Question 1

The measure of how easily a particular asset can be converted quickly to cash without much loss of value is called:

Accepted Answer

A)   liquidity.
B)   risk.
C)   intermediation.
D)   default line.E) All of the above
F) B) and C)

Question 2

If Nate takes out a $5,000 loan for one year at 10 percent annual interest, the principal is:

Accepted Answer

A)   $5,000.
B)   $5,500.
C)   $500.
D)   $1000.E) C) and D)
F) A) and D)

Question 3

Adverse selection refers to when:

Accepted Answer

A)   one party to a transaction has more information than the other and this results in a bargaining dispute.
B)   one party selects the wrong strategy and they are displeased with their selection.
C)   one party to a transaction has more information than the other and transactions occur less frequently due to the information asymmetry.
D)   neither party is willing to be party to a transaction because they don't have enough information.E) A) and B)
F) A) and C)

Question 4

The basic trade-off in valuing any asset is between:

Accepted Answer

A)   amount of risk and rate of return.
B)   rate of return and length of loan.
C)   amount of risk and length of loan.
D)   rate of return and amount of loan.E) All of the above
F) A) and D)

Question 5

A bond is essentially:

Accepted Answer

A)   a stock.
B)   a loan.
C)   an equity.
D)   a derivative.E) All of the above
F) A) and B)

Question 6

Good current economic conditions incent people to save _______, and a good outlook on future economic conditions incent people to save _________.

Accepted Answer

A)   more; less
B)   more; more
C)   less; more
D)   less; lessE) A) and C)
F) C) and D)

Question 7

Which of the following is more liquid?

Accepted Answer

A)   A privately held company's stock
B)   A publicly held company's stock
C)   A house
D)   A rare paintingE) B) and C)
F) A) and D)

Question 8

A saver can eliminate _______ risk through ________________.

Accepted Answer

A)   systemic; diversification
B)   idiosyncratic; diversification
C)   systemic; asset valuation
D)   idiosyncratic; asset valuationE) All of the above
F) B) and D)

Question 9

The risk of a borrower defaulting on a loan is known as:

Accepted Answer

A)   credit risk.
B)   default risk.
C)   loan risk.
D)   asset risk.E) A) and C)
F) A) and B)

Question 10

If lenders think that a particular borrower might default, they will demand a:

Accepted Answer

A)   higher interest rate to make it worth taking that risk.
B)   lower interest rate to make it worth taking that risk.
C)   higher interest rate to decrease the amount of risk incurred.
D)   lower interest rate to decrease the amount of risk incurred.E) A) and C)
F) All of the above

Question 11

The more liquid markets are the:

Accepted Answer

A)   more people are willing to save, and the higher the amount of investment occurs.
B)   less people are willing to save, and the higher the amount of investment occurs.
C)   more people are willing to save, and the lower the amount of investment occurs.
D)   less people are willing to save, and the lower the amount of investment occurs.E) B) and C)
F) C) and D)

Question 12

A net capital inflow occurs in open economies where investment is:

Accepted Answer

A)   higher than national savings.
B)   lower than national savings.
C)   equal to national savings.
D)   higher than national spending.E) None of the above
F) A) and B)

Question 13

A capital outflow occurs when:

Accepted Answer

A)   money saved domestically is invested in another country.
B)   money saved in another country finances domestic investment.
C)   there is a negative difference between capital inflows and capital outflows for a country.
D)   there is a positive difference between capital inflows and capital outflows of a country.E) A) and D)
F) None of the above

Question 14

An asset used to secure a loan is called.

Accepted Answer

A)   collateral.
B)   a retainer.
C)   a down payment.
D)   an investment.E) A) and B)
F) A) and C)

Question 15

In a closed economy, national savings is:

Accepted Answer

A)   the sum of the savings of individuals and corporations plus the savings of the government.
B)   the sum of public savings plus private savings.
C)   equal to national investment.
D)   All of these are true.E) A) and B)
F) A) and C)

Question 16

A bond is:

Accepted Answer

A)   a financial asset that represents partial ownership of a company.
B)   a payment made periodically to all shareholders of a company.
C)   an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest.
D)   a promise by the bond issuer to pay a lump sum at a specified maturity date, and, in some cases, to pay periodic interest at a specific percentage rate.E) All of the above
F) A) and D)

Question 17

Determinants of the supply of loanable funds are all except:

Accepted Answer

A)   wealth.
B)   expectations of future economic conditions.
C)   social welfare policies.
D)   rate of return on investment.E) All of the above
F) None of the above

Question 18

When you have equity in a company, it means you:

Accepted Answer

A)   own part of a company and share in its profits.
B)   have diversified the company's risk.
C)   have diversified your risk by investing with a company.
D)   own a portion of the debt obligations of a company.E) All of the above
F) None of the above

Question 19

Intermediation in the financial system is the process of:

Accepted Answer

A)   bringing together buyers and sellers in a market.
B)   negotiating terms of repayment when agreements between buyers and sellers are in default.
C)   government intervention in a financial market.
D)   an arbitrator working with government and private firms to create an efficient financial system.E) A) and B)
F) A) and C)

Question 20

1 to S2. B)  Supply will shift to the left from S2 to S1. C)  Demand will shift to the right from D1 to D2. D)  Demand will shift to the left from D2 to D1." class="answers-bank-image d-inline" rel="preload" > Suppose investors become more optimistic that the economy will be doing well over the next decade. How will the market for loanable funds as depicted in the accompanying graph be affected?

Accepted Answer

A)   Supply will shift to the right from S1 to S2.
B)   Supply will shift to the left from S2 to S1.
C)   Demand will shift to the right from D1 to D2.
D)   Demand will shift to the left from D2 to D1.E) All of the above
F) A) and B)

Exam 14: The Basics of Finance

An asset used to secure a loan is called.

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Adverse selection refers to when:

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Intermediation in the financial system is the process of:

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A saver can eliminate _______ risk through ________________.

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The risk of a borrower defaulting on a loan is known as:

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When you have equity in a company, it means you:

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Suppose investors become more optimistic that the economy will be doing well over the next decade. How will the market for loanable funds as depicted in the accompanying graph be affected?

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Which of the following is more liquid?

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Good current economic conditions incent people to save _______, and a good outlook on future economic conditions incent people to save _________.

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A bond is essentially:

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A capital outflow occurs when:

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The more liquid markets are the:

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The measure of how easily a particular asset can be converted quickly to cash without much loss of value is called:

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A net capital inflow occurs in open economies where investment is:

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In a closed economy, national savings is:

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Determinants of the supply of loanable funds are all except:

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A bond is:

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The basic trade-off in valuing any asset is between:

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If Nate takes out a $5,000 loan for one year at 10 percent annual interest, the principal is:

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If lenders think that a particular borrower might default, they will demand a:

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A saver can eliminate _ risk through __________.

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Good current economic conditions incent people to save _, and a good outlook on future economic conditions incent people to save ___.

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