1. At the broadest level, the financial system moves the economy’s scarce resources from
a.
the rich to the poor.
b.
financial institutions to business firms and government.
c.
households to financial institutions.
d.
savers to borrowers.
2. The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic
of a bond called
a.
credit risk.
b.
interest risk.
c.
term risk.
d.
private risk.
3. When a large, well-known corporation wishes to borrow directly from the public, it can
a.
b.
c.
d.
4. Which of the following statements about the term of a bond is correct?
a.
Term refers to the various characteristics of a bond, including its interest rate and tax treatment.
b.
The term of a bond is determined entirely by its credit risk.
c.
The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or
she purchases the bond.
d.
Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
5. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have
identical characteristics except that
a.
the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
b.
Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation.
c.
Bond A has a term of 20 years and Bond B has a term of 2 years.
d.
All of the above are correct.
6. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have
identical characteristics except that
a.
Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong
corporation.
b.
Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York.
c.
Bond A has a term of 20 years and Bond B has a term of 1 year.
d.
All of the above are correct.
7. We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have
identical characteristics except that
a.
the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
b.
Bond A was issued by the Apple corporation and Bond B was issued by the city of Houston.
c.
Bond A has a term of 20 years and Bond B has a term of 2 years.
d.
All of the above are correct.
8. We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two bonds have
identical characteristics except that
a.
Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong
corporation.
b.
Bond A was issued by the Exxon Mobil Corporation and Bond B was issued by the state of New York.
c.
Bond A has a term of 1 year and Bond B has a term of 5 years.
d.
All of the above are correct.
9. Atlas Corporation is in sound financial condition. It sells a long-term bond. Which of the following make the interest
rate on this bond lower than otherwise?
a.
Both Altas’ sound finances and the long term of the bond.
b.
Atlas’ sound finances but not the long term of the bond.
c.
The long term of the bond but not Atlas’ sound finances.
d.
Neither Atlas’ sound finances nor the long term of the bond.
10. As an alternative to selling shares of stock as a means of raising funds, a large company could, instead,
a.
invest in physical capital.
b.
use equity finance.
c.
sell bonds.
d.
purchase bonds.
11. Which of the following statements is correct?
a.
The expected future profitability of a corporation influences the demand for that corporation’s stock.
b.
When a corporation sells stock as a means of raising funds it is engaging in debt finance.
c.
The owners of bonds sold by the Microsoft Corporation are part owners of that corporation.
d.
All bonds are, by definition, perpetuities.
12. Which of the following statements is correct?
a.
A corporation receives a monetary payment every time its shares of stock are traded by stockholders on
organized stock exchanges.
b.
When a corporation sells bonds as a means of raising funds it is engaging in debt finance.
c.
A share of stock is an IOU.
d.
The two most important financial markets in the economy are the stock market and financial intermediaries.
13. The economy’s two most important financial markets are
a.
the investment market and the saving market.
b.
the bond market and the stock market.
c.
banks and the stock market.
d.
financial markets and financial institutions.
14. Two of the economy’s most important financial intermediaries are
a.
suppliers of funds and demanders of funds.
b.
banks and the bond market.
c.
the stock market and the bond market.
d.
banks and mutual funds.
15. We associate the term debt finance with
a.
the bond market, and we associate the term equity finance with the stock market.
b.
the stock market, and we associate the term equity finance with the bond market.
c.
financial intermediaries, and we associate the term equity finance with financial markets.
d.
financial markets, and we associate the term equity finance with financial intermediaries.
16. A bond is a
a.
financial intermediary.
b.
certificate of indebtedness.
c.
certificate of partial ownership in an enterprise.
d.
None of the above is correct.
17. Which of the following is a financial-market transaction?
a.
A saver buys shares in a mutual fund.
b.
A saver deposits money into a credit union.
c.
A saver buys a bond a corporation has just issued so it can purchase capital.
d.
None of the above is correct.
18. A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a
a.
b.
c.
d.
19. Long-term bonds are
a.
riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on
short-term bonds.
b.
riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on
short-term bonds.
c.
less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates
on short-term bonds.
d.
less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates
on short-term bonds.
