INTRODUCTION TO FINANCE

TRUE-FALSE QUESTIONS

1. All money market instruments are short-term debt

2. Commercial paper is more likely to be placed directly by large finance companies.

3. Bankers' acceptances are used primarily for financing international trade.

4. Eurodollars are dollar denominated, foreign-owned deposits in U.S. banks.

5. Capital market securities have better liquidity than money market securities.

6. Both governments and businesses issue both debt and equity capital market securities

7. Households are the main providers of funds

8. A financial market is a market in which financial assets can be purchased or sold.

9. Financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are
known as capital markets, while those that facilitate the flow of long-term funds are known as money
markets.

10. Primary markets facilitate the trading of existing securities.

11. Bonds are long-term debt obligations issued by corporations and government agencies to support their
operations.

12. Long-term debt securities tend to have lower risk but a higher return than money market securities.

13. Derivative securities are financial contracts whose values are derived from the values of underlying
assets.

14. The price of a bond is the present value of future payments discounted at the coupon rate.

15. If the coupon rate equals the market rate, a bond is likely to be selling at a discount.

16. The coupon rate varies inversely with bond prices.

MULTIPLE CHOICE QUESTIONS

1. Which of the following is not a characteristic of money market instruments?

a. short-term to maturity b. low default risk

c. small denomination d. high marketability

2. Which of the following money market instruments would typically be used in international
transactions?

a. a Treasury bill. b. a banker's acceptance

c. commercial paper d. a negotiable CD

3. The money market security represented by the largest dollar amount outstanding is

a. commercial paper .b. repurchase agreement

c. negotiable CDs. d. Treasury bills.

4. Calculate the T-Bill discount of a $100,000 face value T-bill priced at $97,500, maturing in 181 days is

a. 4.84%

b. 4.97%

c. 5.10%

d. 5.17%

5. A bank agrees to buy T-bills from a securities dealer for $997,250, and promises to sell the securities
back to the dealer in 4 days for $997,575. The yield on this reverse repo for the bank is:

a. 2.97%

b. 2.91%

c. 2.86%

d. 2.93%

6. A repurchase agreement calls for

a. a firm to first sell securities with the agreement to buy them back in a short period at a higher price.

b. a firm to first buy securities with the agreement to sell them back in a short period at a higher price.

c. a firm to first sell securities with the agreement to buy them back in a short period at a lower price

d. a firm to first buy securities with the agreement to sell them back in a short period at a lower price.

7. Which of the following is not an example of capital market securities?

a. common stocks

b. convertible bonds

c. commercial paper
 d. mortgages

8. Which security below did the market view as having the greatest default risk?

a. 90-day Treasury securities

b. 180-day Treasury securities

c. 10-year Treasury securities

d. 90-day Commercial paper

9. Bond A is not callable; bond B is callable. Investors will want a higher yield on bond __ and will pay
____ for the bond.

a. A; less

b. A; more

c. B; less

d. B; more

10. Financial markets

a. facilitate the flow of funds from deficit to surplus units.

b. facilitate the flow of funds from surplus to deficit units.

c. are markets in which financial assets such as stocks and bonds can be purchased and sold.

d. None of the above

e. Only answers b and c are correct.

11. Financial markets facilitating the flow of short-term funds with maturities of less than one year are
known as

a. money markets.

b. capital markets.

c. primary markets.

d. secondary markets.

12. Financial markets facilitating the trading of existing securities are known as

a. money markets.

b. capital markets.
 c. primary markets.

d. secondary markets.

e. none of the above.

13. Which of the following transactions would not be considered a secondary market transaction?

a. An individual investor purchases some existing shares of IBM stock through his broker.

b. An institutional investor sells some Disney stock through his broker.

c. Microsoft issues new shares of common stock using its investment bank.

d. All of the above would occur in the secondary market.

14. According to your text, which of the following is not considered a money market security?

a. Treasury bills

b. Treasury notes

c. retail CD

d. banker’s acceptance

e. commercial paper

15. ________________ are not considered capital market securities.

a. Repurchase agreements

b. Municipal bonds

c. Corporate bonds

d. Equity securities

16. ____________ are long-term debt obligations issued by corporations and government agencies to
support their operations.

a. Common stock

b. Derivative securities

c. Bonds

d. None of the above

17. Long-term debt securities tend to have a ___________ expected return and _________ risk than
money market securities.
 a. lower; lower

b. lower; higher

c. higher; lower

d. higher; higher

18. Which of the following statements is true?

a. Bond prices and interest rates move together.

b. Coupon rates are fixed at the time of issue.

c. The higher the coupon, the lower the price of a bond.

d. All of the above

19. When a bond's coupon rate is equal to the market rate of interest, the bond will sell for

a. a discount. b. a premium. c. par. d. a variable rate.

20. A bond currently selling at a premium price above face value

a. has a yield equal to its coupon rate.

b. has a yield below its coupon rate.

c. has a yield above its coupon rate.

d. has no risk.

21. If market interest rates fall after a bond is issued, the

a. face value of the bond increases.

b. investor will sell the bond.

c. market value of the bond is increasing.

d. market value of the bond is decreasing

22. What is the price of a $1,000 face value bond with a 10% coupon if the market rate is 10%?

a. more than $1,000 b. $1,000 c. less than $1,000 d. cannot ascertain

23. A standardized, exchange-backed contract to deliver assets 3 months from today is a:

a. forward contract. b. securitized asset. c. futures contract. d. option contract.

24. A conditional contract granting its holder the right to buy assets in the future is a:

a. put. b. forward contract. c. futures contract. d. call.