Deck 5: The Financial System, Corporate Governance, and Interest

Question 1

Money markets deal in securities having maturities of ____; capital market securities have maturities ____.

A) less than 18 months, greater than 18 months
B) one year or less, greater than one year
C) less than 9 months, greater than 9 months
D) less than 6 months, greater than 6 months

Answer 1

B

Question 2

The principal differences between capital markets and money markets are that:

A) money and capital markets deal in the same securities, the only difference is term.
B) both markets deal in short-term debt securities; however, capital markets deal also in equity securities which have an indefinite term.
C) money markets deal only in short-term government debt.
D) capital markets deal in long-term debt and equity securities, while money markets deal only in short-term debt.

Answer 2

D

Question 3

Typically debt financing can be either short- or long-term, whereas equity financing is almost always long-term, the word "term" meaning:

A) the time between a security's issue and its retirement.
B) the duration specified on all debt and equity securities.
C) the amount of time necessary to realize the required return on the investment.
D) All of the above

Answer 3

A

Question 4

____ markets deal in long-term securities having maturities greater than one year.

A) Credit
B) Money
C) Super
D) Capital

Question 5

____ markets deal in short-term securities having maturities of one year or less.

A) Credit
B) Money
C) Capital
D) a and b only

Question 6

Financial markets have the basic function of:

A) providing liquidity.
B) providing signaling and information.
C) matching savers and users of funds.
D) All the above

Question 7

Which financial institution is not involved in the indirect method of financial intermediation?

A) Banks
B) Investment bankers
C) Mutual funds
D) Pension funds

Question 8

In any economy as a whole, the level of saving for a given period of time must ____ the level of investing.

A) be greater than
B) be unrelated to
C) equal
D) be less than

Question 9

Financial markets include:

A) capital markets.
B) money markets.
C) primary markets.
D) secondary markets.
E) All of the above

Question 10

The sale of a 10-year bond by one investor to another investor would be considered a transaction that takes place in the:

A) primary capital market.
B) primary money market.
C) secondary capital market.
D) secondary money market.
E) None of the above

Question 11

Financial intermediaries are associated with:

A) investment banks.
B) direct transfers.
C) indirect transfers.
D) only money market transactions.
E) b and c

Question 12

Which of the following is not considered to be an institutional investor?

A) Governments
B) Pension funds
C) Insurance companies
D) Mutual funds

Question 13

In the ____ market, the firm receives the proceeds from the sale of its securities.

A) over-the-counter
B) secondary
C) fully integrated
D) none of the above

Question 14

Financial intermediaries include:

A) stock brokers.
B) banks.
C) securities dealers.
D) All of the above

Question 15

Financial intermediaries:

A) make indirect transfers from investors to firms.
B) pass securities through to investors.
C) include stockbrokers.
D) facilitate direct transfers from investors to firms.

Question 16

Which of the following best describes the concept of maturity matching?

A) Companies use funds from selling stocks to fund long-term projects and funds from selling bonds to fund short-term projects.
B) Companies try to match the term of a project with the maturity of the financing that pays for it.
C) Companies use funds from selling bonds to fund long-term projects and funds from selling stocks to fund short-term projects.
D) Companies always use bonds to finance both short- and long-term projects because stocks have no maturity and therefore cannot be matched to the length of projects.
E) None of the above describes the concept of maturity matching.

Question 17

The term of an investment can be described as either:

A) long or short, long-term meaning any duration longer than five years.
B) intermediate or short, intermediate being any duration longer than one year.
C) long, intermediate, or short, intermediate being any duration longer than one year but shorter than five years.
D) None of the above

Question 18

The main purpose of an economy's financial system is to facilitate the transfer of funds from:

A) financial middlemen to financial intermediaries.
B) consumer savers to business investors.
C) primary claimholders to secondary claimholders.
D) lenders to financial intermediaries.

Question 19

The primary function of financial markets is to:

A) ensure that interest and dividend payments are made to stockholders and bondholders.
B) facilitate the payment for goods and services between producers and consumers.
C) facilitate the movement of cash from savers to companies that need money.
D) financial markets perform all of these functions.

Question 20

Which of the following is/are a primary market transaction(s)?

