Deck 10: Financial Markets and Securities

Question 1

A tradable contract that entitles its owner to certain rights is called an)

A) security.
B) alternative.
C) maturity.
D) entitlement.
E) financial statement.

Answer 1

security.

Question 2

Banks

A) are the only type of financial intermediary.
B) are savers looking for opportunities to earn a return on their savings.
C) have been owned by the government since the Great Depression.
D) are private firms that accept deposits and extend loans.
E) complicate the connection between borrowers and savers.

Answer 2

are private firms that accept deposits and extend loans.

Question 3

Banks are

A) always owned by the government.
B) one example of direct finance.
C) one example of a financial intermediary.
D) firms and governments in search of funds to undertake their daily operations.
E) savers looking for opportunities to earn a return on their savings.

Answer 3

one example of a financial intermediary.

Question 4

The buyers or borrowers) in financial markets are

A) financial intermediaries.
B) firms and governments in search of funds to undertake their daily operations.
C) savers looking for opportunities to earn a return on their savings.
D) not concerned with the interest rate in the market.
E) located on the supply side of the loanable funds market.

Question 5

In financial markets, firms and governments in search of funds to pay for their daily operations would be the

A) banks.
B) buyers and sellers.
C) financial intermediaries.
D) buyers.
E) sellers.

Question 6

Indirect finance occurs when

A) savers go directly to borrowers for funds.
B) borrowers deposit funds into banks, which then loan these funds to savers.
C) savers deposit funds into banks, which then loan these funds to borrowers.
D) borrowers go directly to savers for funds.
E) firms give bonds.

Question 7

Direct finance occurs when

A) savers go directly to borrowers for funds.
B) borrowers deposit funds into banks, which then loan these funds to savers.
C) savers deposit funds into banks, which then loan these funds to borrowers.
D) borrowers go directly to savers for funds.
E) banks get involved with financing.

Question 8

A security is

A) a private firm that accepts deposits and extends loans.
B) when savers deposit funds into banks, which then loan these funds to borrowers.
C) the date on which a loan repayment is due.
D) a tradable contract that entitles its owner to certain rights.
E) the risk that a borrower will not pay the face value of a bond on the maturity date.

Question 9

A security that represents a debt to be paid is known as an)

A) stock.
B) bond.
C) bank.
D) rating.
E) index.

Question 10

Firms that help to channel funds from savers to borrowers are known as

A) financial intermediaries.
B) securities.
C) channelers.
D) marketers.
E) Treasury securities.

Question 11

In financial markets, savers looking for opportunities to earn a return on their savings would be the

A) banks.
B) buyers and sellers.
C) financial intermediaries.
D) buyers.
E) sellers.

Question 12

Private firms that accept deposits and extend loans are known as

A) bonds.
B) banks.
C) stocks.
D) financials.
E) securities.

Question 13

The two different paths through the loanable funds market are _______ finance and _______finance.

A) indirect; security
B) internal; external
C) saver; borrower
D) indirect; direct
E) bond; stock

Question 14

If you have a savings account at a bank, you participate in the loanable funds market as a

A) borrower.
B) buyer.
C) borrower and a lender.
D) buyer and a seller.
E) lender.

Question 15

When borrowers go directly to savers for funds, it is called _______ finance.

A) indirect
B) direct
C) security
D) bond
E) banking

Question 16

When savers deposit funds into banks, which then loan these funds to borrowers, it is called _______ finance.

A) indirect
B) direct
C) security
D) bond
E) banking

Question 17

The sellers or lenders) in financial markets are

A) financial intermediaries.
B) firms and governments in search of funds to undertake their daily operations.
C) savers looking for opportunities to earn a return on their savings.
D) not concerned with the interest rate in the market.
E) located on the demand side of the loanable funds market.

Question 18

A bond is

A) the creation of a new security by combining otherwise separate loan agreements.
B) an ownership of a firm.
C) a security that represents a debt to be paid.
D) a market in which securities are traded after their first sale.
E) a private firm that accepts deposits and extends loans.

Question 19

One example of a financial intermediary is a

A) bond.
B) bank.
C) stock.
D) financial market.
E) security.

