Deck 5: Financial Markets, Institutions, and Securities

Question 1

A___________ is set up so that employees of corporations or governments can receive income after retirement.

A) credit union
B) commercial bank
C) pension fund
D) life insurance company

Answer 1

pension fund

Question 2

A feature that allows bondholders to change each bond into a stated number of shares of commonstock is called

A) a call feature.
B) a conversion feature.
C) a stock purchase warrant.
D) none of the above.

Answer 2

a conversion feature.

Question 3

Trading is carried out in the Over-the-Counter (OTC) Exchange by

A) the auction process.
B) the competitive bid process and the negotiation process.
C) an investment banker.
D) the competitive bid process.

Answer 3

the competitive bid process and the negotiation process.

Question 4

___________are funds denominated in Canadian dollars and deposited in banks located outsideCanada.

A) Money market mutual funds
B) Negotiable certificates of deposit
C) Eurodollar deposits
D) Banker's acceptances

Question 5

Firms that require funds from external sources can obtain them from

A) financial institutions.
B) private placement.
C) financial markets.
D) all of the above.

Question 6

The nongovernment issues typically have slightly higher yields than government issues withsimilar maturities due to the slightly _ ___________associated with them.

A) higher profitability
B) lower risk
C) higher risk
D) stronger secondary market

Question 7

Firms that require funds from external sources can obtain them in one of the following waysEXCEPT

A) managerial markets.
B) private placement.
C) financial markets.
D) financial institutions.

Question 8

The depth of a market is determined by

A) the ability to absorb the purchase or sale of a large dollar amount of securities.
B) the number of participants.
C) the ability to absorb the purchase or sale of a large number of securities.
D) the safety of principal.

Question 9

The yield on commercial paper is generally higher than the yield on

A) a negotiable certificate of deposit.
B) a Treasury bill.
C) common stock.
D) a corporate bond.

Question 10

All of the following are characteristics of preferred stock EXCEPT

A) it has less restrictive covenants than debt.
B) it is often considered quasi debt due to fixed payment obligation.
C) it gives the holder voting rights which permit selection of the firm's directors.
D) its holders have priority over common stockholders in the liquidation of assets.

Question 11

A put bond gives the bondholder

A) the right to sell the bond back to the corporation at the original purchase price.
B) the right to sell the bond back to the corporation at a stated premium.
C) the right to sell the bond back to the corporation at par.
D) the right to sell the bond back to the corporation at the current market value.

Question 12

The opportunity for management to purchase a certain number of shares of their firm's commonstock at a specified price over a certain period of time is

A) a stock option.
B) a stock right.
C) a preemptive right.
D) a warrant.

Question 13

The two key financial markets are

A) the money market and the capital market.
B) the primary market and the secondary market.
C) the capital market and the secondary market.
D) the primary market and the money market.

Question 14

___________are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.

A) Preferred stockholders
B) Creditors
C) Bondholders
D) Common stockholders

Question 15

The major factor(s) affecting the cost, or interest rate, on a bond is (are)

A) the size of the offering.
B) its maturity.
C) its issuer risk.
D) all of the above.

Question 16

A___________ is the largest financial intermediary handling individual savings. It receives premiumpayments that are placed in loans or investments to accumulate funds to cover future benefits.

A) commercial bank
B) credit union
C) trust company
D) life insurance company

Question 17

The key participants in financial transactions are individuals, businesses, and governments.Individuals are net ___________of funds, and businesses are net ___________of funds.

A) purchasers; sellers
B) demanders; suppliers
C) suppliers; demanders
D) users; providers

Question 18

All of the following are examples of restrictive debt covenants EXCEPT

A) a prohibition on selling accounts receivable.
B) supplying the creditor with audited financial statements.
C) a prohibition on entering certain types of lease arrangements.
D) a constraint on subsequent borrowing.

Question 19

A ___________consumers. Each user of the intermediary is required to buy a membership.

A) credit union
B) savings bank
C) life insurance company
D) commercial bank

Question 20

Shares of stock currently owned by the firm's shareholders are called

A) authorized.
B) treasury shares.
C) issued.
D) outstanding.

Question 21

Trading is carried out on the floor of the New York Stock Exchange by

A) a telecommunications network.
B) investment bankers.
C) the auction process.
D) the negotiation process.

