Deck 1: An Introduction to Finance

Question 1

The difference between a financial intermediary and a market intermediary is best described as:

A) one deals with the financing decision making within a business entity, the other deals with financial markets and securities.
B) one involves the issuing of new securities, the other permits investors to buy and sell existing securities.
C) one transforms the nature of securities in a market; the other does not change the nature of the transaction.

Answer 1

one transforms the nature of securities in a market; the other does not change the nature of the transaction.

Question 2

The environment in which households provide funds to businesses and government is best described as a:

A) financial system.
B) market intermediary.
C) financial intermediary.

Answer 2

financial system.

Question 3

Which of the following would not be an example of intermediation?

A) Matt borrows money from friends to start a food truck business.
B) Andrea takes out a mortgage loan from SunTrust Mortgage.
C) Angela borrows money from a credit union to purchase a new car.
D) A retired person withdraws money from their savings account to take a Caribbean cruise.

Answer 3

A retired person withdraws money from their savings account to take a Caribbean cruise.

Question 4

Investment and financing decisions, which may be short-term or long-term decisions are best described as:

A) financial decision making.
B) economic decision making.
C) accounting decision making.

Question 5

Mutual funds, pension funds, investment dealers and insurance companies are best described as examples of:

A) corporate finance.
B) market intermediaries.
C) financial intermediaries.

Question 6

Which of the following is not a type of financial instrument?

A) Bond
B) Collateral
C) Equity security
D) Debt instrument

Question 7

Farmers and Merchants Bank lends money to Ruth to purchase a car from Steven Toyota. Ruth is going to insure the car with Allstate Insurance. Which party is best described as the creditor?

A) Ruth
B) Steven Toyota
C) Allstate Insurance
D) Farmers and Merchants Bank

Question 8

Which of the following would not be described as a debenture?

A) An unsecured loan
B) A loan secured by collateral
C) A loan secured by the "full faith and credit" of the issuer

Question 9

What is the primary difference between a bond and a note?

A) One is short-term, one is long-term
B) One is a debt security, one is an equity security
C) One is issued in the primary market, one is issued in the secondary market

Question 10

What is wrong with the following statement? General Electric will be issuing $100 million in forty year notes at the end of September?

A) This should be called a bond
B) This should be called a stock
C) Nothing is wrong with this statement

Question 11

The City of Harrisonburg issues revenue bonds to improve the city's water and sewer systems. These bonds would be best described as being backed by:

A) nothing.
B) the full faith and credit of the issuer.
C) a specific revenue stream of the issuing entity.
D) property taxes that are assessed by the local government.

Question 12

U.S. Treasury bonds, which are backed by the full faith and credit of the U.S. government, are best described as:

A) revenue bonds.
B) equity securities.
C) assessment bonds.
D) general obligation bonds.

Question 13

School bonds backed by property taxes that are assessed by Rockingham County would best be described as:

A) revenue bonds.
B) equity securities.
C) assessment bonds.
D) general obligation bonds.

Question 14

The type of stock that entitles the owner to stated dividend payments that must be made before any dividends are paid to other classes of shareholders would best be described as:

A) common stock.
B) preferred stock.
C) corporate bonds.
D) municipal bonds.

Question 15

Which of the following is considered a capital market security?

A) T-bills
B) Equity securities
C) Commercial paper
D) Bankers' acceptances

Question 16

Which of the following is not considered a money market security?

A) T-bills
B) 30-year bond
C) Commercial paper
D) Bankers' acceptances

Question 17

Which of the following is considered a money market security?

A) Treasury bill
B) 30-year bond
C) Common stock

Question 18

Which of the following is best described as a capital market security?

A) Treasury bill
B) Common stock
C) Commercial paper

Question 19

"There are more offerings of IPOs during periods of strong economic activity and fewer offerings of IPOs during economic downturns." "IPO" in the above statement best refers to:

A) first sale of equity interest to the public.
B) property that is pledged to secure a loan.
C) trading environment that allows investors to buy and sell existing securities.
D) instrument that takes the form of a security, generally with a maturity between one and ten years.

Question 20

Morgan Stanley was the investment banking firm that took Facebook from being a closely held company to issuing stock to the public for the first time. Which of the following terms most closely describes this?

