FINC 409 – Chapter 1 Practice Problems – Flashcards
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Finance is the study of how individuals, institutions, and businesses acquire, spend and manage money and other financial resources
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Financial markets provide the mechanism for allocating financial resources or funds from savers to borrowers
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. The primary goal of the financial manager in a profit-seeking organization is to maximize the owners' wealth
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The secondary securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth.
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F
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Money markets are the markets where generally short-term assets are traded
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One of the most significant functions of the financial system is the creation of money, which serves as a medium of exchange.
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Personal finance is the study of how growth-driven performance-focused, early-stage firms raise financial capital and manage operations and assets
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Personal finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth.
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An effective financial system is a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment.
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Capital markets are markets where equity securities and debt securities with maturities of greater than one year are traded.
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Money markets are markets where equity securities and debt securities with maturities of greater than one year are traded.
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The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for taking on more risk, (3) Diversification of investments can reduce risk, (4) Financial markets are efficient in pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters.
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. The principle of finance that "money has a time value" implies Money in hand today is worth less than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time.
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The principle of finance that "lower returns are expected for taking on less risk" implies that rational investors would choose a risky investment only if they feel the expected return is high enough to justify the greater risk.
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The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect some information available to the public and that when new information becomes available, prices change over time to reflect that information.
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The principle of finance that "management objectives may differ from owner objectives" implies that owner returns may suffer as a result of manager objectives.
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The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries.
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The principle of finance that "reputation matters" implies that for institutions or businesses to be successful, they must have the trust and confidence of their customers, employees, and owners, as well as the community and society within which they operate.
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The principle of finance that "reputation matters" sometimes is harmed by the different objectives of owners and managers.
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While the financial press chooses to highlight examples of unethical behavior, most individuals exhibit sound ethical behavior in their personal and business dealings and practices
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The U.S. Treasury Department is primarily responsible for the amount of money that is created in the U.S. economy
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Financial system functions include accumulating savings and lending funds
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Three financial system components are the U.S. Treasury, financial institutions, and financial markets.
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Individuals and businesses hold money for purchases or payments they expect to make in the near future.
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Money markets are where debt securities with maturities of one year or more are issued and traded.
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Derivative securities may be used to speculate on the future price direction of the underlying financial assets or to reduce price risk associated with holding the underlying financial assets.
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Because the relative values of currencies may change, firms cannot use the currency exchange markets to reduce the risk of holding too much of certain currencies.
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Entrepreneurial finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth
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The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for taking on less risk, (3) Diversification of investments can increase risk, (4) Financial markets are inefficient in pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters.
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F
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The principle of finance that "money has a time value" implies Money in hand today is worth more than the promise of receiving the same amount in the future because a sum of money today could be invested and grow over time.
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The principle of finance that " higher returns are expected for taking on more risk " implies that rational investors would choose only safe investment because they generally do not feel that a higher return enough to justify taking greater risk.
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The principle of finance that "financial markets are efficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available, prices quickly change to reflect that information.
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The principle of finance that "financial markets are inefficient in pricing securities" implies that the prices of securities reflect all information available to the public and that when new information becomes available, prices quickly change to reflect that information.
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F
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The role of financial institutions in a country's financial system is to accumulate and invest savings.
