Question

Which of the following statements is (are) correct?
(x) Banks and credit unions are considered financial intermediaries because they act as financial institutions through which savers can indirectly provide funds to borrowers.
(y) Mutual funds are one type of financial intermediary and the advantage of mutual funds is that they allow people with small amounts of money to diversify as well as give ordinary people access to the skills of professional money managers.
(z) A mutual fund is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks, bonds, or both stocks and bonds.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

11. We would expect the interest rate on Bond K to be higher than the interest rate on Bond W if the two bonds have identical characteristics except that
(x) Bond K has a term of 20 years and Bond W has a term of 5 years.
(y) Bond K was issued by the state government of California and Bond W was issued by the General Motors.
(z) Bond K was issued by a financially weak corporation and Bond W was issued by a financially strong corporation.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only
12. According to the textbook, which of the following statements is (are) correct?
(x) In the language of macroeconomics, investment refers to the purchase of new capital.
(y) If Bert builds a new bistro to sell bologna sandwiches, a macroeconomist would consider this as investment, however, a purchase of McDonald’s stock by Ernie would not be considered investment.
(z) Oscar buys a bond issued by Kraft Foods, which uses the funds to buy new machinery for one of its factories. Oscar is investing and Kraft Foods is adding to private saving.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Answer 1

(1) (A)

All the statements are correct.

(11) (C)

Higher bond maturity period increases interest rate risk, raising bond interest rate. However, government bonds are default free and carry lower interest rate.

(12) (B)

Statement z is wrong because Oscar is adding to private saving while Kraft is investing.