Ch. 2 Financial Markets & Interest Rates

What is the annual interest payment on a bond with a 7% coupon rate and a $1,000.00 par value?

A) $7.00 B) Correct! $70.00 C) $700.00 D) none of the answers is correct E) $3.5 ------> Annual interest payment is equal to the coupon payment: (.07)*(1,000)=$70

Which one of the following statements is correct?

A) All stock transactions are secondary market transactions. B) All Dutch auction sales are secondary market transactions. C) All stock trades between existing shareholders are secondary market transactions. D) All secondary markets are dealer markets. E) All secondary markets are broker markets.

Which of the following statement is correct?

A) All the answers are incorrect. B) Primary market transactions may occur on an exchange or on the over-the-counter market. C) Correct! When the federal government wants to borrow money for periods of more than a year, it issues Treasury notes or Treasury bonds. D) Investment brokers make their living buying securities and reselling them to others and operate just like car dealers who buy cars from manufacturers for resale to others. E) Dealers are often account representatives for an investment banking firm and handle orders to buy or sell securities and they are the agents who work on behalf of an investor.

Which of the following statement is correct?

A) All the answers are incorrect. B) Relatively safe bonds are called junk bonds. C) Correct! The secondary market is where previously issued securities or "used" securities are traded among investors. D) Money market securities include bonds and stock. E) Maturity date is the date on which the issuer is obligated to pay the stockholder the stock's dividends.

Which of the following statement is correct?

A) Brokers make money by buying securities for one price, called the bid price, and selling them for a higher price, called the ask (or offer) price. B) Correct! Brokers act as a fiduciary to investors and they are obligated to put the interests of the investors ahead of all others, including the interests of the fiduciary herself as a broker. C) Long-term securities are traded in the money market. D) All the answers are incorrect. E) Buyers of capital market securities include governments, corporations, and financial institutions that want to park surplus cash for a short time and other investors who want the ability to alter or cash in their investments quickly.

Which of the following statement is incorrect?

A) Correct! Risk increases the firm value when owners and investors are less certain about a firm's expected cash inflows. B) The more certain owners and investors are about a firm's expected cash inflows, the higher they will value the company. C) Most of the answers are correct. D) You Answered The sooner a company expects to receive cash and the later it expects to pay out cash, the more valuable the firm and the higher its stock price will be. E) Stock price maximization and stockholder wealth maximization are different ways of saying the same thing.

Which of the following is an example of a primary market transaction?

A) Correct! a surplus economic unit gets a T-bill through the weekly Treasury auction B) Mr. Jones buys common stocks from New York Stock Exchange (NYSE) C) a surplus economic unit issues commercial paper to a dealer D) a surplus economic unit gets a commercial loan from the bank E) a surplus economic unit issues a CD to Citibank

The nominal rate of interest is made up of

A) Correct! both real rate of interest and compensation for inflation B) the real rate of interest. C) a stock cross-index return D) a commodity cross-index return. E) compensation for inflation.

Investment dealers:

A) Correct! brokers who make money by buying and selling securities at bid prices to make profits from the difference. B) none of the answers is correct. C) brokers who make money by buying and selling securities at ask prices to make profits from the difference. D) make money by buying at ask prices and selling securities at bid prices to make profits from the difference. E) make money by buying at bid prices and selling securities at ask prices to make profits from the difference.

If a firm needs to finance a new corporate headquarters building, then it would most likely seek the funds in the

A) Correct! capital market. B) commodity market. C) cash market D) futures market. E) money market.

The investment firms that act as intermediaries between the issuer of securities and the potential investors are called:

A) Correct! underwriters. B) investment advisors. C) Green Shoe firms. D) venture capitalists. E) brokers.

Which of the following statement is correct?

A) Dealers are obligated to find "suitable investments" for their clients as a fiduciary. B) Correct! Money market securities include Treasury bills, negotiable certificates of deposit, commercial paper, Eurodollars, and banker's acceptances. C) Buyers of capital market securities include governments, corporations, and financial institutions that want to park surplus cash for a short time and other investors who want the ability to alter or cash in their investments quickly. D) Primary market transactions may occur on an exchange or on the over-the-counter market. E) All the answers are incorrect.

Which of the following statement is incorrect?

A) If we multiply the number of shares of stock outstanding times the current market price we get the market value of the firm's equity. B) The sub-prime mortgage were riskier than traditional mortgages and the sub-prime mortgage paid a higher interest rate. C) Correct! The sales are the same as cash inflows because businesses sell goods and services and always collect cash at the time of the sale. D) Most of the answers are correct. E) Any event or financial decision that increases the risk associated with receipt of expected cash flows reduces stock price.

