Deck 26: Saving, investment, and the Financial System

Question 1

Which of the following is not correct?

A)If you buy a bond from a corporation, you can sell the bond to someone else before it matures.
B)Date to maturity refers to the scheduling of periodic interest rate payments on a bond.
C)A bond is an IOU.
D)There are millions of different bonds in the U.S.economy.

Answer 1

B

Question 2

Lucy starts her own psychiatric practice,but her expenditures to open the practice exceed her income.Lucy is a

A)saver who demands money from the financial system.
B)saver who supplies money to the financial system.
C)borrower who demands money from the financial system.
D)borrower who supplies money to the financial system.

Answer 2

C

Question 3

Which of the following is correct?

A)The maturity of a bond refers to the amount to be paid back.
B)The principal of the bond refers to the person selling the bond.
C)A bond buyer cannot sell a bond before it matures.
D)None of the above is correct.

Answer 3

D

Question 4

Which of the following would be an example of direct finance?

A)A saver buys shares in a mutual fund.
B)A saver deposits money into a credit union.
C)A saver buys a bond a corporation has just issued so it can purchase capital.
D)None of the above is correct.

Question 5

When a country saves a larger portion of its GDP,it will have

A)more capital and higher productivity.
B)more capital and lower productivity.
C)less capital and higher productivity.
D)less capital and lower productivity.

Question 6

Skyline Chili wants to finance the purchase of new equipment for its restaurants,but they have limited internal funds.Skyline will likely

A)demand loanable funds by buying bonds.
B)demand loanable funds by selling bonds.
C)supply loanable funds by buying bonds.
D)supply loanable funds by selling bonds.

Question 7

Lekeisha's income exceeds her expenditures.Lekeisha is a

A)saver who demands money from the financial system.
B)saver who supplies money to the financial system.
C)borrower who demands money from the financial system.
D)borrower who supplies money to the financial system.

Question 8

Which of the following is not a nonsensical headline?

A)British perpetuities about to mature.
B)Disney issues new bonds with term of $1,000 each.
C)Government bonds currently pay less interest than corporate bonds.
D)Standard and Poor's judges new junk bond to have very low credit risk.

Question 9

Which of the following is correct?

A)Some bonds have terms as short as a few months.
B)Because they are so risky, junk bonds pay a low rate of interest.
C)Corporations buy bonds to raise funds.
D)All of the above are correct.

Question 10

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a

A)bond.
B)stock.
C)mutual fund.
D)All of the above are correct.

Question 11

A bond that never matures is known as a

A)perpetuity.
B)an intermediary bond.
C)an indexed bond.
D)a junk bond.

Question 12

If Proctor and Gamble sells a bond it is

A)borrowing directly from the public.
B)borrowing indirectly from the public.
C)lending directly to the public.
D)lending indirectly to the public.

Question 13

If the government's expenditures exceeded its receipts,it would likely

A)lend money to a bank or other financial intermediary.
B)borrow money from a bank or other financial intermediary.
C)buy bonds directly from the public.
D)sell bonds directly to the public.

Question 14

Institutions in the economy that help to match one person's saving with another person's investment are collectively called the

A)Federal Reserve system.
B)banking system.
C)monetary system.
D)financial system.

Question 15

Megasoft wants to finance the purchase of new equipment for developing security software called Doors,but they have limited internal funds.Megasoft will likely

A)demand loanable funds by buying bonds.
B)demand loanable funds by selling bonds.
C)supply loanable funds by buying bonds.
D)supply loanable funds by selling bonds.

Question 16

The length of time until a bond matures is called the

A)perpetuity.
B)term.
C)maturity.
D)intermediation.

Question 17

A perpetuity is distinguished from other bonds in that it

A)pays continuously compounded interest.
B)pays interest only when it matures.
C)never matures.
D)will be used to purchase another bond when it matures unless the owner specifies otherwise.

Question 18

When opening a restaurant you may need to buy ovens,freezers,tables,and cash registers.Economists call these expenditures

A)capital investment.
B)investment in human capital.
C)business consumption expenditures.
D)None of the above is correct.

Question 19

Which of the following is not correct?

