Finance, Banking, Securities, Investing, and Financial Literacy
Why is money referred to as a medium of exchange?
It makes economic transactions easier.
Who offers commercial paper loans?
Large banks and corporations
What type of short-term financing is available to borrowers and provides them with an amount of money they can borrow against and pay back at a certain interest rate for a certain period?
Line of credit
What is the definition of bonds?
Long-term IOUs issued by governments and corporations are contracts on which the issuer pays the buyer interest at regular intervals.
What type of loans are usually repaid over 3 to 20 years and require the borrower sign a promissory note indicating specific installments, have a good credit rating, have collateral, and pay a higher interest rate?
Long-term loans
Select all of the responsibilities of a financial manager.
Making sure that bills are paid Working to reduce the amount of taxes owed Monitoring the accounting department
From the following list, select all of the short-term financing options.
Pledging and factoring Trade credit
What is the term for selling stock only to a small group of large investors, such as insurance companies and pension funds?
Private placements
What is a form of trade credit that is a written contract prepared by a buyer who agrees to pay a seller a certain amount by a certain time?
Promissory note
From the following list, identify two ways of selling stocks.
Public offerings Private placements
From the following list, select all of the pieces of good advice for people who would like to borrow money from their family and friends.
Put the terms of the loan in writing. Make the repayment terms as specific as possible.
From the following list, identify all of the types of equity financing.
Receiving investment capital Retained earnings By selling stock
Which category of short-term financing does using a credit card fall into?
Short-term loans
Individuals who invest their own money in a private company in order to provide short-term financing are known as
angel
A loan in which the borrower pledges some sort of asset, such as personal property, that is forfeited if the loan is not repaid is called a(n)
secured loan
Equity financing is created by ______.
selling ownership in the company
In what denominations are Treasury bonds sold?
$1,000 and $5,000
Commercial paper loans are for amounts over ______.
$100,000
What time frame is appropriate for a financial plan? More than one answer may be correct.
1 month 7 years
In general, when do commercial paper loans become due?
30 to 90 days
Under trade credit, how long does a seller tend to give a buyer to pay an invoice?
30 to 90 days
Approximately how many U.S. small businesses receive loans from commercial banks?
50%
From the following list, select all of the items that could be used as collateral.
A building A diamond ring A motorcycle
In financial terms, what is a portfolio?
A collection of securities representing a person's investments
What is an exchange-trade fund?
A collection of stocks that is traded on an exchange and can be purchased or sold throughout the trading day
What is the best definition of an insurance company?
A company that accepts payments (called premiums) from policyholders
What is the best definition of a brokerage firm?
A company that buys and sells stocks and bonds for individuals
What is the total amount owed to a firm from customers who have purchased goods or services on credit called?
Accounts receivable
What is financial management?
Acquiring funds for a company and using them to accomplish the company's objectives
Which type of investor is least likely to pursue an investment for growth strategy?
An older investor relying on securities for an upcoming retirement
Which investor is following the buying and holding investment strategy?
Antonio, who bought stocks several years ago and is letting them grow in value
What are the four ways in which bonds may pay off?
As callable, serial, sinking-fund, or convertible bonds
Which activity is most central to the role of a financial manager?
Assessing the risk-return trade-off
Select all of the features and benefits of secured bonds.
Backed by collateral Pay interest to buyers at regular intervals
What are true statements about commercial bank lenders? More than one answer may be correct.
Bank of America and Chase are examples of commercial banks. Commercial lenders are popular sources of funding for small businesses.
Credit unions and commercial and savings institutions all fall under what category?
Banks
What are the main components of the banking system?
Banks and nonbank institutions
Select all of the types of investments that are suitable for income investment strategy.
Blue-chip stocks Bonds Preferred stock
From the following list, select all of the ways that commercial banks make money.
By charging interest on loans By charging fees for services By offering a variety of financial products
How is a stock's book value determined?
By dividing total shareholder equity by the number of shares issued or sold
Select all of the ways in which full-service brokers are different from discount brokers.
