Financial Markets & Institutions Chapter.3 Test Bank 6e

Student name:__________

1) Suppose that an internet-based program, Novus, wants to raise $10 million to expand its business operations. Describe how Novus can raise these funds directly through each of the follow options: issuing stock, issuing bonds, or obtaining a bank loan. Compare and contrast these three options.

2) Explain the various ways that financial intermediaries increase the efficiency of an economy.

3) Compare and contrast financial institutions that act as brokers to those that transform assets. In what sense are both types of institutions financial intermediaries? Provide one example of each type and describe how each functions as a financial intermediary.

4) Trading in electronic exchanges has grown tremendously in recent years. What are some of the disadvantages of trading in decentralized electronic exchanges?

5) Uniqua wants to buy a camper to use when visiting national parks this summer. Her cousin Tyrone recently earned a windfall profit in a business venture with a partner, and Uniqua asked him if she could borrow $5,000 for a down payment on the camper. She proposed paying him 4% interest and paying the loan back over the next two years. Discuss the advantages and disadvantages to Tyrone of choosing to make the loan to Uniqua as opposed to loaning the money to Spectrum Communications, Inc. by buying a $5,000 corporate bond that pays the same amount of interest over that same time period.

6) A financial intermediary

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

7) Most individuals borrow

A) directly without the use of a financial intermediary.
B) using a financial intermediary because it lowers the cost of borrowing.
C) using a financial intermediary, but would save money if they financed directly.
D) without using financial intermediaries, preferring credit cards.

8) Tom obtains a car loan from Old Town Bank. The car loan is Tom’s

A) asset and the bank's liability.
B) asset, but the liability belongs to the bank's depositors.
C) liability and an asset for Old Town Bank.
D) liability and a liability of the bank until Tom pays it off.

9) The ultimate role of the financial system of a country is to

A) provide a place for wealthy households to save.
B) be a low-cost source of funds for government.
C) facilitate production, employment, and consumption.
D) provide jobs in the financial sector.

10) Susie buys a share of Alphabet stock through her broker, Mr. Diaz, who works for Acme Investing and purchases the stock at the New York Stock Exchange. In this transaction, __________ is a financial instrument, __________ is a financial institution, and __________ represents a financial market.

A)

B)

C)

D)

11) Loans made between borrowers and lenders are

A) liabilities to the lenders and assets to the borrowers since the borrower obtains the funds.
B) assets to the lenders and liabilities of the borrowers since the promises are made to the lenders.
C) not part of either parties' assets or liabilities until the loans are repaid.
D) liabilities to both the lenders and the borrowers.

12) Financial instruments are used to channel funds from

A) savers to borrowers in financial markets and via financial institutions.
B) savers to borrowers in financial markets but not through financial institutions.
C) borrowers to savers in financial markets but not through financial institutions.
D) borrowers to savers through financial institutions, but not in financial markets.

13) Loans made between borrowers and lenders are

A) usually not taxable at the federal level.
B) legal only in the state of origination.
C) assets of the lenders.
D) assets of the borrowers.

14) Loans made between lenders and borrowers are

A) assets to the borrowers.
B) liabilities of the lenders.
C) not taxable in the state of origination.
D) liabilities of the borrowers.

15) The process of financial intermediation

A) creates a net cost to an economy.
B) increases the economy's ability to produce.
C) is always used when a borrower needs to obtain funds.
D) is used primarily in underdeveloped countries.

16) Financial intermediaries are

A) banks.
B) firms that provide access to the financial markets.
C) insurance companies.
D) essential to direct finance.

17) Financial intermediaries

A) can be banks, but not all financial intermediaries are banks.
B) must be public corporations.
C) are insurance companies.
D) are government agencies.

18) Which one of the following isnot a financial intermediary?

