Question 1

A collection of securities is called a:
A)basket.
B)conglomerate.
C)portfolio.
D)Any of the above

Accepted Answer

A collection of securities is referred to as a portfolio. A basket typically refers to a specific type of portfolio or investment approach, while a conglomerate refers to a corporation that owns a diverse range of unrelated businesses. Therefore, the best choice is C, portfolio.

Question 2

A person buying a ____ is called an investor.
A)bond
B)stock
C)mutual fund
D)All of the above

Accepted Answer

An investor can purchase any of the options listed, including bonds, stocks, and mutual funds. Therefore, choice D, "All of the above," is the correct answer.

Question 3

A financial market is:
A)a place where investors can buy and sell securities.
B)the stock market.
C)regulated by well-defined rules and regulations.
D)All of the above

Accepted Answer

A financial market can be a physical place (such as a stock exchange) or an electronic platform (such as an online trading platform) where various financial instruments, such as stocks, bonds, commodities, and currencies, are bought and sold. The stock market is a type of financial market, but it is not the only one. Financial markets are usually regulated by rules and regulations that are intended to protect investors and maintain fair and transparent trading practices. Therefore, all of the given choices are correct.

Question 4

Which of the following is not a financial market?
A)Bond market
B)A market in which small business owners buy and sell their companies
C)Stock market
D)All of these are financial markets

Accepted Answer

The bond market and stock market are both financial markets where investors buy and sell securities, while the market in which small business owners buy and sell their companies is typically referred to as the mergers and acquisitions market or the private equity market. Therefore, choice B is not a financial market.

Question 5

Companies finance the purchase of assets through:
A)debt financing, the sale of bonds.
B)equity financing, the sale of stock.
C)lease financing.
D)Only a. and b. above
E)All of the above

Accepted Answer

Companies can finance the purchase of assets through debt financing (such as the sale of bonds), equity financing (such as the sale of stock), and lease financing, making all the options correct.

Question 6

A ____ pools the contributions of many investors and employs a professional manager to select securities that match a particular set of investment goals.
A)mutual fund
B)stock
C)bond
D)real asset

Accepted Answer

A mutual fund pools the contributions of many investors and employs a professional manager to select securities that match a particular set of investment goals. This allows investors to diversify their portfolios without having to individually select and manage a large number of securities.

Question 7

The ____ is the largest stock exchange in the world.
A)American Stock Exchange
B)Chicago Stock Exchange
C)New York Stock Exchange
D)Tokyo Stock Exchange

Accepted Answer

The New York Stock Exchange (NYSE) is the largest stock exchange in the world based on market capitalization of its listed securities. As of 2020, the NYSE had a market cap of over $25 trillion.

Question 8

Financial assets like stocks and bonds have value because:
A)they represent ownership of companies.
B)people are proud to own them.
C)they provide tangible benefits as do real assets.
D)they give their owners command over future cash flows.

Accepted Answer

Financial assets such as stocks and bonds have value because they represent ownership in companies and provide owners with the command over future cash flows through dividends and interest payments. While people may be proud to own them, and they may provide intangible benefits, it is their ability to generate income that gives them their primary value.

Question 9

The prices that investors pay for securities are determined by:
A)The collateral of the firm's liabilities and the profitability of the firm.
B)The profits of the firm and the stability of those profits.
C)What financial advisors think of the company.
D)The cash flows investors expect to receive from owning them.

Accepted Answer

The prices that investors pay for securities are primarily determined by the cash flows they expect to receive from owning them. Other factors such as profitability and stability of profits also contribute to the determination of prices, but ultimately it is the expected cash flows that drive prices. Factors such as collateral of the firm's liabilities and the opinions of financial advisors do not have a direct impact on security prices.

Question 10

Financial assets:
A)include cars, houses, and factory equipment.
B)provide some kind of service.
C)have value because of claims to future cash flows.
D)are not legal documents.

Accepted Answer

Financial assets have value because of claims to future cash flows, such as stocks, bonds, and derivatives. Cars, houses, and factory equipment are physical assets, and providing services is the function of a service industry. Legal documents may be related to financial assets, but they are not financial assets themselves.

Question 11

A loan backed by an asset the lender can sell to pay off the loan if the borrower defaults is called _____.
A)amortized
B)collateralized
C)guaranteed
D)riskless

Accepted Answer

A loan that is collateralized means that the lender has a security interest in an asset that the borrower pledges as collateral. If the borrower defaults, the lender can sell the collateral to recover the amount owed on the loan. This reduces the lender's risk and makes the loan less risky, which may result in lower interest rates for the borrower.

Question 12

Financial assets:
A)are legal documents.
B)give their owners claims to past cash flows.
C)include stocks and bonds.
D)Both a & c
E)All of the above

Accepted Answer

Financial assets include both legal documents and stocks and bonds, but they do not necessarily give their owners claims to past cash flows. Therefore, options A and B can be eliminated. Option E is incorrect because financial assets do not include all possible assets, such as physical assets like real estate or commodities. Choice D correctly identifies that financial assets include stocks and bonds (option C) and also acknowledges that they may take the form of legal documents (option A).

