Deck 1: The Financial Environment

Question 1

An effective financial system is a complex mix of government and policy makers,a monetary system,financial institutions,and financial markets that interact to expedite the flow of financial capital from savings into investment.

Answer 1

True

Question 2

The six principles of finance include (1)Money has a time value,(2)Higher returns are expected for taking on more risk,(3)Diversification of investments can reduce risk,(4)Financial markets are efficient in pricing securities,(5)Manager and stockholder objectives may differ,and (6)Reputation matters.

Answer 2

True

Question 3

The primary goal of the financial manager in a profit-seeking organization is to maximize the owners' wealth.

Answer 3

True

Question 4

The principle of finance that "money has a time value" implies Money in hand today is worth less than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time.

Question 5

One of the most significant functions of the financial system is the creation of money,which serves as a medium of exchange.

Question 6

Business finance is the study of financial planning,asset management and fund raising by businesses and financial institutions.

Question 7

Secondary securities markets are markets where the transfer of existing debt and equity securities between investors occurs.

Question 8

The secondary securities markets are involved in creating and issuing new securities,mortgages,and other claims to wealth.

Question 9

Money markets are markets where equity securities and debt securities with maturities of greater than one year are traded.

Question 10

Primary securities markets are markets where the transfer of existing debt and equity securities between investors occurs.

Question 11

Finance at the macro level is the study of financial institutions and financial markets and how they operate within the financial system in both the U.S.and global economies.

Question 12

Personal finance is the study of how individuals prepare for financial emergencies,protect against premature death and property losses,and accumulate wealth.

Question 13

Finance is the study of how individuals,institutions,and businesses acquire,spend and manage money and other financial resources.

Question 14

Entrepreneurial finance is the study of how individuals prepare for financial emergencies,protect against premature death and property losses,and accumulate wealth.

Question 15

The principle of finance that "money has a time value" implies Money in hand today is worth more than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time.

Question 16

Personal finance is the study of how growth-driven performance-focused,early-stage firms raise financial capital and manage operations and assets.

Question 17

The six principles of finance include (1)Money has a time value,(2)Higher returns are expected for taking on less risk,(3)Diversification of investments can increase risk,(4)Financial markets are inefficient in pricing securities,(5)Manager and stockholder objectives may differ,and (6)Reputation matters.

Question 18

Money markets are the markets where generally short-term assets are traded.

Question 19

The principle of finance that "higher returns are expected for taking on less risk" implies that rational investors would choose a risky investment only if they feel the expected return is high enough to justify the greater risk.

Question 20

Capital markets are markets where equity securities and debt securities with maturities of greater than one year are traded.

Question 21

An adjustable-rate mortgage (ARM)has an interest rate that is usually adjusted annually to reflect changes in Treasury bill rates (or other benchmark);ARMs typically have variable interest rates for one to five years with a provision to switch to a fixed-rate over the remaining life of the ARM.

Question 22

An adjustable-rate mortgage (ARM)has an interest rate that is usually adjusted every five years to reflect changes in Treasury bill rates (or other benchmark);ARMs typically have variable interest rates over the 30 year life of the loan.

Question 23

A credit rating indicates the expected likelihood that a borrower will miss interest or principal payments and possibly default on the debt obligation in the form of a loan,mortgage,or bond.

Question 24

Securitization is the process of pooling and packaging mortgage loans into debt securities.

Question 25

The principle of finance that " higher returns are expected for taking on less risk " implies that rational investors would choose only safe investment because they generally do not feel that a higher return enough to justify taking greater risk.

Question 26

The principle of finance that "financial markets are inefficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available,prices quickly change to reflect that information.

Question 27

A credit score is a number that indicates the creditworthiness or likelihood that a borrower will make loan payments when due

Question 28

The principle of finance that "reputation sometimes matters" implies that businesses do not necessarily require the trust and confidence of their customers,employees,and owners,as well as the community and society within which they operate,to be successful.

Question 29

The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may suffer as a result of manager objectives.

Question 30

The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available,prices quickly change to reflect that information.

Question 31

While the financial press chooses to highlight examples of unethical behavior,most individuals exhibit sound ethical behavior in their personal and business dealings and practices.

Question 32

A mortgage-back security is an investment created by using a mortgage as collateral for a loan.

Question 33

The principle of finance that "reputation matters" implies that for institutions or businesses to be successful,they must have the trust and confidence of their customers,employees,and owners,as well as the community and society within which they operate.

Question 34

The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may be enhanced as a result of manager objectives that differ from their own.

Question 35

A mortgage-back security is an investment created by using a house as collateral for a loan.

Question 36

A mortgage-back security is a debt security created by pooling together a group of mortgage loans whose periodic payments belong to the holders of the security.

Question 37

During the past couple of decades,generally high fixed-rate mortgage loan interest rates and the desire to extend housing ownership to more individuals in the U.S. ,the use of adjustable-rate mortgages grew in usage.

Question 38

During the past couple of decades,generally low fixed-rate mortgage loan interest rates and the desire to extend housing ownership to more individuals in the U.S. ,the use of adjustable-rate mortgages fell.

Question 39

Securitization is the process of securing a mortgage through the purchase of insurance.

Question 40

Credit ratings are prepared by government organizations on individuals,financial institutions,business firms,and government entities.

Question 41

The Toxic Real Asset Problem (TRAP),which was passed as part of the Economic Stabilization Act of 1978 enabled the U.S.Treasury to purchase up to $700 billion of troubled assets held by financial institutions.

Question 42

Finance is:

A)the study of how individuals,institutions,governments,and businesses acquire,spend,and manage money and other financial assets
B)the study of how businesses acquire,spend,and manage money and other financial assets
C)the study of how governments,and businesses acquire,spend,and manage money and other financial assets
D)none of the above

Question 43

An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds among investors,businesses,and governments is called:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 44

A sub-prime mortgage is a home loan made to a borrower with a relatively high credit score indicating the likelihood that loan payments might be missed when due.

Question 45

A credit score measures the number of times a debtor has paid on time.

Question 46

An effective financial system must have:

A)several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies
B)an efficient monetary system for creating and transferring money
C)financial markets that facilitate the transfer of financial assets amongst individuals,institutions,and businesses
D)all of the above

Question 47

A prime mortgage is a home loan to a borrower with relatively high credit worthiness indicating a relatively high likelihood that mortgage payments will be made when due;scores above 900 reflect the highest credit quality classification.

Question 48

The deregulation of financial institutions and lax oversight by government regulatory agencies and private debt rating agencies contributed to the severity of the 2007-2009 financial crisis.

Question 49

The Troubled Asset Relief Program (TARP),which was passed as part of the Economic Stabilization Act of 1978 enabled the U.S.Treasury to purchase up to $700 billion of troubled assets held by financial institutions.

Question 50

An area of finance that involves the sale or marketing of securities,the analysis of securities,and the management of investment risk through portfolio diversification is referred to as:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 51

Overly strict regulation of financial institutions and tight oversight by government regulatory agencies and private debt rating agencies contributed to the severity of the 2007-2009 financial crisis.

Question 52

The primary goal of the financial manager of a profit-seeking organization is to:

A)maximize market share
B)maximize the owners' wealth
C)increase sales and profit
D)have healthy cash flow

Question 53

A sub-prime mortgage is a home loan made to a borrower with a relatively low credit score indicating the likelihood that loan payments might be missed when due.

Question 54

Crucial elements of the financial environment and well-developed financial system include:

A)financial institutions
B)financial markets
C)investment and financial management
D)all of the above

Question 55

A prime mortgage is a home loan to a borrower with relatively high credit worthiness indicating a relatively high likelihood that mortgage payments will be made when due;scores above 300 reflect the highest credit quality classification.

Question 56

The Economic Stabilization Act of 2008 was passed in response to the financial crisis.

Question 57

The issuing of new securities,mortgages,and other claims to wealth takes place in the:

A)secondary market
B)money market
C)primary market
D)securities market

Question 58

The financial environment:

A)encompasses the financial markets and global interactions that contribute to an efficiently operating economy.
B)encompasses the financial institutions and financial markets that contribute to an efficiently operating economy.
C)encompasses the financial system,financial institutions,financial markets,business firms,individuals,and global interactions that contribute to an efficiently operating economy.
D)none of the above.

Question 59

Finance has its origins in:

A)economics and statistics
B)accounting and sociology
C)accounting and economics
D)psychology and mathematics

Question 60

Financial markets encourage investment by:

A)providing capital at lower rates than provided by banks
B)providing electronic execution of transactions which are faster and cheaper than other methods
C)providing the means for savers to easily and quickly convert financial assets into cash when needed
D)none of the above

Question 61

_______________ is the study of how growth-driven,performance-focused,early-stage (from development through early rapid growth)firms raise financial capital and manage their operations and assets.

