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    11. The process of financial intermediation: A. Creates a net cost to an economyB. Increases the economy's ability to produceC. Is always used when a borrower needs to obtain fundsD. Is used primarily in underdeveloped countries   12. Which of the following statements is most correct? A. Financial intermediaries are banksB. A bank is a financial intermediaryC. Financial intermediaries are insurance companiesD. Financial intermediaries.
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    31. Which of the following best expresses the present value of $500 that you have to wait four years and three months to receive? A. ($500/4.25) x (1+i)B. $500 x 4.25 x (1 +i)C. $500/(1+i)4.25D. ($500/4) x (1+i)3   32. If 10% is the annual rate, considering compounding, the monthly rate is: A. 0.0833%B. 0.833%C. 0.00797%D. 1.0833%   33. What is the future value of $1000 after.
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  108. Why are options referred to as derivative instruments?          109. What are the four fundamental characteristics that determine the value of a financial instrument?          110. A high school basketball player decides to bypass college and go right into the NBA (the National Basketball Association). Describe the risk the individual is taking and a contract that.
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    31. A $600 investment has the following payoff frequency: a quarter of the time it will be $0; three quarters of the time it will pay off $1000. Its standard deviation and value at risk respectively are: A. $750; $600B. $433; $600C. $0; $1000D. $433; $1000   32. A $500 investment has the following payoff frequency: half of the.
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    41. A risk-averse investor will: A. Always accept a greater risk with a greater expected returnB. Only invest in assets providing certain returnsC. Never accept lower risk if it means accepting a lower expected returnD. Sometimes accept a lower expected return if it means less risk   42. A risk-averse investor will: A. Never prefer an investment with a lower expected.
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  121. Why didn't the over-the-counter (OTC) exchanges suffer the disruption of service that the New York Stock Exchange did after the terrorist attacks of September 11, 2001?          122. What is the primary distinction between debt/equity markets and derivative markets?          123. From the savers' perspective, what are the benefits of going to a depository institution to.
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  88. Is the characteristic that distinguishes money from other assets its ability to be a store of value?          89. What distinguishes commodity money from fiat money?          90. During the U.S. Civil War the Confederate government had to resort to printing currency to obtain the goods they needed. Comment on what you think happened to both.
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    81. Which of the following is not true of over-the-counter markets? A. Traders are linked by computerB. Dealers buy and sell only for their customersC. Trading does not take place in one physical locationD. Traders are willing to buy and sell stocks and bonds at posted prices   82. Equity markets: A. Are markets of U.S. Treasury bondsB. Are markets for AAA.
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  118. How has Islamic banking redefined lending to deal with Islam's prohibition of usury?          119. Discussions in recent years about the vulnerability of the Social Security System cause some people to feel the payments promised will not materialize. Discuss the possible changes we might observe now.          120. During the early 1980s, the U.S. economy experienced.
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Multiple Choice Questions  1. Which of the following would not be included in a definition of risk? A. Risk is a measure of uncertaintyB. Risk can always be avoided at no costC. Risk has a time horizonD. Risk usually involves some future payoff   2. All other factors held constant, an investment: A. With more risk should offer a lower return and.
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  Essay Questions  125. As we saw in the chapter, some financial instruments are used primarily to transfer risk. Explain how a bread maker can use a financial instrument to transfer the following risk: The bread maker has the opportunity to provide bread to a local army base. The base figures they will.
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  111. Describe what is likely to happen to the average price of a share of stock if the stock markets decide to close every Friday and Monday to provide workers at the exchanges with longer weekends.          112. What evidence is there that the transaction costs involved with the buying and selling of stocks.
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    71. The price of a coupon bond is determined by: A. Taking the present value of the bond's final payment and subtracting the coupon paymentsB. Taking the present value of the coupon payments and adding this to the face valueC. Taking the present value of the bond's final paymentD. Taking the present value of all of.
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  116. How do financial markets pool and communicate the information regarding issuers of financial instruments in a convenient way?          117. How do financial markets contribute to the process of risk transfer?          118. Can a financial instrument be bought and sold in both a primary and secondary financial market? Explain.          119. Is the obtaining of a car loan.
