Question 1

One root of the financial crisis of 2007-2009 was the strict money policies promoted by the U.S.Federal Reserve and other central banks after the technology bubble burst (i.e.,money was relatively expensive during this time).

Accepted Answer

The root of the financial crisis of 2007-2009 was not the strict money policies promoted by the U.S. Federal Reserve and other central banks. Rather, it was a combination of factors such as the housing bubble, subprime mortgage crisis, and risky lending practices. Additionally, during this time, money was actually relatively cheap as interest rates were kept low to stimulate economic growth.

Question 2

Financial markets and intermediaries allow investors and businesses to reduce and reallocate risk.

Accepted Answer

Financial markets and intermediaries provide various tools and mechanisms to manage and distribute risk, such as diversification, insurance, hedging, and pooling. These help investors and businesses to reduce the impact of unfavorable events, such as market fluctuations, credit default, or operational failures, and to channel their resources into more productive and efficient uses. Therefore, financial markets and intermediaries can enhance the resilience and stability of the economy by facilitating risk management and allocation.

Question 3

A share of IBM stock is purchased by an individual investor for $75 and later sold to another investor for $125.Who profits from this sale?

Accepted Answer

The first investor profits from the sale because they were able to sell the share for a higher price than they bought it for. IBM does not directly benefit from this transaction as they only receive profit from the initial sale of the stock. The second investor is paying a higher price for the stock and does not immediately profit from this sale.

Question 4

Once Apple Computer had become a public company,it was able to raise financing from venture capital companies

Accepted Answer

Once a company becomes a public company, it typically raises financing through the sale of its own stock to the public investors, not through venture capital companies. Venture capital companies primarily invest in private companies that are not yet publicly traded.

Question 5

Financing for public corporations flows through:

Accepted Answer

Public corporations have access to both the financial markets and financial intermediaries for financing. They can issue stocks and bonds in the financial markets, or go through financial intermediaries such as banks or investment banks for loans or other financing options. Therefore, financing for public corporations flows through the financial markets, financial intermediaries, or both. The derivatives markets may be used for hedging purposes, but they are not a primary source of financing for public corporations.

Question 6

A company can pay for its expansion in all the following ways except:

Accepted Answer

Purchasing bonds in the secondary market is not a way for a company to pay for its expansion because it involves buying securities from other investors and does not generate any new funds for the company. Choices A, B, and D are all viable ways for a company to finance its expansion.

Question 7

The rates of return on investments outside the corporation set the minimum return for investment projects inside the corporation.

Accepted Answer

This statement is true. The rate of return on investments outside the corporation reflects the opportunity cost of investing in the corporation's projects, and thus sets the minimum acceptable rate of return for those projects. If the expected return on a potential investment project is below the rate of return on outside investments, the corporation may choose to invest in the outside opportunities instead.

Question 8

Which of the following are both a financial intermediary and a financial institution?

Accepted Answer

The answer of Which of the following are both a...

Question 9

The effects of the financial crisis of 2007-2009 were confined to the U.S.and domestic companies.

Accepted Answer

The effects of the financial crisis of 2007-2009 were not confined to the U.S. and domestic companies. The crisis had a global impact, affecting many countries and international companies. The crisis also led to a global recession and affected international trade, financial markets, and the economies of many countries worldwide.

Question 10

Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in New York and London.

Accepted Answer

While there are physical trading floors in New York and London, the majority of foreign exchange trading actually takes place electronically over computer networks.

Question 11

Financing for private companies must flow through financial intermediaries such as mutual funds.

Accepted Answer

Financing for private companies can flow through financial intermediaries such as venture capital firms, angel investors, and private equity firms, among others. While mutual funds can invest in private companies, they are not the only intermediary and are not the primary source of financing for private companies.

Question 12

Which of the following financial assets is least likely to have an active secondary market?

Accepted Answer

Bank loans made to smaller firms are typically illiquid and do not have an active secondary market, as they are privately negotiated and not traded on exchanges. The other financial assets listed are more likely to have active secondary markets.

Question 13

When corporations need to raise funds through stock issues,they rely on the:

Accepted Answer

When corporations need to raise funds through stock issues, they go to the primary market. This is where new securities are issued and the proceeds go directly to the issuer.

B, C, and D are incorrect.

B: The secondary market is where previously issued securities are bought and sold among investors.

C: There is no such thing as a tertiary market.

D: The NASDAQ exchange is a specific exchange where securities can be traded, but it is not the only exchange and not all corporations will use it to raise funds through stock issues.

Question 14

The cost of capital is the minimum acceptable rate of return for capital investment.

Accepted Answer

The cost of capital is the minimum rate of return that a company requires in order to undertake an investment opportunity. It is the cost of funds used for financing a business, including equity and debt. It is also known as the discount rate, hurdle rate, or required rate of return. Therefore, the statement is true.

Question 15

Corporate financing comes ultimately from:

Accepted Answer

Corporate financing ultimately comes from savings by households and foreign investors in the form of investments in the financial markets and intermediaries. The cash generated from the firm's operations and the issue of shares in the firm are forms of internal financing, while external financing ultimately comes from savings by households and foreign investors.

Question 16

The primary distinction between securities sold in the primary and secondary markets is:

Accepted Answer

The primary market is where new securities are issued and sold, while in the secondary market, already issued securities are bought and sold. Therefore, the primary distinction between the two markets is whether the securities are new or already exist. The riskiness, price, and profitability of the securities may vary in both markets.

Question 17

A primary market would be utilized when:

Accepted Answer

A primary market is where securities are initially issued by companies in order to raise capital. Investors can buy these newly issued securities directly from the company or through underwriters. Choices A and B refer to the secondary market, where existing securities are bought and sold among investors. Choice D is not necessarily a determining factor in whether a transaction happens in the primary or secondary market.

Question 18

"Reinvestment" means:

Accepted Answer

Reinvestment refers to the reinvestment of earnings into new projects.

Question 19

Financing for public corporations must flow through financial markets.

Accepted Answer

Public corporations can also obtain financing through private placements, bank loans, or government funding, not just through financial markets.

Question 20

Insurance companies provide a mechanism for individuals to pool their risks.

Accepted Answer

Insurance companies allow individuals to share their risks by combining their premiums to provide financial protection against losses or damages. This pooling of risk enables the insurance company to spread the cost of claims across a larger group of individuals, making it more affordable for everyone.

Quiz 2: Financial Markets and Institutions