Principles of Finance

complete the following multiple Choices

The critical role of the financial system in an economy is to

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A) provide the President with information regarding the debt level inthecountry.

B) gather money from savers and channel it toborrowers.

C) regulate the operations of the commercialbanks.

D) provide managers with incentives to increase capital spending.

2. A primary market is a market for

A) investment bankers are not allowedtotrade.

B) investors sell stocks to eachother.

C) new securities are sold by companies directly to investors.

D) companies buy back their own previously issuedshares.

3. Brokers

A) “make markets” forsecurities.

B) bring buyers and sellers together usually fora commission.

C) buy and sell securities from their owninventory.

D) bear the risk of loss from trading securities.

4. Which of the following is included in direct financing:

A) Financialmarkets.

B) InvestmentBanks.

C) Lenders and borrowers

D) All of the above

5. An investment banker is responsible for

A) taking deposits frominvestors.

B) regulating the issue of newsecurities.

C) underwriting and helping firms sell new issues of securities.

D) making loans to needybusinesses.

6. Individual investors can sell securities to other investors in which of the followingmarkets?

A) Secondarymarket.

B) Moneymarket.

C) Privateplacement.

D) Primary market.

7. Money markets involve which of the following securities?

A) Long-termdebtinstruments.

B) Internationalstocks.

C) Foreign currency derivatives.

D) Short-term debtinstruments.

8. The first offering of a corporation’s stock to the public is known as?

A) Initialpublicoffering.

B) Privateplacement.

C) Underwriting

D) Seasoned equityoffering.

9. If the supply of loanable funds decreases relative to the demand for those funds, then we would expect

A) interest ratestoincrease.

B) interest rates todecrease.

C) the price of money to remain unchanged.

D) interest rates to remainunchanged.

10. 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) about 5percent.

B) about 10percent.

C) about 25 percent.

D) None of theabove.

11. You loaned $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)?

A) increased by 1percent.

B) decreased by 1percent.

C) increased by 5percent.

D) decreased by 5percent.

12. Which of the following is a major participant in the direct financial market?

A) Largecorporations.

B) Government.

C) Investmentbanks.

D) All of the above.

13. If you just purchased 100 shares of IBM from another investor through a brokerage firm, you participated in:

A) a primary markettransaction.

B) a secondary markettransaction.

C) a futures markettransaction.

D) none of theabove.

14. Financial markets in which equity and debt instruments with maturities longer than one year are traded are called:

A) moneymarkets.

B) capitalmarkets.

C) Over the counterexchange.

D) none of theabove.

15. Which of the following is least likely to be included in a pension fund’s investment portfolio?

A) Commercialpaper.

B) Long-term corporatebonds.

C) Stocks.

D) Long-term treasurybonds.


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