Finace

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Multiple Choice Questions

1.In 2005, ____________ was the most significant real asset of U. S. nonfinancial businesses in terms of total value. A)Equipment and software
B)Inventory
C)Real estate
D)Trade credit
E)Marketable securities

Answer: C Difficulty: Easy
Rationale: See Table 1.4.

2.In 2005, ____________ was the least significant real asset of U. S. nonfinancial businesses in terms of total value. A)Equipment and software
B)Inventory
C)Real estate
D)Trade credit
E)Marketable securities

Answer: B Difficulty: Easy
Rationale: See Table 1.4.

3.In 2005, ____________ was the least significant liability of U. S. nonfinancial businesses in terms of total value. A)Bonds and mortgages
B)Bank loans
C)Inventories
D)Trade debt
E)Marketable securities

Answer: B Difficulty: Easy
Rationale: See Table 1.4.

4.In 2005, ____________ was the most significant financial asset of U. S. nonfinancial businesses in terms of total value. A)Cash
B)Trade credit
C)Trade debt
D)Inventory
E)Marketable securities

Answer: B Difficulty: Easy
Rationale: See Table 1.4.

5.The material wealth of a society is equal to the sum of _________. A)All financial assets
B)All real assets
C)All financial and real assets
D)All physical assets
E)None of the above

Answer: B Difficulty: Easy
Rationale: Financial assets do not directly contribute the productive capacity of the economy.

6.____________ of an investment bank.
A)Citigroup is an example
B)Merrill Lynch is an example
C)Goldman is an example
D)B and C are each examples
E)Each of the above is an example

Answer: E Difficulty: Easy

7._______ are financial assets.
A)Bonds
B)Machines
C)Stocks
D)A and C
E)A, B and C

Answer: D Difficulty: Easy
Rationale: Machines are real assets; stocks and bonds are financial assets.

8.An example of a derivative security is ______.
A)A common share of General Motors
B)A call option on Mobil stock
C)A commodity futures contract
D)B and C
E)A and B

Answer: D Difficulty: Easy
Rationale: The values of B and C are derived from that of an underlying financial asset; the value of A is based on the value of the firm only.

9._______ was the first to introduce mortgage pass-through securities. A)Chase Manhattan
B)Citicorp
C)FNMA
D)GNMA
E)None of the above

Answer: D Difficulty: Easy

10.A bond issue is broken up so that some investors will receive only interest payments while others will receive only principal payments, which is an example of ________. A)bundling
B)credit enhancement
C)unbundling
D)financial engineering
E)C and D

Answer: E Difficulty: Easy
Rationale: Unbundling is one of many examples of financial engineering that offer more alternatives to the investor.

11.An example of a primitive security is __________.
A)a common share of General Motors
B)a call option on Mobil stock
C)a call option on a stock of a firm based in a Third World country D)a U. S. government bond
E)A and D

Answer: E Difficulty: Easy
Rationale: A primitive security's return is based only upon the earning power of the issuing agency, such as stock in General Motors and the U. S. government.

12.The ____________ refers to the potential conflict between management and shareholders due to management's control of pecuniary rewards as well as the possibility of incompetent performance by managers. A)agency problem

B)diversification problem
C)liquidity problem
D)solvency problem
E)regulatory problem

Answer: A Difficulty: Easy
Rationale: The agency problem describes potential conflict...
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