Finance 409 Chapter 1 Practice Problems
$1,000 invested today at 6% interest would be worth ________ one year from now. (Choose the closest answer.)
$1,060
Select ALL of the following are not among the six principles of finance:
All decisions are ultimately financial decisions. Managers and stockholders objectives are always the same.
_______________ 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.
Entrepreneurial finance
______________ behavior refers to how an individual or organization treats others legally, fairly, and honestly.
Ethical
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
Entrepreneurial finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth.
False
Money markets are markets where equity securities and debt securities with maturities of greater than one year are traded.
False
Money markets are where debt securities with maturities of one year or more are issued and traded.
False
Personal finance is the study of how growth-driven performance-focused, early-stage firms raise financial capital and manage operations and assets.
False
The U.S. Treasury Department is primarily responsible for the amount of money that is created in the U.S. economy.
False
The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect some information available to the public and that when new information becomes available, prices change over time to reflect that information.
False
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
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
The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries.
False
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 a sum of money today could be invested and grow over time.
False
The role of financial markets in a country's financial system is to accumulate and invest savings.
False
The secondary securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth.
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 investments can increase risk, (4) Financial markets are inefficient in pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters.
False
Three financial system components are the U.S. Treasury, financial institutions, and financial markets.
False
The _________________ is primarily responsible for the amount of money that is created, although most of the money is actually created by depository institutions.
Federal Reserve System
___________________ 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.
Financial Institutions
_________________________________________ are crucial elements of the three areas of finance.
Financial institutions, financial markets, investments, and financial management
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:
Financial system
Select ALL of the following are among the six principles of finance:
Money has a time value. Higher returns are expected for taking on more risk. Financial markets are efficient in pricing securities.
Which statement best describes the six principles of finance?
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.
_______________ is the study of how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time.
Personal finance
Reasons we study finance include all of the following except:
To make informed medical decisions
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
Capital markets are markets where debt securities with maturities of greater than one year and equity securities are issued and traded.
True
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
Finance is the study of how individuals, institutions, and businesses acquire, spend and manage money and other financial resources.
True
Financial markets provide the mechanism for allocating financial resources or funds from savers to borrowers
True
Individuals and businesses hold money for purchases or payments they expect to make in the near future.
True
Money markets are the markets where debt securities with maturities of one year or less are issued and traded.
True
One of the most significant functions of the monetary system within the financial system is the creation of money, which serves as a medium of exchange.
True
Personal finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth.
True
The functions of financial institutions include accumulating savings and lending funds
True
The goal of the financial manager in a profit-seeking organization should be to maximize the owners' wealth.
True
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
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
The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may suffer as a result of manager objectives.
True
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
The principle of finance that "reputation matters" implies that 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
The principle of finance that "reputation matters" sometimes is harmed by the different objectives of owners and managers.
True
The role of financial institutions in a country's financial system is to accumulate and invest savings.
True
The six 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
While the financial press chooses to highlight examples of unethical behavior, most individuals exhibit sound ethical behavior in their personal and business dealings and practices.
True
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 **all of the above**
Basic financial functions of an effective financial system include:
a. creating money b. transferring money c. accumulating savings **all of the above**
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 for creating and transferring money c. that facilitate the transfer of financial assets amongst individuals, institutions, and businesses
____________________ 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.
accountants
Finance has its origins in:
accounting and economics
Functions of the monetary system include all of the following except
accumulating savings
Financial functions in the U.S. financial system include:
all of the above
Select ALL of the following that an effective financial system needs:
an efficient monetary system to be able to create capital by channeling savings into investment markets in which to buy and sell claims to wealth
Career opportunities in finance involving both treasury and control functions are generally associated with:
business financial management
___________ markets are where debt instruments or securities with maturities longer than one year and corporate stocks or equity securities are issued and traded.
capital
In the United States, most money is created by:
depository institutions
Successful businesses typically progress through a series of life-cycle stages—from the idea stage to exiting the business; these five stages include the:
development stage, startup stage, survival stage, rapid growth stage, and maturity stage.
Two risky assets can be combined to lower overall risk. This principle is commonly referred to as
diversification
Finance has its origins in:
economics and accounting
The theory of ___________________ implies that information is quickly embedded in prices making it difficult for investors to "beat the market."
efficient markets
The ______________ is a term used to describe the financial system, institutions, markets, businesses, individuals, and global interactions that help the economy operate efficiently
financial environment
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:
financial institutions
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:
financial institutions
Crucial elements of the three areas of finance include:
financial institutions, financial markets, investments and financial management
An area of finance that involves financial planning, asset management and fund-raising decisions to enhance the value of businesses is called:
financial management
____________________ in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services.
financial management
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:
financial markets
________________ facilitate the transfer of financial assets among individuals, institutions, businesses, and governments.
financial markets
An effective financial system must have
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. **all of the above are required**
Crucial elements of well-developed financial systems include all of the following except:
government control of the economy
Rational investors would consider an investment in a risky business venture only if they feel the expected return is high enough to justify the
greater risk
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:
investments
The primary goal of the financial manager of a profit-seeking organization should be to:
maximize the owners' wealth
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.
monetary system
markets are where debt securities with maturities of one year or less are issued and traded.
money
If the interest rate is greater than 0%, then a dollar today is worth
more than a dollar tomorrow
An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called:
none of the above
__________ markets are where the initial offering or origination of debt and equity securities takes place.
primary
The issuing of new securities, mortgages, and other claims to wealth takes place in the:
primary market
The possible conflict between managers and owners is sometimes called the
principal-agent problem
markets are physical locations or electronic forums where debt (bonds and mortgages) and equity securities are traded
secondary
Economists use a ___________________ framework to explain how the prices and quantities of goods and services are determined in a free-market economic system.
supply-and-demand
The primary securities markets are
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.
the owners' wealth.
If the interest rate is equal to 0%, then a dollar today is worth
the same as a dollar tomorrow
Finance is:
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?
transferring money
