Deck 1: The Financial Environment

Question 1

The principle of finance that "lower returns are expected for taking on less risk" implies that rational investors would choose a risky investment only if they feel the expected return is high enough to justify the greater risk.

Answer 1

True

Question 2

The principle of finance that "money has a time value" implies Money in hand today is worth less than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time.

Answer 2

False

Question 3

The principle of finance that "reputation matters" implies that for institutions or businesses to be successful, they must have the trust and confidence of their customers, employees, and owners, as well as the community and society within which they operate.

Answer 3

True

Question 4

Capital markets are markets where equity securities and debt securities with maturities of greater than one year are traded.

Question 5

Money markets are markets where equity securities and debt securities with maturities of greater than one year are traded.

Question 6

The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may suffer as a result of manager objectives.

Question 7

One of the most significant functions of the financial system is the creation of money, which serves as a medium of exchange.

Question 8

Business finance is the study of financial planning, asset management and fund raising by businesses and financial institutions.

Question 9

An effective financial system is a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment.

Question 10

Money markets are the markets where generally short-term assets are traded.

Question 11

Financial markets provide the mechanism for allocating financial resources or funds from savers to borrowers

Question 12

The primary goal of the financial manager in a profit-seeking organization is to maximize the owners' wealth.

Question 13

Personal finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth.

Question 14

The secondary securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth.

Question 15

Finance is the study of how individuals, institutions, and businesses acquire, spend and manage money and other financial resources.

Question 16

The principle of finance that "reputation matters" sometimes is harmed by the different objectives of owners and managers.

Question 17

Personal finance is the study of how growth-driven performance-focused, early-stage firms raise financial capital and manage operations and assets.

Question 18

The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect some information available to the public and that when new information becomes available, prices change over time to reflect that information.

Question 19

The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for taking on more risk, (3) Diversification of investments can reduce risk, (4) Financial markets are efficient in pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters.

Question 20

The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries.

Question 21

Credit ratings are prepared by government organizations on individuals, financial institutions, business firms, and government entities.

Question 22

The Economic Stabilization Act of 2008 was passed in response to the financial crisis.

Question 23

Financial system functions include accumulating savings and lending funds.

Question 24

The lax oversight by government regulatory agencies and private debt rating agencies helped contribute to the severity of the 2007-2009 financial crisis.

Question 25

Individuals and businesses hold money for purchases or payments they expect to make in the near future.

Question 26

Securitization is the process of pooling and packaging mortgage loans into debt securities.

Question 27

Derivative securities may be used to speculate on the future price direction of the underlying financial assets or to reduce price risk associated with holding the underlying financial assets.

Question 28

A credit score is a number that indicates the creditworthiness or likelihood that a borrower will make loan payments when due

Question 29

A prime mortgage is a home loan to a borrower with a credit score above 300.

Question 30

An adjustable-rate mortgage (ARM) has an interest rate that is usually adjusted annually to reflect changes in Treasury bill rates (or other benchmark); ARMs typically have variable interest rates for one to five years with a provision to switch to a fixed-rate over the remaining life of the ARM.

Question 31

A mortgage-backed security is an investment created by using a house as collateral for a loan.

Question 32

Three financial system components are the U.S.Treasury, financial institutions, and financial markets.

Question 33

During the past couple of decades, generally high fixed-rate mortgage loan interest rates and the desire to extend housing ownership to more individuals in the U.S., the use of adjustable-rate mortgages grew in usage.

Question 34

A sub-prime mortgage is a home loan made to a borrower with a relatively low credit score indicating the likelihood that loan payments might be missed when due.

Question 35

The Troubled Asset Relief Program (TARP), which was passed as part of the Economic Stabilization Act of 1978 enabled the U.S.Treasury to purchase up to $700 billion of troubled assets held by financial institutions.

Question 36

Money markets are where debt securities with maturities of one year or more are issued and traded.

Question 37

A credit rating indicates the expected likelihood that a borrower will miss interest or principal payments and possibly default on the debt obligation in the form of a loan, mortgage, or bond.

Question 38

Because the relative values of currencies may change, firms cannot use the currency exchange markets to reduce the risk of holding too much of certain currencies.

