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Question 1
You recently sold 100 shares of your new company, XYZ Corporation, to your
brother at a family reunion. At the
reunion your brother gave you a check for the stock and you gave your brother
the stock certificates. Which of the
following statements best describes this transaction?
1) This is an example of an exchange of physical assets.
2) This is an example of a primary market transaction.
3) This is an example of a direct transfer of capital.
4) This is an example of a money market transaction.
5) This is an example of a derivatives market transaction.
Question 2
Which of the following statements is CORRECT?
1) While the distinctions are blurring, investment banks generally
specialize in lending money, whereas commercial banks generally help companies
raise capital from other parties
2) A liquid security is a security whose value is derived from the price of
some other "underlying" asset
3) Money market mutual funds usually invest most of their money in a
well-diversified portfolio of liquid common stocks.
4) Money markets are markets for long-term debt and common stocks.
5) The NYSE operates as an auction market, whereas the Nasdaq is a dealer
market
Question 3
Which of the following statements is
CORRECT?
1) The NYSE does not exist as a
physical location; rather it represents a loose collection of
dealers who trade stock electronically.
2) An example of a primary market
transaction would be your uncle transferring 100 shares of
Wal-Mart stock to you as a
birthday gift.
3) Capital market instruments
include both long-term debt and common stocks.
4) If your uncle in New York sold
100 shares of Microsoft through his broker to an investor in
Los Angeles, this would be
a primary market transaction.
5)
While the two frequently perform similar functions, investment banks
generally specialize in lending
money, whereas commercial banks generally help companies raise large blocks
of capital from investors.
Question 4
Which of the following statements is CORRECT?
1) It is usually easier to transfer ownership in a corporation than it is
to transfer ownership in a sole proprietorship
2) Corporate shareholders are exposed to unlimited liability.
3) Corporations generally face fewer regulations than sole proprietorships.
4) Corporate shareholders are exposed to unlimited liability, and this
factor may be compounded by the tax disadvantages of incorporation.
5) There is a tax disadvantage to incorporation, and there is no way any
corporation can escape this disadvantage, even if it is very small
Question 5
Which of the following statements is CORRECT?
1) One disadvantage of operating as a corporation rather than as a
partnership is that corporate shareholders are exposed to more personal
liability than partners
2) There is no good reason to expect a firm's stockholders and bondholders
to react differently to the types of new asset investments a firm makes
3) Bondholders are generally more willing than stockholders to have
managers invest in risky projects with high potential returns as opposed to
safer projects with lower expected returns
4) Stockholders are generally more willing than bondholders to have
managers invest in risky projects with high potential returns as opposed to
safer projects with lower expected returns
5) Relative to sole proprietorships, corporations generally face fewer
regulations, and this makes it easier for corporations to raise capital
Question 6
Suppose the U.S. Treasury announces
plans to issue $50 billion of new bonds.
Assuming the announcement was not expected, what effect, other things
held constant, would that have on bond prices and interest rates?
1) Prices and interest rates would both rise.
2) Prices would rise and interest rates would decline.
3) Prices and interest rates would both decline.
4) There would be no changes in either prices or interest rates.
5) Prices would decline and interest rates would rise.
Question 7
Which of the following statements is CORRECT?
1) Corporations are at a disadvantage relative to partnerships because they
have to file more reports to state and federal agencies, including the
Securities and Exchange Administration, even if they are not publicly owned
2) In a regular partnership, liability for the firm's debts is limited to
the amount a particular partner has invested in the business
3) A fast-growth company would be more likely to set up as a partnership
for its business organization than would a slow-growth company
4) Partnerships have difficulty attracting capital in part because of their
unlimited liability, the lack of impermanence of the organization, and
difficulty in transferring ownership
5) A major disadvantage of a partnership relative to a corporation as a
form of business organization is the high cost and practical difficulty of its
formation
Question 8
Which of the following statements is CORRECT?
