Q&A Hero

Q: Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday? a. 12.36 years b. 16.25 years c. 15.19 years d. 13.52 years e. 14.12 years

Q: If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account? a. 23.02 years b. 18.50 years c. 20.52 years d. 16.89 years e. 25.65 years

Q: Andrea's opportunity cost rate is 12 percent compounded annually. How much must she deposit in an account today if she wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount. a. $10,734 b. $11,625 c. $10,998 d. $11,887 e. $9,584

Q: Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation. a. $6,088 b. $7,086 c. $6,874 d. $6,636 e. $6,420

Q: Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? a. $32,625 b. $34,852 c. $36,234 d. $38,996 e. $40,252

Q: Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today. a. $17,226 b. $14,868 c. $23,252 d. $18,725 e. $21,804

Q: Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? a. $23,089 b. $25,526 c. $26,888 d. $28,685 e. $30,534

Q: If the opportunity cost rate is 8 percent, compounded annually, what is the present value of $8,200 due to be received in 12 years? a. $3,068 b. $3,256 c. $3,552 d. $3,688 e. $3,854

Q: Identify the correct equation for calculating the present value of an investment. (Assume 'r' stands for rate of return and 'n' stands for number of periods interest is earned.) a. Present value = Future value (1 + r)n b. Present value = Future value + (1 + r)n c. Present value = Future value (1 + r)n d. Present value = Future value / (1 + r)n e. Present value = Future value / ((1 + r) n)

Q: The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____. a. compounding b. discounting c. consolidation d. amortization e. annualizing

Q: Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal (future) value of this uneven cash flow stream at the end of Year 4 is _____. a. $2,314 b. $1,833 c. $2,097 d. $2,355 e. $1,784

Q: The future value of an uneven cash flow stream is also referred to as its _____. a. discounted value b. amortized value c. consolidated value d. terminal value e. periodic value

Q: Dwayne plans to invest $4,700 in a savings account at the beginning of each of the next 12 years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth at the end of 12 years? a. $87,542.29 b. $89,961.02 c. $91,250.52 d. $93,668.27 e. $84,075.72

Q: Robert plans to invest $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth at the end of seven years? a. $5,048 b. $5,292 c. $5,557 d. $6,058 e. $6,656

Q: Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? a. $5,055 b. $5,642 c. $5,980 d. $6,026 e. $6,222

Q: Shekhar plans to invest $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. a. $11,125.76 b. $11,857.58 c. $12,580.20 d. $13,351.39 e. $14,871.32

Q: Adam plans to invest $1500 today in a mutual fund. If he earns 12 percent interest compounded monthly, to what amount will his investment grow in 20 years? a. $17,289 b. $15,897 c. $16,339 d. $12,450 e. $18,546

Q: Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. What is the value of the investment today? a. $36,667.76 b. $38,250.26 c. $40,527.37 d. $44,260.91 e. $46,458.63

Q: Sarah invests $2,700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance. a. N = 6, I/Y = 5%, PV = 2,700 b. N = 5, I/Y = 6%, FV = 2,700 c. N = 5, I/Y = 6%, PV = 2,700 d. N = 5, I/Y = 6%, FV = 2,700 e. N = 5, I/Y = 6%, PV = 2,700

Q: Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time) a. Future value = Present value (1 + r)n b. Future value = Present value + (1 + r)n c. Future value = Present value (1 + r)n d. Future value = Present value / (1 + r)n e. Future value = Present value / [(1 + r) n]

Q: The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____. a. discounting b. compounding c. amortization d. consolidation e. annualizing

Q: In most instances, the payment of utility bills is an example of _____. a. immediate annuity b. ordinary annuity c. annuity due d. lump-sum payments e. uneven cash flows

Q: An investor purchased a 10-year bond that makes a $50 interest payment at the end of every six-month period until the bond matures. These interest payments represent a(an) _____. a. perpetuity b. ordinary annuity c. annuity due d. compounded annuity e. discounted annuity