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    61. Usually an investment will be profitable if: A. The internal rate of return is less than the cost of borrowingB. The cost of borrowing is equal to the internal rate of returnC. It is financed with retained earningsD. The cost of borrowing is less than the internal rate of return   62. A coupon bond is a bond.
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    51. A monthly growth rate of 0.6% is an annual growth rate of: A. 7.20%B. 6.00%C. 7.60%D. 7.44%   52. A monthly interest rate of 1% is a compounded annual rate of: A. 12.00%B. 10.00%C. 14.11%D. 6.00%   53. An investment has grown from $100.00 to $130.00 or by 30% over four years. What annual increase gives a 30% increase over four years? A. 7.50%B. 6.30%C. 6.78%D. 7.24%   54. An investment grows from $100.00.
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  102. Why do economists claim the Consumer Price Index (CPI) tends to overstate the actual rate of inflation?          103. How has the Bureau of Labor Statistics (BLS) changed the calculation of the CPI in order to take substitution bias into account?          104. What was the double liquidity shock that occurred in the US financial system.
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    11. If an investment will return $1,500 half of the time and $700 half of the time, the expected value of the investment is: A. $1,250B. $1,050C. $1,100D. $2,200   12. Another name for the expected value of an investment would be: A. The mean valueB. The upper-end valueC. The certain valueD. The risk-free value   13. If an investment has a 20% (0.20) probability of returning.
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  98. Briefly discuss the relationship between present value and each of the following: a) future valueb) timec) interest rate          99. An investment grows from $2,000 to $2,750 over the period of 10 years. What average annual growth rate will produce this result?          100. Calculate the internal rate of return for a machine that costs $500,000.
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    11. Suppose Mary receives an $8,000 loan from First National Bank. Mary repays $8,480 to First National Bank at the end of one year. Assuming the simple calculation of interest, the interest rate on Mary's loan was: A. 8.00%B. $480C. 6.00%D. 5.66%   12. An investor deposits $400 into a bank account that earns an annual interest rate of.
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  121. Explain why countries that have volatile inflation rates are likely to have high nominal interest rates.          122. Explain the suggestion that people may have their own "personal discount rate" and how that may affect decisions about borrowing and other financial matters.          123. What matters more: having a credit card with a low rate or.
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    21. An investment pays $1,200 a quarter of the time; $1,000 half of the time; and $800 a quarter of the time. Its expected value and variance respectively are: A. $1,000; 20,000 dollarsB. $1,050; 20,000 dollarsC. $1,000; 40,000 dollarsD. $1,000; 80,000 dollars   22. An investment pays $1000 three quarters of the time, and $0 the remaining time. Its.
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    21. Juan purchases automobile insurance; the insurance contract is: A. A financial instrumentB. A form of moneyC. A transfer of risk from the insurance company to JuanD. A financial intermediary   22. Most funds that flow between lenders and borrowers: A. Flow directly through financial intermediariesB. Flow through government agenciesC. Flow directly through financial instrumentsD. Flow indirectly through financial intermediaries   23. A bank is a financial.
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    91. Nondepository institutions: A. Do not serve as intermediariesB. Only serve as brokersC. Only transform assetsD. Do not accept deposits   92. Non-depository institutions would include all of the following except: A. Finance companiesB. Pension fundsC. Insurance companiesD. Credit unions   93. Small savers would rather use financial institutions than lend directly to borrowers because: A. Financial institutions will offer the savers higher interest rates than the savers could.
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    41. A derivative instrument: A. Comes into existence after the underlying instrument is in defaultB. Is a low-risk financial instrument used by highly risk-averse saversC. Gets its value and payoff from the performance of the underlying instrumentD. Should be purchased prior to purchasing the underlying security   42. One of the advantages of the financial system is: A. It gathers information.
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    51. The value of a financial instrument rises as: A. The size of the payment promised decreasesB. The promised payment is made sooner rather than laterC. It is less likely the payment will be madeD. The payments are made when the prospective investor needs them least   52. Consider the price paid for debt issued by the State of.