Charge higher commissions Offer additional services such as tax planning
Some banks offer home mortgages. What method of making money is this an example of?
Charging interest on loans
From the following list, select all the types of accounts that allow writing checks.
Checking Money market NOW
What is the difference between checking accounts and savings accounts?
Checking accounts allow check writing.
In an investment context, what is diversification?
Choosing securities in such a way that a loss in one investment will not have a devastating impact on the total portfolio
Which organizations make high-risk short-term loans to borrowers who can pledge collateral?
Commercial finance companies
Which of the following is a substitute for a bank loan?
Commercial paper
Which investment vehicle has the highest level of risk?
Commodities trading
Which type of bond offers long-term funding to businesses?
Corporate bonds
Which type of short-term loan is considered a last resort?
Credit card loans
What is the best definition of credit unions?
Depositor-owned, nonprofit financial cooperatives that offer a range of banking services to their members
How does a certificate of deposit work?
Depositors receive interest upon the maturity date.
Tanya is managing her company's finances. Select all of the activities that she would perform as part of her job duties.
Determining long-term investments Managing the firm's financial risks Establishing budgets and financial controls
Which stock index tracks 30 large corporations that are considered representative of the entire U.S. economy?
Dow Jones Industrial Average
Which source of long-term financing involves selling ownership in a company?
Equity financing
Which investment vehicle offers investors the most convenience and flexibility?
Exchange-traded funds
Select all of the services associated with a full-service broker.
Executing purchase or sales orders Helping investors plan for taxes Researching investment opportunities
Select all of the features and benefits of general obligation bonds.
Exempt from federal taxes on interest Pay for public projects that will not generate revenue
Select all of the features and benefits of revenue bonds.
Exempt from state taxes in some states. They pay for public projects that will generate revenue Exempt from federal taxes
What is bought and sold on secondary securities markets such as the New York Stock Exchange and the NASDAQ?
Existing securities
Select the two items that are balanced in the risk-return trade-off.
Expected payoff Investment risk
Select all of the characteristics necessary to succeed at a market timing investment strategy.
Familiarity with various analytical tools A strong stomach for risk Wealthy enough to pay fees for frequent trades
What is the main difference between a finance company and a brokerage firm?
Finance companies originate loans; brokerage firms buy and sell stocks.
What is the best definition of savings and loan associations?
Financial institutions that accept deposits and were originally intended to make loans primarily for home mortgages
What are securities?
Financial instruments such as stocks and bonds
What is the best definition of mutual savings banks?
For-profit financial institutions that are similar to savings and loan associations but are owned by their depositors rather than by shareholders
Which type of broker offers personal advice, brokerage research, and tax planning in addition to executing trades for clients?
Full-service
Which type of mutual fund focuses on stocks listed in the Standard & Poor's 500 or the Dow Jones Industrial Average?
Index fund
What is the definition of angel investors?
Individuals who invest their own money in a private company to provide short-term financing
What is the term for when a corporation's stock is offered for sale for the first time?
Initial public offering
What is the easiest way to minimize risk when investing?
Invest in mutual funds and exchange-traded funds
Which investment strategy is most closely associated with volatile securities?
Investing for growth
Which investment strategy is considered ideal for an older investor seeking reliable, long-term returns with low effort and a low level of risk?
Investing for income
What is considered the most difficult investment strategy?
Market timing
From the following list, select the fees that most checking accounts charge.
Monthly service fee Fees for exceeding the check writing limit Insufficient funds fee
Select all of the investment vehicles that are collections of stocks that are traded on an exchange.
Mutual funds Exchange-traded funds
Select all of the markets in which existing securities are bought and sold.
NASDAQ New York Stock Exchange
Which of these are true statements about borrowing from family and friends? More than one answer may be correct.
Owing money to family and friends can cause strain in those relationships. The terms of the loan are often informal.
What is a company that is solvent able to do?
Pay its debts
Why is money referred to as a store of wealth?
