Fundamentals of Corporate Finance 3e Test Bank
38.
The ease with which a security can be sold and converted into cash is called:
A)
convertibility.
B)
liquidity.
C)
marketability.
D)
none of the above.
Ans:
C
39.
The presence of a financial market increases the marketability of a financial security by:
A)
essentially insuring the price of the security.
B)
reducing the transaction costs for selling the security.
C)
guaranteeing the accuracy of information produced by the issuer of the security.
D)
none of the above.
Ans:
B
40.
One of the main services offered by investment banks to companies is:
A)
helping companies sell new debt or equity issues in the security markets.
B)
making loans to companies.
C)
taking deposits from companies.
D)
all of the above.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
41.
The NYSE is an example of:
A)
an over-the-counter market exchange.
B)
an organized exchange.
C)
a commodities exchange.
D)
all of the above.
Ans:
B
42.
Which of the following markets has no central trading location?
A)
A futures exchange.
B)
An over-the-counter market.
C)
An auction market.
D)
None of the above.
Ans:
B
43.
A highly liquid financial instrument with a maturity of 90 days would be traded in:
A)
the money market.
B)
the bond market.
C)
the stock market.
D)
none of the above.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
44.
Money market instruments are generally issued by:
A)
firms in dire need of cash to maintain their credit rating.
B)
firms of the highest credit rating.
C)
firms of the lower credit ratings.
D)
all of the above.
Ans:
B
45.
The term money market is used because:
A)
firms that issue securities in this market are in dire need of cash.
B)
it is a market where stocks are converted into money.
C)
the instruments traded in this market are close substitutes for cash.
D)
none of the above.
Ans:
C
46.
If a firm needs to adjust its liquidity position, then it would participate in:
A)
the money market.
B)
the bond market.
C)
the stock market.
D)
the auction market.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
47.
If a firm needs to finance a new corporate headquarters building, then it would most likely seek
the funds in the:
A)
money market.
B)
capital market.
C)
futures market.
D)
all of the above.
Ans:
B
48.
The most common reason that corporate firms use the futures and options markets is:
A)
to hedge risk.
B)
to take risk.
C)
to make deposits.
D)
none of the above.
Ans:
A
49.
Which of the following theories states that security prices reflect all public information, but not
all private information?
A)
Weak-form efficiency.
B)
Semistrong-form efficiency.
C)
Strong-form efficiency.
D)
Nominal-form efficiency.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
50.
Which of the following theories states that security prices reflect all information, whether
public or private?
A)
Weak-form efficiency.
B)
Semistrong-form efficiency.
C)
Strong-form efficiency.
D)
Nominal-form efficiency.
Ans:
C
51.
If your firm primarily borrows from commercial banks, then it primarily accesses the capital
markets through:
A)
direct financing.
B)
indirect financing.
C)
a legal loophole that allows all commercial banks the ability to underwrite securities.
D)
none of the above.
Ans:
B
52.
The process of converting financial securities with one set of characteristics into securities with
another set of characteristics is called:
A)
financial bundling.
B)
financial intermediation.
C)
financial disintermediation.
D)
none of the above.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
53.
A line of credit to a corporation is like _____ to an individual.
A)
a term loan
B)
a bond
C)
a credit card
D)
a debit card
Ans:
C
54.
Which of the following is a primary investment vehicle for the funds in which life insurance
companies must invest?
A)
CDs.
B)
Equity securities.
C)
Long-term corporate bonds.
D)
Both B and C.
Ans:
D
55.
Casualty insurance companies sell:
A)
protection against loss of income in the event of the death of the insured.
B)
protection against loss of property from fire, theft, accidents, and other predictable
causes.
C)
protection against a loss of pension revenue for retirees.
D)
all of the above.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
56.
Which of the following would not make up a major proportion of a pension fund investment
portfolio?
A)
Commercial paper.
B)
Long-term corporate bonds.
C)
Stocks.
D)
None of the above.
Ans:
A
57.
A mutual fund is an example of:
A)
a line of credit.
B)
an endowment fund.
C)
an investment fund.
D)
a pension fund.
Ans:
C
58.
If a small business opts not to borrow funds from a commercial bank, then what will probably
be its next best alternative?
A)
An insurance company.
B)
A pension.
C)
An investment fund.
D)
A business finance company.
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
59.
The cost of borrowing money is called:
A)
inflation.
B)
return.
C)
interest.
D)
all of the above.
Ans:
C
60.
The nominal rate of interest is made up of:
A)
the real rate of interest.
B)
compensation for inflation.
C)
a commodity cross-index return.
D)
both A and B .
Ans:
D
61.
The real rate of return can be justified, at a basic level, by:
A)
compensation for inflation.
B)
compensation for deferring consumption.
C)
compensation for the level of international borrowing.
D)
all of the above.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
62.
If you are a borrower, which would you prefer to occur during the life of your loan?
A)
A level of inflation that is higher than that anticipated at the outset of the loan.
B)
A level of inflation that is lower than that anticipated at the outset of the loan.
C)
A level of inflation that is exactly as anticipated at the outset of the loan.
D)
No inflation at all
Ans:
A
63.
If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a
one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free
one-year loan?
A)
5 percent.
B)
10 percent.
C)
25 percent.
D)
None of the above.
Ans:
B
64.
The general level of interest rates tends to follow:
A)
deflation.
B)
the business cycle.
C)
the default cycle.
D)
all of the above.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
65.
During an economic expansion, we would expect:
A)
interest rates to increase.
B)
interest rates to decrease.
C)
interest rates to remain the same.
D)
the cost of money to decrease.
Ans:
A
66.
In the United States, the real rate of interest has historically been around:
A)
1 percent.
B)
3 percent.
C)
5 percent.
D)
7 percent.
Ans:
B
67.
If the supply of loanable funds decreases relative to the demand for those funds, then we would
expect:
A)
interest rates to remain unchanged.
B)
interest rates to increase.
C)
interest rates to decrease.
D)
the cost of money to remain unchanged.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
68.
If a firm sells common stock to the public for the very first time, it is known as _____.
A)
an underwriting
B)
an initial public offering
C)
a financial intermediation
D)
an origination
Ans:
B
69.
Explain why secondary markets are so important to businesses that need to raise capital?