Question 1

If a firm uses level production with seasonal sales:

Accepted Answer

Level production means that the firm produces the same amount of output all year round, regardless of demand fluctuations. Therefore, if sales decline during the off-season, the inventory will increase because the firm keeps producing at the same level without matching the lower demand.

Question 2

When the term structure of interest rates is downward sloping and interest rates are expected to decline,the:

Accepted Answer

The answer of When the term structure of interest rates...

Question 3

Which of the following yield curves would be characteristic at peak periods of economic expansions?

Accepted Answer

The answer of Which of the following yield curves would...

Question 4

Some analysts believe that the term structure of interest rates is determined by the behaviour of various types of financial institutions.This theory is called the:

Accepted Answer

The segmentation theory posits that the term structure of interest rates is determined by the behavior of various types of financial institutions, which have different preferences for borrowing and lending at different maturities. This theory suggests that the market for bonds is segmented into different maturity sectors and that the yields on bonds in each sector are determined by supply and demand conditions within that sector.

Question 5

The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the:

Accepted Answer

The belief that investors require a higher return to entice them into holding long-term securities is the basis of the liquidity premium theory. This theory suggests that the yield curve is upward sloping because investors demand compensation (in the form of a higher yield) for the added risk of holding a less liquid security. The expectations hypothesis argues that long-term yields are just a series of expected future short-term yields, while the segmentation theory proposes that different investors specialize in different maturities of securities, leading to segmented markets rather than a continuous yield curve. The market credit crunch theory is not related to the yield curve or investors' required returns.

Question 6

A firm will usually increase the ratio of short-term debt to long-term debt when:

Accepted Answer

When the term structure is inverted (short-term interest rates are higher than long-term rates) and is expected to shift down (meaning that short-term rates are expected to decrease), it makes sense for a firm to increase its ratio of short-term debt to long-term debt. This strategy allows the firm to take advantage of lower borrowing costs in the near future as short-term rates decline.

Question 7

One advantage of level production is that:

Accepted Answer

Level production allows for a consistent and balanced use of manpower and equipment, which ultimately leads to lower costs and increased efficiency. The other choices describe potential disadvantages of level production.

Question 8

Government of Canada securities are used to construct yield curves because:

Accepted Answer

Government of Canada securities are considered risk-free because there is no risk of default as the Canadian government has never defaulted on its debt. This makes them a good benchmark for calculating yield curves as they represent the risk-free rate of return in the market.

Question 9

The term structure of interest rates:

Accepted Answer

The answer of The term structure of interest rates:
...

Question 10

Which of the following is a true statement concerning interest rates?

Accepted Answer

The answer of Which of the following is a true...

Question 11

The term structure of interest rates is not influenced by:

Accepted Answer

The normal yield curve is a result of the term structure of interest rates and is not a determinant of it. Inflation, money supply, and Bank of Canada activities all play a role in shaping the term structure of interest rates.

Question 12

An inverted yield curve would suggest that:

Accepted Answer

An inverted yield curve is when the yield on short-term bonds is higher than the yield on long-term bonds. This suggests that investors expect interest rates to fall in the future, which causes long-term bond prices to increase and yield to decrease. This can occur when there is economic uncertainty or a potential recession on the horizon.

Question 13

The theory of the term structure of interest rates,which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the:

Accepted Answer

The theory described is known as the expectations hypothesis, which suggests that the long-term interest rates are based on the market's expectations of future short-term rates.

Question 14

The term structure of interest rates:

Accepted Answer

The term structure of interest rates, which is also known as the yield curve, depicts the relationship between interest rates and the time to maturity of debt securities. It is typically constructed using Government of Canada securities of varying maturities, from short-term (such as 3-month Treasury bills) to long-term (such as 30-year Government of Canada bonds). Therefore, choice D is the correct answer.

Question 15

When actual sales are greater than forecasted sales:

Accepted Answer

When actual sales are greater than forecasted sales, it is an indication of higher demand than anticipated. This means that there will be a decrease in inventory as products are sold at a faster rate than anticipated. As sales increase, accounts receivable will also increase, as more customers will be making purchases and owing money to the business.

Question 16

Publishing companies are characterized by:

Accepted Answer

Publishing companies typically experience higher sales during certain seasons, such as the holiday season, which can result in seasonal sales patterns.

Question 17

Yield curves change daily to reflect:

Accepted Answer

Yield curves change daily to reflect changing conditions in the overall economy, such as shifts in inflation expectations, economic growth, and monetary policy. It is not based on static conditions in the capital or money markets, nor solely on historical inflation rates.

Question 18

The use of cash budgeting procedures:

Accepted Answer

Cash budgeting procedures illustrate the fluctuating levels of current assets for a given production plan, helping businesses to better manage and predict cash flow. It does not necessarily affect revenue or inventory management, but it can potentially reduce the need for temporary or permanent assets.

Question 19

A conservatively financed firm would:

Accepted Answer

The answer of A conservatively financed firm would:
...

Question 20

The term structure of interest rates or the yield curve:

Accepted Answer

The answer of The term structure of interest rates or...

Quiz 6: Working Capital and the Financing Decision

If a firm uses level production with seasonal sales:

When the term structure of interest rates is downward sloping and interest rates are expected to decline,the:

Which of the following yield curves would be characteristic at peak periods of economic expansions?

Some analysts believe that the term structure of interest rates is determined by the behaviour of various types of financial institutions.This theory is called the:

The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the:

A firm will usually increase the ratio of short-term debt to long-term debt when:

One advantage of level production is that:

Government of Canada securities are used to construct yield curves because:

The term structure of interest rates:

Which of the following is a true statement concerning interest rates?

The term structure of interest rates is not influenced by:

An inverted yield curve would suggest that:

The theory of the term structure of interest rates,which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the:

The term structure of interest rates:

When actual sales are greater than forecasted sales:

Publishing companies are characterized by:

Yield curves change daily to reflect:

The use of cash budgeting procedures:

A conservatively financed firm would:

The term structure of interest rates or the yield curve: