Test Bank Docx Financial Markets & Economy Chapter 9 - Microeconomics Principles and Policy 14e | Test Bank by Baumol by William J. Baumol. DOCX document preview.
Indicate whether the statement is true or false. |
1. One of the advantages that corporations have as a business organization is that corporate profits are only taxed once.
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2. Derivatives can be used to reduce risk, but they also can be a source of risk in themselves.
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3. A corporation is the most preferable type of firm if the investor wants to limit liability.
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4. If bond prices and interest rates are plotted on a graph, the curve has a positive slope.
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5. An investor will choose to diversify the portfolio to reduce risk.
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6. Corporations often raise funds for business activities by the sale of shares of existing common stock.
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7. A diversified portfolio only makes sense for large institutional investors, not for small investors.
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8. Professional securities analysts achieve high rate of investment success following a random walk strategy.
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9. Futures and options contracts are examples of derivative securities.
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10. An individual investor can reduce the risk of investing by selecting a bundle of different types of financial assets.
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11. The price of bonds is tied to the interest rate; when one goes up, the other must fall.
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12. One disadvantage of corporations is the double taxation of income to the owners.
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13. For a corporation, issuing bonds is riskier than issuing stock.
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14. Corporate profits are taxed twice.
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15. “Common stock” is the type only sold to small investors.
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16. If a firm goes bankrupt and liquidates its assets, both stockholders and bondholders are responsible for any remaining debt.
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17. When a firm’s earnings rise, its stock prices will tend to fall.
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18. The takeover process does not use up capital; it merely redistributes it.
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19. In the context of stock markets, “the tail wags the dog” means that a failure of the stock market can drag down the entire economy.
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20. Double taxation is a problem for corporations.
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21. The NASDAQ is the only stock exchange where corporations are able to sell stocks and raise money since other exchanges failed in the 2008–2009 Great Recession.
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22. Overall, professional securities analysts have a 75 percent success rate in predicting winning stocks.
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23. Purchasers of corporate bonds lend money to a corporation.
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24. A bond and stock differ in that a stock is an IOU for a fixed amount and a bond is a portion of ownership.
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25. The stock market provides two functions for corporate financing: reducing investors’ risk and setting the prices of stocks.
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26. A hostile takeover is one opposed by the firm’s existing management.
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27. Using one day’s stock price to predict the price for the next day is a good investment strategy, given that stock prices have been shown not to follow a “random walk.”
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28. A corporation is an entity separate and distinct from its owners.
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29. A portfolio’s performance is its yield to the holder.
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30. When business is profitable, corporate managers will prefer plowback rather than other sources of funding.
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31. A private investment firm that holds a portfolio of securities is called a mutual fund.
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32. The sale of new stocks by a corporation is one source of investment funds.
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33. Bondholders have a “prior claim” over stockholders on a company’s earnings or its assets.
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34. A portfolio of a range of stocks, bonds, and other investments helps an investor reduce the risk of investment.
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35. A corporation has legal status like an individual citizen.
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36. Most American firms are corporations.
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37. Holders of shares of common stock in a corporation have a “prior claim” over the company’s earnings or its assets.
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38. The Securities and Exchange Commission (SEC) oversees the regulation of the securities market.
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39. The New York Stock Exchange is the only place where a corporation can sell stocks and raise money.
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40. Whenever the interest rate goes up, the price of bonds will go down.
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41. Corporations obtain funds when their previously issued stock is traded.
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42. A partnership requires the agreement of most or all partners to any major decision.
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43. Unlimited liability is a distinct advantage of the proprietorship.
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44. Derivatives are securities that derive their values from the values of underlying investments.
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45. Many individuals are reluctant to buy common stock is that as owners of a corporation they have unlimited liability for the debts of the business.
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46. Takeovers and takeover attempts waste valuable capital.
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47. Owners of a corporation have limited liability for the debts of the business.
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48. A diversified portfolio represents a disadvantage to small investors since it requires large amounts of money to set up.
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49. A person’s portfolio of investments is the bundle of all the stocks, bonds, and other assets the person owns.
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50. If a firm goes bankrupt, the bondholders will get paid back before the stockholders get any money.
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51. A stockholder’s investment is usually riskier than a bondholder’s.
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52. Stock prices can be described as “random walks” if there is no relationship between one day’s prices and the following day’s prices.
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53. Stocks are riskier for buyers because there is no commitment to pay dividends.
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54. More than 80 percent of American firms are incorporated.
