Question 1

A creditor of a corporation holds
A)bonds sold by the corporation. If the corporation experiences financial difficulties stock holders are paid before bond holders.
B)bonds sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders.
C)stocks sold by the corporation. If the corporation experiences financial difficulties stock holders are paid before bond holders.
D)stocks sold by the corporation. If the corporation experiences financial difficulties bond holders are paid before stock holders.

Accepted Answer

Bond holders have a higher priority claim on a company's assets than stockholders do, so if the corporation experiences financial difficulties, bond holders are paid before stockholders. This is because bonds are considered debt and have a fixed, contractual obligation to be repaid with interest, whereas stocks represent ownership in the company and do not have a guaranteed return.

Question 2

A bond buyer is a
A)saver. Long term bonds have less risk than short term bonds.
B)saver. Long term bonds have more risk than short term bonds.
C)borrower. Long term bonds have less risk than short term bonds.
D)borrower. Long term bonds have more risk than short term bonds.

Accepted Answer

A bond buyer is essentially lending money, which makes them a saver. Long-term bonds typically have more risk than short-term bonds due to the increased uncertainty over a longer period, including interest rate changes and the issuer's creditworthiness.

Question 3

Which of the following statements is correct?
A)NASDAQ is an important stock exchange in the United States.
B)The Standard & Poor's 500 Index and the New York Stock Exchange are two examples of stock indexes.
C)The most significant influence on the demand for a corporation's stock is the number of shares of the stock that the corporation has issued.
D)All of the above are correct.

Accepted Answer

The answer of Which of the following statements is correct?
A)NASDAQ...

Question 4

If a firm wants to borrow it can
A)supply bonds by selling them.
B)supply bonds by buying them.
C)demand bonds by selling them.
D)demand bonds by buying them.

Accepted Answer

When a firm wants to borrow, it can supply bonds by selling them to investors. This allows the firm to receive funds from investors who purchase the bonds, which the firm can then use for its borrowing needs.

Question 5

Which advantage(s) do mutual funds claim to provide?
A)diversification and access to the skills of professional money managers
B)diversification but not access to the skills of professional money managers
C)access to the skills of professional money managers but not diversification
D)neither diversification nor access to the skills of professional money managers.

Accepted Answer

Mutual funds claim to provide both diversification and access to the skills of professional money managers. Diversification allows investors to spread their investments across a variety of securities and industries, reducing risk. Professional money managers strive to achieve higher returns by carefully selecting securities and managing the fund's assets.

Question 6

Which of the following numbers is not associated with shares of a company's stock?
A)term
B)dividend
C)price
D)price-earnings ratio

Accepted Answer

"Term" is not typically associated with shares of a company's stock, whereas "dividend," "price," and "price-earnings ratio" are commonly used terms in discussing stocks.

Question 7

Who accepts all of the risk associated with a mutual fund's portfolio of stocks and/or bonds?
A)the fund's managers
B)the fund's shareholders
C)the federal government
D)the corporations that originally issued the stocks and/or bonds held by the fund

Accepted Answer

The investors who purchase shares in a mutual fund accept all of the risk associated with the fund's portfolio of stocks and/or bonds. This is because mutual funds operate as pooled investments and the shareholders collectively own the underlying assets of the fund. The fund's managers are responsible for making investment decisions and managing the portfolio, but they do not bear the risk themselves. The federal government does not accept any risk associated with mutual funds. The corporations that originally issued the stocks and/or bonds held by the fund may face risks specific to their own operations, but they do not accept the risk associated with the mutual fund's portfolio as a whole.

Question 8

Which of the following would both make the interest rate on a bond higher than otherwise?
A)the interest it pays is taxed and it is long term
B)the interest it pays is taxed and it is short term
C)the interest it pays is tax exempt and it is long term
D)the interest it pays is tax exempt and it is short term

Accepted Answer

If the interest on the bond is taxed, the effective return to the investor is reduced, making the bond less attractive and thus requiring a higher interest rate to compensate for the tax burden. Additionally, longer-term bonds are generally considered riskier investments because of the greater potential for unforeseen events to impact their value over time, which also requires a higher potential return to compensate.