People can save it until they need to make new purchases.
What are investors who use an income investment strategy most interested in?
Reliable payouts of interest or dividends
Omar has received a loan that is guaranteed by the bank. Which type of short-term loan has he received?
Revolving credit agreement
What type of loan is guaranteed by a bank and obligates the bank to loan funds up to that limit?
Revolving credit agreement
Select the factors that help determine an investor profile.
Risk Asset allocation Liquidity
the BLANK securities market is the financial market in which existing stocks and bonds are bought and sold by investors.
Secondary
What type of bonds are backed by a firm's collateral?
Secured
Which type of financing involves collateral?
Secured loans
What is a disadvantage for corporations in issuing stock?
Stockholders may vote to change ownership of the company.
What distinguishes the Standard & Poor's 500 from the Dow Jones Industrial Average?
The S&P 500 weights stock prices to reflect the total market value of each stock.
What does profitability refer to?
The ability of a firm to earn more revenue than expense
What happens if a depositor tries to withdraw funds from a certificate of deposit before the maturity date?
The bank will charge a penalty.
What are true statements about pledging accounts receivable? More than one answer may be correct.
The firm is liable for the total amount of the loan. The company pledges its accounts receivable as collateral.
From the following list, select all of the items borrowers can use transaction loans to pay for.
The purchase of new computers for the office The construction of a new store The purchase of new inventory for an upcoming season
What type of loan is extended by a commercial bank or commercial finance company for a specific purpose?
Transaction loan
Yousef owns a pool supply company and he wants to stock up on pool floats for the upcoming summer swim season. What type of loan can Yousef acquire from a commercial bank or commercial finance company to do this?
Transaction loan
From the following list, select all of the major job titles associated with financial management.
Treasurer Controller
A BLANK bill is a short-term obligation of the U.S. Treasury that has a maturity period of one year or less and may be purchased directly from the U.S. government.
Treasury
Select all of the examples of government bonds.Select all of the examples of government bonds.
Treasury bonds Treasury notes
Which investment strategy seeks to purchase stocks that are underpriced in the market with the expectation that other investors will eventually drive up the price?
Value investing
Select all of the benefits of investing in mutual funds.
Varying degrees of risk Run by professional managers Many choices at an economical price
What is equity financing?
When corporations attempt to raise money by selling stock
If your company takes out a long-term loan, what are you likely to encounter?
Your company's credit rating will be checked.
An extremely active investor who makes frequent trades based on anticipated changes in the market value in the hope of earning a fast profit is using ______ investment strategy.
a market timing
A standard of value is ______.
a unit of account, or a common gauge to measure the value of goods and services
When a company sells stock to the general public for the first time, it is called ______.
an initial public offering
Money is defined as ______.
any medium of value that is generally accepted as payment for goods and services
Compared to the past, money today is more likely to ______.
be made of a cheap material that represents something of value
In the financial realm, solvency refers to ______.
being able to pay debts when they become due
Stocks sold by big, reputable companies are often called ______ stocks.
blue-chip
Total shareholder equity divided by the number of shares of a stock determines the stock's
book value
Major investments in tangible or intangible assets are known as
capital expenditures
Investors who sell a security for a price that is higher than what they paid for it have earned a(n)
capital gain
Forecasts that are directly based on anticipated sales and anticipated expenses are known as ______ forecasts.
cash flow
The top financial manager at a company is called the ______.
chief financial officer (CFO)
Assets that are pledged in order to secure a loan are known as
collateral
Stock that allows shareholders to vote on major company decisions but gives them last claim on dividends and company assets is called
common stock
Both types of corporate stocks have disadvantages. Owners of ______ stock are last in line for assets if the issuing company goes out of business, and owners of ______ are not able to vote on major company decisions.
common; preferred
Businesses can secure long-term funding by issuing
corporate bonds
The act of issuing bonds, both secured and unsecured, is known as
debt financing
E-Trade, Ameritrade, and TD Waterhouse are examples of ______ brokerages, which execute buy and sell orders for clients but do not offer investment advice or tax planning.
discount
Managing money effectively is called
efficiency
A(n) ______ offers investors a diversified array of investment vehicles along with low fees and the ability to trade throughout the trading day.
exchange-traded fund
A new investor who wants help with research and tax planning would be best suited by hiring a ______ broker.
full-service
When bonds are issued, the terms of the lending agreement are known as
indenture terms
When a corporation's stock is offered for sale for the first time, it is called a(n
initial public offering.