Q: Which of the following is the rate of return on the best available alternative investment of equal risk? a. Amortization rate b. Risk adjusted rate c. Required rate of return d. Opportunity cost rate e. Expected rate of return

Q: Which of the following types of annuities best describes a mortgage payment or payment of rent that normally must be paid at the beginning of each month? a. Annuity due b. Ordinary annuity c. Deferred annuity d. Annuity in arrears e. Immediate annuity

Q: At the beginning of the year, William bought 20 shares of Zync Corporation at $18.50 per share. Zync pays dividend at the end of each year based on annual profits, which generally vary substantially from year to year. In its 25 years history, Zync has paid dividends every year without fail. The initial investment by William and the receipt of dividend at the end of every year are examples of a(n) _____ and a(n) _____, respectively. a. uneven cash flow stream; annuity due b. uneven cash flow stream; ordinary annuity c. lump-sum payment; annuity due d. lump-sum payment; uneven cash flow stream e. lump-sum payment; ordinary annuity

Q: Ibiza Corporation invested $20,000 for the last four years in an investment that will pay the firm $120,000 at the end of this year. The $120,000 received at the end of this year is an example of a(n) _____. a. uneven cash flow b. annuity due c. ordinary annuity d. deferred annuity e. lump-sum amount

Q: Pelican Corporation is planning to invest $12,000 at the beginning of each of the next eight years. This form of cash flow pattern is known as a(n) _____. a. immediate annuity b. annuity due c. uneven cash flow stream d. ordinary annuity e. deferred annuity

Q: A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of cash flow pattern represents a(n) _____. a. lump-sum payment b. uneven cash flow stream c. annuity due d. ordinary annuity e. immediate annuity

Q: A firm makes investments of $2,000 this year, $4,000 next year, and $2,500 the following year. This form of cash flow pattern is a(n) _____. a. ordinary annuity b. annuity due c. uneven cash flow stream d. lump-sum payment e. compounded cash flow

Q: An annuity with payments that occur at the beginning of each period is known as a _____. a. deferred annuity b. ordinary annuity c. immediate annuity d. annuity due e. discounted annuity

Q: When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____. a. ordinary annuity b. annuity due c. immediate annuity d. terminal annuity e. discounted annuity

Q: Which of the following agreements is included in the Basel III Accord (2010)? a. Agreement to increase banks' capital (owners' equity) requirements in an effort to reduce the risk that mega bank failures will cause future financial crises b. Agreement to put restrictions on the ability of the U.S. government to use taxpayers' funds to bail out large financial institutions c. Agreement to create new organizations to help provide consumers clear and accurate information related to credit so that better-informed decisions can be made d. Agreement to permit the U.S. government to purchase up to $700 billion in troubled mortgages in an attempt to improve liquidity in the financial markets e. Agreement to limit the salaries of executives whose companies received Troubled Asset Relief Program (TARP) funds.

Q: Which of the following is true about financial institutions in the United States compared to those in other countries? a. U.S. financial institutions have been much more heavily regulated than their foreign counterparts with regard to expansion (branching) and the services that could be offered. b. U.S. financial institutions have been regulated less than their foreign counterparts with regard to expansion (branching) and the services that could be offered. c. U.S. financial institutions and their foreign counterparts have similar regulations with regard to expansion (branching) and the services that could be offered. d. Most U.S. intermediaries are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of foreign financial institutions have been severely restricted until recently. e. U.S. financial institutions and their foreign counterparts have similar regulations with regard to engaging in nonbanking activities.

