Deck 2: Firms and the Financial Market

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Financial intermediaries help bring savers and borrowers together.

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

All financial intermediaries are banks.

Question 11

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 12

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

Question 13

The principal savers in the financial markets are

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

Question 14

All of the following operate as financial intermediaries EXCEPT

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

Question 15

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 16

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C)When Glass-Steagal was repealed in 1999,commercial banks and Investment banks had to be separate entities.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 17

The principal participants in the financial markets are

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

Question 18

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

Question 19

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 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

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

Question 22

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

Question 23

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

Question 24

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 25

Investors in securities markets do not use a financial intermediary.

Question 26

A bond matures in less than 10 years.

Question 27

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.

Question 28

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

Question 29

Owners of common stock are the owners of the firm.

Question 30

Investment banks are similar to commercial banks except that they invest deposits in stocks and bonds rather than loans.

Question 31

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

Question 32

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 33

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

Question 34

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

Question 35

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 36

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 37

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 38

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 39

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 40

Primary markets are always larger than secondary markets.

Question 41

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 42

Organized security exchanges do not physically occupy space.

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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