A)Personal finance
B)Corporate finance
C)Entrepreneurial finance
D)Investment banking
E)none of the above

Question 62

An area of finance that involves financial planning,asset management and fund-raising decisions to enhance the value of businesses is called:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 63

To study finance at the micro level is to study of all but which of the following?

A)fund raising for business firms
B)financial institutions
C)asset management
D)financial planning

Question 64

The goal of the financial manager in a profit-seeking organization is to maximize:

A)the value of perquisites.
B)the owners' wealth.
C)the firm's profits
D)the firm's earnings
E)none of the above

Question 65

Which of the following statements is most correct?

A)Capital markets include short-term and long-term debt securities such as Treasury bills,notes,and bonds.
B)Money market instruments include commercial paper,federal funds,repurchase agreements,and Treasury notes.
C)Real estate mortgages are money market instruments.
D)Federal agencies,and state and local governments,generally issue longer-term financial claims which trade in the capital market.

Question 66

Which of the following statements most correctly describes the process of capital formation?

A)In a highly developed economy,capital formation takes place directly.
B)Capital formation takes place whenever resources are used to produce building,machinery,and other equipment to be used in the production of goods for consumer use.
C)The direct process of capital formation can work only if the proper legal instruments and financial intermediaries exist.
D)All of the above statements are correct.

Question 67

____________________ in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services.

A)Financial management
B)Financial economics
C)Investment management
D)Asset allocation
E)none of the above

Question 68

________________ involves making decisions relating to issuing and investing in stocks and bonds.

A)Financial economics
B)Financial management
C)Investment management
D)Asset allocation
E)none of the above

Question 69

The primary securities markets are

A)the markets for previously issued securities such as the New York Stock Exchange
B)the markets where financial assets such as stocks and bonds are initially issued
C)the three most important financial markets in any economy
D)the markets for stocks and bonds only

Question 70

_________________________________________ are crucial elements of the financial environment and well-developed financial systems.

A)Businesses and the federal government
B)International organizations such as the World Bank and International Monetary Fund
C)Well-developed barter systems
D)Financial institutions,financial markets,and investment and financial management

Question 71

Finance has its origins in:

A)economics and statistics
B)accounting and mathematics
C)management and operations
D)economics and accounting

Question 72

An area of finance that involves the study of organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals,businesses,and governments that seek to spend or invest the funds in physical assets (inventories,buildings,and equipment)is called:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 73

The two themes woven throughout this text include topics relating to ________________________________

A)personal and corporate financial planning
B)corporate finance and small business practice
C)marginal cost and marginal benefit
D)small business practice and personal financial planning

Question 74

Successful businesses typically progress through a series of life-cycle stages-from the idea stage to exiting the business;these five stages include the:

A)development stage,startup stage,survival stage,rapid growth stage,and maturity stage.
B)idea stage,design stage,operating stage,rebuilding stage,and decline stage
C)development stage,operating stage,rebuilding stage,rapid growth stage,and maturity stage
D)idea stage,startup stage,rapid growth stage,survival stage,and decline stage

Question 75

___________________ are intermediaries,such as banks,insurance companies,and investment companies that engage in financial activities to aid the flow of funds from savers to borrowers or investors.

A)Financial Institutions
B)Financial market organizations
C)Federal agencies
D)International financial organizations
E)none of the above

Question 76

An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called:

A)financial management
B)investments
C)financial institutions
D)financial markets
E)none of the above

Question 77

____________________ provide the record-keeping mechanism for showing ownership of the financial instruments used in the flow of financial funds between savers and borrowers and record revenues,expenses,and profitability of organizations that produce and exchange goods and services.

A)Financial Managers
B)Accountants
C)Operations Managers
D)Statisticians
E)none of the above

Question 78

Maximizing _____________________ is accomplished through effective financial planning and analysis,asset management,and the acquisition of financial capital.

A)the value of perquisites.
B)the owners' wealth.
C)the firm's profits
D)the firm's earnings
E)none of the above

Question 79

Economists use a ___________________ framework to explain how the prices and quantities of goods and services are determined in a free-market economic system.

A)opportunity
B)marginal cost
C)supply-and-demand
D)anti-monopoly
E)none of the above

Question 80

The ______________ is a term used to describe the financial system,institutions,markets,businesses,individuals,and global interactions that help the economy operate efficiently

A)financial environment
B)regulatory environment
C)international environment
D)operating environment
E)none of the above