Finance Test 1
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.
T
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
T
Identify the four types of major financial markets.
The four types of financial markets are debt securities markets, equity securities markets, derivative securities markets, and foreign exchange markets. Debt securities markets are markets where money market securities, bonds (corporate, financial institution, and government), and mortgages are originated and traded. Equity securities markets are markets where common stocks are initially sold and traded. Derivative securities markets are markets for financial contracts (or instruments) that derive their values from underlying debt and equity securities. Foreign exchange markets are electronic markets in which banks and institutional traders buy and sell various currencies on behalf of businesses and other clients.
The six principles of finance are:
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. 6. Reputation matters.
The four main types of financial markets are:
1. debt securities markets, 2. equity securities markets, 3. derivative securities markets, and 4. foreign exchange markets.
Entry-level career opportunities involving business financial management include which of the following? a. Capital expenditures analyst b. Investments research analyst c. Stockbroker or account executive d. Insurance agent or broker
A
Finance is the study of how individuals, institutions, governments, and businesses a. acquire, spend, and manage money and other financial assets. b. spend and manage financial assets. c. acquire and spend money. d. acquire and manage money and real assets
A
The reasons for studying finance are to make informed a. economic, personal and business investment, and career decisions. b. political, economic, and career decisions. c. economic, social, and behavioral decisions. d. personal, business, and government decisions.
A
What are financial markets, where debt securities with maturities of one year or less are issued and traded, called? a. Money markets b. Capital markets c. Primary markets d. Secondary markets
A
What are the four major components of the U.S. financial system? a. Policy makers, a monetary system, financial institutions, and financial markets b. Policy makers, a monetary system, a fiscal system, and real estate markets c. A monetary system, a fiscal system, a banking system, and securities markets d. Congress, Federal Reserve central bank, securities firms, and equity securities markets
A
What are the two finance themes carried throughout this book? a. Financial environment and financial management b. Entrepreneurial finance and personal finance c. Personal finance and investments d. Entrepreneurial finance and financial management
B
What is the role of a monetary system in an effective financial system? a. Pass laws and set fiscal and monetary policies b. Create and transfer money c. Accumulate and lend/invest savings d. Market and facilitate transfer of financial assets
B
Finance principles focus on an individual's a. political and economic behavior. b. economic and social behavior. c. economic and ethical behavior. d. ethical and political behavior.
C
In what part of this book is the financial management of businesses covered? a. Part 1 b. Part 2 c. Part 3 d. Part 4
C
What are the financial markets where ownership shares in corporations are initially sold and traded? a. Debt securities markets b. Bond and mortgage markets c. Equity securities markets d. Derivative securities markets
C
What are the three areas of finance? a. Institutions and markets, investments, and entrepreneurial finance b. Investments, institutions and markets, and personal finance c. Institutions and markets, investments, and financial management d. Investments, entrepreneurial finance, and financial management
C
What are the major areas for possible careers in finance? a. Business financial management b. Depository financial institutions c. Contractual savings and real property organizations d. Securities markets and investment firms e. All the choices are correct
E
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.
F
Money markets are where debt securities with maturities of one year or more are issued and traded. Answer
F
The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries.
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 a sum of money today could be invested and grow over time
F
The role of financial markets in a country's financial system is to accumulate and invest savings.
F
The secondary securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth.
F
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.
F
Briefly describe the differences between money and capital markets.
Money markets are the markets where debt instruments of one year or less are traded. In contrast, capital markets are markets for debt securities with maturities in excess of one year and corporate stocks.
What are the differences between primary and secondary markets?
Primary securities markets are markets in which the initial offering of debt and equity securities to the public occurs. Secondary securities markets are markets where the transfer of existing debt and equity securities between investors occurs.
Money markets are the markets where debt securities with maturities of one year or less are issued and traded
T
What are the four major components of an effective financial system?
The basic requirements are: a. Policy makers. Comprised of the President, Congress, the U.S. Treasury, and the Federal Reserve Board. b. An efficient monetary system: This requires a unit of account such as the dollar and a convenient means of paying for everything from a pack of chewing gum to a business worth millions. c. A system for channeling savings into investment: This requires proper legal instruments and financial institutions so that savers are willing and able to transfer savings to those having a demand for them. d. Financial markets and procedures for transferring claims to wealth: This facilitates the investment process since the owner of funds will invest more readily if claims can be converted into cash when there is a need or desire to do so.
