Question 1

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would
A)raise the demand for existing shares of the stock, causing the price to rise.
B)decrease the demand for existing shares of the stock, causing the price to fall.
C)raise the supply of the existing shares of stock, causing the price to rise.
D)raise the supply of the existing shares of stock, causing the price to fall.

Accepted Answer

The development of a way to speed up deliveries and reduce costs is likely to increase the demand for the company's services, leading to an increase in its revenue and profits. This, in turn, can lead to an increase in the demand for the company's stock as investors become more optimistic about its future prospects. The increase in demand for the stock can cause its price to rise.

Question 2

Compared to stocks, bonds offer the holder
A)lower risk and lower potential return.
B)lower risk and higher potential return.
C)higher risk and lower potential return.
D)higher risk and higher potential return.

Accepted Answer

Bonds are generally considered to be lower risk investments compared to stocks because they offer a fixed rate of return and are backed by the issuer's creditworthiness. However, the potential return on a bond is also lower compared to stocks because it is typically fixed and not subject to market fluctuations.

Question 3

In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?
A)raise the demand for existing shares of the stock, causing the price to rise
B)decrease the demand for existing shares of the stock, causing the price to fall
C)raise the supply of the existing shares of stock, causing the price to rise
D)raise the supply of the existing shares of stock, causing the price to fall

Accepted Answer

The answer of In the late summer of 2005 some...

Question 4

If a firm sells a total of 100 shares of stock, then
A)each share represents 1 percent of the firm's indebtedness.
B)each share represents ownership of 1 percent of the firm.
C)the firm is engaging in term finance.
D)All of the above are correct.

Accepted Answer

When a firm sells shares of stock, each share represents ownership of a portion of the company. In this case, 100 shares would represent 100 percent ownership, with each share representing 1 percent. Shares of stock do not represent indebtedness, and the concept of term finance does not apply in this scenario.

Question 5

If a firm sells a total of 100 shares of stock, then
A)the supply of, and demand for, those shares determine the price per share.
B)each share represents ownership of 1 percent of the firm.
C)the firm is engaging in equity finance.
D)All of the above are correct.

Accepted Answer

All of the statements are correct. The supply and demand of the shares determine the price, each share represents a percentage of ownership in the firm, and selling shares is a type of equity financing.

Question 6

Which of the following people purchased the correct asset to meet his or her 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)All of the above are correct.

Accepted Answer

Tim wanted a high return and was willing to take on risk, so purchasing stocks would be the appropriate choice. Michelle's objective was to own part of Mamma Rosa's Pizza, so purchasing a bond would not meet her objective. Jennifer wanted to buy equity in Honda, so buying bonds sold by Honda would not meet her objective either.

Question 7

Which of the following bonds has the highest interest rate?
A)a high credit risk and a short term.
B)a low credit risk and a short term.
C)a long term and a high credit risk.
D)a long term and a low credit risk.

Accepted Answer

Bonds with longer terms of maturity typically have higher interest rates. Additionally, higher credit risk also leads to higher interest rates as the issuer is seen as more likely to default on the bond. Therefore, a long term bond with a high credit risk has the highest interest rate of the options given.

Question 8

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

Accepted Answer

Bonds are a certificate of indebtedness as they represent a loan made by an investor to an entity, such as a corporation, government, or municipality, that promises to repay the loan over a predetermined period of time with interest. Stocks represent ownership in a corporation and do not involve debt.

Question 9

The prices of stock traded on exchanges are determined by
A)the Corporate Stock Administration.
B)the administrators of NASDAQ.
C)the supply of, and demand for, the stock.
D)All of the above are correct.

Accepted Answer

The prices of stock traded on exchanges are determined by the supply of, and demand for, the stock. While the Corporate Stock Administration may influence the stock's price through decisions such as the announcement of dividends or stock splits, ultimately it is the supply and demand that determines the price. The administrators of NASDAQ are responsible for overseeing the marketplace and ensuring fair and efficient trading, but they do not directly determine the prices of individual stocks.

Question 10

Suppose that the tires of a certain tire manufacturer are discovered to be defective. Other things the same, this news would cause
A)the demand for this company's stock to decrease, so the price would rise.
B)the demand for this company's stock to decrease, so the price would fall.
C)the supply of this company's stock to decrease, so the price would fall.
D)the supply of this company's stock to decrease, so the price would rise.

Accepted Answer

The news of defective tires would decrease the demand for the company's stock as investors would perceive it as a negative signal about the company's performance and potential future earnings. As a result, the price of the stock would fall due to a decrease in demand.

Question 11

All else equal, when people become more optimistic about a company's future, the
A)supply of the stock and the price will both rise.
B)supply of the stock and the price will both fall.
C)demand for the stock and the price will both rise.
D)demand for the stock and the price will both fall.

Accepted Answer

When people become more optimistic about a company's future, they will generally want to buy more stock in that company, which will increase the demand for the stock. As a result, the price of the stock will rise due to the increased demand.

Question 12

People who buy newly issued stock in a corporation such as Crate and Barrel provide
A)debt finance and so become part owners of Crate and Barrel.
B)debt finance and so become creditors of Crate and Barrel.
C)equity finance and so become part owners of Crate and Barrel.
D)equity finance and so become creditors of Crate and Barrel.

