time draft payable to a seller of goods, with payment guaranteed by a bank.
loan to an individual or business to purchase a home, land, or other real property.
short-term fund transferred between financial institutions usually for no more than one day.
marketable bank-issued time deposit that specifies the interest rate earned and a fixed
maturity date.
short-term unsecured promissory note issued by a company to raise funds for a short time
period.
References
Multiple Choice Difficulty: 1 Easy
A negotiable CD is a:
time draft payable to a seller of goods, with payment guaranteed by a bank.
loan to an individual or business to purchase a home, land, or other real property.
short-term fund transferred between financial institutions usually for no more than one day.
marketable bank-issued time deposit that specifies the interest rate earned and a fixed
maturity date.
short-term unsecured promissory note issued by a company to raise funds for a short time
period.
References
Multiple Choice Difficulty: 1 Easy
39.
Award: 10.00 points
40.
Award: 10.00 points
Financial intermediaries’ ability to reduce the average cost of collecting information because of their
efficient operations allows them to take advantage of:
asset transformation.
economies of scale.
economies of scope.
transformational trading.
standardization.
References
Multiple Choice Difficulty: 2 Medium
Discuss how secondary markets benefit issuers and investors.
The secondary markets provide liquidity to investors after their initial purchase of the security. This
liquidity encourages them to purchase the security at the initial offer. The current market price also
reflects current prospects for the firm and the competitiveness of the issue relative to similar
securities. Corporate treasurers follow their stock's price closely because the stock price reflects
how well their firm and the market are performing. The current security price also provides
information about the cost of obtaining any additional funds.
References
Short Answer Difficulty: 2 Medium
41.
Award: 10.00 points
42.
Award: 10.00 points
How can brokers and dealers make money? Which activity is riskier? Why?
An asset broker assists buyers and sellers of securities by providing a mechanism for buyers or
sellers to process their orders. If the broker assists one party in finding another party, the broker
charges a small fee called a commission. An asset dealer buys the security for his or her own
account at the bid price and then sells the security at a higher ask price. The dealer profits by
earning the bid-ask spread or the difference between the buy and sell prices. The dealer's function
is riskier because the dealer must maintain an inventory of the asset and honor quotes to buy and
sell. If the security is risky, the value of the inventory can fluctuate with market prices. The broker
takes less risk because he or she does not own the security.
References
Short Answer Difficulty: 3 Hard
What does an asset transformer do? Why is asset transformation a risky activity?
An asset transformer buys one security from a customer and makes or creates a separate claim in
order to raise funds. For example, a bank accepts deposits and uses them to make loans. This is
normally a risky activity because the asset acquired will be riskier than the security (or deposit) used
to raise funds because the intermediary hopes to profit on the spread between the rate earned on
the asset claim and the rate paid on the liability claim. In order for this spread to be positive,
generally speaking, the asset must be riskier than the liability.
References
Short Answer Difficulty: 2 Medium
43.
Award: 10.00 points
44.
Award: 10.00 points
How can using indirect finance rather than direct finance reduce agency costs for users of funds
that is associated with monitoring funds?
A large FI has a greater incentive to monitor the behavior of users of funds in indirect financing. The
FI supposedly hires and trains experts who know how to collect information about a fund's user and
evaluate whether the fund's user is acting appropriately. In direct finance, a fund user sells claims to
the public at large. In this case, there is little incentive for an individual claim holder to monitor and
attempt to enforce good behavior on the part of the fund's user. The benefit of monitoring and
enforcement is shared among all claim holders, but the cost would be borne by the sole individual.