Chapter 26 Practice Test

Lucy starts her own psychiatric practice, but her expenditures to open the practice exceed her income. Lucy is a

• saver who demands money from the financial system.

• saver who supplies money to the financial system.

• borrower who demands money from the financial system.

• borrower who supplies money to the financial system.

A bond is a

• financial intermediary.

• certificate of indebtedness.

• certificate of partial ownership in an enterprise.

• None of the above is correct.

If the government's expenditures exceeded its receipts, it would likely

• lend money to a bank or other financial intermediary.

• borrow money from a bank or other financial intermediary.

• buy bonds directly from the public.

• sell bonds directly to the public.

Megasoft wants to finance the purchase of new equipment for developing security software called Doors, but they have limited internal funds. Megasoft will likely

• demand loanable funds by buying bonds.

• demand loanable funds by selling bonds.

• supply loanable funds by buying bonds.

• supply loanable funds by selling bonds.

If Proctor and Gamble sells a bond it is

• borrowing directly from the public.

• borrowing indirectly from the public.

• lending directly to the public.

• lending indirectly to the public.

A perpetuity is distinguished from other bonds in that it

• pays continuously compounded interest.

• pays interest only when it matures.

• never matures.

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

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

• more risk and so pay higher interest.

• less risk and so pay lower interest.

• less risk and so pay higher interest.

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

On which bond is default most likely?

• a junk bond

• a municipal bond

• a U.S. government bond

• a corporate bond issued by Proctor and Gamble.

Stock represents

• a claim to a share of the profits of a firm.

• ownership in a firm.

• equity finance.

• All of the above are correct

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

• creditors of General Electric, so the benefits of holding the stock depend on General Electric's profits.

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

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

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