Question 1

If you borrow $5,000 from your bank to purchase shares of Snap from your cousin Vinny, this is an example of obtaining ________ financing and purchasing the stock in a ________ market.

Accepted Answer

Borrowing money directly from the bank to purchase shares is an example of direct financing because you are directly obtaining funds from a lender. Purchasing shares from your cousin Vinny, rather than from the issuing company, means you are buying the shares in the secondary market, where securities are traded among investors without raising new capital for the issuing company.

Question 2

Which of the following can only be sold back to the firm that issued them?

Accepted Answer

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

Question 3

In August 2011, Standard & Poor's (S&P) changed its rating on U.S. Treasury bonds from "AAA" to "AA+" based on the state of the federal government's budget deficit. This was the ________ a rating agency had given Treasury bonds less than a rating of "AAA."

Accepted Answer

The answer of In August 2011, Standard & Poor's (S&P)...

Question 4

When the coupon rate on newly issued bonds ________ relative to older, outstanding bonds, the market price of the older bond ________

Accepted Answer

When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds, the market price of the older bond falls in the secondary market. This is because investors will demand a higher yield on the older bond to compensate for the lower coupon rate, leading to a decrease in its market price.

Question 5

Urban Outfitters wants to raise $25 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

Urban Outfitters could use either A or C. Selling $25 million in bonds or issuing $25 million in stock would allow the company to raise the funds through direct finance, without having to borrow from a bank. Both methods have their advantages and disadvantages, so the company would need to weigh their options and consider which would be the best fit for their particular situation.

Question 6

Generally with bond ratings, the ________ the rating, the lower the interest rate an investor will receive and the ________ the risk that the issuer of the bond will default.

Accepted Answer

A higher rating means the issuer is considered to have lower default risk, which makes the bond safer for investors to invest in. As a result, issuers can offer lower interest rates as investors are willing to accept a lower return for the lower risk. Conversely, a lower rating means the issuer is considered to have higher default risk, which makes the bond riskier for investors to invest in. To compensate for the higher risk, issuers must offer higher interest rates to entice investors to invest in their bonds.

Question 7

Mutual funds sell shares to investors and use the funds to

Accepted Answer

Mutual funds typically use funds from selling shares to invest in a diversified portfolio of financial assets such as stocks, bonds, and other securities. While some mutual funds may hold Treasury bonds, this is not the primary use of the funds. They do not usually purchase newly issued shares of a particular company's stock or pay dividends directly to investors.

Question 8

Small savers who only have enough money to buy a few individual financial assets can use ________ to diversify.

Accepted Answer

Mutual funds allow small savers to diversify their investments by pooling their money with other investors and investing in a variety of financial assets, such as stocks, bonds, and securities. This spreads out the risk and can provide a more balanced portfolio for small investors.

Question 9

If Urban Outfitters borrows $25 million from a bank to finance the construction of a new store, this is an example of

Accepted Answer

The borrowing of $25 million from a bank involves indirect finance, as Urban Outfitters is obtaining funds from a financial intermediary (the bank) rather than directly from savers through securities markets (direct finance) or by issuing bonds (bond market transaction).

Question 10

A partnership can raise funds for expansion in which of the following ways?

Accepted Answer

Partnerships can raise funds for expansion by taking on more partners. Partnerships are not corporations and hence do not issue stock through the financial markets or secondary markets.

Question 11

You have a bond that pays $125 per year in coupon payments. Which of the following would result in an increase in the price of your bond?

Accepted Answer

When coupon payments on newly-issued bonds fall, the demand for higher-yielding bonds such as your bond will increase, causing the price of your bond to rise. Therefore, the correct answer is D. None of the other choices would result in an increase in the price of your bond.

Question 12

The ________ a corporation keeps to finance future expansion are known as retained earnings.

Accepted Answer

Retained earnings are profits that a corporation keeps instead of distributing as dividends to shareholders. Therefore, the best choice is A, profits. The other options, B (stock), C (dividends), and D (bonds), do not accurately describe retained earnings.

Question 13

One of the most widely followed stock indexes in the United States is the S&P 500. This index represents

Accepted Answer

The S&P 500 is an index that tracks the stock prices of 500 large U.S. firms. It is considered a good indicator of the overall health of the U.S. stock market because these 500 firms represent a significant portion of the total market capitalization of U.S. equities.

Question 14

Which of the following is the most important of the over-the-counter markets?

Accepted Answer

The NASDAQ Composite Index is a market-capitalization weighted index of all the common equities listed on the NASDAQ stock exchange, which is the second largest stock exchange in the world. The NASDAQ Composite Index is important as it represents the performance of a wide range of technology, biotech, and finance companies, and influences investment decisions for many investors in the US and globally.

Question 15

Dividing the dividend payment by the stock's ________ determines the dividend yield.

Accepted Answer

Dividend yield is calculated by dividing the dividend payment by the stock's closing market price. Option A is incorrect as coupon payment is related to bonds rather than stocks. Option C is incorrect as it doesn't have any direct relation to determining dividend yield. Option D is incorrect as the price/earnings ratio is a completely different measurement.

Question 16

Raising funds through ________ is called indirect finance.

Accepted Answer

Financial intermediaries, such as banks and mutual funds, collect funds from savers and invest them in businesses and individuals who need them. This process is called indirect finance as the savers' funds are not directly provided to the borrowers.

Question 17

When Snap sells newly issued shares of stock this is an example of

Accepted Answer

When Snap sells newly issued shares of stock, it is engaging in direct finance as it is raising funds directly from investors. It is also a primary market transaction since it is the first time the shares are being sold to the public.

Question 18

The interest rate on a bond is calculated as

Accepted Answer

The interest rate on a bond is expressed as the coupon rate, which is the annual interest payment divided by the face value of the bond. Therefore, the correct calculation is the coupon divided by the face value, as stated in choice A.

Question 19

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

Accepted Answer

When an investor buys a corporate bond, they are essentially lending money to the corporation. The principal of the bond is the amount that the corporation borrows from the investor, and the corporation agrees to pay back the principal amount when the bond reaches maturity. The interest on the bond, coupon payment, and dividend payments are all potential sources of income for the investor, but they do not represent the loan itself.

Question 20

All of the following take place in the direct finance market except

Accepted Answer

Deposits from savers being accumulated and loans made to borrowers is a characteristic of the indirect finance market, specifically the banking system. The direct finance market involves the sale of securities, such as common stock, preferred stock, and corporate bonds.

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

If you borrow $5,000 from your bank to purchase shares of Snap from your cousin Vinny, this is an example of obtaining financing and purchasing the stock in a market.