8. If the government’s expenditures exceeded its receipts, it would likely

D.directly sell bonds to the public.

A.lend money to a bank or other financial intermediary.

B.borrow money from a bank or other financial intermediary.

C. directly buy bonds from the public.

9. If Microsoft sells a bond they are

A.borrowing directly from the public.

B.borrowing indirectly from the public.

C. lending directly to the public.

D.lending indirectly to the public.

10. 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.

11. Which of the following is NOT a nonsensical headline?

C. Government bonds currently pay less interest than corporate bonds.

A.British perpetuities about to mature.

B.Disney issues new bonds with term of $1,000 each.

D.Standard and Poor’s judges new junk bond to have very low credit risk.

13. A perpetuity is distinguished from other bonds in that it

A.pays continuously compounded interest.

B.pays interest only when it matures.

D.will be used to purchase another bond when it matures unless the owner specifies otherwise.

14. Which of the following is correct?

A.Some bonds have terms as short as a few months.

C. Corporations buy bonds to raise funds.

15. 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. Junk bonds refer to bonds that have been resold many times.

16. Long-term bonds are generally

C. more risky than short-term bonds and so pay higher interest.

A.less risky than short-term bonds and so pay higher interest.

B.less risky than short-term bonds and so pay lower interest.

D.more risky than short-term bonds and so pay lower interest.

17. Compared to long-term bonds, other things the same, short-term bonds generally have

B.less risk and so pay lower interest.

A.more risk and so pay higher interest.

C. less risk and so pay higher interest.

D.about the same risk and so pay about the same interest.

18. On which bond is default most likely?

D.a corporate bond issued by Proctor and Gamble.

19. Assuming that the bonds below have the same term and principal and that the state or local government which issues the municipal bond has a good credit rating, which list has bonds ordered from the one that pays the most interest to the one that pays the least interest?

B.corporate bond, U.S. government bond, municipal bond

A.corporate bond, municipal bond, U.S. government bond

C. municipal bond, U.S. government bond, corporate bond

D.U.S. government bond, municipal bond, corporate bond

20. Other things the same, as the maturity of a bond becomes longer, the bond will pay

C. more interest because it has more risk

A.less interest because it has less risk.

B.less interest because it has more risk.

D.There is no relation between term to maturity and risk.

21. Which of the following bond buyers did NOT buy the bond that best met their objective?

D.To reduce risk, Toby purchased a long-term bond rather than a short-term one.

A.Mia wanted a bond with a high interest rate, regardless of the risk. She purchased a junk bond.

B.Anna wanted a bond that would let her best avoid taxes. She purchased a municipal bond.

C. Bill wanted to purchase a bond that was unlikely to have default. He purchased a bond that Standards and Poor’s rated a low credit risk.

22. Stephanie is interested only in the rate of interest and is willing to take a great deal of risk in exchange for a high return. She should look for bonds with

D.no tax exemptions and long terms.

A.tax exemptions and short terms.

B.tax exemptions and long terms.

C. no tax exemptions and short terms.

23. Municipal bonds pay a

B.low rate of interest because of their low-default risk and because the interest they pay is not subject to federal income tax.

A.low rate of interest because of their high-default risk and because the interest they pay is 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.

24. Which bond would you expect to pay the highest interest rate?

D.a bond issued by a new restaurant chain

A.a bond issued by the U.S. government

B.a bond issued by General Motors

C. a bond issued by New York State

25. Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest. Which of the following is most likely?

C. The 6 percent bond has a longer term than the 3 percent bond.

A.The 6 percent bond is less risky than the 3 percent bond.

B.The 6 percent bond is a U.S. government bond, and the 3 percent bond is a junk bond.

D.The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S. government bond.

26. Lacey, a financial advisor has told her clients the following things. Which of her statements is incorrect?

A.“U.S. government bonds generally have a lower rate of interest than municipal bonds.”

B.“The interest received on most bonds is taxable.”

C. “U.S. government bonds have the lowest default risk.”

D.“If you purchase a bond, you don’t have to hold it until it matures.”

27. The sale of stocks

D.to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance.

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.

28. Papa Mario's Pizza Company sells common stock.

B.They are using equity financing and the return shareholders earn depends on how profitable the company is.

A.They are using equity financing and the return shareholders earn is fixed.

C. They are using debt financing and the return shareholders earn is fixed.

D.They are using debt financing and the return shareholders earn depends on how profitable the company is.

A.a claim to the profits of a firm.

30. People who buy newly issued stock in a corporation such as Rockwood Pottery provide

C. equity finance and so become part owners of RockwooD.

A.debt finance and so become part owners of RockwooD.