What is meant by the term financial environment?
The financial environment encompasses the financial system, institutions, markets, and individuals that make the economy operate efficiently.
What are the six principles of finance?
The six principles are: 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. 6. Reputation matters.
Identify and briefly describe the financial functions in the financial system.
The three components of the financial system are: a monetary system, financial institutions, and financial markets. a. Monetary system financial functions are: creating money and transferring money. b. Financial institutions carry out the savings-investment process via the financial functions of accumulating savings and lending/investing savings. c. Financial markets perform the financial functions of marketing and transferring financial assets
Match the following dates with the associated events:
a. 2000 [#4 technology stock bubble] b. 2001 [# 2 U.S. terrorist attack] c. 2006 [# 5 housing price bubble] d. 2007-08 [#3 financial crisis] e. 2008-09 [#1 great recession]
Which of the following is the sequencing of the three parts covered in this book's plan of study? a. Institutions and markets, investments, and financial management b. Investments, institutions and markets, and financial management c. Financial management, investments, and institutions and markets d. Institutions and markets, entrepreneurial finance, and personal finance
A
Which one of the following is a principle of finance? a. Money has the same value today or tomorrow. b. Lower returns are expected for taking on more risk. c. Diversification of investments increases risk. d. Financial markets are efficient in pricing securities
D
Which principle of finance is not an economic principle? a. Time value of money b. Risk versus return c. Diversification of risk d. Reputation matters
D
How do debt securities and equity securities differ?
Debt securities are obligations to repay borrowed funds. Common stocks are ownership shares in corporations.
What is finance?
Finance is the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial resources.
Indicate some of the career opportunities in finance available to business graduates today.
Career opportunities are generally found in the following areas. a. Financial management. Entry-level opportunities (either in the treasurer's department or the controller's department) include cash management analyst, capital expenditures analyst, credit analyst, financial analyst, cost analyst, and tax analyst b. Depository financial institutions. Entry-level job opportunities include loan analyst, bank teller, and investments research analyst. c. Contractual savings and real property organizations. Entry-level opportunities include insurance agent or broker, research analyst, real estate agent or broker, and mortgage analyst. d. Securities markets and investment firms. Entry-level opportunities include stockbroker or account executive, security analyst, investment banking analyst, and financial planner assistant.
A basic understanding of business finance is important even if you are interested in a nonfinance career or professional activity because you will likely need a. to interact with finance professionals within and outside your organization. b. a basic knowledge of the concepts, tools, and applications of financial management. c. to make informed career decisions based on a basic understanding of business finance. d. All of the choices are correct.
D
What are financial markets that are physical locations or electronic forums where debt and equity securities are traded called? a. Money markets b. Capital markets c. Primary markets d. Secondary markets
D
What are the financial functions carried out by financial markets in an effective financial system? a. Passing laws and setting fiscal and monetary policies b. Creating money and transferring money c. Accumulating savings and lending/investing savings d. Marketing financial assets and transferring financial assets
D
What topics do the three parts of this book cover? a. Institutions and markets b. Investments c. Financial management d. All of the choices are correct
D
When did the "Great Recession" occur? a. 1999-2000 b. 2005-2006 c. 2007-2008 d. 2008-2009
D
Briefly describe the terms entrepreneurial finance and personal finance
Entrepreneurial finance studies how growth-driven, performance-focused, early-stage firms raise financial capital and manage their operations and assets. Personal finance studies how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time.
Describe what is meant by ethical behavior.
Ethical behavior is how an individual or organization treats others legally, fairly, and honestly. Laws and regulations ensure minimum levels of protection and compliance and the difference between unethical and ethical behavior. High ethical behavior occurs when behavior exceeds basic legal or regulatory standards.
Entrepreneurial finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth.
F
Money markets are markets where equity securities and debt securities with maturities of greater than one year are traded
F
Personal finance is the study of how growth-driven performance-focused, early-stage firms raise financial capital and manage operations and assets.
F
The U.S. Treasury Department is primarily responsible for the amount of money that is created in the U.S. economy.
F
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.
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.
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
F
Three financial system components are the U.S. Treasury, financial institutions, and financial markets.
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.
T
Capital markets are markets where debt securities with maturities of greater than one year and equity securities are issued and traded.
