ch1

ch1Student: ___________________________________________________________________________

1. The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which securities are traded and interest rates determined. True False

2. When credit becomes more costly and less available, total spending for goods and services generally falls.

True False

3. The primary task of a financial system is to move scarce loanable funds from those who save to those who

borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens. True False

4. The money market is designed for the making of short-term loans. It is the institution through which

individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary funds shortages (deficits). True False

5. A market in which prices fully reflect the latest available information is an efficient market.

True False

6. A surplus of current revenues over current expenditures is a measure of current government saving.

True False

7. Business investment consists of purchases of plant and equipment and purchases of inventory.

True False

8. The purchase of a new home is a form of business investment.

True False

9. The purchase of financial claims is a guaranteed form of future income.

True False

10. Spending by federal, state and local governments for public facilities is a form of government savings.

True False

11. One of the most important contributions of the financial markets is to make possible the exchange of

current income for future income. True False

12. Credit represents a loan of funds in return for a promise of future payment. True False

13. Interest payments on debt are a tax-deductible expense for households, but not for businesses.

True False

14. A NOW account is a type of savings account rather than a type of checking account.

True False

15. Commercial banks and retail stores, but not credit unions, may issue plastic credit cards.

True False

16. The financial markets offer businesses, consumers and governments protection against health, property and

income risk. True False

17. The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little risk

of loss. True False

18. Money is the only perfectly liquid asset in the financial system.

True False

19. The financial asset which generally earns the lowest rate of return in the financial system is securities

issued by the federal government which are presumed by investors to be free of credit risk. True False

20. A security evidencing a loan which matures within one year is a money market instrument.

True False

21. One of the most important functions of the capital market is to finance the working-capital needs of

corporations and to provide government with short-term funds in lieu of tax collections. True False

22. Speculative purchases of securities and commodities are generally financed by loans from the money

market. True False

23. The construction of office buildings, highways, schools and homes normally is financed by loans from the

capital market. True False

24. Financial instruments traded in the capital market have original maturities of greater than one year. True False

25. The most important institution lending funds in the money market is the commercial bank.

True False

26. The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank.

True False

27. Most loans to families and individuals would be classified as money market instruments.

True False

28. The largest market for a single security in the world is the Treasury bill market.

True False

29. A short-term IOU issued by a large well-established corporation is known as commercial paper.

True False

30. The fact that professional investors operate daily in the financial marketplace, watching for profitable

opportunities arising from unusually attractive prices and interest rates on selected financial instruments and adjusting their portfolios accordingly is often referred to as the force of profit maximization. True False

31. The only value of the financial system is that it determines the cost of credit.

True False

32. The financial system determines the cost of credit and how much credit is available.

True False

33. The circular flow occurs between governments and households.

True False

34. Business determines what and how many goods and services will be produced.

True False

35. One way for the economy to expand is for households to set aside savings so that they will not return to the

spending stream. True False

36. The tax status of interest paid on debt causes most individuals to think twice before using credit.

True False

37. Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of funds. True False

38. The money market is an excellent place for new corporations to borrow money.

True False

39. Federal funds are temporary cash surpluses held by the federal government.

True False

40. Speculators in securities are continually on the lookout for small differences in prices or interest rates

attached to different securities. True False

41. Arbitrageurs help to maintain consistent prices between financial markets.

True False

42. The financial markets provide a means to protect businesses, consumers and governments against risk.

True False

43. The terms open market and negotiated market are often used interchangeably to mean the same thing.

True False

44. The principal function of the primary market is to raise money for investment in buildings and equipment.

True False

45. An example of a futures market transaction is to borrow money through a new mortgage.

True False

46. Forward markets and futures markets serve the same purpose in principle.

True False

47. The liquidity function of the financial system is designed to protect businesses, consumers and

governments against risks to people, property and income. True False

48. The payments function of the financial system is designed to provide a means to store purchasing power

until needed at a future date for spending on goods and services. True False

49. The financial system is rapidly evolving into a worldwide system, with increasingly intense competition

among financial institutions. True False

50. Current savings for business firms are equal to current retained earnings less operating expenses. True False

51. Current investment for households includes purchases of household durables by individuals and families.

True False

52. Investment by governments includes the construction of new public facilities.

True False

53. The financial system operates to bring planned savings into balance with planned financial investment in

stocks and bonds. True False

54. A high proportion of young adults and newly formed families in a nation's population will generate a high

level of national savings compared to countries with older populations because younger adults have greater need to build up savings for the future. True False

55. A nation with a relatively low savings ratio will tend to have higher interest rates and more rapid inflation.

True False

56. Trading in financial instruments now spans the globe.

True False

57. Few companies or governments have the prestige or stature that would cause investors throughout the

world to want to trade their particular securities. True False

58. One of the most significant barriers to worldwide trading of securities is the delay in paying for and

delivering securities to all parts of the globe. True False

59. If there is imperfect information in a market, it is perfectly competitive.

True False

60. When savings flows fall, living standards rise because people spend more.

True False

61. The net wealth of an economic unit is determined by adding all the unit's assets to it net worth or equity

capital. True False

62. The financial services area where protection is provided against loss due to unfavorable movements in market prices or interest rates is known as agency services. True False

63. The financial services area where protection is provided from loss of income or property in the event of

death, disability, negligence or other adverse developments is known as hedging services. True False

64. The financial services area where payments accounts against which the customer can write checks or wire

funds to pay for purchases of goods and services is known as thrift services. True False

65. Wealth holdings represent stored purchasing power that will be used in future periods to finance purchases

of goods and services and increase society's standard of living. True False

66. A major problem faced by Japan today is too much saving by its citizens.

True False

67. Financial transactions between nations have increased faster in volume than has international trade in goods

and nonfinancial services. True False

68. The world's standard of living increases if production increases while raising productivity.

True False

69. Current savings represents a flow of funds.

True False

70. Accumulated savings built up over time is referred to as a flow of funds.

True False

71. Personal savings are after-tax funds that are not consumed during the year.

True False

72. The term "financial system" refers to the collection of markets, individuals and institutions, laws,

regulations and techniques through which cash is traded and interest rates determined. True False

73. The construction of office buildings, highways, schools and homes normally is financed by loans from the

money market. True False

74. Most loans to families and individuals would be classified as capital market instruments. True False

75. Arbitrageurs help to insure differentials between financial markets

True False

76. A major problem faced by Japan today is too little saving by its citizens.

True False

77. The financial system determines:

A. The cost of creditB. How much credit is availableC. The prices of securitiesD. The quantity of securities issued by borrowersE. All of the above

78. According to your text, the nation's standard of living is increased through the mechanism of the financial

system by: A. Increasing interest ratesB. Reducing the volume of spending for goods and servicesC. Lowering inflationD. Stabilizing the economy's rate of growthE. Making funds available

79. In general, when the cost of credit declines,

A. Unemployment risesB. Total spending decreasesC. Production is cut backD. More jobs are createdE. The economy's rate of growth slows down