Question 20

When firms seek funding to pay for resources for production

A) they always use indirect financing.
B) they always use direct financing.
C) they can use indirect or direct financing.
D) they must borrow money.
E) the government must play a role.

Question 21

Consider the following scenario when answering the next questions:
Your friend Jon is starting a new photography business that specializes in photographs of Central Park in New York City. Because his business is new and risky, he is unable to obtain a loan from the local bank. On June 21, 2017, you agree to pay a price of $4,000 for a bond from Jon. You will receive $5,000 in return on June 21, 2018.
The interest rate of the bond mentioned in the scenario is equal to

A) 80 percent.
B) 20 percent.
C) 25 percent.
D) 10 percent.
E) 5 percent.

Question 22

Consider the following scenario when answering the next questions:
Your friend Jon is starting a new photography business that specializes in photographs of Central Park in New York City. Because his business is new and risky, he is unable to obtain a loan from the local bank. On June 21, 2017, you agree to pay a price of $4,000 for a bond from Jon. You will receive $5,000 in return on June 21, 2018.
The face value of the bond mentioned in the scenario is equal to

A) $9,000.
B) $1,000.
C) $4,000.
D) $5,000.
E) $20,000.

Question 23

Consider the following scenario when answering the next questions:
Your friend Jon is starting a new photography business that specializes in photographs of Central Park in New York City. Because his business is new and risky, he is unable to obtain a loan from the local bank. On June 21, 2017, you agree to pay a price of $4,000 for a bond from Jon. You will receive $5,000 in return on June 21, 2018.
The par value of the bond mentioned in the scenario is equal to

A) $9,000.
B) $1,000.
C) $4,000.
D) $5,000.
E) $20,000.

Question 24

The maturity date of a bond is

A) the date on which the loan is given out.
B) the date on which the loan repayment is due.
C) always one year after the loan is given out.
D) always more than one year after the loan is given out.
E) the date on which the bond is worth the price of the bond.

Question 25

As a result of the 2007 financial crisis, when financial institutions began faltering,

A) financial intermediaries all over the world became less inclined to extend loans.
B) financial intermediaries all over the world started to give out subprime loans.
C) the government did not get involved.
D) the government bailed out all institutions that failed.
E) financial intermediaries all over the world became more inclined to extend loans.

Question 26

The date on which the repayment for a loan is due is called the _______ date.

A) maturity
B) deferment
C) deadline
D) face value
E) par

Question 27

After the Lehman Brothers' bankruptcy, it appeared there might be a domino effect that would lead to the collapse of many large banks. To avoid this potential disaster, the U.S. government implemented the

A) Troubled Asset Reassurance Project.
B) Targeted Assistance Relief Program.
C) Troubled Asset Relief Program.
D) Targeted Bank Bailout Program.
E) Troubled Bank Bailout Program.

Question 28

In 2015, the Target Corporation had $12 billion in bonds outstanding. This means that the Target Corporation

A) was making a loss of $12 billion in 2015.
B) was due $12 billion from the owners of those bonds.
C) owed less than $12 billion to the owners of those bonds.
D) owed more than $12 billion to the owners of those bonds.
E) owed $12 billion to the owners of those bonds.

Question 29

The TARP program

A) led to the collapse of many large banks.
B) was one of the many causes of the financial crisis.
C) was implemented in an effort to assist poor households.
D) helped homeowners who had defaulted on their mortgages.
E) was very controversial from the beginning.

Question 30

The value of the bond at maturity, or the payment due at repayment, is known as the _______ value.

A) face
B) maturity
C) real
D) ending
E) nominal

Question 31

Coupon bonds are bonds with coupons attached that represent

A) multiple interest rates.
B) periodic interest payments.
C) multiple bond issuers.
D) discounted repayments.
E) multiple bondholders.

Question 32

The value of the bond at maturity, or the payment due at repayment, is known as the _______ value.

A) par
B) maturity
C) real
D) ending
E) nominal

Question 33

TARP stands for

A) Troubled Asset Reassurance Project.
B) Targeted Assistance Relief Program.
C) Troubled Asset Relief Program.
D) Targeted Asset Reassurance Program.
E) Timed Assistance Relief Project.

