Question 1

Mutual funds sell shares to investors and use the funds to

Accepted Answer

Mutual funds use the funds collected from investors to invest in a diversified portfolio of financial assets such as stocks, bonds, and other securities. This diversification aims to provide a balance between risk and return for the investors. Therefore, option B is the correct answer as it reflects the primary purpose of mutual funds. 
The other options are not entirely accurate. Option A only refers to one type of investment (Treasury bonds) and does not reflect the general purpose of mutual funds. Option C refers only to the purchase of the shares of a single company, which does not reflect the diversified approach of mutual funds. Option D mentions only one aspect of returns from mutual funds, which is dividends, but does not reflect the broader purpose of mutual funds as an investment vehicle.

Question 2

Small savers who only have enough money to buy a few individual financial assets can use ________ to diversify.

Accepted Answer

Mutual funds allow small investors to pool their money with other investors and purchase a diversified portfolio of assets, including stocks, bonds, and other securities. This allows for greater diversification than purchasing just one company's stock or bonds. Investing in Treasury securities may also provide some diversification, but not as much as a mutual fund.

Question 3

Generally with bond ratings,the ________ the rating,the lower the interest rate an investor will receive and the ________ the risk that the issuer of the bond will default.

Accepted Answer

Bond ratings are meant to indicate the creditworthiness or risk of default of a bond issuer. A higher rating indicates a lower risk of default, and therefore the issuer can offer a lower interest rate to investors as compensation for taking on less risk. Conversely, a lower rating indicates a higher risk of default, and therefore an investor would need a higher interest rate to make the investment worthwhile.

Question 4

When Snap sells newly issued shares of stock this is an example of

Accepted Answer

This is because Snap is issuing newly issued shares, which means they are selling the shares directly to investors in the primary market. Direct finance occurs when borrowers borrow funds directly from lenders in the financial market, bypassing intermediaries like banks.

Question 5

In August 2011,Standard & Poor's (S&P)changed its rating on U.S.Treasury bonds from "AAA" to "AA+" based on the state of the federal government's budget deficit.This was the ________ a rating agency had given Treasury bonds less than a rating of "AAA."

Accepted Answer

The answer of In August 2011,Standard & Poor's (S&P)changed its...

Question 6

If Urban Outfitters borrows $25 million from a bank to finance the construction of a new store,this is an example of

Accepted Answer

This is an example of indirect finance because Urban Outfitters is borrowing money from a bank which is an intermediary between the borrower and savers/lenders. The bank uses deposits from savers to lend to borrowers such as Urban Outfitters.

Question 7

A partnership can raise funds for expansion in which of the following ways?

Accepted Answer

Partnerships can raise funds for expansion by taking on more partners. Partnerships are not corporations and hence do not issue stock through the financial markets or secondary markets.

Question 8

The interest rate on a bond is calculated as

Accepted Answer

The interest rate on a bond is calculated as the coupon payment (which is usually a fixed annual amount) divided by the face value of the bond (which is the amount the bond will be worth when it matures). This is known as the coupon rate, and it is expressed as a percentage. Therefore, the correct choice is A.

Question 9

If you borrow $5,000 from your bank to purchase shares of Snap from your cousin Vinny,this is an example of obtaining ________ financing and purchasing the stock in a ________ market.

Accepted Answer

Borrowing money directly from the bank to purchase shares is an example of direct financing because you are directly obtaining funds from a lender. Purchasing shares from your cousin Vinny, rather than from the issuing company, means you are buying the shares in the secondary market, where securities are traded among investors without raising new capital for the issuing company.

Question 10

You have a bond that pays $125 per year in coupon payments.Which of the following would result in an increase in the price of your bond?

Accepted Answer

When coupon payments on newly-issued bonds fall, the demand for higher-yielding bonds such as your bond will increase, causing the price of your bond to rise. Therefore, the correct answer is D. None of the other choices would result in an increase in the price of your bond.

Question 11

When the coupon rate on newly issued bonds ________ relative to older,outstanding bonds,the market price of the older bond ________.

Accepted Answer

When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds, the market price of the older bond falls in the secondary market. This is because investors would prefer to purchase the newer bonds with higher coupon rates, causing the demand for the older bonds to decrease, leading to a fall in their market price.

Question 12

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

Accepted Answer

When an investor buys a corporate bond, they are essentially lending money to the corporation. The principal of the bond is the amount the bondholder is lending to the corporation, and this is repaid at maturity. Interest payments (also called coupon payments) are made periodically by the corporation to bondholders as compensation for lending the money. Dividend payments are typically associated with stocks rather than bonds.

Question 13

Raising funds through ________ is called indirect finance.

Accepted Answer

Indirect finance refers to raising funds through financial intermediaries like banks, mutual funds, insurance companies, etc. Issuing stock (A) and bonds (B) are both examples of direct finance, where firms raise funds directly from investors. Retaining earnings (D) refers to reinvesting the profits of a company into its operations instead of distributing them as dividends to shareholders. While retaining earnings can provide funding for a company, it is not considered a form of finance as it does not involve obtaining new funds from external sources.

Question 14

Which of the following is the most important of the over-the-counter markets?

Accepted Answer

The NASDAQ Composite Index is the most important over-the-counter market because it includes a broad range of both domestic and international technology-based companies. It is also a benchmark index for the technology sector and is widely followed by investors and analysts. The other options listed are not considered over-the-counter markets; they are either exchanges or indices that track specific stocks or industries, but are traded on organized exchanges.

Question 15

One of the most widely followed stock indexes in the United States is the S&P 500.This index represents

Accepted Answer

The S&P 500 represents the stock prices of 500 large U.S. firms, making it a widely followed index for tracking the performance of the U.S. stock market.

Question 16

Which of the following can only be sold back to the firm that issued them?

Accepted Answer

The answer of Which of the following can only be...

Question 17

The ________ a corporation keeps to finance future expansion are known as retained earnings.

Accepted Answer

Retained earnings refer to profits that a corporation keeps instead of distributing as dividends. Therefore, the correct choice is A, profits. The other options, such as stock, dividends, and bonds, are all ways in which a corporation can finance its operations but do not refer specifically to retained earnings.

Question 18

Urban Outfitters wants to raise $25 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

Urban Outfitters could choose to sell $25 million in bonds (option A) or issue $25 million in stock (option C) to raise the necessary funds. Both of these options involve direct finance, which means that the company would raise the funds directly from investors. Option B (borrowing from a bank) would be considered indirect finance. Selling bonds would involve issuing a loan to investors who would be repaid with interest, while issuing stock would involve selling ownership in the company to investors. Since both of these options are viable for raising the necessary funds, D is the best choice.

Question 19

Dividing the dividend payment by the stock's ________ determines the dividend yield.

Accepted Answer

Dividend yield is calculated by dividing the annual dividend payment by the closing market price of the stock. Therefore, the correct choice is B - closing market price.

Question 20

All of the following take place in the direct finance market except

Accepted Answer

Direct finance refers to the transfer of funds from savers to borrowers through financial intermediaries. Option B describes the process of indirect finance. Options A, C, and D all involve the sale of various securities in the direct finance market.

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