Deck 2: Financial Markets and Institutions

Question 1

Like public companies,private companies can also use their stock price as a measure of performance.

Answer 1

False

Question 2

The market for derivatives is also a source of financing for corporations.

Answer 2

False

Question 3

The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm's capital investments.

Answer 3

True

Question 4

The key to the banks' ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors.

Question 5

Previously issued securities are traded among investors in the secondary markets.

Question 6

Hedge fund managers,unlike mutual fund managers,do not receive fund-performance-related fees.

Question 7

From June 2001 to June 2006,house prices in the United States rose sharply.

Question 8

A financial intermediary invests in financial assets rather than real assets.

Question 9

The stocks of major corporations trade in many markets throughout the world on a continuous or near-continuous basis.

Question 10

For corporate bonds,the higher the credit quality of an issuer,the higher the interest rate.

Question 11

The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment.

Question 12

The markets for long-term debt and equity are called capital markets.

Question 13

During the Financial Crisis of 2007-2009,the U.S.government bailed out all firms in danger of failing.

Question 14

Only small companies can go through financial markets to obtain financing.

Question 15

An individual can save and invest in a corporation by lending money to it or by purchasing additional shares.

Question 16

Households hold directly three quarters of U.S.corporate equities.

Question 17

The cost of capital is the interest rate paid on a loan from a bank or some other financial institution.

Question 18

Only the IPOs for large corporations are sold in primary markets.

Question 19

In the United States,banks are the most important source of long-term financing for corporations.

Question 20

Smaller businesses are especially dependent upon internally generated funds.

Question 21

One root of the financial crisis of 2007-2009 was the strict money policies promoted by the U.S.Federal Reserve and other central banks after the technology bubble burst (i.e.,money was relatively expensive during this time).

Question 22

Financial markets and intermediaries allow investors and businesses to reduce and reallocate risk.

Question 23

A share of IBM stock is purchased by an individual investor for $75 and later sold to another investor for $125.Who profits from this sale?

A) IBM
B) The first investor
C) The second investor
D) IBM and both investors

Question 24

Once Apple Computer had become a public company,it was able to raise financing from venture capital companies

Question 25

Financing for public corporations flows through:

A) the financial markets only.
B) financial intermediaries only.
C) derivatives markets.
D) the financial markets, financial intermediaries, or both.

Question 26

A company can pay for its expansion in all the following ways except:

A) by using the earnings generated from its sale of obsolete equipment.
B) by persuading a director's mother to make a personal loan to the company.
C) by purchasing bonds in the secondary market.
D) by plowing back part of its profits.

Question 27

The rates of return on investments outside the corporation set the minimum return for investment projects inside the corporation.

Question 28

Which of the following are both a financial intermediary and a financial institution?

A) Mutual funds
B) Pension funds
C) Insurance companies
D) Hedge funds

Question 29

The effects of the financial crisis of 2007-2009 were confined to the U.S.and domestic companies.

Question 30

Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in New York and London.

Question 31

Financing for private companies must flow through financial intermediaries such as mutual funds.

Question 32

Which of the following financial assets is least likely to have an active secondary market?

A) Common stock of a large public firm
B) Bank loans made to smaller firms
C) Bonds of a major, multinational corporation
D) Debt issued by the U.S. Treasury

Question 33

When corporations need to raise funds through stock issues,they rely on the:

A) primary market.
B) secondary market.
C) tertiary market.
D) centralized NASDAQ exchange.

Question 34

The cost of capital is the minimum acceptable rate of return for capital investment.

Question 35

Corporate financing comes ultimately from:

A) savings by households and foreign investors.
B) cash generated from the firm's operations.
C) the financial markets and intermediaries.
D) the issue of shares in the firm.

Question 36

The primary distinction between securities sold in the primary and secondary markets is:

A) the riskiness of the securities.
B) the price of the securities.
C) whether the securities are new or already exist.
D) the profitability of the issuing corporation.

Question 37

A primary market would be utilized when:

A) investors buy or sell existing securities.
B) shares of common stock are exchanged.
C) securities are initially issued.
D) a commission must be paid on the transaction.