Question 34

The TARP program

A) provided $25 billion of debt relief to citizens who owed federal taxes.
B) allocated $500 million to individuals who defaulted on their mortgages.
C) provided low-interest-rate loans for students attending college.
D) allocated $700 billion to keep banks from failing.
E) provided low-interest-rate loans for new homeowners.

Question 35

Consider the following scenario when answering the next questions:
Your friend Jon is starting a new photography business that specializes in photographs of Central Park in New York City. Because his business is new and risky, he is unable to obtain a loan from the local bank. On June 21, 2017, you agree to pay a price of $4,000 for a bond from Jon. You will receive $5,000 in return on June 21, 2018.
In the scenario, the date June 21, 2018, is known as the

A) par value.
B) maturity date.
C) real value.
D) ending value.
E) nominal value.

Question 36

During the Great Recession, firms found it _______ to borrow, leading to an economic _______ .

A) easier; contraction
B) easier; expansion
C) too easy; contraction
D) more difficult; contraction
E) more difficult; expansion

Question 37

The face value of a bond is the

A) value of the bond at maturity plus the price of the bond at purchase.
B) value of the bond at maturity minus the price of the bond at purchase.
C) price of the bond at purchase.
D) value of the bond at maturity, or the amount due at repayment.
E) price of the bond at purchase minus the face value of the bond.

Question 38

Consider the following scenario when answering the next questions:
Your friend Jon is starting a new photography business that specializes in photographs of Central Park in New York City. Because his business is new and risky, he is unable to obtain a loan from the local bank. On June 21, 2017, you agree to pay a price of $4,000 for a bond from Jon. You will receive $5,000 in return on June 21, 2018.
The dollar price of the bond mentioned in the scenario is equal to

A) $9,000.
B) $1,000.
C) $4,000.
D) $5,000.
E) $20,000.

Question 39

Bonds contain three important pieces of information. These three pieces are the

A) date of issue, the date of repayment, and the interest rate.
B) name of the borrower, the name of the issuer, and the date of issue.
C) maturity date, the face value of the bond, and the issuing bank.
D) issuing bank, the interest rate, and the date of issue.
E) name of the borrower, the repayment date, and the amount due at repayment.

Question 40

The par value of a bond is the

A) value of the bond at maturity plus the price of the bond at purchase.
B) value of the bond at maturity minus the price of the bond at purchase.
C) price of the bond at purchase.
D) value of the bond at maturity, or the amount due at repayment.
E) price of the bond at purchase minus the face value of the bond.

Question 41

The equation for the interest rate of a bond is face value -initial price
Face value + initial price

A) R = initial price .
B) R =
C) R= face price .
D) R =face price . face value -initial price
E) R =face value - initial price. face value +initial price initial price .

Question 42

Default risk is the risk that

A) the lender will not pay the face value of the bond on the maturity date.
B) a stock will become worthless.
C) the borrower will renegotiate the maturity date on a bond.
D) the borrower will not pay the face value of the bond on the maturity date.
E) a stock will lose value.

Question 43

The interest rate of a bond is computed as an)

A) sum.
B) absolute value.
C) growth rate.
D) difference.
E) multiplication.

Question 44

If the dollar price of a bond is $7,500 and the face value of the bond is $8,000, the interest rate is equal to

A) 7 percent.
B) 6.67 percent.
C) 6.25 percent.
D) 14 percent.
E) 5 percent.

Question 45

If the dollar price of a bond is $4,000 and its face value is $4,250, the interest rate is equal to

A) 5.9 percent.
B) 5 percent.
C) 6.67 percent.
D) 6.25 percent.
E) 10 percent.

Question 46

The interest rate of a bond is equal to the

A) difference between the face value and the initial price all divided by the face value.
B) difference between the face value and the initial price.
C) difference between the face value and the initial price all divided by the initial price.
D) sum of the face value and the initial price all divided by the face value.
E) sum of the face value and the initial price all divided by the initial price.

Question 47

If a borrower defaults on a bond, it means that the borrower

A) has one year to pay before facing possible jail time.
B) did not pay back the loan on the maturity date.
C) only has to pay a portion of the loan back.
D) has paid back the loan on the maturity date.
E) has paid back the loan prior to the maturity date.

