Chapter 1

$1,000 invested today at 6% interest would be worth ________ one year from now. (Choose the closest answer.) a. $1,600 b. $1,060 c. $1,160 d. $1,006

1000(1.06)=1060

T/F: Because the relative values of currencies may change, firms cannot use the currency exchange markets to reduce the risk of holding too much of certain currencies.

False

The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for taking on less risk, (3) Diversification of investment can increase risk, (4) financial markets are inefficient in pricing securities, (5) manager and stockholder objectives may differ, and (6) Reputation matters.

False

T/F: The principle of finance that "finance markets are efficient in pricing securities" implies that the price of securities reflect some information available to the public and that when new information becomes available

False, "prices reflect all information", more about "efficient markets" in chapter 12

T/F: The US Treasury Department is primarily responsible for the amount of money that is created in the US economy

False, "the Federal Reserve System is created by the depository institutions", we will explore this in greater detail in chapter 4 and 5

T/F: Personal finance is the study of how growth-driven performance-focused, early-stage firms raise financial capital and manage operations and assets.

False, Entrepreneurial finance

T/F: The secondary securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth.

False, These are primary markets

T/F: The principle of finance that "money has a time value" implies money in hand today is worth less than the promise of receiving the same amount in the future because the sum of money today could be invested and grow over time

False, because money in hand today grows over time it is worth more

T/F: The principle of finance that "financial markets are inefficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available, prices quickly change to reflect that information.

False, because statement says financial markets are inefficient

T/F: Money markets are where debt securities with maturities of one year or more are issued and traded.

False, capital markets

T/F: Three financial system components are the US Treasury, financial institutions, and financial markets.

False, monetary system is more than the US treasury

T/F: The principle of finance that "higher returns are expected for taking on more risk" implies that rational investors would choose only safe investments because they generally do not feel that a higher return is enough to justify taking greater risk.

False, rational investor would consider a riskier investment if they feel the expected return is high enough to justify the greater risk, similar to 14

T/F: The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries.

False, the manager compensation to measures of performance beneficial to owners

T/F: The role of financial markets in a country's financial system is to accumulate and invest savings.

False, the roles or functions of financial markets are marketing financial assets and transferring financial assets

T/F: Money markets are market where equity securities and debt securities with maturities of greater than one year are traded.

False, these markets are capital markets

T/F: Entrepreneurial finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth.

False, this is personal finance

If the interest rate is equal to 0%, then a dollar today is worth a. more than a dollar tomorrow b. the same as a dollar tomorrow c. less than a dollar tomorrow d. there is not sufficient information to tell

If the interest rate is equal to 0%, then a dollar today is worth a. more than a dollar tomorrow b. the same as a dollar tomorrow c. less than a dollar tomorrow d. there is not sufficient information to tell

T/F: An effective financial system is a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment.

True

T/F: Derivative securities may be used to speculate on the future price direction of the underlying financial assets or to reduce price risk associated with holding the underlying financial assets.

True

T/F: Financial markets provide the mechanism for allocating financial resources or funds form savers to borrowers.

True

T/F: One of the most significant functions of the monetary system within the financial system is the creation of money, which serves as a median of exchange.

True

T/F: The functions of financial institutions include accumulating savings and lending funds

True

T/F: The principle of finance that "money has a time value" implies Money in hand today is worth more than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time.

True

T/F: The principle of finance that "reputation matters" implies for institutions or businesses to be successful, they must have the trust and confidence of their customers, employees, and owners, as well as the community and society within which they operate

True

T/F: The siz principles of finance include (1) Money has a time value, (2) Higher returns are expected for taking on more risk, (3) Diversification of investments can reduce risk, (4) Financial markets are efficient in pricing securities, (5) Manager and stockholder objectives may differ, and (6) reputation matters.

True

T/F: While the financial press chooses to highlight examples of unethical behavior, most individuals exhibit sound ethical behavior in the personal and business dealing and practice

True, "good behavior" is not a news worthy event

T/F: The role of financial institutions in a country's financial system is to accumulate and invest savings.

True, "role" is another word for funciton

T/F: Individuals and business hold money for purchases or payments they expect to make in the near future.

True, Transferring Money

T/F: Finance is the study of how individuals, institution, and businesses acquire, spend, and manage money and other financial resources.