Large and powerful organizations, such as pension funds and insurance companies, investing their own or others' funds are known as
institutional investors
A company that accepts payments called premiums from policyholders is called a(n)
insurance company
The price paid for the use of money over a certain period is known as the
interest rate
Bonds that are considered ______-grade have a low probability of default.
investment
Companies, such as Goldman Sachs or Morgan Stanley, that engage in buying and reselling new securities are known as
investment bankers
A loan from commercial banks, life insurance companies, pension funds, or commercial finance companies that generally requires repayment in 3 to 7 years is a ______ loan.
long-term
The job of acquiring funds for a firm and using them to accomplish the firm's objectives is called financial
management
In the financial realm, efficiency refers to ______.
managing money in the optimum way
The BLANK value of a stock is the price at which the stock is currently selling.
market
The characteristic of money that means it makes economic transactions easier and eliminates the need to barter makes it a ______.
medium of exchange
A non-deposit institution that provides retirement benefits to workers and their families is called a(n)
pension funds
In the arrangement known as BLANK accounts receivable, a firm uses its accounts receivable as collateral, or security, to obtain a short-term loan, as from a commercial bank.
pledging
a collection of securities representing a person's investments.
portfolio
Which type of stock is most similar to a bond?
preferred stock
The ______ securities market is the financial market in which new securities are first sold to investors.
primary
The end goal of financial management is ______.
profitability
Accounts that pay low interest and do not allow check writing are known as
savings accounts
Bonds backed by some form of the firm's collateral, such as real estate or equipment, are known as
secured bonds
Most investment portfolios include ______, such as stocks and bonds.
securities
The four ways bonds may pay off correspond to callable bonds, sinking-fund bonds, convertible bonds, and
serial bonds
Financial securities that are sold on securities markets and represent shares of ownership in a company are known as
stocks
Money market instruments, bonds, and BLANK are the three types of securities.
stocks
The characteristic of money that means that people can save it until they need to make new purchases makes it a ______.
store of wealth
A promissory note indicating specific installments for repayment, such as monthly or yearly, is known as a ______.
term-loan agreement
On the primary securities market, issues are sold by ______, whereas on the secondary securities market, issues are sold by ______.
the issuing company; investors
What is the best definition of a finance company?
A company that makes short-term loans at higher interest rates to individuals or businesses
Which person is responsible for the day-to-day planning and control of the acquisition and uses of funds for a business?
A financial manager
What is the secondary securities market?
A financial market in which existing stocks and bonds are sold by investors
What is a mutual fund?
A fund in which an investment company pools money from many people to buy an array of diversified securities
What differentiates a Super-NOW account from a standard NOW account?
A higher interest rate
Finance and insurance companies are what type of institution?
A nonbank institution
What is the best definition of a pension fund?
A nondeposit institution that provides retirement benefits to workers and their families
What is a stock certificate?
A paper certificate representing a share of ownership in a company
What is a dividend?
A portion of a company's profits that is distributed to stockholders
What is a term-loan agreement?
A promissory note indicating specific installments, such as monthly or yearly, for repayment
What is a Treasury bill?
A short-term debt security sold directly by the U.S. government
Kim receives financing from a commercial finance company. What type of financing has she received?
A short-term loan
From the following list, select all of the nonbank institutions.
Brokerage firm Pension fund
What are the three parts of a financial plan?