B.debt finance and so become creditors of RockwooD.

D.equity finance and so become creditors of RockwooD.

31. If Huedepool Beer runs into financial difficulty, the stockholders as

B.part owners of Huedepool are paid after bondholders get paid.

A.part owners of Huedepool are paid before bondholders get paid anything at all.

C. creditors of Huedepool are paid before bondholders get paid anything at all.

D.creditors of Huedepool are paid after bondholders get paid.

32. People who buy stock in a corporation such as General Electric become

C. part owners of General Electric, so the benefits of holding the stock depend on General Electric’s profits.

A.creditors of General Electric, so the benefits of holding the stock depend on General Electric’s profits.

B.creditors of General Electric, but the benefits of holding the stock do not depend on General Electric’s profits.

D.part owners of General Electric, but the benefits of holding the stock do not depend on General Electric’s profits.

33. Which of the following people purchased the correct asset to meet their objective?

B.Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by specific electric instead of bonds issued by specific electric.

A.Michelle wanted to be a part owner of Mamma Rosa’s pizza, so she purchased a bond issued by Mamma Rosa’s pizza.

C. Jennifer wanted to buy equity in Honda, so she purchased bonds sold by HondA.

34. Compared to bonds, stocks offer the holder

C. the likelihood of a lower return.

35. The price of stock traded on exchanges are determined by

C. the supply and demand for the stock.

A.the Corporate Stock Administration.

37. All else equal, when people become more optimistic about a company's future, the

C. demand for the stock and the price will both rise.

A.supply of the stock and the price will both rise.

B.supply of the stock and the price will both fall.

D.demand for the stock and the price will both fall.

38. Suppose that the government finds a major defect in one of a company’s products and demands that they take it off the market. We would expect that the

D. demand for the stock and the price will both fall.

A. supply of the stock and the price will both rise.

B. supply of the stock and the price will both fall.

C. demand for the stock and the price will both rise.

39. World Wide Delivery Service Corporation develops a way to speed up their deliveries and reduce their costs. We would expect that this would

A.raise the demand for existing shares of the stock, causing its price to rise.

B.decrease the demand for existing shares of the stock, causing its price to fall.

C. raise the supply of the existing shares of stock, causing its price to rise.

D.raise the supply of the existing shares of stock, causing its price to fall.

40. Other things being constant, when a business issues more stock, the

A.supply of the stock is greater and thus the price will fall.

B.supply of the stock is less and thus the price will rise.

C. demand for the stock is greater and thus the price will rise.

D.demand for the stock is less and thus the price will fall.

41. Which of the following statements is most likely to be correct?

B.A general, persistent decline in stock prices is a signal that the economy is about to enter a recession because low stock prices may mean that people are expecting low corporate profits.

A.A general, persistent decline in stock prices is a signal that the economy is about to enter a boom period because people will be able to buy stock for less money.

C. A general, persistent decline in stock prices does not tell us anything about the business cycle because stock prices can fall for many reasons.

D.A general, persistent decline in stock prices is a signal that the economy is about to enter a recession because low stock prices mean that corporations have had low profits in the past.

42. Stock indexes are

A.the average of a group of stock prices.

B.the average of a group of stock yields.

C. reports in the newspaper that report on the price of the stock and earnings of the corporation.

D.measures of the risk relative to the profitability of corporations.

46. Volume, as reported in stock tables refers to the

B.percentage of shares outstanding traded.

C. number of shares traded times the price they sold at.

D.number of shares of a company traded divided by the shares of all companies traded.

47. profits paid out to stockholders are

C. the denominator in the price-earnings ratio.

48. profits not paid out to stockholders are

C. the denominator in the price-earnings ratio.

49. A dividend yield is the

A.dividend as a percentage of the stock price.

B.stock price as a percentage of the dividend.

C. dividend as a percentage of the retained earnings per share.

D.retained earnings per share as the percentage of the dividend.

54. A corporation's earnings is

C. the amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants.

A.the amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants minus the dividends paid out.

B.the amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as measured by its economists minus the dividends paid out.

D.the amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as measured by its economists.

55. Retained earnings are

B.the amount of revenues a corporation receives for the sale of its products minus its costs of production as measured by its accountants.

C. the single most important piece of information about a stock.

58. A high price-earnings ratio indicates that either the stock is

B.overvalued or people have become more optimistic about the corporation’s prospects.

A.undervalued or people have become more optimistic about the corporation’s prospects.

C. overvalued or people have become less optimistic about the corporation’s prospects.

D.undervalued or people have become less optimistic about the corporation’s prospects.

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D.All of the above are correct.

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