80. The role of markets in a market-oriented economy like the United States is to:

A. Allocate resourcesB. Distribute incomeC. Produce needed goods and servicesD. All of the aboveE. None of the above

81. The markets that serve the financial system may be classified in several different ways, including:

A. Money markets versus capital marketsB. Open markets versus negotiated marketsC. Primary markets versus secondary marketsD. Spot markets versus futures marketsE. All of the above

82. The financial system and financial markets are responsible for providing which of the following services? A. Credit servicesB. Payment servicesC. LiquidityD. Facilitating the flow of savingsE. All of the above

83. According to the text, several different financial assets and instruments have served as a medium of

exchange or means of making payments in recent years. Which instrument listed below is not considered a means of making payments or a medium of exchange? A. Checking accountsB. NOW accountsC. Negotiable certificates of depositD. Debit cardsE. Credit cards

84. The ______ is designed for the making of short-term loans where individuals and institutions with

temporary surpluses of funds meet borrowers who have temporary cash shortages. A. Money marketB. Capital marketC. Open marketD. Negotiated marketE. Primary market

85. The ______ is designed to finance long-term investments, making possible the construction of factories,

office buildings, highways, bridges, schools, homes and apartments. A. Money marketB. Capital marketC. Secondary marketD. Negotiated marketE. Primary market

86. One of the financial markets listed below is not part of the nation's capital market. Which one is not?

A. Mortgage marketB. Corporate bond marketC. Municipal bond marketD. Commercial paper marketE. Stock market

87. One of the financial markets listed below is not part of the money market. Which one is not?

A. U.S. Treasury bill marketB. Market for negotiable CDs of $100,000 or moreC. Market for federal fundsD. Market for Eurodollar depositsE. Market for consumer installment loans

88. The financial markets that provide for the immediate delivery of securities are known as: A. Spot marketsB. Futures marketsC. Forward marketsD. Option marketsE. None of the above

89. The market for trading newly issued securities is known as the:

A. Money marketB. Cash marketC. Spot marketD. Primary marketE. Open market

90. Trading in securities previously issued takes place in the:

A. Open marketB. Secondary marketC. Primary marketD. Negotiated marketE. Capital market

91. According to your text, the basic commodity being traded in all the financial markets is:

A. SecuritiesB. CapitalC. Forward marketsD. CreditE. None of the above

92. The circular flow of funds includes which of the following:

A. Consumer unitsB. HouseholdsC. GovernmentD. All of the aboveE. None of the above

93. Which type of market is not part of the circular flow?

A. Factor marketB. Information marketC. Financial marketD. Product marketE. All of the above

94. If households set aside funds that are not returned to the spending stream the economy will: A. ExpandB. ContractC. Operate at a normal levelD. Do nothingE. None of the above

95. The financial system provides all the following services except:

A. Furnish creditB. Payment servicesC. Equitably distribute wealthD. Provide liquidityE. Risk protection

96. The largest borrower in the money market is:

A. BusinessesB. GovernmentC. HouseholdsD. Commercial banksE. None of the above

97. To gain access to the money market an institution must:

A. Have an excellent credit ratingB. Be well knownC. Be largeD. All of the aboveE. None of the above

98. The largest market in the world for a single security is:

A. The capital marketB. The money marketC. The treasury bill marketD. The federal funds marketE. None of the above

99. Arbitrage occurs when:

A. A new security is issuedB. A company is in need of fundsC. A large institution faces defaultD. Interest rates in a sector of the financial market rise relative to other sectorsE. None of the above

100.The function of the financial system that consists of providing a channel through which the government can promote the goals of high employment and low inflation is called the: A. Savings functionB. Wealth functionC. Credit functionD. Liquidity functionE. None of the above

101.The function of the financial system that consists of providing a means of raising funds by converting

securities and other assets into cash balances is called the: A. Savings functionB. Wealth functionC. Credit functionD. Liquidity functionE. None of the above

102.The market for delivery of securities usually within one or two business days is known as a the spot market

A. The spot marketB. The forward marketC. The futures marketD. The primary marketE. None of the above

103.According to the text speculators perform an important function in the financial markets. They:

A. Create underpricing of certain securities, generating more attractive investment opportunitiesB. Cause some securities to be overpriced which tends to drive out those securitiesC. Level out the prices of securitiesD. Help to prevent security fraudE. None of the above

104.According to your text, a key trend in the financial system is:

A. Increasing competitionB. Greater riskC. Growth of technologyD. Growth of debtE. All of the above are key trends for the financial system

105.The U.S. savings rate is one of the lowest among major industrial nations because of the:

A. High proportion of young adults in the U.S. populationB. Large government budget deficitsC. Tax structure which favors consumption and borrowing over savingsD. All of the aboveE. None of the above

106.Current savings for a business firm is measured by: A. Total business sales receipts less business operating expenses (including business taxes)B. Current budget receipts less current budgetary expendituresC. Purchases of plant and equipment and inventory and residential constructionD. Construction of new public facilitiesE. None of the above

107.Current savings for a household is measured by:

A. Current consumption spending (including personal taxes) subtracted from personal incomeB. Current budget receipts less current budgetary expendituresC. Current retained earnings and noncash expensesD. Purchases of household durable goodsE. None of the above

108.The most significant barriers to 24-hour worldwide trading of securities include:

A. Lack of adequate prestige or stature by most companies and governmentsB. Lack of common operating rules and regulations among different exchanges and nationsC. Delays in payment for and delivery of securitiesD. Lack of open access to membership on all exchangesE. All of the above

109.A market in which competition among buyers and sellers sets the terms of trade is a:

A. Primary marketB. Forward marketC. Efficient marketD. Perfect marketE. None of the above

110.A(n) _____ market exists if the market is fully competitive and the same information is available to all

participants. A. PrimaryB. SecondaryC. PerfectD. ImperfectE. Neutral

111._____ risk refers to the risk that you will not receive securities that you have purchased or that you will not

receive payment for securities you have sold. A. HedgingB. ClearingC. GlobalD. SettlementE. Liquidity

112.A bank certificate of deposit is a ______ market instrument. Commercial paper is a ______ market instrument. A. Money, capitalB. Money, futuresC. Capital, capitalD. Futures, capitalE. Money, money

113.Net wealth for an economic unit equals:

A. Total assets plus equity capitalB. Total assets less real (nonfinancial) assetsC. Total assets minus total liabilitiesD. Total savings plus holding of financial assetsE. None of the above

114.The financial service supplied by the money and capital markets in which financial instruments are created

to attract savings for future financial needs is called: A. Agency servicesB. Credit servicesC. Payments servicesD. Thrift servicesE. None of the above

115.Acting as an agent for a customer in managing retirement funds or other property represents what financial

service area? A. Hedging servicesB. Credit servicesC. Thrift servicesD. InsuranceE. None of the above

116.Providing loanable funds to supplement current income in order to sustain current living standards

represents what financial service area? A. Payments servicesB. Thrift servicesC. Agency servicesD. Credit servicesE. None of the above

117.For a household, according to US accounting procedures, which of the following is considered an

investment? A. JewelryB. HomeC. GarageD. Pickup truckE. Boat

118.In early 2006, more than $55 trillion in securities, deposits and other financial assets were held by domestic nonfinancial businesses, households and governments in the United States and represents their financial wealth. After subtracting the total debt owed by these groups, it leaves us with the net financial wealth of: A. $12 trillionB. $15 trillionC. $20 trillionD. $30 trillionE. $75 trillion

119.In early 2006 it appeared that the annual US gross domestic product (GDP) would be around $11.5 trillion.