A) money market security.
B) issuing commercial paper.
C) initial public offering (IPO).
D) debt security backed by the general credit of the issuer.

Question 21

Trading of securities directly between investors without the involvement of brokers or dealers is best described as:

A) Third market
B) Fourth market
C) Primary market
D) Secondary market

Question 22

The world's largest equity market in terms of the value of the stocks listed with the exchange is the:

A) NASDAQ OMX.
B) NYSE Euronext (US).
C) Federal Reserve System.
D) Tokyo Stock Exchange Group.

Question 23

Establish margin requirements, require disclosures regarding consumer lending, assess reserve requirements of member banks and non-depository institutions, these are things the following institution has been given the power to do:

A) NYSE Euronext (US).
B) Federal Insurance Office (FIO).
C) Federal Reserve System (the Fed).
D) Securities and Exchange Commission (SEC).

Question 24

Which of the following organizations is charged with ensuring that financial markets are fair, orderly, and efficient, encouraging capital flows from investors to businesses, protecting investors, and oversight of self-regulatory organizations?

A) NYSE Euronext (US)
B) Federal Reserve System (the Fed)
C) Securities and Exchange Commission (SEC)
D) Financial Industry Regulatory Authority (FINRA)

Question 25

Which of the following would best be described as a self-regulatory organization (SRO)?

A) NASDAQ OMX
B) Federal Reserve Board
C) Securities and Exchange Commission (SEC)
D) Financial Industry Regulatory Authority (FINRA)

Question 26

Which of the following transactions does not take place in the primary market? An investor:

A) buying a newly issued municipal bond.
B) buying shares of an initial public offering.
C) selling one hundred shares of stock through a stock broker.
D) buying a U.S. Treasury bill through the government auction.

Question 27

Which of the following transactions takes place in the secondary market? An investor buying:

A) 500 shares of an IPO.
B) a newly issued municipal bond.
C) 500 shares of stock in his online brokerage account.
D) a U.S. Treasury bill through the government auction.

Question 28

Which of the following is not a power granted to the Board of Governors of the Federal Reserve System?

A) Regulate competition among banks.
B) Establish margin requirements for securities.
C) Evaluate the reserve requirements of member banks.
D) Buy equity securities to maintain equilibrium in the stock market.

Question 29

Which of the following companies has the highest market capitalization?

$\begin{array}{llcc}& \text { Company name }& \text { Shares Outstanding} & \text { Market price per share }\\\end{array}$

A) $\begin{array}{llcc}& \text { Company }\mathrm{ABC} && & 10,000,000 &&&& \$ 2 \\\end{array}$
B) $\begin{array}{llcc}& \text { Company DEF} &&& 15,000,000 &&&& \$ 10 \\\end{array}$
C) $\begin{array}{llcc}& \text { Company} \mathrm{GHI} &&& 12,000,000&&&&\$ 20 \\\end{array}$
D) $\begin{array}{llcc}& \text { Company JKL} &&7,500,000 &&&&&\$ 40 \\\end{array}$

Question 30

Company A had its first day as a publicly traded company on October 20, 2011. The stock closed at a price of $17 per share, with 8,000,000 shares trading on this first day. There are 32,000,000 shares of common stock outstanding after this offering. What type of transaction took place on October 20, 2011 and what is the company's market capitalization at the end of the day?

A) Primary market, $136,000,000
B) Primary market, $544,000,000
C) Secondary market, $136,000,000
D) Secondary market, $544,000,000

Question 31

Which market is particularly important for "block trades", which are extremely large transactions involving at least 10,000,000 shares or $100,000?

A) Third market
B) Fourth market
C) Primary market
D) Secondary market

Question 32

Which of the following did not result in large scale mergers across the financial industry?

A) Sarbanes- Oxley Act
B) Gramm-Leach-Bliley Act
C) Financial crisis of 2007 -2008

Question 33

Classify each of the following transactions, sequentially, as occurring in either the primary market or the secondary market: 1. Rosetta Stone goes public with an offering of 6,250,000 in April of 2009
2) Health Care REIT, Inc., which is already publicly traded, issues 13,800,000 additional shares of stock as a public offering in August 0f 2012
3) Laurie's Thursday night investment club buys 500 shares of Kohl's from their stockbroker following the recommendation of one of their members.
4) A student sells 50 shares of McDonald's stock online to fund her summer travel plans.