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55. The special privileges and obligations of corporations are defined by law.
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56. Business firms are prohibited by law from borrowing money from banks.
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57. Issuing stock is riskier for corporations since there is a legal requirement to pay dividends.
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58. Plowback refers to the profits management decides to keep and reinvest in the firm’s operations.
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59. The sales of the 50 largest corporations in the U.S. economy amount to nearly 31 percent of GDP in 2017.
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60. Corporations must always pay dividends to their shareholders.
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61. The primary disadvantage of the corporation is unlimited liability.
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62. Issuing stocks with little or nothing to back them up is described as “plowing back.”
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63. Investors must rely on stockbrokers to give detailed, day-to-day reports on stocks and bonds.
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64. A corporation is often financed through stocks and bonds.
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65. The basic disadvantage of a proprietorship is unlimited liability.
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66. Unlike other business organizations, corporations are distinct entities that can continue operations even if the people who began that business are no longer around.
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67. Retained earnings may be a better source of funds than issuing stocks or bonds because management does not have to account for their effectiveness this way.
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68. A futures contract is an agreement to buy a commodity at a specific future date, at a price set today.
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69. The term “random walk” means that stock prices are fairly predictable.
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70. Corporations produce most of the output in the United States.
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71. Corporations can finance their activities through the sale of new stocks but are legally prohibited from selling bonds.
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72. The takeover process dissipates capital, making it an inefficient market mechanism.
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73. The New York Stock Exchange handles only about 10 percent of all stock market transactions in the United States.
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74. Retained earnings are the same thing as “plowback.”
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Indicate the answer choice that best completes the statement or answers the question. |
75. A corporation seeking to expand and looking for the least risky financing option would choose
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76. In August 2015, Intermarket Corporation’s 6 percent coupon bonds, with a face value of $1,000, was sold for $1,050. This means that the yield on these bonds was
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77. Which of the following is not a principal means by which corporations obtain money for investment?
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78. Common stocks are ____ risky for the issuing corporation and ____ risky for the corporation’s stockholders, compared to other financial assets, such as bonds.
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79. When a company’s stock is owned by thousands of individuals,
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80. A corporation with “plowback”
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81. What is true of stock exchanges in the United States?
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82. An individual with a diversified stock portfolio consists of
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83. Over the long run, stock prices have
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84. Bond prices in the marketplace will fall when
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85. Which of the following is true?
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86. For legal purposes, a corporation is treated as
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87. Corporate takeovers of a firm occur
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88. The combined revenues of Walmart, ExxonMobil, and Chevron total more than the GDP of
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89. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required which of the following to be traded in established, regular markets?
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90. Stock markets transactions involve
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91. The federal agency that monitors and regulates the stock market is the
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92. “Plowback” represents a portion of corporate profits that are used to
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93. In 2017, new stock sales accounted for ____ in corporate financing because corporations bought back some of their stock.
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94. According to a recent survey, in 2016, the number of U.S. households that owned equities was about
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95. Suppose that many corporations begin issuing new bonds. Everything else being equal, what is most likely to happen to the interest rate?
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96. Assume Joe invests a total of $10,000 in a company—$5,000 of which is his own money and $5,000 of which he borrowed at a 10 percent interest rate. If the company’s stock value increases by 20 percent in one year at which time Joe sells his shares of the stock, what is Joe’s rate of return on his investment?
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97. The issue of bonds in corporate financing
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98. Double taxation of corporate earnings
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99. Predictions of stock prices by stock market analysts
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100. The risk of financing a project by issuing common stock is borne by
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Figure 9-1  |
101. Which of the graphs in Figure 9-1 best illustrates the path of a composite of common stock prices over the long term?
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102. Bond prices and interest rates
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103. The major difference between stocks and bonds is
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104. On June 2, 2017, Diamond Chemical Corporation’s 4.1 percent coupon bonds, with face values of $100, was sold for $95. This means that the yield on these bonds was
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105. A major advantage of the corporation is
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106. The three noteworthy features of corporations’ legal status include all of these except
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107. The concept of “random walk” applies most closely to forecasts of
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108. The tax treatment of corporate profit means that corporations
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109. If money raised in the issue of new stocks and bonds by corporations is used effectively,
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110. Stockholders normally receive higher expected returns, compared to bondholders, since
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111. The major advantage of the corporation is
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112. Suppose you purchase a $1,000 bond that bears an interest rate of 10 percent. What will happen if the interest rate goes to 20 percent?
