Deck 1: Overview of Finance

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Question
In the over-the-counter market,dealers are linked with the purchasers and sellers of securities through the ________ system.

A) NASDAQ
B) NYSE
C) AMEX
D) SEC
E) NYMEX
Use Space or
up arrow
down arrow
to flip the card.
Question
Money markets are markets for

A) foreign currency exchange.
B) corporate stocks.
C) long-term bonds.
D) short-term debt securities.
E) preferred securities.
Question
The over-the-counter market is

A) the New York Stock Exchange.
B) an organized stock exchange.
C) a physical place where securities are bought and sold.
D) an intangible market for unlisted securities.
E) where commodities futures are bought and sold.
Question
According to your text,major players in the money market include all of the following EXCEPT:

A) The U.S. Treasury
B) The Federal Reserve System
C) Commercial Banks
D) Companies
E) The U.S. Commerce Department
Question
________ would be the course where you learn to tell the good stocks from the bad,and the sure things from the really risky.

A) Corporate Finance
B) Investments
C) Personal Finance
D) Derivative Securities
Question
Finance is:

A) The study of investment management
B) The study of the stock exchange
C) The study of the capital market and its many players
D) The study of money management for personal use
Question
Capital markets have maturities of one year or less.
Question
What is the purpose of the capital market?

A) To match people with money to entrepreneurs with great business ideas or concepts
B) To more easily regulate the flow of money between parties
C) To make money without trying
D) To allow people to buy stocks for retirement
Question
Preferred stock pays a variable dividend.
Question
The ________ price is ________ the ________ price.

A) bid; above; ask
B) bid; below; ask
C) ask; below; bid
D) ask; above; bid
E) Answers (B) and (D) are correct.
Question
Common stockholders expect to receive a return through capital gains and

A) interest payments.
B) dividends.
C) fixed periodic dividends.
D) coupon payments.
E) receiving shares of preferred stock
Question
Money market securities have maturities of one year or less.
Question
T-bonds are money market securities,while T-bills and T-notes are traded in the capital market.
Question
Which one of these would a financial advisor say is most important?

A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase
Question
Which of the following is not considered a capital market security?

A) Mortgage-backed Securities
B) Corporate Bonds
C) Common Stock
D) Foreign Currencies
E) Municipal Bonds
Question
A firm raises capital to finance new equipment by selling bonds in the

A) secondary market.
B) primary market.
C) futures market.
D) options market.
E) federal funds market.
Question
The ________ is the financial market in which securities are initially issued.

A) private placement
B) OTC
C) primary market
D) secondary market
E) NASDAQ
Question
Which of these is not one of the basic questions for corporate finance?

A) How should we raise the money?
B) What are we going to make?
C) What do we do with our profits?
D) How big of a bonus should we get?
Question
Regulating the banking institutions is one of the Federal Reserve's duties.
Question
Which of the following statements is true regarding common and preferred shares?

A) Preferred shareholders have more voting power than common shareholders.
B) Common shareholders are guaranteed a fixed dividend.
C) Common shareholders have a more senior claim against assets than preferred shareholders.
D) Preferred shareholders are entitled to their dividends before common shareholders
E) Common shareholders earn a better return than preferred shareholders.
Question
Which of the following is not a major participant in the money market?

A) Money market mutual funds
B) Commercial banks
C) Wall Street dealers
D) Federal Reserve
E) U.S. Treasury
Question
The top of the organizational chart of organizations is:

A) CEO
B) Board of Directors
C) V.P. of Finance
D) Shareholders
E) Executive Chairman
Question
Which of the following statements is true?

A) The presence of asymmetric information in financial markets increases the likelihood that these markets are efficient.
B) Accounting profits are always more important to shareholders than cash flows.
C) Managers should choose investment projects that maximize shareholder wealth.
D) The study of finance only benefits students who aspire to careers in business.
E) Investors should not be compensated with a higher return for owning risky securities since they should know better than to buy stock in a firm that has uncertain prospects.
Question
Which of the following is not a financial intermediary?

A) Investment banks
B) The United States Treasury Department
C) Hedge Funds
D) Insurance companies
E) Thrift institutions
Question
Which of the following are rights of stockholders?

A) To share in the firm's profits after all other creditors have been satisfied
B) To be guaranteed a dividend
C) To decide whether or not to pay taxes on capital gains
D) To vote for directors, but never on specific issues
E) To avoid losses when the firm's prospects decline
Question
Which of the following is the best way to prevent an agency problem between shareholders and managers?

A) Maintain a proportional relationship between a manager's bonus and the number of employees in the firm.
B) Compensate managers to a significant degree with shares of stock in their firm.
C) Reward managers if they keep costs below the budgeted amount.
D) Pay managers a bonus if their division exceeds its targeted market share.
E) Pay managers a bonus if their division exceeds its quarterly sales target.
Question
Which of the following is a role of the secondary market?