Question 22

The over-the-counter market is

A) a place where securities are bought and sold.
B) the New York Stock Exchange.
C) an intangible market for unlisted securities.
D) an organized stock exchange.

Question 23

Dividends in arrears which must be paid to the preferred stockholders before payment of dividends to common stockholders are

A) noncumulative.
B) convertible.
C) cumulative.
D) participating.

Question 24

The principal nongovernment marketable securities are all of the following EXCEPT

A) negotiable certificates of deposit.
B) money market mutual funds.
C) Eurodollar deposits.
D) agency issues.

Question 25

Violation of any standard or restrictive provision by the borrower gives the lender the right to do all of the following EXCEPT

A) demand immediate repayment.
B) increase the interest rate.
C) seize the loan collateral.
D) alter the terms of the initial agreement, for example accelerate the maturity date.

Question 26

Payment of interest required only when earnings are made available from which to make apayment is characteristic of

A) an income bond.
B) a floating rate bond.
C) a mortgage bond.
D) an equipment trust certificate.

Question 27

Securities exchanges create efficient markets that do all of the following EXCEPT

A) ensure a market in which the price reflects the true value of the security.
B) allow the price to be determined by supply and demand of securities.
C) allocate funds to the most productive uses.
D) control the supply and demand for securities through price.

Question 28

Which of the following is true of a Eurodollar deposit?

A) Eurodollar deposits tend to provide higher yields above nearly all other marketable securities with similar maturities due to the absence of an active secondary market.
B) Eurodollar deposits tend to provide yields above nearly all other marketable securities with similar maturities due to the higher risk.
C) Eurodollar deposits tend to provide yields below nearly all other marketable securities with similar maturities due to their low risk.
D) Eurodollar deposits are nonnegotiable and pay interest only at maturity, hence the yield is higher than on other marketable securities with similar maturities.

Question 29

__________is a short-term, unsecured promissory note issued by a corporation with a very highcredit standing.

A) A negotiable certificate of deposit
B) A money market mutual fund
C) A commercial paper
D) A repurchase agreement

Question 30

A debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under clearly defined terms is called a

A) bond indenture.
B) corporate bond.
C) treasury bond.
D) discount bond.

Question 31

The size of the loan and its cost of borrowing are

A) independent.
B) inversely related.
C) correlated.
D) not related.

Question 32

___________is a paid individual, corporation, or commercial bank trust department that acts as a thirdparty to a bond indenture to ensure that the issuer does not default on its contractualresponsibilities to the bondholders.

A) A trustee
B) A bond rating agency
C) A bond issuer
D) An investment banker

Question 33

Trading is carried out on the floor of the Toronto Stock Exchange by

A) a telecommunications network.
B) investment bankers.
C) the auction process.
D) the negotiation process.

Question 34

A___________ is a restrictive provision on a bond which provides for the systematic retirement of the bonds prior to their maturity.

A) sinking-fund requirement
B) subordination clause
C) conversion feature
D) redemption clause

Question 35

As a form of financing, equity capital

A) has a maturity date.
B) is temporary.
C) is only liquidated in bankruptcy.
D) has priority over bonds.

Question 36

Holders of equity capital

A) receive interest payments.
B) own the firm.
C) receive guaranteed income.
D) have loaned money to the firm.

Question 37

By definition, the money market involves the buying and selling of

A) stocks and bonds.
B) funds that mature in more than one year.
C) short-term funds.
D) flows of funds.

Question 38

The decision to refund a callable bond

A) is a financing decision.
B) is a capital budgeting decision
C) is a net working capital decision.
D) should be made only if interest rates have increased.

Question 39

The ___________feature allows the bondholder to change each bond into a stated number of shares of stock.

A) capitalization
B) call
C) conversion
D) put

Question 40

All of the following are examples of organized stock exchanges EXCEPT

A) the Winnipeg Commodity Exchange.
B) the over-the-counter exchange.
C) the Toronto Stock Exchange.
D) the New York Stock Exchange.

Question 41

Which of the following is NOT a financial institution?

A) a newspaper publisher
B) an insurance company
C) a commercial bank
D) a pension fund

Question 42

From the corporation's point of view, the advantages of issuing preferred stock include all of thefollowing EXCEPT

A) its flexible dividend policy.
B) its increased financial leverage.
C) its excellent merger security.
D) its difficulty to retire.

