chapter 17

Holly and Josh paid 10% down for their $245,000 home in 2004. If they sell their house for $255,000 in 2010, what will the value of their equity be?

B. $29,500

Riley and Sue paid 30% down for a house valued at $135,000 in 2013. If they sell the house in 2017 for $140,000, what will the value of their equity be?

C. $45,500

Which of the following would be the least likely method for firms to raise the financial capital they need to pay for new equipment?

C. borrowing from households

The old proverb: "Don't put all your eggs in one basket" is synonymous with which of the following?

C. diversified investments

The stock of a business firm is divided into _________________ .

A. individual shares

Stock markets often experience a frenzy of buying or selling when investors are ___________________ by following the current trend in a very actively traded company.

A. momentum trading

Which of the following is a feature that typically distinguishes a savings account from a checking account?

A. pays interest

Which of the following is considered to be a method that firms can use to raise the financial capital that they need to pay for modernizing their production plants?

A. reinvesting profits

Which of the following belongs in the range of financial investment options available to U.S. households?

A. tangible assets

The term __________ refers to the __________ that a bond is expected to pay at the time of purchase.

B. bond yield; rate of return

During the recent U.S. recession, some large automakers required bailouts from the federal government to avoid being forced into bankruptcy by their _________________ .

B. bondholders

A financial gain earned by purchasing stock in a publically traded company and subsequently selling the investment at higher price is commonly referred to as a _____________ .

B. capital gain

Why would a large publically traded corporation likely prefer issuing bonds as a way to raise new money as opposed to issuing more shares?

B. more shares will dilute the existing value of the stock, causing its market price to fall

________________ are a form of _______ bonds that offer relatively high interest rates to compensate for their relatively high chance of default.

C. Junk bonds; corporate

Which of the following is not a typical question that must be answered with regard to a private company that is owned by a large number of shareholders?

C. What is the dividend yield on preferred shares of companies that hold this stock?

Venture capitalists typically create wealth by investing in a start up firm when its stock is less valuable, and then subsequently selling that stock for a higher price during the firm's _____________________ ,

C. initial public offering

What do stocks, bonds, securitized mortgage assets and other financial investments all have in common?

C. they can only be purchased in financial markets

In the United States, venture capital firms invested __________ in 2009.

D. $21 billion

Levi and Beverly paid 20% down on a house valued at $165,000 in 1994. They upgraded the house entirely in 2003, when they refinanced their mortgage for $165,000. If they sell the house in 2018 for $190,000, what would be the value of their equity in the home?

D. $25,000

Bill and Cathy built a new home in 1985 at a cost of $90,000.00. They paid 20% of the cost to build the home themselves and financed the remainder by way of a mortgage. They paid the mortgage off in 15 years. They used $35,000 from Bill's inheritance to upgrade the home in 2004. When they sold the home for $335,000.00 in 2006, what was the value of their equity?

D. $335,000

Briefly contrast a private company and a public company.

A private company is a business firm that is owned by the people who run it on a day-to-day basis. A public company is a business firm that has sold stock to the public, which can then be bought and sold by investors in an exchange market.

In 2004, Ted and Diane paid 20% down and took out a five-year mortgage for the balance of the $265,000 price of a home. After deducting interest, their monthly payments toward the principle balance owed on the mortgage was reduced by $2,000.00 each year. If they were to sell their home in 2009, it would sell for $215,000. What is the equity in their home?

A. $13,000

Last year Stealth Bank received $60 million in interest payments from borrowers. $20 million in loans were written off as uncollectible. It paid out $22 million in interest to its depositors and collected $35 million for various fees it charged. Administration costs were $15 million and taxes were $3 million. What was the value of Stealth Bank's accounting profits?

A. $35 million

Trevor and Lynda bought a home in 20013 for $185,000 with a 20% down payment. Their mortgage payments were only applied to interest on the mortgage balance. If they have to sell their home in 2016 for $148,000, what would be the value of their equity?

A. 0

Since stock prices will shift in response to unpredictable future news, these prices will tend to follow what mathematicians call _________________.

A. a random walk with a trend

A ________ is a direct payment from a firm to its shareholders

A. dividend

A bond is a form of ___________ through which a corporation agrees to repay the amount that was borrowed together with ___________ over a period of time in the future.

A. financial contract; a rate of interest

Investors who believe that the stock is _____________ , relative to the fundamental value of its future expected profits, will sell their shares to those who believe that the stock is __________.

A. overvalued; undervalued

XYZ Corporation plans to open a manufacturing plant in China, but the company has not retained any of its yearly profits for this purpose. How will XYZ Corporation likely raise the money to finance its offshore expansion?

