2-1ChapterTwoFinancialMarketsandInstitutionsThischaptercontains49multiple-choicequestions,20shortproblemsand10longerproblems.MultipleChoice1.Amarketthathasnoonespecificlocationistermeda(n)________market.(a)over-the-counter(b)geographiclocation(c)intermediary(d)conceptualAnswer:(a)2.________problemsarisebecausepartiestocontractsoftencannoteasilymonitororcontroloneanother.(a)Payment(b)Counter(c)Incentive(d)ExchangeAnswer:(c)3.Incentiveproblemstakeavarietyofformsandinclude:(a)moralhazard(b)adverseselection(c)principal-agent(d)alloftheaboveAnswer:(d)4.The________problemexistswhenhavinginsuranceagainstsomeriskcausestheinsuredpartytotakegreaterriskortotakelesscareinpreventingtheeventthatgivesrisetotheloss.(a)moralhazard(b)adverseselection(c)principal-agent(d)alloftheaboveAnswer:(a)2-25.Lifeannuitiesareexamplesof________problems.(a)moralhazard(b)adverseselection(c)principal-agent(d)alloftheaboveAnswer:(b)6.________meansgivingthelendertherighttoseizespecificbusinessassetsintheeventofdefault.(a)Increasingmoralhazard(b)Increasingadverseselection(c)Collateralizationofloans(d)AlloftheaboveAnswer:(c)7.________instrumentsarealsocalledfixed-incomeinstruments.(a)Debt(b)Equity(c)Derivative(d)AlloftheaboveAnswer:(a)8.Themarketforshort-termdebt(lessthanoneyear)iscalledthe________market,andthemarketforlong-termdebtandequitysecuritiesiscalledthe________market.(a)capital;money(b)money;capital(c)fixed-income;money(d)derivative;equityAnswer:(b)2-39.________securitiesarefinancialinstrumentsthatderivetheirvaluefromthepricesofoneormoreotherassets.(a)Debt(b)Equity(c)Derivative(d)Fixed-incomeAnswer:(c)10.Acalloptiongivesitsholdertherightto________someassetataspecifiedpriceonorbeforesomespecifiedexpirationdate.(a)sell(b)buy(c)loan(d)borrowAnswer:(b)11.Aputoptiongivesitsholdertherightto________someassetataspecifiedpriceonorbeforesomespecifiedexpirationdate.(a)sell(b)buy(c)loan(d)borrowAnswer:(a)12.________contractsobligeonepartytothecontracttobuy,andtheotherpartytosell,someassetataspecifiedpriceonsomespecifieddate.(a)Options(b)Uncertainty(c)Moneymarket(d)ForwardAnswer:(d)2-413.The________curvedepictstherelationbetweeninterestratesonfixed-incomeinstrumentsissuedbytheU.S.Treasuryandthematurityoftheinstrument.(a)long-term(b)short-term(c)yield(d)exchangerateAnswer:(c)14.Iftheshort-termratesarehigherthanthelong-termrates,thentheyieldcurveis________.(a)upwardsloping(b)downwardsloping(c)horizontal(d)verticalAnswer:(b)Questions15and16areintendedtobecalculatedasapair.15.SupposeyouareaFrenchinvestor,whowantsasafeinvestmentintermsoffrancs.Youareinvestingforoneyearandtheinterestrateonaone-yearFrenchgovernmentbondis5%andatthesametimeitis9%onaU.S.governmentbond.Theexchangerateiscurrently6.15Frenchfrancstothedollar.Supposeyouinvest$1,000inaU.S.bond.AlsosupposethatayearfromnowtheFrenchfranc/dollarexchangerateis6.50Frenchfrancstothedollar.WhatwillbetherealizedFrenchfrancrateofreturnontheU.S.bond?(a)5.69%(b)9.00%(c)15.2%(d)7.00%Answer:(c)16.Inquestion15,whatwouldtheexchangerateatyear’sendhavetobeinorderfortheFrenchinvestortoearnexactly4%peryearontheinvestmentinU.S.bonds?(a)6.20FF/$(b)5.87FF/$(c)6.40FF/$(d)5.42FF/$Answer:(b)2-5Usethefollowingyielddatatoanswerquestions17and18.2/29/98Treasury1-10yr5.58%10+yr5.72Corporate1-10yrHighQlty5.98MedQlty6.17Corporate10+yrHighQlty6.26MedQlty6.5717.CalculatetheyieldspreadforTreasu...
