Chapter 7
The Financial System and Interest
1. An efficient capital market is said
to be one in which
a. the amount of money in
the market allows for firms
to grow as needed.
b. information travels
quickly, so is impossible
to find a bargain.
c. each person in a society
has the right to invest in
financial markets.
d. the cost of funds in the
financial market is low.
co
st
of
rs
o
th
e
pe
ch
ea
..
in
fu
nd
s
n
in
a
tra
v
n
fo
rm
at
io
th
.
.
ci
..
el
s
so
y
on
e
m
of
in
am
ou
nt
e
th
q.
..
..
25% 25% 25% 25%
2. Which of the following statements is
correct about interest rate components?
e
ab
ov
n.
..
e
of
th
e
co
on
k
r is
e
Th
N
lu
d
in
c
e
ra
t
se
ba
e
pr
em
iu
m
...
in
cl
at
e
tr
re
s
in
te
Th
Th
e.
..
25% 25% 25% 25%
e
a. The interest rate includes
a base rate minus a risk
premium
b. The base rate includes
pure interest rate plus an
inflation adjustment
c. The risk premium
consists of financial risk,
liquidity risk, and maturity
risk
d. None of the above
3. The belief that investors require a higher
return to entice them into holding long-term
securities is called:
N
on
e
of
th
e
ce
t..
.
ab
ov
..
liq
ui
di
ty
pr
ef
er
en
ta
tio
n.
m
en
eg
ts
ar
ke
m
ex
pe
ct
at
io
ns
th
eo
ry
a. expectations theory
b. market segmentation
theory
c. liquidity preference
theory
d. None of the above
e
25% 25% 25% 25%
4. All of the following are advantages
of going public except:
th
...
co
m
e
m
ay
e
fir
m
fir
m
e
th
be
de
s
pr
ov
i
ta
tt
ha
fa
c
e
m
or
...
pa
.
co
m
ai
la
av
ar
e
ds
fu
n
th
m
.
...
25% 25% 25% 25%
or
e
a. more funds are available
to publicly traded firms
b. the fact that a company is
public helps in bank
negotiations and
marketing
c. the firm provides more
information to the public
about its business
d. the firm may become
active in mergers and
acquisitions
5. The financial market that trades in shortterm, high-quality debt securities is called the:
25% 25% 25% 25%
ar
ke
m
y
on
e
m
de
bt
m
ar
ke
t
t
t
m
ar
ke
pr
im
ar
y
pi
ta
lm
ar
ke
t
capital market
primary market
debt market
money market
ca
a.
b.
c.
d.
6. Which of the following is not
associated with stock exchanges?
tra
d
ia
l
ec
ec
ou
n
te
r
sp
er
-th
ov
er
br
ok
is
t
g
tin
lis
in
g
25% 25% 25% 25%
a. listing
b. specialist
c. over-the-counter
trading
d. broker
7. When the level of interest rates is rising
significantly, share prices are usually
a. rising along with
interest rates.
b. not related to
movements in interest
rates.
c. falling to align share
returns with higher
yields in financial
markets.
d. None of the above.
e.
th
e
of
ig
n
N
on
e
al
to
g
lli
n
ab
ov
...
sh
ar
e
em
...
m
ov
to
fa
tr
el
at
ed
no
r is
in
g
al
on
g
w
ith
in
te
r..
.
25% 25% 25% 25%
8. The interest rate on new bonds
would probably increase with
a. higher default risk
premiums caused by a
few failing firms in the
industry.
b. increased expected
inflation over the next
year.
c. a decline in the number
of dealers and brokers
who will trade a security.
d. all of the above.
a
de
cl
ve
ab
o
lo
ft
he
m
b.
.
al
nu
th
e
in
e
in
ex
se
d
cr
ea
in
hi
gh
e
rd
ef
au
lt
pe
r is
k
ct
ed
pr
...
in
...
.
25% 25% 25% 25%
9. An upward sloping yield curve is an
indication of investor expectations of
a. a coming recession.
b. decreasing interest
rate levels.
c. increasing share
prices.
d. increasing interest
rate levels.
tr
a.
.
in
te
re
s
pr
ic
e
e
g
si
n
cr
ea
in
in
cr
ea
si
n
g
sh
ar
in
te
si
ng
cr
ea
de
a
co
m
in
g
re
c
re
s
es
tr
si
on
a.
.
.
s.
25% 25% 25% 25%
10. The over-the-counter market:
a. trades mainly shares of
smaller corporations
b. is a network of dealers
matching orders from
buyers and sellers of
securities
c. is called NASDAQ in
the US
d. (a), (b), and (c) are
correct
...
co
...
ar
e
in
Q
(a
),
(b
),
a
nd
(c
)
SD
A
NA
is
ca
lle
d
ne
tw
a
is
tr
ad
es
m
ai
nl
or
k
y
of
sh
de
a
ar
e
l..