A. sale of bonds to institutional investors

I'MAStart-UP Corp. issued and sold 2,500,000 common voting shares during its first public stock sale. What is the minimum number of shares needed to be able to elect a new director to the Board?

B. 1.25 million

A mutual fund that seeks to imitate the overall behavior of the stock market is called ____________________ .

B. an index fund

Which of the following is not an ironclad rule in the financial markets?

B. banks fund small business loans and large firms issue bonds to raise money

In the investment industry, the principle of _______________ supports investing in a wide range of companies to reduce the level of risk.

B. diversification

A ________________ operates directly between a saver with financial assets to invest and an entity who will receive those assets in exchange for paying a ________________ .

B. financial intermediary; rate of return

The City of Washington needs to upgrade its levies and its water drainage systems. The cost will exceed the amount of tax revenue the City expects to receive over the next 10 years. How will the City be able to raise the funds needed to finance this upgrade?

B. issue municipal bond

In choosing between the range of alternative investments typically available to U.S. households, which of the following will play a role in influencing their selection of a particular investment type?

B. the interest rate and the expected rate of return

Why do business firms need financial capital?

B. to make real physical capital investments

The _________ of an investment is determined by how easy it is to sell an asset at any given time.

C. liquidity

A checking account typically pays __________________, but gives easy access to your money, either by writing a check or by using ______________.

C. little or no interest; a debit card

In order to be classified as a _______________, a firm must be owned by the people who run it on a day-to-day basis.

C. private company

A _____________ is a firm that has sold its stock by making it available to be bought and sold by outside investors.

C. public company

Last year Stealth Bank received $100 million in interest payments from borrowers. $25 million in loans were written off as uncollectible. It paid out $30 million in interest to its depositors and collected $25 million for various fees it charged. Administration costs were $22 million and taxes were $3 million. What was the value of Stealth Bank's accounting profits?

D. $45 million

Jackie has invested $25,000 for a 10 period at a guaranteed interest rate of 9%. If Jackie decides to sell her investment before the 10 year period has ended, she may receive less if the interest rates at that time are lower. Jackie is a

D. bondholder

During the U.S. stock market collapse of 2007, Paula's financial advisor recommended that she invest in a number of pharmaceutical companies while their stock values were down considerably. He expected these companies to maintain high dividend yields, making them attractive to investors. If Paula follows her financial advisor's recommendations, she is

D. following fundamental trading advice.

The bottom line on investing in individual stocks is: _______________ on average over lengthy periods of time; ________________, especially in the short run; _______________, since stock does need to be sold to turn gains into spendable money.

D. high rate of return; high risk; moderate liquidity

Which of the following will provide an investor with a legally valid claim of partial ownership of a firm?

D. ownership of stock

Identify the most common original source of money used to start up most small businesses. What is an alternative source of funding that involves a network of angel investors who all reside in the same City?

For most small businesses, the original source of money is the owner of the business. Networks of well-to-do individuals residing in the same City who decide to put their own money into small new companies at an early stage of development, in exchange for owning some portion of the firm, are known as angel investors.

Briefly describe what is meant by the term "diversification" with respect to the investment industry. Identify and briefly explain two investment vehicles that offer investors a convenient way to diversify their investments.

In the investment industry, diversification refers to the practice of investing in a wide range of companies in order to reduce the investor's level of risk. Two investment vehicles offered by financial institutions and banks as a convenient way to diversify their investments are: 1) mutual funds, which is a fund that buys a range of stocks or bonds from different companies, and index funds, which is a form of mutual fund that seeks only to mimic the overall performance of the market.

Briefly explain how it is possible for most Americans to accumulate considerable financial wealth during their lifetimes.

Most Americans can accumulate considerable financial wealth if they follow two rules: complete significant additional education and training after graduating from high school, and start saving money early in life.

Briefly discuss how the price of a company's stock will be determined. Briefly describe the two main motivations for purchasing stock and identify which of these motivations will have the greatest effect on the market.

The price of a company's stock will be determined by expectations of future profits. There are two main motivations for purchasing stock. Fundamentals trading involves buying or selling stock based on estimates of the future expected profits of the firm. Momentum trading involves buying stock because the price is rising or selling stock because the price is falling, without regard for long-term fundamental value. Momentum trading may lead to a frenzy of trading activity that creates sharp rises and falls in stock prices.

Identify five examples of financial investment options available to U.S. households. Identify and briefly explain what will play a role in the choices households make in choosing between these investment alternatives.

U.S. households have a range of financial investment options: bank accounts, certificates of deposit, bonds, stocks, mutual funds, housing, and even tangible assets like gold. In choosing between these alternatives, the expected rate of return, risk, and liquidity of each kind of investment will play a role.

