CH-15 Money, Banking, and Securities Markets – Business Essentials : Exam Guide

Chapter 15 Money, Banking, and Securities Markets MULTIPLE CHOICE QUESTIONS. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is correct with regard to the opening case entitled “Money, Money, Money”? A) In the past, objects such as stones, whale teeth, and cows have been used as money but they are not used today B) The various countries of the world get together and make coordinated decisions about what denominations money should have C) A Bank of Canada study found that it was important for the mint to keep producing the penny because there is still a lot of demand for pennies D) The U.S. one dollar bill is out of step with the denominations used in most other western countries E) Money dominates the world financial system, and barter is no longer evident Answer: D 2) Which of the following is a form of money? A) Japanese yen B) Bonds C) A gold medallion D) IBM common stock E) A Visa credit card Answer: A 3) Money is A) important in a market economy, but not in a command economy. B) tokens that represent a countries resources that are accepted in every place of the world. C) any object generally accepted by people as payment for goods and services. D) that which an individuals' efforts must be rewarded. E) wealth. Answer: C 4) In 2009, there were over 1.48 billion Bank of Canada notes in circulation, and about _________ of these were counterfeit. A) 10,000 B) 67,000 C) 107,000 D) 443,000 E) it is not known how many counterfeit notes are in circulation Answer: B 5) Which of the following is not a criterion for something to be considered as money? A) Divisibility B) Stability C) Durability D) Portability E) Value Answer: E 6) The characteristics of money are A) divisible, interchangeable, portable, and exchangeable. B) durable, paper, coin, and stable. C) interchangeable, divisible, paper, and banks. D) durable, divisible, stable, and portable. E) portable, divisible, durable, and interchangeable. Answer: D 7) Modern currency is light and easy to handle thus meeting the criterion of A) portable. B) durable. C) divisible. D) valuable. E) stable. Answer: A 8) Since a salmon is large, bulky, and slippery, it fails to meet the money criterion of being A) stable. B) portable. C) divisible. D) durable. E) valuable. Answer: B 9) Because salmon spoils, it fails to meet the money criterion of being A) valuable. B) divisible. C) stable. D) durable. E) portable. Answer: D 10) Depending on the time of the year, salmon may be in short supply thus violating the money criterion of being A) durable. B) stable. C) portable. D) valuable. E) divisible. Answer: B 11) Different parts of the salmon are worth different amounts thus violating the money characteristic of being A) durable. B) stable. C) divisible. D) valuable. E) portable. Answer: C 12) A dollar can be exchanged for four quarters thus demonstrating that it is A) durable. B) stable. C) divisible. D) portable. E) valuable. Answer: C 13) Because the Canadian dollar varies only slightly in its ability to purchase goods it is considered A) divisible. B) stable. C) valuable. D) portable. E) durable. Answer: B 14) If today's currency wears out it can be replaced, thus demonstrating that it is A) portable. B) divisible. C) durable. D) stable. E) valuable. Answer: C 15) Which characteristic of money means that you must be able to take money with you on shopping trips? A) Durability B) Value C) Portability D) Divisibility E) Stability Answer: C 16) The expression "$1 000 worth of clothes" represents A) a unit of account. B) a store of value. C) a medium of exchange. D) the stability of money. E) the durability of money. Answer: A 17) An order instructing the bank to pay a given sum to a specified person or firm is A) a time deposit. B) currency. C) a bank rate. D) a term deposit. E) a cheque. Answer: E 18) What caused the decline of barter as a means of obtaining something needed by a consumer? A) Development of the central bank B) Discovery of gold C) Invention of the credit card D) The use of bonds E) Introduction of money Answer: E 19) Which of the following influences the value of money? A) The supply of money B) Barter C) Durability D) Divisibility E) Portability Answer: A 20) Debby asked the cashier to trade her dollar for four quarters, thus demonstrating that money is A) valuable. B) portable. C) stable. D) durable. E) divisible. Answer: E 21) At certain times of the year, salmon may be in short supply; this violates the money criterion of being A) stable. B) valuable. C) durable. D) divisible. E) portable. Answer: A 22) When does the value of money increase? A) When money serves as a store of value B) When the supply of money is stable C) When money is durable D) When the money supply is low E) When the money supply increases Answer: D 23) Which of the following is contained in the M-1 measurement of the money supply? A) The number of new automobiles produced in the nation B) Currency and demand deposits C) Credit card cash advances D) The number of new homes started in the month E) Time deposits Answer: B 24) Which of the following is contained in the M-1 measurement of the money supply? A) Savings deposits B) Credit cards C) Time deposits D) Money-market mutual funds E) Chequing accounts Answer: E 25) That part of the money supply known as "M-1" is made up of A) money-market mutual funds. B) credit cards. C) savings deposits. D) time deposits. E) currency and demand deposits. Answer: E 26) As of April 2010, the value of M-2 was $________. A) 34.5 million B) 443.5 million C) 1.2 billion D) 212.4 billion E) 967.5 billion Answer: E 27) A demand deposit is A) the same as a time deposit. B) a chequing account. C) one that remains with the bank for a specified period of time. D) the same as a regular savings account. E) the least important type of money in our economic system. Answer: B 28) An economy where goods are exchanged directly for one another is a(n) ________ economy. A) basic B) market C) simple D) barter E) exchange Answer: D 29) Without money, we would be bogged down in a system of barter. This illustrates the ________ function of money. A) medium of exchange B) unit of account C) store of value D) payment for labour E) basis for banking system Answer: A 30) If Chris takes the money from her pay cheque and gives half of it to her landlord to pay last month's rent, how is she using the money? A) As a unit of account B) As a store of value C) As a source of currency D) As a medium of exchange E) As a standard of value Answer: D 31) Ken and Tina have decided to put $10 in a jar every week until they have saved enough to buy a new dining room set. How are they primarily using this money? A) As a unit of account B) As a store of value C) As a source of currency D) As a standard of value E) As a medium of exchange Answer: B 32) Stephen got his pay cheque on Friday. After a good time at the ballgame on Saturday, he purchased some groceries, rented a video, and made his car payment. This illustrates the ________ function of money. A) store of value B) basis for banking system C) medium of exchange D) payment for labour E) unit of account Answer: C 33) Tom has decided to put $5.00 in a savings account every week until he has saved enough to buy a new bicycle. How is Tom primarily using this money? A) As a standard of value B) As a unit of account C) As a medium of exchange D) As a store of value E) As a basis for banking Answer: D 34) All products can be valued and measured in terms of dollars. This illustrates the ________ function of money. A) payment for labour B) unit of account C) store of value D) basis for banking system E) medium of exchange Answer: B 35) Money, in the form of currency, can be used for future purchases and thus illustrates the ________ function of money. A) basis for banking system B) store of value C) medium of exchange D) payment for labour E) unit of account Answer: B 36) If Sally says she has purchased $250.00 worth of groceries, she is referring to money as A) a unit of account. B) a method of divisibility. C) a medium of exchange. D) a store of value. E) a measure of stability. Answer: A 37) Scott saw Laura's pay cheque and discovered that she makes $200 a month more than he does. He concludes that her job must be more important than his. This illustrates the ________ function of money. A) store of value B) medium of exchange C) payment for labour D) unit of account E) basis for banking system Answer: D 38) David is saving $25.00 a week towards getting a new truck. This illustrates the ________ function of money. A) unit of account B) store of value C) payment for labour D) basis for banking system E) medium of exchange Answer: B 39) Which of the following is a function of money? A) Store of value B) Portability C) Divisibility D) Stability E) All of these Answer: A 40) Money frees society from a system of barter. In so doing, money is performing which of the following functions? A) Unit of account B) Medium of exchange C) Store of value D) Monetary flagging E) Determination factor Answer: B 41) Money lets you measure the relative values of goods and services. In so doing, money is performing which of the following functions? A) Store of value B) Medium of exchange C) Determination factor D) Monetary flagging E) Unit of account Answer: E 42) Which of the following is not part of the M-1 money supply? A) Credit cards B) Currency C) Demand deposits D) Cheques E) All of these are part of M-1 Answer: A 43) Which of the following are considered to be part of the M-1 money supply? A) Stocks in a major auto company B) Bonds C) Certificates of deposit D) Term deposits E) None are these are part of the M-1 money supply Answer: E 44) Which of the following is false regarding M-1? A) It includes M-2 B) It includes chequing accounts C) It includes only very liquid items D) It includes low- or no-interest accounts E) It includes only spendable items Answer: A 45) Joe is a research economist for the Royal Bank. His most reliable measure of money would be A) currency plus demand deposits. B) M-2. C) demand deposits. D) M-1. E) currency. Answer: B 46) Which of the following is contained in the M-1 measurement of the money supply? A) The number of new automobiles