A)When a country saves more, it has more capital.
B)A supplier of loanable funds borrows money.
C)The interest rate adjusts to balance the quantity supplied of and the quantity demanded of loanable funds.
D)If Mary buys equipment for her factory, Mary is engaging in capital investment.

Question 20

A bond is a

A)financial intermediary.
B)certificate of indebtedness.
C)certificate of partial ownership in an enterprise.
D)None of the above is correct.

Question 21

Which of the following bond buyers did not buy the bond that best met their objective?

A)Mia wanted a bond with a high interest rate and was willing to take a lot of risk.She purchased a junk bond.
B)Anna wanted a bond that would let her best avoid federal income taxes.She purchased a municipal bond.
C)Bill wanted to purchase a bond that was unlikely to have default.He purchased a bond that Standards and Poor's rated a low credit risk.
D)Toby held long-term bonds rather than short-term ones to avoid risk.

Question 22

The sale of stocks

A)and bonds to raise money is called debt finance.
B)and bonds to raise money is called equity finance.
C)to raise money is called debt finance, while the sale of bonds to raise funds is called equity finance.
D)to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.

Question 23

Suppose the city of Cincinnati has a high credit rating.

A)The high credit rating and the tax status of municipal bonds should both make the interest rate lower than otherwise.
B)The high credit rating and the tax status of municipal bonds should both make the interest rate higher than otherwise.
C)The high credit rating should make the interest rate higher than otherwise.The tax status of municipal bonds should make the interest rate lower than otherwise.
D)The high credit rating should make the interest rate lower than otherwise.The tax status of municipal bonds should make the interest rate higher than otherwise.

Question 24

Other things the same,bonds are likely to have higher interest rates if they have

A)tax exemptions and short terms.
B)tax exemptions and long terms.
C)no tax exemptions and short terms.
D)no tax exemptions and long terms.

Question 25

Fred sells newly issued bonds.Ethel sells newly issued stocks.Who uses direct finance?

A)Only Fred.
B)Only Ethel.
C)Both Fred and Ethel.
D)Neither Fred nor Ethel.

Question 26

Long-term bonds are generally

A)less risky than short-term bonds and so pay higher interest.
B)less risky than short-term bonds and so pay lower interest.
C)more risky than short-term bonds and so pay higher interest.
D)more risky than short-term bonds and so pay lower interest.

Question 27

Other things the same,which bond would you expect to pay the lowest interest rate?

A)a bond issued by a state with a very good credit rating
B)a bond issued by the U.S.government
C)a bond issued by a fairly new company doing genetic research
D)a bond issued by Nabisco

Question 28

Municipal bonds pay a relatively

A)low rate of interest because of their high-default risk and because the interest they pay is subject to federal income tax.
B)low rate of interest because of their low-default risk and because the interest they pay is not subject to federal income tax.
C)high rate of interest because of their high-default risk and because federal taxes must be paid on the interest they pay.
D)high rate of interest because of their low-default risk and because the interest they pay is not subject to federal income tax.

Question 29

Which of the following is correct?

A)Lenders sell bonds and borrowers buy them.
B)Long-term bonds usually pay a lower interest rate than do short-term bonds because long-term bonds are riskier.
C)Junk bonds refer to bonds that have been resold many times.
D)None of the above is correct.

Question 30

Other things the same,which bond would you expect to pay the highest interest rate?

A)a bond issued by the U.S.government
B)a bond issued by IBM
C)a bond issued by New York State
D)a bond issued by a new restaurant chain

Question 31

Assuming that the bonds below have the same term and principal and that the state or local government which issues the municipal bond has a good credit rating,which list has bonds ordered from the one that pays the most interest to the one that pays the least interest?

A)corporate bond, municipal bond, U.S.government bond
B)corporate bond, U.S.government bond, municipal bond
C)municipal bond, U.S.government bond, corporate bond
D)U.S.government bond, municipal bond, corporate bond

Question 32

Other things the same,as the maturity of a bond becomes longer,the bond will pay

A)less interest because it has less risk.
B)less interest because it has more risk.
C)more interest because it has more risk
D)There is no relation between term to maturity and risk.

