Question 1

Which of the following statements about the characteristics of debt and equity is false?

Accepted Answer

While both debt and equity can be long-term financial instruments, only debt can be a short-term financial instrument. Short-term debt is typically used for working capital and is usually paid back within a year. Equity represents ownership in a company and does not have a set maturity date. Choices A, C, and D are all true statements about the characteristics of debt and equity.

Question 2

Which of the following statements about the characteristics of debt and equities is true?

Accepted Answer

Both debt and equities can be long-term financial instruments.

Answer: B 
 Equity holders are residual claimants, not bond holders.

Answer: C 
 The income from equities is typically more variable than that from bonds.

Answer: D 
 Bonds do not pay dividends. They pay interest.

Question 3

Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them.

Accepted Answer

Securities represent ownership in a company or debt owed by a company. When a person buys a security, they are adding an asset to their portfolio. However, for the individual or firm that issues the security, it represents a liability because they owe either ownership or debt to the buyer.

Question 4

Financial markets improve economic welfare because

Accepted Answer

The answer of Financial markets improve economic welfare because
...

Question 5

With direct finance, funds are channeled through the financial market from the ________ directly to the ________.

Accepted Answer

In direct finance, funds move directly from savers, who have excess funds, to spenders or borrowers who need those funds, typically through financial markets without the intermediation of financial institutions.

Question 6

Every financial market has the following characteristic:

Accepted Answer

The given characteristic that applies to every financial market is that it channels funds from lenders-savers to borrowers-spenders. While the other choices may be true for some financial markets, they do not apply to every market.

Question 7

Which of the following can be described as involving indirect finance?

Accepted Answer

The answer of Which of the following can be described...

Question 8

Well-functioning financial markets

Accepted Answer

Well-functioning financial markets facilitate the efficient allocation of capital. This means that capital is directed towards its most productive uses, increasing economic efficiency and potentially boosting economic growth. Well-functioning financial markets also provide added benefits, such as providing liquidity to investors, allowing firms to raise capital, and enabling risk-sharing through diversification. While financial markets can experience crises, a truly well-functioning market is less prone to such events. Additionally, well-functioning financial markets do not eliminate the need for indirect finance (such as bank loans), but instead complement it by providing additional sources of funding.

Question 9

Financial markets have the basic function of

Accepted Answer

Financial markets facilitate the transfer of funds from savers to borrowers, therefore getting people with funds to lend together with people who want to borrow funds. This enables economic agents to make investments, grow their businesses, and contribute to economic growth.

Question 10

A breakdown of financial markets can result in

Accepted Answer

A breakdown in financial markets could lead to a loss of confidence in the economy, political instability, and potentially unrest as individuals and organizations suffer financial losses. While stable financial markets can contribute to economic growth and stable prices, a breakdown would not lead to these outcomes.

Question 11

Which of the following statements about financial markets and securities is true?

Accepted Answer

The statement that the maturity of a debt instrument is the number of years to its expiration date is true. A bond is a long-term security, but it promises to make periodic payments called interest, not dividends, to its holders. An intermediate-term debt instrument typically has a maturity between one and ten years.

Question 12

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is

Accepted Answer

The answer of You can borrow $5000 to finance a...

Question 13

The principal lender-savers are

Accepted Answer

Household savings, in the form of bank deposits or investments, are a major source of funds for lending by financial institutions such as banks. Governments may also borrow from households through the sale of government bonds, but they are not the primary lenders in the economy. Businesses may borrow from financial institutions or issue bonds to raise funds, but they are not typically considered lenders in the traditional sense. Foreigners may invest in a country's financial markets, but they do not necessarily contribute to the savings that are available for lending within that country.

Question 14

Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States?

Accepted Answer

The answer of Distinguish between direct finance and indirect finance....

Question 15

Which of the following can be described as involving indirect finance?

Accepted Answer

Making a deposit at a bank is an example of indirect finance because the bank uses the funds deposited by savers to make loans to borrowers, rather than having the savers lend directly to the borrowers.

Question 16

Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is

Accepted Answer

The answer of Assume that you borrow $2000 at 10%...

Question 17

Which of the following can be described as direct finance?

Accepted Answer

Direct finance occurs when borrowers directly borrow funds from financial markets or individuals without using a financial intermediary like a bank, mutual fund, or other institution. Borrowing $2,500 from a friend is an example of direct finance because it involves a direct financial transaction between two individuals without an intermediary.

Question 18

Which of the following can be described as involving direct finance?

Accepted Answer

Direct finance refers to the transfer of funds from savers directly to borrowers without the involvement of financial intermediaries. Option D fits this description as people buying shares of common stock in the primary markets directly provide funds to the corporation. The other options involve intermediaries such as banks and mutual funds, and therefore, do not involve direct finance.

Question 19

Which of the following can be described as involving direct finance?

Accepted Answer

Direct finance involves the transfer of funds from savers to borrowers through financial markets. Option A involves a corporation issuing new shares of stock, which is a direct way of raising funds from savers for the corporation's use. The other options either describe indirect finance (B and C) or the investment activities of financial intermediaries (D).

Question 20

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.

Accepted Answer

Direct finance involves borrowers obtaining funds from lenders by selling them securities in the financial markets. Indirect finance, on the other hand, involves financial intermediaries such as banks, which pool and invest funds from savers to provide loans to borrowers. Active and determined are not relevant to the concept of finance.

Quiz 2: An Overview of the Financial System

Which of the following statements about the characteristics of debt and equity is false?

Which of the following statements about the characteristics of debt and equities is true?

Securities are for the person who buys them, but are for the individual or firm that issues them.

Financial markets improve economic welfare because

With direct finance, funds are channeled through the financial market from the directly to the .

Every financial market has the following characteristic:

Which of the following can be described as involving indirect finance?

Well-functioning financial markets

Financial markets have the basic function of

A breakdown of financial markets can result in

Which of the following statements about financial markets and securities is true?

You can borrow $5000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is

The principal lender-savers are

Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States?

Which of the following can be described as involving indirect finance?

Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is

Which of the following can be described as direct finance?

Which of the following can be described as involving direct finance?

Which of the following can be described as involving direct finance?

With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets.