Deck 17: Managing Business Finances

Question 1

Explain the principle of compound growth.

Answer 1

Compound growth is the compounding of interest paid to the investor over given time periods. With each additional time period, interest payments accumulate, are capitalized, and earn more interest, thus multiplying the earning capacity of the investment. The principle of compound growth is the basis for the time value of money.

Question 2

Which of the following is the name for a portion of the ownership of a corporation?

A) Schedule C
B) Stock
C) Partnership
D) LLC
E) Dividend

Answer 2

B
Explanation:B)A corporation will sell stocks, portions of ownership, in order to raise capital. Stock represents a portion of ownership in a corporation.

Question 3

What value of a stock is calculated by dividing total shareholders' equity by the total number of shares of stock issued?

A) Par value
B) Market value
C) Book value
D) Dividend value
E) Total value

Answer 3

C
Explanation:C)Book value for a share of common stock is determined as the firm's owners' equity (from the balance sheet)divided by the number of common shares owned by all shareholders.

Question 4

What is a stock's market value?

A) The current price of a share of stock in the stock market
B) The average price of one share of stock over the past year
C) The face value of a share of stock, set by the issuing company's board of directors
D) The price of the stock plus the previous year's dividend
E) The monthly average of a stock's price over a year

Question 5

Investments such as money market mutual funds offer what advantage to investors?

A) Conservative capital growth
B) Long-term capital growth
C) Market appreciation
D) Aggressive growth
E) Safety and stability

Question 6

Which type of investment will sacrifice current income potential for long-term returns?

A) Blue-chip stock
B) Balanced funds
C) Aggressive growth funds
D) No-load funds
E) Mutual funds

Question 7

Differentiate between market value and book value.

Question 8

The time it takes to double an investment can be estimated by using which of the following?

A) Book value
B) The Rule of 72
C) Blue-chips
D) Dividends
E) Market value

Question 9

What is a stock's book value?

A) The current price of a share of stock in the stock market
B) The average price of one share of stock over the past year
C) The face value of a share of stock, set by the issuing company's board of directors
D) The value expressed as total stockholders' equity divided by the total number of shares of stock issued
E) The value expressed by the number of stock shares issued by the board of directors

Question 10

Dividend payments are optional and variable. The corporation's CEO decides whether and when a dividend will be paid, as well as the amount that is best for the future of the company's employees.

Question 11

Because of the uncertainties involved in stock prices, investment professionals believe day-to-day prices to be a generally poor indicator of any stock's real value.

Question 12

Which of the following is considered to be one of the riskiest of all investments?

A) Blue-chip stock
B) Mutual funds
C) No-load funds
D) Common stock
E) Load funds

Question 13

Explain the Rule of 72.

Question 14

While it's invested, money grows by earning interest or yielding some other form of return. What is this known as?

A) Compound growth
B) Dividend
C) Capital gains
D) Security
E) Diversity

Question 15

How is the market value of a stock determined?

A) Interest rates
B) The firm's owners' equity
C) Number of shares available
D) Profit-seeking potential
E) How much buyers are willing to pay

Question 16

To avoid paying a commission on an investment, what type of fund might an investor choose?

A) Blue-chip stock
B) Mutual funds
C) No-load funds
D) Common stock
E) Load funds

Question 17

Which of the following terms refers to a bundling of stocks, bonds, and other securities?

A) Blue-chips
B) Mutual funds
C) Exchanges
D) Commodities
E) Dividends

Question 18

What is the cumulative growth of money from interest paid over a given period of time known as?

A) Compound growth
B) Rule of 72
C) Time value of money
D) Interest
E) Market value

Question 19

Partial ownership of a firm that is considered to be the strongest and financially sound is done through what method?

A) Buying of mutual funds
B) Buying of blue-chip stocks
C) Dividend reinvestment
D) Funding of aggressive growth opportunities
E) Buying of load funds

Question 20

What type of investment would preserve capital investment but seek capital appreciation?

A) Blue-chip stock
B) Balanced funds
C) Aggressive growth funds
D) No-load funds
E) Mutual funds

Question 21

Which of the following is a function performed by an investment bank?

A) Handling a client's portfolio in the secondary market
B) Establishing relationships for a client with a commercial bank
C) Underwriting purchases of stocks and bonds
D) Arranging travel abroad for purchasers of foreign currencies
E) Providing insurance services for clients

Question 22

In which type of market would investors be motivated to sell because they feel prices will fall further?

A) Bear market
B) Blue-chip market
C) Bull market
D) Large cap market
E) Composite market

Question 23

For investors who do not want investment advice and wish to avoid paying a commission, what is the best type of broker assistance firm?

A) Mutual fund advisors
B) Investment banks
C) Stock broker
D) Discount broker
E) Full service broker

Question 24

When an investor wants to enter the market with a minimum amount of investment, what type of opportunities would offer them ease of entry and low operating expenses?