Question 38

"Reinvestment" means:

A) new investment in new operations.
B) additional investment in existing operations.
C) new investment by new shareholders.
D) the reinvestment of earnings into new projects.

Question 39

Financing for public corporations must flow through financial markets.

Question 40

Insurance companies provide a mechanism for individuals to pool their risks.

Question 41

Foreign currencies are traded:

A) only by banks in New York and London.
B) over the counter.
C) on both the NYSE and NASDAQ.
D) on the Intercontinental Exchange.

Question 42

Insurance companies can usually cover the claims of policyholders because:

A) the incidence of claims normally averages out across all policyholders.
B) they issue a very limited number of policies.
C) they are fully insured by the U.S. government.
D) their stockholders will cover any cash shortfalls encountered by the company.

Question 43

Short-term financing transactions commonly occur in the:

A) primary markets.
B) secondary markets.
C) capital markets.
D) money markets.

Question 44

Which one of the following financial intermediaries has shown the greatest preference for investing in long-term financial assets?

A) Commercial banks
B) Insurance companies
C) Finance companies
D) Savings banks

Question 45

Which one of the following funds provides a tax advantage to individual investors?

A) Balanced funds
B) Pension funds
C) Bond funds
D) Funds that invest in foreign countries

Question 46

Which type of financial institution generally does not accept deposits but does underwrite stock offerings?

A) Insurance company
B) Mutual fund
C) Commercial bank
D) Investment bank

Question 47

Which one of these may provide a financial return to some investors while not providing any financial return to other investors?

A) Mutual funds
B) Pension funds
C) Insurance companies
D) Hedge fund

Question 48

A financial institution:

A) is a kind of financial intermediary.
B) simply pools and invests savings.
C) raises financing by selling shares.
D) invests primarily in commodities.

Question 49

Long-term financing decisions commonly occur in the:

A) option markets.
B) secondary markets.
C) capital markets.
D) money markets.

Question 50

Commodity and derivative markets:

A) are additional sources of financing for corporate projects.
B) enable the financial manager to adjust a firm's exposure to various business risks.
C) are always over-the-counter markets.
D) deal only in foreign currencies.

Question 51

Corporate debt instruments are most commonly traded:

A) on the NYSE.
B) on NASDAQ.
C) in the money market.
D) in the over-the-counter market.

Question 52

Which one of the following statements is not characteristic of mutual funds?

A) They are always considered to be financial institutions.
B) They raise money by selling shares to investors.
C) They pool the savings of many investors.
D) They offer professional management and portfolio diversification.

Question 53

Which one of these correctly applies to mutual funds?

A) Mutual funds are a costly means of achieving portfolio diversification.
B) Funds are required to limit their annual fees and expenses to less than 1 percent of the portfolio value.
C) You can generally buy additional shares in the fund at any time.
D) Shareholders sell their shares to other shareholders.

Question 54

A mother in a developing country wants to borrow the equivalent of $20 to enable her to start a small restaurant run by her family.Which type of financing is she looking to obtain?

A) Public bond issue
B) IPO
C) Micro loan
D) Futures contract on a commodity

Question 55

Who was responsible for the financial crisis of 2007-2009?

A) The U.S. Federal Reserve, for its policy of easy money
B) The U.S. government, for pushing banks to expand credit for low-income housing
C) Bankers, who aggressively promoted and resold subprime mortgages
D) The U.S. Federal Reserve, the U.S. government, rating agencies, and bankers

Question 56

You can buy silver in the:

A) capital markets.
B) foreign exchange markets.
C) commodities markets.
D) option markets.

Question 57

Which one of these is a money market security?

A) Commercial paper
B) Common stock
C) 2-year bond
D) 20-year bond

Question 58

When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of GM stock,GM receives:

A) the dollar value of the transaction.
B) the dollar amount of the transaction, less brokerage fees.
C) only the par value of the common stock.
D) nothing.

Question 59

"Balanced" mutual funds:

A) invest in both stocks and bonds.
B) spread their investments equally over a specified geographic area.
C) spread their investments equally over various industries.
D) charge a management fee that is proportionate to the investment return.

Question 60

A bond differs from a share of stock in that a bond:

A) represents a claim on the firm.
B) has more risk.
C) has guaranteed returns.
D) has a maturity date.

