Question 1

Which of the following statements about the characteristics of debt and equities is TRUE?
A)They can both be long-term financial instruments.
B)Bond holders are residual claimants.
C)The income from bonds is typically more variable than that from equities.
D)Bonds pay dividends.

Accepted Answer

Both debt and equities can be long-term financial instruments. However, the other statements are not true. Bondholders are not residual claimants as they have priority over shareholders in terms of repayment in case of bankruptcy. The income from bonds is typically less variable than that from equities, as bondholders receive fixed interest payments, while dividends for equities can fluctuate based on the company's performance. Finally, bonds do not pay dividends, as they offer fixed interest payments instead.

Question 2

A breakdown of financial markets can result in
A)financial stability.
B)rapid economic growth.
C)political instability.
D)stable prices.

Accepted Answer

A breakdown of financial markets can lead to investors losing money, which can often result in political instability as people become increasingly dissatisfied with the government's handling of the situation. This can lead to protests and demonstrations, which can ultimately have significant political repercussions.

Question 3

Which of the following can be described as involving direct finance?
A)A corporation issues new shares of stock.
B)People buy shares in a mutual fund.
C)A pension fund manager buys a short-term corporate security in the secondary market.
D)An insurance company buys shares of common stock in the over-the-counter markets.

Accepted Answer

Direct finance involves the transfer of funds from savers directly to borrowers, without intermediaries. In option A, a corporation issues new shares of stock, which is a form of direct finance. In option B, people buying shares in a mutual fund involve indirect finance, as the mutual fund acts as an intermediary between the savers and the borrowers. In option C, a pension fund manager buying a short-term corporate security in the secondary market also involves indirect finance, as it is buying from an intermediary rather than the borrower. In option D, an insurance company buying shares of common stock in the over-the-counter markets also involves indirect finance.

Question 4

Which of the following can be described as direct finance?
A)You take out a mortgage from your local bank.
B)You borrow $2500 from a friend.
C)You buy shares of common stock in the secondary market.
D)You buy shares in a mutual fund.

Accepted Answer

Direct finance occurs when borrowers directly borrow funds from financial markets or individuals without using a financial intermediary like a bank, mutual fund, or other institution. Borrowing $2,500 from a friend is an example of direct finance because it involves a direct financial transaction between two individuals without an intermediary.

Question 5

Every financial market has the following characteristic.
A)It determines the level of interest rates.
B)It allows common stock to be traded.
C)It allows loans to be made.
D)It channels funds from lenders-savers to borrowers-spenders.

Accepted Answer

The characteristic that is common to all financial markets is that they channel funds from lenders-savers to borrowers-spenders. This is the basic function of any financial market, whether it is a stock market, a bond market, or a loan market. The other options may be true for some specific financial markets, but they are not true for all financial markets.

Question 6

Securities are ________ for the person who buys them,but are ________ for the individual or firm that issues them.
A)assets;liabilities
B)liabilities;assets
C)negotiable;nonnegotiable
D)nonnegotiable;negotiable

Accepted Answer

Securities represent ownership in a company or a claim on a company's assets and future earnings. For the person who buys these securities, they are considered assets because they represent a financial interest in the underlying company or asset. However, for the individual or firm that issues these securities, they are considered liabilities because they have an obligation to provide the promised return to the investors who hold these securities. So, option A is the correct answer.

Question 7

Financial markets improve economic welfare because
A)they channel funds from investors to savers.
B)they allow consumers to time their purchase better.
C)they weed out inefficient firms.
D)they eliminate the need for indirect finance.

Accepted Answer

The answer of Financial markets improve economic welfare because
A)they channel...

Question 8

Assume that you borrow $2000 at 10% annual interest to finance a new business project.For this loan to be profitable,the minimum amount this project must generate in annual earnings is
A)$400.
B)$201.
C)$200.
D)$199.

Accepted Answer

To make a profit on the loan, the earnings from the business project must exceed the interest paid on the loan. 
10% of $2000 is $200. Therefore, the project must generate at least $200 in annual earnings to break even. 
To make a profit, the earnings must exceed $200. 
So, the minimum amount the project must generate in annual earnings is $200 + $1 (to exceed the interest paid) = $201. Hence, the correct answer is B.

Question 9

Which of the following statements about financial markets and securities is TRUE?
A)A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants.
B)A debt instrument is intermediate term if its maturity is less than one year.
C)A debt instrument is intermediate term if its maturity is ten years or longer.
D)The maturity of a debt instrument is the number of years (term)to that instrument's expiration date.

Accepted Answer

The maturity of a debt instrument refers to the length of time until its final payment or expiration date. A bond is a long-term security that pays interest, not dividends, and the term "intermediate-term" is typically used for debt instruments with maturities between one and ten years. Therefore, option D is the only true statement.

Question 10

You can borrow $5000 to finance a new business venture.This new venture will generate annual earnings of $251.The maximum interest rate that you would pay on the borrowed funds and still increase your income is
A)25%.
B)12.5%.
C)10%.
D)5%.

Accepted Answer

The answer of You can borrow $5000 to finance a...

Question 11

Financial markets have the basic function of
A)getting people with funds to lend together with people who want to borrow funds.
B)assuring that the swings in the business cycle are less pronounced.
C)assuring that governments need never resort to printing money.
D)providing a risk-free repository of spending power.

Accepted Answer

Financial markets facilitate the transfer of funds from those who have excess funds to those who need funds, thereby bringing lenders and borrowers together. This helps in efficient allocation of resources and economic growth. They do not necessarily assure that business cycles are less pronounced or eliminate the need for governments to print money. There is no risk-free repository of spending power in financial markets as there is always some degree of risk involved.