What percentage of the GDP is saved? A. 5%B. 12%C. 17%D. 22%E. 25%

120.A household which consumes assets or increases debt during the year is a condition sometimes referred to

as: A. PoorB. Negative incomeC. Negative savingsD. Asset consumptionE. None of the above

121.Projections for 2006 indicated that personal savings for the year would be:

A. $400 billionB. -$215 billionC. $45 billionD. -$45 billionE. $32 billion

122.On annualized basis US corporations will earn approximately $1.1 trillion, of which ________ will be set

aside for possible future business needs. Choose the answer for the blank. A. $500 billionB. $200 billionC. $700 billionD. $50 billionE. $150 billion

123.Two areas that are major sources of funding for loans are:

A. Personal savings and taxesB. Business savings and taxesC. Taxes and net profitD. Profits and bondsE. Personal savings and business earnings

124.Investing in stocks, bonds or other financial instruments is a good idea because: A. They do not wear outB. Usually generate incomeC. Risk of loss is lower than other forms of stored to wealthD. Are negotiableE. All of the above

125.For any business, individual or government, wealth is:

A. Assets we have managed to accumulate and hold up to the presentB. The sum of the value of all assets we hold at any given timeC. Cash heldD. A and CE. A, B, & C

126.At the end of last year the wealth was $48,000, with a return on the accumulated wealth was 2% during this

year and $1700 was saved this year. At the end of this year the accumulated wealth is: A. $49,700B. $50,660C. $46,300D. $2660E. None of the above

127.Wealth created income results in:

A. Loss of assetsB. New savingsC. DebtD. Increased consumptionE. B & D

128.Every year the volume of financial wealth is growing in the United States. In 2006 the total securities,

deposits and other financial assets held by domestic nonfinancial businesses, households, the US government and foreign investors was A. $55 trillionB. $66 trillionC. $11 trillionD. $50 trillionE. None of the above

129.Perfect liquidity is a trait held by the following:

A. BondsB. StocksC. MoneyD. 30 year U.S. Treasury bondsE. None of the above

130.When a purchaser is issued a bill online and can make payments online, this is referred to as: A. Stored value cardsB. Contactless payment devicesC. Electronic bill presentmentD. ATM cardE. Credit card

131.In the financial marketplace, secondary markets provide:

A. Similar returns to the primary marketB. Support for new investmentC. LiquidityD. Debt for businessesE. A & C

132.Lower savings rates in the United States could be due to:

A. Low unemploymentB. Long periods of prosperityC. No direct experience of the Great DepressionD. Value of homes has risen substantiallyE. All of the above

133.Choose the definition or descriptive phrase on the right that best describes the term on the left.

1. Saving Definitions or Descriptive Phrases

____

2. Debit Cards

Collection of markets, institutions, laws and methods through which securities are traded and interest rates determined.

____

3. Wealth Cost of Credit.

____

4. Investment

Allocates scarce material resources to produce goods and services

____

5. Financial Market Input in the economic system.

____

6. Product Market Payments and production

____

7. Capital Equipment Channel for buyers and sellers to exchange goods and services

____

8. Factor Market Consuming units sell skills and resources to producing units.

____

9. Economic System Income flows to the purchase of goods and services.

____

10. Liquidity Determines volume of credit

____

11. Credit Difference between current income and current consumption.

____

12. Market Medium or exchange

____

13. NOWS Loan of funds in return for a promise of future payment.

____

14. Rate of Interest Medium or exchange

____

15. Terms Transfer funds from a buyer's deposit account to the seller's

account

____

16. Financial System Ability to raise cash quickly with little risk of loss.

____

17. Circular Flow All assets held by an economic unit minus the debts it owes.

____

134.Choose the definition or descriptive phrase on the right which best describes the term on the left.

1. Money Definitions or Descriptive Phrases

____

2. Human capital Market for loans maturing in one year or less.

____

3. Liquidity Possesses perfect liquidity.

____

4. Credit Market for loans with maturities longer than one year.

____

5. Money Market Securities Traded for immediate delivery.

____

6. Wealth Trading of contracts calling for the future delivery of

financial instruments

____

7. Negotiated Market Securities sold to highest bidder.

____

8. Terms Securities sold to one or a few buyers under private

contract.

____

9. Secondary Market Market for newly issued securities.

____

10. Open Market Market for existing securities.

____

11. Primary Market

Transfer of funds between markets in response to attractive prices and rates.

____

12. Capital Market stored purchasing power.

____

13. Personal savings readily spendable assets.

____

14. Forward Market after-tax income not consumed

____

15. Spot Market stocks, bonds, financial instruments .

____

16. Financial wealth marketable skills

____

17. Arbitrage opposite of savings

____

135.Please classify the following financial transactions as to whether they fit in (a) the money market or the capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or futures/forward market. (Note: The transactions below may fit in more than one of the above categories of markets. Be sure to include all the appropriate types of markets that each transaction fits.) a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and some furniture. Capital; primary; negotiated; spot.B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for delivery today. Money; primary; open; spot.C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that company's stock through a phone call to your broker who is linked to a major stock exchange. Capital; secondary; open; spot.

136.Please classify the following financial transactions as to whether they fit in (a) the money market or the

capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or futures/forward market. (Note: The transactions below may fit in more than one of the above categories of markets. Be sure to include all the appropriate types of markets that each transaction fits.) a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and some furniture. Capital; primary; negotiated; spot.B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for delivery today. Money; primary; open; spot.C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that company's stock through a phone call to your broker who is linked to a major stock exchange.Capital; secondary; open; spot.

137.What functions of the financial system do the following transactions illustrate or represent? (Note: Some transactions may involve more than one function. Be sure to identify all the financial system functions involved in each transaction.) a. James Rhodes purchases health and accident insurance policies through the company where he works. Risk protection; payments.B. Sharon MacArthur uses her credit card to purchase wallpaper for a home remodeling project. Payments; credit.C. Fearing a slowdown in the rate of economic growth and increased joblessness, the Federal Reserve System and the Bank of England move to lower interest rates. Policy.