20. If the government’s expenditures exceeded its receipts, it would likely
a.
lend money to a bank or other financial intermediary.
b.
borrow money from a bank or other financial intermediary.
c.
buy bonds directly from the public.
d.
sell bonds directly to the public.
21. A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited
internal funds, so it likely will
a.
demand the required funds by buying bonds.
b.
demand the required funds by selling bonds.
c.
supply the required funds by buying bonds.
d.
supply the required funds by selling bonds.
22. Skyline Chili wants to finance the purchase of new equipment for its restaurants. The firm has limited internal funds,
so Skyline likely will
a.
demand funds from the financial system by buying bonds.
b.
demand funds from the financial system by selling bonds.
c.
supply funds to the financial system by buying bonds.
d.
supply funds to the financial system by selling bonds.
23. If the Apple corporation sells a bond it is
a.
borrowing directly from the public.
b.
borrowing indirectly from the public.
c.
selling shares of ownership directly to the public.
d.
selling shares of ownership indirectly to the public.
24. Which of the following is correct?
a.
The maturity of a bond refers to the amount to be paid back.
b.
The principal of the bond refers to the person selling the bond.
c.
A bond buyer cannot sell a bond before it matures.
d.
None of the above is correct.
25. Which of the following is not correct?
a.
By saving a larger portion of its GDP, a country can raise its output per worker.
b.
Savers supply their money to the financial system with the expectation that they will get it back with a return
at a later date.
c.
Financial intermediaries are the only type of financial institution.
d.
The financial system helps match people’s saving with other people’s borrowing.
26. Which of the following is not a nonsensical headline?
a.
British perpetuities about to mature.
b.
Disney issues new bonds with term of 7 percent.
c.
Corporate bonds currently pay higher interest rates than government bonds.
d.
Standard and Poor’s judges new junk bond to have very low credit risk.
27. The length of time until a bond matures is called the
a.
perpetuity.
b.
term.
c.
maturity.
d.
intermediation.
28. A perpetuity is distinguished from other bonds in that it
a.
pays continuously compounded interest.
b.
pays interest only when it matures.
c.
never matures.
d.
will be used to purchase another bond when it matures unless the owner specifies otherwise.
29. Which of the following is correct?
a.
Some bonds have terms as short as a few months.
b.
Because they are so risky, junk bonds pay a low rate of interest.
c.
Corporations buy bonds to raise funds.
d.
All of the above are correct.
30. Which of the following is not correct?
a.
If you buy a bond from a corporation, you can sell the bond to someone else before it matures.
b.
Term refers to the scheduling of periodic interest rate payments on a bond.
c.
A bond is an IOU.
d.
There are millions of different bonds in the U.S. economy.
31. A bond that never matures is known as a
a.
perpetuity.
b.
an intermediary bond.
c.
an indexed bond.
d.
a junk bond.
32. A perpetuity is
a.
a financial intermediary that has existed throughout recorded history.
b.
an instrument of equity finance.
c.
a stock that pays dividends forever.
d.
a bond that pays interest forever.
33. A bond buyer is a
a.
saver. Bond buyers must hold their bonds until maturity.
b.
saver. Bond buyers may sell their bonds prior to maturity.
c.
borrower. Bond buyers must hold their bonds until maturity.
d.
borrower. Bond buyers may sell their bonds prior to maturity.
34. Which of the following is correct?
a.
Lenders sell bonds and borrowers buy them.
b.
Long-term bonds usually pay a lower interest rate than do short-term bonds because long-term bonds are
riskier.
c.
The term junk bonds refers to bonds that have been resold many times.
d.
None of the above is correct.
35. Short-term bonds are generally
a.
less risky than long-term bonds and so they feature higher interest rates.
b.
less risky than long-term bonds and so they feature lower interest rates.
c.
more risky than long-term bonds and so they feature higher interest rates.
d.
more risky than long-term bonds and so they feature lower interest rates.
36. Compared to short-term bonds, other things the same, long-term bonds generally have
a.
more risk and so they pay higher interest rates.
b.
less risk and so they pay lower interest rates.
c.
less risk and so they pay higher interest rates.
d.
about the same risk and so they pay about the same interest rate.
37. Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is
believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of
the following is correct?
a.
Because they have the same term to maturity the interest rates should be the same.
b.
Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate.
c.
Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest
rate.
d.
It is not possible to say if one bond has a higher interest rate than the other.
38. On which of these bonds is the prospect of default most likely?
a.
a junk bond
b.
a municipal bond
c.
a U.S. government bond
d.
a corporate bond issued by Proctor & Gamble Corporation
39. On which of these bonds is the prospect of default least likely?
a.
a junk bond
b.
a bond issued by the state of Arizona
c.
a bond issued by the federal government
d.
a bond issued by General Electric Corporation
40. Which bond is likely to have higher interest rate due to a higher default risk?
a.
A share of stock issued by Apple.
b.
A corporate bond issued by Apple.
c.
A junk bond.
d.
A U.S. government bond.
41. Assume the bonds below have the same term and principal and that the state or local government that issues the
municipal bond has a good credit rating. Which list has bonds correctly ordered from the one that pays the highest interest
rate to the one that pays the lowest interest rate?
a.
corporate bond, municipal bond, U.S. government bond
b.
corporate bond, U.S. government bond, municipal bond
c.
municipal bond, U.S. government bond, corporate bond
d.
U.S. government bond, municipal bond, corporate bond
42. Other things the same, as the maturity of a bond becomes longer, the bond will pay
a.
a lower interest rate because it has less risk.
b.
a lower interest rate because it has more risk.
c.
a higher interest rate because it has more risk.
d.
the same interest rate, because there is no relationship between term and risk.
43. Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the bondholders. This
failure is referred to as a
a.
breach.
b.
default.
c.
risk.
d.
term failure.
44. Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds,
a.
the city’s high credit rating and the tax status of municipal bonds both contribute to a lower interest rate than
would otherwise apply.
b.
the city’s high credit rating and the tax status of municipal bonds both contribute to a higher interest rate than
would otherwise apply.
c.
the city’s high credit rating contributes to a lower interest rate than would otherwise apply, while the tax status
of municipal bonds contributes to a higher interest rate than would otherwise apply.
d.
the city’s high credit rating contributes to a higher interest rate than would otherwise apply, while the tax
status of municipal bonds contributes to a lower interest rate than would otherwise apply.
45. Municipal bonds pay a relatively
a.
low rate of interest because of their high default risk and because the interest they pay is subject to federal
income tax.
b.
low rate of interest because of their low default risk and because the interest they pay is not subject to federal
income tax.
c.
high rate of interest because of their high default risk and because federal taxes must be paid on the interest
they pay.
d.
high rate of interest because of their low default risk and because the interest they pay is not subject to federal
income tax.
46. A municipal bond is
a.
issued by the federal government.
b.
issued by state and local governments.
c.
issued by corporations.
d.
issued by households.
47. Owners of municipal bonds
a.
are not required to pay federal income tax on the interest income.
b.
usually receive a higher interest rate compared to bonds issued by corporations.
c.
usually receive a higher interest rate compared to stock issued by corporations.
d.
pay taxes on the dividends earned from these bonds.
48. Which of the following is true concerning interest rates on bonds?
a.
The tax treatment of interest earned on municipals bonds makes the interest rate on them higher than
otherwise. High default risk makes the interest rate on a bond higher than otherwise.
b.
The tax treatment of interest earned on municipals bonds makes the interest rate on them higher than
otherwise. High default risk makes the interest rate on a bond lower than otherwise.
c.
The tax treatment of interest earned on municipals bonds makes the interest rate on them lower than otherwise.
High default risk makes the interest rate on a bond higher than otherwise.
d.
The tax treatment of interest earned on municipals bonds makes the interest rate on them lower than otherwise.
High default risk makes the interest rate on a bond lower than otherwise.
49. Which of the following bond buyers did not buy the bond that best met his or her objective?
a.
Jackie wanted a bond with a high interest rate and was willing to take a lot of risk. She purchased a junk bond.
b.
Andrew wanted a bond that would allow him to legally avoid paying federal income taxes. He purchased a
municipal bond.
c.
Suzy wanted to purchase a bond whose seller was unlikely to default. She purchased a bond that Standards and
Poor’s rated a low credit risk.
d.