Question 12

Distinguish between direct finance and indirect finance.Which of these is the most important source of funds for corporations in the United States?

Accepted Answer

The answer of Distinguish between direct finance and indirect finance.Which...

Question 13

With direct finance,funds are channeled through the financial market from the ________ directly to the ________.
A)savers,spenders
B)spenders,investors
C)borrowers,savers
D)investors,savers

Accepted Answer

In direct finance, funds move directly from savers, who have excess funds, to spenders or borrowers who need those funds, typically through financial markets without the intermediation of financial institutions.

Question 14

Well-functioning financial markets
A)cause inflation.
B)eliminate the need for indirect finance.
C)cause financial crises.
D)allow the economy to operate more efficiently.

Accepted Answer

Well-functioning financial markets allow individuals and businesses to access the capital they need to invest and grow, which can lead to more efficient allocation of resources, innovation, and economic growth. They also provide a means for individuals and institutions to manage risk, increasing the overall stability of the financial system. While financial markets can experience crises, their overall functioning is critical to a healthy economy.

Question 15

Which of the following can be described as involving direct finance?
A)A corporation takes out loans from a bank.
B)People buy shares in a mutual fund.
C)A corporation buys a short-term corporate security in a secondary market.
D)People buy shares of common stock in the primary markets.

Accepted Answer

Direct finance involves the transfer of funds from savers directly to borrowers through financial markets, rather than through intermediaries like banks. Buying shares of common stock in the primary market is an example of direct finance. Choices A, B, and C involve intermediaries or secondary markets and therefore are not direct finance.

Question 16

The principal lender-savers are
A)governments.
B)businesses.
C)households.
D)foreigners.

Accepted Answer

Household sector plays a significant role in the economy as the primary lender-savers. They save their surplus earnings and invest them in various financial instruments such as stocks, bonds, and deposits, which in turn are used by businesses and governments for their investment needs. Other sectors such as governments, businesses, and foreigners also contribute to the flow of funds in an economy, but household savings are the largest and most stable source of funding.

Question 17

Which of the following statements about the characteristics of debt and equity is FALSE?
A)They can both be long-term financial instruments.
B)They can both be short-term financial instruments.
C)They both involve a claim on the issuer's income.
D)They both enable a corporation to raise funds.

Accepted Answer

Equity is generally considered a long-term financial instrument as it represents ownership in the company, while debt can be either short-term or long-term depending on the terms of the loan.

Question 18

Which of the following can be described as involving indirect finance?
A)You make a loan to your neighbor.
B)You buy shares in a mutual fund.
C)You buy a U.S.Treasury bill from the U.S.Treasury at Treasury Direct.gov.
D)You purchase shares in an initial public offering by a corporation in the primary market.

Accepted Answer

Indirect finance involves the use of a financial intermediary, such as a mutual fund, to channel funds from savers to borrowers. Buying shares in a mutual fund involves indirect finance as you are lending your funds to the fund, which in turn uses them to purchase securities issued by borrowers. The other options involve direct finance, as you are either lending directly to a neighbor (A), purchasing a U.S. Treasury bill (C), or buying shares in an initial public offering (D).

Question 19

With ________ finance,borrowers obtain funds from lenders by selling them securities in the financial markets.
A)active
B)determined
C)indirect
D)direct

Accepted Answer

Direct finance involves borrowers obtaining funds directly from lenders through financial markets, such as issuing stocks or bonds. Indirect finance involves borrowers obtaining funds from financial intermediaries, such as banks or mutual funds. Active and determined do not relate to the type of finance.

Question 20

Which of the following can be described as involving indirect finance?
A)You make a loan to your neighbor.
B)A corporation buys a share of common stock issued by another corporation in the primary market.
C)You buy a U.S.Treasury bill from the U.S.Treasury at TreasuryDirect.gov.
D)You make a deposit at a bank.

Accepted Answer

Indirect finance involves a financial intermediary between the saver and the borrower. When you make a deposit at a bank, the bank can use those funds to make loans to others, which is an example of indirect finance. Choices A, B, and C involve direct finance, where borrowers and savers interact directly without an intermediary.

Quiz 2: An Overview of the Financial System

Which of the following statements about the characteristics of debt and equities is TRUE?

A breakdown of financial markets can result in

Which of the following can be described as involving direct finance?

Which of the following can be described as direct finance?

Every financial market has the following characteristic.

Securities are for the person who buys them,but are for the individual or firm that issues them.

Financial markets improve economic welfare because

Assume that you borrow $2000 at 10% annual interest to finance a new business project.For this loan to be profitable,the minimum amount this project must generate in annual earnings is

Which of the following statements about financial markets and securities is TRUE?

You can borrow $5000 to finance a new business venture.This new venture will generate annual earnings of $251.The maximum interest rate that you would pay on the borrowed funds and still increase your income is

Financial markets have the basic function of

Distinguish between direct finance and indirect finance.Which of these is the most important source of funds for corporations in the United States?

With direct finance,funds are channeled through the financial market from the directly to the .

Well-functioning financial markets

Which of the following can be described as involving direct finance?

The principal lender-savers are

Which of the following statements about the characteristics of debt and equity is FALSE?

Which of the following can be described as involving indirect finance?

With ________ finance,borrowers obtain funds from lenders by selling them securities in the financial markets.

Which of the following can be described as involving indirect finance?