Deck 13: Saving, Investment, and the Financial System

Question 1

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

A)credit risk.
B)interest risk.
C)term risk.
D)private risk.

Answer 1

A

Question 2

As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,

A)invest in physical capital.
B)use equity finance.
C)sell bonds.
D)purchase bonds.

Answer 2

C

Question 3

When a large, well-known corporation wishes to borrow directly from the public, it can

A)sell bonds.
B)sell shares of stock.
C)go to a bank for a loan.
D)All of the above are correct.

Answer 3

A

Question 4

The primary economic function of the financial system is to

A)keep interest rates low.
B)provide expert advice to savers and investors.
C)match one person's consumption expenditures with another person's capital expenditures.
D)match one person's saving with another person's investment.

Question 5

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

A)the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
B)Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation.
C)Bond A has a term of 20 years and Bond B has a term of 2 years.
D)All of the above are correct.

Question 6

Which of the following statements about the term of a bond is correct?

A)Term refers to the various characteristics of a bond, including its interest rate and tax treatment.
B)The term of a bond is determined entirely by its credit risk.
C)The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond.
D)Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Question 7

Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,

A)their consumption expenditures are being financed by someone else's saving.
B)their consumption expenditures are being financed by someone else's investment.
C)their investments are being financed by someone else's saving.
D)their saving is being financed by someone else's investment.

Question 8

Given that Monika's income exceeds her expenditures, Monika is best described as a

A)saver or as a supplier of funds.
B)saver or as a demander of funds.
C)borrower or as a supplier of funds.
D)borrower or as a demander of funds.

Question 9

Two of the economy's most important financial intermediaries are

A)suppliers of funds and demanders of funds.
B)banks and the bond market.
C)the stock market and the bond market.
D)banks and mutual funds.

Question 10

The economy's two most important financial markets are

A)the investment market and the saving market.
B)the bond market and the stock market.
C)banks and the stock market.
D)financial markets and financial institutions.

Question 11

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

A)Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation.
B)Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York.
C)Bond A has a term of 20 years and Bond B has a term of 1 year.
D)All of the above are correct.

Question 12

If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs.

A)These purchases are called capital investment. If you raise the funds to purchase them from others you are a saver.
B)These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower.
C)These purchases are called consumption. If you raise the funds to purchase them from others you are a saver.
D)These purchases are called consumption. If you raise the funds to purchase them from others you are a borrower.

Question 13

We associate the term debt finance with

A)the bond market, and we associate the term equity finance with the stock market.
B)the stock market, and we associate the term equity finance with the bond market.
C)financial intermediaries, and we associate the term equity finance with financial markets.
D)financial markets, and we associate the term equity finance with financial intermediaries.

Question 14

Norberto is opening a bicycle shop, and his monthly expenditures to get the shop up and running exceed his monthly income. Norberto is best described as a

A)saver or as a supplier of funds.
B)saver or as a demander of funds.
C)borrower or as a supplier of funds.
D)borrower or as a demander of funds.

Question 15

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures

A)capital investment.
B)investment in human capital.
C)business consumption expenditures.
D)personal saving.

Question 16

Which of the following statements is correct?

A)A corporation receives a monetary payment every time its shares of stock are traded by stockholders on organized stock exchanges.
B)When a corporation sells bonds as a means of raising funds it is engaging in debt finance.
C)A share of stock is an IOU.
D)The two most important financial markets in the economy are the stock market and financial intermediaries.

Question 17

Which of the following statements is correct?

A)The expected future profitability of a corporation influences the demand for that corporation's stock.
B)When a corporation sells stock as a means of raising funds it is engaging in debt finance.
C)The owners of bonds sold by the Microsoft Corporation are part owners of that corporation.
D)All bonds are, by definition, perpetuities.

Question 18

When a country saves a larger portion of its GDP than it did before, it will have

A)more capital and higher productivity.
B)more capital and lower productivity.
C)less capital and higher productivity.
D)less capital and lower productivity.

Question 19

At the broadest level, the financial system moves the economy's scarce resources from

A)the rich to the poor.
B)financial institutions to business firms and government.
C)households to financial institutions.
D)savers to borrowers.

Question 20

Institutions that help to match one person's saving with another person's investment are collectively called the

A)Federal Reserve system.
B)banking system.
C)monetary system.
D)financial system.

Question 21

A bond is a

A)financial intermediary.
B)certificate of indebtedness.
C)certificate of partial ownership in an enterprise.
D)None of the above is correct.

Question 22

Long-term bonds are

A)riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
B)riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
C)less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
D)less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Question 23

Which of the following is correct?

