Question 1

What happens in the primary market?

Accepted Answer

In the primary market, newly issued securities are sold directly by the issuer to investors, allowing the issuer to raise capital.

Question 2

If a corporation retains all its profits and distributes none of the profit to owners, how can owners benefit?

Accepted Answer

If the corporation retains earnings to invest in growth and future profitability, the market value of its stock is likely to increase over time, providing returns to its owners. This increase in stock value is called capital gain. It is important to note that this benefit is not realized until the stock is sold.

Question 3

Dividends are

Accepted Answer

Dividends are payments made by a corporation to its shareholders, usually in the form of cash or additional shares of stock. They are a way for companies to share their profits with their investors. A is incorrect because financial securities representing ownership in a corporation are called stocks. B is incorrect because bond payments are called interest or coupon payments, not dividends. C is incorrect because the interest rate paid on shares of stock is called the dividend yield, which is related to but not the same as actual dividends.

Question 4

The three most widely followed stock indexes in the United States include all of the following except

Accepted Answer

The Fortune 500 is not a stock index but rather a list of the top 500 publicly-traded companies in the United States based on revenue. The other choices are all stock indexes, with the Dow Jones Industrial Average being the oldest and most well-known, the S&P 500 being a broader index covering 500 large-cap stocks, and the NASDAQ Composite Index focusing on technology and growth stocks.

Question 5

If a corporation goes bankrupt, bondholders have ________ on the firm's assets.

Accepted Answer

The answer of If a corporation goes bankrupt, bondholders have...

Question 6

A financial security that represents a promise to repay a fixed amount of funds is a

Accepted Answer

The definition provided matches that of a bond, which is a type of fixed income security where an investor loans money to an entity (usually a company or government) and receives regular interest payments until the maturity date, when the principal amount is repaid. Shares of stock represent an ownership stake in a company, coupons are the interest payments made to bondholders, and dividends are the distribution of profits to shareholders.

Question 7

If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store, this is an example of

Accepted Answer

This is an example of indirect finance because the company is borrowing from a bank instead of directly receiving funding from investors through stock or bond markets.

Question 8

If a corporate bond with face value of $5,000 has an interest rate of 4 percent paid once a year for a term of 30 years, what is the size of the coupon payment?

Accepted Answer

The size of the coupon payment can be calculated using the following formula:
Coupon payment = Face value x Coupon rate
Coupon rate is the annual interest rate divided by the face value, so in this case it would be 4% / $5,000 = 0.0008.
Coupon payment = $5,000 x 0.0008 = $4.
Therefore, the correct answer is B.

Question 9

When an investor buys a corporate bond, the ________ the bond is a loan to the corporation.

Accepted Answer

The face value of the bond represents the amount of money that the corporation borrows from the investor. The bondholder receives interest payments on this principal amount until the bond reaches maturity, at which point the face value is repaid in full. The coupon payment represents the regular interest payments made to the bondholder, and the dividend payment is a separate concept that applies specifically to stocks, not bonds.

Question 10

The coupon rate of a bond is equal to

Accepted Answer

The coupon rate of a bond is the annual interest rate that is paid to the bondholder. It is not the same as the coupon payment, which is the actual dollar amount paid to the bondholder. Therefore, the coupon rate is the interest rate.

Question 11

Which of the following is a characteristic of a bond?

Accepted Answer

All of these are characteristics of bonds. Bonds represent a promise to repay a fixed amount of funds, the face value or principal plus interest is repaid at a specified period of time, and the length of coupon payments is fixed by the stated maturity period.

Question 12

Owners of a corporation share in the profits of the firm

Accepted Answer

Owners of a corporation, or shareholders, receive a share of the profits through dividend payments on shares of the firm's stock. Bondholders receive coupon payments on the bonds they hold, but they do not share in the profits of the company in the same way that shareholders do. Increasing the interest rate on bonds does not affect the profits of the company or the share that shareholders receive.

Question 13

When you buy previously issued shares of Snap stock, this transaction takes place in the

Accepted Answer

When buying previously issued shares of Snap stock, this transaction would take place in the secondary market. The secondary market is where already issued securities are traded among investors, rather than directly between the issuing company and investors (which would occur in the primary market). The bond market is specifically for the issuance and trading of debt securities, which Snap stock is not. The bear market refers to a downward trend in the stock market, which is not relevant to this transaction.

Question 14

What is a secondary market?

Accepted Answer

The answer of What is a secondary market?
...

Question 15

If a corporate bond with a face value of $2,000 pays yearly coupon payments of $50, what is the coupon rate?

Accepted Answer

The answer of If a corporate bond with a face...

Question 16

Securities dealers that trade stocks and bonds outside exchanges comprise the

Accepted Answer

The over-the-counter market refers to the trading of securities outside of traditional exchanges, where securities dealers trade stocks and bonds directly with one another rather than through a centralized exchange. The other options listed are not relevant to this scenario.

Question 17

Which of the following does not take place in the direct finance market?

Accepted Answer

Direct finance markets involve the sale of securities such as common and preferred stock, corporate bonds, and other investments directly between savers and borrowers without the involvement of financial intermediaries such as banks. Deposits and loans are not typically made in the direct finance market, putting option B out of place.

Question 18

Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store, and the company wishes to raise the funds through direct finance. Which of the following methods could it use?

Accepted Answer

Abercrombie & Fitch could choose either to sell $8 million in bonds or issue $8 million in stocks. Both methods involve direct finance, where the company raises funds directly from investors rather than borrowing from intermediaries like banks. Selling bonds involves issuing debt securities that promise to repay the principal amount with interest, while issuing stocks involves selling ownership shares in the company. The choice between the two would depend on the company's preference for debt versus equity financing and the market conditions for each option. Borrowing $8 million from a bank would involve indirect finance, where the company obtains funds from an intermediary and would not meet the requirement for direct finance.

Question 19

Raising funds through financial intermediaries is called

Accepted Answer

Raising funds through financial intermediaries, such as banks or mutual funds, is called indirect finance. Direct finance involves raising funds through securities markets, while corporate finance refers to managing a company's capital structure and investments. Dividend reinvestment involves using cash dividends to purchase additional shares of the same stock.

Question 20

All of the following represent differences between stocks and bonds except

Accepted Answer

Bonds represent debt while stocks represent ownership. Therefore, bonds actually do not represent partial ownership in a firm as stated in option D. options A, B, and C are all true differences between stocks and bonds.

Quiz 8: Firms, the Stock Market, and Corporate Governance