Deck 8: Saving, Investment, and the Financial System

Question 1

What is the face value of a bond?

A) the market price of the bond
B) the difference between the amount owned by the issuer and the market price of the bond
C) the amount owed by the issuer
D) the interest earned by the owner of the bond

Answer 1

C

Question 2

What are junk bonds?

A) Junk bonds are those that yield low interest rates.
B) Junk bonds are those that never mature.
C) Junk bonds refer to bonds that have been resold many times.
D) Junk bonds are those issued by financially weak corporations.

Answer 2

D

Question 3

Reggie's income exceeds his expenditures. Which statement best describes Reggie?

A) He is a saver who demands money from the financial system.
B) He is a saver who supplies money to the financial system.
C) He is a borrower who demands money from the financial system.
D) He is a borrower who supplies money to the financial system.

Answer 3

B

Question 4

Which bond is most likely to default?

A) a junk bond
B) a municipal bond
C) a federal government bond
D) a corporate bond issued by Bell Canada

Question 5

Which list of bonds is ordered from the most interest to the least interest?

A) corporate bond, municipal bond, federal government bond
B) corporate bond, federal government bond, municipal bond
C) municipal bond, federal government bond, corporate bond
D) municipal bond, corporate bond, federal government bond

Question 6

How is a perpetuity distinguished from other bonds?

A) It pays continuously compounded interest.
B) It pays interest only when it matures.
C) It never matures.
D) The principal is repaid over the term of the bond rather than as a lump sum.

Question 7

Suppose Microsoft sells a bond. What is the company doing?

A) borrowing directly from the public
B) borrowing indirectly from the public
C) lending directly to the public
D) lending indirectly to the public

Question 8

In terms of riskiness, how do long-term bonds and short-term bonds compare?

A) Short-term bonds are more risky and so pay higher interest.
B) Short-term bonds are less risky and so pay lower interest.
C) Short-term bonds are less risky and so pay higher interest.
D) Short-term bonds have about the same degree of risk and so pay about the same interest.

Question 9

What is a characteristic of the bond market?

A) Some bonds have terms as short as a few months.
B) Because they are risky, bonds pay a low rate of interest.
C) Corporations buy bonds to raise funds.
D) Bonds are rarely used as financial instruments.

Question 10

How does the risk of long-term bonds compare with short-term bonds?

A) Long-term bonds are generally less risky than short-term bonds and so pay higher interest.
B) Long-term bonds are generally less risky than short-term bonds and so pay lower interest.
C) Long-term bonds are generally more risky than short-term bonds and so pay higher interest.
D) Long-term bonds are generally more risky than short-term bonds and so pay lower interest.

Question 11

When a country saves a larger portion of its GDP, will it have more or less investment?

A) It will have less investment, and so it will have more capital and higher productivity.
B) It will have less investment, and so it will have less capital and higher productivity.
C) It will have more investment, and so it will have more capital and higher productivity.
D) It will have more investment, and so it will have less capital and higher productivity.

Question 12

What will happen to the interest on a bond as the bond's term increases?

A) The bond will pay less interest because it has less risk.
B) The bond will pay less interest because it has more risk.
C) The bond will pay more interest because it has more risk.
D) The bond will pay more interest because it has less risk.

Question 13

If the government's expenditures exceeded its receipts, what would it most likely do?

A) It would lend money to a bank or other financial intermediary.
B) It would borrow money from a bank or other financial intermediary.
C) It would directly buy bonds from the public.
D) It would directly sell bonds to the public.

Question 14

Which term refers to institutions that help to match one person's saving with another person's investment?

A) the Bank of Canada
B) the banking system
C) the monetary system
D) the financial system

Question 15

Which statement best describes a characteristic of a bond?

A) The maturity of a bond refers to the amount to be paid back.
B) The principal of the bond refers to the person buying the bond.
C) A bond buyer cannot sell a bond before it matures.
D) The interest paid by a bond depends on its price.