Question 9

The bond market, the stock market, banks, pension funds, and insurance companies are all financial
A)systems.
B)markets.
C)institutions.
D)intermediaries.

Accepted Answer

The bond market, stock market, banks, pension funds, and insurance companies are all institutional players that provide financial services and products to consumers and businesses. They are not just markets or systems, but rather established organizations that have been created for the purpose of providing financial services. Therefore, C is the best choice.

Question 10

Which of the following involves financial intermediation?
A)a bank makes a loan
B)a household buys stock issued by a corporation
C)a foreign government purchases U.S. government bonds
D)All of the above are correct.

Accepted Answer

Financial intermediation refers to the process of channeling funds between borrowers and lenders through intermediaries such as banks. Option A involves a bank making a loan and therefore represents financial intermediation. Options B and C do not involve intermediaries and therefore do not represent financial intermediation.

Question 11

Which of the following is a certificate of indebtedness?
A)both stocks and bonds
B)stocks but not bonds
C)bonds but not stocks
D)neither stocks nor bonds

Accepted Answer

Bonds are a type of fixed-income security that represents a loan made by an investor to a borrower, typically a corporation or a governmental body. As such, bonds can be considered a certificate of indebtedness as they represent the borrower's promise to repay the loan with interest at a later date. Stocks, on the other hand, represent ownership in a company and do not involve any debt obligations.

Question 12

Banks
A)play a role in creating an asset that people can use as a medium of exchange.
B)are financial intermediaries, but mutual funds are not financial intermediaries.
C)are financial markets, as are bond markets.
D)All of the above are correct.

Accepted Answer

Banks play a crucial role in creating currency and deposits that are used as mediums of exchange in the economy. This is their primary function and distinguishes them from other financial intermediaries like mutual funds. While bond markets can be considered financial markets, banks are not synonymous with financial markets.

Question 13

Borrowers can (and sometimes do) default on their loans when
A)the dividend yield on their shares of stock reaches zero.
B)they convert their bonds into perpetuities.
C)they declare bankruptcy.
D)they cannot find enough buyers of their bonds to sell all the bonds they wish to sell.

Accepted Answer

When borrowers declare bankruptcy, it means they are unable to repay their debts, including the loans they may have taken. Therefore, defaulting on loans is a common consequence of declaring bankruptcy. The other options - A, B, and D - do not necessarily relate to borrowers defaulting on their loans.

Question 14

Which of the following both make the interest rate on a bond higher than otherwise?
A)the interest it pays is taxed and it was issued by a financially strong corporation
B)the interest it pays is taxed and it was issued by a financially weak corporation
C)the interest it pays is tax exempt and it was issued by a financially strong corporation
D)the interest it pays is tax exempt and it was issued by a financially weak corporation

Accepted Answer

If the interest paid by a bond is taxed and it was issued by a financially weak corporation, then the interest rate on the bond will be higher than otherwise. This is because investors will demand a higher return to compensate for the additional risk associated with investing in a financially weak corporation. Option A is incorrect because a financially strong corporation is perceived as less risky and therefore may be able to offer a lower interest rate. Options C and D are incorrect because if the interest paid by the bond is tax-exempt, then investors will be willing to accept a lower interest rate because their after-tax return is higher.

Question 15

What do we call financial institutions through which savers can indirectly provide funds to borrowers?
A)stock markets
B)financial institutions
C)financial markets
D)financial intermediaries

Accepted Answer

Financial intermediaries are institutions that act as intermediaries between savers and borrowers. They collect funds from savers (depositors) and then lend those funds to borrowers (such as individuals, businesses, or governments) in the form of loans or other financial instruments. Examples of financial intermediaries include banks, credit unions, insurance companies, and pension funds.