A) a bank
B) an insurance company
C) the New York Stock Exchange
D) a mutual fund

19) Mary purchases a U.S. Treasury bond. The bond is a(n)

A) asset of the U.S. government as well as an asset for Mary.
B) liability of the U.S. government and an asset for Mary.
C) liability of the U.S. government as well as a liability for Mary.
D) asset for the government but a liability for Mary.

20) A financial instrument would include

A) only a written obligation and a transfer of value.
B) only a written obligation and a specified date.
C) a written obligation, a transfer of value, a future date, and certain conditions.
D) a written obligation, a transfer of value, a specific date for payment, and undefined conditions.

21) Which one of the following isnot a financial instrument?

A) a share of Microsoft stock
B) a U.S. Treasury bond
C) an electric bill
D) a life insurance policy

22) Sue has a checking account at the First National Bank. Her checking account is a(n)

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

23) Financial instruments and money both can function

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

24) Financial instruments are different from money because they

A) can act as a store of value and money cannot.
B) can't be a means of payment but money can.
C) can allow for the transfer of risk.
D) have greater liquidity.

25) Juan purchases automobile insurance. The insurance contract is a

A) financial instrument.
B) form of money.
C) transfer of risk from the insurance company to Juan.
D) financial intermediary.

26) The listed concepts relate most closely to which part of the financial system?

counterparty, asymmetric information, bank loans, options, mortgages, stock

A) types of money
B) financial instruments
C) financial markets
D) financial institutions

27) The listed concepts relate most closely to which part of the financial system?

risk sharing, centralized exchanges or markets, electronic communication networks, bid price, collateral, ask price

A) types of money
B) financial instruments
C) financial markets
D) financial institutions

28) The listed concepts relate most closely to which part of the financial system?

insurance companies, pension funds, securities firms, finance companies, direct finance, assets

A) types of money
B) financial instruments
C) financial markets
D) financial institutions

29) A bank is a financial intermediary that, at a fundamental level, facilitates borrowing and lending between which parties?

A) The bank’s depositors are lenders and the bank is the borrower.
B) People seeking loans from the bank are the borrowers while the bank is the lender.
C) The bank's depositors are the lenders, while those seeking loans from the bank are the borrowers.
D) Those seeking loans from the bank are the borrowers while the bank's stockholders are the lenders.

30) Financial instruments

A) are created to transfer risks that are difficult to predict.
B) are created to transfer risks that are relatively easy to predict.
C) require certainty of an event to be able to transfer risk.
D) eliminate the risk from uncertainty, they do not transfer it.

31) Which one of the following has contributed to the standardization of financial instruments?

A) rule of 70.
B) law of demand.
C) economies of scale.
D) law of supply.

32) More detailed financial instruments tend to be

A) less costly because all possible contingencies are covered.
B) more costly because they will cost more to create.
C) more desirable than less detailed ones, no matter what the price.
D) less costly because they can be standardized more easily.

33) Many financial instruments are standardized because

A) it is believed that most parties to a contract do not read them anyway.
B) complexity is costly, the more complex a contract, the more it costs to create.
C) the standardization of contracts makes them harder to understand.
D) it is required by the government.

34) A share of Ford Motor Company stock is an example of

A) a nonstandardized financial instrument.
B) a standardized financial instrument.
C) a debt-based financial instrument.
D) a financial instrument without risk.

35) A counterparty to a financial instrument is always the

A) issuer of the financial instrument.
B) government agency guaranteeing the value of the instrument.
C) person or institution that purchases the financial instrument.
D) person or institution that is on the other side of the financial contract.

36) Any entity on the other side of a financial transaction is

A) the counterparty.
B) the borrower.
C) assuming all of the risk.
D) responsible for providing full information.

37) The information concerning the issuer of a financial instrument

A) needs to be complete and closely monitored by the buyers of the instrument for change.
B) is somewhat non-standardized to minimize the cost of the instrument.
C) is usually standardized to the essential information required by the buyers.
D) is closely monitored by the buyers of these instruments for change.