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The role of financial markets in a country's financial system is to accumulate and invest savings
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The primary goal of the financial manager of a profit-seeking organization is to: a. maximize market share b. maximize the owners' wealth c. increase sales and profit d. have healthy cash flow
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B
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Finance has its origins in: a. economics and statistics b. accounting and sociology c. accounting and economics d. psychology and mathematics
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C
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Finance is: a. the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets b. the study of how businesses acquire, spend, and manage money and other financial assets c. the study of how governments, and businesses acquire, spend, and manage money and other financial assets d. none of the above
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A
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Crucial elements of the financial environment and well-developed financial system include: a. financial institutions b. financial markets c. investments and financial management d. all of the above
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D
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An area of finance that involves the sale or marketing of securities, the analysis of securities, and the management of investment risk through portfolio diversification is referred to as: a. financial management b. investments c. financial institutions d. financial markets e. none of the above
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B
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The issuing of new securities, mortgages, and other claims to wealth takes place in the: a. secondary market b. money market c. primary market d. securities market
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C
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An effective financial system must have: a. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies b. an efficient monetary system for creating and transferring money c. financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses d. all of the above
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D
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An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above
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D
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An area of finance that involves financial planning, asset management and fund-raising decisions to enhance the value of businesses is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above
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A
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An area of finance that involves the study of organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds in physical assets (inventories, buildings, and equipment) is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above
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C
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An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called: a. financial management b. investments c. financial institutions d. financial markets e. none of the above
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E
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The ______________ is a term used to describe the financial system, institutions, markets, businesses, individuals, and global interactions that help the economy operate efficiently a. financial environment b. regulatory environment c. international environment d. operating environment e. none of the above
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A
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The primary securities markets are a. the markets for previously issued securities such as the New York Stock Exchange b. the markets where financial assets such as stocks and bonds are initially issued c. the three most important financial markets in any economy d. the markets for stocks and bonds only
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B
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Finance has its origins in: a. economics and statistics b. accounting and mathematics c. management and operations d. economics and accounting
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D
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Economists use a ___________________ framework to explain how the prices and quantities of goods and services are determined in a free-market economic system. a. opportunity b. marginal cost c. supply-and-demand d. anti-monopoly e. none of the above
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C
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____________________ provide the record-keeping mechanism for showing ownership of the financial instruments used in the flow of financial funds between savers and borrowers and record revenues, expenses, and profitability of organizations that produce and exchange goods and services. a. Financial Managers b. Accountants c. Operations Managers d. Statisticians e. none of the above
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B
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_____________________ are crucial elements of the financial environment and well-developed financial systems. a. Businesses and the federal government b. International organizations such as the World Bank and International Monetary Fund c. Well-developed barter systems d. Financial institutions, financial markets, and investment and financial management
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D
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___________ are intermediaries, such as banks, insurance companies, and investment companies that engage in financial activities to aid the flow of funds from savers to borrowers or investors. a. Financial Institutions b. Financial market organizations c. Federal agencies d. International financial organizations e. none of the above
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A
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__________ in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services. a. Financial management b. Financial economics c. Investment management d. Asset allocation e. none of the above
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A
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Maximizing _____________________ is accomplished through effective financial planning and analysis, asset management, and the acquisition of financial capital. a. the value of perquisites. b. the owners' wealth. c. the firm's profits d. the firm's earnings e. none of the above
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B
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Successful businesses typically progress through a series of life-cycle stages—from the idea stage to exiting the business; these five stages include the: a. development stage, startup stage, survival stage, rapid growth stage, and maturity stage. b. idea stage, design stage, operating stage, rebuilding stage, and decline stage c. development stage, operating stage, rebuilding stage, rapid growth stage, and maturity stage d. idea stage, startup stage, rapid growth stage, survival stage, and decline stage
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A
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_________ is the study of how growth-driven, performance-focused, early-stage (from development through early rapid growth) firms raise financial capital and manage their operations and assets. a. Personal finance b. Corporate finance c. Entrepreneurial finance d. Investment banking e. none of the above
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C
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__________ is the study of how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time. a. Personal finance b. Corporate finance c. Entrepreneurial finance d. Investment banking e. none of the above
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A
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. Reasons we study finance include all of the following except: a. To make informed economic decisions b. To make informed personal and business investment decisions c. To make informed career decisions based on a basic understanding of business finance d. To make informed medical decisions e. all of the above about reasons to study finance.
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D
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. The six principles of finance include all of the following except: a. Money has a time value. b. Higher returns are expected for taking on more risk c. Diversification of investments can reduce risk d. Financial markets are efficient in pricing securities e. all of the above are included in the six principles.
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E
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Among the six principles of finance, all are included except: a. All decisions are ultimately financial decisions. b. Higher returns are expected for taking on more risk c. Diversification of investments can reduce risk d. Financial markets are efficient in pricing securities e. all of the above are included
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A
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Which statement best describes the six principles of finance? a. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments does not impact risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. b. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. c. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are inefficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters. d. Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation doesn't matter.
