N1577
Principles of Banking
Seminar 1. Essentials Concepts in Banking
Questions 1-28: Choose the correct answer to each question.
1) Financial markets promote economic efficiency by
A) channeling funds from investors to savers.
B) creating inflation.
C) channeling funds from savers to investors.
D) reducing investment.
2) Well-functioning financial markets promote
A) inflation.
B) deflation.
C) unemployment.
D) growth.
3) Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called
A) commodity markets.
B) fund-available markets.
C) derivative exchange markets.
D) financial markets.
4) The process of indirect finance using financial intermediaries is called
A) direct lending.
B) financial intermediation.
C) resource allocation.
D) financial liquidation.
5) Which of the following can be described as direct finance?
A) You take out a mortgage from your local bank.
B) You borrow $2500 from a friend.
C) You buy shares of common stock in the secondary market.
D) You buy shares in a mutual fund.
6) Which of the following can be described as involving direct finance?
A) A corporation takes out loans from a bank.
B) People buy shares in a mutual fund.
C) A corporation buys a short-term corporate security in a secondary market.
D) People buy shares of common stock in the primary markets.
7) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
8) Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is
A) $400.
B) $201.
C) $200.
D) $199.
9) You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is
A) 25%.
B) 12.5%.
C) 10%.
D) 5%.
10) Securities are for the person who buys them, but are for the individual
or firm that issues them.
A) assets; liabilities
B) liabilities; assets
C) negotiable; nonnegotiable
D) nonnegotiable; negotiable
11) When an investment bank securities, it guarantees a price for a corporation's
securities and then sells them to the public.
A) underwrites
B) undertakes
C) overwrites
D) overtakes
12) Secondary markets make financial instruments more
A) solid.
B) vapid.
C) liquid.
D) risky.
13) A liquid asset is
A) an asset that can easily and quickly be sold to raise cash.
B) a share of an ocean resort.
C) difficult to resell.
D) always sold in an over-the-counter market.
14) When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n)
A) exchange.
B) over-the-counter market.
C) common market.
D) barter market.
15) A financial market in which only short-term debt instruments are traded is called the market.
A) bond
B) money
C) capital
D) stock
16) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called
A) commercial paper.
B) a certificate of deposit.
C) a municipal bond.
D) federal funds.
17) A short-term debt instrument issued by well-known corporations is called
A) commercial paper.
B) corporate bonds.
C) municipal bonds.
D) commercial mortgages.
18) Which of the following financial intermediaries is NOT a depository institution?
A) a savings and loan association
B) a commercial bank
C) a credit union
D) a finance company
19) The primary liabilities of depository institutions are
A) premiums from policies.
B) shares.
C) deposits.
D) bonds.
20) institutions are financial intermediaries that acquire funds at periodic intervals
on a contractual basis.
A) Investment
B) Contractual savings
C) Thrift
D) Depository
21) Which of the following is a contractual savings institution?
A) a life insurance company
B) a credit union
C) a savings and loan association
D) a mutual fund
22) Banks, savings and loan associations, mutual savings banks, and credit unions
A) are no longer important players in financial intermediation.
B) since deregulation now provide services only to small depositors.
C) have been adept at innovating in response to changes in the regulatory environment.
D) produce nothing of value and are therefore a drain on society's resources.
23) The time and money spent in carrying out financial transactions are called
A) economies of scale.
B) financial intermediation.
C) liquidity services.
D) transaction costs.
24) Reducing risk through the purchase of assets whose returns do not always move together is
A) diversification.
B) intermediation.
C) intervention.
D) discounting.
25) Banks can lower the cost of information production by applying one information resource to many different services. This process is called
A) economies of scale.
B) asset transformation.
C) economies of scope.
D) asymmetric information.
26) The Bank, N.A. accepts deposits from thousands of individuals and lends that money to (among others) the Stillwater Body Shop to expand their work bays. Which of the following roles is the bank performing?
A) The intermediation role.
B) The payment role.
C) The risk management role.
D) The guarantor role.
27) A financial crisis is
A) not possible in the modern financial environment.
B) a major disruption in the financial markets.
C) a feature of developing economies only.
D) typically followed by an economic boom.
28) The primary purpose of deposit insurance is to
A) improve the flow of information to investors.
B) prevent banking panics.
C) protect bank shareholders against losses.
D) protect bank employees from unemployment.
29) Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market?
30) Discuss how banks create money.
31) Critically discuss relationship banking and transactional banking.