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Quiz 1 Overview of the Financial System (January 18, 2023)

Started on Wednesday, 18 January 2023, 12:25 PM

State Finished
Completed on Wednesday, 18 January 2023, 12:49 PM
Time taken 24 mins 15 secs
Grade 35.00 out of 45.00 (78%)

Question 1

Correct

Mark 2.00 out of 2.00

surplus deficit

In the financial system, the flow of funds occurs from surplus spending units to deficit spending
units.

Your answer is correct.

Question 2

Correct

Mark 1.00 out of 1.00

An efficient payment system is characterized by its efficiency in terms of which of the following?

Select one:
a.
Speed
b.
Settlement Mechanism
c.
Financial strength of the financial institutions

d.
Stability
e.
None of the above

f. All of the above

Your answer is correct.

The correct answer is: All of the above
Question 3

Incorrect

Mark 0.00 out of 1.00

Which of the following is NOT true about dealers?

Select one:
a. Carry an inventory of securities
b. Make markets for securities

c. Assist in the initial sale of securities

d. Make profits by selling stocks at a price higher than the bid price

Your answer is incorrect.

The correct answer is: Assist in the initial sale of securities

Question 4

Correct

Mark 1.00 out of 1.00

In 2018, the credit rating agencies in India assigned the highest rating to the debt instruments of the IL&FS
Group, even though it was highly leveraged and on the brink of default.
This is an example of the failure of which crucial function of financial markets?

Select one:
a. Settlement of transactions

b. Dissemination of information

c. Dealing with incentive problems

d. Transfer of risk

Your answer is correct.

The correct answer is: Dissemination of information
Question 5

Correct

Mark 1.00 out of 1.00

Yes No

“Sirine & Co. offered two bonds in the market but the credit rating agency assigned Grade AA to the first bond
and Grade AAA to the second bond.” Can a credit rating agency assign two different ratings to two different
bonds of the same company? yes

Your answer is correct.

Yes, for example, a company offers two bonds, but one is riskier due to no collateral requirement, as assets of
the company cannot be used to pay back the bondholder. So, the riskier bond has a lower credit rating, say
Grade AA, than Grade AAA.

Question 6

Correct

Mark 1.00 out of 1.00

ABC ltd. who buys stocks in a company such as Adani Ports provides-

Select one:
a. Debt finance and so become creditors of Adani Ports
b. Debt finance and so become part owners of Adani Ports

c. Equity finance and so become creditors of Adani Ports

d. Equity finance and so become part owners of Adani Ports

Your answer is correct.

The correct answer is: Equity finance and so become part owners of Adani Ports
Question 7

Incorrect

Mark 0.00 out of 1.00

Which is not the role of financial markets?

Select one:
a. Transfer and management of risk

b. Deal with the incentive problems

c. Transfer of funds from DSU to SSU

d. None of the above

Your answer is incorrect.

The correct answer is: Transfer of funds from DSU to SSU

Question 8

Correct

Mark 1.00 out of 1.00

Financial system consists of:

Select one:
a. money

b. financial markets
c. financial institutions

d. all of the above

Your answer is correct.

The correct answer is: all of the above
Question 9

Correct

Mark 2.00 out of 2.00

The financial instruments that are used to raise funds for the first time are traded in Primary markets

, whereas Secondary markets provide liquidity to these instruments.

Your answer is correct.

The correct answer is:
The financial instruments that are used to raise funds for the first time are traded in [Primary markets ],
whereas [Secondary markets] provide liquidity to these instruments.

Question 10

Correct

Mark 1.00 out of 1.00

secondary market primary market

A financial market in which financial claims are issued for the first time is primary market .

Your answer is correct.

Question 11

Correct

Mark 1.00 out of 1.00

Jiya took a loan of $5,000 from ABC Bank, but she was fired from the company within first month of her job.
Therefore, she may not be able to pay back the interest as well as the principal amount to the bank.
Which risk is faced by the bank in the above statement?

Select one:
a.
Political risk

b.
Credit risk

c.
Interest rate risk

d.
Reputational risk

Your answer is correct.