A)Some bonds have terms as short as a few months.
B)Because they are so risky, junk bonds pay a low rate of interest.
C)Corporations buy bonds to raise funds.
D)All of the above are correct.

Question 24

Short-term bonds are generally

A)less risky than long-term bonds and so they feature higher interest rates.
B)less risky than long-term bonds and so they feature lower interest rates.
C)more risky than long-term bonds and so they feature higher interest rates.
D)more risky than long-term bonds and so they feature lower interest rates.

Question 25

A perpetuity is distinguished from other bonds in that it

A)pays continuously compounded interest.
B)pays interest only when it matures.
C)never matures.
D)will be used to purchase another bond when it matures unless the owner specifies otherwise.

Question 26

A perpetuity is

A)a financial intermediary that has existed throughout recorded history.
B)an instrument of equity finance.
C)a stock that pays dividends forever.
D)a bond that pays interest forever.

Question 27

If the government's expenditures exceeded its receipts, it would likely

A)lend money to a bank or other financial intermediary.
B)borrow money from a bank or other financial intermediary.
C)buy bonds directly from the public.
D)sell bonds directly to the public.

Question 28

If Research in Motion, Inc. sells a bond it is

A)borrowing directly from the public.
B)borrowing indirectly from the public.
C)lending directly to the public.
D)lending indirectly to the public.

Question 29

Which of the following is correct?

A)Lenders sell bonds and borrowers buy them.
B)Long-term bonds usually pay a lower interest rate than do short-term bonds because long-term bonds are riskier.
C)The term junk bonds refers to bonds that have been resold many times.
D)None of the above is correct.

Question 30

Which of the following is not correct?

A)If you buy a bond from a corporation, you can sell the bond to someone else before it matures.
B)Term refers to the scheduling of periodic interest rate payments on a bond.
C)A bond is an IOU.
D)There are millions of different bonds in the U.S. economy.

Question 31

Which of the following is not a nonsensical headline?

A)British perpetuities about to mature.
B)Disney issues new bonds with term of 7 percent.
C)Corporate bonds currently pay higher interest rates than government bonds.
D)Standard and Poor's judges new junk bond to have very low credit risk.

Question 32

A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will

A)demand the required funds by buying bonds.
B)demand the required funds by selling bonds.
C)supply the required funds by buying bonds.
D)supply the required funds by selling bonds.

Question 33

Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds, so Skyline likely will

A)demand funds from the financial system by buying bonds.
B)demand funds from the financial system by selling bonds.
C)supply funds to the financial system by buying bonds.
D)supply funds to the financial system by selling bonds.

Question 34

A bond that never matures is known as a

A)perpetuity.
B)an intermediary bond.
C)an indexed bond.
D)a junk bond.

Question 35

The length of time until a bond matures is called the

A)perpetuity.
B)term.
C)maturity.
D)intermediation.

Question 36

A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a

A)bond.
B)stock.
C)mutual fund.
D)All of the above are correct.

Question 37

Which of the following is correct?

A)The maturity of a bond refers to the amount to be paid back.
B)The principal of the bond refers to the person selling the bond.
C)A bond buyer cannot sell a bond before it matures.
D)None of the above is correct.

Question 38

Which of the following is a financial-market transaction?

A)A saver buys shares in a mutual fund.
B)A saver deposits money into a credit union.
C)A saver buys a bond a corporation has just issued so it can purchase capital.
D)None of the above is correct.

Question 39

A bond buyer is a

A)saver. Bond buyers must hold their bonds until maturity.
B)saver. Bond buyers may sell their bonds prior to maturity.
C)borrower. Bond buyers must hold their bonds until maturity.
D)borrower. Bond buyers may sell their bonds prior to maturity.

Question 40

Which of the following is not correct?

A)By saving a larger portion of its GDP, a country can raise its output per worker.
B)Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date.
C)Financial intermediaries are the only type of financial institution.
D)The financial system helps match people's saving with other people's borrowing.

Question 41

Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the bondholders. This failure is referred to as a

A)breach.
B)default.
C)risk.
D)term failure.

Question 42

Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest. Which of the following is most likely?

A)The 6 percent bond is less risky than the 3 percent bond.
B)The 6 percent bond is a U.S. government bond, and the 3 percent bond is a junk bond.
C)The 6 percent bond has a longer term than the 3 percent bond.
D)The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S. government bond.

Question 43

Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?

A)corporate bond, municipal bond, U.S. government bond
B)corporate bond, U.S. government bond, municipal bond
C)municipal bond, U.S. government bond, corporate bond
D)U.S. government bond, municipal bond, corporate bond

Question 44

You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds

A)is not subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government.
B)is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.
C)is subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds issued by the U.S. government.
D)is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.

Question 45

Morgan, a financial advisor, has told her clients the following things. Which of her statements is not correct?

