Q&A Hero

Q: The one-year interest rate is 4%. The interest rate for a two-year security is 6%. According to the unbiased expectations theory, the one-year interest rate one year from now must be equal to A) 5.00%. B) 8.00%. C) 8.04%. D) 10.00%.

Q: Which of the following securities will likely have the highest maturity risk premium? A) U.S. Treasury bond maturing in 2027 B) Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange C) Aaa-rated corporate bond maturing in 2015 not actively traded D) U.S. Treasury bill

Q: A liquidity-risk premium is the additional return required by investors for securities that cannot quickly be converted into cash at a reasonably predictable price.

Q: A real interest rate is the interest rate on a fixed-income security that has no risk in an economic environment of high inflation.

Q: A liquidity-risk premium is the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuation on those securities caused by interest rate changes.

Q: In response to the banking crisis and economic collapse of 2007 and 2008, the U.S. government moved to increase interest rates in order to attract foreign capital seeking high returns in U.S. banks.

Q: The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns.

Q: Distinguish between the concepts of the maturity-risk premium and the liquidity-risk premium.

Q: Distinguish between the concepts of the inflation premium and the default-risk premium.

Q: Examine the securities below and identify the security with the highest liquidity premium, the highest default risk premium, and the highest maturity premium. a. 30-year U.S. Government Treasury bond maturing in 2025 b. 25-year Bbb-rated corporate bond maturing in 2030, actively traded on the New York Exchange c. 10-year Aaa-rated corporate bond maturing in 2020, thinly traded on a regional exchange d. 3-month U.S. Treasury bill

Q: Which of the following statements is false? A) Brokers purchase securities for their own account. B) Most corporate bond trading takes place over the counter. C) Broker-dealers stand ready to buy and sell specific securities at selected prices. D) none of the above

Q: Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificates of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by A) liquidity premiums. B) default risk premiums. C) maturity premiums. D) inflation risk premiums.

Q: Which of the following securities will likely have the highest default risk premium? A) U.S. Treasury bond maturing in 2027 B) Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange C) Aaa-rated corporate bond maturing in 2015 not actively traded D) U.S. Treasury bill

Q: Which of the following securities will likely have the highest liquidity premium? A) U.S. Treasury bond maturing in 2027 B) Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange C) Aaa-rated corporate bond maturing in 2015 not actively traded D) U.S. Treasury bill

Q: During the period 1990 to 2014, the average yield on 3-month U.S. Treasury bills was 3.04%, the average inflation rate was 2.64%, the average yield on 30-year Treasury bonds was 5.49%, and the average return on 30-year Aaa-rated corporate bonds was 6.35%. The real risk-free short-term interest rate is A) 0.40%. B) 2.13%. C) 2.97%. D) 4.76%.

Q: Which of the following represents the correct ordering of standard deviation of returns over the period 1926 to 2014 (from highest to lowest standard deviation of returns)? A) Treasury bills, long-term corporate bonds, long-term government bonds, common stocks B) common stocks, long-term government bonds, long-term corporate bonds, Treasury bills C) Treasury bills, long-term government bonds, long-term corporate bonds, common stocks D) Treasury bills, long-term government bonds, common stocks, long-term corporate bonds

Q: Which of the following represents the correct ordering of returns over the period 1926 to 2014 (from lowest to highest return)? A) Treasury bills, long-term government bonds, long-term corporate bonds, common stocks B) common stocks, long-term government bonds, long-term corporate bonds, Treasury bills C) Treasury bills, common stocks, long-term corporate bonds, long-term government bonds D) long-term corporate bonds, Treasury bills, long-term government bonds, common stocks

Q: Over the period 1926 to 2014, the standard deviation of returns has been the greatest for which of the following? A) Treasury bills B) corporate bonds C) government bonds D) common stocks

Q: What was the average annual rate of return on common stocks during the period 1926 to 2014? A) 15.4% B) 18.6% C) 10.1% D) 9.5%

Q: What was the average annual rate of return on long-term corporate bonds during the period 1926 to 2014? A) 8.3% B) 6.5% C) 6.10% D) 7.00%

Q: What was the average annual rate of return on long-term government bonds (30-year Treasury bonds) during the period 1990 to 2014? A) 4.14% B) 5.88% C) 5.49% D) 7.82%

Q: What was the average annual rate of return on 3-month U.S. Treasury bills during the period 1990 to 2014? A) 2.15% B) 4.23% C) 3.04% D) 5.68%

Q: The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because A) oil and gas exploration investments have a greater variability in possible returns. B) the preferred stock is more liquid. C) the inflation rate would vary more with oil and gas exploration investments. D) both A and B

Q: The real rate of return is the return earned above the A) default risk premium. B) risk-adjusted return. C) inflation risk premium. D) variability of returns measured by standard deviation.