138.What functions of the financial system do the following transactions illustrate or represent? (Note: Some

transactions may involve more than one function. Be sure to identify all the financial system functions involved in each transaction.) a. Dynamic Corporation places some of its current earnings in a bank CD, anticipating a need for funds in about a year in order to build a new warehouse. Savings; wealthB. The Italian government sells new bonds in the open market to cover a large budget deficit. Credit; policyC. Cal and Jane Lewis hope to put their three young children through college someday. Accordingly, they begin buying U.S. savings bonds. Savings; wealth; liquidity, risk protectionD. Needing immediate spending power, Hillcrest Corporation sells its holdings of Denton County bonds through a security broker.Liquidity.

139.From the information presented below on the U.S. economy, please calculate (a) the volume of current savings for all U.S. households, business firms and governments; and (b) the volume of current investment for households and businesses. (Hint: Not all of the information below needs to be used to answer this question; decide what is and is not needed.)

a. Current savings for households = Total personal income - personal tax and nontax payments - personal consumption expenditures = $4677.7 b - $709.0 b - $3697.6 b = $271.1 billion.Current business savings = Undistributed business profits + capital consumption on business plant and equipment = $42.1 b + $500.0 b = $542.1 billion.Current government savings = Current budgetary receipts - current budgetary outlays = federal, state and local government net budget surplus (+) or deficit (-) = - $143.0 b + $39.2 b = - $103.8 billion.Current savings for all households, businesses and governments = $271.1 b + $542.1 b - $103.8 b = $709.4 billion.b. Current household investment = Purchase of durable goods + residential construction = $481.9 b + $218.2 b = $700.1 billion.Current business investment = Change in business inventories + expenditures on nonresidential plant and equipment = $9.6 b + $532.4 b = $542.0 billion.Current investment for households and businesses = $700.1 b + $542.0 b = $1,242.1 billion.

140.In a recent year the following amounts of money market and capital market instruments – loans and securities – were issued and outstanding in the United States. Based on the discussion in this chapter classify each of the instruments as to whether they usually qualify as (a) a money market instrument or (b) a capital market instrument. If the listed instruments represent all U. S. money and capital market instruments outstanding, what was the total dollar size of the U.S. money market? The total size of the U.S. capital market?

141.What roles of the global financial system are being described in the items listed below?

a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets. Savings, wealth, credit functionsB. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new home. Savings, wealth, liquidity functionsC. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a friend who needs ready cash for a down payment on an automobile. Credit function.

142.What roles of the global financial system are being described in the items listed below? a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets. Savings, wealth, credit functionsB. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new home. Savings, wealth, liquidity functionsC. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a friend who needs ready cash for a down payment on an automobile. Credit function.

143.What roles of the global financial system are being described in the items listed below?

a. Deutsche Bank develops and offers to its customers a new savings plan that combines traditional bank deposits with the availability of shares in a growth-oriented mutual fund. Savings, liquidity and wealth functionsB. Randy Bose plans to retire in 18 months but elects to loan a portion of his long-term savings to his son Robert who is starting a new business and has recently married. Credit functionC. The Greater Asia Insurance Corporation has managed to attract $100 million in annuity investments from savers over the past six months and plans to make a loan to Eastman Hotel Corporation,which is beginning construction on a series of luxury resorts in Honolulu and Singapore. Savings and credit functions.

144.What concept, institution or instrument is described by each of the phrases or sentences listed below?

a. Trading of loans and securities in which any individual or institution can participate. Open marketB. Mechanisms set up by society to trade newly issued loans and securities. Primary marketC. Set up to channel temporary cash surpluses into temporary loans. Money marketD. Immediately spendable cash. LiquidityE. Assets minus liabilities held by an economic unit. Net financial wealth.

145.What concept, institution or instrument is described by each of the phrases or sentences listed below? a. Expenditures on capital goods or raw materials. Investment expendituresB. Current earnings retained in a business. Business savingsC. Funds left over out of current income after deducting current consumption expenditures. Household savingsD. An institutional mechanism for trading goods and services. MarketE. Collection of markets, individuals, institutions, laws and regulations through which financial services are produced and delivered. Financial system

146.Herman Gleep has built up total assets at the end of last year of $520,000. It consisted off a home valued at

$350,000 and financial assets valued at $170,000. During this year his home appreciated by a -4% because of the contracting housing market, but his financial assets achieved a return of 6.5%. What is Herman's overall rate of return this year and what are his total assets worth? Home $350,000 X (1-.04) + Financial Assets $170,000 X (1+.065) = Total Asset Value$336,000 + $181,050 = $517,050Percent Return[(Ending value - Starting Value)/starting value] X 100[($517,050 - $520,000)/$520,000] X 100[$2,950/$520,000] X 100 = -.57%

147.What concept, device or instrument is described by each of the phrases or sentences listed below? a. On payday, many workers are receiving this negotiable item instead of a traditional paycheck. Stored value cardsb. Fund's that are transferred electronically from the payor's account to the account of the payee. Direct depositc. Provides the holder access to cash, the ability to transfer funds and the ability to check balances. ATM Card mediumd. Transfers information and money in using radio frequencies with no direct contact. Contactless payment devices

ch1 Key

1. The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which securities are traded and interest rates determined. TRUE

Difficulty: Medium

Rose - Chapter 01 #1

2. When credit becomes more costly and less available, total spending for goods and services generally falls. TRUE

Difficulty: Hard


3. The primary task of a financial system is to move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens. TRUE

Difficulty: Easy


4. The money market is designed for the making of short-term loans. It is the institution through which individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary funds shortages (deficits). TRUE

Difficulty: Easy


5. A market in which prices fully reflect the latest available information is an efficient market. TRUE

Difficulty: Medium


6. A surplus of current revenues over current expenditures is a measure of current government saving. TRUE

Difficulty: Medium


7. Business investment consists of purchases of plant and equipment and purchases of inventory. TRUE

Difficulty: Medium


8. The purchase of a new home is a form of business investment. FALSE

Difficulty: Easy


9. The purchase of financial claims is a guaranteed form of future income. FALSE

Difficulty: Medium


10. Spending by federal, state and local governments for public facilities is a form of government savings. FALSE

Difficulty: Easy


11. One of the most important contributions of the financial markets is to make possible the exchange of current income for future income. TRUE

Difficulty: Easy


12. Credit represents a loan of funds in return for a promise of future payment. TRUE

Difficulty: Easy


13. Interest payments on debt are a tax-deductible expense for households, but not for businesses. FALSE

Difficulty: Easy


14. A NOW account is a type of savings account rather than a type of checking account. FALSE

Difficulty: Easy


15. Commercial banks and retail stores, but not credit unions, may issue plastic credit cards. FALSE

Difficulty: Medium


16. The financial markets offer businesses, consumers and governments protection against health, property and income risk. TRUE

Difficulty: Medium


17. The term "liquidity" refers to the ability of a financial asset to be converted quickly into cash with little risk of loss. TRUE

Difficulty: Easy


18. Money is the only perfectly liquid asset in the financial system. TRUE

Difficulty: Medium


19. The financial asset which generally earns the lowest rate of return in the financial system is securities issued by the federal government which are presumed by investors to be free of credit risk. FALSE