T
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.
T
Finance is the study of how individuals, institutions, and businesses acquire, spend and manage money and other financial resources
T
Financial markets provide the mechanism for allocating financial resources or funds from savers to borrowers
T
Individuals and businesses hold money for purchases or payments they expect to make in the near future.
T
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.
T
Personal finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth.
T
The functions of financial institutions include accumulating savings and lending funds.
T
The goal of the financial manager in a profit-seeking organization should be to maximize the owners' wealth.
T
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.
T
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.
T
The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may suffer as a result of manager objectives.
T
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.
T
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.
T
The principle of finance that "reputation matters" sometimes is harmed by the different objectives of owners and managers.
T
The role of financial institutions in a country's financial system is to accumulate and invest savings.
T
Briefly describe how the financial environment has changed during the past few years
The technology/dot.com stock price bubble burst in 2000. The housing price bubble burst in 2006. Falling housing prices accompanied by falling values of mortgage-backed securities led to the 2007-08 financial crisis and the resulting 2008-09 Great Recession. Economic activity has been slow to recover and unemployment rates remained at high levels at the end of the first decade of the twenty-first century.
What are the three areas of finance?
The three areas of finance within the financial environment and financial system are institutions and markets, investments, and financial management. Financial institutions are intermediaries that help the financial system operate efficiently and assist the savings-investment process. Financial markets are physical locations or electronic forums that facilitate the flow of funds. Investments involve the marketing of securities, securities analysis, and the management of investment risk. Financial management involves financial planning, asset management, and fund raising decisions to enhance the value of firms
Identify and briefly describe several reasons for studying finance.
There are several reasons to study finance. a. As a citizen (of the U.S.A. or another country), you should want to make informed economic decisions. Whatever your financial and economic goals may be, you need to be an informed participant if you wish to "make a difference." b. Having some knowledge about finance, particularly the financial markets or investments component, should be important to you. An understanding of various aspects of personal finance should help you better manage your existing financial resources, as well as provide the basis for making sound decisions for accumulating wealth over time. c. To be successful in the business world, it is important to have a basic understanding of business finance in addition to an understanding of institutions, markets, and investments.
In business, ethical dilemmas or situations occur frequently. Laws and regulations exist to define unethical behavior. However, the practicing of high quality ethical behavior often goes beyond just meeting laws and regulations. Indicate how you would respond to the following situations
a. Your boss has just told you that there will be an announcement tomorrow morning that the Federal Drug Administration has approved your firm's marketing of a new breakthrough drug. As a result of this information, you are considering purchasing shares of stock in your firm this afternoon. What would you do? The violation of U.S. laws is both illegal, which could result in prison time, and unethical. U. S. securities laws prohibit officers, employees, and others from taking advantage of "inside" information which when released will impact security prices. This situation seems to violate securities laws and thus you should not purchase shares of stock in your firm prior to the public announcement of this inside information. b. In the past, your firm has been in compliance with regulatory standards relating to product safety. However, you have heard through the "company grapevine" that recently some of your firm's products have failed resulting in injuries to customers. You are considering quitting your job due to personal moral concerns. What would you do? Ethical behavior is how an individual or organization treats others legally, fairly, and honestly. Your firm has been legally in compliance with regulatory standards relating to product safety. At this time injury related product failures seem to be rumors and product safety regulations do not attempt to ensure there will be no injuries. You probably would want to wait until actual "facts" are known before taking any actions. Ultimately you should decide whether you believe your firm is treating customers fairly and honestly in addition to legally
The U.S. financial system is comprised of: (1) policy makers, (2) a monetary system, (3) financial institutions, and (4) financial markets. Indicate which of these components is associated with each of the following "roles":
a. accumulate and lend/invest savings [# 3 financial institutions] b. create and transfer money [# 2 a monetary system] c. pass laws and set fiscal and monetary policies [# 1 policy makers] d. market and facilitate transfer of financial assets [# 4 financial markets]
Financial markets may be categorized as: (1) debt securities markets, (2) equity securities markets, (3) derivative securities markets, and (4) foreign exchange markets. Indicate in which of these markets the following securities trade:
a. mortgages [# 1 debt securities markets] b. bonds [# 1 debt securities markets] c. common stocks [# 2 equity securities markets] d. currencies [# 4 foreign exchange markets]