A) Keep prices level
B) Give information for securities on sale in the primary market
C) Trade long term securities only
D) Offer securities for sale for the first time
E) Establishing security prices
Question
The ________ is a financial relationship created by a number of institutions with arrangements that allow the suppliers and demanders of long-term funds to make transactions.

A) money market
B) eurobond market
C) bond market
D) capital market
E) futures market
Question
The primary role of a financial system is to

A) make savvy investors rich.
B) regulate the banking system.
C) enable financial managers to evaluate investment projects with a system that always selects the correct opportunity for their firm.
D) channel funds from savers to borrowers who need funds for investment projects.
E) provide employees in financial institutions with a code of ethics.
Question
________ are further divided into two groups: Auctions,and Dealer markets.

A) Secondary markets
B) Primary markets
C) Money markets
D) Capital markets
E) Investment markets
Question
________ are long-term debt instruments business and government use to raise large sums of money.

A) T-bills
B) Bonds
C) Common stocks
D) Preferred stocks
E) Commercial papers
Question
What is the principal-agent problem?

A) When the principal misrepresents the agent to the board
B) When an agent does not maximize the utility of the principal
C) The cost of training new agents
D) When an agent misrepresents the principal to the board
Question
Which of the following are agency costs?
I.Forgoing an investment opportunity which would add to the market value of the owner's equity
II.Paying a dividend to each of the existing shareholders
III.Purchasing new equipment which increases the value of each share of stock
IV.Hiring outside auditors to verify the accuracy of the company financial statements

A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I, II, and IV only
Question
In a broad sense,every business asset is ultimately owned by

A) individuals.
B) the federal government.
C) foreign governments.
D) trust funds.
E) none of the above
Question
Shares of ________ are units of ownership interest,or equity,in a corporation.

A) debt
B) common stock
C) bank loans
D) commercial paper
E) debentures
Question
Which of the following is an advantage of a partnership?

A) No license, charter, or agreement legally required
B) Joint liability for company debts
C) Least regulated form of business
D) Ownership is easy to transfer
E) Can raise money using capital markets (debt and equity)
Question
Which of the following statements best describes mutual funds?

A) They are illegal in the United States, but popular in Europe.
B) They enable investors to buy many shares of stock in a single firm at a lower cost than using a stockbroker.
C) They provide good investment returns, but insufficient diversification.
D) They enable many investors with limited funds to buy a diversified portfolio.
E) They appeal only to wealthy investors.
Question
What do we call a market in which the price of a security is an accurate estimate by the market of its true value?

A) Efficient Market
B) Law of One Price
C) Effective Market
D) Primary Market
E) Secondary Market
Question
Agency costs are fees paid by the management of a corporation to compensate any investor that feels it has suffered a loss due to the agency problem.
Question
Agency costs pose the biggest problem for

A) insiders.
B) shareholders.
C) directors.
D) agents.
E) executives.
Question
The higher the probability that the return on an investment will not pay off its averaged promised value,the higher the expected return must be to induce an investor to invest in it.
Question
As the risk of a stock investment increases,

A) return will increase.
B) return will decrease.
C) required rate of return will decrease.
D) required rate of return will increase.
E) the beta approaches zero.
Question
A firm's net income is a true representation of cash flows available to the stockholders.
Question
Which of the following statements about risk is false?

A) Risk is one of the determinants of the required return.
B) Risk requires the possibility of at least one outcome less favorable than the expected value.
C) Risk requires the possibility of more than one outcome.
D) High risk should require low return.
Question
$100 today is worth

A) the same as $100 to be received in one year, since the inflation rate has been low recently and funds received in the near future should have the same purchasing power that they have today.
B) less than $100 to be received in one year, since many people will spend money foolishly today and will become more careful in their spending habits as they mature.
C) more than $100 to be received in one year, since you can invest the money received today for this period, leaving you with more than $100 in the future.
D) the same as a future receipt of $100, since the physical characteristics of U.S. currency are unchanged for long periods of time.
E) less than $100 received by someone ten years ago, since many products have been improved over this time period.
Question
Information Asymmetry is:

A) false information spread by competitors.
B) when two pieces of information counteract each other.
C) when some know more than others.
D) when information is not reflected properly in the market.
E) incomplete information.
Question
The efficient market hypothesis states that:

A) Requiring firms to issue more stock will reduce volatility.
B) Requiring investors to hold securities longer will reduce volatility.
C) Electing a pro-business Republican president makes the market more efficient.
D) Taxing security returns will raise prices .
E) Markets price securities fairly at all times and that new information is rapidly reflected in the price.
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Deck 1: Overview of Finance
1
In the over-the-counter market,dealers are linked with the purchasers and sellers of securities through the ________ system.