A) Securities
B) Common stock
C) Blue-chip stock
D) Exchange-traded funds
E) Mutual funds

Question 25

Which index focuses specifically on the smallest U.S. companies, based on market capitalization?

A) S&P 500
B) Dow Jones Industrial Average
C) TradeStation
D) Russell 2000
E) NASDAQ Composite

Question 26

Which of the following is a basis for a firm to be listed on the New York Stock Exchange?

A) Headquarters in New York
B) Total value of outstanding stock
C) Industry in which the company operates
D) Number of shares of stock
E) Global operations

Question 27

Which of the following is an organization of individuals coordinated to provide an institutional setting in which stock can be bought and sold?

A) Stock exchange
B) Brokerage
C) Server
D) Over-the-counter market
E) Mutual fund

Question 28

Which of the following is indicative of a bull market?

A) Stock prices that are averaging 20 percent off peak
B) Rising stock prices for 12 months or more
C) Falling stock prices for 6 months or more
D) A spike in the value of the Dow Jones Industrial Average
E) Investors who are motivated to sell stocks based on current value

Question 29

Which of the following is a summary of price trends in a specific industry and/or the stock market as a whole?

A) Investment index
B) Average index
C) Market indicator
D) Market index
E) Prospectus

Question 30

New stocks and bonds are sold in what market?

A) Private placement market
B) Secondary market
C) Primary market
D) Tertiary market
E) Open market

Question 31

Which is the MOST widely cited U.S. stock market index?

A) Standard & Poor's Composite Index of 500 Stocks
B) The NYSE index
C) Dow Jones Industrial Average
D) Moody's Stock List
E) The NASDAQ

Question 32

Which stock exchange has the highest volume of shares traded?

A) American Stock Exchange (ASE)
B) New York Stock Exchange (NYSE)
C) National Association of Securities Dealers Automated Quotation System (NASDAQ)
D) Philadelphia Stock Exchange (PSE)
E) Securities and Exchange Commission (SEC)

Question 33

Which of the following is considered by many to be the BEST single indicator of the U.S. equities market?

A) NASDAQ Composite
B) Russell 2000
C) Dow Jones Industrial Average
D) Standard & Poor's 500
E) New York Stock Exchange

Question 34

Which of the following allows after-hours trading and protects traders' anonymity?

A) National Association of Securities Dealers Automated Quotation (NASDAQ)
B) New York Stock Exchange (NYSE)
C) Electronic Communication Networks (ECNs)
D) Standard & Poor's 500
E) Mutual funds

Question 35

Explain what exchange-traded funds are and how they are tracked.

Question 36

An exchange-traded fund (ETF)is a bundle of stocks (or bonds)that are in an index that tracks the overall movement of a market.

Question 37

Which of the following is the federal government agency that regulates U.S. securities markets?

A) New York Stock Exchange
B) Federal Reserve
C) Commerce Department
D) Securities and Exchange Commission
E) Treasury Department

Question 38

Which of the following receives and executes buy-and-sell orders for other people in return for commissions?

A) Stock exchanges
B) Stock brokers
C) Investment banks
D) Stock agents
E) Savings banks

Question 39

What is the advantage of exchange-traded funds (EFTs)over mutual funds?

A) They can be traded throughout the day like a stock.
B) The cost of the fund management is passed on to the holder.
C) They do not require the services of a broker to complete a transaction.
D) They allow for frequent trading with lower overall transaction fees.
E) They regularly out-perform mutual funds.

Question 40

A bear market can be revealed by tracking ________, which is a summary of overall price trends.

A) the Dow Jones Industrial Average
B) market indexes
C) the value of blue-chip stocks
D) technology-based economies
E) exchange-traded funds

Question 41

The New York Stock Exchange, the world's oldest electronic stock market, has orders gathered and executed exclusively on a computer network.

Question 42

Stocks are known as securities because they represent a secured interest in a company.

Question 43

Although advising and underwriting may be tasks of an investment bank, distribution of new securities is NOT one of their services.

Question 44

Describe the services provided by investment banks.

Question 45

The largest stock exchange in the world is the Tokyo exchange.

Question 46

What is the term for the proportion of funds invested in each of several investment alternatives?

A) Spreading
B) Shorting
C) Margin buying
D) Asset allocation
E) Diversification

Question 47

An investment bank is a financial institution that specializes in issuing and reselling new securities.

Question 48

Describe the differences between primary and secondary securities markets.

Question 49

In a secondary securities market, new stocks and bonds are bought and sold by firms and governments.

Question 50

A stock exchange is an organization of individuals coordinated to provide an institutional auction setting in which stocks can be bought and sold.

Question 51

Mutual funds are traded in securities markets.

Question 52

Which of the following is figured by dividing the yearly dollar amount of dividend income by the investment's current market value?

