Chapter 7

The Financial System and Interest

1. An efficient capital market is said to be one in which

the

amoun

t of m

oney

..

info

rmat

ion

trave

ls q

...

eac

h per

son in

a s

oci...

the

cost

of f

unds

in th

...

25% 25%25%25%a. the amount of money in the market allows for firms to grow as needed.

b. information travels quickly, so is impossible to find a bargain.

c. each person in a society has the right to invest in financial markets.

d. the cost of funds in the financial market is low.

2. Which of the following statements is correct about interest rate components?

The

inte

rest

rate

incl

...

The

base

rate

incl

ude...

The

risk

prem

ium

con...

None

of the

abo

ve

25% 25%25%25%a. The interest rate includes a base rate minus a risk premium

b. The base rate includes pure interest rate plus an inflation adjustment

c. The risk premium consists of financial risk, liquidity risk, and maturity risk

d. None of the above

3. The belief that investors require a higher return to entice them into holding long-term

securities is called:

exp

ecta

tions

theo

ry

mar

ket s

egm

enta

tion...

liquid

ity p

refe

rence

t...

None

of the

abo

ve

25% 25%25%25%a. expectations theory

b. market segmentation theory

c. liquidity preference theory

d. None of the above

4. All of the following are advantages of going public except:

mor

e fu

nds ar

e av

aila

...

the

fact

that

a c

ompa

..

the

firm

pro

vide

s m

or...

the

firm

may

bec

ome

...

25% 25%25%25%a. more funds are available to publicly traded firms

b. the fact that a company is public helps in bank negotiations and marketing

c. the firm provides more information to the public about its business

d. the firm may become active in mergers and acquisitions

5. The financial market that trades in short-term, high-quality debt securities is called the:

cap

ital m

arke

t

prim

ary

mar

ket

deb

t mar

ket

mon

ey m

arke

t

25% 25%25%25%

a. capital market

b. primary market

c. debt market

d. money market

6. Which of the following is not associated with stock exchanges?

list

ing

spec

ialis

t

ove

r-the-

counte

r tra

ding

bro

ker

25% 25%25%25%a. listing

b. specialist

c. over-the-counter trading

d. broker

7. When the level of interest rates is rising significantly, share prices are usually

risi

ng alo

ng with

inte

r...

not r

elat

ed to

move

m...

falli

ng to

alig

n shar

e ...

None

of the

abo

ve.

25% 25%25%25%a. rising along with interest rates.

b. not related to movements in interest rates.

c. falling to align share returns with higher yields in financial markets.

d. None of the above.

8. The interest rate on new bonds would probably increase with

hig

her d

efau

lt ris

k pr..

.

incr

ease

d exp

ecte

d in...

a d

eclin

e in

the

numb..

all

of th

e ab

ove.

25% 25%25%25%a. higher default risk premiums caused by a few failing firms in the industry.

b. increased expected inflation over the next year.

c. a decline in the number of dealers and brokers who will trade a security.

d. all of the above.

9. An upward sloping yield curve is an indication of investor expectations of

a c

omin

g rece

ssio

n.

dec

reas

ing in

tere

st ra

..

incr

easi

ng sh

are

prices

.

incr

easi

ng in

tere

st ra

..

25% 25%25%25%a. a coming recession.

b. decreasing interest rate levels.

c. increasing share prices.

d. increasing interest rate levels.

10. The over-the-counter market:

trad

es m

ainly

shar

es...

is a

net

work

of d

eal..

.

is c

alle

d NASDAQ in

...

(a),

(b),

and

(c) a

re c

o...

25% 25%25%25%a. trades mainly shares of smaller corporations

b. is a network of dealers matching orders from buyers and sellers of securities

c. is called NASDAQ in the US

d. (a), (b), and (c) are correct

11. If an investor sold a 9-year bond to another investor, that sale would take place in the:

prim

ary

capita

l mar

ket

prim

ary

mone

y m

arke

t

sec

ondary

cap

ital m

a...

sec

ondary

money

m...

25% 25%25%25%a. primary capital market

b. primary money market

c. secondary capital market

d. secondary money market

12. In the Canadian economy as a whole, what is the relationship between the level of saving for any year, to the level of investing for that same year?

Sav

ing m

ust b

e eq

ual..

.

Sav

ing m

ust b

e gre

at..

Sav

ing is

unre

late

d to...

Sav

ing m

ust b

e le

ss ..

.

25% 25%25%25%a. Saving must be equal to investing.

b. Saving must be greater than investing.

c. Saving is unrelated to investing.

d. Saving must be less than investing.

13. If ABC Corp wishes to "go public" they must:

rece

ive

appr

oval

of .

..

offe

r shar

es to

the

pu...

pre

pare

a "p

ublic h

ot ..

.

none

of the

abov

e

25% 25%25%25%a. receive approval of the CIPO

b. offer shares to the public in an IPO

c. prepare a "public hot file" and file it with the Canada Revenue Agency

d. none of the above

14. ABC Corp's preliminary prospectus could also be called a(n):

regi

stra

tion

stat

emen

t

deb

entu

re

inde

nture

red

herrin

g

25% 25%25%25%a. registration statement

b. debenture

c. indenture

d. red herring

15. If your job on the exchange floor is to supervise trading in a share and ensure that the marked remains orderly, you are a(n):

spec

ialis

t

sec

urity

anal

yst

floor b

roke

r

inst

itutio

nal b

roke

r

25% 25%25%25%a. specialist

b. security analyst

c. floor broker

d. institutional broker

16. The date when the principal of ABC Corp's bonds is due to be paid off is the bond

rede

mptio

n dat

e.

cal

l dat

e.

mat

urity

date.

ex

offic

io d

ate.

25% 25%25%25%a. redemption date.

b. call date.

c. maturity date.

d. ex officio date.

17. Which of the following is the best definition of interest?

Inte

rest

is th

e re

turn

..

Inte

rest

is th

e re

turn

..

Inte

rest

is th

e re

turn

..

Inte

rest

is th

e 1-

year

r...

25% 25%25%25%a. Interest is the return on all investments.

b. Interest is the return on debt investments.

c. Interest is the return on equity investments.

d. Interest is the 1-year return on investments in shares.

18. If economists forecast that inflation rates for the next 4 years will be 1.5%, 2%, 3%, and 5% respectively,

expectations theory says that the yield curve should slope:

downw

ard

to th

e le

ft

downw

ard

to th

e rig

ht

upwar

d to

the

left

upwar

d to

the

right

25% 25%25%25%a. downward to the left

b. downward to the right

c. upward to the left

d. upward to the right

19. Inflation is expected to be 2.5% for each of the next two years, and 3.5% per year for the three years after. The inflation adjustment (INFL) on a 5-year loan would be:

3.80

%3.

50%

3.30

%3.

10%

25% 25%25%25%a. 3.8%

b. 3.5%

c. 3.3%

d. 3.1%

20. The yield on ABC Corp's 10-year corporate bond is 15%. The yield on 90-day treasury bills is 8% while 10-year

Government of Canada bonds yield 12%. What is the default risk premium on ABC Corp's corporate bond?

4% 3% 2% 1%

25% 25%25%25%a. 4%

b. 3%

c. 2%

d. 1%