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B
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An effective financial system needs: a. an efficient monetary system b. to be able to create capital by channeling savings into investment c. markets in which to buy and sell claims to wealth d. all of the above
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D
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Crucial elements of well-developed financial systems include all of the following except: a. government control of the economy b. financial intermediaries (institutions) c. financial markets d. all of the above
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A
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Financial functions in the U.S. financial system include: a. transferring financial assets b. creating money c. accumulating savings d. all of the above
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D
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. $1,000 invested today at 6% interest would be worth ________ one year from now a. $1,600 b. $1,060 c. $1,160 d. $1,006 e. none of the above
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B
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If the interest rate is greater than 0%, then a dollar today is worth a. more than a dollar tomorrow b. the same as a dollar tomorrow c. less than a dollar tomorrow d. there is not sufficient information to tell
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A
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If the interest rate is equal to 0%, then a dollar today is worth a. more than a dollar tomorrow b. the same as a dollar tomorrow c. less than a dollar tomorrow d. there is not sufficient information to tell
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B
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A basic requirement for an effective financial system is a monetary system that performs which of the following financial functions? a. formation and transferring of money b. storing gold and silver to back up money c. creating jobs d. transferring real assets
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A
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Rational investors would consider an investment in a risky business venture only if they feel the expected return is high enough to justify the a. greater risk. b. higher cost. c. longer useful life. d. more complex designs. e. none of the above.
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A
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Two risky assets can be combined to lower the overall risk of a portfolio. This principle is commonly referred to as a. blending b. asset allocation c. diversification d. portfolio segmentation e. none of the above
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C
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In the United States, most money is created by: a. depository institutions b. the United States Treasury c. capital markets d. None of the above
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A
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Basic requirements of an effective financial system include: a. creating money b. transferring money c. accumulating savings d. all of the above e. none of the above
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D
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The theory of ___________________ implies that information is quickly embedded in prices making it difficult for investors to "beat the market." a. stock investing b. efficient markets c. portfolio management d. asset allocation e. none of the above
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B
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The basic requirements for an effective financial system in a developed economy include: a. a monetary system b. a savings-investment process c. markets for the transfer of financial assets d. all of the above
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D
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The possible conflict between managers and owners is sometimes called the a. principal-subordinate problem b. principal-agent problem c. boss-subordinate problem d. boss-agent problem e. none of the above
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B
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________ behavior refers to how an individual or organization treats others legally, fairly, and honestly. a. Principal-agent b. Stakeholder c. Responsible d. Ethical e. none of the above
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D
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Career opportunities in finance involving both treasury and control functions are generally associated with: a. business financial management b. financial intermediaries c. securities markets d. government organizations
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A
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Intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds are known as: a. financial markets b. financial institutions c. securities markets d. government organizations
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B
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An economy's _____________________ is the interaction of policy makers, a monetary system, financial institutions, and financial markets to expedite the flow of financial capital from savings into investment: a. banking system b. stock market c. capital market d. financial system
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D
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An efficient ______________ that is comprised of a central bank and a banking system that is able to create and transfer a stable medium of exchange called money. a. allocation system b. banking system c. monetary system d. market system e. none of the above
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C
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An effective financial system must have a. financial markets that facilitate the transfer of financial assets among individuals, institutions, businesses, and governments. b. financial institutions or intermediaries that support capital formation either by channeling savings into investment in physical assets or by fostering direct financial investments by individuals in financial institutions and businesses. c. an efficient monetary system that is comprised of a central bank and a banking system that is able to create and transfer a stable medium of exchange called money. d. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies. e. all of the above are required
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E
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____________ facilitate the transfer of financial assets among individuals, institutions, businesses, and governments. a. Financial markets b. Government institutions c. Regulatory authorities d. none of the above
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A
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The _________________ is primarily responsible for the amount of money that is created, although most of the money is actually created by depository institutions. a. Securities Exchange Commission b. Federal Treasury c. Federal Reserve System d. Financial Asset Oversight Board
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C
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. Functions of the monetary system include all of the following except a. creating money b. transferring money c. accumulating savings d. all of the above are included as functions of a monetary system
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C