Q: The prime lending rate is the base rate on A) mortgage loans. B) home equity loans. C) auto loans. D) corporate loans.

Q: A basis point is equal to A) one percent. B) one-tenth of one percent. C) one-hundredth of one percent. D) one-half of one percent.

Q: The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is A) 5.0%. B) 6.86%. C) 5.1%. D) 4.9%.

Q: Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issued.

Q: The rate of return available on the next best investment alternative for the saver refers to the opportunity cost of funds.

Q: Over time, there has been a high correlation between actual rates of return on securities and the securities' standard deviations of returns.

Q: Within the financial markets, explain what we mean by "private placements" and name the advantages and disadvantages.

Q: What are the five key methods by which securities are distributed to final investors?

Q: Has looking beyond U.S. borders been a profitable experience for U.S. corporations?

Q: What has brought on the era of the multinational corporation?

Q: In the search for profits, U.S. corporations have been forced to look beyond our country's borders. All of the following contributed to the movement EXCEPT A) trade protectionism. B) collapse of communism. C) acceptance of the free market system in Third World countries. D) information technology revolution.

Q: Even though many U.S. companies, including General Electric, IBM, Walt Disney, and American Express, have successfully restructured their operations to expand internationally, not many foreign firms have made their mark in the United States.

Q: Due to unstable world markets, most large U.S. corporations do almost all of their business in the United States.

Q: Explain why large and growing firms tend to choose the corporate form.

Q: What are the primary differences among a sole proprietorship, a partnership, and a corporation?

Q: Which of the following is an advantage of the general partnership form of business organization? A) limited liability of business owners B) low cost of formation C) easy ability to raise capital D) double taxation

Q: Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of business organization? A) limited ability to raise capital B) life is limited to that of the owner C) unlimited liability of business owners D) fewer regulations and reporting requirements

Q: Which of the following forms of business organization has the greatest ability to attract new capital? A) sole proprietorship B) corporation C) general partnership D) limited partnership

Q: Which of the following forms of business organization limits the liability of owners? A) sole proprietorship B) general partnership C) corporation D) two person partnership

Q: Which form of organization is free of initial legal requirements? A) sole proprietorship B) general partnership C) corporation D) both A and B

Q: Advantages of the corporate form of business organization include A) easier transfer of ownership. B) double taxation. C) minimal legal requirements. D) none of the above

Q: Which of the statements below are true? A) The sole proprietorship and the general partnership both feature unlimited liability. B) A corporation is the business form that is typically the most complicated (legally) to establish. C) The corporation and the limited partnership both provide at least some owners with limited liability. D) all of the above

Q: All of the following forms of business organizations provide limited liability to all owners EXCEPT A) limited liability company. B) S-type corporation. C) corporation. D) limited partnership.

Q: Which of the following forms of business organizations provide limited liability to all its owners? A) general partnership B) limited partnership C) corporation D) both B and C

Q: Which of the following categories of owners have limited liability? A) general partners B) sole proprietors C) shareholders of a corporation D) both A and B

Q: Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends? A) corporations B) general partnerships C) limited partnerships D) both A and C

Q: Which of the following are characteristics of a limited partnership? A) Limited partners may not participate in the management of the limited partnership. B) There must be one or more general partners. C) General partners have unlimited liability. D) all of the above

Q: Which of the following categories of owners have unlimited liability? A) general partners in a limited partnership B) sole proprietors C) shareholders of a corporation D) both A and B

Q: Which of the following categories of owners enjoy limited liability? A) all partners in a limited partnership B) common shareholders of a corporation C) in a partnership, only the general partners D) only B and C above

Q: In terms of the costs to organize each, which of the following sequences is correct, moving from highest to lowest cost? A) general partnership, sole proprietorship, limited partnership, corporation B) sole proprietorship, general partnership, limited partnership, corporation C) corporation, limited partnership, general partnership, sole proprietorship D) sole proprietorship, general partnership, corporation, limited partnership

Q: The true owners of the corporation are the A) holders of debt issues of the firm. B) preferred stockholders. C) board of directors of the firm. D) common stockholders.