Difficulty: Medium


20. A security evidencing a loan which matures within one year is a money market instrument. TRUE

Difficulty: Easy


21. One of the most important functions of the capital market is to finance the working-capital needs of corporations and to provide government with short-term funds in lieu of tax collections. FALSE

Difficulty: Easy


22. Speculative purchases of securities and commodities are generally financed by loans from the money market. TRUE

Difficulty: Hard


23. The construction of office buildings, highways, schools and homes normally is financed by loans from the capital market. TRUE

Difficulty: Medium


24. Financial instruments traded in the capital market have original maturities of greater than one year. TRUE

Difficulty: Easy


25. The most important institution lending funds in the money market is the commercial bank. TRUE

Difficulty: Easy


26. The largest borrower in the U.S. money market is Citibank, the nation's largest commercial bank. FALSE

Difficulty: Medium


27. Most loans to families and individuals would be classified as money market instruments. FALSE

Difficulty: Medium


28. The largest market for a single security in the world is the Treasury bill market. TRUE

Difficulty: Medium


29. A short-term IOU issued by a large well-established corporation is known as commercial paper. TRUE

Difficulty: Easy


30. The fact that professional investors operate daily in the financial marketplace, watching for profitable opportunities arising from unusually attractive prices and interest rates on selected financial instruments and adjusting their portfolios accordingly is often referred to as the force of profit maximization. FALSE

Difficulty: Hard


31. The only value of the financial system is that it determines the cost of credit. FALSE

Difficulty: Medium


32. The financial system determines the cost of credit and how much credit is available. TRUE

Difficulty: Medium


33. The circular flow occurs between governments and households. FALSE

Difficulty: Medium


34. Business determines what and how many goods and services will be produced. FALSE

Difficulty: Easy


35. One way for the economy to expand is for households to set aside savings so that they will not return to the spending stream. FALSE

Difficulty: Medium


36. The tax status of interest paid on debt causes most individuals to think twice before using credit. FALSE

Difficulty: Hard


37. Generally a business firm enters the capital market if it experiences a temporary surplus or deficit of funds. FALSE

Difficulty: Hard


38. The money market is an excellent place for new corporations to borrow money. FALSE

Difficulty: Medium


39. Federal funds are temporary cash surpluses held by the federal government. FALSE

Difficulty: Easy


40. Speculators in securities are continually on the lookout for small differences in prices or interest rates attached to different securities. TRUE

Difficulty: Medium


41. Arbitrageurs help to maintain consistent prices between financial markets. TRUE

Difficulty: Easy


42. The financial markets provide a means to protect businesses, consumers and governments against risk. TRUE

Difficulty: Easy


43. The terms open market and negotiated market are often used interchangeably to mean the same thing. FALSE

Difficulty: Medium


44. The principal function of the primary market is to raise money for investment in buildings and equipment. TRUE

Difficulty: Medium


45. An example of a futures market transaction is to borrow money through a new mortgage. FALSE

Difficulty: Medium


46. Forward markets and futures markets serve the same purpose in principle. TRUE

Difficulty: Medium


47. The liquidity function of the financial system is designed to protect businesses, consumers and governments against risks to people, property and income. FALSE

Difficulty: Hard


48. The payments function of the financial system is designed to provide a means to store purchasing power until needed at a future date for spending on goods and services. FALSE

Difficulty: Hard


49. The financial system is rapidly evolving into a worldwide system, with increasingly intense competition among financial institutions. TRUE

Difficulty: Easy


50. Current savings for business firms are equal to current retained earnings less operating expenses. FALSE

Difficulty: Hard


51. Current investment for households includes purchases of household durables by individuals and families. TRUE

Difficulty: Medium


52. Investment by governments includes the construction of new public facilities. TRUE

Difficulty: Medium


53. The financial system operates to bring planned savings into balance with planned financial investment in stocks and bonds. FALSE

Difficulty: Easy


54. A high proportion of young adults and newly formed families in a nation's population will generate a high level of national savings compared to countries with older populations because younger adults have greater need to build up savings for the future. FALSE

Difficulty: Medium


55. A nation with a relatively low savings ratio will tend to have higher interest rates and more rapid inflation. TRUE

Difficulty: Hard


56. Trading in financial instruments now spans the globe. TRUE

Difficulty: Easy


57. Few companies or governments have the prestige or stature that would cause investors throughout the world to want to trade their particular securities. TRUE

Difficulty: Easy


58. One of the most significant barriers to worldwide trading of securities is the delay in paying for and delivering securities to all parts of the globe. TRUE

Difficulty: Medium


59. If there is imperfect information in a market, it is perfectly competitive. FALSE

Difficulty: Easy


60. When savings flows fall, living standards rise because people spend more. FALSE

Difficulty: Easy


61. The net wealth of an economic unit is determined by adding all the unit's assets to it net worth or equity capital. FALSE

Difficulty: Medium


62. The financial services area where protection is provided against loss due to unfavorable movements in market prices or interest rates is known as agency services. FALSE

Difficulty: Hard


63. The financial services area where protection is provided from loss of income or property in the event of death, disability, negligence or other adverse developments is known as hedging services. FALSE

Difficulty: Medium


64. The financial services area where payments accounts against which the customer can write checks or wire funds to pay for purchases of goods and services is known as thrift services. FALSE

Difficulty: Easy


65. Wealth holdings represent stored purchasing power that will be used in future periods to finance purchases of goods and services and increase society's standard of living. TRUE

Difficulty: Easy


66. A major problem faced by Japan today is too much saving by its citizens. TRUE

Difficulty: Easy


67. Financial transactions between nations have increased faster in volume than has international trade in goods and nonfinancial services. TRUE

Difficulty: Medium


68. The world's standard of living increases if production increases while raising productivity. TRUE

Difficulty: Hard


69. Current savings represents a flow of funds. TRUE

Difficulty: Easy


70. Accumulated savings built up over time is referred to as a flow of funds. FALSE

Difficulty: Medium


71. Personal savings are after-tax funds that are not consumed during the year. TRUE

Difficulty: Hard


72. The term "financial system" refers to the collection of markets, individuals and institutions, laws, regulations and techniques through which cash is traded and interest rates determined. FALSE

Difficulty: Medium


73. The construction of office buildings, highways, schools and homes normally is financed by loans from the money market. FALSE

Difficulty: Medium


74. Most loans to families and individuals would be classified as capital market instruments. TRUE

Difficulty: Medium


75. Arbitrageurs help to insure differentials between financial markets FALSE

Difficulty: Medium


76. A major problem faced by Japan today is too little saving by its citizens. FALSE

Difficulty: Medium


77. The financial system determines: A. The cost of creditB. How much credit is availableC. The prices of securitiesD. The quantity of securities issued by borrowersE. All of the above

Difficulty: Medium


78. According to your text, the nation's standard of living is increased through the mechanism of the financial system by: A. Increasing interest ratesB. Reducing the volume of spending for goods and servicesC. Lowering inflationD. Stabilizing the economy's rate of growthE. Making funds available

