Business Finance – Ch. 2

1. A company can pay for its expansion in all the following ways except: A. by using the earnings generated from its sale of obsolete equipment.B. by persuading the director’s mother to make a personal loan to the company.C. by purchasing bonds in the secondary market.D. by selling stock certificates for a new subsidiary. C. by purchasing bonds in the secondary market.
2. “Reinvestment” means: A. new investment in new operations.B. additional investment in existing operations.C. new investment by new shareholders.D. additional investment by existing shareholders. D. additional investment by existing shareholders.
3. Excess cash held by a firm should be: A. reinvested by the firm in projects offering the highest rate of return.B. reinvested by the firm in projects offering rates of return higher than the cost of capital.C. reinvested by the firm in the financial markets.D. distributed to bondholders in the form of extra coupon payments. B. reinvested by the firm in projects offering rates of return higher than the cost of capital.
4. A financial intermediary provides financing for: A. individuals.B. companies.C. other organizations.D. all of these. D. all of these.
5. Which of the following statements is not characteristic of mutual funds? A. They are financial institutions.B. They raise money by selling shares to investors.C. They pool the savings of many investors.D. They offer professional management. A. They are financial institutions.
6. Compared to buying stocks and bonds directly, what are the advantages of investing in a mutual fund? A. Mutual funds are efficiently diversified and professionally managed.B. Investment returns are never taxed until withdrawn from the fund.C. You can buy additional shares in the fund or cash out at any time.D. All of these. A. Mutual funds are efficiently diversified and professionally managed.
7. Banks cover the costs of the service they provide primarily via: A. a management fee.B. a service charge.C. an interest rate differential.D. an operating fee. C. an interest rate differential.
8. Which of the following financial intermediaries has shown a preference for investing in long-term financial assets? A. Commercial banksB. Insurance companiesC. Finance companiesD. Savings banks B. Insurance companies
9. Which of the following financial intermediaries can loan money directly to businesses? A. Mutual fundsB. Pension fundsC. Insurance companiesD. All of these C. Insurance companies
10. Insurance companies can usually cover the claims of policyholders because: A. the incidence of claims normally averages out.B. they issue thousands of insurance policies.C. the cost of paying for claims has already been factored into the price of the policies.D. all of these. D. all of these.
11. Which of the following is not typically considered a function of financial intermediaries? A. Providing a payment mechanismB. Investing in real assetsC. Accumulating funds from smaller investorsD. Spreading, or pooling risk among individuals B. Investing in real assets
12. U.S. bonds and other debt securities are mostly held by: A. institutional investors.B. households.C. foreign investors.D. state and local governments. A. institutional investors.
13. Liquidity is important to a mutual fund because: A. a fund that is less liquid will attract more investors.B. the fund’s shareholders may want to redeem their shares at any time.C. the fund’s managers need liquidity to trade actively.D. the fund needs to distribute payouts to its shareholders and managers periodically. B. the fund’s shareholders may want to redeem their shares at any time.
14. Property insurance companies protect themselves against the extensive damage caused by hurricanes and earthquakes by: A. selling thousands of policies to different homeowners.B. factoring the cost into the price of the policies.C. buying reinsurance against such catastrophes.D. declaring bankruptcy when the need arises. C. buying reinsurance against such catastrophes.
15. Financing for public corporations flows through: A. the financial markets only.B. financial intermediaries only.C. derivatives markets.D. the financial markets, financial intermediaries, or both. D. the financial markets, financial intermediaries, or both.
16. When corporations need to raise funds through stock issues, they rely on the: A. primary market.B. secondary market.C. tertiary market.D. centralized NASDAQ exchange. A. primary market.
17. A primary market would be utilized when: A. investors buy or sell existing securities.B. shares of common stock are exchanged.C. securities are initially issued.D. a commission must be paid on the transaction. C. securities are initially issued.
18. The primary distinction between securities sold in the primary and secondary markets is the: A. riskiness of the securities.B. price of the securities.C. previous issuance of the securities.D. profitability of the issuing corporation. C. previous issuance of the securities.
19. Which of the following are both a financial intermediary and a financial institution? A. Mutual fundsB. Pension fundsC. Insurance companiesD. Hedge funds C. Insurance companies
_______________: Market where securities are issued and traded. Financial markets
________________________: Over-the-counter markets for foreign currency trades through a network of largest international banks. Foreign-exchange markets
______________________: Securities whose payoffs depend on the prices of other securities / commodities. Derivatives markets
________________________: An organization that raises money from investors, and provides financing for individuals, companies, and other organizations Financial Intermediaries
__________________________: Raise money by taking deposits or selling insurance policies and invest only in financial assets Non-financial (manufacturing) corporations
Classes of Financial Intermediaries: _________ funds ____ funds ______ funds Mutual, Hedge, Pension
_____________: A private investment pool open to wealthy or institutional investors. Are lightly regulated and can pursue high-risk investment strategies. Hedge Fund
Insurance Companies: debt financing from sale of __________________ insurance policies

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