Q: During the past decade, the areas of greatest worldwide growth in the financial markets have occurred in _____. a. China, India, and Brazil b. China, India, and Argentina c. India, Brazil, and South Africa d. China, Brazil, and Argentina e. China, South Africa, and Argentina

Q: Which of the following plans is administered primarily by the trust departments of commercial banks or by life insurance companies? a. Health insurance plans b. Underwriting plans c. Shelf plans d. Pension plans e. Initial expansion plans

Q: Which of the following financial intermediaries is also known as a savings and loan association? a. Commercial bank b. Credit union c. Mutual fund d. Thrift institution e. Pension fund

Q: Which of the following statements is true of a term life insurance? a. A term life insurance policy is administered primarily by the trust departments of commercial banks. b. The premiums associated with a term insurance policy are fixed payments computed as an average of the premiums required over the expected life of the insured person. c. A term life insurance offers both insurance coverage and a savings feature. d. A term life insurance is a relatively short-term contract that provides financial protection for a temporary period. e. The cost of a term life insurance generally decreases with each renewal as the risk of premature death increases as the insured ages.

Q: Mutual funds _____. a. are depository institutions that are owned by its depositors, who are often members of a common organization or association b. are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds, in the financial markets c. cater to savers, especially individuals who have relatively small savings or need long-term loans to purchase houses d. are organizations that distribute new issues of securities for corporations e. are groups of investment banking firms formed to spread the risk associated with the purchase and distribution of a new issue of securities

Q: Investment companies that use the money provided by savers to invest in various types of financial assets, including stocks and bonds, are called _____. a. commercial banks b. investment banks c. credit unions d. mutual funds e. thrift institutions

Q: Which of the following financial intermediaries operates as a not-for-profit organization? a. Commercial bank b. Credit union c. Thrift institution d. Mutual fund e. Whole-life insurance company

Q: A depository institution that is owned by its depositors, who are often members of a common organization or association, such as an occupation, a religious group, or a community, is called a(an) _____. a. underwriting syndicate b. mutual fund c. investment bank d. credit union e. commercial bank

Q: Credit unions, mutual funds, and thrift institutions are all examples of _____. a. financial intermediaries b. investment banks c. regulatory bodies d. underwriters e. over-the-counter markets

Q: Financial intermediaries spread their risk by providing funds to a large number and variety of borrowers by offering many different types of loans. Due to this, the loan portfolios of intermediaries are said to be _____. a. well diversified b. well consolidated c. economically efficient d. partially underwritten e. partially shelf registered

Q: Organizations that create various loans and investments from funds provided by depositors are known as _____. a. investment banks b. financial intermediaries c. derivatives markets d. over-the-counter markets e. designated market makers

Q: The process by which commercial banks transform funds provided by savers into funds used by borrowers is called _____. a. investment banking b. shelf registration c. diversification d. underwriting e. financial intermediation

Q: A document describing a new security issue and the issuing company is called a(n) _____. a. registration statement b. underwriting statement c. prospectus d. footnote e. abridged statement

Q: The expenditure incurred by a company in connection with its initial public offer is called the _____. a. shelf registration cost b. competitive spread c. initiation cost d. flotation cost e. bid spread

Q: Which of the following equations is used to compute the dollar amount of common stock or debt that a company must issue after taking into account the flotation costs? a. Amount of issue = (Net proceeds Other flotation costs in dollars) / (1 Flotation costs in decimal form) b. Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 Flotation costs in decimal form) c. Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 + Flotation costs in decimal form) d. Amount of issue = (Net proceeds Other flotation costs in dollars) (1 + Flotation costs in decimal form) e. Amount of issue = (Net proceeds + Other flotation costs in dollars) (1 Flotation costs in decimal form)

Q: Ship Shape Marine (SSM) needs $92 million to support future growth. If SSM issues bonds to raise funds, flotation (issuance) costs will be 8 percent. Each bond will be sold for $1,000; fractions of bonds cannot be issued. How many bonds must be issued so that SSM has $92 million after flotation costs to use for its planned growth? a. 99,360 b. 92,000 c. 100,000 d. 84,640 e. 108,000

Q: Devine Linens (DL) must raise $14,000,000 to support future growth. If it raises the funds by issuing stock, DL must pay an investment banker 5 percent of the total amount issued plus $250,000 in other costs associated with the issue. What is the amount of stock that DL must issue to net $14,000,000 after flotation costs? a. $14,962,500 b. $14,950,000 c. $14,737,092 d. $15,000,000 e. $13,537,500

