Please review the following multiple choices questions and determine if answers are correct. My answers are italicized . If answer is wrong please provide correct answer.
1. A mutual fund is BEST characterized by ________.
a) multiple investors making collective decisions
b) multiple investors in a diversified set of bonds or stocks
c) multiple investors in a single bond or stock
d) multiple investors with limited knowledge of the market
2. ________ is a practice that enables banks to "create" money that can be loaned out by requiring them to keep on hand only a small percentage of their total deposits.
a) Fractional reserve banking
b) Financial intermediation
c) Printing money
3. Which of the following statements about financing with stocks is NOT true?
a) Equity financing allows the company to retain cash and profits.
b) Equity financing means less debt, which means the balance sheet looks stronger
c) Equity financing does not need to be repaid.
d) Equity financing increases owner control of the company
4. In the process of a retailer deciding where to locate a new store, Juan is analyzing U.S. Census Bureau data on household characteristics. What type of data is Juan using?
a) secondary data
b) observational data
c) internal data
d) primary data
5. Most individual stock investors buy stock ________.
a) directly from companies
b) in the secondary market
c) through their local banks
d) in the primary market
6. The Federal Deposit Insurance Corporation (FDIC) was created to ________.
a) apprehend counterfeiters
b) stop people from taking their money out of the bank
c) prevent bank runs and subsequent bank failures
d) prevent robberies
7. If you buy a $10,000, five-year corporate bond, what amount will the company pay you in a lump sum at the end of five years?
a) It's impossible to know before the investment is made
b) the interest earned by the $10,000 only
c) $10,000 plus the principle amount invested
8. Your boss asks you to email a spreadsheet that shows the company's profitability last month. When sending the email, you MOST LIKELY will attach the file named ________.
9. Of the following investments, which has the lowest risk?
a) common stock
b) mutual funds
d) government bonds
10. The Federal Reserve manages the supply of money through its ________.
a) monetary policy
b) domestic policy
c) foreign policy
d) fiscal policy
11. The Federal Reserve is most likely to sell U.S. Treasury bonds to counteract ________.
12. The Federal Reserve System (the Fed) manages the country's money supply by doing all of the following EXCEPT ________.
a) Increasing taxes
b) changing the reserve requirement
c) changing the discount rate
d) buying and selling government securities
13. The strategic planning and budgeting of short- and long-term funds for current and future needs is called ________ management.
2 Answers | Add Yours
Question #1: B is the correct answer. “Mutual funds” are, in fact, diversified portfolios representing the contributions of a number of investors and managed by a money manager.
Question #2: A is the correct answer. “Fractional reserve banking” does refer to the practice – actually, banks are required to do this; it isn’t an option – of maintaining a reserve to protect against runs on the bank (an extreme scenario, made less likely with establishment of the Federal Deposit Insurance Corporation) and to ensure banks have the cash on hand needed to operate. Without this requirement, banks would be prone to lending out almost all their assets as a way of generating revenue.
Question #3: A slightly more complicated question, as option C can be wrong under certain circumstances. If a publicly-traded company offers up shares of stock for the purpose of attaining cash for operating purposes, or to expand existing operations, the profits on revenues are returned to the stockholders in the form of dividends. That could be construed as “repayment.” The correct answer, however, is D, a poorly-worded phrase that is wrong. Equity financing does, in fact, distribute ownership among a larger number of individuals. As “owners” sell of shares for the purpose of raising cash, the buyers of those shares, or investors, become part of the ownership.
Question #4: A is the correct answer. Secondary data refers to any data collected by someone other than the individual conducting current analysis. For the Census taker, the information is primary; for those who use that information, it is considered secondary, insofar as the data was not collected by the researcher exploiting Census Bureau data but by others.
Question #5: B is the correct answer. “Secondary market” refers to the stock exchanges, for example, the New York Stock Exchange, through which most investors buy and sell stocks. In contrast, “primary market” refers to those who created the entity or business and who sell stocks at the business’s birth, or during an Initial Public Offering, during which a previously privately-owned company begins to sell shares as part of the process by which it transitions to being a publicly-traded company.
