CHAPTER 02 14FINANCIAL MARKETS AND INSTITUTIONS 1

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Chapter 2: Financial Markets and Institutions

Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in multiple-choice questions.

Multiple Choice: True/False

1. A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.
a. True
b. False

ANSWER: True

2. The NYSE is defined as a “spot” market purely and simply because it has a physical location. The NASDAQ, on the other hand, is not a spot market because it has no one central location.
a. True
b. False

ANSWER:
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If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index.
a. True
b. False

ANSWER: True

17. The annual rate of return on any given stock can be found as the stock’s dividend for the year plus the change in the stock’s price during the year, divided by its beginning-of-year price.
a. True
b. False

ANSWER: True

18. The annual rate of return on any given stock can be found as the stock’s dividend for the year plus the change in the stock’s price during the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question.
a. True
b. False

ANSWER: True

19. Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock’s total market value, is then calculated, and that average return is often used as an indicator of the “return on the market.”
a. True
b. False

ANSWER: True

20. Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be

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