True, can also include government

T/F: The principle of finance that "management objectives may differ from owner objectives" implies that owners returns may suffer as a result of manager objectives

True, decisions may benefit the manager's career but be detrimental to the corporation

T/F: Capital markets are markets where debt securities with maturities of greater than one year and equity securities are issued and traded.

True, definition of capital markets, stocks never mature

T/F: Money markets are the markets where debt securities with maturities of one year or less are issued and traded.

True, definition of money markets

T/F: Personal finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulated wealth.

True, definition of personal finance

T/F: The principle of finance that "reputation matters" sometimes is harmed by the different objectives of owners and managers

True, directors, officers, managers, and other individuals sometimes are guilty of unethical behavior

T/F: The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available, prices quickly change to reflect that information.

True, efficient markets, similar to 15 & 33

T/F: the principle of finance that "lower returns are expected for taking on less risk" implies that rational investors would choose a risky investment only if they feel the expected return is high enough to justify the greater risk

True, people do not like risk -> rational investors will consider a riskier investment only if they feel the expected return is high enough to justify the greater risk

T/F: The goal of the financial manager in a profit-seeking organization should be to maximize the owners' wealth.

True, while this should be their goal sometimes they have their own goals

Select ALL of the following are not among the six principles of finance: a. All decisions are ultimately financial decisions. b. Higher returns are expected for taking on more risk. c. Diversification of investments can reduce risk. d. Financial markets are efficient in pricing securities. e. Managers and stockholders objectives are always the same.

a. All decisions are ultimately financial decisions. e. Managers and stockholders objectives are always the same.

___________________ are intermediaries, such as banks, insurance companies, and investment companies that engage in financial activities to aid the flow of funds from savers to borrowers or investors. a. Financial Institutions b. Financial market organizations c. Federal agencies d. International financial organizations e. none of the above

a. Financial Instituations Financial Instituations: organizations or intermediaries that help the finanicial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds in physical assets

____________________ in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services. a. Financial management b. Financial economics c. Investment management d. Asset allocation e. none of the above

a. Financial Management Being efficient is important for buisness to be successful

________________ facilitate the transfer of financial assets among individuals, institutions, businesses, and governments. a. Financial markets b. Government institutions c. Regulatory authorities d. none of the above

a. Financial markets

_________ markets are where debt securities with maturities of one year or less are issued and traded. a. Money b. Capital c. Primary d. Secondary

a. Money

Select ALL of the following are among the six principles of finance: a. Money has a time value. b. Higher returns are expected for taking on more risk. c. Diversification of investments most of the time increases risk. d. Financial markets are efficient in pricing securities. e. Reputation does not matter.

a. Money has a time value. b. Higher returns are expected for taking on more risk. d. Financial markets are efficient in pricing securities.

_______________ is the study of how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time. a. Personal finance b. Corporate finance c. Entrepreneurial finance d. Investment banking e. none of the above

a. Personal finance

Select ALL of the following that an effective financial system needs: a. an efficient monetary system b. to be able to create capital by channeling savings into investment c. markets in which to buy and sell claims to wealth d. coins made of either gold or silver

a. an efficient monetary system b. to be able to create capital by channeling savings into investment c. markets in which to buy and sell claims to wealth an effective financial system needs:

Career opportunities in finance involving both treasury and control functions are generally associated with: a. business financial management b. financial intermediaries c. securities markets d. government organizations

a. business financial management corporations separate these functions, small firms combine them

In the United States, most money is created by: a. depository institutions b. the United States Treasury c. capital markets d. None of the above

a. depository institutions "the federal reserve systerm is primarily responsible for the amount of money created although most of the money is created by depsitory insitutions"

Successful businesses typically progress through a series of life-cycle stages—from the idea stage to exiting the business; these five stages include the: a. development stage, startup stage, survival stage, rapid growth stage, and maturity stage. b. idea stage, design stage, operating stage, rebuilding stage, and decline stage c. development stage, operating stage, rebuilding stage, rapid growth stage, and maturity stage d. idea stage, startup stage, rapid growth stage, survival stage, and decline stage

a. development stage, startup stage, survival stage, rapid growth stage, and maturity stage. statement on this page, this is the terminology commonly used for these stages

