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1Copyright©2010PearsonEducationInc.PublishingasPrenticeHallFoundationsofFinancialMarketsandInstitutions,4e(Fabozzi/Modigliani/Jones)Chapter1IntroductionMultipleChoiceQuestions1FinancialAssets1)Anassetisapossessionthathasvalueinanexchangeandcanbeclassifiedas________.A)financialorintangible.B)financialorvariable.C)tangibleorintangible.D)fixedorvariable.Answer:CDiff:2Topic:1.1FinancialAssetsObjective:1.5:thevariouswaystoclassifyfinancialmarkets2)Thefinancialassetisreferredtoasa________iftheclaimisafixeddollar.A)debtinstrument.B)commonequityinstrument.C)derivativeinstrument.D)preferredequityinstrument.Answer:ADiff:2Topic:1.1FinancialAssetsObjective:1.4:thedistinctionbetweendebtinstrumentsandequityinstruments3)Abasiceconomicprincipleisthatthepriceofanyfinancialasset________thepresentvalueofitsexpectedcashflow,evenifthecashflowisnotknownwithcertainty.A)isgreaterthanB)isequaltoC)islessthanD)isequaltoorgreaterthanAnswer:BDiff:2Topic:1.1FinancialAssetsObjective:1.1:whatafinancialassetisandtheprincipaleconomicfunctionsoffinancialassets2Copyright©2010PearsonEducationInc.PublishingasPrenticeHall4)A(n)________suchasplantorequipmentpurchasedbyabusinessentitysharesatleastonecharacteristicwithafinancialasset:Bothareexpectedtogeneratefuturecashflowfortheirowner.A)tangibleassetB)intangibleassetC)balancesheetassetD)cashassetAnswer:ADiff:1Topic:1.1FinancialAssetsObjective:1.2:thedistinctionbetweenfinancialassetsandtangibleassets5)Financialassetshavetwoprincipaleconomicfunctions.WhichofthebelowisONEofthese?A)Aprincipaleconomicfunctionistotransferfundsfromthosewhohavesurplusfundstoborrowtothosewhoneedfundstoinvestinintangibleassets.B)Aprincipaleconomicfunctionistotransferfundsinsuchawayastoredistributetheavoidableriskassociatedwiththecashflowgeneratedbyintangibleassetsamongthoseseekingandthoseprovidingthefunds.C)Aprincipaleconomicfunctionistotransferfundsinsuchawayastoredistributetheunavoidableriskassociatedwiththecashflowgeneratedbytangibleassetsamongthoseseekingandthoseprovidingthefunds.D)Aprincipaleconomicfunctionistotransferfundsfromthosewhohavesurplusfundstoinvesttothosewhoneedfundstoinvestinintangibleassets.Answer:CComment:Financialassetshavetwoprincipaleconomicfunctions.(1)Thefirstistotransferfundsfromthosewhohavesurplusfundstoinvesttothosewhoneedfundstoinvestintangibleassets.(2)Thesecondeconomicfunctionistotransferfundsinsuchawayastoredistributetheunavoidableriskassociatedwiththecashflowgeneratedbytangibleassetsamongthoseseekingandthoseprovidingthefunds.Diff:3Topic:1.1FinancialAssetsObjective:1.1:whatafinancialassetisandtheprincipaleconomicfunctionsoffinancialassets3Copyright©2010PearsonEducationInc.PublishingasPrenticeHall6)Aprincipaleconomicfunctiontotransferfundsfromthosewhohave________toinvesttothosewhoneedfundstoinvestin________.A)deficitfunds;tangibleassets.B)surplusfunds;intangibleassets.C)deficitfunds;intangibleassets.D)surplusfunds;tangibleassets.Answer:DComment:Financialassetshavetwoprincipaleconomicfunctions.(1)Thefirstistotransferfundsfromthosewhohavesurplusfundstoinvesttothosewhoneedfundstoinvestintangibleassets.(2)Thesecondeconomicfunctionistotransferfundsinsuchawayastoredistributetheunavoidableriskassociatedwiththecashflowgeneratedbytangibleassetsamongthoseseekingandthoseprovidingthefunds.Diff:2Topic:1.1FinancialAssetsObjective:1.1:whatafinancialassetisandtheprincipaleconomicfunctionsoffinancialassets2FinancialMarkets1)Financialmarketsprovidethreeeconomicfunctions.WhichofthebelowisNOToneofthese?A)Theinteractionsofbuyersandsellersinafinancialmarketdeterminethepriceofthetradedasset.B)Financialmarketsprovideamechanismforaninvestortosellafinancialasset.C)Financialmarketsincreasesthecostoftransacting.D)Theinteractionsofbuyersandsellersinafinancialmarketdeterminetherequiredreturnonafinancialasset.Answer:CComment:Financialmarketsprovidethreeeconomicfunctions.First,theinteractionsofbuyersandsellersinafinancialmarketdeterminethepriceofthetradedasset.Or,equivalently,theydeterminetherequiredreturnonafinancialasset.Asthenducementforfirmstoacquirefundsdependsontherequiredreturnthatinvestorsdemand,itisthisfeatureoffinancialmarketsthatsignalshowthefundsintheeconomyshouldbeallocatedamongfinancialassets.Thisiscalledthepricediscoveryprocess.Second,financialmarketsprovideamechanismforaninvestortosellafinancialasset.Becauseofthisfeature,itissaidthatafinancialmarketoffersliquidity,anattractivefeaturewhencircumstanceseitherforceormotivateaninvestortosell.Iftherewerenotliquidity,theownerwouldbeforcedtoholdadebtinstrumentuntilitmaturesandanequityinstrumentuntilthecompanyiseithervoluntarilyorinvoluntarilyliquidated.Whileallfinancialmarketsprovidesomeformofliquidity,thedegreeofliquidityisoneofthefactorsthatcharacterizedifferentmarkets.Thethirdeconomicfunctionofafinancialmarketisthatitreducesthecostoftransacting.Therearetwocostsassociatedwithtransacting:searchcostsandinformationcosts.Diff:3Topic:1.2FinancialMarketsObjective:1.3:whatafinancialmarketisandtheprincipaleconomicfunctionsitperforms4Copyright©2010PearsonEducationInc.Publish