Question 48

If the interest rate of a one-year bond is 10 percent and its face value is $5,000, the dollar price of the bond is

A) $5,000.00.
B) $5,500.00.
C) $4,545.45.
D) $5,250.50.
E) $454.00.

Question 49

Consider a supply and demand model of bonds for company X. Which of the following would one expect to happen if the default risk increases for company X?

A) The demand curve will shift to the right, causing the price of the bond to rise.
B) The demand curve will shift to the left, causing the price of the bond to rise.
C) The supply curve will shift to the right, causing the price of the bond to fall.
D) The demand curve will shift to the left, causing the price of the bond to fall.
E) The supply curve will shift to the left, causing the price of the bond to rise.

Question 50

Which of the following statements is true about bonds?

A) Bonds are ownership shares in a firm.
B) The dollar price and interest rate of a bond have an inverse relationship.
C) A bond's dollar price is calculated as growth rate.
D) Bonds can never default.
E) The dollar price and interest rate of a bond have a positive relationship.

Question 51

All else equal, the greater the default risk, the _______ of the bond.

A) higher the face value
B) higher the price
C) lower the price
D) lower the face value
E) lower the interest rate

Question 52

What is the highest rating a bond can receive from the rating firm Standard and Poor's S&P)?

A) A+
B) A++
C) AA
D) AAA
E) A

Question 53

Consider a supply and demand model of bonds for company X. Which of the following would one expect to happen if the default risk decreases for company X?

A) The demand curve will shift to the right, causing the price of the bond to rise.
B) The demand curve will shift to the left, causing the price of the bond to rise.
C) The supply curve will shift to the right, causing the price of the bond to fall.
D) The demand curve will shift to the left, causing the price of the bond to fall.
E) The supply curve will shift to the left, causing the price of the bond to rise.

Question 54

Which of the following statements about bonds is true?

A) Bond interest rates fall with increased default risk.
B) Bond interest rates and default risk are not related.
C) Bond prices rise with increased default risk.
D) Bond prices rise with increased interest rates.
E) Bond interest rates rise with increased default risk.

Question 55

Your friend Michelle is starting a fitness center that specializes in helping people get in shape through exercise and eating healthy. Because her business is new and risky, she is unable to obtain a loan from the local bank. You agree to pay $7,500 for a one-year bond from Michelle with an interest rate of 5 percent. The face value of the bond is

A) $7,875.00.
B) $7,500.00.
C) $7,142.86.
D) $7,000.00.
E) $375.

Question 56

If the interest rate of a one-year bond is 15 percent and its dollar price is $3,250, the face value of the bond is

A) $3,737.50.
B) $2,826.09.
C) $373.75.
D) $282.61.
E) $3,350.00.

Question 57

The risk that the borrower will not pay the face value of a bond on the maturity date is called the _______ risk.

A) default
B) maturity
C) timing
D) full-pay
E) par value

Question 58

All else equal, the smaller the default risk, the _______ of the bond.

A) higher the face value
B) higher the price
C) lower the price
D) lower the face value
E) higher the interest rate

Question 59

Private rating agencies evaluate and then grade the default risk of bonds to address which of the following problems?

A) the government's inability to judge default risks
B) companies hiding their finances
C) bondholders not having access to companies' finances
D) individuals' inability to easily judge default risks
E) too many investors picking risky bonds for their portfolios

Question 60

Your friend Jamarcus is an award-winning chef. Jamarcus wants to start his own restaurant in Denver but is unable to obtain a loan from his local bank. Jamarcus has decided to issue a one-year bond with a face value of $6,000 and an interest rate of 10 percent. If you wanted to buy this bond, what would be the initial price?

A) $6,600.00
B) $5,500.50
C) $6,000.00
D) $5,000.00
E) $5,454.54

Question 61

Holding all else equal, if a secondary market exists for a security, you would expect the

A) demand curve for the security to shift to the left, causing the price of the security to fall.
B) supply curve for the security to shift to the right, causing the price of the security to fall.
C) demand curve for the security to shift to the right, causing the price of the security to rise.
D) supply curve for the security to shift to the right, causing the price of the security to rise.
E) supply curve for the security to shift to the left, causing the price of the security to rise.

Question 62

As of January 2016, American Airlines had a Standard and Poor's S&P) bond rating of

A) A.
B) AA.
C) BB.
D) CCC.
E) CC.

