Deck 2: Firms and the Financial Market

Question 1

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.

Answer 1

D

Question 2

All financial intermediaries are banks.

Answer 2

False

Question 3

The principal savers in the financial markets are

A) businesses.
B) banks.
C) individuals.
D) governments.

Answer 3

C

Question 4

The principal participants in in the financial markets are

A) businesses, banks, government.
B) borrowers, savers, financial institutions.
C) mutual finds, hedge funds, investment bankers.
D) dealers, brokers, regulators.

Question 5

The purpose of financial markets is to bring borrowers and savers together.

Question 6

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

Question 7

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C) When Glass-Steagal was repealed in 1999, commercial banks and Investment banks had to be separate entities.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 8

Financial intermediaries help bring savers and borrowers together.

Question 9

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

Question 10

Secondary markets

A) function as a place for smaller, less well-known firms to issue securities.
B) are an important vehicle for established firms to raise additional money for expansion.
C) are a means by which funds are cycled from savers to borrowers.
D) are concerned with the trading of previously issued securities between investors.

Question 11

Commercial banks in the U.S. often own the corporations they lend to.

Question 12

All of the following are classified as non-bank financial intermediaries except

A) stock brokerages.
B) investment banks.
C) insurance companies.
D) hedge funds.

Question 13

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 14

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

Question 15

Firms that wish to raise funds for investment purposes issue securities in the

A) primary and secondary markets.
B) primary markets.
C) secondary markets.
D) intermediary markets.

Question 16

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 17

All of the following operate as financial intermediaries EXCEPT

A) commercial banks.
B) mutual funds.
C) insurance companies.
D) the U. S. Treasury

Question 18

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 19

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

Question 20

Insurance companies have a great deal of money to invest because

A) there profit margins are so high.
B) because they are reluctant to cover insurable losses.
C) because they must hold large reserves to pay potential claims.
D) insurance do not actually have large sums to invest.

Question 21

Investors in common stock increase their wealth when the

A) the market value of the stock goes up.
B) when the stock pays a dividend.
C) when the stock pays interest on the original investment.
D) both A and B.

Question 22

The 2010 law which prevents banks that take deposits from engaging in proprietary trading is known as

A) Sarbanes-Oxley.
B) The Dodd-Frank (Wall Street Reform and Consumer Protection) Act.
C) The Glass-Steagall Act.
D) The Gramm-Leach-Bliley Act.

Question 23

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

Question 24

Owners of common stock are the owners of the firm.

Question 25

Which of the following financial instruments entails the most risk and potentially the highest returns for investors?

A) debt with a maturity of less than one year
B) bonds
C) common stock
D) preferred stock

Question 26

Over the long term, mutual fund fee and expenses can have a significant impact on returns.

Question 27

Mortgage Backed securities are bonds whose cash flows are backed by large pools of mortgages.

Question 28

Banking regulations are essentially the same in all developed nations.

Question 29

A bond matures in less than 10 years.

Question 30

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 31

Characteristics of typical bonds include all of the following except

A) the par value.
B) the dividend rate.
C) the coupon rate
D) the maturity date.

Question 32

Which of the following is true about Preferred Stock?

A) Preferred shareholders always have voting rights.
B) In most cases, if a company fails to pay a preferred dividend when it is due the preferred shareholders have no right to collect that dividend in the future.
C) Preferred dividends must be paid before the company can pay a dividend on its common stock.
D) Like bonds, preferred stock always has a maturity date at which time the issue price must be repaid to shareholders.

Question 33

Which of the following financial instruments is not traded in the capital markets?

A) debt with a maturity of less than one year
B) bonds
C) common stock
D) preferred stock

Question 34

Venture capital funds play an important role in the initial financing of new businesses.

Question 35

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 36

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

Question 37

The financial crisis of 2008 and was caused in part by declining real estate values and defaults on mortgage payments.

Question 38

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

Question 39

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

Question 40

The market for short-term debt is known as

A) the bond market.
B) the notes market.
C) the capital market.
D) the money market.

Question 41

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

Question 42

Established firms in need of additional capital can raise it in the secondary market.

Question 43

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

Question 44

The primary markets sell only stocks and bonds issued by major corporations while the secondary markets sell securities issued by newer and smaller companies.

Question 45

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

Question 46

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

Question 47

Organized security exchanges do not physically occupy space.

Question 48

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

Question 49

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

Question 50

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