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Finance
Q:
If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
a. perfect
b. active
c. inefficient
d. in equilibrium
Q:
If markets are perfect, securities buyers and sellers do not have full access to information and cannot always break down securities to the precise size they desire.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
Q:
If financial markets are efficient, this implies that all securities should earn the same return.
a. True
b. False
Q:
An asymmetric information problem arises when one party to a transaction has information that is not available to the other party, as when a corporation fails to tell investors the full extent of its losses.
a. True
b. False
Q:
Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.
a. True
b. False
Q:
Common types of capital market securities include Treasury bills and commercial paper.
a. True
b. False
Q:
Securities that are not as safe and liquid as other securities are never considered for investment by anyone.
a. True
b. False
Q:
The total asset value of savings institutions is larger than that of commercial banks.
a. True
b. False
Q:
When security prices fully reflect all available information, the markets for these securities are said to be perfect.
a. True
b. False
Q:
Most of the funds that insurance companies receive from premiums are invested in short-run money market securities.
a. True
b. False
Q:
Savings institutions are a type of nondepository institution.
a. True
b. False
Q:
Capital market securities are commonly issued in order to finance the purchase of assets such as buildings, equipment, or machinery.
a. True
b. False
Q:
When a depository institution offers a loan, it is acting as a creditor.
a. True
b. False
Q:
The credit crisis in the 20082009 period was caused by weak economies in Asia.
a. True
b. False
Q:
Commercial banks in aggregate have more assets than credit unions.
a. True
b. False
Q:
Common types of money market securities include negotiable certificates of deposit and Treasury bills.
a. True
b. False
Q:
Debt securities represent debt (borrowed funds) incurred by the issuer.
a. True
b. False
Q:
Money market securities are commonly issued to finance the purchase of assets such as buildings, equipment, or machinery.
a. True
b. False
Q:
Securities represent a claim on the issuer.
a. True
b. False
Q:
Speculating with derivative contracts on an underlying asset typically results in both higher risk and higher returns than speculating in the underlying asset itself.
a. True
b. False
Q:
A broker executes securities transactions between two parties and charges a commission for the transaction.
a. True
b. False
Q:
The Sarbanes-Oxley Act requires firms to provide complete and accurate financial information and imposes penalties on key executives of the firm if financial fraud is detected.
a. True
b. False
Q:
The adoption of the euro by 19 European countries has increased business between those countries and created a more competitive environment in Europe.
a. True
b. False
Q:
By requiring full disclosure of information, securities laws prevent investors from making poor investment decisions.
a. True
b. False
Q:
Systemic risk is the risk that a large decline in one stocks price could cause investors to sell their stock in other companies.
a. True
b. False
Q:
In recent years, financial institutions have consolidated to capitalize on economies of scale and on economies of scope.
a. True
b. False
Q:
Institutional investors not only provide financial support to companies but also exercise some degree of corporate control over them.
a. True
b. False
Q:
Valuing stocks is easier than valuing debt securities because stocks promise to provide investors with specific payments at regular intervals.
a. True
b. False
Q:
Debt securities include commercial paper, Treasury bonds, and corporate bonds.
a. True
b. False
Q:
Those financial markets that facilitate the flow of short-term funds (with maturities of less than one year) are known as capital markets, while those that facilitate the flow of long-term funds are known as money markets.
a. True
b. False
Q:
Most mutual funds raise funds by issuing securities and then lend the funds to individuals and small businesses.
a. True
b. False
Q:
Bonds commonly have maturities of one to three years.
a. True
b. False
Q:
Indicate whether the statement is true or false.Securities represent a claim on the provider of funds.a. Trueb. False
Q:
The Securities Act of 1933
a. required complete disclosure of relevant financial information for publicly offered securities in the primary market.
b. declared trading strategies to manipulate the prices of public secondary securities illegal.
c. imposed heavy penalties for insider trading.
d. required complete disclosure of relevant financial information for securities traded in the secondary market.
e. All of these are correct.
Q:
Which of the following is most likely to be described as a depository institution?
a. finance companies
b. securities firms
c. credit unions
d. pension funds
e. insurance companies
Q:
Which of the following are NOT major investors in stocks?
a. commercial banks
b. insurance companies
c. mutual funds
d. pension funds
Q:
____ involve(s) decisions such as how much funding to obtain and what types of securities to issue when financing operations.
a. Corporate finance
b. Investment management
c. Financial markets and institutions
d. None of these are correct.