Budget Financial control Forecast
Tony asks Eve, his finance manager, to develop a financial plan for the company. She develops a financial plan that allows managers to anticipate problems, coordinate activities of the business, and control operations. Which of the following terms describes Eve's plan?
Budgeting
What is venture capital?
Funds acquired from wealthy individuals and institutions that invest in promising start-ups or emerging companies in return for their giving up some ownership
Ahmed wants to purchase a new headquarters for his company. What kind of funds does Ahmed need?
Funds for making major investments
From the following list, select all of the requirements that are typically associated with long-term loans.
Good credit rating Collateral An increased interest rate compared to short-term loans
An IOU issued by the U.S. Treasury that matures in 25 years is an example of which type of security?
Government bond
The U.S. Treasury sells which type of bonds?
Government bonds
Select all of the features associated with growth stocks.
Highly volatile Issued by small, innovative companies
In the context of investing, what is a yield?
Income from securities
What is the name for companies that engage in buying and selling new securities?
Investment bankers
Which of the following is a benefit of mutual funds?
Investors do not have to do research or manage the investments themselves.
Which of these actions takes place as part of debt financing?
Issuing corporate bonds
How is a stock's par value determined?
It is set arbitrarily by the issuing company's board of directors.
Select all of the downsides of the value investment strategy.
It requires a significant amount of research and analysis. There is a small window of time in which stocks can be purchased for a good value.
Which type of firm is tracked by the Dow Jones Industrial Average?
Large U.S. corporations
What are institutional investors?
Large and powerful organizations that invest their own or others' funds
Select all of the features of common stock.
Last claim on the company's dividends Voting rights for major company decisions
From the following list, select all of the primary financial management activities.
Managing the company's financial risk Analyzing the company's cash flow
Which method of determining the value of a stock is based on the price at which the stock is currently selling?
Market value
Select the two valuation methods that investors can compare to determine when a stock is underpriced and should be purchased.
Market value Book value
Select all of the features and benefits of Treasury notes.
Mature in 10 years or less from the date of issue Pay the buyer interest at regular intervals Sold in minimum denominations of $100
Select all of the features and benefits of Treasury bonds.
Mature in 25 years or more Sold in denominations of $1,000 and $5,000 Pay interest at regular intervals
Select all of the features and benefits of corporate bonds.
May be backed by by pledges of assets to the bondholders Provide long-term funding for businesses Pay the buyer interest at regular intervals
From the following list, select the three functions of money.
Medium of exchange Store of wealth Standard of value
What is sold in a primary securities market?
New security issues
What is the difference between a commercial bank and a nonbank?
Nonbanks traditionally did not accept deposits.
From the following list, select all of the characteristics of money market accounts.
Offer competitive interest rates Limit check writing Require high minimum balances
Select all of the differences between short- and long-term forecasts.
One is measured in months, while the other is measured in years. They have different timelines.
What is the main difference between savings and loan associations and mutual savings banks?
One is owned by shareholders; the other is owned by depositors.
Select all of the characteristics of an investor for whom a buying and holding investment strategy is ideal.
Patient enough to ride out any downturns in the market Not interested in watching stock values on a day-to-day basis Young enough to invest for the long term
Which considerations should a borrower keep in mind when using credit cards? More than one answer may be correct.
Penalties for late payments can be costly. Interest rates can be high.
To whom do lenders make unsecured loans?
People whom they have known for a very long time
Which of these is a primary financial management activity?
Planning the expenditure of funds
Select the two ways firms can make use of their accounts receivable to generate short-term funds.
Pledging Factoring
Thousands of dollars can be carried in the form of a small credit card. Which of the five characteristics of money does this represent?
Portability
Which item was commonly used as money in the distant past and is still used today?
Precious metals such as silver and gold
What do general obligation bonds pay for?
Public projects that will not generate revenue
What are stocks?
Shares of ownership in a company
Xavier's forecast takes into account the next 8 to 9 months. What kind of forecast is it?
Short-term
Which type of forecasts are defined as predictions for the next year or less?