Question 16

When opening a spa, you may need to buy tables, a sound system, and credit card processing equipment. What do economists call these expenditures?

A) capital investment
B) investment in human capital
C) business consumption expenditures
D) inventories

Question 17

Which term refers to the length of time until a bond matures?

A) duration
B) term
C) maturity
D) expiration period

Question 18

Bailey wants to start her own dental practice, but her expenditures exceed her income. Which statement best describes Lucy?

A) She is a saver who demands money from the financial system.
B) She is a saver who supplies money to the financial system.
C) She is a borrower who demands money from the financial system.
D) She is a borrower who supplies money to the financial system.

Question 19

What is a bond?

A) a financial intermediary
B) a certificate of indebtedness
C) a certificate of partial ownership in an enterprise
D) a mortgage

Question 20

Which term refers to a certificate of indebtedness that specifies the obligations of the borrower to the holder?

A) bond
B) stock
C) mutual fund
D) savings plan

Question 21

What do people who buy newly issued stock in a corporation such as Rockwood Pottery Ltd. provide?

A) They buy debt finance and so become part owners of Rockwood.
B) They buy debt finance and so become creditors of Rockwood.
C) They buy equity finance and so become part owners of Rockwood.
D) They buy equity finance and so become creditors of Rockwood.

Question 22

Ian has the choice of two bonds, one that pays 4 percent interest and one that pays 86 percent interest. Which of the following situations is most likely?

A) The 8 percent bond is less risky than the 4 percent bond.
B) The 8 percent bond is a Canadian government bond, and the 4 percent bond is a junk bond.
C) The 8 percent bond has a longer term than the 4 percent bond.
D) The 8 percent bond is a Canadian government bond, and the 4 percent bond is a provincial bond.

Question 23

What does stock represent?

A) certificate of insurance
B) a bond that never matures
C) ownership in a company
D) debt finance

Question 24

Who purchased the correct asset to meet their objective?

A) Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond issued by Mamma Rosa's Pizza.
B) Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric instead of bonds issued by Specific Electric.
C) Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
D) George wanted to lend money at a specified rate of interest to Research In Motion (RIM), so he purchased RIM stock.

Question 25

Suppose that the government finds a major defect in one of a company's products and demands that it be taken off the market. What would we expect?

A) The supply of the stock and the price will both rise.
B) The supply of the stock and the price will both fall.
C) The demand for the stock and the price will both rise.
D) The demand for the stock and the price will both fall.

Question 26

Which statement best defines stock indexes?

A) They are the average of a group of stock prices.
B) They are the average of a group of stock yields.
C) They are reports in the newspaper that report on the price of the stock and earnings of the corporation.
D) They are measures of the risk relative to the profitability of corporations.

Question 27

Other things being constant, when a business issues more stock, what happens?

A) The supply of the stock is greater and thus the price will fall.
B) The supply of the stock is less and thus the price will rise.
C) The demand for the stock is greater and thus the price will rise.
D) The demand for the stock is less and thus the price will fall.

Question 28

Which term refers to the sale of stocks and bonds to raise money?

A) debt finance
B) debt-equity finance
C) debt finance for stocks, and equity finance for bonds
D) equity finance for stocks, and debt finance for bonds

Question 29

Which of the following bond buyers did NOT buy the bond that best met his or her objective?

A) Mia wanted a bond with a high interest rate, regardless of the risk. She purchased a junk bond.
B) Anna wanted the least risky bond available. She purchased a federal bond.
C) Bill wanted to purchase a bond that was unlikely to default. He purchased a bond that Standard & Poor's rated a low credit risk.
D) To reduce risk, Toby purchased a bond with a date of maturity far in the future.

Question 30

What does a general, persistent decline in stock prices signal about an economy?