_______________ of well-to-do individuals often put their own money into small new companies at an early stage of development, in exchange for owning some portion of the firm.

C. A network

_______________________ find ways to take the inflow of funds from many separate _________ of financial capital and transform it into the funds desired by _______________ of financial capital.

C. Financial capital markets; suppliers; demanders

Treasury bonds are issued by the federal government through the _____________________ .

C. U.S. Department of the Treasury

Small companies typically prefer____________ to borrowing from a bank because it is a source of funding where the company is not obligated to _____________________ .

C. an IPO; make interest payments

Briefly describe what a "bond" is and give three examples that identify the issuers of the most common types of bonds that are available to investors.

A bond is a form of financial contract through which a borrower agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future. Three examples of the most common types of bonds available to investors are: 1) corporate bonds issued by firms that wish to borrow; 2) municipal bonds issued by cities that wish to borrow; and 3) Treasury bonds issued by the federal government through the U.S. Department of the Treasury

If a $1,000 five-year bond that was issued at an interest rate of 7% is offered for sale one year before it matures, and the current interest is 5%, how much should an investor be willing to pay for it?

A. $1,019

Each year banks typically offer a wide range of ____________ comprised of ______________________from a variety of different companies.

B. mutual funds; a range of stocks or bonds

Michael purchased 5,000 shares of IMAGoldMiner Inc. in May for $0.55 each. He purchased 5,000 more at $0.75 cents in June and another 5,000 for $1.02 in July. In October, IMAGoldMiner began production at its new gold mine and Michael was able to sell 5,000 shares at $2.05, another 5,000 at $3.25 and the remaining 5000 at $4.50. In this instance, Michael

B. profited by momentum trading.

How would a sustained increase in the market price of its shares directly benefit a publically traded company?

D. It could sell any shares it owns in itself at the higher valuation.

How has the widespread adoption of debit cards as the preferred method of payment for consumer purchases likely affected bank administration costs?

D. costs are reduced because the cost of purchase is immediately debited from purchaser's checking account

In January 2001, Bianca invested $5,000 for three years at 4.20%; in January 2010, she invested $5,000 for two years at 3.81%; and, in January 2011, she invested $5,000 for one year at 3.55%. Bianca's savings account in each year paid 2.8%, 1.59%, and 1.13% respectively. In January, 2014, if Bianca reinvests her initial capital of $15,000., plus the interest it has earned for another two-year term, her bank will likely offer to pay a higher rate of return

D. on the CD in exchange for her promise to leave the funds invested for the set-term.

The ownership in a company is represented by ________________ and those who are legally recognized as having ownership in a company are called _____________.

D. ownership of shares in the company's stock; shareholders

List the four main methods available to a textile manufacturer that needs to raise the financial capital they need to pay for the purchase and installation of solar panel equipment to generate electricity to run its large, existing textile plant.

The textile manufacturer can raise the financial capital that its needs to pay for the project using one of four main methods: 1) early stage investors; 2) reinvesting profits; 3) borrowing through banks or bonds; and 4) selling stock.

Discuss venture capital firms. Include a description of what venture capital firms do, how they gather money, what added benefits, if any, they provide, and how investors receive returns on their investments.

Venture capital firms make financial investments in new companies that are still relatively small in size, but that have potential to grow substantially. Venture capital firms gather money from a variety of individual or institutional investors, including banks, institutions like college endowments, insurance companies that hold financial reserves, and corporate pension funds. Venture capital firms do more than just supply money to small start-up firms. They also provide advice to the firm on potential products, customers, and key employees. A venture capital fund typically invests in a number of firms, and then investors in that fund receive returns according to how the fund as a whole performs.

Briefly explain why it is considered to be extremely difficult for financial professionals to choose only stocks for their client's investment portfolios whose price will rise in the future.

It is extremely difficult for financial professionals to predict changes in future expectations and thus to choose only the stocks whose price is going to rise in the future because: a) changes in the price of a stock depend on changes in expectations about future profits, and b) changes in expectations are largely unpredictable, so movements in stock prices will tend to be a random walk.

Which of the following would legally qualify you to be registered as a shareholder of Microsoft Corporation?

A. buying the stock on the New York Stock Exchange

Alysa and Todd purchased a home in 1999 for $80,000 with no down payment. In 2004, they were able to refinance their mortgage on the home for $140,000. They reinvested $75,000 into the home, adding a new addition and making upgrades. In 2006, the couple sold the home for $320,000. What was the value of Alysa and Todd's equity in 2006?

B. $180,000