produced in the nation in the previous month B) The number of new homes started in the month C) Time deposits D) Credit card balances E) Cash and the money in chequing accounts Answer: E 47) The M-2 measurement of the money supply includes everything in M-1 plus A) time deposits. B) money market mutual funds. C) time deposits, money market mutual funds, and savings deposits. D) corporate bonds, corporate stocks, and commercial paper. E) corporate stocks, money market mutual funds, and corporate bonds. Answer: C 48) Demand deposits include A) money in chequing accounts. B) time deposits. C) savings accounts. D) money market mutual funds. E) credit cards. Answer: A 49) Which of the following accounts for nearly all the nation's money supply? A) M-1 B) Currency C) Demand deposits D) Currency plus demand deposits E) M-2 Answer: E 50) Which of the following is not in the M-2 measurement of the money supply? A) Currency B) Time deposits C) Chequing accounts D) Money owed for credit card spending E) Money market mutual funds Answer: D 51) Which of the following is not included in either M-1 or M-2? A) CD’s B) Time deposits C) Savings accounts D) Credit cards E) Chequing accounts Answer: D 52) Money held by a financial institution which requires notice prior to making a withdrawal and cannot be transferred to others by a written cheque is known as A) money market funds and accounts. B) time deposits. C) currency. D) certified holdings. E) demand deposits. Answer: B 53) A deposit that requires prior notice to make a withdrawal is called a A) demand deposit. B) time deposit. C) savings deposit. D) chequing deposit. E) preferred deposit. Answer: B 54) ________ are operated by investment companies that bring together pools of assets from many investors and purchases a collection of short-term, low-risk financial securities. A) All mutual funds B) Global Development Funds C) Money market mutual funds D) Schedule B Banks E) Pension Funds Answer: C 55) All of the following is true about credit cards except A) credit cards are a store of value. B) credit cards are quite convenient. C) 2 to 5 percent of total credit-sales dollars goes to card issuers. D) credit cards serve as a temporary medium of exchange. E) credit cards are extremely profitable for issuing companies. Answer: A 56) In 2008, Canadians spent about _________ using credit cards. A) $180 million B) $980 million C) $267 billion D) $800 billion E) $1.2 trillion Answer: C 57) The Interac Association estimated that credit card fraud cost financial institutions about $_________ in 2007. A) 5 million B) 10 million C) 100 million D) 500 million E) 1.2 billion Answer: C 58) You are applying for a bank loan and the loan officer wants to know about your personal wealth. She is inquiring about A) the money you have in your wallet. B) the money in your chequing and savings account. C) the money you have invested. D) the amount of equity you have in your home. E) all of these. Answer: E 59) As early as ________ coins were being used, and paper money came into existence around ________. A) 600 BCE; 1200 CE B) 1614; the later part of the 16th century C) 1700; early 1800 D) 1900; 1930 E) 600; 1200 Answer: A 60) What caused the decline of barter as a means of obtaining something needed by a consumer? A) The invention of the credit card B) The development of the central bank idea C) The introduction of money D) The discovery of gold E) The decline in the annual salmon run Answer: C 61) Which of the following occurs when the supply of money is low? A) More money is available for consumer purchases B) Interest rates decline C) Its value increases D) Inflation increases E) The value of money decreases Answer: C 62) Joanne has money in a ___________; this requires notice prior to making a withdrawal and cannot be transferred to others by a written cheque. A) demand deposit B) money market fund C) jar D) certified cheque E) time deposit Answer: E 63) In 2009, Canadians held a total of _______ credit cards. A) 5 million B) 20 million C) 43 million D) 72 million E) 190 million Answer: D 64) ________ are managed by professionals who monitor changing investment opportunities. A) Term deposits B) Demand deposits C) Time deposits D) Mutual funds E) Savings deposits Answer: D 65) Canadian Heritage, an investment company that groups together pools of assets, showed an average return of 44% for the last three months. Canadian Heritage set up ________ for its investors. A) time deposits B) money market mutual funds C) demand deposits D) hedge funds E) term deposits Answer: B 66) Which of the following is correct regarding credit cards? A) They are a store of value B) They are not a money substitute C) They are a permanent medium of exchange D) They are becoming more important but are still not a major factor in the purchase of consumer goods E) They are often referred to as “plastic money” Answer: E 67) Which of the following is not one of the "four financial pillars"? A) Investment dealers B) Life insurance companies C) Credit card companies D) Trust companies E) Chartered banks Answer: C 68) The main function of financial institutions is to A) offer trust services. B) create money. C) provide loans to small businesses. D) offer chequing and savings accounts. E) ease the flow of money from sectors with surpluses to those with deficits. Answer: E 69) Deregulation of banks has caused banks to ________. A) decrease the amount of funds they lend to small business B) abandon plans for expansion into foreign markets C) stop issuing commercial paper D) increase their level of foreign ownership E) diversify to provide a wider array of financial products to their clients Answer: E 70) Which of the following changes have occurred in banking because of deregulation? A) Large business firms have increased their reliance on bank loans B) Banks can now make whatever profits they can manage C) Banks are providing a narrower and more highly focused array of financial products to their customers than they did before deregulation D) Banks have increased the training given to employees E) Bank profits are now being sent to foreign financial companies Answer: D 71) Which of the following is correct with regard to recent changes in banking in Canada? A) Banks are increasingly focusing on their role as intermediaries between depositors and borrowers B) Retailers like Sears and Canadian Tire are opening their own bank branches C) Rather than making most of their profit from investment banking fees, banks now make most of their money from the spread between interest rates paid to depositors and the rates charged on loans D) During the last few years, large companies have increased their reliance on bank loans E) U.S. and other foreign banks are not allowed to do business in Canada Answer: B 72) Which of the following is correct with regard to Canadian banks? A) They may not provide financing to small businesses B) They are not allowed to sell shares of stock to the general public C) They may provide insurance services, but not in their bank branches D) They are protected from competition from foreign controlled banks E) All of these Answer: C 73) Which of the following is correct with regard to the Canadian banking system? A) It is very similar to that in the U.S., where there are many different banks, each with just a few branches B) The five largest Canadian banks account for about 50 percent of total bank assets C) Schedule A banks are those which are Canadian-owned and have no more than 10 percent of voting shares controlled by a single interest D) Because there a just a few large banks, banking is not very competitive in Canada E) Banks perform largely a storage function for money, and they do not generally help their customers manage their money Answer: C 74) Commercial paper is usually issued by A) investment dealers. B) pension funds. C) blue-chip companies. D) insurance companies. E) the Bank of Canada. Answer: C 75) ________ is a revolutionary way of using electronic money over the Internet. Traditional currency is used to buy electronic money that is then used to shop on-line. A) The debit card B) E-cash C) The E-card D) The Net Cash card E) The smart card Answer: B 76) Which of the following is a potential problem with E-cash? A) Hackers may break in B) Regulation and control are virtually non-existent C) There is no protection like that which covers government-controlled money systems D) A computer crash could wipe out an account forever E) All of these Answer: E 77) E-cash is issued by A) securities dealers. B) pension funds. C) commercial banks. D) the Bank of Canada. E) money service businesses. Answer: E 78) A ________ is a privately owned, profit-seeking firm that serves individuals, non-business organizations, and businesses as a financial intermediary. A) pension fund B) credit union C) chartered Bank D) trustee E) trust company Answer: C 79) Which of the following statements about chartered banks is false? A) A chartered bank is privately owned B) A chartered bank is profit-seeking C) Chartered banks are the main source of short-term loans for businesses D) A chartered bank is required to use funds obtained from savers to purchase portfolios of government bonds E) A chartered bank serves individuals, non-business organizations and businesses as a financial intermediary Answer: D 80) The principal source of short-term loans for business firms is A) contractual savings institutions. B) trust companies. C) chartered banks. D) investment companies. E) loans from relatives of the owners. Answer: C 81) Canada has a ________ banking system. A) multi-sectoral B) governmental C) unitary D) bilingual E) branch Answer: E 82) Which of the following is correct with regard to the box entitled “Online and Mobile Banking Solutions Straight to the Consumer”? A) During the past decade, the banking industry has only reluctantly embraced technology B) About half of Canadians currently use online banking services C) Experts predict that mobile banking services will eventually surpass online banking D) The Bank of Montreal was the first Canadian bank to launch a mobile banking application for the iphone platform E) All of these are correct Answer: C 83) Which of the following is not a characteristic