A) that the economy is about to enter a boom period because people will be able to buy stock for less money
B) that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits
C) that the economy is about to enter a boom because people expect prices of stock to rise
D) that the economy is about to enter a recession because low stock prices mean that corporations have had low profits in the past

Question 31

Which of the following most likely determines the price of stocks traded on exchanges?

A) the Corporate Securities Commission
B) the supply and demand for goods and services
C) the supply and demand for the stock
D) the Toronto Stock Exchange

Question 32

Approximately how many firms are included in the S&P/TSX stock index?

A) 200
B) 300
C) 400
D) 500

Question 33

Bella Roma Italian Market sells common stock. What type of financing are they using?

A) They are using equity financing, and the return shareholders earn is fixed.
B) They are using equity financing, and the return shareholders earn depends on how profitable the company is.
C) They are using debt financing, and the return debt holders earn is fixed.
D) They are using debt financing, and the return debt holders earn depends on how profitable the company is.

Question 34

Sylvia is interested only in the rate of interest and is willing to take a great deal of risk in exchange for a high return. Which bond should she look for?

A) federal bonds with short terms
B) territorial bonds with long terms
C) corporate bonds with short terms
D) corporate bonds with long terms

Question 35

What do shareholders receive when they are paid a dividend?

A) a fixed share of the price of the stock
B) the face value of the stock at the maturity date
C) a share of the company's profit
D) interest

Question 36

Compared to bonds, what does stock offer the holder?

A) lower risk
B) partial ownership
C) lower return
D) higher return

Question 37

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. What would we expect?

A) This would raise the demand for existing shares of the stock, causing its price to rise.
B) This would decrease the demand for existing shares of the stock, causing its price to fall.
C) This would raise the supply of the existing shares of stock, causing its price to rise.
D) This would raise the supply of the existing shares of stock, causing its price to fall.

Question 38

If Huedepool Beer runs into financial difficulty, how are bondholders and shareholders paid?

A) Shareholders are paid before bondholders.
B) Shareholders are paid after bondholders.
C) Shareholders and bondholders are paid proportional shares of the company's assets.
D) Shareholders receive all the company's assets.

Question 39

Assuming that all else remains equal, when people become more optimistic about a company's future, what is most likely to happen to the company's stock?

A) The supply of the stock and the price will both rise.
B) The supply of the stock and the price will both fall.
C) The demand for the stock and the price will both rise.
D) The demand for the stock and the price will both fall.

Question 40

Which bond would you expect to pay the highest interest rate?

A) a bond issued by the federal government
B) a bond issued by CN Railway
C) a bond issued by Manitoba
D) a bond issued by a new clothing chain

Question 41

Which of the following terms refers to the profits NOT paid out to shareholders?

A) retained earnings
B) dividends
C) revenue
D) costs

Question 42

Queen City Sausage Ltd. stock is selling at $40 per share. It has retained earnings of $1.50 per share, and dividends of $0.50 per share. What is the price/earnings ratio?

A) 0.06
B) 16
C) 20
D) 100

Question 43

What does a low P/E for a stock indicate?

A) People may expect earnings to fall in the future perhaps because the firm will be faced with increased competition.
B) Its dividends have been low so that no one is willing to pay very much for it.
C) The corporation is possibly overvalued.
D) It is always a good time for buying the company's stock.

Question 44

What is a dividend yield?

A) It is the dividend as a percentage of the stock price.
B) It is the stock price as a percentage of the dividend.
C) It is the dividend as a percentage of the retained earnings per share.
D) It is the retained earnings per share as a percentage of the dividend.

Question 45

Which statement best defines retained earnings?

A) They are the amounts paid out as dividends.
B) They are the amount of revenues a corporation receives for the sale of its products, minus its costs of production, as measured by its accountants.
C) They are interest paid to creditors.
D) They are profits not paid out to shareholders.

Question 46

Stock in Synergistic Corporation is selling at $20 per share. It had earnings of $4 a share and a dividend yield of 4 percent. What is the dividend?