A) A company issues new stock.
B) A company issues new bonds.
C) An investor asks his broker to purchase 1,000 shares of Microsoft common stock from another stockholder.
D) All of the above
E) a. and b.

Question 21

A five-year corporate bond would initially be issued in which market?

A) Secondary market
B) Primary market
C) Money market
D) None of the above

Question 22

Which of the following is a characteristic(s) of initial public offerings (IPOs)?

A) Very stable
B) General public can get involved right away
C) Institutions are the largest investors in IPOs
D) Secondary market transaction

Question 23

Which of the following are not financial intermediaries?

A) Bank
B) Insurance company
C) Securities broker
D) All are financial intermediaries

Question 24

A project's duration should match the term of the financing that supports it. This is called the ____ principle.

A) maturity matching
B) term matching
C) default matching
D) repayment matching

Question 25

Money markets are markets for:

A) foreign currency exchange.
B) consumer automobile loans.
C) corporate stocks.
D) long-term bonds.
E) short-term debt securities.

Question 26

Investment banks:

A) help companies issue new securities.
B) are part of the direct transfer of funds from investors to companies.
C) generally line up buyers for new securities before they're issued.
D) All of the above

Question 27

Which is not an example of a money market security?

A) A 30 day treasury bill
B) A one year treasury bill
C) Home mortgages
D) 30 day loans by large companies
E) None of the above

Question 28

Which of the following is a primary market transaction in the capital market?

A) Purchase of a new issue of IBM
B) Purchase of an existing issue of Intel
C) Purchase of a new 30-day treasury bill
D) Both a & b

Question 29

Firms raise capital by issuing various types of ____ such as ____.

A) securities, stocks and bonds
B) consumer products, goods and services
C) securities, interest and dividends
D) taxes, bonds and savings accounts
E) none of the above

Question 30

A bank issuing a Certificate of Deposit (CD) to a depositor and then lending the money deposited to a business borrower is an example of a(n):

A) direct transfer from a business to an investor.
B) direct transfer through an investment bank.
C) direct transfer through a financial intermediary.
D) indirect transfer through an investment bank.
E) indirect transfer through a financial intermediary.

Question 31

Which of the following would NOT be considered a capital market instrument?

A) Common Stock
B) Preferred Stock
C) Treasury Bond
D) Treasury Bill

Question 32

Which is not an example of a capital market security?

A) Common stock
B) A 30 day treasury bill
C) Corporate bonds
D) Preferred stock
E) None of the above

Question 33

A red herring is:

A) very volatile and risky.
B) an unapproved prospectus.
C) discloses information approved by the SEC.
D) is given to an investor when a security is sold for the first time.

Question 34

In order to "go public," a company must take all of the following actions except:

A) engage an investment bank to determine if a market exists for the company's stock.
B) prepare a prospectus.
C) prepare a "red herring" and file it with the Commerce Department.
D) receive approval of the prospectus from the SEC.
E) offer stock to the public in an IPO.

Question 35

Which of the following is not a short-term debt instrument?

A) Commercial paper
B) Common stock
C) Money market securities
D) Treasury bills

Question 36

An investment banker is generally thought to be qualified to advise a corporation on a variety of matters, including all the following except:

A) long range financial planning.
B) the marketing of securities.
C) the timing of securities.
D) the firm's new product marketing decisions.

Question 37

The over-the-counter market differs from the New York Stock Exchange in that it:

A) trades unlisted securities.
B) is a physical trading place.
C) uses the NASDAQ system.
D) Both a & c
E) All of the above

Question 38

A sale of stock between two investors is a ____ market transaction.

A) primary
B) secondary
C) money
D) independent

Question 39

A thirty-year bond would be initially issued in which market(s)?

A) Capital market
B) Primary market
C) Secondary market
D) Both a and b

Question 40

Which financial intermediary is not involved in the indirect method of financial intermediation?

A) Investment banks
B) Insurance companies
C) Mutual funds
D) Pension funds

Question 41

Interest is defined as the:

A) return on all investments.
B) return on debt investments.
C) return on equity investments.
D) the one year return on investments in stocks or bonds.

