Free Finance and Banking Basics MCQs with Answers
30 Finance and Banking Basics MCQs from Introduction to Business, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Business finance covers capital requirements, sources of funds, budgeting, cash flow, investment decisions and basic financial statements and ratios. Banking includes commercial bank functions, deposits, loans, credit creation, interest and the role of a central bank, including its monetary policy and regulatory functions.
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21. Which financial market mainly deals in short-term instruments with maturities of up to one year?
- A. Money market
- B. Capital market
- C. Foreign exchange market
- D. Commodity market
Explanation: The money market provides funds through short-term instruments such as treasury bills and commercial paper.
Correct answer: Money market- A. To eliminate all investment risk
- B. To connect savers with borrowers
- C. To fix prices of all goods
- D. To replace government taxation
Explanation: Financial intermediaries collect funds from savers and channel them to individuals, firms, or governments that need finance.
Correct answer: To connect savers with borrowers- A. Lower value of all assets
- B. Lower use of borrowed funds
- C. Higher cash held by owners
- D. Greater use of borrowed funds
Explanation: The debt-to-equity ratio compares financing supplied by creditors with financing supplied by owners.
Correct answer: Greater use of borrowed funds- A. Absorbing unexpected losses
- B. Guaranteeing profits each year
- C. Replacing customer deposits
- D. Increasing currency circulation
Explanation: Bank capital acts as a cushion against unexpected losses and protects depositors and other creditors.
Correct answer: Absorbing unexpected losses- A. A lender checks a borrower's income before lending
- B. A borrower takes greater risks after receiving a loan
- C. A saver compares rates at different banks
- D. A bank records interest earned on a loan
Explanation: Moral hazard occurs when a party changes behaviour after entering an agreement because some consequences are borne by another party.
Correct answer: A borrower takes greater risks after receiving a loan- A. Become equal to its face value
- B. Increase
- C. Remain exactly unchanged
- D. Decrease
Explanation: Current yield is calculated by dividing the annual coupon payment by the bond's market price.
Correct answer: Decrease- A. Interest coverage ratio
- B. Inventory turnover ratio
- C. Dividend payout ratio
- D. Price-to-book ratio
Explanation: The interest coverage ratio compares operating earnings, commonly EBIT, with interest expense.
Correct answer: Interest coverage ratio- A. It removes market-wide risk
- B. It reduces unsystematic risk
- C. It guarantees a positive return
- D. It raises every asset's income
Explanation: Diversification combines different investments to reduce risk specific to an individual company or asset.
Correct answer: It reduces unsystematic risk- A. Approval by a stock exchange
- B. Payment in foreign currency
- C. Deposit into a bank account
- D. Conversion into a bond
Explanation: A crossed cheque is generally collected through a bank account rather than being paid directly over the counter in cash.
Correct answer: Deposit into a bank account- A. Exporters avoiding every business loss
- B. All firms seeking higher profits
- C. Consumers buying ordinary goods
- D. Banks facing temporary liquidity problems
Explanation: The lender of last resort function supplies short-term liquidity to otherwise viable banks that cannot obtain funds normally.
Correct answer: Banks facing temporary liquidity problems