FINANCE 101Self-Test Questions

forMidterm #1

Most security transactions take place in the primary market True False

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Correct!

That’s right, most security transactions occur in the secondary market.

Financial intermediation involves borrowers issuing securities directly to lenders

True False

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Correct!

With financial intermediation, borrowers issue securities to intermediaries who transform them into a different type of security to issue to the lender

Inflation is defined as an overall increase in the aggregate price level True False

Correct!

Inflation is measured by the change in a price index that is based on a broad sample of goods and services. To the extent that these goods and services are representative of all transactions in the economy, their (weighted) average change in price represents the overall change of prices in the economy.

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Buying shares in a mutual fund is an example of direct finance True False

Correct!

Mutual funds are intermediaries and thus are involved in “indirect” finance. Mutual funds provide diversification and denomination transformation for small investors.

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Liquidity refers to your ability to convert a security to cash very quickly

True False

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Liquidity refers to the ability to convert to cash quickly AT CLOSE TO THE MARKET PRICE. Thus, the statement is only half right.

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Credit cards are widely accepted and easy to use. Thus, the credit limit you have is considered to be money

True False

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Correct!

The definition of money also requires that the use of money requires no further obligation from the buyer or seller. When you charge a good or service on your credit card, you have created a security that is a liability to you and an asset to the bank. You still have the obligation to pay the bank.

Amazon.com issued $1.25 billion of convertible debt with a ten-year maturity earlier this year. Which phrase best characterizes this issue?

Money market issue in the primary market Capital market issue in the secondary market Capital market issue in the primary market Money market issue in the secondary market

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Because the original maturity of this issue is in excess of one year it is considered to be a capital market issue. New issues of securities take place in the primary market.

Congratulations!

You have successfully completed Self-Test #1