Question 33

Compared to long-term bonds,other things the same,short-term bonds generally have

A)more risk and so pay higher interest.
B)less risk and so pay lower interest.
C)less risk and so pay higher interest.
D)about the same risk and so pay about the same interest.

Question 34

Jerry has the choice of two bonds,one that pays 3 percent interest and one that pays 6 percent interest.Which of the following is most likely?

A)The 6 percent bond is less risky than the 3 percent bond.
B)The 6 percent bond is a U.S.government bond, and the 3 percent bond is a junk bond.
C)The 6 percent bond has a longer term than the 3 percent bond.
D)The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S.government bond.

Question 35

Interest on bonds issued by state and local governments with good credit ratings

A)is not subject to federal income tax and so these bonds have a higher interest rate than otherwise comparable bonds issued by the U.S.government.
B)is not subject to federal income tax and so these bonds have a lower interest rate than otherwise comparable bonds issued by the U.S.government.
C)is subject to federal income tax and so these bonds have a higher interest rate than otherwise comparable bond issued by the U.S.government.
D)is subject to federal income tax and so these bonds have a lower interest rate than otherwise comparable bond issued by the U.S.government.

Question 36

Stock represents

A)a claim to a share of the profits of a firm.
B)ownership in a firm.
C)equity finance.
D)All of the above are correct

Question 37

On which bond is default most likely?

A)a junk bond
B)a municipal bond
C)a U.S.government bond
D)a corporate bond issued by Proctor and Gamble.

Question 38

Lacey,a financial advisor has told her clients the following things.Which of her statements is not correct?

A)"U.S.government bonds generally have a higher rate of interest than municipal bonds."
B)"The interest received on corporate bonds is taxable."
C)"U.S.government bonds have the lowest default risk."
D)"If you purchase a bond, you must hold it until it matures."

Question 39

You are thinking of buying a bond from Knight Corporation.You know that this bond is long term and you know that Knight's business ventures are risky and uncertain.You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation.Which of the following is correct?

A)The longer term would tend to make the interest rate on the bond issued by Knight higher, while the higher risk would tend to make the interest rate lower.
B)The longer term would tend to make the interest rate on the bond issued by Knight lower, while the higher risk would tend to make the interest rate higher.
C)Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by Knight.
D)Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Knight.

Question 40

Papa Mario's Pizza Company sells common stock.

A)They are using equity financing and the return shareholders earn is fixed.
B)They are using equity financing and the return shareholders earn depends on how profitable the company is.
C)They are using debt financing and the return shareholders earn is fixed.
D)They are using debt financing and the return shareholders earn depends on how profitable the company is.

Question 41

Suppose that the tires of a certain tire manufacturer are discovered to be defective.Other things the same,this news would make

A)the demand for stock of this company decrease, so the price would rise.
B)the demand for stock of this company decrease, so the price would fall.
C)the supply of stock of this company decrease and the price would fall.
D)the supply of stock of this company decrease and the price would rise.

Question 42

Nastech Pharmaceuticals announced they have developed a nasal spray that would reduce hunger cravings.Other things the same we'd expect

A)the demand for existing shares of stock in this company decreased, so the price fell.
B)the demand for existing shares of stock in this company increased, so the price rose.
C)the supply of stock of existing shares of stock in this company decreased, so the price fell.
D)the supply of stock of existing shares of stock in this company increased, so the price rose.

Question 43

Other things being constant,when a business issues more stock,the

A)supply of the stock is greater and thus the price will fall.
B)supply of the stock is less and thus the price will rise.
C)demand for the stock is greater and thus the price will rise.
D)demand for the stock is less and thus the price will fall.

Question 44

The Dow Jones Industrial Average has been computed regularly since

A)1976.
B)1948.
C)1913.
D)1896.

Question 45

All else equal,when people become more optimistic about a company's future,the

A)supply of the stock and the price will both rise.
B)supply of the stock and the price will both fall.
C)demand for the stock and the price will both rise.
D)demand for the stock and the price will both fall.

Question 46

Stock indexes are

A)the average of a group of stock prices.
B)the average of a group of stock yields.
C)reports in the newspaper that report on the price of the stock and earnings of the corporation.
D)measures of the risk relative to the profitability of corporations.