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113. A stockholder who owns 1,000 shares of the corporation’s 100,000 shares is entitled to what percentage of the vote in an election of corporate officers?
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114. The Securities and Exchange Commission is
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115. In the traditional view, stocks are ____ than bonds to the firm that issues them and ____ than bonds to the investor who purchases them.
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116. The least scrutiny of management’s operations occurs when ____ is the method used to obtain corporate financing.
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117. An individual who acquires a bond from a corporation
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118. Recently, Argo Chemical’s 8.5 percent bonds maturing in 2019 closed at $92 with a face value of $100. This means the Argo bonds
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119. Dividend refers to
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120. Securities markets perform a valuable economic function because they provide
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121. Which of the following exchanges handles numerous technology companies including Intel and Microsoft?
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122. Recently, Chrysler bonds with a face value of $100 closed at $103. The coupon rate was 12.75 percent. The current yield on these bonds was
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123. A company’s annual payment to stockholders is called the
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124. Under most circumstances, a corporate firm will choose to use retained earnings as a way to finance its activities because
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125. New stock issues are typically handled by
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126. Between 1980 and 2005, the Vanguard Index Fund earned 12.3 percent per year, while the average mutual fund investor earned
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127. The most heavily traded American stocks are traded on the
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128. The primary source of corporate financing in the United States is
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129. What most frightens investors in the stock market is
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130. You hold a $1,000 bond that has an interest rate of 5 percent. If comparable interest rates rise to 10 percent, and you decide to sell this bond, the price you receive will be
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131. A technique that can be employed to make a portfolio less risky than any of its individual securities is
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132. If a person owns 2,000 shares in a corporation that has issued 200,000 shares of stock, that person owns ____ of the company and is entitled to ____ of the dividends.
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133. The value of an investment in an index fund depends on
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134. Random walk theory says
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135. When bond prices rise,
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136. When interest rates in the economy fall, the prices of previously issued bonds
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137. In 2017, plowback accounted for approximately ____ of corporate financing while new stock sales accounted for approximately ____.
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138. To the investor, stocks are riskier than bonds because
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139. A stock market
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140. If the random walk theory is correct, prudent investors could choose their stock portfolio by
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141. A corporate bond will have paid, at maturity,
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142. Double taxation of corporate profits
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143. For some investors, derivatives can be attractive financial assets to purchase because
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144. When the founder of a corporation dies or leaves the company, that corporation
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145. Which of the following acts required that financial derivatives be traded in established, regulated markets?
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146. An individual with a diversified stock portfolio usually
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147. Double taxation of corporate earnings means
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148. When a corporation needs capital to expand, its choices are
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149. Why is it that only a small percentage of American firms are incorporated?
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150. If stock exchanges did not exist,
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151. A bond that pays a high interest rate
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152. Double taxation of corporate earnings
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153. What percentage of American business firms are incorporated?
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154. A corporate bond sold in 2000 with a face value of $10,000, a $100 coupon, and a maturity date in 2010
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155. Which of the following is a series of rules that stops trading on an exchange for a relatively short period of time?
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156. Which of the following was designed to head off panics among market participants and forestall crashes like the ones in October 1929 and October 1987?
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157. A takeover of one firm by another
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158. In 2017, new bond issues and other forms of debt totaled ____ in corporate financing.
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159. “Never put all your eggs in one basket.” This saying refers to the concept of
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160. A corporation is liable to pay to bondholders the
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161. In recent years, established U.S. stock exchanges have faced significant competition from
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162. Bonds differ from stocks in all of these ways except
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163. A ____ is a type of derivative in which the seller promises to pay the buyer of a particular security the value of that security if it goes into default.
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164. “Circuit breaker” rules halt trading when the Dow declines below its previous day’s closing value by a percentage amount for
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165. A bond with a high yield
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166. When a corporation wishes to issue shares of stock, it will do so by working through
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167. Mortgage loans made to borrowers with a more limited ability to repay are known as
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168. Corporations have the disadvantage of which of these? (i) double taxation; (ii) unlimited liability.
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169. In 2017, plowback accounted for nearly ____ in corporate financing.
