Question

5. We know that financial markets have a high degree of information asymmetry. Without the participation of financial intermediaries in financial market transactions:

a. Information and transaction costs would be lower

b. Transaction costs would be higher but information costs would be unchanged

c. Information costs would be higher but transaction costs would be unchanged

d. Information and transaction costs would be higher

7. Which of the following is not a function of the financial markets?

a. Transfer funds across time and place

b. Allocate capital efficiently

c. Transfer and diversify risk

d. Trade securities to generate abnormal returns

10. Suppose the Federal Reserve suddenly announces it will increase interest rates, we would expect stock prices to _________ because of the _________ in discount rates.

a. Increase; increase

b. Increase; decrease

c. Decrease; decrease

d. Decrease; increase

Answer 1

5). Without the participation of financial intermediaries in financial market transactions, information and transaction costs would be higher because in order to get information, more effort would be required which in turn would increase transaction costs. Option (d) is correct.

7). Trading securities to generate abnormal returns is not a function of the financial markets. Option (d) is correct.

10). As interest rates increase, stock prices decrease due to increase in discount rates. Option (d) is correct.