Chapter 2 Practice QuizMultiple Choice. Choose the one alternative that best completes the statement or answers the question.1. If bad credit risks are the ones who most actively seek loans, then financial intermediaries face the problem ofa. moral hazard.b. costly state verification.c. adverse selection.d. free-riding.2. The primary purpose of deposit insurance is toa. protect bank shareholders against losses.b. improve the flow of information to investors.c. improve financial stability.d. protect bank employees from unemployment.3. Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known asa. foreign bonds.b. Eurobonds.c. country bonds.d. equity bonds.4. Which of the following is a depository institution?a. a life insurance companyb. a finance companyc. a pension fundd. a mutual savings bank5. U.S. Treasury bills are considered the safest of all money market instruments because there is almost no risk of __________.a. defaultb. demarcationc. desertiond. defeat6. Economies of scale enable financial institutions toa. reduce transactions costs.b. reduce moral hazard.c. avoid the asymmetric information problem.d. avoid adverse selection problems.7. Financial markets have the basic function ofa. getting people with funds to lend together with people who want to borrow funds.b. providing a risk-free repository of spending power.c. assuring that the swings in the business cycle are less pronounced.d. assuring that governments need never resort to printing money.8. A corporation acquires new funds only when its securities are sold in the a. secondary market by a stock exchange broker.b. primary market by an investment bank.c. secondary market by an investment bank.d. primary market by a commercial bank.9. Equity holders are a corporation's _____________. That means the corporation must pay all of its debt holders before it pays its equity holders.a. underwritersb. brokersc. debtorsd. residual claimants10. Which of the following can be described as direct finance?a. You borrow $2500 from a friend.b. You take out a mortgage from your local bank.c. You buy shares in a mutual fund.d. You buy shares of common stock in the secondary market.Answers on the next page.Answers to the Chapter 2 Practice Quiz1. C2. C3. B4. D5. A6. A7. A8. B9. D10.
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