Cecilia held long-term bonds rather than short-term bonds to avoid risk.
50. You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds
a.
is not subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable
bonds issued by the U.S. government.
b.
is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable
bonds issued by the U.S. government.
c.
is subject to federal income tax and so these bonds pay a higher interest rate than otherwise comparable bonds
issued by the U.S. government.
d.
is subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds
issued by the U.S. government.
51. Other things the same, bonds are likely to have higher interest rates if they have
a.
tax exemptions and short terms.
b.
tax exemptions and long terms.
c.
no tax exemptions and short terms.
d.
no tax exemptions and long terms.
52. Other things the same, which bond would you expect to pay the highest interest rate?
a.
a bond issued by the U.S. government
b.
a bond issued by Microsoft Corporation
c.
a bond issued by the state of Montana
d.
a bond issued by a new chain of Brazilian-style restaurants
53. Other things the same, which bond would you expect to pay the lowest interest rate?
a.
a bond issued by a state with a very good credit rating
b.
a bond issued by the U.S. government
c.
a bond issued by a fairly new company doing genetic research
d.
a bond issued by Nabisco
54. You are thinking of buying a bond from Bluestone Corporation. You know that this bond is long term and you know
that Bluestone’s business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity
issued by a company with good prospects and an established reputation. Which of the following is correct?
a.
The longer term would tend to make the interest rate on the bond issued by Bluestone higher, while the higher
risk would tend to make the interest rate lower.
b.
The longer term would tend to make the interest rate on the bond issued by Bluestone lower, while the higher
risk would tend to make the interest rate higher.
c.
Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by
Bluestone.
d.
Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by
Bluestone.
55. Jerry has the choice of two bonds, one that pays 5 percent interest and one that pays 2 percent interest. Which of the
following is most likely?
a.
The 2 percent bond is more risky than the 5 percent bond.
b.
The 5 percent bond is a U.S. government bond, and the 2 percent bond is a junk bond.
c.
The 2 percent bond has a longer term than the 5 percent bond.
d.
The 2 percent bond is a municipal bond, and the 5 percent bond is a U.S. government bond.
56. Morgan, a financial advisor, has told her clients the following things. Which of her statements is not correct?
a.
“U.S. government bonds generally pay a higher rate of interest than corporate bonds.”
b.
“The interest received on corporate bonds is taxable.”
c.
“U.S. government bonds have the lowest default risk.”
d.
“If you purchase a municipal bond, you can sell it before it matures.”
57. The sale of stocks
a.
and bonds to raise money is called debt finance.
b.
and bonds to raise money is called equity finance.
c.
to raise money is called debt finance, while the sale of bonds to raise funds is called equity finance.
d.
to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.
58. ABC Co. sells newly issued bonds. JLG Co. sells newly issued stocks. Which company is raising funds in financial
markets?
a.
only ABC
b.
only JLG
c.
both ABC and JLG
d.
neither ABC nor JLG
59. The sale of bonds
a.
and stocks to raise money is called debt finance.
b.
and stocks to raise money is called equity finance.
c.
to raise money is called debt finance, while the sale of stocks to raise funds is called equity finance.
d.
to raise money is called equity finance, while the sale of stocks to raise funds is called debt finance.
60. Northwest Wholesale Foods sells common stock. The company is using
a.
equity financing and the return shareholders earn is fixed.
b.
equity financing and the return shareholders earn depends on how profitable the company is.
c.
debt financing and the return shareholders earn is fixed.
d.
debt financing and the return shareholders earn depends on how profitable the company is.
61. Stock represents
a.
a claim to a share of the profits of a firm.
b.
ownership in a firm.
c.
equity finance.
d.
All of the above are correct
62. The bond market
a.
is a financial market, whereas the stock market is a financial intermediary.
b.
is a financial intermediary, whereas the stock market is a financial market.
c.
is a financial market, as is the stock market.
d.
is a financial intermediary, as is the stock market.
63. Which of the following would likely make the interest rate on a bond higher than otherwise?
a.
both high credit risk and a long term
b.
high credit risk but not a long term
c.
a long term but not a high credit risk