Deck 1: Overview of Finance

Question 1

In the over-the-counter market,dealers are linked with the purchasers and sellers of securities through the ________ system.

A) NASDAQ
B) NYSE
C) AMEX
D) SEC
E) NYMEX

Answer 1

NASDAQ

Question 2

Money markets are markets for

A) foreign currency exchange.
B) corporate stocks.
C) long-term bonds.
D) short-term debt securities.
E) preferred securities.

Answer 2

short-term debt securities.

Question 3

The over-the-counter market is

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

Answer 3

an intangible market for unlisted securities.

Question 4

According to your text,major players in the money market include all of the following EXCEPT:

A) The U.S. Treasury
B) The Federal Reserve System
C) Commercial Banks
D) Companies
E) The U.S. Commerce Department

Question 5

________ would be the course where you learn to tell the good stocks from the bad,and the sure things from the really risky.

A) Corporate Finance
B) Investments
C) Personal Finance
D) Derivative Securities

Question 6

Finance is:

A) The study of investment management
B) The study of the stock exchange
C) The study of the capital market and its many players
D) The study of money management for personal use

Question 7

Capital markets have maturities of one year or less.

Question 8

What is the purpose of the capital market?

A) To match people with money to entrepreneurs with great business ideas or concepts
B) To more easily regulate the flow of money between parties
C) To make money without trying
D) To allow people to buy stocks for retirement

Question 9

Preferred stock pays a variable dividend.

Question 10

The ________ price is ________ the ________ price.

A) bid; above; ask
B) bid; below; ask
C) ask; below; bid
D) ask; above; bid
E) Answers (B) and (D) are correct.

Question 11

Common stockholders expect to receive a return through capital gains and

A) interest payments.
B) dividends.
C) fixed periodic dividends.
D) coupon payments.
E) receiving shares of preferred stock

Question 12

Money market securities have maturities of one year or less.

Question 13

T-bonds are money market securities,while T-bills and T-notes are traded in the capital market.

Question 14

Which one of these would a financial advisor say is most important?

A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase

Question 15

Which of the following is not considered a capital market security?

A) Mortgage-backed Securities
B) Corporate Bonds
C) Common Stock
D) Foreign Currencies
E) Municipal Bonds

Question 16

A firm raises capital to finance new equipment by selling bonds in the

A) secondary market.
B) primary market.
C) futures market.
D) options market.
E) federal funds market.

Question 17

The ________ is the financial market in which securities are initially issued.

A) private placement
B) OTC
C) primary market
D) secondary market
E) NASDAQ

Question 18

Which of these is not one of the basic questions for corporate finance?

A) How should we raise the money?
B) What are we going to make?
C) What do we do with our profits?
D) How big of a bonus should we get?

Question 19

Regulating the banking institutions is one of the Federal Reserve's duties.

Question 20

Which of the following statements is true regarding common and preferred shares?

A) Preferred shareholders have more voting power than common shareholders.
B) Common shareholders are guaranteed a fixed dividend.
C) Common shareholders have a more senior claim against assets than preferred shareholders.
D) Preferred shareholders are entitled to their dividends before common shareholders
E) Common shareholders earn a better return than preferred shareholders.

Question 21

Which of the following is not a major participant in the money market?

A) Money market mutual funds
B) Commercial banks
C) Wall Street dealers
D) Federal Reserve
E) U.S. Treasury

Question 22

The top of the organizational chart of organizations is:

A) CEO
B) Board of Directors
C) V.P. of Finance
D) Shareholders
E) Executive Chairman

Question 23

Which of the following statements is true?

A) The presence of asymmetric information in financial markets increases the likelihood that these markets are efficient.
B) Accounting profits are always more important to shareholders than cash flows.
C) Managers should choose investment projects that maximize shareholder wealth.
D) The study of finance only benefits students who aspire to careers in business.
E) Investors should not be compensated with a higher return for owning risky securities since they should know better than to buy stock in a firm that has uncertain prospects.

Question 24

Which of the following is not a financial intermediary?

A) Investment banks
B) The United States Treasury Department
C) Hedge Funds
D) Insurance companies
E) Thrift institutions

Question 25

Which of the following are rights of stockholders?

A) To share in the firm's profits after all other creditors have been satisfied
B) To be guaranteed a dividend
C) To decide whether or not to pay taxes on capital gains
D) To vote for directors, but never on specific issues
E) To avoid losses when the firm's prospects decline

Question 26

Which of the following is the best way to prevent an agency problem between shareholders and managers?

A) Maintain a proportional relationship between a manager's bonus and the number of employees in the firm.
B) Compensate managers to a significant degree with shares of stock in their firm.
C) Reward managers if they keep costs below the budgeted amount.
D) Pay managers a bonus if their division exceeds its targeted market share.
E) Pay managers a bonus if their division exceeds its quarterly sales target.