Q: Which of the following is NOT true for a limited partnership? A) It has limited liability for its owners. B) One general partner must exist who has unlimited liability. C) Only the name of general partners can appear in the name of the firm. D) Limited partners may sell their interest in the company.

Q: Which of the following is an advantage of the sole proprietorship? A) limited liability for its owners B) double taxation for its owners C) no significant legal requirements for starting the business D) easily transferred ownership

Q: Limited partnerships are not as prevalent as corporations because A) limited partners can lose up to three times the amount they invested in the partnership if the business goes bankrupt. B) limited partnerships have the disadvantage of double taxation. C) the general partner has no liability, making it difficult for the partnership to borrow money. D) it is easier to transfer ownership by selling common stock than it is to sell partnership.

Q: Which of the following statements about the corporate form of business organization is true? A) The corporate form has the disadvantage of double taxation relative to a sole proprietorship. B) The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation. C) Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor. D) The corporate form has the advantage of unlimited liability.

Q: Bill, a local inventor, developed a diet pill that he believes will solve the obesity problem in the United States. Bill wants to create a new company, 50% owned by Bill and 50% owned by a major drug company. Although he believes the pills are safe, Bill is concerned about liability if someone becomes sick or dies. The best form of business organization for the new company is A) sole proprietorship with Bill as owner and the drug company as creditor. B) general partnership with Bill and the drug company as equal partners. C) S-type corporation with Bill and the drug company owning equal shares. D) limited liability company with Bill and the drug company owning equal shares.

Q: All of the following business organizations provide limited liability to their owners EXCEPT A) general partnership. B) S-type corporation. C) corporation. D) limited liability company.

Q: S-type corporations have all of the following advantages EXCEPT A) they are taxed as partnerships. B) the owners have limited liability. C) distributions are taxed twice, similar to corporate dividend payments. D) all owners must be people, no corporations.

Q: Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is A) $10,000 if Joe is a general partner. B) $10,000 if Joe is a sole proprietor. C) $10,000 if Joe is a limited partner. D) $10,000 plus his share of the lawsuits if Joe is a limited partner.

Q: A limited partnership provides limited liability to A) all general partners. B) only limited partners responsible for day to day management of the firm. C) only to limited partners who do not participate in the management of the business. D) all partners.

Q: In a limited partnership at least one general partner must exist; that general partner has unlimited liability.

Q: The procedure by which significant changes may be made to a partnership, such as admission of a new partner or termination of the partnership, are governed by each state so no partnership agreement is needed.

Q: In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.

Q: The corporation is a legal entity separate from its owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.

Q: The owners of a corporation enjoy limited liability.

Q: There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership.

Q: Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital.

Q: A limited liability company (LLC) is taxed like a partnership but provides limited liability for its owners, similar to a corporation.

Q: Limited liability companies are more flexible than S-type Corporations because limited liability companies operate under state laws.

Q: S-type corporations and limited liability companies are taxed like partnerships, but have the advantage of limited liability for their owners.

Q: The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner.

Q: A general partnership, unlike a limited partnership, is an entity that legally functions separate and apart from its owners.

Q: The sole proprietorship is for all practical purposes the absence of any formal legal business structure.

Q: What are the duties of a treasurer? Of a controller?

Q: Your friend, John, believes that since capital markets are efficient, he doesn't need to read the financial press or be involved in stock research before purchasing stocks for his portfolio. He simply throws darts at the stock pages and buys the stocks the darts hit. Is stock research and analysis important when buying and selling stocks in an efficient market?

Q: Determining the best way to raise money to fund a firm's long-term investments is called A) the capital budgeting decision. B) the portfolio decision. C) the money flow processing decision. D) the capital structure decision.