Q:
Which of the following transactions would NOT be considered a secondary market transaction?
a. An individual investor purchases some existing shares of stock in Apple through her broker.
b. An institutional investor sells some Disney stock through its broker.
c. A firm that was privately held engages in an offering of stock to the public.
d. All of these are correct.
Q:
Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities.
a. liquid; many
b. liquid; not many
c. illiquid; not many
d. illiquid; many
Q:
Which of the following facilitates the exchange of currencies?
a. money market
b. foreign exchange market
c. New York Stock Exchange
d. federal funds market
Q:
Bonds issued by corporations have a ____ expected return and ____ risk than Treasury bonds.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
Q:
If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.
a. efficient
b. inefficient
c. perfect
d. imperfect
Q:
Which of the following is a nondepository financial institution?
a. savings bank
b. commercial bank
c. savings and loan association
d. mutual fund
Q:
If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve ____ returns, and they are exposed to relatively ____ risk.
a. lower; lower
b. lower; higher
c. higher; lower
d. higher; higher
Q:
____ are long-term debt obligations issued by corporations and government agencies to support their operations.
a. Common stock
b. Derivative securities
c. Bonds
d. None of these are correct.
Q:
____________ applies psychology to financial decisions and offers an explanation for why markets are not always efficient.
a. Psychological marketing
b. Behavioral finance
c. Inefficient markets theory
d. Financial psychology
Q:
____ securities have a maturity of one year or less; ____ securities generally have relatively high liquidity.
a. Money market; capital market
b. Money market; money market
c. Capital market; money market
d. Capital market; capital market
Q:
If a depository institution is experiencing more deposits than it needs to make loans or invest in securities, it can lend its excess funds to another depository institution through the
a. Federal Reserves trading desk.
b. options market.
c. federal funds market.
d. federal exchange market.
Q:
Money market securities generally have ____.
a. relatively low liquidity, low expected return, and a high degree of credit risk
b. relatively high liquidity, high expected return, and a high degree of credit risk
c. relatively low liquidity, high expected return, and a low degree of credit risk
d. relatively high liquidity, low expected return, and a low degree of credit risk
Q:
Which of the following is NOT a reason why depository financial institutions are popular?
a. They offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most surplus units.
b. They repackage funds received from deposits to provide loans of the size and maturity desired by deficit units.
c. They accept the risk on loans that they provide.
d. They use their information resources to act as brokers, executing securities transactions between two parties.
e. They have more expertise than individual surplus units in evaluating the creditworthiness of deficit units.
Q:
If security prices fully reflect all available information, the markets for these securities are
a. efficient.
b. primary.
c. overvalued.
d. undervalued.
Q:
When a securities firm acts as a broker, it
a. guarantees the issuer a specific price for newly issued securities.
b. makes a market in specific securities by adjusting its own inventory.
c. executes securities transactions between two parties.
d. purchases securities for its own account.
Q:
____ concentrate on mortgage loans.
a. Finance companies
b. Commercial banks
c. Savings institutions
d. Credit unions
Q:
Which of the following is a money market security?
a. Treasury note
b. municipal bond
c. mortgage
d. commercial paper
Q:
In aggregate, ____ are the most dominant depository institution, with more total assets than other depository institutions.
a. commercial banks
b. savings banks
c. credit unions
d. S&Ls
Q:
Which of the following is a capital market instrument?
a. a six-month certificate of deposit
b. a three-month Treasury bill
c. a ten-year bond
d. an agreement for a bank to loan funds directly to a company for nine months
Q:
The main source of funds for ____ is proceeds from selling securities to households and businesses, while their main use of funds is providing loans to households and businesses.
a. savings institutions
b. commercial banks
c. mutual funds
d. finance companies
e. pension funds
Q:
Systemic risk exists because
a. there is no government regulation of financial markets.
b. financial institutions invest in similar securities and therefore are similarly exposed to large declines in prices of those securities.
c. financial institutions borrow using long-term debt securities but lend their funds for short-term periods.
d. financial institutions invest heavily in Treasury securities and therefore are exposed to the possibility that the government will default on its debts.
Q:
____ are classified as depository institutions.
a. Credit unions
b. Pension funds
c. Finance companies
d. Securities firms
Q:
Without the participation of financial intermediaries in financial market transactions,
a. information and transaction costs would be lower.
b. transaction costs would be higher but information costs would be unchanged.
c. information costs would be higher but transaction costs would be unchanged.
d. information and transaction costs would be higher.