A)"U.S. government bonds generally pay a higher rate of interest than corporate bonds."
B)"The interest received on corporate bonds is taxable."
C)"U.S. government bonds have the lowest default risk."
D)"If you purchase a municipal bond, you can sell it before it matures."

Question 46

Municipal bonds pay a relatively

A)low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax.
B)low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.
C)high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay.
D)high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.

Question 47

On which of these bonds is the prospect of default most likely?

A)a junk bond
B)a municipal bond
C)a U.S. government bond
D)a corporate bond issued by Proctor & Gamble Corporation

Question 48

Other things the same, which bond would you expect to pay the lowest interest rate?

A)a bond issued by a state with a very good credit rating
B)a bond issued by the U.S. government
C)a bond issued by a fairly new company doing genetic research
D)a bond issued by Nabisco

Question 49

Which of the following bond buyers did not buy the bond that best met his or her objective?

A)Jackie wanted a bond with a high interest rate and was willing to take a lot of risk. She purchased a junk bond.
B)Andrew wanted a bond that would allow him to legally avoid paying federal income taxes. He purchased a municipal bond.
C)Suzy wanted to purchase a bond whose seller was unlikely to default. She purchased a bond that Standards and Poor's rated a low credit risk.
D)Cecilia held long-term bonds rather than short-term bonds to avoid risk.

Question 50

On which of these bonds is the prospect of default least likely?

A)a junk bond
B)a bond issued by the state of Arizona
C)a bond issued by the federal government
D)a bond issued by General Electric Corporation

Question 51

Other things the same, bonds are likely to have higher interest rates if they have

A)tax exemptions and short terms.
B)tax exemptions and long terms.
C)no tax exemptions and short terms.
D)no tax exemptions and long terms.

Question 52

Compared to short-term bonds, other things the same, long-term bonds generally have

A)more risk and so they pay higher interest rates.
B)less risk and so they pay lower interest rates.
C)less risk and so they pay higher interest rates.
D)about the same risk and so they pay about the same interest rate.

Question 53

ABC Co. sells newly issued bonds. JLG Co. sells newly issued stocks. Which company is raising funds in financial markets?

A)only ABC
B)only JLG
C)both ABC and JLG
D)neither ABC nor JLG

Question 54

The sale of stocks

A)and bonds to raise money is called debt finance.
B)and bonds to raise money is called equity finance.
C)to raise money is called debt finance, while the sale of bonds to raise funds is called equity finance.
D)to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.

Question 55

Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds,

A)the city's high credit rating and the tax status of municipal bonds both contribute to a lower interest rate than would otherwise apply.
B)the city's high credit rating and the tax status of municipal bonds both contribute to a higher interest rate than would otherwise apply.
C)the city's high credit rating contributes to a lower interest rate than would otherwise apply, while the tax status of municipal bonds contributes to a higher interest rate than would otherwise apply.
D)the city's high credit rating contributes to a higher interest rate than would otherwise apply, while the tax status of municipal bonds contributes to a lower interest rate than would otherwise apply.

Question 56

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

A)Because they have the same term to maturity the interest rates should be the same.
B)Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate.
C)Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.
D)It is not possible to say if one bond has a higher interest rate than the other.

Question 57

You are thinking of buying a bond from Bluestone Corporation. You know that this bond is long term and you know that Bluestone's business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct?

A)The longer term would tend to make the interest rate on the bond issued by Bluestone higher, while the higher risk would tend to make the interest rate lower.
B)The longer term would tend to make the interest rate on the bond issued by Bluestone lower, while the higher risk would tend to make the interest rate higher.
C)Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by Bluestone.
D)Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Bluestone.

Question 58

Other things the same, which bond would you expect to pay the highest interest rate?

A)a bond issued by the U.S. government
B)a bond issued by Microsoft Corporation
C)a bond issued by the state of Montana
D)a bond issued by a new chain of Brazilian-style restaurants

Question 59

Other things the same, as the maturity of a bond becomes longer, the bond will pay

A)a lower interest rate because it has less risk.
B)a lower interest rate because it has more risk.
C)a higher interest rate because it has more risk.
D)the same interest rate, because there is no relationship between term and risk.

Question 60

Northwest Wholesale Foods sells common stock. The company is using

A)equity financing and the return shareholders earn is fixed.
B)equity financing and the return shareholders earn depends on how profitable the company is.
C)debt financing and the return shareholders earn is fixed.
D)debt financing and the return shareholders earn depends on how profitable the company is.

Question 61

Other things being constant, when a firm sells new shares of stock, the

A)supply of the stock increases and the price decreases.
B)supply of the stock decreases and the price increases.
C)demand for the stock increases and the price increases.
D)demand for the stock decreases and the price decreases.

