Question 1

A bank allows us to diversify risk because it has a:

Accepted Answer

A)   big pool of borrowers and savers, so the risk of repayment is spread among many.
B)   small amount of borrowers, but many savers, so it can combine savings to make larger loans.
C)   small amount of borrowers and savers, so it can connect the optimal saver to the best-matched borrower.
D)   big pool of borrowers, but not many savers, so it can choose the riskiest person to borrow from.E) B) and C)
F) A) and B)

Question 2

Crowding out is reduction in:

Accepted Answer

A)   private borrowing that is caused by an increase in government borrowing.
B)   government borrowing that is caused by an increase in private borrowing.
C)   private borrowing that is caused by an increase in corporate borrowing.
D)   corporate borrowing that is caused by an increase in private borrowing.E) A) and B)
F) B) and D)

Question 3

The less liquid markets are the:

Accepted Answer

A)   less willing people are to save, and the higher the interest rates.
B)   more willing people are to save and the higher the interest rates.
C)   less willing people are to save, and the lower the interest rates.
D)   more willing people are to save, and the lower the interest rates.E) A) and B)
F) None of the above

Question 4

The financial system:

Accepted Answer

A)   brings together savers and borrowers in a set of interconnected markets where people trade a variety of financial products.
B)   connects the government to those truly in need of public services.
C)   is used to help individuals keep track of the general price level.
D)   gathers information about the economy in an effort to inform the public.E) B) and C)
F) A) and C)

Question 5

A company's net present value:

Accepted Answer

A)   is the current value of the company's expected future cash flows.
B)   is a measure of the book value of that company.
C)   tells you the "correct" price of shares in the company.
D)   adds up the value of all the assets a company currently owns.E) B) and C)
F) None of the above

Question 6

Information asymmetries are defined to be when:

Accepted Answer

A)   one party to a transaction has more information that another.
B)   information isn't readily available to anyone.
C)   both sides to a transaction have equal information.
D)   one party withholds information from the other party.E) C) and D)
F) B) and D)

Question 7

Which of the following financial assets is most likely to have the chance of a higher rate of return than the others?

Accepted Answer

A)   Stocks
B)   Bonds
C)   Mutual funds
D)   Savings accountsE) B) and D)
F) None of the above

Question 8

Idiosyncratic risk:

Accepted Answer

A)   can not be eliminated through diversification.
B)   is unique to a particular company or asset.
C)   is not generally absent from index funds.
D)   All of these are true.E) A) and B)
F) A) and D)

Question 9

A stock is:

Accepted Answer

A)   a financial asset that represents partial ownership of a company.
B)   a payment made periodically to all shareholders of a company.
C)   an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest.
D)   a promise by the bond issuer to repay the loan, at a specified maturity date, and to pay periodic interest at a specific percentage rate.E) A) and D)
F) A) and C)

Question 10

The more liquid markets are the:

Accepted Answer

A)   lower the interest rates, and the higher the amount of investment.
B)   lower the interest rates, and the lower the amount of investment.
C)   higher the interest rates, and the higher the amount of investment.
D)   higher the interest rates, and the lower the amount of investment.E) A) and B)
F) None of the above

Question 11

The difference between the risk-free rate and the interest rate a particular investor has to pay is called the:

Accepted Answer

A)   credit spread.
B)   risk premium.
C)   Both of these are true.
D)   Neither of these is true.E) A) and D)
F) B) and C)

Question 12

The supply of loanable funds comes from all the following, but:

Accepted Answer

A)   businesses.
B)   individuals.
C)   government.
D)   borrowers.E) B) and D)
F) C) and D)

Question 13

If Jen takes out a $2,000 loan for one year at 10 percent interest annually, the price she will pay for borrowing is:

Accepted Answer

A)   $2,000.
B)   $2,200.
C)   $200.
D)   $2,400.E) B) and C)
F) B) and D)

Question 14

The reduction in private borrowing that is caused by an increase in government borrowing is called:

Accepted Answer

A)   the crowding out effect.
B)   surplus investment.
C)   the dissaving effect.
D)   the savings effect.E) C) and D)
F) None of the above

Question 15

Banks act as:

Accepted Answer

A)   an organizer among firms in a specific market.
B)   intermediaries between borrowers and savers.
C)   informants to various buyers about prices and contracts.
D)   a negotiator for buyers.E) A) and B)
F) A) and C)

Question 16

Liquidity is:

Accepted Answer

A)   a measure of how easily a particular asset can be converted quickly to cash without much loss of value.
B)   the speed with which dollars are spent in the economy.
C)   the speed with which physical dollars change hands in the economy.
D)   the magnitude of change in the money supply as controlled by the Fed.E) None of the above
F) All of the above

Question 17

In a closed economy, income equals:

Accepted Answer

A)   consumption plus net exports.
B)   consumption plus savings.
C)   consumption minus savings.
D)   savings plus investment.E) A) and B)
F) A) and C)

Question 18

Net capital outflow measures how many capital goods are:

Accepted Answer

A)   exported from a country.
B)   exported minus how many are imported to a country.
C)   imported from a country.
D)   imported to a country minus exported from a country.E) A) and B)
F) B) and D)

Question 19

Historically, government bonds have averaged a real return of about ____ percent, while a broad index of stocks generates a _______ percent return over the same period.

Accepted Answer

A)   2; 7
B)   7; 2
C)   7; 12
D)   12; 7E) All of the above
F) A) and B)

Question 20

If an asset cannot be sold quickly for cash without much loss of value, it is called:

Accepted Answer

A)   illiquid.
B)   liquid.
C)   durable.
D)   fixed.E) All of the above
F) B) and C)

Exam 14: The Basics of Finance

Crowding out is reduction in:

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Which of the following financial assets is most likely to have the chance of a higher rate of return than the others?

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The difference between the risk-free rate and the interest rate a particular investor has to pay is called the:

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A stock is:

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If Jen takes out a $2,000 loan for one year at 10 percent interest annually, the price she will pay for borrowing is:

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The less liquid markets are the:

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In a closed economy, income equals:

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The supply of loanable funds comes from all the following, but:

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A bank allows us to diversify risk because it has a:

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Net capital outflow measures how many capital goods are:

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The financial system:

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Information asymmetries are defined to be when:

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The reduction in private borrowing that is caused by an increase in government borrowing is called:

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Liquidity is:

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Banks act as:

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Historically, government bonds have averaged a real return of about ____ percent, while a broad index of stocks generates a _______ percent return over the same period.

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The more liquid markets are the:

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A company's net present value:

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If an asset cannot be sold quickly for cash without much loss of value, it is called:

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Idiosyncratic risk:

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Historically, government bonds have averaged a real return of about percent, while a broad index of stocks generates a ___ percent return over the same period.

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