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 at a specified future date, along with periodic interest payments. Shares of stock represent ownership in a company and do not have a fixed repayment obligation. A coupon is a feature of a bond that specifies the interest rate and payment schedule. A dividend is a payment made to shareholders from a company's profits.

Question 2

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 3

Securities dealers that trade stocks and bonds outside exchanges comprise the

Accepted Answer

Securities dealers that trade stocks and bonds outside of exchanges are referring to over-the-counter (OTC) markets. The other options listed are not accurate descriptions for this type of trading.

Question 4

If a corporation retains all its profits and distributes none of the profit to owners,how can owners benefit?

Accepted Answer

If the corporation retains its profits to reinvest in the business, for example in research and development, marketing, or expanding operations, it can create future profits and increase the value of the company's stock. This can result in a capital gain for the owners if they sell their shares. However, this assumes that the market has confidence in the company's ability to generate future growth and profits.

Question 5

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

Abercrombie & Fitch could either sell $8 million in bonds or issue $8 million in stocks to raise the necessary funds through direct finance. Both of these methods involve raising capital by dealing directly with investors, rather than going through an intermediary like a bank. Option B, borrowing $8 million from a bank, would not be considered direct finance as it involves going through an intermediary. Therefore, the best choice is D, which includes both options of A and C.

Question 6

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

Accepted Answer

The secondary market is where previously-issued shares of a company's stock are bought and sold among investors, as opposed to the primary market where new securities are initially sold. Therefore, when buying previously-issued shares of Facebook stock, the transaction takes place in the secondary market.

Question 7

The coupon rate of a bond is equal to

Accepted Answer

The coupon rate of a bond refers to the annual interest rate that the issuer pays to the bondholder, expressed as a percentage of the bond's face value. Therefore, the coupon rate is equivalent to the interest rate.

Question 8

Dividends are

Accepted Answer

Dividends are payments made by a corporation to its shareholders as a distribution of profits.

Question 9

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. This is where the borrowing firm raises capital by selling securities directly to investors for the first time. A corporate financial manager reselling previously issued shares of stock would take place in the secondary market. The sale of primary inputs like electricity would take place in a completely different market. The sale of already issued claims from one investor to another would also take place in the secondary market.

Question 10

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

Accepted Answer

When an investor buys a corporate bond, the face value of the bond is a loan to the corporation. The face value is the amount that the corporation has promised to repay to the investor at the maturity of the bond. Interest on the bond is the amount that the corporation has promised to pay periodically to the investor as a return on their investment. Coupon payment is another term for interest payment. Dividend payment is a payment made by a corporation to its shareholders, and is not relevant in the context of a bond purchase.

Question 11

A stock's dividend yield is determined by

Accepted Answer

The answer of A stock's dividend yield is determined by
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Question 12

You have a bond that pays $60 per year in coupon payments.Which of the following would result in a decrease in the price of your bond?

Accepted Answer

When coupon payments on newly-issued bonds rise, this makes other bonds with lower coupon payments less desirable and lowers their price. Therefore, an increase in coupon payments for new bonds would result in a decrease in the price of an existing bond.

Question 13

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

To find the size of the coupon payment, we need to multiply the face value of the bond ($5,000) with the interest rate (4%) and then divide by the number of coupon payments per year (1) to get the annual coupon payment:
($5,000 x 4%) / 1 = $200
Therefore, the size of the coupon payment is $200, which is option B.

Question 14

The three most widely followed stock indexes in the United States include all of the following except

Accepted Answer

The Fortune 500 is a list of the largest companies in the United States, but it is not an index tracking stock prices like the other three options.

Question 15

What is a secondary market?

Accepted Answer

The answer of What is a secondary market?
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Question 16

Owners of a corporation share in the profits of the firm

Accepted Answer

Owners of a corporation (shareholders) receive profits in the form of dividend payments on shares of the firm's stock. Selling bonds or stocks owned may also generate a capital gain, but it does not guarantee a share in the profits of the corporation. Coupon payments on bonds and raising interest rates on bonds do not provide a share in the profits of the corporation, but rather pay out fixed amounts in interest.

Question 17

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 18

All of the following represent differences between stocks and bonds except

Accepted Answer

This is because bonds represent a loan to a company, while stocks represent partial ownership in a company.

Question 19

Which of the following is a characteristic of a bond?

Accepted Answer

All of these are characteristic of bonds. Bonds represent a promise to repay a fixed amount of funds, the face value or principal plus interest is repaid at a specified period of time, and the length of coupon payments is fixed by the stated maturity period.

Question 20

When the coupon rate on newly issued bonds increases relative to older,outstanding bonds,what happens?

Accepted Answer

When the coupon rate on newly issued bonds increases relative to older, outstanding bonds, the market demand for older bonds decreases as investors prefer to invest in newer bonds with higher coupon rates. As a result, the market price of the older bond falls in the secondary market.

Quiz 8: Firms, the Stock Market, and Corporate Governance