A) $0.04
B) $0.20
C) $1.00
D) $120

Question 47

Buskins Corporation has issued 2 million shares. Its earnings were $10 million of which it retained $4 million. What was the dividend per share?

A) $2
B) $3
C) $5
D) $8

Question 48

What is the single most important piece of information about a stock?

A) price/earnings ratio
B) dividend
C) volume
D) price

Question 49

What has the typical price/earnings ratio been historically?

A) about 5
B) about 10
C) about 15
D) about 20

Question 50

What is the "volume" as reported in stock tables?

A) the number of shares traded
B) the percentage of shares outstanding traded
C) the number of shares traded times the price they sold at
D) the number of shares of a company traded divided by the shares of all companies traded

Question 51

Which of the following is a Canadian stock market index?

A) S&P 100
B) S&P 500
C) S&P/TSX
D) S&P/CAD

Question 52

What does a high price/earnings ratio indicate?

A) Either the stock is undervalued or people have become more optimistic about the corporation's prospects.
B) Either the stock is overvalued or people have become more optimistic about the corporation's prospects.
C) Either the stock is overvalued or people have become less optimistic about the corporation's prospects.
D) Either the stock is undervalued or people have become less optimistic about the corporation's prospects.

Question 53

Mount Adams Jazz Corporation has a price of $50, a dividend of $0.50, and retained earnings of $1.00 per share. What is the dividend yield on this stock?

A) 0.5 percent
B) 1 percent
C) 1 percent
D) 3.2 percent

Question 54

Table 8-1

Refer to Table 8-1. What were company D's earnings per share?

A) $0.61
B) $1.38
C) $1.64
D) $38

Question 55

Which term refers to the profits paid out to shareholders?

A) retained earnings
B) dividends
C) interest
D) shares

Question 56

Which term refers to the amount of revenue a firm receives for the sale of its products, minus its costs of production, as measured by its accountants?

A) earnings
B) retained earnings
C) economic, or real, profit
D) dividends

Question 57

Which statement best defines a corporation's earnings?

A) They are the amount of revenue the corporation receives for the sale of its products, minus its costs of production, as measured by its accountants, minus the dividends paid out.
B) They are the amount of revenue the corporation receives for the sale of its products, minus its direct and indirect costs of production, as measured by its economists, minus the dividends paid out.
C) They are the amount of revenue the corporation receives for the sale of its products, minus its costs of production, as measured by its accountants.
D) They are the amount of revenue the corporation receives for the sale of its products, minus its direct and indirect costs of production, as measured by its economists.

Question 58

Suppose Sarah Lee Corporation stock has a P/E ratio of 10. Which statement best describes this P/E ratio?

A) The P/E ratio is low, indicating that buyers may expect earnings to rise.
B) The P/E ratio is low, indicating that buyers may expect earnings to fall.
C) The P/E ratio is high, indicating that buyers may expect earnings to rise.
D) The P/E ratio is high, indicating that buyers may expect earnings to fall.

Question 59

PacknCamp Corporation has a price of $40, has issued 2 million shares, has increased its cumulated retained earnings by $2 million, and has a dividend yield of 2 percent. What is the price/earnings ratio of PacknCamp?

A) 40, which is high compared to historical standards of the market
B) 40, which is low compared to historical standards of the market
C) 20, which is low compared to historical standards of the market
D) 20, which is high compared to historical standards of the market

Question 60

Table 8-1

Refer to Table 8-1. In dollar terms, which company paid the highest dividend per share?

A) A
B) B
C) C
D) D

Question 61

Which statement best defines financial intermediaries?

A) They are the same as financial markets.
B) They are individuals who make a profit by buying a stock low and selling it high.
C) They are a more general name for financial assets, such as stocks, bonds, and chequing accounts.
D) They are financial institutions through which savers can indirectly provide funds to borrowers.

Question 62

What is a medium of exchange?