The correct answer is:
Credit risk

Question 12

Incorrect

Mark 0.00 out of 1.00

Based on the term to maturity of a given financial claim, the financial markets are sorted into the primary and
secondary markets.

Select one:
True

False

Based on the term to maturity of a given financial claim, the financial markets are sorted into the money and
capital markets.
The correct answer is 'False'.
Question 13

Correct

Mark 1.00 out of 1.00

Direct financing involves financial intermediaries.

Select one:
True

False

The correct answer is 'False'.

Question 14

Correct

Mark 1.00 out of 1.00

indirect direct

A corporate raising funds through Initial Public Offering (IPOs) is an example of direct financing

Your answer is correct.

Question 15

Correct

Mark 1.00 out of 1.00

Increasing trend has been observed in Indian household's debt to GDP ratio.

Your answer is correct.

The correct answer is:
[Increasing] trend has been observed in Indian household's debt to GDP ratio.
Question 16

Incorrect

Mark 0.00 out of 1.00

Which one is the legal obligation of firm to pay their investors?

Select one:
a. Dividends

b. Interest

c. Both of them
d. None of them

Your answer is incorrect.

The correct answer is: Interest

Question 17

Correct

Mark 2.00 out of 2.00

SSU DSU

Smith Co. is a large manufacturing firm in the U.S. and has decided to finance its expansion project through a
loan from Citigroup Inc.

In the above example, Smith Co. is a DSU , and Citigroup Inc. is a SSU .

Your answer is correct.

Question 18

Correct

Mark 1.00 out of 1.00

A risk-averse investor will prefer to invest in

Select one:
a. Risky assets
b. Risk-free assets

Your answer is correct.

The correct answer is: Risk-free assets

Question 19

Correct

Mark 1.00 out of 1.00

An individual's behavior changes (starts taking more risk) because he is protected against the losses, which
are covered through an insurance. This is an example of _______?

Select one:
a. Information asymmetry

b. Moral Hazard
c. Agency problem

d. None of the above

Your answer is correct.

The correct answer is: Moral Hazard
Question 20

Correct

Mark 1.00 out of 1.00

Mr Joseph wants to set up a new plant for the assembly of different parts of the machine, which his factory

manufactures. Which market would he prefer to use to finance this project? Capital Market

Your answer is correct.

This is because the plant and machinery are capital goods, and capital goods are financed with stock or long-
term debt instruments in the capital market.
The correct answer is:
Mr Joseph wants to set up a new plant for the assembly of different parts of the machine, which his factory
manufactures. Which market would he prefer to use to finance this project? [Capital Market]

Question 21

Correct

Mark 1.00 out of 1.00

Credit risk relates to the repayment of interest and principal amount in a loan agreement.

Your answer is correct.

The correct answer is:
[Credit ] risk relates to the repayment of interest and principal amount in a loan agreement.

Information asymmetry
Question 22
Moral hazard Adverse select
Incorrect

Mark 0.00 out of 1.00

Equity instruments provide a return to investors in the form of regular coupon payments. True/ False?

Select one:
True

False

Debt instruments provide a return to investors in the form of regular coupon payments.
The correct answer is 'False'.

Question 23

Correct

Mark 1.00 out of 1.00

Money market is the market for Short-term financial claims .

Your answer is correct.

The correct answer is:
Money market is the market for [Short‑term financial claims].

Question 24

Correct

Mark 1.00 out of 1.00

Putting your money in a term deposit is riskier than putting that in a savings deposit.

Select one:
True

False

The correct answer is 'True'.

Question 25

Correct

Mark 1.00 out of 1.00

An individual saver may find it challenging to invest in commercial paper, which is denominated in packages of
$2,50,000 or more but can pool his/her funds in a mutual fund by buying its shares with other small investors.
Which intermediation service is the mutual fund performing in this instance?
Financial Intermediaries

Reliance Indutries Ltd

Select one:
a. Currency transformation
b. Maturity flexibility

c. Credit risk diversification

d. Denomination divisibility

Your answer is correct.

The correct answer is: Denomination divisibility

Question 26

Incorrect

Mark 0.00 out of 1.00

Gross household debt savings as a percentage of GDP are higher in the case of developed economies
compared to developing economies

Select one:
True

False

The correct answer is 'False'.