Question 39

While the financial press chooses to highlight examples of unethical behavior, most individuals exhibit sound ethical behavior in their personal and business dealings and practices.

Question 40

Finance has its origins in:

A)economics and statistics
B)accounting and sociology
C)accounting and economics
D)psychology and mathematics

Question 41

Economists use a ___________________ framework to explain how the prices and quantities of goods and services are determined in a free-market economic system.

A)opportunity
B)marginal cost
C)supply-and-demand
D)anti-monopoly
E)none of the above

Question 42

The financial environment:

A)encompasses the financial markets and global interactions that contribute to an efficiently operating economy.
B)encompasses the financial institutions and financial markets that contribute to an efficiently operating economy.
C)encompasses the financial system, financial institutions, financial markets, business firms, individuals, and global interactions that contribute to an efficiently operating economy.
D)none of the above.

Question 43

An area of finance that involves the sale or marketing of securities, the analysis of securities, and the management of investment risk through portfolio diversification is referred to as:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 44

Finance has its origins in:

A)economics and statistics
B)accounting and mathematics
C)management and operations
D)economics and accounting

Question 45

___________________ are intermediaries, such as banks, insurance companies, and investment companies that engage in financial activities to aid the flow of funds from savers to borrowers or investors.

A)Financial Institutions
B)Financial market organizations
C)Federal agencies
D)International financial organizations
E)none of the above

Question 46

An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments is called:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 47

Maximizing _____________________ is accomplished through effective financial planning and analysis, asset management, and the acquisition of financial capital.

A)the value of perquisites.
B)the owners' wealth.
C)the firm's profits
D)the firm's earnings
E)none of the above

Question 48

Financial markets encourage investment by:

A)providing capital at lower rates than provided by banks
B)providing electronic execution of transactions which are faster and cheaper than other methods
C)providing the means for savers to easily and quickly convert financial assets into cash when needed
D)none of the above

Question 49

An area of finance that involves the study of organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds in physical assets (inventories, buildings, and equipment) is called:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 50

_________________________________________ are crucial elements of the financial environment and well-developed financial systems.

A)Businesses and the federal government
B)International organizations such as the World Bank and International Monetary Fund
C)Well-developed barter systems
D)Financial institutions, financial markets, and investment and financial management

Question 51

The primary securities markets are

A)the markets for previously issued securities such as the New York Stock Exchange
B)the markets where financial assets such as stocks and bonds are initially issued
C)the three most important financial markets in any economy
D)the markets for stocks and bonds only

Question 52

____________________ provide the record-keeping mechanism for showing ownership of the financial instruments used in the flow of financial funds between savers and borrowers and record revenues, expenses, and profitability of organizations that produce and exchange goods and services.

A)Financial Managers
B)Accountants
C)Operations Managers
D)Statisticians
E)none of the above

Question 53

An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 54

Which of the following statements is most correct?

A)Capital markets include short-term and long-term debt securities such as Treasury bills, notes, and bonds.
B)Money market instruments include commercial paper, federal funds, repurchase agreements, and Treasury notes.
C)Real estate mortgages are money market instruments.
D)Federal agencies, and state and local governments, generally issue longer-term financial claims which trade in the capital market.

Question 55

Crucial elements of the financial environment and well-developed financial system include:

A)financial institutions
B)financial markets
C)investments and financial management
D)all of the above

Question 56

An effective financial system must have:

A)several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies
B)an efficient monetary system for creating and transferring money
C)financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses
D)all of the above

Question 57

____________________ in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services.

A)Financial management
B)Financial economics
C)Investment management
D)Asset allocation
E)none of the above

Question 58

The ______________ is a term used to describe the financial system, institutions, markets, businesses, individuals, and global interactions that help the economy operate efficiently

A)financial environment
B)regulatory environment
C)international environment
D)operating environment
E)none of the above

Question 59

________________ involves making decisions relating to issuing and investing in stocks and bonds.

A)Financial economics
B)Financial management
C)Investment management
D)Asset allocation
E)none of the above

Question 60

The issuing of new securities, mortgages, and other claims to wealth takes place in the:

A) secondary market
B) money market
C) primary market
D) securities market

Question 61

If the interest rate is equal to 0%, then a dollar today is worth

A)more than a dollar tomorrow
B)the same as a dollar tomorrow
C)less than a dollar tomorrow
D)there is not sufficient information to tell

Question 62

Reasons we study finance include all of the following except:

A)To make informed economic decisions
B)To make informed personal and business investment decisions
C)To make informed career decisions based on a basic understanding of business finance
D)To make informed medical decisions
E)all of the above about reasons to study finance.