Q: Persian Rugs needs $600 million to support growth next year. If it issues new common stock to raise the funds, the flotation (issuance) costs will be 4 percent. If Persian can issue stock at $125 per share, how many shares of common stock must be issued so that it has $600 million after flotation costs to use for its planned growth? a. 5,000,000 b. 4,800,000 c. 4,992,000 d. 4,512,000 e. 4,000,000

Q: Welsh Corporation wants to issue debt of $525,000 to invest in a new project. Welsh is required to pay its investment banker 5 percent of the issue's total value. There are no other floatation costs. Compute the amount of debt that the firm must issue to net $525,000 after flotation costs. a. $525,347 b. $552,632 c. $498,752 d. $551,257 e. $575,886

Q: The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the issuing firm is known as the _____. a. offering price b. efficiency return c. underwriter's spread d. bid price e. premium cost

Q: Which of the following is true about the process of setting the offering price of a security issue? a. The offering price of an initial public offering (IPO) of the stock of a privately held company is determined by a financial intermediary. b. An investment banker has an easier job of selling the issue if it carries a relatively high price. c. An investment bank finds it easier to set the offering price of an initial public offering as compared to that of a seasoned offering. d. An investment bank finds it easier to set the offering price of a seasoned offering of a private company than a seasoned offering of a public company. e. If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds.

Q: When issuing new securities, which of the following decisions is made jointly by a corporation and its investment banker? a. Deciding whether to go for a competitive bid or a negotiated deal with the investment banker b. Deciding which investment banker to use c. Deciding whether to go for a best-efforts or underwritten issue d. Deciding on the investment project for which to raise additional capital e. Deciding which member of the senior management team deals with the investment banker

Q: When issuing new securities, which of the following decisions does the firm make by itself? a. Deciding whether to go for a competitive bid or a negotiated deal with an investment banker b. Deciding whether to go for a best-efforts or an underwritten issue c. Determining the flotation costs d. Deciding the offering price e. Reevaluating the decisions about the size of the issue and the type of securities to be issued

Q: What is the primary reason an investment banking firm often forms an underwriting syndicate to sell new securities? a. To ensure that the auction trading process is completed in a fair and efficient manner b. To enhance liquidity in high-volume trade of securities by maintaining continuous up-to-date prices for the securities assigned to them c. To regulate the issuance and trading of stocks and bonds d. To provide the issuing company with the most competitive underwriting bids e. To spread the risk associated with the purchase and distribution of a new issue of securities

Q: Zync Corporation decides that instead of simply offering a block of its debt securities for sale to the investment banker that submits the highest price, it should do business with a single (one) investment banker. In this case, the issuing costs are determined by using _____. a. the Securities and Exchange Commission (SEC) b. a competitive bid c. a negotiated deal d. a trade-through arrangement e. a financial intermediation arrangement

Q: Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all interested investment bankers. This procedure is known as a _____. a. financial intermediation b. negotiated deal c. competitive bid d. shelf registration e. dual listing

Q: Zinc Corporation, a large, well-known public company that frequently issues securities, filed a master registration statement with the Securities and Exchange Commission (SEC). This master statement is updated with a short-form statement just prior to each individual security offering. What is this arrangement called? a. Underwriting registration b. Shelf registration c. Best-effort registration d. Multiple registration e. Initial public offering registration

Q: An arrangement in which the investment banking firm typically buys the securities from the issuing firm and then sells the securities in the primary markets, hoping to make a profit, is called a(n) _____. a. best-efforts arrangement b. underwritten arrangement c. guaranteed capital arrangement d. privately placed arrangement e. accelerated securities exchange arrangement

Q: An agreement for the sale of securities in which the investment bank handling the transaction gives no assurance that the entire issue will be sold is called a(n) _____. a. private placement b. guaranteed issue arrangement c. underwritten arrangement d. best-efforts arrangement e. shelf registration