The ______________ is a term used to describe the financial system, institutions, markets, businesses, individuals, and global interactions that help the economy operate efficiently a. financial environment b. regulatory environment c. international environment d. operating environment e. none of the above

a. financial environment

An area of finance that involves financial planning, asset management and fund-raising decisions to enhance the value of businesses is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above

a. financial management

Crucial elements of well-developed financial systems include all of the following except: a. government control of the economy not in capitalism b. financial intermediaries (institutions) c. financial markets d. all of the above

a. government control of the economy not in capitalism

Rational investors would consider an investment in a risky business venture only if they feel the expected return is high enough to justify the a. greater risk. b. higher cost. c. longer useful life. d. more complex designs. e. none of the above.

a. greater risk. Since people are risk averse -> they will require a higher expected return to get them to voluntarily take on greater risk

Select ALL of the following statements that an effective financial system must have: a. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies b. an efficient monetary system for creating and transferring money c. financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses d. three branches of government (Executive, Legislative, and Judicial)

a. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies b. an efficient monetary system for creating and transferring money c. financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses

Finance is: a. the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets b. the study of how businesses acquire, spend, and manage money and other financial assets c. the study of how governments, and businesses acquire, spend, and manage money and other financial assets d. none of the above

a. the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets

A basic financial function of an effective financial system is a monetary system that performs which of the following? a. transferring money b. storing gold and silver to back up money c. creating jobs d. transferring real assets

a. transferring money

____________________ provide the record-keeping mechanism for showing ownership of the financial instruments used in the flow of financial funds between savers and borrowers and record revenues, expenses, and profitability of organizations that produce and exchange goods and services. a. Financial Managers b. Accountants c. Operations Managers d. Statisticians e. none of the above

b. Accountants finance has its origins in economics and accounting

________ markets are where debt instruments or securities with maturities longer than one year and corporate stocks or equity securities are issued and traded. a. Money b. Capital c. Primary d. Secondary

b. Capital

Which statement best describes the six principles of finance? a. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments does not impact risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. b. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. c. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are inefficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. d. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation doesn't matter.

b. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters.

The theory of ___________________ implies that information is quickly embedded in prices making it difficult for investors to "beat the market." a. stock investing b. efficient markets c. portfolio management d. asset allocation e. none of the above

b. efficient markets another way of saying the statement of this page

Intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds are known as: a. financial markets b. financial institutions c. securities markets d. government organizations

b. financial institutions both a and c are markets, not intermediaries, intermediaries operate within markets

An area of finance that involves the sale or marketing of securities, the analysis of securities, and the management of investment risk through portfolio diversification is referred to as: a. financial management b. investments c. financial institutions d. financial markets e. none of the above

b. investments Definition of Investment

The primary goal of the financial manager of a profit-seeking organization should be to: a. maximize market share b. maximize the owners' wealth c. increase sales and profit d. have healthy cash flow

b. maximize the owners' wealth While this should be their goal sometimes they have their own goals

The possible conflict between managers and owners is sometimes called the a. principal-subordinate problem b. principal-agent problem c. boss-subordinate problem d. boss-agent problem e. none of the above

b. principal-agent problem

The primary securities markets are a. the markets for previously issued securities such as the New York Stock Exchange secondary markets b. the markets where financial assets such as stocks and bonds are initially issued c. the three most important financial markets in any economy d. the markets for stocks and bonds only includes mortgages

b. the markets where financial assets such as stocks and bonds are initially issued

Maximizing _____________________ is accomplished through effective financial planning and analysis, asset management, and the acquisition of financial capital. a. the value of perquisites. b. the owners' wealth. c. the firm's profits d. the firm's earnings e. none of the above

b. the owner's wealth owner's wealth maximization should be the goal of financial decision makers