Question #6: C is the correct answer, although B is misleadingly close, inasmuch as the idea behind federally-insured deposits is to dissuade depositors from withdrawing their savings during a period of wide-spread financial instability. A large-scale movement among customers to withdraw their savings from banks out of fear for the bank’s collapse is called a “run.” Runs on banks are inherently destabilizing and exacerbate whatever the underlying problem with the economy or the financial services industry is experiencing. The FDIC was established to provide assurances to the public that their savings are insured against bank failures, assuming, of course, that the bank has chosen to participate in the federal system.
Question #7: A appears to be the correct answer. This appears to be a trick question. Bonds pay out annually according to the interest rate, with the face value of the bond being paid out upon expiration of the specified period of time. The “lump sum at the end of five years” would be the $10,000, making D appear to be the correct answer. That, however, does not necessarily represent the full amount the investment will have recouped depending upon the rate of interest. What makes the question appear unanswerable is that a $10,000 corporate bond can be issued at whatever rate the corporation in question determines suitable. Corporate bonds pay dividends, plus the face-value of the bond. As stated, it is the face value of the bond that is paid out at the end of the five- (or ten-, or however many years) in a lump sum, irrespective of interest or dividends paid out during the course of the five year period. My answer, then, is D.
Question #8: C is the correct answer. The purpose of the spreadsheet is to display both assets and debts so that the “boss” can get as accurate a picture as possible of the company’s financial situation. Balance sheets perform that service: they reflect profits, when appropriate, which is revenue above and beyond the payment of debts.
Question #9: B is the correct answer. Taking into account the fact that lower risk generally equals lower gain, there is generally nothing lower risk than U.S. Government bonds. Historically a no-brainer, the U.S. Government’s current $17 trillion debt makes the notion of a low-risk investment in it more than a little problematic. In practical terms, however, government bonds (and this answer assumes the “government” in question is that of the United States of America) carry no risk, whereas the other categories carry some level of risk. You will (presumably, assuming the government doesn’t default on its debts, ala Argentina) be paid the face-value of the bond upon its maturation. It is not necessarily a good investment if inflationary pressures devalue the bond over time, but it is low risk; you’re not likely to lose your initial investment; it just may not be worth what you had hoped it would be when you purchased it. Then, again, interest on the investment may make it lucrative. In any event, stocks and mutual funds are inherently risky to greater or lesser degrees, and futures can be too nebulous to categorically declare them low-risk.
Question #10: A is the correct answer. Finally, a relatively easy question. The Federal Reserve defines its mission as follows:
“Today, the Federal Reserve's duties fall into four general areas:
conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.” [http://www.federalreserve.gov/aboutthefed/mission.htm]
Note bullet #1: “conducting the nation’s monetary policy . . .”
Question #11: B is the correct answer. The Federal Reserve sells U.S. Treasury securities as a means of raising revenue while pulling cash out of the economy, placing downward pressure on prices. Inflation occurs when there are too many U.S. dollars floating around the economy, which diminishes the value of the dollar. Consequently, it costs more dollars to buy the same product one used to purchase for less. Selling securities, including bonds, reduces the amount of dollars “out there,” thereby reducing inflationary pressures. When banks have less money to lend, there is, obviously, less money in the economy.
Question #12: A is the correct answer, not D. Article I, Section 8 of the U.S. Constitution states:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
In short, the Federal Reserve does not have the power to raise or lower taxes. Furthermore, as was discussed in Question #11, the Federal Reserve does buy and sell government securities.
Question #13: B is the correct answer. According to the U.S. Bureau of Labor Statistics, financial managers are responsible for the
“financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization.” [http://www.bls.gov/ooh/management/financial-managers.htm]
Strategic management, on the other hand, is concerned with short- and long-term planning.
8. Incorrect. Answer: B. Income statement.
Since, Income statement directly determines the profitability of a company.
12. Incorrect. Correct answer: A. Increasing taxes.
( http://en.wikipedia.org/wiki/Federal_Reserve_System )
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