Question 1

If a corporate bond with a face value of $1,000 pays yearly coupon payments of $40,what is the coupon rate?

Accepted Answer

The coupon rate is the annual interest payment divided by the face value of the bond, expressed as a percentage. In this case, the annual coupon payment is $40, which is 4% of the face value of $1,000. Therefore, the coupon rate is 4%.

Question 2

If a corporation's retained earnings are expected to create future profits,the market price of the firm's stock will ________ and create a ________ for stockholders if the stock is sold.

Accepted Answer

Retained earnings are profits that are reinvested back into the company instead of being paid out as dividends to shareholders. If a corporation's retained earnings are expected to create future profits, this means that the company is investing in its growth and increasing its value. As a result, the market price of the firm's stock will increase, creating a capital gain for stockholders if the stock is sold.

Question 3

Sylvia wants to expand her taxidermy business and is going to use profits from the business to do so.This is an example of using ________ for her expansion.

Accepted Answer

Retained earnings are profits that a company chooses to keep rather than pay out as dividends to shareholders. Sylvia's plan to use profits from her taxidermy business to expand it is an example of using retained earnings for the business's expansion.

Question 4

Raising funds through ________ is called indirect finance.

Accepted Answer

Indirect finance refers to the process of acquiring funds from financial intermediaries such as banks, credit unions, or insurance companies. Therefore, the correct choice for raising funds through indirect finance is financial intermediaries. The other options, issuing stock, issuing bonds, and retaining earnings, are forms of direct finance.

Question 5

When an investor buys a corporate bond,the face value of the bond is

Accepted Answer

When an investor buys a corporate bond, they are lending money to the corporation. The face value of the bond is the principal amount that the investor is lending and will be repaid at maturity. Choices A, C, and D are not accurate as they do not reflect the true nature of a corporate bond.

Question 6

If you purchased a newly issued 30-year bond from Google with a face value of $3,000 and a coupon payment of 6 percent,Google would pay you

Accepted Answer

The coupon payment of 6 percent on a face value of $3,000 would be $180 per year. This payment would be made for 30 years. Additionally, at the end of the 30th year, Google would pay back the face value of the bond, which is $3,000. Therefore, the total payment over the 30-year period would be $180 per year for 30 years plus $3,000 at the end of the 30th year, which corresponds to option C.

Question 7

All of the following are characteristics of a bond except

Accepted Answer

Bonds generally do not pay dividends as they are a form of debt and not equity. Instead, they pay regular interest payments to the bondholders. Therefore, option D is the only characteristic that is not true for a bond.

Question 8

Giorgio wants to build a new distribution warehouse for his sporting goods business and is going to issue new shares of stock to do so.This is an example of using ________ for his building project.

Accepted Answer

Direct finance involves raising funds by issuing new claims to investors, such as stocks or bonds. In this situation, Giorgio is using new shares of stock to fund his building project, making it an example of direct finance. Indirect finance involves using financial intermediaries, such as banks or mutual funds, to raise funds through loans or investments. Retained earnings involve using profits from the business to fund projects, while dividends involve paying out profits to shareholders.

Question 9

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

Accepted Answer

Deposits from savers being accumulated and loans made to borrowers is an example of the indirect finance market, not the direct finance market. The other options all involve transactions that take place in the direct finance market.

Question 10

Owners of a corporation ________ through dividend payments on shares of that firm's stock.

Accepted Answer

Owners of a corporation (shareholders) receive a share in the profits of the firm in the form of dividend payments on shares of that firm's stock. "Retain earnings of the firm" and "issue bonds for the firm" are activities of the firm itself and not related to the distribution of profits to shareholders. "Indirectly finance the firm" is a vague option and not directly related to the question.

Question 11

Securities dealers that trade stocks and bonds ________ comprise the over-the-counter market.

Accepted Answer

Over-the-counter (OTC) market refers to trading that takes place outside of organized exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq. Securities dealers trade stocks and bonds outside these exchanges, thus comprise the OTC market.

Question 12

Yolanda wants to expand her microbrewery business by buying out a competitor and is going to sell newly-issued corporate bonds to do so.This is an example of using ________ for her expansion plans.

Accepted Answer

Yolanda is using direct finance by selling newly-issued corporate bonds to finance her expansion plans, as opposed to indirect finance, where she would borrow from a financial intermediary like a bank. Coupon payments and retained earnings are not relevant in this context.

Question 13

Which of the following is one of the most widely followed stock indexes in the United States?

Accepted Answer

The Dow Jones Industrial Average (DJIA) is one of the most widely followed stock indexes in the United States. It tracks the stock prices of 30 large, publicly traded companies that are considered to be leaders in their respective industries.

Question 14

If a corporate bond with face value of $8,000 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 coupon payment is calculated as the face value of the bond ($8,000) multiplied by the interest rate (4 percent or 0.04), which equals $320.

Question 15

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

Both options A and C are viable methods for raising funds through direct finance. Option A involves selling bonds to investors, which represents a form of debt financing. The company would be required to make regular interest payments to bondholders, but would not give up ownership control. Option C involves selling stock to investors, which represents a form of equity financing. The company would give up partial ownership control, but would not be required to make regular interest payments. Therefore, option D is the best choice, as it allows Urban Outfitters to choose the method of financing (debt or equity) that best suits its needs.

Question 16

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 obtaining funding through a bank loan rather than directly selling securities to investors in the bond or stock markets.

Question 17

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

Accepted Answer

The answer of When the coupon rate on newly issued...

Question 18

Kendrick wants to start a tax preparation company and is going to his bank to borrow $50,000.This is an example of

Accepted Answer

This is an example of indirect finance, as Kendrick is borrowing from a bank instead of directly from investors.

Question 19

If you purchased a newly issued 30-year bond from American Airlines with a face value of $1,000 and a coupon payment of 3 percent,American Airlines would pay you

Accepted Answer

The coupon payment of 3 percent on a face value of $1,000 equals $30 per year. This payment is made for 30 years, so the total payment received over the 30-year period is $30 x 30 = $900. In addition to this, the face value of $1,000 is paid back at the end of the 30th year, making the total received $1,900. Therefore, choice C is the best option.

Question 20

Which of the following statements is true?

Accepted Answer

Stocks do not have a fixed number of payments and may or may not pay dividends in the future. Bonds, on the other hand, have a fixed number of payments (i.e. coupon payments) and a maturity date.

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