Question 63

If the interest rate is greater than 0%, then a dollar today is worth

A)more than a dollar tomorrow
B)the same as a dollar tomorrow
C)less than a dollar tomorrow
D)there is not sufficient information to tell

Question 64

Which statement best describes the six principles of finance?

A)Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments does not impact risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters.
B)Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters.
C)Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are inefficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters.
D)Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation doesn't matter.

Question 65

Rational investors would consider an investment in a risky business venture only if they feel the expected return is high enough to justify the

A)greater risk.
B)higher cost.
C)longer useful life.
D)more complex designs.
E)none of the above.

Question 66

An effective financial system needs:

A)an efficient monetary system
B)to be able to create capital by channeling savings into investment
C)markets in which to buy and sell claims to wealth
D)all of the above

Question 67

Financial functions in the U.S.financial system include:

A)transferring financial assets
B)creating money
C)accumulating savings
D)all of the above

Question 68

The value of money results from:

A) its backing
B) rates set by the Federal Reserve
C) its purchasing power
D) none of the above

Question 69

$1,000 invested today at 6% interest would be worth ________ one year from now

A)$1,600
B)$1,060
C)$1,160
D)$1,006
E)none of the above

Question 70

The six principles of finance include all of the following except:

A)Money has a time value.
B)Higher returns are expected for taking on more risk
C)Diversification of investments can reduce risk
D)Financial markets are efficient in pricing securities
E)all of the above are included in the six principles.

Question 71

In the United States, most money is created by:

A)depository institutions
B)the United States Treasury
C)capital markets
D)None of the above

Question 72

Basic requirements of an effective financial system include:

A)creating money
B)transferring money
C)accumulating savings
D)all of the above
E)none of the above

Question 73

_______________ is the study of how growth-driven, performance-focused, early-stage (from development through early rapid growth) firms raise financial capital and manage their operations and assets.

A)Personal finance
B)Corporate finance
C)Entrepreneurial finance
D)Investment banking
E)none of the above

Question 74

Two risky assets can be combined to lower the overall risk of a portfolio.This principle is commonly referred to as

A)blending
B)asset allocation
C)diversification
D)portfolio segmentation
E)none of the above

Question 75

A basic requirement for an effective financial system is a monetary system that performs which of the following financial functions?

A)formation and transferring of money
B)storing gold and silver to back up money
C)creating jobs
D)transferring real assets

Question 76

Checks:

A)are orders to depository institutions to transfer money to the party who received the check
B)may be safely sent in the mail
C)provide a record of payment
D)all of the above
E)none of the above

Question 77

Successful businesses typically progress through a series of life-cycle stages-from the idea stage to exiting the business; these five stages include the:

A)development stage, startup stage, survival stage, rapid growth stage, and maturity stage.
B)idea stage, design stage, operating stage, rebuilding stage, and decline stage
C)development stage, operating stage, rebuilding stage, rapid growth stage, and maturity stage
D)idea stage, startup stage, rapid growth stage, survival stage, and decline stage

Question 78

_______________ is the study of how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time.

A)Personal finance
B)Corporate finance
C)Entrepreneurial finance
D)Investment banking
E)none of the above

Question 79

Crucial elements of well-developed financial systems include all of the following except:

A)government control of the economy
B)financial intermediaries
C)financial markets
D)all of the above

Question 80

Among the six principles of finance, all are included except:

A)All decisions are ultimately financial decisions.
B)Higher returns are expected for taking on more risk
C)Diversification of investments can reduce risk
D)Financial markets are efficient in pricing securities
E)all of the above are included