of a Canadian Schedule A chartered bank? A) No more than 10% of voting shares can be controlled by a single interest B) It must be Canadian owned C) They control the Canadian economy through monetary policy D) Until 1944, they issued legal currency in Canada E) They provide mortgage financing in Canada Answer: C 84) In March 2010, Canadian chartered banks had assets totaling _________.The largest Canadian bank in terms of annual revenues is the A) $800 million B) $2.9 billion C) $50 billion D) $500 billion E) $2 trillion Answer: E 85) The five largest Canadian banks account for __________ percent of total bank assets. A) 34 B) 48 C) 57 D) 71 E) 90 Answer: E 86) The Canadian banking system is A) characterized by hundreds of banks. B) smaller than the credit union system. C) the same as the banking system in the U.S. D) a branch banking system. E) able to offer only four services. Answer: D 87) What term identifies a bank's promise to pay a foreign business firm (e.g., German firm) a certain amount if the specified conditions are met? A) Bank loan B) Letter of credit C) Promissory note D) Deposit E) Electronic funds transfer Answer: B 88) Chartered banks and trust companies offer all of the following services except A) foreign exchange. B) automated teller machines. C) chequing accounts. D) pension funds. E) debit and credit cards. Answer: D 89) As for loans, banks prefer to specialize in providing A) money to help individuals purchase homes. B) money so that the shareholders get dividends. C) money in the short-term to finance inventories and accounts receivable. D) money so that the owner can make a profit. E) money to finance at most the first six years of start-up where sales are low. Answer: C 90) When a business has a secured loan and is unable to pay the loan back, a bank may A) take back the loan. B) allow them two years to come up with the money to pay back the loan. C) confiscate and sell the collateral that was put up for the loan. D) make them work at the bank until they have made enough money to pay back the loan. E) do nothing. Answer: C 91) The prime rate of interest is the rate charged A) on time deposits. B) on consumer installment loans. C) to major business customers. D) on mortgages. E) to the most risky borrowers. Answer: C 92) The interest rate available to a bank's most creditworthy customers is the A) discount rate. B) optimal rate. C) key rate. D) funds rate. E) prime rate. Answer: E 93) CIBC is considered a(n) ________ because it is a privately-owned, profit-seeking firm. A) credit union. B) trust company. C) investment dealer. D) brokerage house. E) chartered bank. Answer: E 94) Schedule A banks are ___________ owned and have no more than __________ percent of voting shares controlled by a single interest. A) 25 percent Canadian; 25 B) Canadian; 10 C) Canadian; 50 D) at least 50 percent Canadian; 10 E) at least 51 percent Canadian; 51 Answer: B 95) Which of the following is not a form of electronic technology for banking? A) Direct withdrawals B) Pay-by-phone systems C) Personal cheques D) Smart card E) Direct deposits Answer: C 96) A plastic card that allows an individual to transfer money between bank accounts is a(n) A) smart card. B) E-card. C) Net Cash. D) E-cash. E) debit card. Answer: E 97) When a bank makes your monthly bill payments and manages your investment portfolio, this is known as A) a trust service. B) a smart card. C) an ABM. D) a direct deposit. E) a point-of-sale transfer. Answer: A 98) In 2009, there were _______ active debit cards in Canada. A) 3 million B) 10 million C) 21 million D) 48 million E) 108 million Answer: C 99) Terri will be going to Ireland next week. She would be wise to arrange for a(n) ________ prior to leaving so that she can withdraw cash and transfer money between bank accounts on her trip. A) e-card B) smart card C) debit card D) Net Cash E) e-cash Answer: C 100) A debit card A) is an identification card issued by a credit union to its members who must present the card when conducting business at the credit union. B) allows the user to move money via digital electronic transmissions. C) permits the holder to transfer money from his/her chequing account to the store's account. D) permits the holder to purchase a product and to pay for it later. E) is an identification card issued by a consumer finance company to its members who must present the card when conducting business at the company. Answer: C 101) A(n) ________ card is a credit card-sized computer that can be programmed with "electronic money." A) e- B) e-cash C) debit card D) smart card E) Net Cash Answer: D 102) What term identifies a bank's promise to pay a specified amount of money at a future date? A) Bankers' acceptance B) Electronic funds transfer C) Promissory note D) Bank loan E) Letter of credit Answer: A 103) The prime rate of interest is A) the rate of interest a chartered bank pays to the Bank of Canada on overnight loans. B) the rate charged by banks on all vehicle loans. C) the lowest rate charged by banks to its customers. D) the interest rate earned by consumers on savings account deposits. E) none of these. Answer: C 104) ________ is a revolutionary way of using electronic money over the Internet. Traditional currency is used to buy electronic money, which is then used to shop on-line. A) The smart card B) The debit card C) Direct deposit D) E-cash E) Net Cash Answer: D 105) Cynthia is genuinely concerned about electronic money because A) power failures cause information to be repeated. B) hackers may break into e-cash systems and steal the money in them. C) there are extensive rules and regulations dealing with e-money. D) electronic money generates an extremely large amount of paper. E) banks will generally not recognize this form of money. Answer: B 106) Sally opened a small boutique; unfortunately, she had no credit and her suppliers wished to be paid immediately. Sally did not like to carry cash, so she paid by A) writing cheques on her term deposit account. B) writing cheques on her demand deposit account. C) using a banker's acceptance. D) writing a promissory note. E) using a letter of credit. Answer: B 107) What is “e-cash”? A) The same thing as a demand deposit B) Money that moves along multiple channels of consumers and businesses via digital electronic transmissions C) A type of plastic money that immediately reduces the balance in the user’s bank account when it is used D) An electronic purse that can be programmed with electronic money at ATM machines E) None of these Answer: B 108) What is a debit card? A) The same thing as a demand deposit B) Money that moves along multiple channels of consumers and businesses via digital electronic transmissions C) A type of plastic money that immediately reduces the balance in the user’s bank account when it is used D) An electronic purse that can be programmed with electronic money at ATM machines E) The same thing as a time deposit Answer: C 109) Which of the following is correct regarding e-cash? A) It is part of the established network of banks, cheques, and paper currency B) E-cash transactions are more expensive than handling cheques and paper records C) E-cash can be lost if the issuer’s computer system crashes and the money that is “banked” in memory is lost D) Tight controls over e-cash have been established to prevent hackers from stealing the money E) E-cash can be purchased only from banks Answer: C 110) Jack is one of the bank's most creditworthy customers. The interest rate available to Jack is the A) reserve requirement rate. B) overnight rate. C) prime rate. D) discount rate. E) rediscount rate. Answer: C 111) Which of the following is most likely to get an unsecured loan? A) A retail florist shop with collateral B) A wholesale grocer with a marginal credit history C) A lawyer with collateral D) A large manufacturing firm with an excellent credit rating E) A farmer Answer: D 112) If the reserve requirement was 10 percent, a $100 deposit could result in a ______ increase in new deposits for all banks in the system. A) $200 B) $500 C) $1000 D) $10,000 E) $100,000 Answer: C 113) Banks expand the money supply by A) opening new chequing accounts. B) earning higher profits. C) paying interest on accounts. D) printing money. E) taking in deposits and lending money. Answer: E 114) If the banks were allowed to lend out all the money they take in from deposits, they would A) be able to print more money. B) further expand the money supply. C) reduce the money supply. D) charge higher interest. E) have no impact on the money supply. Answer: B 115) If the chartered bank legal reserve requirement was 10 percent, a $100 deposit could theoretically result in a total increase in new deposits throughout the banking system of A) $5 000. B) $1 000. C) $500. D) $100. E) $10. Answer: B 116) The ________ is the percentage of its deposits a bank must hold, in cash or on deposit, with a chartered bank. A) prime rate B) open-market operation C) selective credit control D) reserve requirement E) bank rate Answer: D 117) Which of the following might the Bank of Canada do to increase the money supply? A) Sell government securities B) Increase the bank rate C) Impose a new tax D) Buy government securities E) Increase the reserve rate Answer: D 118) Which of the following will result in an decrease of the money supply? A) An increase in taxes B) Purchase of securities by the Bank of Canada C) A decrease in the bank rate D) An increase in the discount rate E) A decrease in reserve requirements Answer: D 119) The Bank of Canada was formed in A) 1935 B) 1903 C) 1929 D) 1867 E) 1850 Answer: A 120) The interest rate at which chartered banks can borrow from the Bank of Canada is the A) preferred rate. B) prime rate. C) prime plus 1 percent. D) bond rate. E) bank rate. Answer: E 121) The main purpose of the Bank of Canada is to A) set prime interest rates. B) assist in the merger of troubled banks with healthier institutions. C) bail out banks like the Northland and CCB. D) deregulate the banking industry. E) control the nation's money supply. Answer: E 122) To slow down the economy, the Bank of Canada A) raises the bank rate. B) increases government spending. C) buys Canada Savings Bonds. D) decreases government spending. E) buys