1) In a regular partnership, liability for other partners' misdeeds is
limited to the amount of a particular partner's investment in the business
2) Partnerships have more difficulty attracting large amounts of capital
than corporations because of such factors as unlimited liability, the need to
reorganize when a partner dies, and the illiquidity (difficulty buying and
selling) of partnership interests
3) A slow-growth company, with little need for new capital, would be more
likely to organize as a corporation than would a faster growing company
4) In a limited partnership, the limited partners have voting control,
while the general partner has operating control over the business. Also, the limited partners are individually
responsible, on a pro rata basis, for the firm's debts in the event of
bankruptcy.
5) A major disadvantage of all partnerships relative to all corporations is
the fact that federal income taxes must be paid by the partners rather than by
the firm itself
Question 9
Which of the following statements is CORRECT?
1) If you purchase 100 shares of Disney stock from your brother-in-law,
this is an example of a primary market transaction.
2) If Disney issues additional shares of common stock through an investment
banker, this would be a secondary market transaction.
3) The NYSE is an example of an over-the-counter market.
4) Only institutions, and not individuals, can engage in derivative market
transactions.
5) As they are generally defined, money market transactions involve debt
securities with maturities of less than one year
Question 10
Which of the following factors would be most likely to lead to an increase
in interest rates in the economy?
1) Households reduce their consumption and increase their savings
2) The Federal Reserve decides to try to stimulate the economy.
3) There is a decrease in expected inflation
4) The economy falls into a recession
5) Most businesses decide to modernize and expand their manufacturing
capacity, and to install new equipment to reduce labor costs
Question 11
Which of the following statements is CORRECT?
1) Hedge funds are legal in Europe and Asia, but they are not permitted to
operate in the United States
2) Hedge funds have more in common with commercial banks than with any
other type of financial institution
3) Hedge funds have more in common with investment banks than with any
other type of financial institution
4) Hedge funds are legal in the United States, but they are not permitted
to operate in Europe or Asia
5) The justification for the "light" regulation of hedge funds is
that only "sophisticated" investors with high net worths and high
incomes are permitted to invest in these funds, and such investors supposedly
can do the necessary "due diligence" on their own rather than have it
done by the SEC or some other regulator
Question 12
Which of the following statements is CORRECT?
1) The New York Stock Exchange is an auction market with a physical
location
2) Capital market transactions involve only the purchase and sale of equity
securities, i.e., common stocks
3) If an investor sells shares of stock through a broker, then this would
be a primary market transaction.
4) Consumer automobile loans are evidenced by legal documents called
"promissory notes," and these individual notes are traded in the
money market
5) Consumer automobile loans are evidenced by legal documents called
"promissory notes," and these individual notes are traded in the
money market
Question 13
Which of the following statements is CORRECT?
1) The corporate bylaws are a standard set of rules established by the
state of incorporation. These rules are
identical for all corporations in the state, and their purpose is to ensure
that the firm's managers run the firm in accordance with state laws
2) The corporate charter is a standard document prescribed by the state of
incorporation, and its purpose is to ensure that the firm's managers run the
firm in accordance with state laws.
Procedures for electing corporate directors are contained in bylaws,
while the declaration of the activities that the firm will pursue and the
number of directors are included in the corporate charter.
3) Companies must establish a home office, or domicile, in a particular
state, and that state must be the one in which most of their business (sales,
manufacturing, and so forth) is conducted
4) Attorney fees are generally involved when a company develops its charter
and bylaws, but since these documents are voluntary, a new corporation can
avoid these costs by deciding not to have either a charter or bylaws
5) The corporate charter is concerned with things like what business the
company will engage in, whereas the bylaws are concerned with things like
procedures for electing the board of directors
Question 14
Which of the following statements is CORRECT?
1) If expected inflation increases, interest rates are likely to increase
2) If individuals in general increase the percentage of their income that
they save, interest rates are likely to increase
3) If companies have fewer good investment opportunities, interest rates
are likely to increase
4) Interest rates on all debt securities tend to rise during recessions
because recessions increase the possibility of bankruptcy, hence the riskiness
of all debt securities
5) Interest rates on long-term bonds are more volatile than rates on
short-term debt securities like T-bills
Question 15
The primary operating goal of a publicly-owned firm interested in serving
its stockholders should be to ____
1) maximize its expected total corporate income
2) maximize its expected EPS
3) minimize the chances of losses
4) maximize the stock price per share over the long run, which is the
stock's intrinsic value
5) maximize the stock price on a specific target date
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