Question 1

The market for loanable funds is a market in which:

Accepted Answer

A)   savers supply funds to those who want to borrow for their investment spending needs.
B)   borrowers buy and sell loans.
C)   savers interact to set the interest rate for loans.
D)   borrowers supply funds to savers, who want loans for their investment spending needs.E) C) and D)
F) A) and B)

Question 2

An economy that interacts with other economies is called:

Accepted Answer

A)   an open economy.
B)   a closed economy.
C)   an international economy.
D)   a global economy.E) None of the above
F) B) and C)

Question 3

Buying assets like stocks and bonds is a way to:

Accepted Answer

A)   save.
B)   invest.
C)   spend.
D)   be a market maker.E) A) and C)
F) B) and D)

Question 4

The price of borrowing is known as the:

Accepted Answer

A)   equilibrium price.
B)   interest rate.
C)   transaction cost.
D)   None of these is true.E) A) and C)
F) All of the above B

Question 5

In general, stocks are _________ risky than bonds, and have a _________ rate of return.

Accepted Answer

A)   more; higher
B)   more; lower
C)   less; higher
D)   less; lowerE) A) and B)
F) All of the above

Question 6

The buyer of a derivative is _______ assuming risk relative to the seller.

Accepted Answer

A)   more comfortable
B)   less comfortable
C)   just as comfortable
D)   less open toE) A) and B)
F) None of the above

Question 7

A bank provides:

Accepted Answer

A)   liquidity; that is, access to cash when and where you want it.
B)   liquidity; that is, it connects buyers to sellers to ease saving and borrowing.
C)   risk diversification; that is, access to cash when and where you want it.
D)   risk diversification; that is, connecting buyers and sellers to ease saving and borrowing.E) B) and C)
F) A) and B)

Question 8

Investment decisions are based on the trade-off between the:

Accepted Answer

A)   potential profit that could be generated by investment and the cost of borrowing money to finance the investment.
B)   interest rate that savers will earn and the interest rate that the borrowers will have to pay.
C)   future value of the loan and the present value of the loan.
D)   potential profit that could be generated and the willingness of a lender to make the loan.E) B) and C)
F) A) and B)

Question 9

Saving is like:

Accepted Answer

A)   selling the right to use your money for a time.
B)   buying the right to use someone else's money.
C)   selling the right to use someone else's money.
D)   buying the right to use your money for a time.E) All of the above
F) C) and D)

Question 10

If income is equal to total spending, then in a closed economy, it is equal to:

Accepted Answer

A)   consumption plus investment spending.
B)   savings plus investment.
C)   savings minus investment.
D)   consumption minus investment spending.E) All of the above
F) C) and D)

Question 11

Financial assets that represent the partial ownership of a firm and ability to share in its profits are called:

Accepted Answer

A)   equities.
B)   debt certificates.
C)   intermediaries.
D)   credit risks.E) A) and B)
F) None of the above

Question 12

When current economic conditions are bad, people are ____________ inclined to save, and when they predict bad future economic conditions they are ____________ inclined to save now.

Accepted Answer

A)   less; more
B)   less; less
C)   more; more
D)   more; lessE) B) and C)
F) A) and D) A

Question 13

If the rate of return is lower than the cost of borrowing the:

Accepted Answer

A)   investor will lose money on net after paying back the loan.
B)   investor should take out the loan.
C)   borrower will make money by taking out the loan.
D)   savers will lose out by taking a loan.E) A) and B)
F) A) and C) A

Question 14

In general, __________ a higher rate of return for a given level of risk than ____________ can offer.

