Intro Ch 16

Select the two statement(s) that are true about commercial certificates of deposit (CDs).

Commercial CDs are issued by commercial banks and brokerage companies in minimum amounts of $100,000. Commercial CDs may be traded prior to maturity.

______ financing involves borrowing money; ______ financing is selling part of the company or reinvesting retained earnings in the company.

Debt; equity

_____ is a percentage of the principal that a bank charges for use of its money.

Interest

Match the market type with its definition. Primary market Secondary Market

Market where new issues of stocks and bonds are sold to the public Stock exchanges and over-the-counter markets where investors can trade previously owned stock

Which three items are specified in the bond indenture?

Maturity date of the bond Face value of the bond Interest rate of the bond

Because most corporate bonds and all U.S. government debt securities are traded in the _____ market, this market regularly accounts for the largest total dollar value of all the secondary markets.

OTC

Which market has no central location and is a network of dealers all over the country?

OTC

Which type of stock gives its owners preference in the distribution of company profits?

Preferred stock

Which type of market serves companies that wish to raise financial capital?

Primary market

Name the two largest stock markets in the United States.

The New York Stock Exchange The NASDAQ

What is par value?

The dollar amount printed on the stock certificate and has no relation to actual market value

Which investment option is considered to be the safest of all investments since it is issued by the federal government?

Treasury bills

True or false: A firm's cash must be available in the correct amount and on the correct date.

True

True or false: The prime rate is reserved for a commercial bank's best customers.

True

Which bonds are not backed by any specific collateral, such as land or equipment?

Unsecured bonds

An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request is called ______.

a line of credit

What market handles the trading of securities between investors rather than the company that issued the stock or bonds?

Secondary market

Joan owns a flower shop. As a small business owner she carefully manages the finances of her business. If Joan purchases flowers from a local producer for $500 and agrees to pay for the flowers within a month, Joan will list the $500 bill as _____ on her balance sheet.

accounts payable

Money an organization owes to suppliers for goods and services is called _____.

accounts payable

If you use your Macy's credit card to purchase a new outfit, you represent a(n) _____ on Macy's balance sheet.

accounts receivable

The balance sheet item that reflects money owed to a business by credit customers is ______.

accounts receivable

A(n) is a debt instrument that larger companies and governments sell to raise long-term funds.

bond

A(n) is like an IOU with a promise to repay the amount borrowed, with interest, on a certain date.

bond

Quinn works for a manufacturing company and is in the process of making a decision about the funding of future projects. Since the company has outlined more potential projects than can actually be funded, Quinn must select those projects that promise the greatest future return for the company. Quinn is involved in the process of _______.

capital budgeting

The process of analyzing the needs of the business and selecting assets that will maximize its value is called _____.

capital budgeting

When the board of directors distributes some of a corporation's profits to the owners, it issues them as ______.

cash dividend payments

The term used to describe a written promise from one company to another to pay a specific amount of money is _____________ paper.

commercial

A written promise from one company to another to pay a specific amount of money is the definition of ______.

commercial paper

The single most important source of capital for most new companies is stock.

common

Two common choices for raising funds to pay for long-term assets are equity financing and _____ financing.

debt

An international market for trading U.S. dollars in foreign countries is called the market.

eurodollar

Originally developed by London banks, any dollar-denominated deposit in a non-U.S. bank is called a ____________ deposit.

eurodollar

Originally developed by London banks, any dollar-denominated deposit in a non-U.S. bank is called a deposit.

eurodollar

Production facilities, office equipment, and heavy machinery are assets that are expected to last many years and are called long-term or assets.

fixed

Newer and less prosperous firms must pay ______ costs to attract capital because these companies tend to be quite risky.

higher

Naveen owns a distribution supply company. He is trying to decide whether or not to develop a robotic delivery system. All of the following are items Naveen should consider when making his decision EXCEPT ______.

how he can use his competitor's equipment

The bond contract, also called the _____, specifies all of the terms of the agreement between the bondholders and the issuing organization.

indenture

As a measurement of stock prices, a(n) ______ compares current stock prices with those in a specified base period.

index

When a small business owner borrows money from a bank, they will repay the original principal amount plus .

interest

When businesses calculate the costs to borrow money for capital budget projects they must be sure to include the _____ expenses for the debt used to finance the project.