Question 42

The Securities and Exchange Commission is responsible for:

A) approving new issues of corporate stock.
B) supervising the trading of securities.
C) the enforcement of insider trading laws.
D) All of the above
E) a and b

Question 43

The individual on the exchange floor who supervises trading in a stock and ensures that the market remains orderly is called a(n):

A) institutional investor.
B) floor broker.
C) security analyst.
D) designated market maker.

Question 44

Based on the concept of supply and demand driving changes in the cost of money (interest rates), which of the following changes in the economy will tend to increase interest rates?

A) Investors have decided to save a higher percentage of their income.
B) Business in general is finding fewer opportunities to expand their operations.
C) Investors are insecure about the economy.
D) Both b and c will tend to increase interest rates.
E) All of the above will tend to increase interest rates.

Question 45

The preliminary prospectus is commonly known as a(n):

A) indenture.
B) tombstone.
C) registration statement.
D) red herring.
E) debenture.

Question 46

The over-the-counter market differs from the New York Stock Exchange in that:

A) the stocks, although publicly traded, are not listed on an exchange.
B) only relatively small companies are traded because larger companies are required to be traded on exchanges.
C) NASDAQ quotations apply only to smaller, less capitalized firms.
D) All of the above

Question 47

The date on which a bond's principal is paid off is its:

A) call date.
B) maturity date.
C) redemption date.
D) All of the above

Question 48

Stock and bond markets:

A) are independent of each other as to prevailing rates of return.
B) offer identical returns in order to compete for the investors' dollars.
C) would offer identical returns if the respective investments had identical terms to maturity.
D) offer returns that tend to move up and down together although equity returns are higher because stocks are riskier than bonds.

Question 49

The initial public offerings, or IPOs:

A) do not require the SEC's final approval of the prospectus.
B) always result in immediate wealth for the executives of the company who have divested most of their ownership through the offering.
C) represent a very risky subdivision of the general stock market.
D) All of the above

Question 50

Which of the following constitute the interest rate model?

A) k = risk free rate + inflation adjustment + default risk premium + liquidity risk premium
B) k = basic rate + default risk premium + liquidity risk premium + maturity risk premium + government risk premium
C) k = pure rate + inflation adjustment + default risk premium + liquidity risk premium + maturity risk premium
D) None of the above

Question 51

The stock market is:

A) an interconnected network of brokers and exchanges licensed by the government to assist investors in trading securities.
B) located in a large building in New York City called the stock exchange.
C) an exchange that allows people to trade stock certificates in person.
D) very much like a department store in that stocks from different industries are traded.

Question 52

Which organization typically helps a company market new securities?

A) Commercial bank
B) Insurance company
C) Investment bank
D) Mutual fund

Question 53

In an efficient market:

A) new information is quickly disseminated.
B) an investor cannot consistently beat the market.
C) all available information is reflected in stock price.
D) all of the above.

Question 54

The term "red herring" relates to the:

A) SEC's approval of a stock offering from a company whose future is questionable.
B) circulation of the company's prospectus prior to approval by the SEC.
C) document distributed to potential investors that is stamped "incomplete information."
D) SEC's conditional approval of the prospectus.

Question 55

Established through the Securities Exchange Act of 1934, the Securities and Exchange Commission is charged with the responsibility to:

A) oversee financial market activities.
B) promote fairness in stock dealings in public and private companies.
C) enforce the laws preventing certain manipulative and deceptive behavior.
D) a and c

Question 56

Which of the following is not true concerning privately held companies?

A) Generally does not have a large number of shareholders.
B) Cannot make sales solicitations across state lines.
C) Sales are severely restricted by federal regulation.
D) Stock cannot be sold to anyone other than current stockholders.

Question 57

If a stock has a dividend yield of 1.50%, and pays an annual dividend of $.80, its price is:

A) $11.25.
B) $21.00.
C) $53.33.
D) None of the above.

Question 58

Non-amortized debt requires:

A) both interest and principal to be paid annually.
B) principal to be repaid annually and interest to be paid semiannually.
C) interest to be paid regularly and principal to be repaid at maturity.
D) None of the above

Question 59

Which of the following is an electronic exchange and does not have a physical location?

