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 equity can be long-term instruments. Choice B is incorrect as bond holders are not residual claimants, but rather have priority in receiving their investment back before equity holders. Choice C is also incorrect as income from bonds is typically more stable and predictable compared to income from equities. Choice D is incorrect as bonds pay interest, not dividends.

Question 2

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 applies to all financial markets is that they channel funds from lenders-savers to borrowers-spenders. Financial markets provide a platform for lenders-savers to invest their money and earn a return, while borrowers-spenders can access funds to make investments or meet their financial needs. The other options mentioned may apply to specific types of financial markets but do not apply to all markets universally.

Question 3

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 political instability as it impacts the confidence of investors and consumers, leading to decreased economic activity and potentially causing social unrest. The other choices, such as financial stability, rapid economic growth, and stable prices, are outcomes that are associated with functioning financial markets, not a breakdown.

Question 4

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 refers to the process of obtaining funds directly from lenders in the financial markets by selling them securities such as stocks, bonds, or loans. This differs from indirect finance, where financial intermediaries such as banks obtain funds from lenders and then lend them to borrowers.

Question 5

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

The minimum amount the project must generate in annual earnings to cover the 10% annual interest on the $2000 loan is:
$2000 x 10% = $200
Therefore, the minimum amount the project must generate in annual earnings is $200. However, to be profitable, the project must generate earnings greater than $200 to cover other expenses and make a profit. Thus, the best choice is B) $201.

Question 6

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

Accepted Answer

Typically, households are considered the primary lender-savers as they save their income in various financial instruments such as bank deposits, securities, and retirement accounts. This savings is then channeled by financial intermediaries such as banks and investment firms to businesses and governments who require funds for their operations. While governments, businesses, and foreigners can also be lender-savers, households are typically the largest group.

Question 7

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 to channel funds from savers to borrowers. Buying shares in a mutual fund involves indirect finance as the fund pools money from many investors and then invests that money in a variety of assets.

Option A involves direct finance as the borrower and lender are directly involved. Option C involves purchasing a security issued by the government rather than through an intermediary. Option D involves taking part in the primary market by purchasing shares directly from the issuing corporation rather than through an intermediary.

Question 8

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 9

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 are assets for the person who buys them as they are expected to increase in value or generate income. However, for the individual or firm that issues securities, they are liabilities as they represent a debt or obligation to repay the investor.

Question 10

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 sale of securities in the primary market, such as when people purchase shares of common stock directly from a corporation. Choice A involves borrowing from a bank, which is an example of indirect finance. Choice B involves investing in a mutual fund, which pools together money from multiple investors to purchase securities, and is also an example of indirect finance. Choice C involves buying a security in a secondary market, which is also an example of indirect finance.

Question 11

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 12

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 time remaining until it expires or when the principal must be repaid to the investor. Therefore, option D is correct. Option A is false because a bond is a long-term security that pays interest instead of dividends. Option B and C are incorrect as they provide conflicting information about what constitutes an intermediate-term debt instrument.

Question 13

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 typically a long-term financial instrument, as it represents ownership in a company. Debt can be either long-term or short-term, depending on the specific type of debt instrument (e.g. bonds, commercial paper).

Question 14

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 15

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 bring together savers and borrowers, facilitating the transfer of funds between them. This allows those who have excess funds to earn a return by lending to those who need to borrow money to finance investments or other activities. This function is essential in promoting economic growth and development. Financial markets do not have the ability to eliminate swings in the business cycle or guarantee that governments will not resort to printing money. Additionally, financial markets involve risk and do not provide a risk-free repository of spending power.

Question 16

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 17

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 18

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 to borrowers without the involvement of financial intermediaries. The issuance of new shares of stock by a corporation is a direct way for the company to raise funds from investors.

Question 19

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 for the efficient allocation of resources and facilitate economic growth by mobilizing savings and channelling them into productive investments. This helps businesses to grow, creates employment opportunities and allows individuals to save for retirement or other long-term goals. A well-developed financial system also helps to reduce transaction costs, lower the cost of capital and facilitate risk management, thereby increasing economic efficiency. Inflation and financial crises can occur regardless of the functioning of financial markets. Indirect finance is still required for certain sectors, particularly among poor and marginalized communities.

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?

Every financial market has the following characteristic.

A breakdown of financial markets can result in

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

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

The principal lender-savers are

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

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

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

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

Financial markets improve economic welfare because

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

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

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

Financial markets have the basic function of

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

Which of the following can be described as direct finance?

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

Well-functioning financial markets

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