government securities. Answer: A 123) When the Bank of Canada wants to slow down business activity and decrease the money supply, it A) lowers the bank rate. B) lowers the reserve requirement. C) decreases government spending. D) buys government securities. E) raises the bank rate. Answer: E 124) When the Bank of Canada wants to stimulate business activity and increase the money supply, it A) buys government securities. B) raises the reserve requirement. C) decreases government spending. D) raises the bank rate. E) sells government securities. Answer: A 125) Which of the following Bank of Canada actions would probably stimulate business activity? A) Sell government securities B) Raise the margin requirement C) Buy government securities D) Raise the reserve requirement E) Raise the bank rate Answer: C 126) The ________ is the rate at which the Bank of Canada will loan money to chartered banks. A) Bank of Canada rate B) funds rate C) credit rate D) prime rate E) bank rate Answer: E 127) Expansionary monetary policy A) slows down business activity only. B) slows down business activity and increases the money supply. C) stimulates business activity and decreases the money supply. D) decreases the money supply only. E) stimulates business activity and increases the money supply. Answer: E 128) The main purpose of the Bank of Canada is to A) assist in the merger of troubled banks with healthier institutions. B) set prime interest rates. C) deregulate the banking industry. D) bail out banks that are in trouble. E) manage the nation's money supply. Answer: E 129) If the Bank of Canada wants to decrease the money supply, it can _________; if it wants to increase the money supply, it can ____________. A) sell government securities; buy government securities B) raise the bank rate; buy government securities C) increase the value of the Canadian dollar; decrease the value of the Canadian dollar D) lower the bank rate; sell government securities E) buy government securities; sell government securities Answer: A 130) When the Bank of Canada wants to increase the money supply, it A) raises the reserve requirement. B) sells government securities. C) buys government securities. D) increase the bank rate. E) allows more credit cards to be produced. Answer: C 131) When the Bank of Canada wants to decrease the money supply, it A) raises the reserve requirement. B) sells government securities. C) buy government securities. D) decrease the bank rate. E) allow fewer credit cards to be produced. Answer: B 132) The interest rate at which chartered banks can borrow from the Bank of Canada is the ________ rate; it is also known as the _________ rate. A) bank rate; sub-prime rate B) mutual fund rate; bank rate C) prime rate; bank rate D) bank rate; rediscount rate E) sub-prime rate; prime rate Answer: D 133) An alternative bank that safeguards funds and estates in its care is called a(n) A) trustee. B) credit union. C) trust company. D) pension fund. E) Schedule B bank. Answer: C 134) Which of the following provides cooperative savings and lending services to its members? A) Schedule B Bank B) Trustee C) Credit Union D) Trust Company E) Pension Fund Answer: C 135) A corporation selling bonds to investors will often use a __________ to protect the bondholders’ interests. A) trust company B) chartered bank C) credit union D) caisses populaire E) finance company Answer: A 136) A ________ company shares risks with its policyholders in return for payment of a premium. A) life insurance B) venture capital C) credit union D) sales finance E) factoring Answer: A 137) A ________ buys accounts receivables from a firm for less than face value. A) sales finance company B) credit union C) trust company D) consumer finance company E) factoring company Answer: E 138) In 2009, venture capital firms in Canada raised $_________. A) 40 million B) 95 million C) 645 million D) 1 billion E) 7.4 billion Answer: D 139) Which term identifies companies that specialize in loans to businesses and consumers? A) Federal Business Development Bank B) Finance companies C) Trust services D) Mutual savings banks E) Credit unions Answer: B 140) GMAC is an example of a A) Schedule B Bank. B) consumer finance company. C) venture capital firm. D) sales finance company. E) venture development firm. Answer: D 141) A financial corporation that specializes in financing instalment purchases made by individuals and firms is called a A) consumer finance company. B) factoring company. C) credit union. D) sales finance company. E) commercial finance company. Answer: D 142) Suppose that, as a small business, you decide to buy a new copying machine. Since you cannot afford to pay cash, you finance the machine over 12 months. The copy machine itself will serve as loan collateral. The major source of credit is a(n) A) investment company. B) sales finance company. C) venture capital firm. D) consumer finance company. E) factoring company. Answer: B 143) A ________ provides financing to businesses by buying accounts receivables at a discount. A) pension fund B) Schedule B bank C) factoring company D) credit union E) trust company Answer: C 144) Which of the following do not make loans to business firms? A) Sales finance companies B) The Federal Business Development Bank of Canada C) Credit unions D) Consumer finance companies E) All of these do make loans to business firms Answer: D 145) A pool of funds managed to provide retirement income for its members is called a(n) A) trust service. B) insurance company. C) finance company. D) factoring company. E) pension fund. Answer: E 146) ________ provides funds for new or expanding firms thought to have significant potential and may demand an ownership stake in the business. A) A pension fund B) The International Monetary Fund (IMF) C) A chartered bank D) A global bank E) A venture capital fund Answer: E 147) A venture capital firm may do all but which of the following? A) Demand a seat on the board of directors B) Provide financing to new or expanding firms with growth potential C) Earn a higher than normal return on their investment D) Provide pension services to new businesses E) Demand an ownership stake Answer: D 148) Financing new, untested businesses is risky, so the easiest route to financing would be to go to ________ A) a venture capital firm. B) the Economic Development Bank. C) an institutional lender. D) the Industrial Development Bank. E) a brokerage house. Answer: A 149) One function of investment dealers is to A) manage pensions for large Canadian corporations. B) create stability in the money supply. C) provide equity start up loans for small business. D) underwrite new stock and bond issues. E) provide debt financing to small businesses. Answer: D 150) Which of the following is correct with regard to government sources of funds for businesses? A) The Business Development Bank of Canada helps small companies sell stock to the general public B) The Export Development Corporation finances and insures export sales for Canadian companies C) The Canada Mortgage and Housing Corporation makes mortgages available to businesses, but it does not guarantee those mortgages D) The Department of Regional Industrial Expansion gives grants for businesses that provide services, but not for business that provide physical products E) All of these Answer: B 151) Which of the following is not a government supplier of funds to businesses in Canada? A) Federal Bureau of Government Grants B) Business Development Bank of Canada C) Export Development Corporation D) Canada Mortgage and Housing Corporation E) Department of Regional Industrial Expansion Answer: A 152) The ________ makes term loans, primarily to small firms judged to have growth potential but unable to secure funds on reasonable terms from traditional sources. A) International Monetary Fund B) Business Development Bank of Canada C) Department of Regional Industrial Expansion D) Government pension fund E) Export Development Corporation Answer: E 153) The law of one price is A) the principle that to be competitive, a company must offer its product at only one price. B) a principle suggested by Canadian economists that means that all products in a given economy should be sold for the same price. C) that the supply and demand of a product must not alter its price. D) a principle that identical products should sell for the same price in all countries. E) if a retailer puts an item on sale, all other retailers must match their price for consumers. Answer: D 154) The value of the Canadian dollar A) is valued always at the same exchange rate. B) typically trades above the U.S. dollar. C) typically valued at par with the U.S. dollar. D) reflects the overall supply and demand for Canadian dollars both at home and abroad. E) none of these. Answer: D 155) According to the Big Mac index A) Big Mac's are priced higher in China than in Canada. B) the price of a Big Mac is used as a comparison of foreign currencies being overvalued or undervalued. C) Big Mac's are better than Mom's homemade hamburgers. D) Big Mac's are always cheaper in France as compared to Canada. E) Big Mac's are the same price all over the world. Answer: B 156) In regard to the international payments process, which of the following statements is true? A) Most foreign nations will never accept dollars B) Banks just do not get involved in such transactions C) Money does not actually have to flow between the two countries D) Diplomatic pouches move currency payments from one nation to another E) All of these statements are true Answer: C 157) Which of the following would not be expected when a country's currency becomes overvalued? A) Its export goods become too expensive B) Its high costs make the country less competitive C) Its exchange rate is higher than warranted by its economic conditions D) Fewer goods are purchased by other countries E) The costs of exported goods declines Answer: E 158) The name for the United Nations agency that provides a limited scope of financial services, such as funding national improvements in undeveloped countries is the A) International Monetary Fund (IMF). B) Interbank Bank. C) World Bank. D) Bank of Canada. E) Global Bank. Answer: C 159) Which of the following is a purpose of the