Copyright 2014 John Wiley Sons, Inc. 1-1

Copyright © 2014 John Wiley & Sons, Inc. 1-1

Chapter 1: An Introduction to Finance

Multiple Choice

• The difference between a financial intermediary and a market intermediary is best described as:
• one deals with the financing decision making within a business entity, the other deals with

financial markets and securities.

• one involves the issuing of new securities, the other permits investors to buy and sell existing

securities.

• one transforms the nature of securities in a market; the other does not change the nature of the

transaction.

Answer C Difficulty Easy Learning outcome LO 1.1 Bloom’s taxonomy Describe AACSB Analytical skills Feedback A financial intermediary transforms the nature of the securities they issue and invest in, whereas a market intermediary simply makes the markets work better.

• The environment in which households provide funds to businesses and government is best

described as a:

• financial system.
• market intermediary.
• financial intermediary.

Answer A Difficulty Easy Learning outcome LO 1.1 Bloom’s taxonomy Remember AACSB Analytical skills Feedback A financial system is an environment in which households provide funds to businesses and government.

• Which of the following would not be an example of intermediation?
• Matt borrows money from friends to start a food truck business.

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Booth, Cleary, & Drake / Corporate Finance Test Bank Copyright © 2014 John Wiley & Sons, Inc. 1-2

• Andrea takes out a mortgage loan from SunTrust Mortgage.
• Angela borrows money from a credit union to purchase a new car.
• A retired person withdraws money from their savings account to take a Caribbean cruise.

Answer D Difficulty Easy Learning outcome LO 1.1 Bloom’s taxonomy Describe AACSB Analytical skills Feedback Intermediation is the transfer of funds from lenders to borrowers

• Investment and financing decisions, which may be short-term or long-term decisions are best

described as:

• financial decision making.
• economic decision making.
• accounting decision making.

Answer A Difficulty Easy Learning outcome LO 1.1 Bloom’s taxonomy Remember AACSB Analytical skills Feedback Financial decision making encompasses investment and financing decisions, which may be short-term or long-term decisions.

• Mutual funds, pension funds, investment dealers and insurance companies are best described as

examples of:

• corporate finance.
• market intermediaries.
• financial intermediaries.

Answer C Difficulty Easy Learning outcome LO 1.1 Bloom’s taxonomy Describe AACSB Analytical skills Feedback A financial intermediary transforms the nature of the securities they issue and invest in, whereas a market intermediary simply makes the markets work better.

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Booth, Cleary, & Drake / Corporate Finance Test Bank Copyright © 2014 John Wiley & Sons, Inc. 1-3

• Which of the following is not a type of financial instrument?
• Bond
• Collateral
• Equity security
• Debt instrument

Answer B Difficulty Easy Learning outcome LO 1.2 Bloom’s taxonomy Remember AACSB Analytical skills Feedback A financial instrument is a legal agreement that represents an ownership interest, a debt obligation, or other claim on assets or income.

• Farmers and Merchants Bank lends money to Ruth to purchase a car from Steven Toyota. Ruth is

going to insure the car with Allstate Insurance. Which party is best described as the creditor?

• Ruth
• Steven Toyota
• Allstate Insurance
• Farmers and Merchants Bank

Answer D Difficulty Easy Learning outcome LO 1.2 Bloom’s taxonomy Describe AACSB Analytical skills Feedback creditor - a party lending funds through a loan arrangement

• Which of the following would not be described as a debenture?
• An unsecured loan
• A loan secured by collateral
• A loan secured by the “full faith and credit” of the issuer

Answer B Difficulty Easy Learning outcome LO 1.2 Bloom’s taxonomy Remember AACSB Analytical skills 3 / 4

Booth, Cleary, & Drake / Corporate Finance Test Bank Copyright © 2014 John Wiley & Sons, Inc. 1-4 Feedback A debenture is an unsecured debt obligation.

• What is the primary difference between a bond and a note?
• One is short-term, one is long-term
• One is a debt security, one is an equity security
• One is issued in the primary market, one is issued in the secondary market

Answer B Difficulty Easy Learning outcome LO 1.2 Bloom’s taxonomy Remember AACSB Analytical skills Feedback A note is similar to a bond, but with a maturity in the range of one to ten years.

• What is wrong with the following statement? General Electric will be issuing $100 million in forty

year notes at the end of September?

• This should be called a bond
• This should be called a stock
• Nothing is wrong with this statement

Answer A Difficulty Easy Learning outcome LO 1.2 Bloom’s taxonomy Describe AACSB Analytical skills Feedback A bond is debt instrument that takes the form of a security, generally with a maturity of more than ten years.

• The City of Harrisonburg issues revenue bonds to improve the city’s water and sewer systems.

These bonds would be best described as being backed by:

• nothing.
• the full faith and credit of the issuer.
• a specific revenue stream of the issuing entity.
• property taxes that are assessed by the local government.

Answer C

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