Short-term forecasts
Which stock index tracks 400 industrial, 40 financial, 40 public utility, and 20 transportation stocks?
Standard & Poor's 500
Select all of the advantages to corporations in issuing stock.
Stockholders do not have to be repaid for their investment. Earnings can be reinvested because the firm is not required to pay dividends. The corporation shares its ownership but does not increase its debt.
Select all of the features of preferred stock.
Stockholders have first claim on company dividends. Stockholders are not allowed to vote on most company decisions. The dividend that stockholders receive is fixed.
What are true statements about factoring accounts receivable? More than one answer may be correct.
The buyer of the accounts receivable is generally a financial institution. The company sells its accounts receivable at a discount. It is an expensive way to acquire short-term funds.
What must occur for an investor to earn a capital gain?
The investor must sell a security for a price higher than the original purchase price.
What is a net period?
The length of time for which the supplier (the seller) extends trade credit
Who pays interest on a loan?
The person borrowing the money
What is used to back unsecured bonds?
The reputation of the issuing firm
Select all of the features and benefits of unsecured bonds.
They pay the buyer interest at regular intervals. They are backed only by the issuing company's reputation.
What are true statements about commercial finance companies? More than one answer may be correct.
They require borrowers to pledge collateral. They charge high interest rates to borrowers. They make high-risk short-term loans.
Why do mutual funds and exchange-traded funds carry the lowest level of risk?
They spread an investor's risk across a collection of securities.
From the following list, select all of the characteristics of savings accounts.
Time deposits Low interest rates
From the following list, select all of the reasons why firms borrow money.
To keep enough inventory available To make major investments To manage everyday business activities
If a company is unable to obtain a long-term loan, it may try to issue corporate ______, contracts between the issuer and the buyer in which the purchase price represents a loan by the buyer and for which the issuing firm pays the buyer interest.
bonds
A company that buys and sells stocks and bonds for individuals and competes with banks by offering high-interest-rate combination checking-and-savings accounts is called a(n)
brokerage firms
Investing in securities and leaving them alone to gain value over a period of several years is known as a(n) ______ strategy.
buying and holding
Depositor-owned, nonprofit financial cooperatives that offer a range of banking services to their members are known as
credit unions
The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet, is known as
crowdfunding
Unsecured bonds, which are backed only by the issuing company's reputation, are also known as
debenture bonds
Corporations can demonstrate a strong financial position and make the stock more appealing by issuing BLANK , or part of the company's profits, to stockholders.
dividends
In the arrangement known as BLANK accounts receivable, a firm sells its accounts receivable at a discount to a financial institution.
factoring
A company that makes short-term loans at higher interest rates to individuals or businesses is called a(n)
finance company
Any medium of value that is generally accepted as payment for goods and services is known as
money
Accounts that pay brokerage-competitive interest and offer some check writing are known as
money market accounts
A fund operated by an investment company that brings together money from many people and invests it in an array of diversified stocks, bonds, or other securities is known as a(n)
mutual fund
For-profit financial institutions that are similar to savings and loan associations but are owned by their depositors rather than by shareholders are known as
mutual savings banks
The length of time for which the supplier (the seller) extends credit is known as the
net period
The main components of the banking system are banks and
nonbanks
Public offerings involve ______.
selling stock to the general public in securities markets
When a company uses private placements, it ______.
sells stock to only a small group of large investors such as insurance companies and pension funds
When money acts as a common way to measure the value of goods and services, it is acting as a ______.
standard of value
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via ______.
the Internet
Indenture terms refer to the terms of ______.
the lending agreement associated with bonds
The process by which a firm buys a product, then receives a bill (an invoice) from the supplier, then pays it later, usually in 30 to 90 days, is known as a
trade credit
A loan in which the borrower does not post collateral is known as a(n)
unsecured loan
Money acquired from wealthy individuals and institutions that invest in promising start-ups or emerging companies and often provide management expertise in return for some ownership is called ______.
venture capital
The regular payout of interest or dividends from a security is called the security's
yield