FINANCIAL MARKETS Formative Assessment 1

1. Two problems arising from asymmetric information 

a. Libel and slander
b. Adverse Selection and Moral Hazard
c. Moral Hazard and slander

2. A vibrant and healthy economy requires an ecosystem that makes or channels fund from
people who have productive investment opportunities. FALSE. 

3. The option holder is mandated to exercise the option like the futures contract wherein
the holder must buy or sell within a specified period unless the contract is closed out
before delivery. FALSE. 

4. The business system consists of all financial intermediaries and financial markets and
their relations with respect to the flow of funds to and from the household, governments,
business firms and foreigners, as well as financial infrastructure. FALSE. 

5. When limitations are placed on the uses of funds borrowed or requiring the borrowers to
pay off the debt even before maturity date if borrower's net worth drop below certain
level. What does the financial intermediary wants to impose? 
a. Restrictive Instruments
b. Optional Covenants
c. Restrictive Covenants

6. A financial system should not be complex to have a smooth transfer of flow of funds. 

7. When financial institutions collect information on firms and selling that information to
investors, what does it try to reduce? 
a. Moral hazard problems
b. The problem of adverse selection.
c. Transaction costs

8. Futures and forward contracts are one and the same. FALSE. 

9. The main task of a financial system 

a. To regulate economists, accountants and industry workers.
b. Channel funds from sectors that have a shortage of funds.
c. Channel grievances to financial authorities to settle disputes among investors.

10. The service that the financial system can help one decide whether to continue investing
in the securities previously purchased or sell more stocks or bonds or real estate
properties to finance a planned expansion. 
a. PRODUCTION
b. INFORMATION
c. COLLECTION
11. Economists believe there are three key services that the financial system provides to
savers and borrowers. 
a. collection, distribution and production
b. risk sharing, liquidity and information
c. liquidity, collection and distribution

12. A developed economy relies on goods and raw materials for efficient transfer of funds. 

13. The service that the financial system offers where it provides ease with which an asset
can be exchanged for money which savers can view as a benefit. 
a. RISK SHARING
b. INFORMATION
c. LIQUIDITY

14. When the Financial Institution collects information on firms and selling that information to
investors what does it try to reduce? 
a. The problem of adverse selection
b. Transaction costs
c. Moral Hazard Problems

15. What is the effect when financial system provides risk sharing by allowing savers to hold
many assets? 
a. It makes savers more willing to buy stocks, bonds and other financial assets
thus this willingness increases the ability of borrowers to raise funds in the
financial system.
b. Risks on investments will be transformed into other form of assets.
c. Other investors will not be held liable.

16. Direct finance is the most efficient way to transfer funds because it is less complex.
FALSE.

17. When financial intermediaries advantage to technology to provide financial services,

such as those automated teller machine networks provide is a technique to: *
a. To reduce transaction costs
b. To increase deposits.
c. To advertise their services to clients.

18. When a brokerage firm is charged for buying or selling a financial instrument what cost
did the firm incur? 
a. Information Costs
b. Production costs
c. Transaction costs
19. Marissa keeps cash balances to pay for minor expenditures such as daily snacks for the
company's staff. These cash balances cannot be considered as a financial instrument
because these are just used for small-out-of the pocket expenditures only. FALSE.

20. Over the past few decades, changing technology and improving communications have
increased tariffs and has limited the scope and efficiency of the global financial
system. FALSE.

21. Nowadays with a click of a mouse, an individual investor in Davao City can deposit funds
in a US Bank or purchase a mutual fund that invests in Chinese securities if he or she
has lived on either countries for at least 1 year. FALSE.

22. Companies raising capital expenditures and investors saving to accumulate funds for
future use require substantial amount of cash. FALSE.

23. Having a well-functioning financial system in place that directs funds to their most
productive uses is crucial prerequisite for political development. FALSE.

24. Checks cannot be considered as a financial instrument if these are not deposited yet
and converted to cash. FALSE.

25. In many ways, the financial crisis illustrates that a financial manager and investors do
not operate in vacuum. They make decisions within a large and complex financial
environment. TRUE

26. BPI Family bank has no commitment to advance funds on demand by the party to whom
the draft was directed. FALSE.

27. Describes the situation in which one party to an economic transaction has better
information than does the other party. *
a. Adverse information
b. Collection Information
c. Asymmetric Information

28. Financial intermediaries can reduce Moral Hazard Problems by adapting more stringent
procedures in monitoring borrower's use of funds which includes: 
a. Specializing in monitoring borrowers and developing effective techniques to
ensure that the funds they loan are actually used for their indeed purpose.
b. Manage the investments and books of both lenders and borrowers.
c. Imposing ease on covenants.
29. Financial Instruments include primary instruments and derivative instruments. By this
definition, financial instruments include current assets, current liabilities, equity
instruments and derivatives. FALSE

30. When loans must be repaid in foreign currencies, there will be no risk anymore. This is
because the currency is already locked up to its value upon exchange. Even if exchange
rates change, the equivalent of the currency borrowed will remain its value. FALSE.