International Monetary Fund? A) Encourage members to cooperate on international monetary issues B) Encourage development of a system for international payments C) Promote the stability of exchange rates D) Provide temporary, short-term loans to member countries E) All are purposes of the IMF Answer: E 160) Which is not a purpose of The International Monetary Fund? A) Encourage development of a system for international payments B) Promote social programs in nations suffering from negative trade balances C) Encourage members to co-operate on international monetary issues D) Promote the stability of exchange rates E) Provide temporary short term loans to member countries Answer: B 161) When the value of the Canadian dollar is less than the U.S. dollar ________. A) Canadian companies are more interested in buying American companies B) Big Macs are more expensive in Canada than the United States C) American companies become more interested in buying Canadian companies D) the overall supply and demand of the Canadian Dollar is in equilibrium E) American companies have become less interested in buying Canadian companies Answer: C 162) The law of one price A) says that the supply and demand of a product must not alter its price. B) says that if a retailer puts an item on sale, all other retailers must match their price for customers. C) says that identical products should sell for the same price in all countries. D) is a principle suggested by Canadian economists that means that all identical products in a given economy should be sold for the same price. E) is the principle that to be competitive, a company must offer its product at only one price. Answer: C 163) All of the following are purposes of the International Monetary Fund except A) to promote the stability of exchange rates. B) to provide temporary loans to member countries. C) to encourage members to cooperate on international monetary ideas. D) to equalize exchange rates as much as possible to facilitate world trade. E) to encourage development of a system for international payments. Answer: D 164) Which of the following is correct with regard to the box entitled “Canadian Vs. U.S. Banks: Quite a Difference”? A) When the recession started in 2008, it was originally thought that Canadian banks were in much better shape than American banks, but Canadian banks later developed the same kinds of problems B) A World Economic Forum report ranked the Canadian banking system as the soundest in the world C) In the U.S., there a just a few big banks, each with thousands of branches, while in Canada, there are many banks and each one has just a few branches D) Canadian laws do not limit the amount of foreign competition in the Canadian banking industry E) All of these are correct Answer: B 165) Which market handles the buying and selling of new stocks and bonds by business firms or governments? A) The primary securities market B) The tertiary security market C) The over-the-counter market D) The commodities market E) The secondary securities market Answer: A 166) Why are stocks and bonds called “securities”? A) Because investors have financial security by owning them B) Because they are used to secure sales revenue for companies C) Because they represent secured, or asset-based claims on the part of investors D) Because they are guaranteed by the government of Canada E) All of these are reasons Answer: C 167) Which of the following business firms serve as financial specialists in issuing new securities? A) Speculators B) Venture capitalists C) Financial managers D) Institutional investors E) Investment bankers Answer: E 168) Previously owned stocks and bonds are bought and sold in the A) primary securities market. B) securities and exchange commission. C) private placement market. D) investment bank. E) secondary securities market. Answer: E 169) Stocks and bonds representing secured, or asset-based, claims by investors against issuers, are known as A) IPOs. B) securities. C) equities. D) debt. E) commodities. Answer: B 170) New securities are traded in the ______________, while existing securities are traded in the _____________. A) primary securities market; secondary securities market B) equity market; debt market C) debt market; equity market D) secondary securities market; primary securities market E) common stock market; preferred stock market Answer: A 171) When an investment bank underwrites a new security they are A) assessing the risk of that new security. B) privately supporting the issuing organization. C) buying the new security. D) co-signing the bonds. E) attesting to the good investment potential of a new security. Answer: C 172) What is the meaning of par value when discussing common stock? A) The current price of a share of stock B) The selling price of the previous day's last transactions involving that stock C) The average price paid on the previous day's trades D) The face value of a share of common stock E) One dollar Answer: D 173) The face value of a share of stock at the time it is originally issued is called its A) market value. B) book value. C) resale value. D) earnings value. E) par value. Answer: E 174) Suppose you were interested in purchasing a printing company. This might be an attractive target if the ________ value of the stock was less than the ________ value. A) book; market B) par; market C) book; par D) market; book E) market; par Answer: D 175) Which of the following represents a stock's real value? A) Profitability ratio B) Market value C) Price earnings ratio D) Par value E) Book value Answer: B 176) The current price of a share of stock in the stock market is called its A) earnings value. B) book value. C) market value. D) resale value. E) par value. Answer: C 177) Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each. What is the par value of the stock? A) $20.00 B) $25.00 C) $5.00 D) $19.99 E) $0.01 Answer: E 178) Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each. What is the market value of the stock? A) $50.00 B) $25.00 C) $20.00 D) $19.99 E) $0.01 Answer: B 179) Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each. What are Ted's capital gains? A) $19.99 B) $20.00 C) $25.00 D) $50.00 E) $0.01 Answer: D 180) The market value of a share of stock is determined by A) Dividing total assets by the number of outstanding shares B) Stock brokers’ opinions and ratings C) Dividing total shareholders' equity by the number of outstanding shares D) What buyers are willing to invest in a firm E) Dividing net profit by the number of outstanding shares Answer: D 181) Investors are concerned primarily with the ________ of a stock. A) earnings value B) par value C) resale value D) market value E) book value Answer: D 182) Regarding the issue of investor relations, it is correct to say that A) investor relations activities do not have much impact on the price of a firm's stock. B) investor relations may include inviting financial analysts to one of the operating sites of a firm. C) investor relations is a relatively new idea that began to be practised in the late 1980s. D) investor relations are not that important to a firm's success. E) investor relations targets individual buyers of corporate stock rather than brokers and financial analysts. Answer: B 183) Deprenyl Research Ltd. makes a drug that is used to control Parkinson's disease. When the company convinced a Wall Street health care analyst to recommend its stock to his clients, this was an example of A) a prospectus. B) publicity. C) insider trading. D) investor relations. E) margin trading. Answer: D 184) The book value of a company's common stock is determined by A) what buyers are willing to invest in a firm. B) dividing total assets by the number of outstanding shares. C) dividing total shareholders' equity by the number of outstanding shares. D) dividing net profit by the number of outstanding shares. E) stock brokers’ opinions and ratings. Answer: C 185) Which term represents the value of a common stock expressed as total shareholders' equity divided by the number of shares of common stock? A) Profitability ratio B) Par value C) Price-earnings ratio D) Market value E) Book value Answer: E 186) Which of the following is correct? A) The par value of stock is generally the best indicator of the real value of a share of stock B) The market value of a share of stock is determined almost solely by objective, financial considerations C) The book value of a share of stock is calculated by dividing stockholders’ equity by the current market price of the stock D) A company’s market capitalization is determined by multiplying the number of a company’s outstanding shares times the market value of each share E) By law, subjective factors like rumours and stockbroker recommendations are not allowed to influence the market price of a share of stock Answer: D 187) Mega Computer's financial statements show 1 000 shares of common stock with a par value of $10 000, retained earnings of $20 000, additional paid in capital of $10 000, and long-term debt of $30 000. What is the book value of a share of stock? A) $70.00 B) $10.00 C) $40.00 D) $30.00 E) $50.00 Answer: C 188) What is an advantage of purchasing common stock? A) Stocks with high interest rates are desirable for individuals living on a fixed income B) Common stock pays out interest C) Common stock has first claim on dividends ahead of preferred stock D) Offer high growth potential for investors E) Less risk than in purchasing bonds Answer: D 189) Which of the following is true with regard to preferred stock? A) Dividends must be paid each year on preferred stock B) The growth potential of preferred stock is limited due to its fixed dividend C) Preferred stock is more risky than common stock D) The usual par value of a preferred share is $1 E) It cannot be callable Answer: B 190) The market value of a company's stock, computed by multiplying the number of a company's outstanding shares times the value of each share, is called ________. A) net book value B) shareholder's equity C) equity D) goodwill E) market capitalization Answer: E 191) Which of the following is correct with regard to market capitalization? A) There is considerable stability in the market capitalization of companies from year to year B) Market