All the following statements concerning a financial asset are correct, EXCEPT: (RM 26)
B. It provides a continuing stream of services to its owner, as would any material asset.
A financial asset, like stocks, bonds, or money, is a claim against the issuer. As such, it is a way to store up value. Unlike a physical asset such as a house or car, financial assets do not provide a continuing stream of services to their owners.
All the following statements concerning balance sheets are correct, EXCEPT:
(RM 28)
A. A balance sheet showing liabilities but no assets is the result of internal financing to acquire net worth.
In a balance sheet, liabilities and net worth items show where the funds came from in order to acquire assets, and the assets reflect how those funds have been used. Since all funds raised are used in some fashion, the balance sheet must balance. The sum of the uses of funds (assets) must equal the sum of the sources (liabilities and net worth).
All the following are examples of internal financing, EXCEPT:
(RM 28-29)
D. A firm issues bonds to buy a new plant.
The issuance of bonds represents external financing. The other three sources are examples of internal financing.
Which of the following statements concerning the balance sheet effects of external financing of the purchase of an asset is (are) correct?
(RM 29-30)
I The total value of assets will rise.
II The total value of the sum of liabilities and net worth will rise.
C. Both I and II
Assume that the balance sheet originally shows assets of $100, liabilities of $70, and net worth of $30. If $10 of additional assets are obtained entirely through external financing (for example, a bank loan), assets will rise to $110, liabilities will rise to $80, and net worth will remain at $30.
All the following statements concerning assets and liabilities are correct, EXCEPT:
(RM 31-33)
B. A society’s total financial liabilities must be equal to net worth.
Every financial liability is a financial asset to someone else.If there is any net worth on a balance sheet, it must be represented by real assets of the same amount.Financial liabilities must equal financial assets on the balance sheet of a financial system.
Which of the following statements concerning the effects of creating financial assets and liabilities is (are) correct?
(RM 31-33)
I The economy has more productive real assets because the financial system creates paper assets and liabilities to channel savings to investors who acquire the real assets.
II Since financial assets and liabilities are created in matching amounts, any increase in total assets is offset by an increase in total liabilities, and the economy as a whole is not improved or harmed.
A. I only
I is correct because the creation of financial assets and liabilities expands economic output by channeling funds from savers to those who invest in inventories, equipment, and other capital goods. II is incorrect. Part of the increase in total assets will be in the form of increased real assets, which reflect an increase in the net worth of the financial system.
All the following are real assets, EXCEPT:
(RM 31-33)
A. Loans to the government
Machinery and equipment, inventories, and infrastructure components like roads and bridges all are real assets. Loans to the government are financial assets of the lenders and financial liabilities of the government.
All the following statements concerning a deficit-budget unit are correct, EXCEPT:
(RM 34)
B. It is a supplier, or net lender or investor, of funds.
Because a deficit budget unit has current receipts that are lower than its current expenditures, it is a net demander or borrower of funds. The deficit may be financed by selling off some of the financial assets owned by the budget deficit unit or by raising new funds through the issuance of stock or debt instruments.
All the following statements concerning a surplus-budget unit are correct, EXCEPT:
(RM 34)
C. It is a net borrower of funds, which are the source of its surplus.
Because a surplus budget unit has more current receipts than expenditures, it can acquire additional financial assets or retire some of its outstanding stock or debt. Thus, it is a net supplier, lender, or investor of funds.
All the following are functions of money, EXCEPT:
(RM 37-38)
B. Consumption good
Money is not a consumption good but, because of the function it performs, it can be used to acquire consumption goods now or in the future.
Which of the following is viewed as the perfectly liquid asset in the financial system?
(RM 39)
D. Money
Which of the following statements concerning direct and semi-direct finance is (are) correct? (RM 41-42)
I In direct finance, borrowers and lenders exchange funds for primary securities because, despite the costs of information, there is a coincidence of their wants.
II In semi-direct finance, brokers and dealers bring securities buyers and sellers together, may split primary securities issues into smaller units, and increase liquidity through roles in secondary markets.
C. Both I and II
Direct finance involves interaction between a borrower and a lender without any intermediary. In semi-direct finance, brokers and dealers bring borrowers and lenders together. Unlike indirect finance, however, the broker or dealer in semi-direct finance does not issue securities of its own.
Which of the following statements concerning indirect finance is (are) correct?
(RM 43)
I Financial intermediaries issue secondary securities to ultimate lenders and accept primary securities from borrowers, to satisfy both deficit-budget and surplus-budget units.
II As compared to primary securities, secondary securities generally have greater risk of default, are less liquid, and are available only in larger denominations.
A. I only
In direct finance the intermediary, such as a bank, issues its own secondary securities, such as a CD, to lenders. It also accepts primary securities, such as a promissory note, from borrowers. The bank’s secondary securities generally are safe, liquid, and available in a variety of denominations.
All the following are secondary securities, EXCEPT: (RM 43)
D. Home mortgages
A home mortgage is a primary security given by a borrower to a lending institution.
All the following engage in indirect finance, EXCEPT: (RM 43-44)
D. Securities brokers
Securities brokers engage in semi-direct finance.
Which of the following is the most important type of financial institution as measured by total assets?
(RM 45-46)
C. Commercial banks
As of 2009, for example, total assets of commercial banks were slightly above $14 trillion. More than twice that of investment companies and three times that of life insurance companies.
Which of the following statements concerning the classification of financial intermediaries is (are) correct?
(RM 46)
I Depository, contractual, and investment institutions make different portfolio decisions on uses of funds.
II Depository, contractual, and investment institutions have different sources of funds.
C. Both I and II
Both the sources from which they derive their funds and the types of assets in which they invest differ for the three types of financial intermediaries.
Which of the following combinations would be considered collectively to be an external factor in the portfolio decisions of financial institutions?
(RM 46-47)
C. Competition and regulation of markets
The others are internal factors in the portfolio decisions of financial institutions.
Which of the following statements concerning portfolio decisions of financial institutions is (are) correct?
(RM 46-47)
I Managers use the hedging principle to try to match the maturity of their liabilities to the maturity of their assets.
II Managers selecting assets may take greater risks in order to maximize the rate of return.
C. Both I and II
The hedging principle is the approximate matching of the maturity of a financial institution’s assets and liabilities. Generally, the institution must take greater risks in order to earn greater returns on its invested assets.
All the following statements concerning the portfolio decisions of financial intermediaries are correct, EXCEPT:
(RM 46-47)
B. Portfolio diversification in uses and sources of funds tends to increase overall risk.
Diversification of the portfolio tends to reduce risk, not to increase it.
Which of the following statements concerning disintermediation is (are) correct?
(RM 47-48)
I It involves removing funds from financial intermediaries by investors seeking higher returns from other securities.
II It is a shift of funds from direct finance to indirect finance, a move that must reduce the total flow of credit in the financial system.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
A. I only
II is incorrect because disintermediation is a shift of financing activities away from financial institutions and toward direct finance.
Which of the following statements concerning bank-dominated and market-dominated financial systems is correct?
(RM 48-49)
C. Market-dominated systems tend to develop where growing numbers of borrowers sell securities in the open market.
Market-dominated systems tend to appear where markets for stocks and bonds are more developed and when growing numbers of borrowers sell securities in the open market. Market-dominated systems require greater rights and protections for small investors. If the protections are lacking, bank-dominated systems tend to remain. Early financial systems are bank-dominated and market-dominated systems arise when financial sophistication grows.