Question 13

The principal legal difference between a stockholder and a bondholder is:
A)the stockholder receives interest and the bondholder receives dividends.
B)only the bondholder can attend annual meetings.
C)the bondholder has an ownership interest and the shareholder is a lender.
D)the shareholder has an ownership interest and the bondholder is a lender.

Accepted Answer

The principal legal difference between a stockholder and a bondholder is that the shareholder has an ownership interest in the company, while the bondholder is a lender to the company. Shareholders have voting rights and may participate in company decisions through meetings, while bondholders typically have no such rights. Bondholders receive interest on their investment, while shareholders may receive dividends if the company chooses to distribute profits.

Question 14

Which of the following is not a real asset?
A)Equipment
B)Land
C)Stock
D)None of the above

Accepted Answer

Stock is not a real asset. Real assets are tangible assets like equipment and land. Stock is a financial asset that represents ownership in a company.

Question 15

A ____ is licensed to trade securities on behalf of investors.
A)stockbroker
B)securities analyst
C)market maker
D)corporation

Accepted Answer

A stockbroker is specifically licensed to trade securities on behalf of investors. Securities analysts analyze and make recommendations about securities, but they do not have the license to actually make trades. Market makers facilitate trading by buying and selling securities for their own account, but they may not necessarily be licensed to trade on behalf of investors. Corporations are legal entities that may issue securities, but they are not licensed to trade them.

Question 16

Which of the following is not one of the three major areas of finance?
A)Accounting
B)Investments and financial markets
C)Financial management of companies
D)The banking system

Accepted Answer

Accounting is not one of the three major areas of finance. The three major areas of finance are investments and financial markets, financial management of companies, and the banking system. Accounting is a related field that deals with recording, analyzing, and reporting financial transactions.

Question 17

A company can raise money to purchase assets by:
A)borrowing money.
B)issuing stock.
C)using money earned.
D)Both a & b
E)All of the above

Accepted Answer

A company can raise funds for purchasing assets through borrowing money (like taking loans), issuing stock (equity financing), and using its retained earnings (money earned and saved from its operations).

Question 18

Financial assets can be distinguished from real assets in that financial assets:
A)are pieces of paper rather than tangible, physical objects.
B)are not intended to provide services like transportation or shelter.
C)have value because they provide their owners with claims to future cash flows.
D)All of the above

Accepted Answer

Financial assets are generally not tangible and are represented by pieces of paper or digital records, such as stocks, bonds, and derivatives. They are not intended to provide services like transportation or shelter like real assets, such as houses or cars. The value of financial assets comes from the claims they provide their owners to future cash flows, such as interest, dividends, or capital gains. Therefore, all the options mentioned in the question are correct.

Question 19

Which of the following represents a real asset?
A)Land
B)Bonds
C)Stocks
D)Both a & c
E)All of the above

Accepted Answer

Land is a tangible asset that can be physically touched and has inherent value based on its location and potential uses. Bonds and stocks are financial assets, representing a claim on future income or ownership in a company, but they are not tangible assets like land.

Question 20

Which of the following is true of financial assets?
A)Companies issue financial assets to earn revenue.
B)Investors purchase financial assets to earn a return.
C)The ownership of financial assets cannot be transferred.
D)Investors purchase financial assets because they are virtually risk free.

Accepted Answer

Financial assets are instruments that represent a claim to future cash flows or a share in a company's ownership. Companies issue financial assets such as stocks and bonds to raise capital while investors purchase these assets in hopes of earning a return on their investment. Therefore, option B is the correct choice. Option A is incorrect because companies issue financial assets to raise capital, not to earn revenue. Option C is incorrect because financial assets are transferable. Option D is incorrect because financial assets carry varying degrees of risk, with some being virtually risk-free while others carry significant risk.

Quiz 1: Foundations

A collection of securities is called a:

A person buying a ____ is called an investor.

A financial market is:

Which of the following is not a financial market?

Companies finance the purchase of assets through:

A ____ pools the contributions of many investors and employs a professional manager to select securities that match a particular set of investment goals.

The ____ is the largest stock exchange in the world.

Financial assets like stocks and bonds have value because:

The prices that investors pay for securities are determined by:

Financial assets:

A loan backed by an asset the lender can sell to pay off the loan if the borrower defaults is called _____.

Financial assets:

The principal legal difference between a stockholder and a bondholder is:

Which of the following is not a real asset?

A ____ is licensed to trade securities on behalf of investors.

Which of the following is not one of the three major areas of finance?

A company can raise money to purchase assets by:

Financial assets can be distinguished from real assets in that financial assets:

Which of the following represents a real asset?

Which of the following is true of financial assets?