Q: A $$1,000 zero-coupon bond is sold for 950 $$and matures in one year. What is the annualized interest rate earned by the investor?

$$ \frac{1000 - 950}{950} \times 100 = 5.26\% $$

Question 1

Which of the following best describes the role of financial markets in the economy?

Accepted Answer

Financial markets are markets in which funds are transferred from people and firms who have an excess of available funds to people and firms who have a need of funds.

Question 2

A $$1,000 zero-coupon bond is sold for 950 $$and matures in one year. What is the annualized interest rate earned by the investor?

Accepted Answer

$$ \frac{1000 - 950}{950} 	imes 100 = 5.26\% $$

Question 3

Which of the following is NOT a function of financial intermediaries?

Accepted Answer

Guaranteeing profits for all investors

Question 4

Which financial asset represents partial ownership in a firm and entitles the holder to dividends?

Accepted Answer

Stock

Question 5

A financial intermediary that collects premiums and invests them to pay future claims is known as:

Accepted Answer

Insurance company

Question 6

Which of the following best explains the concept of adverse selection in financial markets?

Accepted Answer

The problem of selecting risky borrowers before the transaction occurs due to asymmetric information

Question 7

If a $100, 10-year bond has a 6% coupon, what is the annual coupon payment?

Accepted Answer

$$ 100 	imes 0.06 = 6 $$

Question 8

Which of the following is an example of a money market instrument?

Accepted Answer

Treasury bill

Question 9

What is the primary role of the Federal Reserve as established in 1913?

Accepted Answer

Lender of last resort

Question 10

Which of the following statements about securitization is correct?

Accepted Answer

Securitization is the process of converting loans and other financial assets that are not tradable into tradable securities.

Question 11

Which of the following is a plausible consequence of moral hazard in banking?

Accepted Answer

Borrowers may take on excessive risk after receiving a loan, increasing the chance of default.

Question 12

Which regulatory agency is responsible for regulating organized exchanges and financial markets, and restricts insider trading?

Accepted Answer

Securities and Exchange Commission (SEC)

Question 13

A mutual fund pools money from investors and invests in a portfolio of financial assets. Which of the following is NOT a typical asset in a mutual fund portfolio?

Accepted Answer

Physical real estate

Question 14

Which of the following best describes the difference between primary and secondary financial markets?

Accepted Answer

Primary markets are where new securities are issued to investors; secondary markets are where existing securities are traded among investors.

Question 15

Suppose a bank makes a loan to a borrower. For the borrower, this loan is:

Accepted Answer

A financial liability

Question 16

Which of the following is a key reason for regulating financial intermediaries?

Accepted Answer

To ensure the soundness of financial intermediaries and protect the financial system from collapse

Question 17

If the Federal Reserve wants to lower the federal funds rate, which of the following actions is it most likely to take?

Accepted Answer

Buy government securities in the open market

Question 18

Which of the following is an example of a contractual savings institution?

Accepted Answer

Life insurance company

Question 19

During the financial crisis of 2007-2009, which government program provided funds to commercial banks in exchange for stock?

Accepted Answer

Troubled Asset Relief Program (TARP)

Question 20

Which of the following is a plausible effect of the internationalization of financial markets?

Accepted Answer

Financial markets become increasingly integrated, impacting domestic monetary policy and economic performance.

Introduction to Money and the Financial System (ECON 2035) - Study Notes

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