A) a stock exchange company
B) an item that makes transactions easier
C) a financial market
D) a stock or bond

Question 63

Refer to Table 8-2. Which company had the highest earnings per share?

A) P
B) Q
C) R
D) S

Question 64

Which statement best defines a mutual fund?

A) It is a financial market where small firms agree to sell stocks and bonds to raise funds.
B) It is a fund set aside by a local government to lend to small firms who want to invest in projects that are beneficial to the firm and community.
C) It is an institution that sells stocks and bonds on behalf of small and less known firms who would otherwise have to pay high interest to obtain credit.
D) It is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks and bonds.

Question 65

Which statement best describes the pattern in the returns of index funds?

A) They typically have about the same rate of return as more actively managed funds.
B) They typically have lower rates of return than more actively managed funds.
C) There is no pattern; they may have either higher or lower rates than more actively managed funds.
D) They typically have higher rates of return than more actively managed funds.

Question 66

What happens when a person buys shares in a mutual fund?

A) The person indirectly becomes owner or creditor to many companies.
B) The person lends to and borrows from the other shareholders in the mutual fund.
C) The person receives a fixed interest as long as he or she does not sell the shares.
D) The person lends money to the federal government.

Question 67

Refer to Table 8-2. Which company had the lowest earnings per share?

A) P
B) Q
C) R
D) S

Question 68

Which of the following identities shows that GDP is both total income and total expenditure?

A) GDP = Y
B) Y = PI + DI + NX
C) GDP = GNP - NX
D) Y = C + I + G + NX

Question 69

Refer to Table 8-2. Which company had the lowest dollar dividend?

A) P
B) Q
C) R
D) S

Question 70

As a money management fee, how much do mutual funds usually charge their customers?

A) between 0.5 and 3.0 percent of assets each year
B) between 1.5 and 3.0 percent of assets each year
C) nothing, because they receive commissions from the firms whose stock they buy
D) a flat fee of about $50

Question 71

What makes Y = C + I + G + NX an identity?

A) Each symbol identifies a variable.
B) The right-hand and left-hand sides are equal.
C) The equality holds due to the way the variables are defined.
D) This relationship is identical for all economies.

Question 72

Table 8-1

Refer to Table 8-1. Assume that the closing price was also the average price at which each stock transaction took place. What was the total dollar volume of company B's stock traded that day?

A) $121,712
B) $12,171,200
C) $121,712,000
D) $1,217,120,000

Question 73

Which statement best characterizes the lending strategy of banks?

A) Banks make most their profits from account fees.
B) Banks lend mostly to large and familiar companies rather than smaller local firms.
C) Banks charge borrowers a slightly lower interest rate than they pay to depositors.
D) Banks lend money both for investment and consumption purposes.

Question 74

Which of the following is a financial intermediary?

A) a mutual fund
B) the stock market
C) a Canadian government bond
D) a stock exchange company

Question 75

What is a secondary advantage of mutual funds?

A) They allow an investor to avoid investment charges and fees.
B) They give ordinary people access to loanable funds for investing.
C) They usually outperform stock market indexes.
D) They give ordinary people access to the skills of professional money managers.

Question 76

Refer to Table 8-2. Which company had the highest dollar dividend?

A) P
B) Q
C) R
D) S

Question 77

Which statement best defines a closed economy?

A) It does not trade with other economies.
B) It does not have free markets.
C) It does not allow immigration.
D) It does not have freedom of entry and exit.

Question 78

What is the primary advantage of mutual funds?

A) They usually make a return that "beats the market."
B) They allow people with small amounts of money to diversify.
C) They provide customers with a medium of exchange.
D) They allow investing in the venture capital industry.

Question 79

Which equation will always represent GDP in an open economy?

A) S = I - G
B) I = Y - C + G
C) Y = C + I + G
D) Y = C + I + G + NX

Question 80

Which of the following is both a store of value and a common medium of exchange?

A) corporate bonds
B) mutual funds
C) chequing account balances
D) a pension plan