Question 62

Suppose that the tires of a certain tire manufacturer are discovered to be defective. Other things the same, this news would cause

A)the demand for this company's stock to decrease, so the price would rise.
B)the demand for this company's stock to decrease, so the price would fall.
C)the supply of this company's stock to decrease, so the price would fall.
D)the supply of this company's stock to decrease, so the price would rise.

Question 63

People who buy stock in a corporation such as General Electric become

A)creditors of General Electric, so the benefits of holding the stock depend on General Electric's profits.
B)creditors of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.
C)part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits.
D)part owners of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.

Question 64

The bond market

A)is a financial market, whereas the stock market is a financial intermediary.
B)is a financial intermediary, whereas the stock market is a financial market.
C)is a financial market, as is the stock market.
D)is a financial intermediary, as is the stock market.

Question 65

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would

A)raise the demand for existing shares of the stock, causing the price to rise.
B)decrease the demand for existing shares of the stock, causing the price to fall.
C)raise the supply of the existing shares of stock, causing the price to rise.
D)raise the supply of the existing shares of stock, causing the price to fall.

Question 66

If Huedepool Beer runs into financial difficulty, the stockholders as

A)part owners of Huedepool are paid before bondholders get paid anything at all.
B)part owners of Huedepool are paid after bondholders get paid.
C)creditors of Huedepool are paid before bondholders get paid anything at all.
D)creditors of Huedepool are paid after bondholders get paid.

Question 67

In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

A)raise the demand for existing shares of the stock, causing the price to rise
B)decrease the demand for existing shares of the stock, causing the price to fall
C)raise the supply of the existing shares of stock, causing the price to rise
D)raise the supply of the existing shares of stock, causing the price to fall

Question 68

Which of the following would likely make the interest rate on a bond higher than otherwise?

A)both high credit risk and a long term
B)high credit risk but not a long term
C)a long term but not a high credit risk
D)neither high credit risk nor a long term

Question 69

If a firm sells a total of 100 shares of stock, then

A)each share represents 1 percent of the firm's indebtedness.
B)each share represents ownership of 1 percent of the firm.
C)the firm is engaging in term finance.
D)All of the above are correct.

Question 70

People who buy newly issued stock in a corporation such as Crate and Barrel provide

A)debt finance and so become part owners of Crate and Barrel.
B)debt finance and so become creditors of Crate and Barrel.
C)equity finance and so become part owners of Crate and Barrel.
D)equity finance and so become creditors of Crate and Barrel.

Question 71

If a firm sells a total of 100 shares of stock, then

A)the supply of, and demand for, those shares determine the price per share.
B)each share represents ownership of 1 percent of the firm.
C)the firm is engaging in equity finance.
D)All of the above are correct.

Question 72

Which of the following people purchased the correct asset to meet his or her objective?

A)Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza.
B)Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.
C)Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
D)All of the above are correct.

Question 73

Nastech Pharmaceuticals announced it has developed a nasal spray that would reduce hunger cravings. Other things the same we would expect

A)the demand for existing shares of stock in this company to decrease, so the price would fall.
B)the demand for existing shares of stock in this company to increase, so the price would rise.
C)the supply of existing shares of stock in this company to decrease, so the price would fall.
D)the supply of existing shares of stock in this company to increase, so the price would rise.

Question 74

All else equal, when people become more optimistic about a company's future, the

A)supply of the stock and the price will both rise.
B)supply of the stock and the price will both fall.
C)demand for the stock and the price will both rise.
D)demand for the stock and the price will both fall.

Question 75

Which of the following is not an important stock exchange in the United States?

A)New York Stock Exchange
B)American Stock Exchange
C)Chicago Mercantile Exchange
D)NASDAQ

Question 76

Stock represents

A)a claim to a share of the profits of a firm.
B)ownership in a firm.
C)equity finance.
D)All of the above are correct

Question 77

As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is

A)borrowing directly.
B)borrowing indirectly.
C)lending directly.
D)lending indirectly.

Question 78

The prices of stock traded on exchanges are determined by

A)the Corporate Stock Administration.
B)the administrators of NASDAQ.
C)the supply of, and demand for, the stock.
D)All of the above are correct.

Question 79

Suppose the government finds a major defect in one of a company's products and demands that the product be taken off the market. We would expect that the

A)supply of existing shares of the stock and the price will both rise.
B)supply of existing shares of the stock and the price will both fall.
C)demand for existing shares of the stock and the price will both rise.
D)demand for existing shares of the stock and the price will both fall.

Question 80

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan,

A)the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls.
B)the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises.
C)the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls.
D)the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises.