Deck 2: Firms and the Financial Market

Question 1

Which of the following is true about Preferred Stock?

A)Preferred shareholders always have voting rights.
B)If at a time a dividend is due on preferred stock,if the company does not have the funds to pay the dividend,the right of the preferred shareholders to collect that dividend lapses.
C)Preferred dividends are not tax deductible to the corporation.
D)Like bonds,preferred stock always has a maturity date at which time the issue price must be repaid to shareholders.

Answer 1

C

Question 2

In financial markets,borrowers pay savers by giving them a return on investment.

Answer 2

True

Question 3

Describe the costs and benefits to investors of owning Mutual Funds.

Answer 3

Owners of mutual fund shares get professional management of their portfolio,and get a diversified portfolio,as each mutual share is a share in the whole portfolio purchased by the mutual fund.In order to get these benefits,the investor must pay commissions upon purchase,and/or pay yearly management fees.The fees can significantly diminish the value of the shares of the mutual fund to the investor.An alternative for the investor is to buy an index fund,that is a fund that tracks an index such as the Dow Jones Industrial Average or the S & P 500.An index fund tracking the DJIA,for example,will automatically purchase stocks in the same percentage that they are used to determine the Dow Jones Industrial Average.Owning an index fund reduces costs,because there is no need to have professionals running the portfolio.

Question 4

Each of the following is true of Mutual Funds EXCEPT:

A)Funds can be classified as load or no-load funds.
B)Mutual Fund shares must be bought from or sold to the Fund by investors.
C)An index fund is the fund with the highest expenses payable by investors.
D)The NAV is the total value of stock held by the fund divided by the number of outstanding shares in the mutual fund.

Question 5

All of the following are true about insurance companies EXCEPT:

A)They invest their reserves.
B)They may guarantee to reimburse lenders should lenders' loans go into default.
C)They participate in equipment leasing.
D)They may only invest their reserves in interest paying bank accounts under Federal law.

Question 6

Most businesses are considered to be savers.

Question 7

Mutual Funds and ETFs provide the investor a chance to diversify without having to buy shares in numerous corporations.

Question 8

Which of the following is true about bonds?

A)They are obligations from the investor to the corporation.
B)Their interest rate always varies with the Consumer Price Index
C)They have a fixed maturity,and they pay an amount equal to the maturity value times the coupon rate each year.
D)At maturity of the bond,the investor receives the market price of the bond.

Question 9

Which of the following is true regarding Investment Banks?

A)As a result of the financial crisis of 2008,all stand alone Investment banks either failed,were merged into commercial banks,or became commercial banks.
B)Under the Glass-Steagal act,commercial banks were allowed to operate as Investment banks.
C)When Glass-Steagal was repealed in 1999,commercial banks and Investment banks had to be separate entities.
D)As of 2010,stand alone Investment banks are numerous.

Question 10

The difference between mutual funds and ETFs is that ETFs are traded on exchanges and mutual funds are not.

Question 11

Financial markets are where money and credit are exchanged.

Question 12

In Financial markets,borrowers and lenders most both be located in the same country.

Question 13

Private equity firms are financial intermediaries that are not traded on public capital markets.

Question 14

Banks that are financial intermediaries generate earnings when they facilitate the transfer of money from savers to borrowers by paying savers a smaller return than they demand from borrowers.

Question 15

A security is a written instrument that represents a financial claim.

Question 16

All financial intermediaries are banks.

Question 17

Individuals are often savers because they wish to save for things such as a down payment on a home or graduate school.

Question 18

Financial intermediaries help bring savers and borrowers together.

Question 19

All of the following operate as financial intermediaries EXCEPT:

A)commercial banks.
B)mutual funds.
C)insurance companies.
D)public universities.

Question 20

Capital markets are markets for short term debt instruments maturing in less than one year,and money markets are markets for long term debt instruments maturing in more than one year.

Question 21

A stock's market value is dependent on investors' expectations of future cash flows to the firm.

Question 22

Bonds are less risky than are stocks because their return is more predictable.

Question 23

Investors in securities markets do not use a financial intermediary.

Question 24

Preferred stock prices are solely dependent on investors' expectations of future cash flows to the corporation.

Question 25

A company has the option to pay bond interest or not.

Question 26

ABC Corporation issued and sold 10 shares of stock to Irene Investor,a private individual.This represents a secondary market transaction.

Question 27

Explain how securities markets provide a link between the corporation and investors.

Question 28

A bond matures in less than 10 years.

Question 29

Each year,shareholders receive a dividend equal to the firm's net earnings divided by the number of shares of common stock.

Question 30

Describe the tax benefits to a corporation of issuing debt rather than issuing stock.

Question 31

There are more companies listed on NASDAQ than are listed on the New York Stock Exchange.

Question 32

Colin,a private individual,sold one thousand shares of stock in DEF Corporation to Colleen,also a private individual.This represents a secondary market transaction.

Question 33

Owners of common stock are the owners of the firm.

Question 34

Primary markets are always larger than secondary markets.

Question 35

Organized security exchanges do not physically occupy space.