Question 27

Correct

Mark 1.00 out of 1.00

Bond instruments that are expected to have higher chances of default are termed 'investment grade' and not
'speculative grade' bonds

Select one:
True

False

The correct answer is 'False'.

Question 28

Correct

Mark 1.00 out of 1.00

Financial claims are liabilities for deficit spending units.

Your answer is correct.

The correct answer is:
Financial claims are [liabilities] for deficit spending units.

Question 29

Correct

Mark 1.00 out of 1.00

Financial claims are liabilities for deficit spending units and assets for surplus spending units.

Select one:
True

False

The correct answer is 'True'.

Question 30

Correct

Mark 1.00 out of 1.00

Convertible bonds or debentures are a type of debenture that can be converted into equity shares

Select one:
a. False
b. True

Your answer is correct.

The correct answer is: True

Question 31

Incorrect

Mark 0.00 out of 1.00

The buyers of a company’s share do not have access to private information available to the manager. This is
an example of which of the following?

Select one:
a. Adverse selection
b. Moral hazard
c.
Information asymmetry

Your answer is incorrect.

The correct answer is:
Information asymmetry
Question 32

Correct

Mark 1.00 out of 1.00

Investment bank is an important financial institution that assists DSUs in the initial sale of

securities in the primary market.

Your answer is correct.

The correct answer is:
[Investment bank] is an important financial institution that assists DSUs in the initial sale of securities in the
primary market.
Question 33

Correct

Mark 1.00 out of 1.00

When the two parties have different amounts of information regarding a deal, Information asymmetry

is said to exist.

Your answer is correct.

The correct answer is:
When the two parties have different amounts of information regarding a deal, [Information asymmetry] is said
to exist.

Question 34

Incorrect

Mark 0.00 out of 1.00

is a market process where a less-than-optimal outcome is achieved due to

parties having asymmetric information.

Your answer is incorrect.

The correct answer is:
[Adverse selection] is a market process where a less-than-optimal outcome is achieved due to parties having
asymmetric information.
Question 35

Incorrect

Mark 0.00 out of 1.00

A company gets new funds only when its stocks are sold

Select one:
a. in the secondary market when a stock trades between investors

b. in the secondary market when an investor purchases stock from his broker

c. in the primary market when the company engages services of an investment bank
d. in the money market

Your answer is incorrect.

The correct answer is: in the primary market when the company engages services of an investment bank

Question 36

Correct

Mark 1.00 out of 1.00

Lisa is a college student and has taken a bank loan of Rs. 5 lakhs to fund her education. How will this impact
the balance sheet of the bank?

Select one:
a. Decrease in Bank’s liabilities

b. Decrease in Bank’s assets

c. Increase in Bank’s liabilities

d. Increase in Bank’s assets

Your answer is correct.

The correct answer is: Increase in Bank’s assets
Question 37

Correct

Mark 1.00 out of 1.00

Liquidity refers to the ease with which financial instruments can be converted into cash without

losing their capital value.

Your answer is correct.

The correct answer is:
[Liquidity] refers to the ease with which financial instruments can be converted into cash without losing their
capital value.

Question 38

Correct

Mark 1.00 out of 1.00

are the connecting link between money and capital markets.

Your answer is correct.

The correct answer is:
[Financial Intermediaries] are the connecting link between money and capital markets.

Question 39

Correct

Mark 1.00 out of 1.00

Financial claims are assets for surplus spending units.

Your answer is correct.

The correct answer is:
Financial claims are [assets] for surplus spending units.
 Question 40

Partially correct

Mark 1.00 out of 2.00

larger flow of funds and a more efficient financial system will lead to a larger

economic output and welfare in the economy.

Your answer is partially correct.

You have correctly selected 1.
The correct answer is:
[larger] flow of funds and a more efficient financial system will lead to a [greater] economic output and welfare
in the economy.

Question 41

Correct

Mark 1.00 out of 1.00

Investing in the bonds of a company makes you a part-owner of the company. True or False?

Select one:
True

False

The correct answer is 'False'.

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