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

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

39) Bond rating agencies rate bonds based on characteristics of the borrower. These agencies are an example of a financial market response designed to

A) increase information asymmetry.
B) decrease the real return to bondholders.
C) provide a lower cost solution to the high cost of information.
D) transfer risk from the buyer to the rating agency.

40) The better the information provided to financial markets, the

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

41) Financial markets enable the transfer of risk by

A) requiring that risk-averse investors have access to U.S. Treasury bond markets.
B) allowing individuals and firms less willing to bear risk to transfer risk to other individuals and firms more willing to bear risk.
C) making sure that higher default risk is offset by greater liquidity.
D) enabling even unsophisticated investors to purchase highly complex financial instruments.

42) If a borrower has information that is not available to a prospective lender, there is

A) a trading algorithm.
B) a transfer of risk.
C) information asymmetry.
D) liquidity risk.

43) Disability income insurance is insurance that

A) borrowers can take out in case the company they invest in defaults.
B) makes payments of wages to workers when the company they work for is disabled due to a natural disaster.
C) makes payments to workers when they are unable to work due to an injury.
D) is only available through the government as part of the Social Security System.

44) The owner of a small business applies for a bank loan and tells the loan officer that the funds will be used to expand inventory for the upcoming holiday season. The small business finds itself in need of additional funds to meet the monthly rent for the next quarter, and the owner uses the loan proceeds to pay the rent. This is an example of

A) liquidity risk.
B) default risk.
C) a lack of diversification for the bank.
D) information asymmetry.

45) A share of Microsoft stock would best be described as which one of the following?

A) a derivative instrument
B) a means of payment
C) an underlying instrument
D) a debt instrument

46) A derivative instrument

A) comes into existence after the underlying instrument is in default.
B) is a low-risk financial instrument used by highly risk-averse savers.
C) gets its value and payoff from the performance of the underlying instrument.
D) should be purchased prior to purchasing the underlying security.

47) A futures contract is an example of

A) a derivative instrument.
B) an instrument used solely by financial institutions.
C) a high-risk security that will only have value if certain events occur.
D) a contract that is traded but is not a financial instrument.

48) The primary use of derivative contracts is

A) for IRA and other pension plans since they only have value well into the future.
B) to shift risk among investors.
C) for investors seeking a greater return by taking greater risk.
D) to add to the profits an investor obtains through information asymmetry.

49) Considering the value of a financial instrument, the bigger the size of the promised payment the

A) less valuable the financial instrument because risk must be greater.
B) longer an investor has to wait for the payment.
C) more valuable the financial instrument.
D) greater the risk.

50) Considering the value of a financial instrument, the sooner the promised payment is made the

A) less valuable is the promise to make it since time is valuable.
B) greater the risk, therefore the promise has greater value.
C) more valuable is the promise to make it.
D) less relevant is the likelihood that the payment will be made.

51) Considering the value of a financial instrument, the more likely it is the payment will be made the

A) more valuable the financial instrument.
B) less valuable is the instrument because risk is lower.
C) less valuable is the financial instrument because it is highly liquid.
D) greater the uncertainty; therefore the less valuable is the financial instrument.

52) Considering the value of a financial instrument, the circumstances under which the payment is to be made influence the value because

A) we like uncertain payoffs because this adds to the return.
B) payments that are made when we need them the most are more valuable.
C) the sooner the payment is to be made the better.
D) we know when certain events are going to occur and that is when we want the payment.

53) The fundamental characteristics influencing the value of a financial instrument include each of the following except

A) the size of the payment promised.
B) when the promised payment will be made.
C) where the instrument is traded.
D) the likelihood of payment.

54) The value of a financial instrument rises as

A) the size of the payment promised decreases.
B) the promised payment is made sooner rather than later.
C) it is less likely the payment will be made.
D) the payments are made when the prospective investor needs them least.

55) Consider the price paid for debt issued by the State of California. Which one of the following would lead to a decrease in the value of State of California bonds?

