Chapter 2: The Financial System and the Level of Interest Rates

Savings by ______ is small dollar amounts in the origin of much of the money that funds bussines loans in an economy

Household

A financial system’s primary function is funneling money from

lender-savers to borrow-spenders

An important function of the financial system is:

To direct money to the best investment opportunities in the economy

The role of the financial system is to gather money from people, businesses and government that have funds to invest and to channel that money to those who need it

True

Underwriting is th eprocess by which an investment banker

Helps a company sell its new security issue

Which of the following statements is incorrect?

The retail individual investor is a common direct participant in the direct financial markets

Direct financing occurs when:

a borrower-spender borrows directly from a lender-savers

Major buyers and sellers of securities in direct financial markets include commerical banks, large corporations, the federal government, hedge funds, and some wealthy individuals

True

Direct financial markets could be broadly labeled as wholesale markets for funding

True

A primary market is a market for

companies to sell new securities directly to investors

Money Markets are markets where

short-term financial instruments are traded

Which of the following transactions is a secondary market transaction?

Johny Appleseed buying 1,000 shares of Dell through NYSE

The ease with which a security can be sold and converted to cash is called

marketability

Companies receive funds when their securtites are sold by and investor in a secondary market.

False

The nominal rate of interest is comprised of

The Real Interest Rate and a commodity cross-index return

According to the FIsher equation, if the real rate of interest is 2.5% and the nominal rate of interest is 5.3%, the rate of inflation is forecast to be approximately

2.8%

If your investment increased by 12% this year and inflation for that period was 4%, what was your real rate of return? Please use the simplified (or approximate) Fisher equation for this equation.

8.0%

You loaned $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. How much did the purchasing power of your money change( an increase is positive and a decrease is negative)?

increased by 1 percent

Which of the following is a financial institution involved in indirect financing in a financial system?

Commercial banks

The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called:

Financial intermediation

The major players in the direct financial markets are:

Both investment banks and money center banks

If a firm needs to finance a new corporate headquarters building, then it would most likely seek the funds in the:

Capital market

If your firm obtains most of its financing from commercial banks, then it primarily accesses the capital markets through:

Indirect financing