a.
a supplier in the capital market.
c.
a financial capital investor
b.
an entrepreneur.
d.
an intermediary.
 

 19. 
In June, Leslie wins a cash prize of $2,000. She plans to use this money to pay her tuition bill in September. Leslie puts this money in a savings account because her main priority is
a.
receiving the maximum amount of interest possible.
b.
taking a risk in hopes that she’ll get a high return.
c.
liquidity, since she’ll need to use the money in a short time.
d.
making a safe long term investment.
 

 20. 
Against your better judgment, you lend $100 to your cousin Manny, who has a reputation for failing to pay back loans. You are taking a
a.
liquidity risk
c.
inflation rate risk.
b.
time risk.
d.
credit risk.
 

 21. 
Your neighbor asks you to invest $500 at 5 percent interest in her catering business. She insists that with all the working parents in the neighborhood, a business that provides home-cooked meals has the potential for making huge profits. You want to invest but are concerned because your neighbor has not had any business experience. How can you offset your risk?
a.
Ask for a higher interest rate.
b.
Invest your $500 in a certificate of deposit.
c.
Use the $500 to open a savings account.
d.
Lend you neighbor the $500 and keep your fingers crossed.
 

 22. 
Because you want to reduce the risk of losing all your savings if an investment fails, you decide to invest in
a.
a mutual fund.
c.
the stock market.
b.
a finance company.
d.
credit unions.
 

 23. 
Since bonds are considered among the safest investments, you would expect that they would
a.
mature quickly.
c.
take a long time to mature.
b.
have high interest rates.
d.
have low interest rates.
 

 24. 
Why would a person invest in junk bonds?
a.
He does not know anything about investment.
b.
Junk bonds can pay very high interest rates.
c.
Most junk bonds have low interest rates.
d.
Junk bonds have high bond ratings.
 

 25. 
If a bond from the franchise Greens Galore has a coupon rate of 5 percent, a par value of $2000, and will mature in 5 years, what is its yield to maturity?
a.
$2500
c.
$100
b.
$200
d.
$500
 

 26. 
If a bond from the franchise Greens Galore has a coupon rate of 5 percent, a par value of $2000, and will mature in 5 years, how much will the company have paid the holder when it retires its debt?
a.
$2100, plus the original investment of $2000
b.
$200, plus the original investment of $2000
c.
$2500, plus the original investment of $2000
d.
$500, plus the original investment of $2000
 

 27. 
Your friend Jorge has just inherited $1000 and would like to invest the money in the stock market. You suggest that he
a.
contact a brokerage firm, who will put him in touch with a stockbroker.
b.
reserve a seat at the New York Stock exchange.
c.
contact Nasdaq, who will assign a stockbroker to him.
d.
call the New York Stock Exchange, who can direct him to the OTC market.
 

 28. 
Karen wants to buy stock, but is worried about the current “bear market.” This means that
a.
profits from stocks are rising, making it a good time to buy.
b.
many investors are selling their stocks in anticipation of lower profits.
c.
profits from stocks are falling, making it a good time to buy.
d.
many investors are buying stocks in anticipation of higher profits.
 

 29. 
The Great Crash can be attributed to all of the following reasons EXCEPT
a.
many people had gone into debt buying consumer items on credit.
b.
the practice of making high-risk investments with borrowed money.
c.
the small number of people buying stock on margin.
d.
a relatively few companies and families held much of the nation’s wealth.
 

 30. 
You are a financial advisor whose client wants stock that pays regular dividends. You advise him to buy
a.
income stock.
c.
common stock.
b.
growth stock.
d.
preferred stock.
 

 31. 
You are a financial advisor whose client is concerned about losing his investment if a company goes out of business. You advise him to buy
a.
income stock.
c.
common stock.
b.
growth stock.
d.
preferred stock.
 

 32. 
You hear on the news that The Dow has fallen to just below 8000 points. This means that
a.
the Dow is at the lowest level it has been since the Great Depression.
b.
the Dow has fallen after an all-time high of 8000 points.
c.
the Dow is at relatively high levels compared to the early 1980s, but short of its all-time high.
d.
the Dow has plunged to its lowest level in 100 years.
 

Matching
 
 
Identifying Key Terms
Match each term with the correct statement below.
a.
bear market
f.
investment
b.
bull market
g.
par value
c.
capital gain
h.
portfolio
d.
equities
i.
prospectus
e.
financial asset
j.
yield
 

 33. 

 an investment report to potential investors
 

 34. 

 the use of assets to earn income or profits
 

 35. 

 amount paid to purchase a bond that will be repaid at maturity
 

 36. 

 the annual rate of return on a bond if the bond were held to maturity
 

 37. 

 claim on the property or income of a borrower
 

 38. 

 claims of ownership in a corporation
 

 39. 

 the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller
 

 40. 

 a steady drop in the price of stocks over a period of time
 
 
Identifying Key Terms
Match each term with the correct statement below.
a.
bear market
f.
portfolio
b.
bull market
g.
primary market
c.
equities
h.
prospectus
d.
investment
i.
return
e.
money market
j.
speculation
 

 41. 

 the act of redirecting resources from being consumed today so that they may create benefits in the future
 

 42. 

 a collection of financial assets
 

 43. 

 the money an investor receives above and beyond the sum of money initially invested
 

 44. 

 market for selling financial assets that can only be redeemed by the original holder
 

 45. 

 claims of ownership in a corporation
 

 46. 

 market in which money is lent for periods less than a year
 

 47. 

 a steady rise in the stock market over a period of time
 

 48. 

 the practice of making high-risk investments with borrowed money in hopes of getting a big return
 



 
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