Question 63

Stocks are

A) ownership shares in a firm.
B) securities that represent a debt to be paid.
C) markets in which securities are bought and sold.
D) contracts that represent a guaranteed payment.
E) not available for individual investors.

Question 64

Typical individuals have difficulty judging the default risk of any one company, let alone the thousands of firms that sell bonds in a developed economy. To address this problem,

A) the price of bonds increases as more information is made available to investors.
B) borrowing entities rate their own bonds.
C) individuals should never invest in bonds.
D) the government assigns ratings of borrowing entities.
E) private rating agencies evaluate and then grade the default risk of borrowing entities.

Question 65

Noninvestment-grade bonds are bonds that receive a Standard and Poor's S&P) bond rating of _______ and lower.

A) A
B) B
C) BB
D) BBB
E) CCC

Question 66

The existence of a secondary market for a given security will

A) increase the supply for that security.
B) decrease the supply for that security.
C) decrease the demand for that security.
D) increase the demand for that security.
E) increase both the supply and the demand for that security.

Question 67

A majority shareholder

A) receives all the profits earned by the company.
B) is responsible for all the debt owed by the company.
C) controls 100 percent of the ownership votes.
D) becomes the CEO of the company.
E) can determine the direction of the company.

Question 68

Secondary markets are

A) markets in which securities are bought for the first time.
B) markets in which securities are traded after their first sale.
C) available for stocks but not for bonds.
D) markets in which securities are traded on the maturity date.
E) available for bonds but not for stocks.

Question 69

If a bond cannot be resold in secondary markets, the

A) demand for that security will increase.
B) demand for that security will decrease.
C) supply for that security will increase.
D) supply and the demand for that security will decrease.
E) supply and the demand for that security will increase.

Question 70

As of January 2016, Microsoft had a Standard and Poor's S&P) bond rating of

A) A.
B) AA.
C) AAA.
D) A++.
E) BBB.

Question 71

Which of the following would explain why a firm would want to sell stocks instead of bonds?

A) The owners are worried about the burden of debt.
B) The owners don't want to give up ownership of the business.
C) The owners aren't trying to finance production.
D) Stocks are easier to issue than bonds are.
E) There are more fees associated with issuing bonds.

Question 72

Which of the following is a secondary stock market?

A) North American Stock Exchange
B) Standard & Poor's S&P) 500
C) New York Stock Exchange
D) Dow Jones Industrial Average the Dow)
E) U.S. Stock Exchange

Question 73

Most people who purchase stocks and bonds use brokers, who buy the stocks and bonds in _______ markets.

A) minor
B) inferior
C) alternate
D) secondary
E) primary

Question 74

A higher bond rating directly translates into _______ prices and _______ rates on the firm's bonds.

A) higher; higher interest
B) higher; lower interest
C) lower; lower interest
D) lower; higher interest
E) higher; higher default

Question 75

Ownership shares in a firm are known as

A) bonds.
B) stocks.
C) treasuries.
D) mortgages.
E) chips.

Question 76

Markets in which securities are traded after their first sale are known as _______ markets.

A) minor
B) inferior
C) alternate
D) primary
E) secondary

Question 77

NYSE stands for

A) New York Stock Exchange.
B) National Youth Stock Exchange.
C) New York Securities Exchange.
D) National Youth Student Ensemble.
E) New York Student Ensemble.

Question 78

A shareholder who owns more than 50 percent of the shares of the firm is called the

A) minority shareholder.
B) CEO.
C) majority shareholder.
D) overwhelming shareholder.
E) bulk shareholder.

Question 79

Which of the following statements is true about stocks?

A) Owners of stock securities are guaranteed a return on their investments.
B) Stocks have a maturity date.
C) Stocks represent a debt to be paid.
D) Owners of stock securities are actual owners of the firm.
E) Only institutional investors can own stock securities.

Question 80

NASDAQ stands for

A) National Association of Stock Dealers Automated Quotations.
B) National Association of Securities Deals and Quotes.
C) National Act on Securities, Derivatives, and Quotations.
D) National Act on Stocks, Derivatives, and Quotations.
E) National Association of Securities Dealers Automated Quotations.