Q: Treasury bills are issued by the U.S. government. In which type of financial market do already issued treasury bills trade? a. Capital market b. Primary market c. Stock market d. Money market e. Derivatives market

Q: Listing requirements of a security refer to the _____. a. quantitative and qualitative characteristics a firm must possess to be listed on a stock exchange b. quantitative and qualitative characteristics a firm must possess to be listed with the Securities and Exchange Commission (SEC) c. quantitative and qualitative characteristics a firm must possess to go public for the first time (i.e., an IPO) d. quantitative and qualitative characteristics a firm must possess to be listed with the IRS e. quantitative and qualitative characteristics a firm must possess to be listed with an underwriting syndicate

Q: In the trading of a security, the dealer's spread refers to _____. a. the sum of the bid and asked prices of a security, which represents the dealer's revenue from a security transaction b. the sum of the bid and asked prices of a security, which represents the dealer's markup, or profit from a security transaction c. the difference between the bid and asked prices of a security, which represents the dealer's markup, or profit from a security transaction d. the difference between the bid and asked prices of a security, which represents the dealer's expenses from a security transaction e. the ratio of the bid price of a security to its asked price, which represents the dealer's markup, or profit from a security transaction

Q: Primary markets are the financial markets where _____. a. already issued instruments with original maturities equal to one year or less are traded b. outstanding loans are traded c. options and futures are issued by corporations d. where previously issued financial assets are traded among investors e. corporations and governments raise funds by issuing new securities

Q: A stock with a dual listing is _____. a. registered to be traded in more than one money market b. registered to be traded in the money market as well as the capital market c. registered to be traded in the debt market and the stock market d. registered to be traded in more than one stock market e. registered to be traded in the primary market as well as the secondary market

Q: An investor who wants to purchase previously issued shares of stock from another investor would trade in the _____. a. primary market b. debt market c. IPO market d. secondary market e. derivatives market

Q: Which of the following terms refers to the process of converting a not-for-profit stock exchange owned by its members to a for-profit organization with publicly-traded stocks that are owned by outside shareholders? a. Privatization b. Diversification c. Demutualization d. Consolidation e. Flotation

Q: When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of _____. a. an investment banker b. a commercial lender c. the Securities and Exchange Commission (SEC) d. the New York Stock Exchange (NYSE) e. an over-the-counter derivatives market

Q: Which form of market efficiency that states that it does no good to scrutinize such publicly available information as a company's financial statements to seek abnormal returns, because market prices will adjust to any good news or bad news contained in such reports as soon as they are made public? a. Economic efficiency b. Strong-form efficiency c. Semistrong-form efficiency d. Weak-form efficiency e. Real-time efficiency

Q: If William earns a 10 percent return and Kate earns a 7 percent return on investments with the same risk, the additional 3 percent return on William's investment is a(n) _____. a. risk adjusted return b. justified return c. abnormal return d. efficient return e. premium return

Q: The form of informational market efficiency that states that current market prices fully reflect all information contained in past price movements is known as the _____. a. economic efficiency b. semistrong-form efficiency c. strong-form efficiency d. weak-form efficiency e. real-time efficiency

Q: Which of the following are the degrees of informational efficiency described in the book? a. Weak form, semistrong form, and strong form b. Past form, present form, and future form c. Normal form and abnormal form d. Primary form and secondary form e. Physical-form and over-the-counter form

Q: Which of the following examples involves the sacrifice of current income for greater expected earnings in the future? a. Buying a car with own surplus funds b. Buying a car with a bank loan c. Buying a financial security (e.g., a bond or a stock) with one's own funds d. Buying a security with borrowed funds e. Buying a house

Q: When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(n) _____. a. investment transfer b. best-effort arrangement c. underwriting d. direct transfer e. positive intermediation

Q: Which form of informational efficiency states that current market prices of securities reflect all pertinent information? a. Strong-form b. Semistrong-form c. Weak-form d. Economic-form e. Real-form

Q: Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently. a. True b. False

Q: The international market for bonds has grown at a slower rate as compared to the international stock markets. a. True b. False