capitalization is computed by dividing owners’ equity by the number of outstanding shares C) In Canada, most of the companies with the highest market capitalization are financial institutions or resource companies D) There is general agreement that market capitalization really doesn’t tell us very much about the real value of a company E) All of these are correct Answer: C 192) Preferred stock with a $100 par value and a 6 percent dividend is currently trading on the market at $110 per share. What is the amount of the dividend the holder is entitled to receive each year? A) $66 B) 6 percent of $110 C) $6 percent of the total book value of preferred shares D) $6 E) $0 Answer: D 193) Preferred stock with a $100 par value and a 5 percent dividend is currently trading on the market at $90 per share. What is the amount of the dividend the holder is entitled to receive each year on each share? A) $90(i.e., 90 percent of $100) B) 5 percent of $90 C) 5 percent of total corporate profits divided by the number of shares outstanding D) $5 E) None of these Answer: D 194) If preferred stock is cumulative, that means that preferred shareholders must be paid dividends due from previous years before common shareholders are entitled to receive any dividends. If a 5 percent, $1,000 par value cumulative preferred stock fails to pay dividend for 2 years, how much are preferred shareholders entitled to before common shareholders can receive a dividend? A) $55 per share B) $50 per share C) $0 per share D) $100 per share E) It is not possible to tell with the information that is provided Answer: D 195) Bob's Barbecue has issued preferred stock that is callable. Which of the following is possible with this stock? A) The investors can make Bob buy the stock back if it falls to a given price B) The investors can choose to receive interest payments instead of dividends C) The investors can exchange the preferred stock for common stock D) Bob can make the investors trade the preferred stock for common stock E) Bob can make the investors sell the stock back to the company Answer: E 196) Make an educated guess on the following information: Stock on which dividends not paid in the past must first be paid up before dividends can be paid to other stockholders is A) cumulative common stock. B) common stock. C) preferred stock. D) callable preferred stock. E) cumulative preferred stock. Answer: E 197) Who would be permitted to work on the trading floor of a stock exchange? A) A business firm's financial manager B) Brokers C) The manager of a pension fund (institutional investor) D) An individual investor E) An investment banker Answer: B 198) A ________ is an organization of individuals formed to provide an institutional setting where stocks can be bought and sold. A) credit union B) commodity exchange C) stock exchange D) bank E) market Answer: C 199) Online trading is becoming increasingly popular because A) experts manage the traders’ portfolios. B) traders do not need to use a broker to buy and sell stocks. C) online brokerages provide investment advice. D) it is facilitated by convenient access to the internet. E) all of these are reasons. Answer: D 200) Which of the following is correct with respect to stock exchanges? A) All of the people working on the trading floor are employed by the exchange B) Anyone is allowed to trade on the exchange C) The general public is allowed to participate in the actual buying and selling of stock on the exchange floor D) Memberships on a stock exchange cannot be bought or sold E) Most are non-profit organizations Answer: E 201) Which type of financial institution buys and sells stocks and bonds on stock exchanges for investors? A) Finance companies B) Chartered banks C) Pension services D) Credit unions E) Brokers Answer: E 202) A(n) ________ is an individual or organization who receives and executes buy and sell orders on behalf of other people in return for commissions. A) commodities market B) broker C) stock exchange D) agent E) investment bank Answer: B 203) In order for a security to be listed on the Toronto Stock Exchange, the issuing corporation must A) have at least 200 employees. B) have paid a fee. C) never have traded its stock anywhere else. D) be making a profit. E) all of these. Answer: B 204) Independent dealers who own the securities that they buy and sell are traded A) on the Toronto Stock Exchange. B) only at par value. C) by investors who seek to hide their identity. D) in the over-the-counter market. E) only on the Vancouver Stock Exchange. Answer: D 205) The world's first electronic stock market is known as A) the TSE. B) the Electronic Market. C) AMEX. D) NASDAQ. E) the NYSE. Answer: D 206) Unlisted securities are traded A) by investors who don’t want their identity known. B) in the over-the-counter market. C) only on the smaller exchanges like the Vancouver Stock Exchange. D) only at par value or book value, not market value. E) on the large exchanges like the Toronto Stock Exchange. Answer: B 207) A ________ is a promise by the issuer to pay the buyer a certain amount of money at a stated future date, usually with interest paid at regular intervals. A) preferred stock B) bond C) banker's acceptance D) common stock E) letter of credit Answer: B 208) Which of the following represents a high-grade bond as rated by one of the bond rating services? A) Aaa B) BBB C) BB D) Baa E) ABC Answer: A 209) Bonds that receive poor ratings are likely to A) be registered. B) not be issued. C) pay higher interest rates. D) require more underwriting. E) reduce the total amount issued. Answer: C 210) One of the safest investments available is bonds issued by A) not-for-profit organizations. B) municipalities. C) public corporations. D) the Canadian government. E) private corporations. Answer: D 211) The bonds that are issued to finance schools, transportation, and airports are called A) government bonds. B) public bonds. C) private bonds. D) municipal bonds. E) debentures. Answer: D 212) With ________ bonds, the corporation simply mails the interest cheques directly to the bondholders. A) secured B) registered C) bearer D) debenture E) callable Answer: B 213) The type of bond that requires the bondholder to clip coupons from certificates and send them to the issuer in order to receive payment is A) callable. B) secured. C) bearer. D) debenture. E) registered. Answer: C 214) Just like clockwork, Mr. and Mrs. Clark, an elderly retired couple, walk in the bank every year on November 1 to clip coupons from their bonds. What kind of bonds are these? A) Registered B) Secured C) Callable D) Bearer E) Retirement Answer: D 215) Issuers reduce the risk to bondholders by pledging certain assets in the event of default. These bonds are A) callable. B) secured. C) registered. D) bearer. E) debenture. Answer: B 216) ________ bonds are most likely to receive high ratings from the firms that rate bonds. A) Callable B) Registered C) Debenture D) Bearer E) Secured Answer: E 217) A ________ is a bond for which no specific property is pledged as collateral. A) secured bond B) bearer bond C) callable bond D) debenture E) registered bond Answer: D 218) ________ are most likely to receive low ratings from the firms that rate bonds. A) Callable bonds B) Secured bonds C) Registered bonds D) Bearer bonds E) Debentures Answer: E 219) The type of bonds that are said to have "inferior claims" on a corporation's assets are A) secured bonds. B) debentures. C) registered bonds. D) callable bonds. E) bearer bonds. Answer: B 220) Issuers of bonds are most likely to call them in when A) the prevailing rate of interest exceeds that stipulated on the bonds. B) when investor confidence goes down. C) the prevailing rate of interest is less than that stipulated on the bonds. D) when investor confidence goes up. E) when the government revises its capital gains tax law. Answer: C 221) When a bond sells at a premium A) its selling price is below its redemption price. B) its selling price is above its redemption price. C) its price is getting into the range that is too high for most people. D) its redemption price equals its face value. E) its selling price equals its redemption price. Answer: B 222) Which of the following is not a mechanism for the retirement of bonds? A) Sell the bonds of the issuing firm to another investor B) Use a convertible bond issue C) Use a sinking bond provision in the bond indenture D) Use a serial bond issue E) Issue callable bonds Answer: A 223) What kind of bond gives the issuer the right to redeem the bond at almost any time? A) Municipal bonds B) Registered bonds C) Convertible bonds D) Promissory bonds E) Callable bonds Answer: E 224) A ________ can pay the holder in stock instead of cash. A) derivative B) common share C) callable Bond D) convertible bond E) preferred share Answer: D 225) A ________ bond permits the issuing firm to retire portions of the bond issue at different predetermined dates. A) municipal B) serial C) secured D) callable E) convertible Answer: B 226) What is an advantage of issuing a bond with a sinking fund provision? A) This provision offers greater security to an investor because funds to retire the bond issue are set aside each year into the sinking fund B) The bonds may be converted to a specified number of shares of common stock at the firm's convenience C) The firm has the right to call in the outstanding bonds at any time and thus sink the bond issue D) The firm can decide to redeem the fund at any time E) The firm may retire portions of the bond issue at different predetermined dates Answer: A 227) When interest rates move up, bond prices tend to A) move down. B) stay about the same. C) move up. D) move up, but only if the company is making a profit. E) there is no general pattern. Answer: A 228) Which type of bond retirement would permit a bond to be converted into common stock of the bond issuing company? A) Convertible bond B) Sinking funds C) Callable bonds D) Serial bond E) Equity-potential bond Answer: A 229) What is the difference between registered bonds and bearer bonds? A) Registered bonds have to be registered with the government of Canada, but bearer bonds do not B) Registered bonds generally pay lower rates of interest than bearer bonds C) Registered