A) The State of California bonds are in small dollar amounts.
B) The State of California bonds have a shorter maturity.
C) The State of California experiences a fiscal crisis that makes it less likely it will be able to honor its interest payments.
D) The State of California pays back its previous bonds ahead of schedule.

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

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

57) Financial instruments used primarily as stores of value wouldnot include

A) a car insurance policy.
B) a U.S. Treasury bond.
C) shares of General Motors stock.
D) a home mortgage.

58) Financial instruments used primarily to transfer risk would include all of the following,except

A) an insurance contract.
B) a futures contract.
C) options.
D) a bank loan.

59) Financial instruments used primarily to transfer risk wouldnot include

A) a bank loan.
B) options.
C) an insurance policy.
D) swaps.

60) Which type of financial instrument is used mainly to transfer risk?

A) asset-backed securities
B) bonds
C) options
D) stocks

61) Financial instruments used primarily as stores of value donot include

A) asset backed securities.
B) U.S. Treasury bonds.
C) a car insurance policy.
D) a bank loan.

62) Which one of the following is a familiar type of asset-backed security?

A) shares of stock in corporations
B) securities backed by home mortgages
C) U.S. Treasury bonds
D) movie box-office receipts

63) Financial markets contribute to all of the followingexcept which one?

A) elimination of risk
B) providing liquidity
C) pooling and communicating information
D) sharing of risk

64) If financial markets did not exist

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

65) The high volume of shares of stock that are traded on a normal day on stock markets reflects the

A) high transaction costs associated with these financial markets.
B) low transaction costs and high liquidity associated with these markets.
C) low transaction costs and low liquidity associated with these markets.
D) high transactions costs and low liquidity associated with these markets.

66) The pool of information collected by financial markets is usually

A) only available to lenders.
B) summarized in the form of a price.
C) valuable and not made available until the parties pay for it.
D) more than a borrower needs to make a loan.

67) Financial markets

A) enable buyers and sellers to exchange financial instruments but not risk.
B) enable buyers and sellers to exchange risk by buying and selling financial instruments.
C) allow the transfer of risk only through derivative securities.
D) do not allow for the transfer of risk but do help reduce it.

68) Commissions paid to a stock broker are an example of

A) risk transfer.
B) transaction costs.
C) information asymmetry.
D) liquidity.

69) Brokerage commissions

A) are set by government regulators so they cannot vary across firms for the same services.
B) can vary but typically don't because firms tend to set them at the same levels.
C) can differ reflecting the different services being offered.
D) are always a percentage of the amount of the trade.

70) A primary financial market is

A) a market just for corporate stocks.
B) a market only for AAA rated Securities.
C) the New York Stock Exchange.
D) one in which newly issued securities are sold.

71) A primary financial market is

A) located only in New York, London, and Tokyo but can handle transactions anywhere in the world.
B) one where the borrower obtains funds directly from the lender for newly issued securities.
C) a market where U.S. Treasury bonds are traded.
D) one that can only deal in the highest investment grade securities.

72) Newly issued U.S. Treasury Securities are sold

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

73) The figure shown here illustrates the flow of funds through financial institutions. The labels for the types of financial institutions and the major actors in this process are missing. Choose the option that identifies the correct labels for the types of financial institutions and where these labels go in the figure.

A) 1. Saver-Lenders and 3. Spender-Borrowers
B) 2. Spender-Borrowers and 4. Saver-Lenders
C) 1. those that act as Brokers and 3. those that transform Assets
D) 2. those that transform Assets and 4. those that act as Brokers

74) The figure shown here illustrates the flow of funds through financial institutions. The labels for the types of financial institutions and the major actors in this process are missing. Choose the option that identifies the correct labels for the major actors in this process and where these labels go in the figure.