Difficulty: Medium


79. In general, when the cost of credit declines, A. Unemployment risesB. Total spending decreasesC. Production is cut backD. More jobs are createdE. The economy's rate of growth slows down

Difficulty: Hard


80. The role of markets in a market-oriented economy like the United States is to: A. Allocate resourcesB. Distribute incomeC. Produce needed goods and servicesD. All of the aboveE. None of the above

Difficulty: Easy


81. The markets that serve the financial system may be classified in several different ways, including: A. Money markets versus capital marketsB. Open markets versus negotiated marketsC. Primary markets versus secondary marketsD. Spot markets versus futures marketsE. All of the above

Difficulty: Easy


82. The financial system and financial markets are responsible for providing which of the following services? A. Credit servicesB. Payment servicesC. LiquidityD. Facilitating the flow of savingsE. All of the above

Difficulty: Easy


83. According to the text, several different financial assets and instruments have served as a medium of exchange or means of making payments in recent years. Which instrument listed below is not considered a means of making payments or a medium of exchange? A. Checking accountsB. NOW accountsC. Negotiable certificates of depositD. Debit cardsE. Credit cards

Difficulty: Medium


84. The ______ is designed for the making of short-term loans where individuals and institutions with temporary surpluses of funds meet borrowers who have temporary cash shortages. A. Money marketB. Capital marketC. Open marketD. Negotiated marketE. Primary market

Difficulty: Easy


85. The ______ is designed to finance long-term investments, making possible the construction of factories, office buildings, highways, bridges, schools, homes and apartments. A. Money marketB. Capital marketC. Secondary marketD. Negotiated marketE. Primary market

Difficulty: Easy


86. One of the financial markets listed below is not part of the nation's capital market. Which one is not? A. Mortgage marketB. Corporate bond marketC. Municipal bond marketD. Commercial paper marketE. Stock market

Difficulty: Medium


87. One of the financial markets listed below is not part of the money market. Which one is not? A. U.S. Treasury bill marketB. Market for negotiable CDs of $100,000 or moreC. Market for federal fundsD. Market for Eurodollar depositsE. Market for consumer installment loans

Difficulty: Medium


88. The financial markets that provide for the immediate delivery of securities are known as: A. Spot marketsB. Futures marketsC. Forward marketsD. Option marketsE. None of the above

Difficulty: Medium


89. The market for trading newly issued securities is known as the: A. Money marketB. Cash marketC. Spot marketD. Primary marketE. Open market

Difficulty: Easy


90. Trading in securities previously issued takes place in the: A. Open marketB. Secondary marketC. Primary marketD. Negotiated marketE. Capital market

Difficulty: Easy


91. According to your text, the basic commodity being traded in all the financial markets is: A. SecuritiesB. CapitalC. Forward marketsD. CreditE. None of the above

Difficulty: Medium


92. The circular flow of funds includes which of the following: A. Consumer unitsB. HouseholdsC. GovernmentD. All of the aboveE. None of the above

Difficulty: Easy


93. Which type of market is not part of the circular flow? A. Factor marketB. Information marketC. Financial marketD. Product marketE. All of the above

Difficulty: Medium


94. If households set aside funds that are not returned to the spending stream the economy will: A. ExpandB. ContractC. Operate at a normal levelD. Do nothingE. None of the above

Difficulty: Hard


95. The financial system provides all the following services except: A. Furnish creditB. Payment servicesC. Equitably distribute wealthD. Provide liquidityE. Risk protection

Difficulty: Medium


96. The largest borrower in the money market is: A. BusinessesB. GovernmentC. HouseholdsD. Commercial banksE. None of the above

Difficulty: Medium


97. To gain access to the money market an institution must: A. Have an excellent credit ratingB. Be well knownC. Be largeD. All of the aboveE. None of the above

Difficulty: Medium


98. The largest market in the world for a single security is: A. The capital marketB. The money marketC. The treasury bill marketD. The federal funds marketE. None of the above

Difficulty: Medium


99. Arbitrage occurs when: A. A new security is issuedB. A company is in need of fundsC. A large institution faces defaultD. Interest rates in a sector of the financial market rise relative to other sectorsE. None of the above

Difficulty: Hard


100. The function of the financial system that consists of providing a channel through which the government can promote the goals of high employment and low inflation is called the: A. Savings functionB. Wealth functionC. Credit functionD. Liquidity functionE. None of the above

Difficulty: Hard


101. The function of the financial system that consists of providing a means of raising funds by converting securities and other assets into cash balances is called the: A. Savings functionB. Wealth functionC. Credit functionD. Liquidity functionE. None of the above

Difficulty: Hard


102. The market for delivery of securities usually within one or two business days is known as a the spot market A. The spot marketB. The forward marketC. The futures marketD. The primary marketE. None of the above

Difficulty: Medium


103. According to the text speculators perform an important function in the financial markets. They: A. Create underpricing of certain securities, generating more attractive investment opportunitiesB. Cause some securities to be overpriced which tends to drive out those securitiesC. Level out the prices of securitiesD. Help to prevent security fraudE. None of the above

Difficulty: Medium


104. According to your text, a key trend in the financial system is: A. Increasing competitionB. Greater riskC. Growth of technologyD. Growth of debtE. All of the above are key trends for the financial system

Difficulty: Medium


105. The U.S. savings rate is one of the lowest among major industrial nations because of the: A. High proportion of young adults in the U.S. populationB. Large government budget deficitsC. Tax structure which favors consumption and borrowing over savingsD. All of the aboveE. None of the above

Difficulty: Hard


106. Current savings for a business firm is measured by: A. Total business sales receipts less business operating expenses (including business taxes)B. Current budget receipts less current budgetary expendituresC. Purchases of plant and equipment and inventory and residential constructionD. Construction of new public facilitiesE. None of the above

Difficulty: Hard


107. Current savings for a household is measured by: A. Current consumption spending (including personal taxes) subtracted from personal incomeB. Current budget receipts less current budgetary expendituresC. Current retained earnings and noncash expensesD. Purchases of household durable goodsE. None of the above

Difficulty: Hard


108. The most significant barriers to 24-hour worldwide trading of securities include: A. Lack of adequate prestige or stature by most companies and governmentsB. Lack of common operating rules and regulations among different exchanges and nationsC. Delays in payment for and delivery of securitiesD. Lack of open access to membership on all exchangesE. All of the above

Difficulty: Medium


109. A market in which competition among buyers and sellers sets the terms of trade is a: A. Primary marketB. Forward marketC. Efficient marketD. Perfect marketE. None of the above

Difficulty: Medium


110. A(n) _____ market exists if the market is fully competitive and the same information is available to all participants. A. PrimaryB. SecondaryC. PerfectD. ImperfectE. Neutral

Difficulty: Easy


111. _____ risk refers to the risk that you will not receive securities that you have purchased or that you will not receive payment for securities you have sold. A. HedgingB. ClearingC. GlobalD. SettlementE. Liquidity