bondholders automatically receive interest cheques, but holders of bearer bonds have to clip coupons and send them to the company D) Registered bonds have lower financial risk than bearer bonds E) There is really no practical difference between registered and bearer bonds Answer: C 230) ________ are mostly used by financially strong corporations. A) Callable bonds B) Bearer bonds C) Registered bonds D) Debentures E) Secured bonds Answer: D 231) What is a mutual fund? A) A mutual fund is a pool of funds established by corporate financial managers to provide for short-term business loans B) A mutual fund is a loan to the federal government made by a business firm C) Investors pool resources from individuals and business firms to purchase a portfolio of stocks, bonds, and short-term securities D) A mutual fund consists of money raised by selling a share of ownership in a business firm E) A mutual fund is a product of a mutual life company Answer: C 232) Which of the following types of mutual funds do not charge a sales commission when investors buy into the fund or sell out of the mutual fund? A) A money market fund B) A municipal bond mutual fund C) An aggressive growth mutual fund D) A no-load fund E) A low-load fund Answer: D 233) A(n) ________ is a company that pools investments from individuals and organizations to purchase a portfolio of stocks, bonds, and short-term securities. A) mutual fund B) stock brokerage C) investment bank D) commodities fund E) private placement Answer: A 234) In a(n) ________ investors are charged sales commissions when they buy in or sell out. A) commodities fund B) load mutual fund C) fee-less stock brokerage D) no-load mutual fund E) investment bank Answer: B 235) What types of investments would be most likely for a mutual fund with a safety strategy? A) Commodities futures B) Stocks of other bills C) Stocks of new companies D) Treasury bills E) Common stocks with good dividend paying records Answer: D 236) Mutual funds that include money market funds and government bonds are emphasizing A) high current income. B) aggressive growth. C) stability. D) growth. E) safety. Answer: E 237) Mutual funds that include long-term municipal bonds, corporate bonds, and common stocks with good dividend-paying records are emphasizing A) growth. B) stability. C) aggressive growth. D) high current income. E) safety. Answer: D 238) Mutual funds that include a balance of bonds, preferred stocks, and common stocks, especially the common stocks of established firms are emphasizing A) aggressive growth. B) growth. C) safety. D) stability. E) high current income. Answer: B 239) Mutual funds that invest in new companies or even troubled companies and other high-risk securities are emphasizing A) aggressive growth. B) stability. C) high current income. D) growth. E) safety. Answer: A 240) Which of the following is correct with regard to mutual funds? A) They are oriented toward investors with large amounts of money B) Most mutual funds stress the same goal: growth C) Only managers who have passed an ethics test can work for ethical mutual funds D) A mutual fund that stresses safety of investment would likely invest in treasury bills E) All of these Answer: D 241) John has bought into a mutual fund that includes long-term municipal bonds, corporate bonds, and common stocks with good dividend-paying records. This mutual fund is emphasizing A) stability. B) safety. C) high current income. D) aggressive growth. E) growth. Answer: C 242) Agreements to purchase specified amounts of commodities at a given price on a set future date are known as A) load mutual funds. B) debentures. C) purchase agreements. D) futures contracts. E) no-load mutual funds. Answer: D 243) What is an agreement to purchase a specified amount of a commodity at a given price on a set date in the future? A) Municipal bond B) Commodity option C) Commodity debenture D) Preferred stock E) Futures contract Answer: E 244) ________ are private pools of money that try to give investors a positive return regardless of stock market performance, and often engage in practices like short-selling and leveraging. A) Mutual Funds B) Ethical Funds C) Stock Purchase Plans D) Commodities E) Hedge Funds Answer: E 245) Which of the following is correct with regard to hedge funds? A) Historically, they have been bought only by conservative investors who don’t have a lot of money to invest B) Hedge funds avoid risky practices like short-selling and leveraging C) Hedge funds are not as closely regulated as mutual funds D) Management fees in hedge funds are much lower than for mutual funds E) All of these Answer: C 246) Which of the following is correct with regard to hedge funds? A) They guarantee investors a positive return on their money B) They allow individual investors to exchange shares of mutual funds that they hold C) They historically were marketed to mostly wealthy investors, but in recent years they have been marketed to the average investor D) They were declared illegal after the financial meltdown of 2008 E) They are valued only at the end of each day Answer: C 247) The ________ is the percentage of the total sales price that a buyer must put up to place an order for a stock or a futures contract. A) installment B) up-front money C) purchase money D) down payment E) margin Answer: E 248) Which investment has the greatest risk? A) Common stock B) Stock options C) Futures contracts in the commodities market D) Municipal bond E) A safety of principal oriented mutual fund Answer: C 249) Suppose you have a put option that allows you to sell 100 shares of Alcan for $54.50 per share any time before October 2009. If the stock price falls to $45.00 per share, your profit is A) $9.50 B) $54.50 C) $950.00 D) $45.00 E) $0.00 Answer: C 250) A ________ is the right to buy a particular stock at a certain price until a particular date, while a ________ gives the owner the right to sell a particular stock at a specified price until a particular date. A) put option; call option B) limit order; sales order C) call option; put option D) sales order; limit order E) market purchase order; market sales order Answer: C 251) Which of the following is correct with regard to the box entitled “Green Trading”? A) Environmental polluters and green companies have come into conflict over the idea of emissions trading B) The setting of pollution caps by various countries has inhibited the popularity of the carbon credits idea C) Carbon credits essentially allow some companies to deliberately pollute the atmosphere D) A company which is polluting more than its cap can sell its surplus credits to other companies E) All of these are correct Answer: C 252) If the stock of Vogue Cosmetics was reported in The Globe and Mail as selling for 24.5, you have to pay ________ per share. A) $245.00 B) $2450.00 if you buy between 100 and 200 shares C) $24.00 for one half of a share D) $24.50 E) $24.005 Answer: D 253) A stock quote of 30.5 means A) the stock is down 30 cents from 80 cents to 50 cents. B) the stock is selling at $30.50. C) the stock is selling at 30 cents. D) the stock is up 30 cents from 50 cents to 80 cents. E) the stock will be selling between 50 cents and 80 cents for the next 30 days. Answer: B 254) A(n) ________ is a summary of price trends in a specific industry and/or the stock market as a whole. A) investment index B) market index C) average index D) market indicator E) average indicator Answer: B 255) Assume you bought a $1 000 par value corporation bond in 1999 for 75 1/4 with an interest rate of 7.5%. If you held the bond until maturity in 2009, what would be the total amount that you earned on this bond? A) $1 000.00 B) $750 C) $779.50 D) $887.50 E) $997.50 Answer: E 256) Suppose you purchased a $1 000 par-value bond in 1997 for $650. Its stated interest rate is 6 percent and it matured in 2007. What was your yield? A) 6.1 percent B) 7.2 percent C) 10.4 percent D) 9.2 percent E) 8.4 percent Answer: D 257) A ________ is a period of generally rising stock prices, while a ________ is a period of generally falling stock prices. A) bear market; cash cow market B) bull market; bear market C) blue-sky market; bear market D) bull market; bear market E) market index; bear index Answer: E 258) An average which indicates the overall behaviour of Canadian security prices is A) the Dow Jones index. B) the S&P/TSX index. C) the price of Bell Canada stock. D) the average price of oil stocks. E) the NASDAQ index. Answer: B 259) During a bear market A) stock prices as a whole are rising. B) corporations are being funded through secondary market transactions. C) stock prices as a whole are falling. D) both stock prices as a whole are falling and speculators are avoiding short selling. E) speculators are avoiding short selling. Answer: C 260) If you purchase a round lot of stock quoted in The Globe and Mail at 10.75, the total price you would pay for the stock is ________ plus commission. A) $1 034.00 B) $107.50 C) $10.34 D) $1 075.00 E) $1 000.75 Answer: D 261) The type of order which authorizes the purchase of a stock only if its price is less than or equal to a given amount is known as a(n) A) short sale. B) odd lot order. C) market order. D) limit order. E) round lot order. Answer: D 262) A(n) ________ is an order to a stock broker to buy or sell a security at the prevailing price at the time the order is placed. A) stop order B) limit order C) odd lot order D) market order E) round lot order Answer: D 263) A(n) ________ is an order to a stock broker to buy a security only if its price is equal to or less than a specified amount. A) stop order B) round lot order C) limit order D) market order E) odd lot order Answer: C 264) A(n) ________ is an order to a stock broker to sell a security if its price falls to or below a specified amount. A) limit order B) stop order C) round lot order D) market order E) odd lot order Answer: B 265) A round lot is the purchase of securities in multiples of ____________, while an odd lot is the purchase of securities in multiples less than ___________. A) 10; 20 B) 50; 50 C) 100; 100 D) 1 000; 500 E) 1 000; 1 000 Answer: C 266) Scott just called his broker to place an order to buy 100 shares of IBM at a price of $70 or less. Which of the