Question 1

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 2

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, without an intermediary such as a bank. Buying shares of common stock in the primary market is an example of direct finance. Option A involves an intermediary (the bank) and therefore is indirect finance. Option B is indirect finance as savers are investing in a mutual fund, which then invests in various securities. Option C is also indirect finance since the corporation is buying a security from a secondary market, not directly from savers.

Question 3

Well-functioning financial markets
A)cause inflation.
B)eliminate the need for indirect finance.
C)cause financial crises.
D)produce an efficient allocation of capital.

Accepted Answer

Well-functioning financial markets facilitate an efficient allocation of capital by connecting savers and borrowers, allowing the flow of funds to the most productive uses. This can lead to increased economic growth and development. Inflation and financial crises can occur regardless of the market's efficiency, and indirect finance may still be necessary for certain types of investments.

Question 4

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 5

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 6

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, rather than through a financial intermediary. In this case, borrowers sell securities (such as bonds or stocks) directly to lenders in the financial markets, without the need for a middleman. This contrasts with indirect finance, where borrowers obtain funds through financial intermediaries such as banks or other financial institutions. Therefore, option D is the best choice as it specifically describes direct finance.

Question 7

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 cause panic and uncertainty leading to political instability. It can also result in economic downturns and decrease in asset prices, which can cause financial distress to individuals and companies, leading to a cycle of negative economic effects.

Question 8

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

While both debt and equity can be long-term financial instruments, equity is typically considered a long-term investment while debt is typically a short-term investment. Therefore, statement B is false.

Question 9

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.
D)A corporation buys a short-term security issued by another corporation in the primary market.

Accepted Answer

Buying shares in a mutual fund involves indirect finance as the mutual fund collects funds from investors and then invests in a diversified portfolio of securities on behalf of those investors. The investors are indirectly financing the securities held by the mutual fund. The other options all involve direct finance as the lenders/investors are providing financing directly to the borrower/issuer.

Question 10

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 are in need of funds. They provide a platform for borrowers and lenders to come together and enter into transactions such as loans, bonds, and securities.

Question 11

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 until its expiration date, measured in years. This definition applies to both short-term and long-term debt instruments. Choice A is false because a bond is a long-term debt instrument that promises periodic interest payments, not dividends. Choice B and C contradict each other and are both false.

Question 12

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 13

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

Accepted Answer

Household savings through banks, investments, and other financial instruments are the primary sources of funds for lending activities. Governments, businesses, and foreigners may also save and invest, but household savings are the most significant contributor to the financial system.

Question 14

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.
D)You make a deposit at a bank.

Accepted Answer

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

Question 15

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 the involvement of a financial intermediary. In this scenario, a corporation is issuing new shares of stock directly to investors, which is an example of direct finance. Choices B, C, and D involve the participation of financial intermediaries such as mutual funds, pension funds, and insurance companies, respectively.

Question 16

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 calculate the minimum amount of earnings required, we need to use the formula:

Minimum Earnings = Interest Rate x Loan Amount

Minimum Earnings = 0.10 x $2000
Minimum Earnings = $200

Therefore, the minimum amount the project must generate in annual earnings is $200. However, since the question asks for the minimum amount for the loan to be profitable, we need to factor in the cost of the loan, which is the interest.

Profitable Earnings = Minimum Earnings + Interest
Profitable Earnings = $200 + Interest

We know that the interest is 10% of the loan amount, which is $2000. Therefore, the interest is:

Interest = 0.10 x $2000
Interest = $200

So, the profitable earnings must be:

Profitable Earnings = $200 + $200
Profitable Earnings = $400

Therefore, the answer is (B), $201. The project must generate at least $201 in earnings in order to cover the cost of the loan and make a profit.

Question 17

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 financial instruments.

Question 18

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 means that financial markets provide a mechanism for savers to earn a return on their savings while allowing borrowers to obtain the funding they need to make investments or finance their activities. Financial markets can take many forms, including stock markets, bond markets, and loan markets, but they all serve this same basic function. While financial markets can have an impact on interest rates and do allow for the trading of common stock, these are not characteristics that are unique to all financial markets.

Question 19

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)eliminate the need for indirect finance.

Accepted Answer

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

Question 20

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 because they represent ownership in a company, and can potentially increase in value over time. However, they are liabilities for the individual or firm that issues them because they represent a financial obligation or debt owed to shareholders.

Quiz 2: An Overview of the Financial System

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

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 .

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

A breakdown of financial markets can result in

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?

Financial markets have the basic function of

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

The principal lender-savers are

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

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

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 the characteristics of debt and equities is true?

Every financial market has the following characteristic:

Financial markets improve economic welfare because

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