A) 1. Primary market, 2. Primary market, 3. Primary market, 4. Primary market
B) 1. Primary market, 2. Primary market, 3. Secondary market, 4. Secondary market
C) 1. Secondary market, 2. Secondary market, 3. Primary market, 4. Primary market.
D) 1. Secondary market, 2. Secondary market, 3. Secondary market, 4. Secondary market.

Question 34

The common stock of the social networking company, Facebook, began trading May 18, 2012 on NASDAQ. This start of trading on a securities market is best described as:

A) a close out.
B) a security filing.
C) an initial public offer.
D) a secondary market offer.

Question 35

Classify each of the following , sequentially, as either a money market security or a capital market security:
1) 20-year Rockingham County School Bonds
2) 90-day Treasury Bill
3) 9-month certificate of deposit
4) Wal-Mart stock

A) 1. Money market security, 2. Money market security, 3. Money market security, 4. Money market security
B) 1. Capital market security, 2. Capital market security, 3. Capital market security, 4. Capital market security
C) 1. Capital market security, 2. Money market security, 3. Capital market security, 4. Capital market security
D) 1. Capital market security, 2. Money market security, 3. Money market security, 4. Capital market security

Question 36

You observe that the Express Company has total shareholders' equity on its balance sheet of $5 billion, total debt on its balance sheet of $3 billion, and its common stock has a price per share of $20. If Express has 1 billion shares outstanding, its market value is closest to:

A) $5 billion
B) $8 billion
C) $20 billion
D) $23 billion

Question 37

August 16, 2012 Health Care REIT, Inc. (HCN) stock closed at $60.17 on trading volume of 1,660,000. That same day HCN completes a public offering of 13,800,000 shares which it sells for a price of $58.75 each. What most closely represents the increase in market capitalization HCN experienced from the new stock offering?

A) $97,525,000
B) $99,882,200.
C) $810,750,000
D) $830,346,000

Question 38

Which of the following is not an example of a financial derivative?

A) Options
B) Mortgages
C) Interest-rate swaps

Question 39

Which of the following did not contribute to the 2007 - 2008 financial crisis?

A) Housing bubble
B) Lax lending standards
C) Globalization of financial investments and instruments
D) Mortgage loans made with moderate loan-to-value ratios
E) Push for government sponsored entities (GSEs) to purchase lower quality loans

Question 40

The majority of home purchases in the U.S. are secured with a mortgage. A mortgage is:

A) an unsecured loan.
B) an equity investment in the property.
C) a debt obligation secured by a specific property.

Question 41

Which of the following is not characteristic of systemic risk?

A) Affects the larger economy
B) Cannot be diversified away
C) Arose from the mortgage housing crisis
D) Affects a specific sector of the economy

Question 42

Lack of available loans for businesses is best described as:

A) stress test.
B) systemic risk.
C) subprime mortgages.
D) credit crunch or credit squeeze.

Question 43

Which of the following is a government program designed to assist financial institutions in response to the financial crisis of 2007-2008?

A) Glass-Steagall Act
B) Troubled Asset Relief Program (TARP)
C) Government- sponsored entities (GSEs)
D) Financial Industry Regulatory Authority (FINRA)

Question 44

The debt obligation secured by a person's primary home is best described as a:

A) stock.
B) mortgage.
C) debenture.
D) margin loan.

Question 45

Uncertainty that affects the larger economy is best described as:

A) volatility risk.
B) systemic risk.
C) systematic risk.

Question 46

The primary responsibility of the Federal Open Market Committee is:

A) U.S. monetary policy.
B) regulate banks and insurance companies.
C) to bring the U.S. out of a recession in a timely manner.

Question 47

The predominant regulator of insurance companies in the U.S.

A) are the States.
B) is the Federal government.
C) is the Securities and Exchange Commission.

Question 48

Which of the following U.S. securities laws created the Financial Stability Oversight Council, created criteria and standards for systemically important financial companies, provided for orderly liquidation of insolvent financial companies, and regulated derivatives and hedge funds?