Question 47

The single most important piece of information about a stock is the

A)amount of earnings the firm retains.
B)dividend.
C)volume
D)price.

Question 48

As chief financial officer you sell newly issued bonds on behalf of your firm.Your firm is

A)borrowing directly.
B)borrowing indirectly.
C)lending directly.
D)lending indirectly.

Question 49

Which of the following people purchased the correct asset to meet their objective?

A)Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza.
B)Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.
C)Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
D)All of the above are correct.

Question 50

Which of the following statements is correct?

A)A general, persistent decline in stock prices may signal that the economy is about to enter a boom period because people will be able to buy stock for less money.
B)A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits.
C)A general, persistent decline in stock prices may signal that the economy is about to enter a recession because low stock prices mean that corporations have had low profits in the past.
D)Expectations about the business cycle have no impact on stock prices.

Question 51

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs.We would expect that this would

A)raise the demand for existing shares of the stock, causing the price to rise.
B)decrease the demand for existing shares of the stock, causing the price to fall.
C)raise the supply of the existing shares of stock, causing the price to rise.
D)raise the supply of the existing shares of stock, causing the price to fall.

Question 52

Which of the following is not an important stock exchange in the United States?

A)New York Stock Exchange
B)American Stock Exchange
C)Chicago Mercantile Exchange
D)NASDAQ

Question 53

The prices of stock traded on exchanges are determined by

A)the Corporate Stock Administration.
B)the administrators of NASDAQ.
C)the supply and demand for the stock.
D)All of the above are correct.

Question 54

The Dow Jones Industrial Average is now based on the prices of the stocks of

A)30 major U.S.corporations.
B)100 major U.S.corporations.
C)500 representative U.S.corporations.
D)1000 representative U.S.corporations.

Question 55

Suppose that the government finds a major defect in one of a company's products and demands that it take it off the market.We would expect that the

A)supply of existing shares of the stock and the price will both rise.
B)supply of existing shares of the stock and the price will both fall.
C)demand for existing shares of the stock and the price will both rise.
D)demand for existing shares of the stock and the price will both fall.

Question 56

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company that they believe will make poor decisions.If things turn out as they plan

A)The price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls.
B)The price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises.
C)The price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls.
D)The price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises.

Question 57

People who buy newly issued stock in a corporation such as Crate and Barrel provide

A)debt finance and so become part owners of Crate and Barrel.
B)debt finance and so become creditors of Crate and Barrel.
C)equity finance and so become part owners of Crate and Barrel.
D)equity finance and so become creditors of Crate and Barrel.

Question 58

If Huedepool Beer runs into financial difficulty,the stockholders as

A)part owners of Huedepool are paid before bondholders get paid anything at all.
B)part owners of Huedepool are paid after bondholders get paid.
C)creditors of Huedepool are paid before bondholders get paid anything at all.
D)creditors of Huedepool are paid after bondholders get paid.

Question 59

In the late summer of 2005 some regions of the country were suffering from drought.What effect would we expect this to have on the stock of companies like John Deere that manufacture farm equipment?

A)raise the demand for existing shares of the stock, causing the price to rise
B)decrease the demand for existing shares of the stock, causing the price to fall
C)raise the supply of the existing shares of stock, causing the price to rise
D)raise the supply of the existing shares of stock, causing the price to fall

Question 60

People who buy stock in a corporation such as General Electric become

A)creditors of General Electric, so the benefits of holding the stock depend on General Electric's profits.
B)creditors of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.
C)part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits.
D)part owners of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.

Question 61

Buskin's Corporation has issued 2 million shares of stocks.Its earnings were $10 million dollars of which it retained $6 million.What was the dividend per share?

A)$2.
B)$3.
C)$5
D)None of the above is correct.

Question 62

The amount of revenue a firm receives for the sale of its products minus its costs of production as measured by its accountants is the firm's

A)earnings.
B)retained earnings.
C)economic, or real, profit.
D)dividend.

Question 63

Dependable Appliances had a PE ratio of 25,earnings per share of $4,and retained earnings per share of $3.What was its dividend yield?

A)4%
B)3%
C)1%
D)None of the above is correct.