A) 1. Saver-Lenders and 3. Spender-Borrowers
B) 2. Spender-Borrowers and 4. Saver-Lenders
C) 1. those that act as Brokers and 3. those that transform Assets
D) 2. those that transform Assets and 4. those that act as Brokers

75) The figure shown here illustrates the flow of funds through financial institutions. The labels for the types of financial institutions and the major actors in this process are missing. Consider the flows of funds and financial instruments in the figure. What is the difference between financial institutions that act as brokers and those that transform assets?

A) Broker institutions facilitate indirect finance while institutions that transform assets facilitate direct finance.
B) Broker institutions facilitate direct finance while institutions that transform assets facilitate indirect finance.
C) Broker institutions sell stocks, bonds, and insurance policies while institutions that transform assets sell real estate.
D) Broker institutions sell real estate while institutions that transform assets sell stocks, bonds, and insurance policies.

76) Most of the buying and selling in primary markets

A) is in the public view.
B) is highly transparent and closely monitored by the SEC.
C) involves an investment bank.
D) is done by the Federal Reserve.

77) Secondary financial markets

A) are financial markets for all financial instruments rated less than investment grade.
B) are financial markets where existing securities are bought and sold.
C) eliminate the transaction costs for buyers and sellers.
D) are only for stock.

78) A collection of assets is known as a(n)

A) asset-backed security.
B) derivative.
C) futures contract.
D) portfolio.

79) Which one of the following wouldnot be an example of a secondary financial market transaction?

A) You call a broker and purchase 100 shares of McDonald's Corp. stock.
B) You go to the bank and purchase a $5,000 certificate of deposit.
C) You call a broker and purchase a U.S. Treasury bond.
D) You call a broker and purchase a bond issued by General Motors.

80) Which one of the following is likely to be a primary financial market transaction?

A) You cash the check your grandmother sent you for your birthday.
B) You call a broker and purchase bonds for your retirement fund.
C) A city issues bonds to finance new road construction.
D) A supermarket needs to borrow the funds for a second location and takes out a loan from a commercial bank to pay for it.

81) An over-the-counter (OTC) market is

A) made up of dealers who only sell government bonds.
B) an example of a centralized market.
C) made up of dealer who buy and sell only for their own accounts.
D) made up of dealers who buy and sell for their customers and for their own accounts.

82) The New York Stock Exchange (NYSE) originated as

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

83) Over-the-counter (OTC) markets

A) employ specialists to minimize price volatility.
B) are centralized exchanges but you must be a dealer to be part of an exchange.
C) only deal in the stocks of companies with over $100 million in capital.
D) are networks of security dealers linked electronically.

84) Which one of the following isnot true of over-the-counter markets?

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

85) Equity markets are markets

A) of U.S. Treasury bonds.
B) for AAA rated bonds.
C) for stocks.
D) for either stocks or bonds.

86) Debt instruments that have maturities less than one year are traded in the

A) primary market exclusively.
B) bond markets exclusively.
C) bond market if they are already in existence.
D) money market.

87) Money markets are where trades occur for

A) stocks.
B) bonds of all maturities.
C) derivatives.
D) short-term bonds issued by both governments and private companies.

88) All of the following are examples of the types of problems that can exist when trading on decentralized electronic exchanges, except which one?

A) Customer orders are not executed quickly.
B) Not all bid and offer prices are available prior to the trade.
C) Systemic fragility and the presence of high frequency traders may reduce liquidity.
D) Trading algorithms can inadvertently lead to price volatility.

89) Well-run financial markets

A) keep transactions costs high to benefit brokers.
B) prevent the widespread pooling of information.
C) ensure that resources are allocated efficiently.
D) are usually the result of little or no government regulation.

90) Countries that lack well-defined property laws and legal structures

A) have large secondary financial markets because the primary markets do not exist.
B) will not develop as fast economically as counties with clear property rights and a formal legal system.
C) will have much lower transaction costs associated with any level of lending.
D) will not have any financial markets at all.