Accepted Answer

People who buy newly issued stock in a corporation are providing equity finance, meaning they are becoming part owners of the company. As part owners, they are entitled to a share of the profits and have a claim on the company's assets. On the other hand, debt finance involves lending money to the company and becoming a creditor, which is not the case for stockholders.

Question 13

Suppose the government finds a major defect in one of a company's products and demands that the product be taken off the market. We would expect that the
A)supply of existing shares of the stock and the price will both rise.
B)supply of existing shares of the stock and the price will both fall.
C)demand for existing shares of the stock and the price will both rise.
D)demand for existing shares of the stock and the price will both fall.

Accepted Answer

When a government finds a major defect in a company's product and demands its removal from the market, it typically leads to a loss of consumer confidence and potential financial losses for the company. This negative news can cause investors to sell their shares, increasing the supply of the stock in the market. However, the demand for these shares is likely to decrease as investors become wary of the company's future profitability and regulatory compliance. This decrease in demand, coupled with an increase in supply, generally leads to a fall in the stock price.

Question 14

If Huedepool Beer runs into financial difficulty, the stockholders as
A)part owners of Huedepool are paid before bondholders get paid anything at all.
B)part owners of Huedepool are paid after bondholders get paid.
C)creditors of Huedepool are paid before bondholders get paid anything at all.
D)creditors of Huedepool are paid after bondholders get paid.

Accepted Answer

Bondholders have priority over stockholders in the event of financial difficulty or bankruptcy. Therefore, stockholders will be paid after bondholders.

Question 15

Which of the following is not an important stock exchange in the United States?
A)New York Stock Exchange
B)American Stock Exchange
C)Chicago Mercantile Exchange
D)NASDAQ

Accepted Answer

While the Chicago Mercantile Exchange is an important commodity and futures exchange, it is not a stock exchange. The New York Stock Exchange, American Stock Exchange, and NASDAQ are all important stock exchanges in the United States.

Question 16

Nastech Pharmaceuticals announced it has developed a nasal spray that would reduce hunger cravings. Other things the same we would expect
A)the demand for existing shares of stock in this company to decrease, so the price would fall.
B)the demand for existing shares of stock in this company to increase, so the price would rise.
C)the supply of existing shares of stock in this company to decrease, so the price would fall.
D)the supply of existing shares of stock in this company to increase, so the price would rise.

Accepted Answer

The announcement of Nastech Pharmaceuticals developing a new product that could potentially be successful would increase investor confidence in the company and its future prospects, leading to an increase in demand for existing shares of stock in the company and thus an increase in the stock's price.

Question 17

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan,
A)the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls.
B)the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises.
C)the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls.
D)the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises.

Accepted Answer

If the board of directors deliberately chooses someone who is expected to make poor decisions and run the company into the ground, investors will lose confidence in the company and sell their shares. This will decrease the demand for shares and cause the price of a share of stock in the Hudsucker corporation to decline.

Question 18

As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is
A)borrowing directly.
B)borrowing indirectly.
C)lending directly.
D)lending indirectly.

Accepted Answer

Selling newly issued bonds means that the firm is borrowing money directly from investors who purchase the bonds. Indirect borrowing would involve borrowing through a financial intermediary, such as a bank or other lending institution. Direct lending involves the firm lending money to another entity, while indirect lending would involve lending through a financial intermediary. Therefore, the correct answer is A) borrowing directly.

Question 19

Other things being constant, when a firm sells new shares of stock, the
A)supply of the stock increases and the price decreases.
B)supply of the stock decreases and the price increases.
C)demand for the stock increases and the price increases.
D)demand for the stock decreases and the price decreases.

Accepted Answer

When a firm sells new shares of stock, the supply of the stock increases as there are now more shares available in the market. Assuming demand for the stock remains constant or doesn't increase proportionately, the increased supply would result in a decrease in the price of the stock. This is due to the basic economic principle of supply and demand, where an increase in supply without a corresponding increase in demand leads to a decrease in price.

Question 20

People who buy stock in a corporation such as General Electric become
A)creditors of General Electric, so the benefits of holding the stock depend on General Electric's profits.
B)creditors of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.
C)part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits.
D)part owners of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.

Accepted Answer

People who buy stock in a corporation such as General Electric become part owners of the corporation. Therefore, the benefits of holding the stock depend on the corporation's profits.

Quiz 26: Saving, Investment, and the Financial System

World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would expect that this would

Compared to stocks, bonds offer the holder

In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect this to have on the stock of companies such as John Deere that manufacture farm equipment?

If a firm sells a total of 100 shares of stock, then

If a firm sells a total of 100 shares of stock, then

Which of the following people purchased the correct asset to meet his or her objective?

Which of the following bonds has the highest interest rate?

Which of the following is a certificate of indebtedness?

The prices of stock traded on exchanges are determined by

Suppose that the tires of a certain tire manufacturer are discovered to be defective. Other things the same, this news would cause

All else equal, when people become more optimistic about a company's future, the

People who buy newly issued stock in a corporation such as Crate and Barrel provide

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

If Huedepool Beer runs into financial difficulty, the stockholders as

Which of the following is not an important stock exchange in the United States?

Nastech Pharmaceuticals announced it has developed a nasal spray that would reduce hunger cravings. Other things the same we would expect

In the Coen Brothers' movie The Hudsucker Proxy the board of directors picks someone to run the company who they believe will make poor decisions. If things turn out as they plan,

As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is

Other things being constant, when a firm sells new shares of stock, the

People who buy stock in a corporation such as General Electric become