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170. Almost 85 percent of American firms have less than
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171. Prices of previously issued bonds have risen. It is likely that
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172. A bond’s price is unaffected by
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173. A bond’s price is sensitive to changes in
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174. A corporation is legally owned by its
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175. If a corporation is sued and loses the lawsuit, its liability to pay
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176. Composites of stock prices
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177. If corporations have their choice, they will prefer to invest using
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178. To the corporation, bonds are riskier than stocks because
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179. Historically, investment in stocks have been a prudent investment
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180. An investor in an index fund earning 12.3 percent per year would see an investment of $10,000 increase to approximately ____ in 25 years.
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181. Assume Joe invests a total of $10,000 in a company—$5,000 of which is his own money and $5,000 of which he borrowed at a 10 percent interest rate. If the company’s stock value decreases by 5 percent in one year at which time Joe sells his shares of the stock, what is Joe’s rate of return on his investment?
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182. “Plowback” is a preferred source of financing a corporation because
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183. A company may borrow money from
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184. Stockholders normally obtain higher expected payments than bondholders because
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185. When institutional money managers use their computers to decide on large sales or purchases in the stock market, they are employing
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186. A dividend is the
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187. If bond prices are plotted on a graph with interest rates on the vertical axis,
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188. Under what conditions is it most likely that a corporation will issue new stock as a form of finance?
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189. Bonds can be risky investments because
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190. A corporation’s income is taxed
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191. The sole owner of an unincorporated business unable to pay its debts
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192. Julie is in the 28 percent tax bracket. She earns an 8 percent rate of return after taxes on a tax-free municipal bond. What will the after-tax rate of return be on a taxable bond (with equal risk)?
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193. A corporation may be reluctant to raise capital by issuing stock because
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194. A “specialist” is a
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195. The reason that some corporations grow so big is
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196. Which of the following serves only the best known and heavily traded securities?
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197. Which of the following is true?
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198. If stock prices follow a random walk,
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199. A recent issue of the Wall Street Journal headlined a story, “Bond Prices End Lower.” From this we can conclude that
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200. Brokerage houses may differ in the
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201. The “random walk” theory
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202. Derivatives
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203. A corporation’s income is taxed
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204. Corporations account for a ____ proportion of the total number U.S. firms but a ____ proportion of sales by U.S. firms.
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205. As an investor, would you agree to the statement “put all your eggs in one basket?” Substantiate your answer. |
206. Explain how “herd behavior” affects the stock market and contributes to recession. |
207. Why are bonds risky to a corporation? |
208. Define the following terms and explain their importance to the study of economics. a. common stock b. corporation c. limited liability d. plowback |
209. An investor is trying to decide whether to put his funds into stocks or bonds. He expects rising interest rates over the next year and higher inflation. Your advice? |
210. Explain why using leverage to purchase risky securities is so popular. |
211. If stocks are riskier than bonds, why would a rational investor ever buy stocks? |
212. From the viewpoint of the individual investor, are stocks or bonds riskier? Explain. |
213. Assume Jean-Claude purchased real estate for $500,000 using $50,000 of which is his own money and $450,000 of which he borrowed at an 8 percent interest rate. If the value increased by 10 percent in one year and he sold the property, what was Joe’s rate of return on his investment? If the value of the property had declined by 2 percent, what would have been the rate of return on his investment? |
214. Define the following terms briefly and concisely. a. stock b. bond c. portfolio diversification d. mutual fund e. random walk |
215. Why is plowback the overwhelming favorite among choices of sources of funds for financing corporate investment? |
216. What are the two critically important functions for corporate financing performed by stock exchanges? |
217. Write a short note on the regulation of the U.S. securities markets. |
218. Would a corporation seeking to raise capital sell its new shares on the stock market? If not, why not? |
219. Explain how derivatives were used to increase risk making the financial crisis of 2007–2009 more severe. |
220. How is it possible to have a separation between ownership and control of a major corporation? What specific type of market imperfection can cause this? |
221. Explain how mutual funds are advantageous to small investors. |
222. What is the stock market’s role in achieving efficient use of resources? |
223. Explain why bond prices and interest rates are inversely related. |
224. Corporate income is taxed twice—once in the form of corporate income tax and the second time when the owner must pay income tax on dividends. What are the effects of this double taxation? |
225. Explain how a diversified portfolio can reduce fluctuations in returns even when the economy as a whole is experiencing contractions and expansions. |
226. Why is diversification recommended for investors? |
227. Several writers have helped to popularize the notion that stock prices follow no discernible pattern. What is meant by a random walk, and how can you explain why people continue to invest in stocks if the random walk theory is correct? |
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Microeconomics Principles and Policy 14e | Test Bank by Baumol
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