Accepted Answer

A)   a portfolio has; individual assets
B)   individual assets have; a portfolio
C)   a portfolio has; any other type of saving
D)   any other type of saving has; a portfolioE) A) and C)
F) All of the above

Question 15

A loan is:

Accepted Answer

A)   a financial asset that represents partial ownership of a company.
B)   a payment made periodically to all shareholders of a company.
C)   an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest.
D)   a promise by the bond issuer to repay the loan, at a specified maturity date, and to pay periodic interest at a specific percentage rate.E) B) and C)
F) A) and B)

Question 16

An example of a buyer in a financial market would be:

Accepted Answer

A)   families buying new houses.
B)   students saving for college.
C)   corporations loaning money to other firm.
D)   families putting money away for the future.E) None of the above
F) A) and C)

Question 17

In general, entrepreneurs prefer:

Accepted Answer

A)   more diversification, to reduce the risk of their ventures.
B)   more diversification, to increase the risk and payoff of their ventures.
C)   less diversification, to reduce the risk of their ventures.
D)   less diversification, to increase the risk and payoff of their ventures.E) A) and C)
F) B) and C)

Question 18

In the market for loanable funds, the law of supply:

Accepted Answer

A)   reflects that more people will choose to borrow the lower is the interest rate.
B)   reflects that more people will choose to save the lower is the interest rate.
C)   reflects that more people will choose to save the higher is the interest rate.
D)   reflects that more people will choose to borrow the higher is the interest rate.E) None of the above
F) A) and D)

Question 19

When you own part of a company and share in its profits, we say that you have:

Accepted Answer

A)   equity in that company.
B)   credit with that company.
C)   intermediary stock in that company.
D)   financial diversification in that company.E) B) and C)
F) A) and B)

Question 20

The risk-free rate is usually approximated by interest rates on U.S. government debt, because the US government:

Accepted Answer

A)   is considered extremely unlikely to default.
B)   sets all policy concerning interest rates.
C)   backs all loans secured with that rate.
D)   will never default on a loan that it makes.E) C) and D)
F) A) and C)

Exam 14: The Basics of Finance

The market for loanable funds is a market in which:

Correct AnswerverifiedShow Answer

An economy that interacts with other economies is called:

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Buying assets like stocks and bonds is a way to:

Correct AnswerverifiedShow Answer

The price of borrowing is known as the:

Correct AnswerverifiedB

In general, stocks are _________ risky than bonds, and have a _________ rate of return.

Correct AnswerverifiedShow Answer

The buyer of a derivative is _______ assuming risk relative to the seller.

Correct AnswerverifiedShow Answer

A bank provides:

Correct AnswerverifiedShow Answer

Investment decisions are based on the trade-off between the:

Correct AnswerverifiedShow Answer

Saving is like:

Correct AnswerverifiedShow Answer

If income is equal to total spending, then in a closed economy, it is equal to:

Correct AnswerverifiedShow Answer

Financial assets that represent the partial ownership of a firm and ability to share in its profits are called:

Correct AnswerverifiedShow Answer

When current economic conditions are bad, people are ____________ inclined to save, and when they predict bad future economic conditions they are ____________ inclined to save now.

Correct AnswerverifiedA

If the rate of return is lower than the cost of borrowing the:

Correct AnswerverifiedA

In general, __________ a higher rate of return for a given level of risk than ____________ can offer.

Correct AnswerverifiedShow Answer

A loan is:

Correct AnswerverifiedShow Answer

An example of a buyer in a financial market would be:

Correct AnswerverifiedShow Answer

In general, entrepreneurs prefer:

Correct AnswerverifiedShow Answer

In the market for loanable funds, the law of supply:

Correct AnswerverifiedShow Answer

When you own part of a company and share in its profits, we say that you have:

Correct AnswerverifiedShow Answer

The risk-free rate is usually approximated by interest rates on U.S. government debt, because the US government:

Correct AnswerverifiedShow Answer

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B

In general, stocks are _ risky than bonds, and have a _ rate of return.

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When current economic conditions are bad, people are inclined to save, and when they predict bad future economic conditions they are inclined to save now.

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A

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A

In general, a higher rate of return for a given level of risk than __ can offer.

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