Question 64

Thomas Publishing has a share price of $30,retained earnings of $1 per share,and a dividend yield of 5%.What is its PE ratio?

A)30
B)20
C)15
D)12

Question 65

Volume,as reported in stock tables refers to the

A)number of shares traded.
B)percentage of shares outstanding traded.
C)number of shares traded times the price they sold at.
D)number of shares of a company traded divided by the shares of all companies traded.

Question 66

A corporation's earnings are

A)the amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants minus the dividends paid out.
B)the amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as measured by its economists minus the dividends paid out.
C)the amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants.
D)the amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as measured by its economists.

Question 67

A dividend yield is the

A)dividend as a percentage of the price per share.
B)stock price as a percentage of the dividend.
C)dividend as a percentage of the retained earnings per share.
D)retained earnings per share as the percentage of the dividend.

Question 68

PacknCamp Corporation has a stock price of $50,has issued 2,000,000 shares of stock,has retained earnings of $4 million dollars,and a dividend yield of 4 percent.The price-earnings ratio of PacknCamp is

A)25, which is high compared to historical standards of the market.
B)25, which is low compared to historical standards of the market.
C)12.5, which is low compared to historical standards of the market.
D)12.5, which is high compared to historical standards of the market.

Question 69

Profits not paid out to stockholders are

A)retained earnings.
B)known as dividends.
C)the denominator in the price-earnings ratio.
D)All of the above are correct.

Question 70

A high price-earnings ratio indicates that either the stock is

A)undervalued or people are relatively optimistic about the corporation's prospects.
B)overvalued or people are relatively optimistic about the corporation's prospects.
C)overvalued or people are relatively pessimistic about the corporation's prospects.
D)undervalued or people are relatively pessimistic about the corporation's prospects.

Question 71

Mount Adams Jazz Corporation has a price of $100,a dividend of $0.80,and retained earnings of $2.00 per share.The dividend yield on this stock is

A)2.8 percent.
B)2 percent.
C)1.2 percent.
D).8 percent.

Question 72

Retained earnings are

A)paid out as dividends.
B)the amount of revenues a corporation receives for the sale of its products minus its costs of production as measured by its accountants.
C)the single most important piece of information about a stock.
D)None of the above is correct.

Question 73

A low price-earnings ratio indicates that either the stock is

A)undervalued or people are relatively optimistic about the corporation's prospects.
B)overvalued or people are relatively optimistic about the corporation's prospects.
C)overvalued or people are relatively pessimistic about the corporation's prospects.
D)undervalued or people are relatively pessimistic about the corporation's prospects.

Question 74

ACME Pumps had a price to earnings ratio of 15,paid a dividend of $1,and retained earnings of $2 a share.What was the price of a share of its stock?

A)$15
B)$30
C)$45
D)None of the above is correct.

Question 75

Queen City Sausage stock is selling at $40 per share,it has retained earnings of $2.00 per share and dividends of $.50 per share.What is the price-earnings ratio and what is the dividend yield?

A)20, 1.25 percent
B)20, 6.25 percent
C)16, 1.25 percent
D)None of the above is correct.

Question 76

Profits paid out to stockholders are

A)retained earnings.
B)dividends.
C)the denominator in the price-earnings ratio.
D)All of the above are correct.

Question 77

Stock in Precision Instruments is selling at $25 per share.It had earnings of $5 a share and a dividend yield of 5 percent.What is the dividend and the price-earnings ratio?

A)$.25, 5
B)$.25, 6.7
C)$1.25, 5
D)$1.25, 6.7

Question 78

Over-the-Rhine Cheese Corporation had a PE ratio of 20,retained earnings of $1.5 per share and a dividend of $.50.What was its dividend yield?

A)1.25%
B)1.67%
C)3.33%
D)7.50%

Question 79

Thomas Publishing has a price of $20 a share,outstanding shares of 2.5 million,retained earnings of $1 million dollars,and a dividend yield of 2 percent.It has a price to earnings ratio of

A)50, which is high by historical standards.
B)50, which is low by historical standards.
C)25, which is high by historical standards.
D)25, which is low by historical standards.

Question 80

Historically,the typical price-earnings ratio is about

A)3
B)8
C)15
D)26