Question 43

All of the following are examples of long-term debt EXCEPT

A) bonds.
B) term loans.
C) lines of credit.
D) debentures.

Question 44

The major securities traded in the capital markets are

A) bonds and commercial paper.
B) Treasury bills and certificates of deposit.
C) commercial paper and Treasury bills.
D) stocks and bonds.

Question 45

A___________ accepts both demand and time deposits and primarily makes loans directly to both individual and business borrowers or through the financial markets.

A) trust company
B) credit union
C) commercial bank
D) mutual fund

Question 46

Bonds are

A) a series of short-term debt instruments.
B) a hybrid form of financing used to raise large sums of money from a diverse group of lenders.
C) a form of equity financing that pays interest.
D) long-term debt instruments.

Question 47

All of the following are functions of security exchanges EXCEPT

A) holding demand deposits.
B) creating continuous markets.
C) allocating scarce capital.
D) aiding in new financing.

Question 48

Government usually

A) borrows funds directly from financial institutions.
B) maintains permanent deposits with financial institutions.
C) is a net supplier of funds.
D) is a net demander of funds.

Question 49

Most money market transactions are made in

A) common stock.
B) stocks and bonds.
C) marketable securities.
D) preferred stock.

Question 50

To compensate for the uncertainty of future interest rates and the fact that the longer the term of aloan the higher the probability that the borrower will default, the lender typically

A) reserves the right to change the terms of the loan at any time.
B) charges a higher interest rate on long-term loans.
C) reserves the right to demand immediate payment at any time.
D) includes excessively restrictive debt provisions.

Question 51

The ___________is created by a financial relationship between suppliers and demanders of short-termfunds.

A) money market
B) financial market
C) stock market
D) capital market

Question 52

Equity capital can be raised through

A) retained earnings and the stock market.
B) the TSX bond market.
C) the money market.
D) a private placement with an insurance company as the creditor.

Question 53

___________arise from a short-term credit arrangement used by businesses to finance transactionsinvolving firms in foreign countries or firms with unknown credit capacities.

A) Money market mutual funds
B) Eurodollar deposits
C) Negotiable certificates of deposit
D) Banker's acceptances

Question 54

Another term sometimes applied to a common shareholder is

A) a residual owner of the firm.
B) a net owner of the firm.
C) a fundamental or basic owner of the firm.
D) a reciprocal owner of the firm.

Question 55

___________are bonds that have a short maturity, typically one to five years, and which can be redeemed or renewed for a similar period at the option of their holders.

A) Floating rate bonds
B) Junk bonds
C) Putable bonds
D) Extendible notes

Question 56

The major factors affecting the cost of long-term debt include all of the following EXCEPT

A) restrictive covenants.
B) the loan size.
C) the loan maturity.
D) the basic cost of money.

Question 57

Bonds that can be redeemed at par at the option of their holders either on a specific date after the date of issue and every 1 to 5 years thereafter or when and if the firm takes specified actions such as being acquired, acquiring another company, or issuing a large amount of additional debt are called

A) putable bonds.
B) floating-rate bonds.
C) junk bonds.
D) zero coupon bonds.

Question 58

The ease of salability of marketable securities refers to the

A) risk of payments.
B) safety of maturity.
C) safety of principal.
D) safety of return.

Question 59

On ___________, the stated interest rate is adjusted periodically within stated limits in response tochanges in specified money or capital market rates.

A) an equipment trust certificate
B) a mortgage bond
C) a floating rate bond
D) a zero discount bond

Question 60

The purpose of the restrictive debt covenant that imposes fixed assets restrictions is to

A) prevent the firm from liquidation, acquisition, or encumbrance of capital assets.
B) protect the lender by controlling the risk and marketability of the borrower's security investment alternatives.
C) limit the amount of fixed-payment obligations.
D) ensure a cash shortage does not cause an inability to meet current obligations.

Question 61

___________allow the holder to purchase a certain number of shares of the firm's common stock at a specified price over a certain period of time and are occasionally part of a debt agreement.

A) Stock-purchase warrants
B) Debentures
C) Puts and calls
D) Rights

Question 62

The riskiness of publicly traded bond issues is rated by independent agencies. According toDominion Bond Rate service, an AAA bond and a CCC bond are ____________ and___________ ,respectively.

