CHAPTER 1 – INTRODUCTION TO FINANCE

TRUE/FALSE QUESTIONS

1. The purpose of the financial system is to bring savers and borrowers together.

2. Firms are never DSUs.

3.. Investment bankers help DSUs bring new primary security issues to market.

4. Deposits in a credit union by a household are an example of direct finance.

5. Direct finance requires a more or less exact match of preferences.

6. There must be an equal number of DSUs and SSUs in a period.

7. Without a financial sector, real investment must be financed internally by the DSU.

8. A household is an SSU when income for the period exceeds spending.

9. Financial claims or securities are written for the mutual benefit of both SSU and DSU.

10. DSUs and SSUs always have some contact with each other in financial markets.

11. Households are the major source of funds to the financial system.

12. In capital budgeting, the financial manager tries to identify investment opportunities that
will increase the value of the firm

MULTIPLE CHOICE QUESTIONS

1. An SSU’s

a. income and expenditures for the period are equal.

b. income for the period exceeds expenditures.

c. expenditures for the period exceed receipts.

d. spending is entirely financed by credit cards

2. Financial institutions facilitate the flow of investment funds

a. from savers to borrowers

b. from SSUs to DSUs

c. from the household sector to the business sector

d. any of the above

a. Business

b. Government

c. Foreign

d. Household

4. Which of the following are “economic units”?

a. households b .businesses

c. governments d. all of the above

5. All but one of the following is comparative advantage of financial intermediaries:

a. ability to finance businesses and governments.

b. ability to achieve economies of scale.

c. ability to reduce transaction costs.

d. ability to find confidential information.

6. All of the following are terms for or examples of financial claims except

a. bonds.

b. money.

c. loans.

d. commodities.

7. Direct finance is best exemplified by

a. the purchase of mutual fund shares.

b. depositing in a credit union.

c. borrowing from a friend or relative.

d. employee contributions to a pension fund.

8. Surplus spending units (SSU) are also called

a. lenders. b. borrowers.

c. sellers of securities. d. balanced budget units.

a. DSU b. business

c. SSU d. household

10. The ease with which a financial claim can be resold is its

a. quality.

b. risk.

c. marketability.

d. perpetuity.

11. The flow of funds from saving to investment through direct financing involves

a. the saver holding the lender's IOU.

b. two separate contracts.

c. the lender holding the borrower's IOU.

d. several different financial institutions.

12. All but one of the following is associated with investment banking:

a. Taking deposits.

b. Marketing new issues of securities.

c. Underwriting securities.

d. Completing regulatory paperwork and rendering advice.

13. Most of the financial claims issued by U.S. financial intermediaries are purchased by

a. the household sector.

b. the business sector.

c. the government sector.

d. the foreign sector

14. The household sector is the largest surplus sector and invests in the capital market

a. directly by purchasing stocks and bonds.

b. indirectly through mutual funds.

d. all of the above

15. Financial markets provide financial institutions:

a. a place to securitize assets.

b. a source of generating fee income from trading.

c. a source of funding.

d. all of the above.

16. Financial managers are responsible for determining:

I. how suppliers will be paid. II. the appropriate level of debt for a firm.

III. which projects a firm should undertake. IV. how to invest the firm's cash.

a. I and II only

b. II and III only

c. I, II and III only

d. I, II, III and IV

17. Capital structure refers to the:

a. types of equipment a firm employs in its production process.

b. mixture of short-term and long-term debt a firm uses to finance its operations.

c. amount of long-term debt and equity a firm uses.

d. composition of a firm's short-term assets.

e. size, timing, and risk of a firm's future cash flows.

18. Capital budgeting is the process of:a. determining how to raise the money required to fund a project.

b. choosing how much cash to keep on hand.

c. deciding the amount of earnings that a firm should retain.

d. planning and managing a firm's long-term investments.

e. deciding which marketable securities to purchase.