A) Securities Act of 1933
B) Sarbanes-Oxley Act of 2002
C) Investment Company Act of 1940
D) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Question 49

Suppose homeowners own a home that has an appraised value of $200,000. The homeowners have a mortgage loan outstanding on the home of $180,000. The loan to value ratio is closest to:

A) 0.9.
B) 1.0.
C) 1.05

Question 50

Suppose homeowners own a home that has an appraised value of $250,000. The homeowners have a mortgage loan outstanding on the home of $260,000. Which of the following statements is incorrect regarding the mortgage loan?

A) This loan is underwater.
B) The loan to value ratio is 0.9615
C) The homeowners owe more than what the home is worth.

Question 51

Financial managers learned many lessons following the financial crisis of 2007 - 2008. These lessons include all of the following except:

A) financial risk management is important.
B) executive compensation should be tied to some measure of risk, not just earnings
C) reliance on bank financing for short-term needs is recommended during a credit crunch.
D) companies that rely on securitizing their assets should be prepared for the associated risks.

Question 52

The three primary areas of finance are business finance, corporate finance, and investments.

Question 53

The primary area of finance that deals with financing decision making within a business entity would best be described as investments.

Question 54

Mortgage brokers, real estate brokers, stock brokers, and insurance brokers are all examples of market intermediaries.

Question 55

Mortgage brokers, real estate brokers, stock brokers, and insurance brokers are all examples of financial intermediaries.

Question 56

A broker is a type of market intermediary.

Question 57

The primary area of finance that deals with financing decision making within a business entity would best be described as investments.

Question 58

Bank loans, commercial paper, banker's acceptance, and U.S. Treasury bills are all examples of short-term equity securities.

Question 59

Mortgage loans, municipal bonds, and corporate bonds all represent equity interests.

Question 60

An equity security represents a debt obligation.

Question 61

Common stock, preferred stock, and mortgage loans are all examples of equity instruments.

Question 62

Secondary markets are the key to the wealth creation process because they enable money to be transferred to those who can make the best use of it in terms of developing new real assets like houses and factories.

Question 63

Without well-functioning secondary markets, governments and companies would be unable to raise financing because investors could not sell securities when necessary.

Question 64

Mortgage loans, municipal bonds, and corporate bonds all represent equity interests.

Question 65

Secondary market trading in equity securities is many times the size of the primary market, whereas for debt securities it is the opposite.

Question 66

Exchange market or auction market is a secondary market that does not have a physical location and consists of a network of dealers who trade directly with one another.

Question 67

Dealer market or over-the-counter (OTC) market is a secondary market that does not have a physical location and consists of a network of dealers who trade directly with one another.

Question 68

The twelve-member committee that affects the monetary policy of the U.S. is the Federal Open Market Committee (FOMC).

Question 69

The federal agency responsible for monitoring and advising regulators about insurance companies' risk and solvency is called the Federal Reserve System.

Question 70

There is substantial investment in the U.S. by non-U.S. investors, and there is also substantial investment outside the U.S. by U.S. investors.

Question 71

The 2007 - 2008 financial crisis is an example of the globalization of the financial system.

Question 72

The process of converting loans into securities is best referred to as packaging.

Question 73

The process of converting loans into securities is best referred to as securitization.

Question 74

Mortgage backed securities carry claims on the cash flows of a pool of mortgages.

Question 75

Term Asset-Backed Securities Loan Facility (TALF) is one of the U.S. Government programs put into place in response to the financial crisis of 2007 - 2008. TALF is designed to infuse capital in the financial system by purchasing assets and equity from troubled financial institutions.

Question 76

Stress tests were one of the tools Federal regulators used to evaluate bank holding companies' solvency following the financial crisis of 2007-2008.

Question 77

Deregulation in the 1990s resulted in fewer bank failures following the financial crisis of 2007 - 2008, as compared to previous economic downturns, but the size of losses per institution was larger during the 2007-2008 crisis.

Question 78

The U.S. economy faltering along with economies around the world during the 2007 - 2008 financial crisis is an example of the insulation of the U.S. economy to the globalization of the financial system.

Question 79

What is finance?

Question 80

List three different types of securities.