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ECO 315 - Midterm 1 Review

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Midterm 1 self made
smjackson7
Quiz by smjackson7, updated more than 1 year ago
smjackson7
Created by smjackson7 about 9 years ago
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Resource summary

Question 1

Question
A main disadvantage of owning equity rather than bond equity is that the holder is a residual claimant and the firm.
Answer
  • True
  • False

Question 2

Question
The firm must pay all its debt holders before it can pay its equity holders?
Answer
  • True
  • False

Question 3

Question
An advantage to holding is equity is that equity holders benefit directly from any increase in the corporation's profits or asset value.
Answer
  • True
  • False

Question 4

Question
Debit holders do not benefit in any increase in the corporation's profits or asset value because their payments are fixed.
Answer
  • True
  • False

Question 5

Question
A security is a financial instrument that is a claim on the issuer's future income or assets (or any financial claim or piece of property that is subject to ownership)?
Answer
  • True
  • False

Question 6

Question
Bond's account of 32% of all financial business external financing?
Answer
  • True
  • False

Question 7

Question
Stock - A security that is a claim on the earnings and assets of a corporation.
Answer
  • True
  • False

Question 8

Question
A bond is
Answer
  • a debt security that promises to make periodic payments for a specific period of time.
  • When a firm sells a bond, it is effectively borrowing from the public, instead of the bank.
  • is basically an IOU and it stipulates that when the corporation owes the bond's buyer a certain stream of payments til the bond matures - when the bond is paid off.

Question 9

Question
When you purchase stock, you're purchasing a partial ownership of the company.
Answer
  • True
  • False

Question 10

Question
Stocks are also called equities.
Answer
  • True
  • False

Question 11

Question
A main advantage of owning equity rather than bond equity is that the holder is a residual claimant.
Answer
  • True
  • False

Question 12

Question
A financial intermediary is
Answer
  • an institution that pools the savings of a LARGE number of households and channels it in the form of a loan to other households and firms
  • an institution that pools the savings of a SMALL number of households and channels it in the form of a loan to other households and firms

Question 13

Question
Financial intermediaries channels funds from lenders
Answer
  • = savers or investors
  • = dissavers or spenders

Question 14

Question
Financial intermediaries channel funds to borrowers
Answer
  • = dissavers or spenders
  • = savers or investors

Question 15

Question
Direct financing:
Answer
  • borrowers borrow directly from lenders through financial markets (debt, equity markets) by selling them securities (bonds, stocks)
  • borrowers borrow indirectly from lenders through financial intermediaries (commercial banks): bank loans

Question 16

Question
Indirect financing:
Answer
  • borrowers borrow indirectly from lenders through financial intermediaries (commercial banks): bank loans
  • borrowers borrow directly from lenders through financial markets (debt, equity markets) by selling them securities (bonds, stocks).

Question 17

Question
Benefits of well-function financial system
Answer
  • efficient allocation of resources
  • allows for the timing of purchases for what is desired at prferred times - thus improving the economic welfaire

Question 18

Question
The rate of return is defined as a payment to the owner plus the change in its value, expressed as a fraction of its purchase.
Answer
  • True
  • False

Question 19

Question
investment banks
Answer
  • not really banks, help companies raise funds by issuing new securities
  • accept deposits, make loans for a variety of purposes & some also deal in securities markets

Question 20

Question
Commercial Banks
Answer
  • not really banks, help companies raise funds by issuing new securities
  • accepts deposits, makes loans for variety of purposes & some deal in securities markets

Question 21

Question
Economic growth
Answer
  • Increase in real GDP, standards of living and productivity
  • Decrease in real GDP, standards of living and productivity

Question 22

Question
Present value
Answer
  • value of future dollars in terms of today's dollars
  • value of 1 dollar today in terms of dollars @ some future time

Question 23

Question
Yield to Maturity = interest rate that equates the PV of future cash flow payments to its price today
Answer
  • True
  • False

Question 24

Question
Because corporations do not actually raise any funds in secondary markets, secondary markets are less important to the economy than primary markets are.” Is this statement true, false, or uncertain?
Answer
  • True
  • False

Question 25

Question
Future value (FV)
Answer
  • value of 1 dollar today in terms of dollars @ some future time
  • value of future dollars in terms of today's dollars

Question 26

Question
If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
Answer
  • Bonds issued by the company
  • Equities issued by the company

Question 27

Question
Is everybody worse off when interest rates rise?
Answer
  • Yes
  • No

Question 28

Question
Calculate the present value of a $1,000 discount bond with five years to maturity if the yield to maturity is 6%
Answer
  • 757.20
  • 747.10
  • 747.26

Question 29

Question
Money market instruments
Answer
  • are short-term securities whose maturity is less than 1 year
  • are securities whose maturity is greater than 1 year
  • undergo lease price fluctuations, and hence, are less risky than long-term instruments in general

Question 30

Question
Money Market Instruments (involving short-term securities ) include which of the following:
Answer
  • US Treasury bills (T-bills)
  • Negotiable Certificates of Deposits (CDs)
  • Commercial Papers (CPs)
  • Banker's acceptances
  • Repurchase agreements (Repos)
  • Federal funds (Fed funds) - interbank loans
  • Eurodollars (or Eurocurrencies)

Question 31

Question
Capital Market Instruments:
Answer
  • Instruments whose maturity is GREATER than 1 year
  • Instruments whose maturity is LESSthan 1 year

Question 32

Question
Capital Market instruments include:
Answer
  • Stocks
  • Corporate bonds
  • US government securities (T-Notes and T-Bonds)
  • US government agency securities: Ginnie Mae (GNMA), Fannie Mae (FNMA)
  • Mortgages and Mortgage-backed securities (MBS)
  • Bank loans: consumer loans
  • Foreign bonds vs. Eurobonds: international bond markets
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