Question 1

The coupon rate of a bond is equal to

Accepted Answer

The coupon rate of a bond is the interest rate that the bond pays annually. This rate is used to calculate the annual coupon payment, which is then divided by the face value of the bond to determine the coupon rate. Therefore, the coupon rate is equal to the interest rate.

Question 2

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

Accepted Answer

The direct finance market involves the direct transfer of funds from savers to borrowers without the involvement of financial intermediaries. Ownership in corporations can be sold in the form of common stock or preferred stock, and corporate bonds can be sold directly to savers. Deposits from savers being accumulated and loans being made to borrowers is characteristic of the indirect finance market, which involves financial intermediaries such as banks.

Question 3

Owners of a corporation share in the profits of the firm

Accepted Answer

Owners of a corporation, or shareholders, receive a share of the profits of the firm through dividend payments on shares of that firm's stock. Bond owners typically receive coupon payments, not a share of profits, and can realize a capital gain or loss by selling the bonds. The interest rate on bonds is determined by market conditions and is not directly related to a corporation's profits.

Question 4

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 use either method A (selling $8 million in bonds) or method C (issuing $8 million in stocks) to raise $8 million in direct finance. Both methods involve raising funds directly from investors without intermediaries such as banks. The choice between bonds and stocks will depend on the company's specific financial situation and goals. Bonds offer a fixed income stream and may be more attractive to investors looking for stability, while stocks offer potential for capital appreciation and may appeal to investors looking for higher returns.

Question 5

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

Accepted Answer

When you buy previously issued shares of Twitter stock, this transaction takes place in the secondary market. The secondary market is where securities such as stocks, bonds, and other financial instruments are traded among investors without the involvement of the issuing company. The primary market, on the other hand, is where newly issued securities are sold for the first time to investors through an initial public offering (IPO) or a seasoned equity offering (SEO). The bond market is a separate market for trading bonds and other fixed-income securities. A bear market refers to a prolonged period of declining stock prices and a generally pessimistic sentiment in the financial markets.

Question 6

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 7

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 8

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 the issuer of the bond agrees to pay the bondholder at the maturity of the bond. This amount represents the principal borrowed by the issuer. The interest payments made by the corporation to the bondholder are in exchange for the use of the borrowed funds. The coupon payment is the amount of interest paid to the bondholder on a regular basis. Dividend payments are payments made to shareholders, not bondholders.

Question 9

Securities dealers that trade stocks and bonds outside exchanges comprise the

Accepted Answer

The over-the-counter (OTC) market is a decentralized market where securities, such as stocks and bonds, are traded outside of formal exchanges. Securities dealers operate in this market and buy or sell securities directly with one another or with clients. The foreign exchange market deals with currencies, the NASDAQ market is a specific electronic stock exchange, and the term "outlet market" is not commonly used in finance.

Question 10

Which of the following is a characteristic of a bond?

Accepted Answer

All of these are characteristics of bonds. A bond represents a promise to repay a fixed amount of funds (the principal) at a specified period of time (the maturity date) with interest payments (the coupon).

Question 11

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 answer of If a corporate bond with face value...

Question 12

Dividends are

Accepted Answer

Dividends are payments made by a corporation to its shareholders, usually in the form of cash, although they may also be in the form of additional shares or other securities. They represent a portion of the company's profits and are paid out to shareholders as a way to share in the company's success.

Question 13

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, typically with interest. This distinguishes it from a share of stock, which represents ownership in a company, and coupons or dividends, which are payments made to shareholders.

Question 14

What happens in the primary market?

Accepted Answer

The primary market is where newly issued claims, such as stocks or bonds, are sold by the borrowing firm to the initial buyer. This is typically done through an initial public offering (IPO) or a bond offering. In the primary market, the money raised from the sale goes directly to the issuing company. This is different from the secondary market, where already issued claims are sold from one investor to another.

Question 15

Raising funds through financial intermediaries is called

Accepted Answer

Raising funds through financial intermediaries such as banks, mutual funds, and insurance companies is known as indirect finance. In this process, the intermediaries act as a bridge between the investors and the borrowers, facilitating the flow of funds from savers to borrowers. Direct finance involves the issuance of securities directly to the investors, bypassing the intermediaries. Corporate finance is a broader term that encompasses various financial decisions and activities related to a corporation, including financial intermediation. Dividend reinvestment refers to using dividends from an investment to purchase additional shares of the same investment.

Question 16

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 is an example of indirect finance because Abercrombie & Fitch is borrowing from a bank rather than directly from investors.

Question 17

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 profits to create future profits, the market price of the stock will increase, leading to a capital gain for stockholders if they sell the stock.

Question 18

What is a secondary market?

Accepted Answer

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

Question 19

All of the following represent differences between stocks and bonds except

Accepted Answer

Bonds represent a loan that the issuer must pay back with interest, while stocks represent ownership in the company. Therefore, bonds represent partial ownership in a firm, but stocks do not. Choices A, B, and C are all correct differences between stocks and bonds.

Question 20

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 based on revenue, it is not a stock index. The other three options are all widely followed stock indexes.

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