Financial Markets and Securities

Well-functioning financial markets eliminate the need for indirect finance.

• eliminate the need for indirect finance.

• allow the economy to operate more efficiently.

• cause financial crises

• cause inflation

What is the maximum interest rate that you would pay on the borrowed funds and still increase your income?

• 12.5%

• 5%

• 10%

• 35%

Which of the following can be described as involving direct finance?

• People buy shares in a mutual fund.

• People buy shares of common stock in the primary markets.

• A corporation buys a short-term corporate security in a secondary market.

• A corporation takes out loans from a bank.

Which of the following can be described as involving indirect finance?

• A corporation buys a share of common stock issued by another corporation in the primary market.

• You make a deposit at a bank.

• You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov.

• You make a loan to your neighbor.

Which of the following statements about the characteristics of debt and equity is FALSE?

• They can both be long-term financial instruments.

• They can both be short-term financial instruments.

• They both involve a claim on the issuer's income.

• They both enable a corporation to raise funds.

Which of the following statements about financial markets and securities is TRUE?

• A debt instrument is intermediate term if its maturity is less than one year.

• The maturity of a debt instrument is the number of years (term) to that instrument's expiration date.

• A debt instrument is intermediate term if its maturity is ten years or longer.

• A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants.

Which of the following is an example of an intermediate-term debt?

• a fifteen-year mortgage

• a sixty-month car loan

• a six-month loan from a finance company

• a thirty-year U.S. Treasury bond

Long-term debt has a maturity that is

• less than a year.

• ten years or longer.

• between five and ten years.

• between one and ten years.

Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders.

• brokers

• residual claimants

• debtors

• underwriters

When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public.

• underwrites

• undertakes

• overwrites

• overtakes