A) satisfactory quality; very highly speculative
B) satisfactory quality; highly speculative
C) highest quality; speculative
D) highest quality; very highly speculative

Question 63

General Motors sells 100,000 shares of common stock to investors at large.

A) seasoned new issue.
B) rights offering.
C) private placement.
D) initial public offering.

Question 64

Regarding the tax treatment of payments to securities holders; it is true that ____________ , while___________.

A) common stock dividends and preferred stock dividends are tax-deductible; interest is not tax deductible
B) interest and preferred stock dividends are not tax-deductible; common stock dividends are tax deductible
C) common stock dividends and preferred stock dividends are not tax-deductible; interest is tax deductible
D) interest and preferred stock dividends are tax-deductible; common stock dividends are not tax deductible

Question 65

An instrument that give their holders the right to purchase a certain number of shares of the firm'scommon stock at a specified price over a certain period of time is called

A) a call feature.
B) a conversion feature.
C) a stock purchase warrant.
D) none of the above.

Question 66

The legal contract setting forth the terms and provisions of a corporate bond is

A) an indenture.
B) a loan document.
C) a debenture.
D) a promissory note.

Question 67

Funds on deposit at commercial banks having variable maturities and yields based on size,maturity, and prevailing money market conditions are

A) savings accounts.
B) money market mutual funds.
C) commercial paper.
D) negotiable certificates of deposit.

Question 68

In utilizing a(n)___________ the issuer can annually deduct the current year's interest accrual without having to actually pay the interest until the bond matures.

A) extendible note
B) zero coupon bond
C) floating rate bond
D) junk bond

Question 69

Each of the following instruments demonstrates the safety of principal characteristic common to marketable securities EXCEPT

A) banker's acceptances.
B) Treasury bills.
C) common stock.
D) short-dated bonds.

Question 70

A___________ is not a specific security but an arrangement whereby a bank or security dealer sellsspecific marketable securities to a firm and agrees to repurchase the securities in the future.

A) negotiable certificate of deposit
B) money market mutual fund
C) repurchase agreement
D) commercial paper issue

Question 71

Which of the following financial institutions would b e the smallest in size?

A) Royal Bank of Canada
B) Toronto Dominion Bank
C) National Bank of Canada
D) Saskatoon Credit Union

Question 72

High-risk, high-yield junk bonds have declined in popularity during the early 1990s due to

A) the stabilizing of interest rates.
B) a number of major defaults on these bonds.
C) the declining need of growth capital.
D) the decline in mergers and takeovers, which these bonds were used to finance.

Question 73

The___________ is created by a number of institutions and arrangements that allow the suppliers anddemanders of long-term funds to make transactions.

A) capital market
B) financial market
C) money market
D) credit market

Question 74

The purpose of the restrictive debt covenant that prohibits the sale of accounts receivable is to

A) ensure that a cash shortage does not cause an inability to meet current obligations.
B) assure the lender that the borrowed funds are put to the use for which they were intended.
C) prevent liquidation of assets through large salary increases of key employees.
D) limit the amount of fixed-payment obligations.

Question 75

___________is a stipulation in a long-term debt agreement that subsequent or less important creditors agree to wait until all claims of the ____________ are satisfied before having their claims satisfied.

A) The combination restriction; senior debt
B) Subordination; common stockholders
C) Subordination; senior debt
D) The senior debt; common stockholders

Question 76

Convertible bonds are normally

A) subordinated debentures.
B) debentures.
C) income bonds.
D) mortgage bonds.

Question 77

Another name for a bond that does not make periodic coupon payments is a

A) subordinated debenture.
B) zero coupon bond.
C) junk bond.
D) floating rate bond.

Question 78

All of the following are services provided by financial institutions EXCEPT

A) lending money to customers.
B) buying the businesses of customers.
C) investing customers' savings in stocks and bonds.
D) paying savers interest on deposited funds.

Question 79

Most businesses raise money by selling their securities in

A) a private placement.
B) a direct placement.
C) a public offering.
D) a stock exchange.

Question 80

Long-term debt instruments used by both government and business are known as

A) bonds.
B) bills.
C) stocks.
D) equities.