Question 1

Securities dealers that trade stocks and bonds outside exchanges comprise the

Accepted Answer

Securities dealers that trade stocks and bonds outside exchanges are part of the over-the-counter (OTC) market. The OTC market refers to a network of dealers that trade securities directly among themselves without a formal exchange. The NASDAQ market is a stock exchange that also has an electronic OTC trading platform. The foreign exchange market is a market for trading currencies, and the term "outlet market" is not commonly used in finance.

Question 2

The three most widely followed stock indexes in the United States include all of the following except

Accepted Answer

The Fortune 500 is not a stock index; it is a ranking of the largest U.S. corporations by revenue. The other three options are all stock indexes.

Question 3

What happens in the primary market?

Accepted Answer

In the primary market, newly issued claims (such as stocks, bonds, or other securities) are sold by the borrowing firm to the initial buyer. This is typically done through an initial public offering (IPO) or a private placement. The primary market is where securities are first offered for sale, and the proceeds from those sales go directly to the issuing company.

Question 4

You have a bond that pays $60 per year in coupon payments.Which of the following would result in a decrease in the price of your bond?

Accepted Answer

If coupon payments on newly-issued bonds rise to $75 per year, investors will demand a higher yield on bonds in the market, including your bond. This will result in a decrease in the price of your bond.

Question 5

If a corporation goes bankrupt,bondholders have ________ on the firm's assets.

Accepted Answer

Bondholders have the first claim on a corporation's assets in the event of bankruptcy. This means that in the liquidation process, bondholders are paid first before any other claimants, including stockholders or the IRS.

Question 6

Dividends are

Accepted Answer

Dividends are payments made by a corporation to its shareholders as a portion of the company's earnings. The other options (A, B, and C) do not accurately describe dividends.

Question 7

When the coupon rate on newly issued bonds increases relative to older,outstanding bonds,what happens?

Accepted Answer

When the coupon rate on newly issued bonds increases, investors are more likely to buy the new bonds, which offer a higher rate of return. As a result, the demand for older, lower-yielding bonds decreases, and their market price falls in the secondary market. This is because investors can purchase the new bonds at a higher coupon rate and still receive the same or better return as the older bonds, which have a lower coupon rate.

Question 8

Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store,and the company wishes to raise the funds through direct finance.Which of the following methods could it use?

Accepted Answer

Both selling bonds (option A) and issuing stocks (option C) are methods of direct finance, meaning that the funds are obtained by selling securities directly to investors. Borrowing from a bank (option B) is a method of indirect finance, where the bank acts as an intermediary between the borrower and the investors. Therefore, options A and C are both suitable choices for Abercrombie & Fitch to raise $8 million through direct finance.

Question 9

What is a secondary market?

Accepted Answer

The answer of What is a secondary market?
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Question 10

A financial security that represents a promise to repay a fixed amount of funds is a

Accepted Answer

A bond is a financial security that represents a promise to repay a fixed amount of funds. A share of stock represents ownership in a company, a coupon is a component of a bond that pays the holder a fixed interest payment, and a dividend is a distribution of a company's earnings to its shareholders.

Question 11

The coupon rate of a bond is equal to

Accepted Answer

The coupon rate of a bond is the annual interest rate that the issuer agrees to pay the bondholder. It is not the same as the coupon payment or interest payment, which are the actual payments made to the bondholder based on the coupon rate and the face value of the bond. Therefore, the correct answer is C, the coupon rate is the annual interest rate.

Question 12

When an investor buys a corporate bond,the ________ the bond is a loan to the corporation.

Accepted Answer

When an investor buys a corporate bond, the face value of the bond is the amount of money that the corporation borrowed from the investor and is obligated to repay when the bond reaches maturity. The interest on the bond is the amount of money the investor will receive periodically until the bond matures. The coupon payment refers to the interest payment made to the investor. Dividend payment is not applicable as it is typically associated with stocks and not bonds.

Question 13

Owners of a corporation share in the profits of the firm

Accepted Answer

Dividend payments on shares of the firm's stock are the primary way that owners (shareholders) of a corporation share in the profits of the firm. Bondholders receive coupon payments, but they do not participate in the profits of the firm. Raising the interest rate on bonds does not directly impact the profits of the firm or the shareholders' ability to share in those profits. Selling bonds or stocks may result in capital gains, but this is not a direct sharing of profits from the corporation.

Question 14

If a corporate bond with a face value of $2,000 pays yearly coupon payments of $50,what is the coupon rate?

Accepted Answer

The answer of If a corporate bond with a face...

Question 15

A stock's dividend yield is determined by

Accepted Answer

The answer of A stock's dividend yield is determined by
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Question 16

If a corporate bond with face value of $5,000 has an interest rate of 4 percent paid once a year for a term of 30 years,what is the size of the coupon payment?

Accepted Answer

The answer of If a corporate bond with face value...

Question 17

All of the following represent differences between stocks and bonds except

Accepted Answer

Bonds represent debt that a company owes and the bondholder is essentially loaning money to the company in exchange for interest payments. Stocks, on the other hand, represent partial ownership in a company and give the shareholder a say in company decisions, but do not represent any debt owed by the company. Choices A, B, and C are all differences between stocks and bonds.

Question 18

If a corporation retains all its profits and distributes none of the profit to owners,how can owners benefit?

Accepted Answer

If the retained earnings are expected to create future profits, the market price of the firm's stock will increase and create a capital gain for stockholders if the stock is sold. Therefore, owners can benefit from the increase in the value of their stocks even if there are no dividends being paid out.

Question 19

When you buy previously-issued shares of Facebook stock,this transaction takes place in the

Accepted Answer

Buying previously-issued shares of Facebook stock is an example of a transaction taking place in the secondary market. The secondary market refers to the buying and selling of existing shares between investors, rather than the initial sale of shares by a company in the primary market.

Question 20

Which of the following is a characteristic of a bond?

Accepted Answer

Each of the characteristics listed in A, B, and C are typical characteristics of bonds. A bond is essentially a loan that an investor makes to a borrower, and the characteristics listed here are typical of the terms of that loan.

Quiz 6: Firms, the Stock Market, and Corporate Governance