.
s.
..
25% 25% 25% 25%
11. If an investor sold a 9-year bond to another
investor, that sale would take place in the:
se
m
...
ey
m
on
co
nd
ar
y
ca
pi
ta
lm
a.
..
m
ar
ke
co
nd
ar
y
m
on
ey
se
pr
im
ar
y
ca
p
ita
lm
ar
ke
t
t
25% 25% 25% 25%
pr
im
ar
y
a. primary capital
market
b. primary money
market
c. secondary capital
market
d. secondary money
market
12. In the Canadian economy as a whole, what is
the relationship between the level of saving for any
year, to the level of investing for that same year?
a. Saving must be
equal to investing.
b. Saving must be
greater than
investing.
c. Saving is unrelated
to investing.
d. Saving must be
less than investing.
s
le
s
be
us
t
m
Sa
vi
ng
is
vi
ng
Sa
...
to
...
re
la
te
d
un
us
t
m
vi
ng
Sa
Sa
vi
ng
m
us
t
be
be
eq
gr
ea
ua
l
t..
...
25% 25% 25% 25%
13. If ABC Corp wishes to "go public"
they must:
a. receive approval of
the CIPO
b. offer shares to the
public in an IPO
c. prepare a "public hot
file" and file it with the
Canada Revenue
Agency
d. none of the above
ov
e
ab
of
ne
no
"p
u
a
ar
e
th
e
bl
ic
th
e
to
pr
ep
ar
es
sh
fe
r
of
ho
t.
...
pu
..
f.
lo
pr
ov
a
ap
ve
ce
i
re
..
25% 25% 25% 25%
14. ABC Corp's preliminary
prospectus could also be called a(n):
tu
re
re
d
de
n
in
de
be
nt
u
re
t
st
at
em
en
n
tra
tio
gi
s
he
rr
in
g
25% 25% 25% 25%
registration statement
debenture
indenture
red herring
re
a.
b.
c.
d.
15. If your job on the exchange floor is to
supervise trading in a share and ensure that
the marked remains orderly, you are a(n):
na
lb
ro
k
er
in
st
itu
tio
or
flo
an
rit
y
cu
se
br
ok
al
ys
t
is
t
ia
l
ec
er
25% 25% 25% 25%
specialist
security analyst
floor broker
institutional broker
sp
a.
b.
c.
d.
16. The date when the principal of ABC
Corp's bonds is due to be paid off is the bond
da
te
.
o
of
fic
i
ex
at
ur
ity
m
ll
ca
da
da
te
.
te
.
da
io
n
de
m
pt
te
.
25% 25% 25% 25%
redemption date.
call date.
maturity date.
ex officio date.
re
a.
b.
c.
d.
17. Which of the following is the best
definition of interest?
a. Interest is the return
on all investments.
b. Interest is the return
on debt investments.
c. Interest is the return
on equity investments.
d. Interest is the 1-year
return on investments
in shares.
ar
1ye
th
e
ti
s
te
re
s
In
r..
.
..
re
tu
rn
..
In
te
re
s
ti
s
th
e
re
tu
rn
th
e
ti
s
te
re
s
In
In
te
re
s
ti
s
th
e
re
tu
rn
..
25% 25% 25% 25%
18. If economists forecast that inflation rates for the next 4
years will be 1.5%, 2%, 3%, and 5% respectively,
expectations theory says that the yield curve should slope:
t
rig
h
th
e
d
w
ar
up
up
w
ar
d
to
to
th
e
to
ar
d
w
nw
do
th
e
rig
h
t
le
ft
th
e
to
ar
d
w
nw
do
le
ft
25% 25% 25% 25%
a. downward to the
left
b. downward to the
right
c. upward to the left
d. upward to the right
19. Inflation is expected to be 2.5% for each of the next two
years, and 3.5% per year for the three years after. The
inflation adjustment (INFL) on a 5-year loan would be:
%
25%
3.
10
%
25%
3.
30
25%
%
%
25%
3.
50
3.8%
3.5%
3.3%
3.1%
3.
80
a.
b.
c.
d.
25%
25%
1%
25%
3%
4%
3%
2%
1%
4%
a.
b.
c.
d.
25%
2%
20. The yield on ABC Corp's 10-year corporate bond is 15%.
The yield on 90-day treasury bills is 8% while 10-year
Government of Canada bonds yield 12%. What is the default
risk premium on ABC Corp's corporate bond?