Question 1

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 part of a bond's interest payment, and a dividend is a portion of a company's profits paid out to shareholders.

Question 2

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 options A and C (selling bonds or issuing stocks) would allow Abercrombie & Fitch to raise the necessary $8 million through direct finance. Option B (borrowing from a bank) would be considered indirect finance.

Question 3

What happens in the primary market?

Accepted Answer

In the primary market, newly issued claims such as stocks or bonds are sold by the borrowing firm to the initial buyer (usually institutional investors). This is different from the secondary market, where already issued claims are traded between investors. The primary market is where companies raise funds by issuing new securities.

Question 4

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

Accepted Answer

The answer of If a corporation goes bankrupt,bondholders have ________...

Question 5

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 6

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

Accepted Answer

Buying previously issued shares of stock falls under the secondary market, where investors trade securities among themselves, rather than directly with the issuing company. The primary market is where new shares are issued by the company, while the bond market deals with debt securities, not shares of stock. The bear market refers to a prolonged period of declining stock prices, rather than a specific market for trading securities.

Question 7

Securities dealers that trade stocks and bonds outside exchanges comprise the

Accepted Answer

The over-the-counter market (OTC) refers to securities trading conducted outside of formal exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ. OTC trading is typically conducted through dealers who negotiate directly with each other. This includes trading of stocks and bonds, as mentioned in the question. The foreign exchange market refers to the trading of currencies, while NASDAQ is a specific electronic marketplace for trading stocks. The term "outlet market" is not commonly used in finance.

Question 8

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 generate future profits, the market price of the firm's stock will likely increase, resulting in a capital gain for stockholders if the stock is sold. Therefore, owners (stockholders) can still benefit from the retained earnings even if no dividends are paid out.

Question 9

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

Accepted Answer

The face value of a bond represents the principal amount borrowed by the corporation and is the amount the investor will receive back at maturity. The interest on the bond represents the compensation paid to the investor for lending money to the corporation. The coupon payment on a bond is the periodic interest payment made to the investor. Dividend payment is typically paid to stockholders, not bondholders.

Question 10

Which of the following is a characteristic of a bond?

Accepted Answer

All of the choices represent characteristics of bonds. Bonds represent a promise to repay a fixed amount of funds (A), the face value or principal plus interest is repaid at a specified period of time (B), and the length of coupon payments is fixed by the stated maturity period (C). Therefore, all of these are characteristics of bonds.

Question 11

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, but rather a list of the largest companies in the United States based on revenue. The other three options are all widely followed stock indexes in the United States.

Question 12

What is a secondary market?

Accepted Answer

The answer of What is a secondary market?
...

Question 13

The coupon rate of a bond is equal to

Accepted Answer

The coupon rate is the interest rate that a bond issuer will pay to the bondholder. It is expressed as a percentage. Therefore, the coupon rate is equal to the interest rate.

Question 14

All of the following represent differences between stocks and bonds except

Accepted Answer

Bonds represent debt and do not represent ownership in a firm, while stocks represent ownership in a firm. The other options all represent differences between stocks and bonds.

Question 15

Which of the following does not take place in the direct finance market?

Accepted Answer

Deposits and loans are characteristic of the indirect finance market, where financial institutions act as intermediaries between lenders and borrowers. Direct finance markets involve the sale of securities, such as stocks and bonds, directly to investors. Choices A, C, and D describe activities that take place in the direct finance market.

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 size of the coupon payment can be calculated using the formula:
Coupon Payment = Face Value x Coupon Rate

where,
Face value = $5,000
Coupon Rate = 4% = 0.04

Thus, Coupon Payment = $5,000 x 0.04 = $200

Therefore, the correct answer is B) $200.

Question 17

If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store,this is an example of

Accepted Answer

This scenario represents indirect finance, where Abercrombie & Fitch is obtaining funding from a bank instead of directly from investors through stock or bond markets.

Question 18

Dividends are

Accepted Answer

Dividends are payments made by a corporation to its shareholders as a way of distributing profits to them. This can be done through cash payments or additional shares of stock. Therefore, the correct answer is D.

Question 19

Owners of a corporation share in the profits of the firm

Accepted Answer

Owners of a corporation, or shareholders, receive a portion of the profits of the firm through dividend payments on shares of that firm's stock. Bondholders (who own bonds issued by the corporation) receive coupon payments, which are fixed interest payments, and they do not share in the profits of the firm through capital gains. Raising the interest rate on bonds would increase coupon payments, but it would not affect the profits of the corporation or the ability of shareholders to share in those profits.

Question 20

Raising funds through financial intermediaries is called

Accepted Answer

Raising funds through financial intermediaries, such as banks or investment firms, is called indirect finance. Direct finance involves raising funds directly from investors, while corporate finance involves managing a company's own financial resources. Dividend reinvestment refers to using dividends to purchase additional shares of a company's stock, and is not directly related to raising funds through financial intermediaries.

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