interest

Juan runs a small manufacturing company. He thinks over the next year he might need to borrow approximately $25,000 for upgrades to his business. He has decided to make an arrangement with the bank for (a) _____, which will allow him to borrow various amounts over time, not to exceed $25,000, if he needs it.

line of credit

To facilitate collection, some companies have customers send their payments to a _____, which is simply an address for receiving payments, instead of directly to the company's main address.

lockbox

One of the strongest motivations for companies to manage their financial resources wisely is the desire to the costs of their funds in order to increase their overall profitability.

lower

Temporary investments of extra cash generated by companies are called ______.

marketable securities

Capital in excess of par is the difference between a stock's par value and its ______.

offering price

A stock's ______ is a dollar amount assigned to each share of stock on the stock certificate.

par value

Owners of ______ stock are given preference in the payment of company dividends

preferred

The interest rate commercial banks charge their best customers, usually large corporations, for short-term loans is the _____ rate.

prime

When Sal and Jen bought their first home they obtained a mortgage. The amount of money they borrowed for their mortgage is called the ______.

principal

When individuals and businesses borrow money, the amount of money borrowed is called ____.

principal

If a company balance sheet shows retained earnings, this number represents ______.

profits the company kept and reinvested in the firm

Bonds that are backed by the specific collateral that must be forfeited in the event that the issuing firm defaults are called bonds.

secured

Bonds that are backed by specific collateral that must be forfeited in the event that the issuing firm defaults are called ______.

secured bonds

If a small business owner takes out a loan to purchase a delivery van, where the delivery van is used as collateral for the loan, it is called a _____.

secured loan

An individual wants to sell his or her stocks and bonds to other investors. This is made possible through ______.

securities markets

Which of the following provide a mechanism for buying and selling securities?

securities markets

Credit extended by suppliers for the purchase of their goods and services is called .

trade credit

A loan backed only by the borrowers' good reputation and previous credit rating is a(n) ______.

unsecured loan

Match the term to its definition. Index Average

A comparison of current stock prices with those in a specified base period The calculated average of certain stock prices

What is a bond?

Debt instruments that larger companies sell to raise long-term funds

Choose all of the long-term (fixed) assets from the following list.

Production facilities Automobiles Heavy machinery

Which potential investment project would pose the least amount of risk for a firm?

Repairing old machinery and equipment

Which of the following long-term funds can be generated internally by a firm?

Retained earnings

What is debenture?

an unsecured bond

Shares of ownership in a company are called ______.

stock

The NYSE and the NASDAQ are ______.

stock markets

What is a stock?

A share of ownership in a company

Choose the correct definition for a transaction balance.

A transaction balance is cash kept on hand by a firm to pay normal daily expenses such as employee wages and bills such as utility payments.

Firms that receive thousands of checks from customers each day may benefit from the use of a(n) ______ to speed up cash collections from customers.

lockbox

Idle cash typically does not earn interest for the company, thus financial managers try to keep small amounts of cash on hand, called _____, to pay current bills such as wages, supplies and utilities.

transaction balances

Which two things will firms do to speed up the collection of payments from customers?

utilize a lockbox utilize electronic funds transfer systems

How often are T-bills issued?

weekly

Profits a company keeps and reinvests in the firm are called .

retained earnings

A sequence of small bond issues of progressively longer maturities are called _____ bonds.

serial

What do trade credit terms of 2/15 net 30 mean to a buyer?

A discount of 2 percent is offered if the bill is paid within 15 days, otherwise, the entire amount is due within 30 days.

Which of the following is a type of dividend?

A payment of additional shares or cash to stockholders

What type of stock is the single most important source of capital for most new companies?

Common

Which of the following does not trade on the OTC (over-the-counter) market?

Large corporate stocks

Which type of bond is not one bond, but a sequence of small bonds?

Serial bonds

Which two of the following is true of trade credit?

Trade credit frequently involves discounts to organizations that pay their bills early. Trade credit is the most widely used source of short-term funds.

Which of the following are examples of temporary marketable security investments utilized by firms to invest idle cash? (pick four answers)

Eurodollar deposits U.S. Treasury bills Certificates of deposit Commercial paper

True or false: Commercial certificates of deposit (CDs) work exactly the same way consumer CDs work, except that commercial CDs are issued in larger dollar amounts.

False