Question 16

Which of the following statements about mutual funds is correct?
A)A mutual fund is not a financial intermediary.
B)A disadvantage of buying mutual funds is a lack of diversification
C)People who buy shares from a mutual fund are guaranteed a minimum return.
D)On average index funds outperform managed funds.

Accepted Answer

On average, index funds have lower fees and outperform managed funds. Option A is incorrect as a mutual fund is a financial intermediary. Option B is incorrect as mutual funds provide diversification by pooling investors' money to invest in a variety of securities. Option C is incorrect as there is no guarantee of a minimum return when purchasing shares in a mutual fund.

Question 17

By definition, equity finance
A)is accomplished when units of government sell bonds.
B)is accomplished when firms sell bonds.
C)is accomplished when firms sell shares of stock.
D)involves "fair" interest rates or dividend yields.

Accepted Answer

Equity finance is the process of raising capital by selling shares of stock in a company to investors. It differs from debt finance, where a company raises capital by borrowing money and promising to pay back interest and principal. Selling shares of stock carries risks for both the company and the investor, but can also offer potential benefits, such as the ability to raise large amounts of capital without taking on debt or the potential for significant returns if the company is successful. Choice A is incorrect because it refers to government bond sales, not equity finance. Choice B is incorrect because it refers to debt finance, not equity finance. Choice D is incorrect because it doesn't accurately describe the concept of equity finance.

Question 18

Which of the following is not a characteristic of a bond?
A)its tax treatment
B)its credit risk
C)its term
D)its dividend yield

Accepted Answer

Bonds do not have a dividend yield as they are a fixed-income security with a set interest rate. The other characteristics listed, tax treatment, credit risk, and term, are all typical attributes of bonds.

Question 19

Which of the following statements is correct?
A)NASDAQ is an important stock exchange in the United States.
B)The demand for a corporation's stock is largely based on people's perception of the corporation's profitability in the future.
C)Compared to the Standard & Poor's 500 Index, the Dow Jones Industrial Average incorporates the stock prices of a much smaller number of corporations.
D)All of the above are correct.

Accepted Answer

A) NASDAQ is indeed an important stock exchange in the United States, known for its listings of technology and growth-oriented companies. 
B) The demand for a corporation's stock is largely based on people's perception of the corporation's profitability in the future, as investors buy stocks with the expectation of earning a profit through capital gains or dividends. 
C) Compared to the Standard & Poor's 500 Index, the Dow Jones Industrial Average incorporates the stock prices of a much smaller number of corporations, as it only includes 30 blue-chip companies.

Question 20

Midwestern corporation issues bonds. Southern corporation issues stock. Which corporation used equity financing?
A)both Midwestern corporation and Southern corporation
B)Midwestern corporation but not Southern corporation
C)Southern corporation but not Midwestern corporation
D)neither Midwestern nor Southern corporation

Accepted Answer

Southern corporation issued stock, which is a type of equity financing, whereas Midwestern corporation issued bonds, which is a type of debt financing.

Quiz 26: Saving, Investment, and the Financial System

A creditor of a corporation holds

A bond buyer is a

Which of the following statements is correct?

If a firm wants to borrow it can

Which advantage(s) do mutual funds claim to provide?

Which of the following numbers is not associated with shares of a company's stock?

Who accepts all of the risk associated with a mutual fund's portfolio of stocks and/or bonds?

Which of the following would both make the interest rate on a bond higher than otherwise?

The bond market, the stock market, banks, pension funds, and insurance companies are all financial

Which of the following involves financial intermediation?

Which of the following is a certificate of indebtedness?

Banks

Borrowers can (and sometimes do) default on their loans when

Which of the following both make the interest rate on a bond higher than otherwise?

What do we call financial institutions through which savers can indirectly provide funds to borrowers?

Which of the following statements about mutual funds is correct?

By definition, equity finance

Which of the following is not a characteristic of a bond?

Which of the following statements is correct?

Midwestern corporation issues bonds. Southern corporation issues stock. Which corporation used equity financing?