Question 61

Which of the following information is not provided by the financial markets?

A) The price of six ounces of gold
B) The cost of borrowing $500,000 for 5 years
C) Microsoft's earnings in 2013
D) The cost of one million yen in U.S. dollars

Question 62

The cost of capital:

A) is the expected rate of return on a capital investment.
B) is an opportunity cost determined by the risk-free rate of return.
C) is the interest rate that the firm pays on a loan from a bank or insurance company.
D) for risky investments is normally higher than the firm's borrowing rate.

Question 63

Approximately what percentage of U.S.corporate equities are held by households?

A) 20%
B) 40%
C) 60%
D) 80%

Question 64

Which one of the following is the biggest provider of payment mechanisms?

A) Hedge funds
B) Banks
C) Mutual funds
D) Insurance companies

Question 65

Which of the following are major holders of corporate bonds?

A) households.
B) banks.
C) insurance companies.
D) New York Stock Exchange.

Question 66

Which one of the following is least liquid?

A) Foreign currency
B) U.S. Treasury bonds
C) Real estate
D) Bank deposit

Question 67

Which of the following is not typically considered a function of financial intermediaries?

A) Providing a payment mechanism
B) Investing in real assets
C) Accumulating funds from smaller investors
D) Spreading, or pooling risk among individuals

Question 68

Which one of these assists in shifting an individual's consumption forward in time?

A) A bank line of credit
B) A bank savings account
C) A life insurance policy
D) A retirement savings plan

Question 69

Which of the following is not a function of financial markets?

A) allow individuals to diversify their risk.
B) provide convenient ways to make large payments.
C) allow individuals to purchase a range of goods online.
D) provide funds to companies that wish to expand.

Question 70

One contributing factor to the 2007-2009 financial crisis was the structuring of mortgage loans with:

A) high initial payments, offset by significantly lower payments later.
B) low initial payments, offset by significantly higher payments later.
C) high initial payments, offset by high payments later.
D) very short maturities.

Question 71

Which of the following functions does not require financial markets?

A) Retention of cash by corporations
B) Provision of liquidity
C) Risk reduction by investment in diversified portfolios
D) Provision of pricing information

Question 72

A capital investment that generates a 10% rate of return is worthwhile if:

A) corporate bonds of similar risk offer 8% rates of return.
B) corporate bonds of similar risk offer 11% rates of return.
C) top-quality corporate bonds offer 10% rates of return.
D) the expected rate of return on the stock market is 12%.

Question 73

Excess cash held by a firm should be:

A) reinvested by the firm in projects offering the highest rate of return.
B) reinvested by the firm in projects offering rates of return higher than the cost of capital.
C) reinvested by the firm in the financial markets.
D) distributed to bondholders in the form of extra coupon payments.

Question 74

Which of the following actions does not help reduce risk?

A) Extending the service warranty for your notebook
B) Converting your money market account to a mutual fund account
C) Contracting to sell your farm produce to the neighborhood grocery
D) Buying Japanese yen now when you plan to study in Japan next year

Question 75

Liquidity is important to a mutual fund primarily because:

A) a fund that is less liquid will attract more investors.
B) the fund's shareholders may want to redeem their shares at any time.
C) new investors may invest in the fund at any time.
D) the fund requires cash to pay its taxes.

Question 76

U.S.bonds and other debt securities are mostly held by:

A) institutional investors.
B) households.
C) foreign investors.
D) state and local governments.

Question 77

One reason suggesting that banks may be better than individuals at matching lenders to borrowers is that banks:

A) can shift loan risk to their deposit customers.
B) are motivated by the potential for profit.
C) do not have any income tax liability.
D) have information to evaluate creditworthiness.

Question 78

Financial markets and intermediaries:

A) channel savings to real investment.
B) increase risks for businesses.
C) generally reduce the liquidity of securities.
D) prevent the transportation of cash across time.

Question 79

Which one of these transports income forward in time?

A) Retirement savings
B) Car loan
C) Bank line of credit
D) Credit card purchase

Question 80

Insurance companies primarily reduce an individual's risk by:

A) transporting that risk forward in time.
B) providing payment services.
C) spreading that risk across many individuals.
D) providing low-interest-rate loans.