Difficulty: Medium


112. A bank certificate of deposit is a ______ market instrument. Commercial paper is a ______ market instrument. A. Money, capitalB. Money, futuresC. Capital, capitalD. Futures, capitalE. Money, money

Difficulty: Medium


113. Net wealth for an economic unit equals: A. Total assets plus equity capitalB. Total assets less real (nonfinancial) assetsC. Total assets minus total liabilitiesD. Total savings plus holding of financial assetsE. None of the above

Difficulty: Medium


114. The financial service supplied by the money and capital markets in which financial instruments are created to attract savings for future financial needs is called: A. Agency servicesB. Credit servicesC. Payments servicesD. Thrift servicesE. None of the above

Difficulty: Easy


115. Acting as an agent for a customer in managing retirement funds or other property represents what financial service area? A. Hedging servicesB. Credit servicesC. Thrift servicesD. InsuranceE. None of the above

Difficulty: Medium


116. Providing loanable funds to supplement current income in order to sustain current living standards represents what financial service area? A. Payments servicesB. Thrift servicesC. Agency servicesD. Credit servicesE. None of the above

Difficulty: Easy


117. For a household, according to US accounting procedures, which of the following is considered an investment? A. JewelryB. HomeC. GarageD. Pickup truckE. Boat

Difficulty: Easy


118. In early 2006, more than $55 trillion in securities, deposits and other financial assets were held by domestic nonfinancial businesses, households and governments in the United States and represents their financial wealth. After subtracting the total debt owed by these groups, it leaves us with the net financial wealth of: A. $12 trillionB. $15 trillionC. $20 trillionD. $30 trillionE. $75 trillion

Difficulty: Medium


119. In early 2006 it appeared that the annual US gross domestic product (GDP) would be around $11.5 trillion. What percentage of the GDP is saved? A. 5%B. 12%C. 17%D. 22%E. 25%

Difficulty: Hard


120. A household which consumes assets or increases debt during the year is a condition sometimes referred to as: A. PoorB. Negative incomeC. Negative savingsD. Asset consumptionE. None of the above

Difficulty: Medium


121. Projections for 2006 indicated that personal savings for the year would be: A. $400 billionB. -$215 billionC. $45 billionD. -$45 billionE. $32 billion

Difficulty: Medium


122. On annualized basis US corporations will earn approximately $1.1 trillion, of which ________ will be set aside for possible future business needs. Choose the answer for the blank. A. $500 billionB. $200 billionC. $700 billionD. $50 billionE. $150 billion

Difficulty: Medium


123. Two areas that are major sources of funding for loans are: A. Personal savings and taxesB. Business savings and taxesC. Taxes and net profitD. Profits and bondsE. Personal savings and business earnings

Difficulty: Hard


124. Investing in stocks, bonds or other financial instruments is a good idea because: A. They do not wear outB. Usually generate incomeC. Risk of loss is lower than other forms of stored to wealthD. Are negotiableE. All of the above

Difficulty: Hard


125. For any business, individual or government, wealth is: A. Assets we have managed to accumulate and hold up to the presentB. The sum of the value of all assets we hold at any given timeC. Cash heldD. A and CE. A, B, & C

Difficulty: Hard


126. At the end of last year the wealth was $48,000, with a return on the accumulated wealth was 2% during this year and $1700 was saved this year. At the end of this year the accumulated wealth is: A. $49,700B. $50,660C. $46,300D. $2660E. None of the above

Difficulty: Medium


127. Wealth created income results in: A. Loss of assetsB. New savingsC. DebtD. Increased consumptionE. B & D

Difficulty: Hard


128. Every year the volume of financial wealth is growing in the United States. In 2006 the total securities, deposits and other financial assets held by domestic nonfinancial businesses, households, the US government and foreign investors was A. $55 trillionB. $66 trillionC. $11 trillionD. $50 trillionE. None of the above

Difficulty: Hard


129. Perfect liquidity is a trait held by the following: A. BondsB. StocksC. MoneyD. 30 year U.S. Treasury bondsE. None of the above

Difficulty: Easy


130. When a purchaser is issued a bill online and can make payments online, this is referred to as: A. Stored value cardsB. Contactless payment devicesC. Electronic bill presentmentD. ATM cardE. Credit card

Difficulty: Medium


131. In the financial marketplace, secondary markets provide: A. Similar returns to the primary marketB. Support for new investmentC. LiquidityD. Debt for businessesE. A & C

Difficulty: Hard


132. Lower savings rates in the United States could be due to: A. Low unemploymentB. Long periods of prosperityC. No direct experience of the Great DepressionD. Value of homes has risen substantiallyE. All of the above

Difficulty: Hard


133. Choose the definition or descriptive phrase on the right that best describes the term on the left.

1. Saving Definitions or Descriptive Phrases

15

2. Debit Cards

Collection of markets, institutions, laws and methods through which securities are traded and interest rates determined.

16

3. Wealth Cost of Credit.

14

4. Investment

Allocates scarce material resources to produce goods and services

9

5. Financial Market Input in the economic system.

7

6. Product Market Payments and production

17

7. Capital Equipment

Channel for buyers and sellers to exchange goods and services

12

8. Factor Market Consuming units sell skills and resources to producing units.

8

9. Economic System Income flows to the purchase of goods and services.

6

10. Liquidity Determines volume of credit

5

11. Credit Difference between current income and current consumption. 1

12. Market Medium or exchange 4

13. NOWS Loan of funds in return for a promise of future payment.

11

14. Rate of Interest Medium or exchange

13

15. Terms Transfer funds from a buyer's deposit account to the seller's

account 2

16. Financial System Ability to raise cash quickly with little risk of loss.

10

17. Circular Flow All assets held by an economic unit minus the debts it owes.

3

Difficulty: Medium


134. Choose the definition or descriptive phrase on the right which best describes the term on the left. 1. Money Definitions or Descriptive Phrases 8 2. Human capital Market for loans maturing in one year or less. 1 3. Liquidity Possesses perfect liquidity. 5

4. Credit Market for loans with maturities longer than one year.

12

5. Money Market Securities Traded for immediate delivery.

15

6. Wealth Trading of contracts calling for the future delivery of

financial instruments

14

7. Negotiated Market Securities sold to highest bidder.

10

8. Terms Securities sold to one or a few buyers under private

contract. 7

9. Secondary Market Market for newly issued securities.

11

10. Open Market Market for existing securities. 9

11. Primary Market

Transfer of funds between markets in response to attractive prices and rates.

17

12. Capital Market stored purchasing power. 6 13. Personal savings readily spendable assets. 3

14. Forward Market after-tax income not consumed

13

15. Spot Market stocks, bonds, financial instruments .

16

16. Financial wealth marketable skills 2 17. Arbitrage opposite of savings 4

Difficulty: Medium


135. Please classify the following financial transactions as to whether they fit in (a) the money market or the capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or futures/forward market. (Note: The transactions below may fit in more than one of the above categories of markets. Be sure to include all the appropriate types of markets that each transaction fits.) a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and some furniture. Capital; primary; negotiated; spot.B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for delivery today. Money; primary; open; spot.C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that company's stock through a phone call to your broker who is linked to a major stock exchange. Capital; secondary; open; spot.


