Question 1

Sylvia wants to expand her taxidermy business and is going to use profits from the business to do so. This is an example of using ________ for her expansion.

Accepted Answer

Retained earnings refer to the profits that a business retains and reinvests back into the business for growth and expansion. In this case, Sylvia is using the profits from her taxidermy business to expand, which is an example of retained earnings. Direct finance involves obtaining funds directly from investors, while indirect finance involves obtaining funds from financial intermediaries such as banks. Dividends refer to the portion of profits that are distributed to shareholders, which is not the case in this scenario.

Question 2

If a corporate bond with a face value of $1,000 pays yearly coupon payments of $40, what is the coupon rate?

Accepted Answer

The coupon rate is calculated by dividing the annual coupon payments by the face value of the bond and multiplying by 100. 
Coupon Rate = (Annual Coupon Payment / Face Value) * 100 
In this case, the annual coupon payment is $40 and the face value is $1,000. 
Coupon Rate = (40/1000) * 100 = 4% 
Therefore, the correct answer is B.

Question 3

If you purchased a newly issued 30-year bond from American Airlines with a face value of $1,000 and a coupon payment of 3 percent, American Airlines would pay you

Accepted Answer

The coupon payment of 3 percent means that American Airlines will pay 3% of the face value of the bond ($1,000) every year, which is $30 per year for 30 years. Additionally, at the end of the 30th year, American Airlines will pay back the face value of the bond ($1,000). Therefore, the correct answer is choice C: $30 per year for 30 years plus $1,000 at the end of the 30th year.

Question 4

If you purchased a newly issued 30-year bond from Google with a face value of $3,000 and a coupon payment of 6 percent, Google would pay you

Accepted Answer

The coupon payment of 6 percent on a face value of $3,000 means that Google will pay $180 per year for 30 years. At the end of the 30th year, they will also pay back the face value of $3,000. Therefore, the total payment each year will be $180 + ($3,000/30) = $280.

Question 5

A bond's coupon payment divided by the bond's ________ is equal to the bond's current yield.

Accepted Answer

The current yield of a bond is calculated by dividing the annual coupon payment by the current market price of the bond. Therefore, the correct choice is B, which is the current price of the bond.

Question 6

Kendrick wants to start a tax preparation company and is going to his bank to borrow $50,000. This is an example of

Accepted Answer

Borrowing from a bank is an example of indirect finance, as Kendrick is obtaining funds from an intermediary (the bank) rather than directly from investors. Direct finance would involve Kendrick raising funds from investors (e.g. through an initial public offering). A primary market transaction involves the issuance of new securities (e.g. an initial public offering) whereas a secondary market transaction involves the buying and selling of existing securities. As Kendrick is not issuing securities, this is not a primary or secondary market transaction.

Question 7

If a corporation's retained earnings are expected to create future profits, the market price of the firm's stock will ________ and create a ________ for stockholders if the stock is sold.

Accepted Answer

Retained earnings that are expected to create future profits are seen as a positive sign by investors, as it indicates growth and potential for increased dividends. This positive sentiment will lead to an increase in the market price of the stock, resulting in a capital gain for stockholders if they sell their shares.

Question 8

When Electronic Arts, the company behind the games Zuma and Plants vs. Zombies, sold stock to the public for the first time in September 1989, funds were being raised in a ________ market, and when those newly issued shares are resold to other buyers, the sales take place in a ________ market.

Accepted Answer

When Electronic Arts sold stock to the public for the first time, it was during the initial offering and hence it was a primary market. However, when those shares are resold to other buyers, it takes place in a secondary market. Hence, the correct answer is B.

Question 9

Yolanda wants to expand her microbrewery business by buying out a competitor and is going to sell newly-issued corporate bonds to do so. This is an example of using ________ for her expansion plans.

Accepted Answer

Direct finance refers to raising funds directly from investors through various means such as issuing corporate bonds, stocks, or other financial instruments. Yolanda's plan to sell newly-issued corporate bonds directly to investors for the purpose of expanding her business is an example of direct finance. Indirect finance, on the other hand, involves intermediaries such as banks and financial institutions that facilitate the flow of funds from savers to borrowers. Coupon payments refer to the periodic interest payments made to bondholders, while retained earnings are profits that are reinvested back into the company instead of being distributed to shareholders.

Question 10

Which of the following is one of the most widely followed stock indexes in the United States?

Accepted Answer

The Dow Jones Industrial Average is one of the most widely followed stock indexes in the United States. It is a price-weighted index made up of 30 large U.S. companies, including Apple, Boeing, Goldman Sachs, and Coca-Cola. The index is frequently used as a barometer of the overall health of the U.S. stock market.

Question 11

All of the following are characteristics of a bond except

Accepted Answer

Bonds do not generally pay dividends; they pay interest in the form of coupon payments.

Question 12

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

Accepted Answer

The answer of When the coupon rate on newly issued...

Question 13

When an investor buys a corporate bond, the face value of the bond is

Accepted Answer

When an investor buys a corporate bond, they are essentially loaning money to the corporation. The face value of the bond is the amount that the corporation will pay back to the investor at the bond's maturity date. It is not a measure of ownership in the corporation, a coupon rate, or a dividend payment.

Question 14

Giorgio wants to build a new distribution warehouse for his sporting goods business and is going to issue new shares of stock to do so. This is an example of using ________ for his building project.

Accepted Answer

Direct finance involves obtaining funds directly from financial markets, rather than using intermediaries like banks. In this case, Giorgio is planning to issue new shares of stock to finance his building project, which means he will be obtaining funds directly from investors through the stock market. This makes it an example of direct finance.

Question 15

When Carvana sold stock to the public in its IPO, it did so through the New York Stock Exchange. People who bought the shares

Accepted Answer

When people buy shares of a company in an IPO, they become shareholders and own a portion of the company. They may or may not receive dividends, but they are not promised repayment of their investment plus interest. This is a characteristic of debt financing, not equity financing. The sale of stock through a stock exchange is an example of direct finance, not indirect finance.

Question 16

Owners of a corporation ________ through dividend payments on shares of that firm's stock.

Accepted Answer

Owners of a corporation, known as shareholders, share in the profits of the firm through dividend payments on shares of that firm's stock. This is one of the primary ways in which shareholders receive a return on their investment in the company. Retaining earnings or issuing bonds are methods used by the company to finance operations or future growth, while shareholders only receive a return on their investment through dividends or appreciation of the stock price.

Question 17

You have a bond that pays $18 per year in coupon payments. Which of the following would result in a decrease in the price of your bond?

Accepted Answer

The price of your bond will decrease if newly-issued bonds have a higher coupon rate than your bond because investors will prefer the higher coupon rate. Therefore, coupon payments on newly-issued bonds rising to $22 per year will result in a decrease in the price of your bond.

Question 18

Securities dealers that trade stocks and bonds ________ comprise the over-the-counter market.

Accepted Answer

The over-the-counter market refers to trading that occurs outside of organized exchanges, such as the New York Stock Exchange. Securities dealers that trade stocks and bonds outside of exchanges are a major part of this market.

Question 19

Which of the following statements is true?

Accepted Answer

Stocks have no fixed maturity or number of payments, so they have the potential to pay dividends forever. Bonds, on the other hand, have a fixed maturity and a set number of payments before they are redeemed. Therefore, statement A is true, while statements B, C, and D are false.

Question 20

If a corporate bond with face value of $8,000 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 as (Face Value x Interest Rate). Therefore, the coupon payment for this bond would be ($8,000 x 0.04) = $320. Thus, the best choice is A.

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