Question 27

Which of the following is a role of the secondary market?

A) Keep prices level
B) Give information for securities on sale in the primary market
C) Trade long term securities only
D) Offer securities for sale for the first time
E) Establishing security prices

Question 28

The ________ is a financial relationship created by a number of institutions with arrangements that allow the suppliers and demanders of long-term funds to make transactions.

A) money market
B) eurobond market
C) bond market
D) capital market
E) futures market

Question 29

The primary role of a financial system is to

A) make savvy investors rich.
B) regulate the banking system.
C) enable financial managers to evaluate investment projects with a system that always selects the correct opportunity for their firm.
D) channel funds from savers to borrowers who need funds for investment projects.
E) provide employees in financial institutions with a code of ethics.

Question 30

________ are further divided into two groups: Auctions,and Dealer markets.

A) Secondary markets
B) Primary markets
C) Money markets
D) Capital markets
E) Investment markets

Question 31

________ are long-term debt instruments business and government use to raise large sums of money.

A) T-bills
B) Bonds
C) Common stocks
D) Preferred stocks
E) Commercial papers

Question 32

What is the principal-agent problem?

A) When the principal misrepresents the agent to the board
B) When an agent does not maximize the utility of the principal
C) The cost of training new agents
D) When an agent misrepresents the principal to the board

Question 33

Which of the following are agency costs?
I.Forgoing an investment opportunity which would add to the market value of the owner's equity
II.Paying a dividend to each of the existing shareholders
III.Purchasing new equipment which increases the value of each share of stock
IV.Hiring outside auditors to verify the accuracy of the company financial statements

A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I, II, and IV only

Question 34

In a broad sense,every business asset is ultimately owned by

A) individuals.
B) the federal government.
C) foreign governments.
D) trust funds.
E) none of the above

Question 35

Shares of ________ are units of ownership interest,or equity,in a corporation.

A) debt
B) common stock
C) bank loans
D) commercial paper
E) debentures

Question 36

Which of the following is an advantage of a partnership?

A) No license, charter, or agreement legally required
B) Joint liability for company debts
C) Least regulated form of business
D) Ownership is easy to transfer
E) Can raise money using capital markets (debt and equity)

Question 37

Which of the following statements best describes mutual funds?

A) They are illegal in the United States, but popular in Europe.
B) They enable investors to buy many shares of stock in a single firm at a lower cost than using a stockbroker.
C) They provide good investment returns, but insufficient diversification.
D) They enable many investors with limited funds to buy a diversified portfolio.
E) They appeal only to wealthy investors.

Question 38

What do we call a market in which the price of a security is an accurate estimate by the market of its true value?

A) Efficient Market
B) Law of One Price
C) Effective Market
D) Primary Market
E) Secondary Market

Question 39

Agency costs are fees paid by the management of a corporation to compensate any investor that feels it has suffered a loss due to the agency problem.

Question 40

Agency costs pose the biggest problem for

A) insiders.
B) shareholders.
C) directors.
D) agents.
E) executives.

Question 41

The higher the probability that the return on an investment will not pay off its averaged promised value,the higher the expected return must be to induce an investor to invest in it.

Question 42

As the risk of a stock investment increases,

A) return will increase.
B) return will decrease.
C) required rate of return will decrease.
D) required rate of return will increase.
E) the beta approaches zero.

Question 43

A firm's net income is a true representation of cash flows available to the stockholders.

Question 44

Which of the following statements about risk is false?

A) Risk is one of the determinants of the required return.
B) Risk requires the possibility of at least one outcome less favorable than the expected value.
C) Risk requires the possibility of more than one outcome.
D) High risk should require low return.

Question 45

$100 today is worth

A) the same as $100 to be received in one year, since the inflation rate has been low recently and funds received in the near future should have the same purchasing power that they have today.
B) less than $100 to be received in one year, since many people will spend money foolishly today and will become more careful in their spending habits as they mature.
C) more than $100 to be received in one year, since you can invest the money received today for this period, leaving you with more than $100 in the future.
D) the same as a future receipt of $100, since the physical characteristics of U.S. currency are unchanged for long periods of time.
E) less than $100 received by someone ten years ago, since many products have been improved over this time period.

Question 46

Information Asymmetry is:

A) false information spread by competitors.
B) when two pieces of information counteract each other.
C) when some know more than others.
D) when information is not reflected properly in the market.
E) incomplete information.

Question 47

The efficient market hypothesis states that:

A) Requiring firms to issue more stock will reduce volatility.
B) Requiring investors to hold securities longer will reduce volatility.
C) Electing a pro-business Republican president makes the market more efficient.
D) Taxing security returns will raise prices .
E) Markets price securities fairly at all times and that new information is rapidly reflected in the price.