Q:
International integration of securities markets allows
a. governments and corporations to have easier access to funding from creditors and investors in other countries.
b. investors and creditors to benefit from investment opportunities in other countries.
c. one countrys financial problems to adversely affect other countries.
d. All of these are correct.
Q:
Which of the following are NOT considered money market securities?
a. Treasury bills
b. mortgage-backed securities
c. negotiable certificates of deposit
d. commercial paper
Q:
A five-year security was purchased two years ago by an investor who plans to resell it. The investor will sell the security in the
a. secondary market.
b. primary market.
c. deficit market.
d. surplus market.
Q:
Stock issued by a corporation is an example of a(n)
a. debt security.
b. money market security.
c. equity security.
d. debt security AND money market security.
Q:
____ maintain a larger amount of assets in aggregate than the other types of nondepository institutions.
a. Finance companies
b. Mutual funds
c. Life insurance companies
d. Securities firms
Q:
When particular securities are perceived to be ____ by the market, their prices decrease when they are sold by investors.
a. undervalued
b. overvalued
c. fairly priced
d. efficient
e. None of these are correct.
Q:
There is a ____ relationship between the risk of a security and the expected return from investing in the security.
a. positive
b. negative
c. indeterminable
d. None of these are correct.
Q:
The foreign exchange market facilitates the exchange of
a. information between investors in different countries.
b. debt securities.
c. equity securities.
d. currencies.
Q:
Which of the following are NOT considered depository financial institutions?
a. finance companies
b. commercial banks
c. savings institutions
d. credit unions
e. All of these are depository financial institutions.
Q:
Which of the following statements is incorrect?
a. Financial markets attract funds from investors and channel the funds to corporations.
b. Money markets enable corporations to borrow funds on a short-term basis so that they can support their existing operations.
c. Financial institutions serve solely as intermediaries with the financial markets and never serve as investors.
d. Investors seek to invest their funds in the stock of firms that are presently undervalued and have much potential to improve.
Q:
____ are not considered capital market securities.
a. Derivative securities
b. Treasury bonds
c. Corporate bonds
d. Equity securities
e. Mortgages
Q:
Which of the following is an example of an asymmetric information problem?
a. A corporation releases toxic wastes into a river.
b. A corporation relocates to Ireland to take advantage of lower corporate tax rates.
c. A stock analyst rates a stock higher than it deserves because the securities firm she works for wants to obtain business from the corporation that issued the stock.
d. A corporation manipulates its financial information to avoid disclosing a large loss from its operations in China.
Q:
Financial markets facilitating the flow of short-term debt securities with maturities of one year or less are known as
a. secondary markets.
b. capital markets.
c. primary markets.
d. money markets.
e. None of these are correct.
Q:
The Securities and Exchange Commission (SEC) was established by the
a. Federal Reserve Act.
b. McFadden Act.
c. Securities Exchange Act of 1934.
d. Glass-Steagall Act.
e. None of these are correct.
Q:
The financial markets that facilitate the flow of short-term funds are known as
a. money markets.
b. capital markets.
c. primary markets.
d. secondary markets.
Q:
Financial market participants who provide funds are called
a. deficit units.
b. surplus units.
c. primary units.
d. secondary units.
Q:
When a securities firm acts as a(n) ____, it makes a market in specific securities by maintaining an inventory of those securities.
a. adviser
b. dealer
c. broker
d. None of these are correct.
Q:
The creditors in the federal funds market are
a. households.
b. depository institutions.
c. firms.
d. government agencies.
Q:
Empirical evidence indicates that the returns to shareholders of the target firm vary significantly from the returns to the shareholders of the acquiring firm. Identify the shareholders that tend to realize the smaller return. Does your answer depend on the way the acquisition is financed?
Q:
Rainy City Coffee's (RCC) free cash flow next year will be $100 million and it is expected to grow at a 4 percent annual rate indefinitely. The company's weighted average cost of capital is 10 percent, the market value of its liabilities is $1 billion, and it has 20 million shares outstanding.
a. Estimate the price per share of RCC's common stock.
b. A hedge fund believes that by selling the company's private jet and instituting other cost savings, it can increase RCC's free cash flow next year to $110 million and can add a full percentage point to RCC's growth rate without affecting its cost of capital. What is the maximum price per share the hedge fund can justify bidding for control of RCC?