A) Bond yield
B) Current dividend yield
C) Debenture
D) Trading volume
E) Earnings per share

Question 53

Stock brokers earn commissions from the individuals and organizations for which they place orders.

Question 54

More Americans are investing in the stock market through online trading. Explain the value of online trading.

Question 55

The value of the Dow Jones Industrial Average (DJIA)has remained unchanged in recent years.

Question 56

Unlike the Dow and the S&P 500, all NASDAQ-listed companies, not just a selected few, are included in the index for a total of some 3,400 firms across six continents.

Question 57

An investment bank operates in the secondary securities market.

Question 58

The Russell 2000 Index focuses primarily on technology companies, small-company stocks, and has a smaller representation of sectors such as financial, consumer products, and industrials.

Question 59

What is the term for buying several different kinds of investments rather than just one?

A) Spreading
B) Shorting
C) Margin buying
D) Diversification
E) Management

Question 60

When an investment bank engages in underwriting, that investment bank is taking on risk in the process of launching new securities.

Question 61

What can an angel investor offer to small businesses when the small business doesn't have enough history to get a loan from a commercial bank?

A) A credit history
B) Start-up funds
C) Stock options
D) Financial oversight
E) Bonds

Question 62

What type of loan is guaranteed by collateral?

A) Unsecured loan
B) Venture capital loan
C) Angel investor loan
D) Secured loan
E) Corporate bond

Question 63

Aggressive growth funds are designed for investors who can accept the risk of loss inherent in common stock investing with severe price fluctuations, but also the potential for superior returns over time.

Question 64

What is the formula for measuring a firm's working capital?

A) Current assets = working capital /current liabilities
B) Working capital = current assets - current liabilities
C) Current liabilities = current assets + working capital
D) Working capital = current assets × current liabilities
E) Current liabilities = current assets / working capital

Question 65

What is the result of a borrower who fails to make payments to the lender when due?

A) Bankruptcy
B) Default
C) Risk ratings
D) Bondholder's claim
E) Bond indenture

Question 66

The profit realized when the market value of an investment increases is known as which of the following?

A) Capital gains
B) Asset allocation
C) Diversification
D) Price appreciation
E) Profiteering

Question 67

A portfolio represents the proportion of funds invested in each of the investment alternatives.

Question 68

What is the legal document that identifies a borrower's obligation when issuing corporate bonds?

A) Bondholder's claim
B) Risk claim analysis
C) Initial public offering
D) Mortgage-backed security
E) Bond indenture

Question 69

What type of investment offers low returns, but is insured by the U.S. government?

A) Common stock
B) Mutual funds
C) Exchange-traded funds
D) Treasury bills
E) Securities

Question 70

What is the increase in the dollar value of an investment known as?

A) Dividend payout
B) Total return
C) Interest yield
D) Capital gain
E) Price appreciation

Question 71

How are federal and state projects, such as roads and schools, typically financed?

A) Municipal bonds
B) Common stock
C) Angel investors
D) Corporate bonds
E) TARP loans

Question 72

What is the advantage to a small business when planning for shortfalls in cash flow?

A) Financial resources can be saved in a savings account until needed.
B) Banks are more likely to offer loans if they know when the money will be needed.
C) Loans can be obtained in advanced and put in interest earning investments.
D) Lower interest loans can be sought for the needed time frame.
E) Small businesses will appear more professional, resulting in favorable banking relationships.

Question 73

An investment's current dividend yield plus its capital gain rate is known as its total return.

Question 74

What is the proportion of investments in each investment alternative referred to as?

A) Portfolio
B) Dividend yield
C) Asset allocation
D) Risk-reward relationship
E) Diversification

Question 75

According to rating services such as Moody's, what type of rating would a bond have if it was one of the safest investments possible, but produced lower returns?

A) AAA
B) BBB
C) Caa
D) CCC
E) D

Question 76

Why should an investor consider diversification and asset allocation?

A) To offset capital gains
B) To achieve desired risk-return balance
C) To increase total returns
D) To achieve higher dividend yields
E) To improve price-appreciation values

Question 77

Explain how dividend yield and interest dividend yield are computed.

Question 78

When do investors expect a higher rate of return on their investments?

A) When there is greater uncertainty
B) When the investment requires more upfront capital
C) When the investment is stable
D) When there is a short time commitment
E) When the investment is for a larger share of the offering

Question 79

Which of the following is a formal pledge (an IOU)obligating the issuer to pay interest periodically and repay the principal at maturity (a preset future date)to the lender?

A) Commercial bank loan
B) Corporate bond
C) Mutual fund
D) Bond indenture
E) Prospectus

Question 80

What are low grade bonds usually called?

A) Bankruptcy
B) Default bonds
C) Junk bonds
D) Corporate bonds
E) Grade B bonds