A) NASDAQ
B) NYSE
C) AMEX
D) SEC
E) NYMEX
NASDAQ
2
Money markets are markets for

A) foreign currency exchange.
B) corporate stocks.
C) long-term bonds.
D) short-term debt securities.
E) preferred securities.
short-term debt securities.
3
The over-the-counter market is

A) the New York Stock Exchange.
B) an organized stock exchange.
C) a physical place where securities are bought and sold.
D) an intangible market for unlisted securities.
E) where commodities futures are bought and sold.
an intangible market for unlisted securities.
4
According to your text,major players in the money market include all of the following EXCEPT:

A) The U.S. Treasury
B) The Federal Reserve System
C) Commercial Banks
D) Companies
E) The U.S. Commerce Department
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
5
________ would be the course where you learn to tell the good stocks from the bad,and the sure things from the really risky.

A) Corporate Finance
B) Investments
C) Personal Finance
D) Derivative Securities
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
6
Finance is:

A) The study of investment management
B) The study of the stock exchange
C) The study of the capital market and its many players
D) The study of money management for personal use
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
7
Capital markets have maturities of one year or less.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
8
What is the purpose of the capital market?

A) To match people with money to entrepreneurs with great business ideas or concepts
B) To more easily regulate the flow of money between parties
C) To make money without trying
D) To allow people to buy stocks for retirement
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
9
Preferred stock pays a variable dividend.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
10
The ________ price is ________ the ________ price.

A) bid; above; ask
B) bid; below; ask
C) ask; below; bid
D) ask; above; bid
E) Answers (B) and (D) are correct.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
11
Common stockholders expect to receive a return through capital gains and

A) interest payments.
B) dividends.
C) fixed periodic dividends.
D) coupon payments.
E) receiving shares of preferred stock
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
12
Money market securities have maturities of one year or less.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
13
T-bonds are money market securities,while T-bills and T-notes are traded in the capital market.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
14
Which one of these would a financial advisor say is most important?

A) Making decent dough over the long haul
B) Making a quick buck
C) Avoiding paying taxes whenever possible
D) Properly financing a large purchase
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
15
Which of the following is not considered a capital market security?

A) Mortgage-backed Securities
B) Corporate Bonds
C) Common Stock
D) Foreign Currencies
E) Municipal Bonds
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
16
A firm raises capital to finance new equipment by selling bonds in the

A) secondary market.
B) primary market.
C) futures market.
D) options market.
E) federal funds market.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
17
The ________ is the financial market in which securities are initially issued.

A) private placement
B) OTC
C) primary market
D) secondary market
E) NASDAQ
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
18
Which of these is not one of the basic questions for corporate finance?

A) How should we raise the money?
B) What are we going to make?
C) What do we do with our profits?
D) How big of a bonus should we get?
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
19
Regulating the banking institutions is one of the Federal Reserve's duties.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
20
Which of the following statements is true regarding common and preferred shares?

A) Preferred shareholders have more voting power than common shareholders.
B) Common shareholders are guaranteed a fixed dividend.
C) Common shareholders have a more senior claim against assets than preferred shareholders.
D) Preferred shareholders are entitled to their dividends before common shareholders
E) Common shareholders earn a better return than preferred shareholders.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
21
Which of the following is not a major participant in the money market?

A) Money market mutual funds
B) Commercial banks
C) Wall Street dealers
D) Federal Reserve
E) U.S. Treasury
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
22
The top of the organizational chart of organizations is:

A) CEO
B) Board of Directors
C) V.P. of Finance
D) Shareholders
E) Executive Chairman
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
23
Which of the following statements is true?

A) The presence of asymmetric information in financial markets increases the likelihood that these markets are efficient.
B) Accounting profits are always more important to shareholders than cash flows.
C) Managers should choose investment projects that maximize shareholder wealth.
D) The study of finance only benefits students who aspire to careers in business.
E) Investors should not be compensated with a higher return for owning risky securities since they should know better than to buy stock in a firm that has uncertain prospects.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
24
Which of the following is not a financial intermediary?

A) Investment banks
B) The United States Treasury Department
C) Hedge Funds
D) Insurance companies
E) Thrift institutions
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
25
Which of the following are rights of stockholders?

A) To share in the firm's profits after all other creditors have been satisfied
B) To be guaranteed a dividend
C) To decide whether or not to pay taxes on capital gains
D) To vote for directors, but never on specific issues
E) To avoid losses when the firm's prospects decline
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
26
Which of the following is the best way to prevent an agency problem between shareholders and managers?

A) Maintain a proportional relationship between a manager's bonus and the number of employees in the firm.
B) Compensate managers to a significant degree with shares of stock in their firm.
C) Reward managers if they keep costs below the budgeted amount.
D) Pay managers a bonus if their division exceeds its targeted market share.
E) Pay managers a bonus if their division exceeds its quarterly sales target.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
27
Which of the following is a role of the secondary market?