Which of the following statement is incorrect?

A) Most of the answers are correct. B) Correct! Cash inflows expected later result in a higher stock price. C) Closely held or close corporations are owned by a small number of stockholders and do not extend ownership opportunities to the general public. D) The basic goal of the business firm is to maximize the wealth of the firm's owners by adding value; it is not to maximize profits. E) When risk increases, the stock price goes down; and conversely, when risk decreases, the stock price goes up.

Which of the following statement is incorrect?

A) Most of the answers are correct. B) When the financial decisions are not consistent with the best interests of the stockholders, then there is a violation of the agent-principal relationship and an agency problem exists. C) The sole proprietor is responsible for any tax liability generated by the business, and the tax rates are those that apply to an individual. D) Correct! With financial monitoring costs such as accounting audits, the firm resources are expended to increase agency conflicts. E) The sooner a company expects to receive cash and the later it expects to pay out cash, the more valuable the firm and the higher its stock price will be.

Which one of the following parties can sell shares of ABC stock in the primary market?

A) Private individual shareholder B) Any corporation, other than the ABC company C) Institutional shareholder D) Any of the above E) Correct! ABC company

Which of the following statement is correct?

A) The coupon interest payments of the corporate bonds are free of federal income tax. B) Securities does not have value because the bearer has to pay the amount specified, and therefore the bearer could not sell the security to someone else for cash. C) All the answers are incorrect. D) Primary market transactions may occur on an exchange or on the over-the-counter market. E) Correct! The secondary market is where a previously issued security is traded from one investor to another.

Which of the following statement is incorrect?

A) The sole proprietor is responsible for all the obligations of the business, even if those obligations exceed the amount the proprietor has invested in the business. B) Correct! A corporation is responsible for all the obligations of the business, even if those obligations exceed the amount the proprietor has invested in the business. C) Most of the answers are correct. D) Concentrating on company value, not profits, is a better measure of financial success. E) Financial managers act as agents for the stockholders who are principals.

An example of a capital market security would be:

A) a Treasury bill B) none of the answers is correct C) Correct! a bond D) a commercial paper E) a banker's acceptance

All of the following are characteristics of common stock except the:

A) ability to vote for corporate directors. B) right to share proportionally in any residual value in a bankruptcy proceeding. C) Correct! priority over other equity in a bankruptcy proceeding. D) ability to vote on key issues such as a merger. E) right to share proportionally in dividends paid to common shareholders.

With respect to bid-ask spreads, a dealer:

A) and a broker both profit directly from spreads B) quotes the bid price on a security higher than the ask price C) trades exchange listed securities only D) none of the answers is correct E) Correct! has a spread that generates income for him/her

A broker is an agent who:

A) buys and sells from inventory. B) mediates sales between dealers. C) trades on the floor of an exchange for himself or herself. D) offers new securities for sale to dealers only. E) Correct! arranges transactions among investors.

Money market instruments are generally issued by

A) firms of the lower credit ratings. B) firms of the no credit ratings. C) Correct! firms of the highest credit rating. D) firms going public first time E) firms in dire need of cash to maintain their credit rating.

Which of the following risk premiums might be included in a corporation's bonds?

A) inflation risk B) Correct! default risk, inflation risk, and illiquidity risk C) illiquidity risk D) default risk E) none of the answers is correct

Common stock:

A) is generally issued frequently B) does not pay dividends as does preferred stock C) Correct! is riskier than preferred stock to the investor D) none of the answers is correct E) is usually less profitable to the investor than preferred stock

Commercial paper is:

A) is sold at a premium over par B) Correct! is a money market instrument C) is sold at bid price D) issued for a period greater than one year E) has a slightly lower yield than a Treasury bill of comparable maturity

The coupon interest on a typical Treasury bond traded in the secondary market:

A) none of the answers is correct B) changes frequently C) is capped at 10% by law D) Correct! can be higher or lower than the current market interest rate E) adjusts for changes in the market interest rates

Preferred stock:

A) pays a guaranteed dividend. iB) s more valuable if it is noncumulative rather than cumulative. C) Correct! does not create a liability for a firm when its dividends are deferred. D) is treated as debt for tax purposes. E) almost always carries voting privileges.

____________ make money by buying and selling securities at bid ask prices.

A) real estate agents B) investment brokers C) Correct! investment dealers D) over-the-counter-agents E) government agents

A zero-coupon bond:

A) usually pays interest semi-annually B) is usually issued with a maturity of less than five years C) Correct! makes no periodic interest payments D) is illegal to sell E) is junk bond and has no value