A) American Stock Exchange
B) NASDAQ
C) New York Stock Exchange
D) Money market

Question 60

The document which details the issuer's finances and must be provided to each potential buyer of the security is called the:

A) indenture.
B) tombstone.
C) registration statement.
D) prospectus.
E) All of the above

Question 61

Investors demand higher returns on stock investments when:

A) inflationary pressures are low.
B) interest rates increase offering stockholders attractive alternative investment opportunities.
C) the pure rate of interest changes to compensate for an economic slowdown.
D) None of the above

Question 62

The interest rates we observe in the economy differ from the risk-free rate because of:

A) the real rate of interest.
B) diversification.
C) risk premiums.
D) all the above

Question 63

The increased volatility of longer term bonds in response to interest rate movements is reflected in the:

A) pure interest rate.
B) default risk premium.
C) liquidity risk premium.
D) maturity risk premium.

Question 64

The following yields on 20-year bonds were quoted recently: The difference in yields is due primarily to:

A) maturity risk premium.
B) default risk premium.
C) seniority risk premium.
D) financial risk premium.

Question 65

The "yield curve":

A) always has a positive slope.
B) shows the relationship between default risk and the return on securities.
C) has constant slope and height over time.
D) a and b
E) None of the above

Question 66

The interest rates we observe on financial instruments are based on the following components:

A) the real risk-free rate.
B) inflationary expectations.
C) risk premiums.
D) All the above
E) None of the above

Question 67

Economists forecast the following inflation rates for the next four years: Under these conditions the ____ theory says the yield curve should slope ____ to the right.

A) liquidity preference, downward
B) market segmentation, upward
C) market segmentation, downward
D) expectations, upward

Question 68

Which of the following definitions does not describe the risk-free rate?

A) The interest rate for a stable, prosperous company
B) The pure rate plus an inflation premium
C) The rate on a 90-day treasury bill
D) The conceptual floor for the structure of interest rates
E) All of the above describe the risk-free rate.

Question 69

The term structure of interest rates or yield curve is the pattern of interest rate yields for securities that differ only in:

A) default risk.
B) liquidity premiums.
C) the yield to maturity.
D) the length of time to maturity.

Question 70

Which of the following risk premiums apply to both corporate securities and federal government securities?

A) Default risk only
B) Liquidity risk only
C) Maturity risk only
D) Both default risk and liquidity risk
E) Both liquidity risk and maturity risk

Question 71

Which of the following is not a component of the interest rate model?

A) Default risk premium
B) The activities of the Federal Reserve Bank
C) Pure interest rate
D) Maturity risk premium

Question 72

The maturity risk premium reflects a preference by many lenders for:

A) shorter maturities.
B) reducing yields.
C) high yield securities.
D) longer maturities.

Question 73

Which of the following is not a source of risk?

A) Liquidity risk
B) Deferred consumption risk
C) Maturity risk
D) Default risk

Question 74

The nominal interest rate on a loan:

A) never equals its real interest rate.
B) exceeds the real interest rate by a default risk premium.
C) differs from the real interest rate by an inflation premium.
D) cannot by directly observed.

Question 75

The term structure of interest rates or yield curve is the pattern of interest rate yields for debt securities that are similar in all respects except for differences in:

A) tax status.
B) liquidity.
C) risk of default.
D) term or maturity.

Question 76

Which of the following arises because long-term bond prices change more with interest rate movements than short-term bond prices?

A) Liquidity risk
B) Maturity risk
C) Default risk
D) Inflation risk

Question 77

If inflation is viewed as a "sustained increase in the general level of prices," an increase in the price of a specific market basket of goods from $34.50 six months ago $35.71 today would suggest that the annual rate of inflation is:

A) 3.4%.
B) $1.21.
C) 3.5%.
D) 7.0%.

Question 78

Interest rates are set by:

A) the forces of supply and demand in the market for debt.
B) the Federal Reserve, the nation's central bank which regulates the banking industry.
C) senior banking executives on the basis of the funds banks have available to lend.
D) the president and his council of economic advisors.

Question 79

The supply of loanable funds ultimately depends on:

A) the Federal Reserve's monetary and economic policy.
B) commercial banks' inclination to lend at prevailing interest rates.
C) the time preference for consumption.
D) the opportunities available to use the funds.

Question 80

Interest rates and stock prices move:

A) randomly exhibiting no causal relationship.
B) in opposite directions.
C) up and down together.
D) None of the above