A) Keep prices level
B) Give information for securities on sale in the primary market
C) Trade long term securities only
D) Offer securities for sale for the first time
E) Establishing security prices
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
28
The ________ is a financial relationship created by a number of institutions with arrangements that allow the suppliers and demanders of long-term funds to make transactions.

A) money market
B) eurobond market
C) bond market
D) capital market
E) futures market
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
29
The primary role of a financial system is to

A) make savvy investors rich.
B) regulate the banking system.
C) enable financial managers to evaluate investment projects with a system that always selects the correct opportunity for their firm.
D) channel funds from savers to borrowers who need funds for investment projects.
E) provide employees in financial institutions with a code of ethics.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
30
________ are further divided into two groups: Auctions,and Dealer markets.

A) Secondary markets
B) Primary markets
C) Money markets
D) Capital markets
E) Investment markets
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
31
________ are long-term debt instruments business and government use to raise large sums of money.

A) T-bills
B) Bonds
C) Common stocks
D) Preferred stocks
E) Commercial papers
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
32
What is the principal-agent problem?

A) When the principal misrepresents the agent to the board
B) When an agent does not maximize the utility of the principal
C) The cost of training new agents
D) When an agent misrepresents the principal to the board
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
33
Which of the following are agency costs?
I.Forgoing an investment opportunity which would add to the market value of the owner's equity
II.Paying a dividend to each of the existing shareholders
III.Purchasing new equipment which increases the value of each share of stock
IV.Hiring outside auditors to verify the accuracy of the company financial statements

A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I, II, and IV only
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
34
In a broad sense,every business asset is ultimately owned by

A) individuals.
B) the federal government.
C) foreign governments.
D) trust funds.
E) none of the above
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
35
Shares of ________ are units of ownership interest,or equity,in a corporation.

A) debt
B) common stock
C) bank loans
D) commercial paper
E) debentures
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
36
Which of the following is an advantage of a partnership?

A) No license, charter, or agreement legally required
B) Joint liability for company debts
C) Least regulated form of business
D) Ownership is easy to transfer
E) Can raise money using capital markets (debt and equity)
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
37
Which of the following statements best describes mutual funds?

A) They are illegal in the United States, but popular in Europe.
B) They enable investors to buy many shares of stock in a single firm at a lower cost than using a stockbroker.
C) They provide good investment returns, but insufficient diversification.
D) They enable many investors with limited funds to buy a diversified portfolio.
E) They appeal only to wealthy investors.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
38
What do we call a market in which the price of a security is an accurate estimate by the market of its true value?

A) Efficient Market
B) Law of One Price
C) Effective Market
D) Primary Market
E) Secondary Market
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
39
Agency costs are fees paid by the management of a corporation to compensate any investor that feels it has suffered a loss due to the agency problem.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
40
Agency costs pose the biggest problem for

A) insiders.
B) shareholders.
C) directors.
D) agents.
E) executives.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
41
The higher the probability that the return on an investment will not pay off its averaged promised value,the higher the expected return must be to induce an investor to invest in it.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
42
As the risk of a stock investment increases,

A) return will increase.
B) return will decrease.
C) required rate of return will decrease.
D) required rate of return will increase.
E) the beta approaches zero.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
43
A firm's net income is a true representation of cash flows available to the stockholders.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
44
Which of the following statements about risk is false?

A) Risk is one of the determinants of the required return.
B) Risk requires the possibility of at least one outcome less favorable than the expected value.
C) Risk requires the possibility of more than one outcome.
D) High risk should require low return.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
45
$100 today is worth

A) the same as $100 to be received in one year, since the inflation rate has been low recently and funds received in the near future should have the same purchasing power that they have today.
B) less than $100 to be received in one year, since many people will spend money foolishly today and will become more careful in their spending habits as they mature.
C) more than $100 to be received in one year, since you can invest the money received today for this period, leaving you with more than $100 in the future.
D) the same as a future receipt of $100, since the physical characteristics of U.S. currency are unchanged for long periods of time.
E) less than $100 received by someone ten years ago, since many products have been improved over this time period.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
46
Information Asymmetry is:

A) false information spread by competitors.
B) when two pieces of information counteract each other.
C) when some know more than others.
D) when information is not reflected properly in the market.
E) incomplete information.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
47
The efficient market hypothesis states that:

A) Requiring firms to issue more stock will reduce volatility.
B) Requiring investors to hold securities longer will reduce volatility.
C) Electing a pro-business Republican president makes the market more efficient.
D) Taxing security returns will raise prices .
E) Markets price securities fairly at all times and that new information is rapidly reflected in the price.
Unlock Deck
Unlock for access to all 47 flashcards in this deck.
Unlock Deck
k this deck
locked card icon
Unlock Deck
Unlock for access to all 47 flashcards in this deck.