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  93. Explain the difference(s) between a debit card and a credit card.          94. Describe how money's uses (means of payment, unit of account, and store of value) will likely change in the future. Which feature of money is most likely to be retained over time and why? Why are other features disappearing?          95. Rank the.
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    71. Most of the buying and selling in primary markets: A. Is in the public viewB. Is highly transparent and closely monitored by the SECC. Involve an investment bankD. Is done by the Federal Reserve   72. Secondary financial markets: A. Are financial markets for all financial instruments rated less than investment gradeB. Are financial markets where existing securities are bought and.
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    31. The information concerning the issuer of a financial instrument: A. Needs to be complete and closely monitored by the buyers of the instrument for changeB. Is somewhat non-standardized to minimize the cost of the instrumentC. Is usually standardized to the essential information required by the buyersD. Is closely monitored by the buyers of these instruments.
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  104. Explain why most financial instruments are fairly complex, while at the same time quite standardized.          105. Credit cards usually charge higher rates of interest than most other forms of lending. In terms of information, collateral and monitoring, how might these higher rates be explained?          106. Why might a life insurance company insist on an.
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Multiple Choice Questions  1. A promise of a $100 payment to be received one year from today is: A. More valuable than receiving the payment todayB. Less valuable than receiving the payment six months from nowC. Equally valuable as a payment received today if the interest rate is zeroD. Not enough information is provided to answer the.
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  Essay Questions  106. Consider two barter economies: Duos and Varietas. Duos produces two different goods, whereas Varietas produces 80 different goods. Both countries have the same number of people. In which barter economy is it more likely that the means of payment and the units of account would be efficient? How many.
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  Short Answer Questions  79. Consider the following: there are two countries, A and B. Each country has the same resources, and produces the same goods. The residents of country A use money; the residents of country B rely on bartering of goods. Will each country produce the same quantity of output? Explain.          80. Consider.
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    81. From the Fisher equation we see that the nominal interest rate and expected inflation have: A. An inverse relationshipB. Error! Hyperlink reference not valid.Error! Hyperlink reference not valid. direct but less than one-to-oneC. A relationship which is direct and one-to-oneD. No relationship   82. High rates of inflation are usually associated with: A. Low nominal interest rates but high real.
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  108. Historically, some governments have relied on the revenue generated from printing currency to finance government spending. Give two examples of government's relying on paper currency to finance wartime expenditures. What do you expect happened to inflation rates during these historical episodes?          109. In the chapter you read that it cost The U.S..
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  127. Many countries of the former Soviet Union are finding the transformation to a market-based economy to be quite difficult and economic growth rates for many of these countries are quite low. Explain what role the lack of financial market development may play in these countries.          128. Explain the various ways that financial.
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  Essay Questions  116. Explain why an investor cannot simply compare the size of promised payments from different investments, even if the interest rates and other risk factors are the same.          117. Historically, many cultural groups have outlawed usury, or the practice of levying interest on loans. Some groups oppose usury because it exacerbates problems.
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    41. What is the present value of $500 promised four years from now at 5% annual interest? A. $411.35B. $400.00C. $607.75D. $520.00   42. The higher the future value of the payment: A. The lower the present valueB. The higher the present valueC. The future value doesn't impact the present value, only the interest rate really mattersD. The lower the present value because the.
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    61. Which of the following is not a reason why interbank lending dried up during the financial crisis of 2007-2009? A. Banks preferred to hold on to their liquid assets in case their own need for them increasedB. Banks grew increasingly concerned about the ability of their trading partners to repay the loansC. The increased.
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Multiple Choice Questions  1. A financial intermediary: A. Is an agency that guarantees a loanB. Is involved in indirect financeC. Would be used in direct financeD. Must be a depository institution   2. Most individuals borrow: A. Directly without the use of a financial intermediaryB. Using a financial intermediary because it lowers the cost of borrowingC. Using a financial intermediary, but would save money.
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  Short Answer Questions  99. Provide examples of direct and indirect finance and a brief explanation of the difference between the two.          100. Stacy needs $5,000 to help with her tuition fees this semester. She is considering two ways to raise the funds she needs. First, she is considering going to her parents for the.
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