136. Please classify the following financial transactions as to whether they fit in (a) the money market or the capital market; (b) the primary or secondary market; (c) the open or negotiated market; and (d) the spot or futures/forward market. (Note: The transactions below may fit in more than one of the above categories of markets. Be sure to include all the appropriate types of markets that each transaction fits.) a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car and some furniture. Capital; primary; negotiated; spot.B. You purchase a new U.S. Treasury bill through the Federal Reserve bank in a neighboring city for delivery today. Money; primary; open; spot.C. Responding to a rise in the price of Texaco common stock, you have just purchased 100 shares of that company's stock through a phone call to your broker who is linked to a major stock exchange.Capital; secondary; open; spot.


137. What functions of the financial system do the following transactions illustrate or represent? (Note: Some transactions may involve more than one function. Be sure to identify all the financial system functions involved in each transaction.) a. James Rhodes purchases health and accident insurance policies through the company where he works. Risk protection; payments.B. Sharon MacArthur uses her credit card to purchase wallpaper for a home remodeling project. Payments; credit.C. Fearing a slowdown in the rate of economic growth and increased joblessness, the Federal Reserve System and the Bank of England move to lower interest rates. Policy.


138. What functions of the financial system do the following transactions illustrate or represent? (Note: Some transactions may involve more than one function. Be sure to identify all the financial system functions involved in each transaction.) a. Dynamic Corporation places some of its current earnings in a bank CD, anticipating a need for funds in about a year in order to build a new warehouse. Savings; wealthB. The Italian government sells new bonds in the open market to cover a large budget deficit. Credit; policyC. Cal and Jane Lewis hope to put their three young children through college someday. Accordingly, they begin buying U.S. savings bonds. Savings; wealth; liquidity, risk protectionD. Needing immediate spending power, Hillcrest Corporation sells its holdings of Denton County bonds through a security broker.Liquidity.


139. From the information presented below on the U.S. economy, please calculate (a) the volume of current savings for all U.S. households, business firms and governments; and (b) the volume of current investment for households and businesses. (Hint: Not all of the information below needs to be used to answer this question; decide what is and is not needed.)

a. Current savings for households = Total personal income - personal tax and nontax payments - personal consumption expenditures = $4677.7 b - $709.0 b - $3697.6 b = $271.1 billion.Current business savings = Undistributed business profits + capital consumption on business plant and equipment = $42.1 b + $500.0 b = $542.1 billion.Current government savings = Current budgetary receipts - current budgetary outlays = federal, state and local government net budget surplus (+) or deficit (-) = - $143.0 b + $39.2 b = - $103.8 billion.Current savings for all households, businesses and governments = $271.1 b + $542.1 b - $103.8 b = $709.4 billion.b. Current household investment = Purchase of durable goods + residential construction = $481.9 b + $218.2 b = $700.1 billion.Current business investment = Change in business inventories + expenditures on nonresidential plant and equipment = $9.6 b + $532.4 b = $542.0 billion.Current investment for households and businesses = $700.1 b + $542.0 b = $1,242.1 billion.


140. In a recent year the following amounts of money market and capital market instruments – loans and securities – were issued and outstanding in the United States. Based on the discussion in this chapter classify each of the instruments as to whether they usually qualify as (a) a money market instrument or (b) a capital market instrument. If the listed instruments represent all U. S. money and capital market instruments outstanding, what was the total dollar size of the U.S. money market? The total size of the U.S. capital market?


141. What roles of the global financial system are being described in the items listed below? a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets. Savings, wealth, credit functionsB. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new home. Savings, wealth, liquidity functionsC. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a friend who needs ready cash for a down payment on an automobile. Credit function.


142. What roles of the global financial system are being described in the items listed below? a. Exxon Corporation issues new shares of stock to finance its expansion into foreign markets. Savings, wealth, credit functionsB. The Wiliams' family withdraws its bank deposit in order to purchase new furniture for their new home. Savings, wealth, liquidity functionsC. Robert Enlow plans to purchase a new home in three years, but in the interim, he makes a loan to a friend who needs ready cash for a down payment on an automobile. Credit function.


143. What roles of the global financial system are being described in the items listed below? a. Deutsche Bank develops and offers to its customers a new savings plan that combines traditional bank deposits with the availability of shares in a growth-oriented mutual fund. Savings, liquidity and wealth functionsB. Randy Bose plans to retire in 18 months but elects to loan a portion of his long-term savings to his son Robert who is starting a new business and has recently married. Credit functionC. The Greater Asia Insurance Corporation has managed to attract $100 million in annuity investments from savers over the past six months and plans to make a loan to Eastman Hotel Corporation,which is beginning construction on a series of luxury resorts in Honolulu and Singapore. Savings and credit functions.


144. What concept, institution or instrument is described by each of the phrases or sentences listed below? a. Trading of loans and securities in which any individual or institution can participate. Open marketB. Mechanisms set up by society to trade newly issued loans and securities. Primary marketC. Set up to channel temporary cash surpluses into temporary loans. Money marketD. Immediately spendable cash. LiquidityE. Assets minus liabilities held by an economic unit. Net financial wealth.


145. What concept, institution or instrument is described by each of the phrases or sentences listed below? a. Expenditures on capital goods or raw materials. Investment expendituresB. Current earnings retained in a business. Business savingsC. Funds left over out of current income after deducting current consumption expenditures. Household savingsD. An institutional mechanism for trading goods and services. MarketE. Collection of markets, individuals, institutions, laws and regulations through which financial services are produced and delivered. Financial system


146. Herman Gleep has built up total assets at the end of last year of $520,000. It consisted off a home valued at $350,000 and financial assets valued at $170,000. During this year his home appreciated by a -4% because of the contracting housing market, but his financial assets achieved a return of 6.5%. What is Herman's overall rate of return this year and what are his total assets worth? Home $350,000 X (1-.04) + Financial Assets $170,000 X (1+.065) = Total Asset Value$336,000 + $181,050 = $517,050Percent Return[(Ending value - Starting Value)/starting value] X 100[($517,050 - $520,000)/$520,000] X 100[$2,950/$520,000] X 100 = -.57%


147. What concept, device or instrument is described by each of the phrases or sentences listed below? a. On payday, many workers are receiving this negotiable item instead of a traditional paycheck. Stored value cardsb. Fund's that are transferred electronically from the payor's account to the account of the payee. Direct depositc. Provides the holder access to cash, the ability to transfer funds and the ability to check balances. ATM Card mediumd. Transfers information and money in using radio frequencies with no direct contact. Contactless payment devices


ch1 Summary

Category # of Questions

Difficulty: Easy 41

Difficulty: Hard 28

Difficulty: Medium 65

Rose - Chapter 01 147

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ch1