91) Financial institutions

A) raise the level of transaction costs relating to borrowing/lending.
B) can lower the information asymmetry involved with borrowing/lending.
C) decrease the liquidity to savers.
D) are required for all financial transactions.

92) An insurance company is an example of a financial institution that

A) transfers risk.
B) acts as a broker.
C) serves as a depository institution.
D) sells derivative securities.

93) All of the following are depository institutions, except

A) commercial banks.
B) credit unions.
C) insurance companies.
D) savings banks.

94) Which of the following are depository institutions?

A) credit unions
B) mutual funds
C) pension funds
D) insurance companies

95) Nondepository institutions

A) do not serve as intermediaries.
B) only serve as brokers.
C) only transform assets.
D) do not accept deposits.

96) Nondepository institutions would include all of the following except

A) finance companies.
B) pension funds.
C) insurance companies.
D) credit unions.

97) Small savers would rather use financial institutions than lend directly to borrowers because

A) financial institutions will offer the savers higher interest rates than the savers could obtain directly from borrowers.
B) lenders wouldn't want to deal with small savers.
C) it allows them to diversify risk.
D) the liquidity is lower with financial institutions but the return is higher.

98) Financial intermediaries pool funds of

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

99) Financial intermediaries handle a larger flow of funds than do primary markets mainly because financial intermediaries

A) have a government-provided monopoly.
B) have government-regulated prices, so there is little competition.
C) can lower transaction costs and increase liquidity for savers.
D) do not have to worry about information asymmetry.

100) Derivative markets exist to allow for

A) the transfer of risk.
B) direct transfers of common stocks for bonds.
C) cash receipts from the sale of bonds.
D) reduced information asymmetry.

101) Financial intermediaries include each of the following, except

A) the New York Stock Exchange.
B) credit unions.
C) savings banks.
D) commercial banks.

102) Which of the following is not considered to be a shadow bank?

A) credit unions
B) brokerages
C) insurers
D) money-market mutual funds

103) As the historical gap between direct and indirect finance has narrowed, the primary distinction between direct and indirect finance today is in who owns the underlying asset. In direct finance,

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

104) Derivatives would include all of the following except

A) options.
B) U.S. Treasury securities.
C) swaps.
D) futures.

105) Reasons for the rapid structural change in financial markets in recent years include all of the following except

A) globalization.
B) technological advances in computing.
C) technological advances in communication.
D) high real interest rates.

106) How are financial market development and economic growth related?

107) What are the four characteristics of a financial instrument?

108) Briefly explain one function of financial instruments that can make them very different from money.

109) Explain why most financial instruments are fairly complex, while at the same time quite standardized.

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

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

112) An annuity is a contract that makes monthly payments as long as someone lives. Explain why an individual would want to purchase such a contract. What risk is being transferred?

113) Why are options referred to as derivative instruments?

114) What are the four fundamental characteristics that determine the value of a financial instrument?

115) Ceteris paribus, how would each of the four fundamental characteristics that determine the value of a financial instrument need to change to increase the value of a financial instrument?

116) A high-school basketball player decides to bypass college and go right into the NBA (the National Basketball Association). Describe the risk the individual is taking and describe a contract that might transfer the risk.

117) Describe what is likely to happen to the average price of a share of stock if the stock markets decide to close every Friday and Monday to provide workers at the exchanges with longer weekends.

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

119) The primary business of Standard & Poor's is the selling of information to investors. Is this an example of a financial intermediary? Explain.

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

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

122) How do financial markets pool and communicate the information regarding issuers of financial instruments in a convenient way?

123) Can a financial instrument be bought and sold in both a primary and secondary financial market? Explain.

124) What is the primary distinction between debt/equity markets and derivative markets?

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

126) What is the primary distinction between debt/equity markets and derivative markets?

127) What are some of the advantages of trading in decentralized electronic exchanges?

128) Why has the pace of structural change in financial markets accelerated in recent years?

129) What are some of the advantages of trading in decentralized electronic exchanges?

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