_______________ is the study of how growth-driven, performance-focused, early-stage (from development through early rapid growth) firms raise financial capital and manage their operations and assets. a. Personal finance b. Corporate finance c. Entrepreneurial finance d. Investment banking e. none of the above

c. Entrepreneurial finance definition

The _________________ is primarily responsible for the amount of money that is created, although most of the money is actually created by depository institutions. a. Securities Exchange Commission b. Federal Treasury c. Federal Reserve System d. Financial Asset Oversight Board

c. Federal Reserve System

___________ markets are where the initial offering or origination of debt and equity securities takes place. a. Money only debt securities with maturities of less than one year b. Capital debt securities with maturities longer than one year c. Primary initial sale of debt and equity securities d. Secondary transfer of existing debt and equity securities between investors

c. Primary initial sale of debt and equity securities

Finance has its origins in: a. economics and statistics b. accounting and sociology c. accounting and economics d. psychology and mathematics

c. accounting and economics

Functions of the monetary system include all of the following except a. creating money b. transferring money c. accumulating savings d. all of the above are included as functions of a monetary system

c. accumulating savings accumulating savings is a function of fincncial institution of financial instituations

Two risky assets can be combined to lower overall risk. This principle is commonly referred to as a. blending b. asset allocation c. diversification d. portfolio segmentation e. none of the above

c. diversification the technical term for this is diversification, studied in more detail in chapter 12

An area of finance that involves the study of organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds in physical assets (inventories, buildings, and equipment) is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above

c. financial institutions

An efficient ______________ that is comprised of a central bank and a banking system that is able to create and transfer a stable medium of exchange called money. a. allocation system b. banking system c. monetary system d. market system e. none of the above

c. monetary system

The issuing of new securities, mortgages, and other claims to wealth takes place in the: a. secondary market b. money market c. primary market d. securities market

c. primary market from the definition of primary markets, initial offering of new securities

Economists use a ___________________ framework to explain how the prices and quantities of goods and services are determined in a free-market economic system. a. opportunity b. marginal cost c. supply-and-demand d. anti-monopoly e. none of the above

c. supply-and-demand

______________ behavior refers to how an individual or organization treats others legally, fairly, and honestly. a. Principal-agent b. Stakeholder c. Responsible d. Ethical e. none of the above

d. Ethical

_________________________________________ are crucial elements of the three areas of finance. a. Businesses and the federal government b. International organizations such as the World Bank and International Monetary Fund c. Well-developed barter systems d. Financial institutions, financial markets, investments, and financial management

d. Financial institutions, financial markets, investments, and financial management

_________ markets are physical locations or electronic forums where debt (bonds and mortgages) and equity securities are traded. a. Money: only debt securities with maturities of less than one year b. Capital: debt securities with maturities longer than one year c. Primary: initial sale of debt and equity securities d. Secondary: definition of secondary markets

d. Secondary: definition of secondary markets

Reasons we study finance include all of the following except: a. To make informed economic decisions b. To make informed personal and business investment decisions c. To make informed career decisions based on a basic understanding of business finance d. To make informed medical decisions e. all of the above are reasons to study finance.

d. To make informed medical decisions

Basic financial functions of an effective financial system include: a. creating money function of monetary system b. transferring money function of monetary system c. accumulating savings function of financial institutions d. all of the above e. none of the above

d. all of the above

Crucial elements of the three areas of finance include: a. financial institutions b. financial markets c. investments and financial management d. all of the above

d. all of the above

Financial functions in the U.S. financial system include: a. transferring financial assets b. creating money c. accumulating savings d. all of the above

d. all of the above

The basic components of an effective financial system in a developed economy include: a. a monetary system b. a savings-investment process c. markets for the transfer of financial assets d. all of the above

d. all of the above

Finance has its origins in: a. economics and statistics b. accounting and mathematics c. management and operations d. economics and accounting

d. economics and accounting

An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above

d. financial markets definition of financial markets

An economy's _____________________ is the interaction of policy makers, a monetary system, financial institutions, and financial markets to expedite the flow of financial capital from savings into investment: a. banking system b. stock market c. capital market d. financial system

d. financial system

An effective financial system must have a. financial markets that facilitate the transfer of financial assets among individuals, institutions, businesses, and governments. b. financial institutions or intermediaries that support capital formation either by channeling savings into investment in physical assets or by fostering direct financial investments by individuals in financial institutions and businesses. c. an efficient monetary system that is comprised of a central bank and a banking system that is able to create and transfer a stable medium of exchange called money. d. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies. e. all of the above are required

e. all of the above are required

An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above

e. none of the above not an area of finance, opinions differ about government rescuing private firms