terms below describe his order? A) Both a round lot and a limit order B) Limit order C) Both a round lot and a stop order D) Odd lot E) Stop order Answer: A 267) Scott just called his broker to place an order to sell his 50 shares of IBM if the price falls to 100. Which of the terms below describe his order? A) Stop order, round lot B) Round lot, limit order C) Market order, round lot D) Limit order, odd lot E) Odd lot, stop order Answer: E 268) Scott just called his broker to place an order to buy 200 shares of IBM at the best price the broker could get. Which of the terms below describe his order? A) Stop order, round lot B) Round lot, limit order C) Limit order, odd lot D) Odd lot, stop order E) Market order, round lot Answer: E 269) When an investor pays a broker only a portion of the entire purchase price of the stock acquired, that investor is said to be buying on A) collateral. B) the edge. C) margin. D) hope. E) faith. Answer: C 270) George just called his broker to place an order to buy 200 shares of IBM at the best price the broker could get. Which of the terms below describes his order? A) Margin trading B) Stop order C) Round lot D) Odd lot E) Limit order Answer: C 271) Mohamar just called his broker to place an order to sell 50 shares of IBM at the prevailing market price. Which of the terms below describes his order? A) Margin trading B) Odd lot C) Limit order D) Round lot E) Stop order Answer: B 272) Which of the following are aspects of a short sale by an investor? A) Required return of the stock to the broker B) Borrowing stock from a broker C) Money not required up front D) Hope for falling price on the stock that has been sold short E) All of these Answer: E 273) When an investor gets involved in a short sale, what is that investor hoping for in the movement of the price of the stock? A) A sharp drop B) Maintenance of the current price C) An unchanged and very stable S&P/TSX index D) Appreciation E) A boost upward Answer: A 274) A(n) ________ is a stock transaction in which an investor borrows securities from a broker to be sold and then replaced at a specified future date. A) long sale B) short sale C) futures sale D) insider trade E) program trade Answer: B 275) Which of the following statements about short selling is false? A) At some time in the future, the speculator must buy the security to "cover" the short sale B) Short selling is legal C) Short selling involves selling a security that you do not own by borrowing it from your broker D) Speculators may profit from short selling when stock prices are falling E) Speculators will generally profit from short selling when stock prices rise Answer: E 276) Samantha instructs her stockbroker to buy a certain stock only if its price is less than or equal to $50. This is a(n) ________. A) round lot order B) odd lot order C) limit order D) stop order E) market order Answer: C 277) Ron instructs his stockbroker to sell one of his stock if its price falls below $85. This is a(n) ________. A) odd lot order B) limit order C) round lot order D) market order E) stop order Answer: E 278) Canadian securities regulations A) are generally seen as representing a good model which other industrialized countries should follow. B) are characterized by a comprehensive federal securities legislation and a federal regulatory body. C) apply only to the sale of new issues of stock. D) have led to timely corrective action being taken when securities violations are alleged. E) none of these are correct. Answer: E 279) Before a corporation sells securities, that corporation is required by law to offer future investors the opportunity to read through a document, which contains complete information on both the new issue and the corporation. What is that required document called? A) Prospectus B) Book report C) Affidavit D) Income statement E) Order blank Answer: A 280) The illegal practice of using special knowledge about a firm that is not available to the general public for making profits in the stock market is A) program trading. B) blue sky trading. C) short trading. D) insider trading. E) prospectus trading. Answer: D 281) "I am a chemist with the nation's largest chemical company. We have secretly developed a cure for three of the world's most serious epidemics. Before this news breaks out, I am going to buy as many shares of stock in my company as I can get my hands on. Then I'll sit back and watch the stock price head for the sky." The person making this statement is about to engage in A) a news conference. B) insider trading. C) open-market operations. D) further research. E) selling shares of stock. Answer: B 282) The laws that require securities dealers to be licensed and registered with the provinces in which they do business are called ________ laws. A) prospectus B) insider trading C) blue sky D) brokerage E) national security dealers Answer: C 283) Blue-sky laws apply mainly to the A) operation of local brokerage firms. B) sale of new securities. C) purchase of shares by insiders. D) sale of securities on the secondary market. E) issuance of unsecured bonds. Answer: B TRUE/FALSE QUESTIONS. Write 'T' if the statement is true and 'F' if the statement is false. 284) Coins came into use sometime around 600 B.C. and paper money around 1200 A.D. Answer: True 285) One important characteristic of money is that it be portable. Answer: True 286) The characteristics of money include portability, divisibility, durability, and stability. Answer: True 287) The functions of money are 1) a medium of exchange, 2) a unit of account, and 3) a store of value. Answer: True 288) Currency and money are the same thing. Answer: False 289) A chequing account and a demand deposit are the same thing. Answer: True 290) One of the functions of money is to serve as a medium of exchange, in which money replaces the need for barter among individuals. Answer: True 291) Money as a store of value refers to the acceptance of money as a relative value of goods. Answer: False 292) The M-1 money supply account measures only the most liquid forms of money, such as cash. Answer: True 293) A personal chequing account represents demand deposits because the bank must pay "on demand" to the person receiving the cheque. Answer: True 294) The value of money will fluctuate in response to the laws of demand and supply just as the value of a corn crop will fluctuate by the same laws. Answer: True 295) When the money supply is high the value of the dollar rises. Answer: False 296) M-1 is a more reliable measure of money supply than M-2. Answer: False 297) M-1 includes M-2 plus currency, demand deposits, and other chequable deposits. Answer: False 298) The M-2 measurement of the money supply includes time deposits, money market mutual funds, and savings deposits. Answer: True 299) The measure of the money supply known as M-2 includes currency, demand deposits, and savings accounts. Answer: True 300) Credit cards qualify as a form of money. Answer: False 301) Certificates of deposits (CDs) and saving certificates are classified as time deposits. Answer: True 302) One feature of time deposits is that advance notice is required to make a withdrawal. Answer: True 303) Credit cards are widely used as money in business transactions but are not included in either M-1 or M-2. Answer: True 304) About 10 percent of Canadian banknotes in circulation are counterfeit. Answer: False 305) The main function of financial institutions is to facilitate the flow of money from sectors with surpluses to those with deficits. Answer: True 306) Banks are permitted to own securities dealers. Answer: True 307) Deregulation has allowed banks to shift away from their historical role as intermediaries between depositors and borrowers. Answer: True 308) Retailers like Canadian Tire are not allowed to provide financial service products that compete with those provided by banks. Answer: False 309) Banks are allowed to sell insurance in their branches. Answer: False 310) Foreign banks are not allowed to do business in Canada. Answer: False 311) A chartered bank is a privately owned, profit seeking business firm. Answer: True 312) The five larges Schedule A banks account for about 90% of total bank assets in Canada. Answer: True 313) Banks offer services including pension services. Answer: True 314) A banker's acceptance promises that the bank will pay some specified amount at a future date. Answer: True 315) Money that moves among consumers and businesses via digital electronic transmissions is known as E-cash. Answer: True 316) Smart cards are credit card sized plastic cards that can be programmed with electronic money Answer: True 317) The prime rate of interest is the lowest rate charged to a bank's best customers. Answer: True 318) Since 1991, Canadian chartered banks have had to maintain a reserve requirement with the Bank of Canada. Answer: False 319) The bank rate is the lowest rate a chartered bank charges to its borrowers Answer: False 320) The Bank of Canada plays an important role in managing the money supply in Canada. Answer: True 321) If the Bank of Canada wants to increase the money supply, it will purchase government securities. Answer: True 322) The Bank of Canada plays an important role in managing the money supply in Canada. Answer: True 323) If the bank of Canada wants to decrease the money supply, it can sell government securities. Answer: True 324) The largest credit union in Canada (based on annual revenues) is Credit Union Central of Ontario. Answer: False 325) Credit unions usually pay higher interest rates on GIC’s than banks do. Answer: True 326) Trust companies have increased in importance during the last few years because there is more demand for the trust company's function, which is to safeguard funds and estates. Answer: False 327) A sales finance company finances installment purchases only for consumers, not businesses. Answer: False 328) Venture capital firms are mainly in the business of selling bonds to retired investors. Answer: False 329) Investment dealers are the primary distributors of new stock and bond issues, but they are not allowed to facilitate secondary trading of stocks and bonds. Answer: False 330) The law of one price says that identical products should sell for the same price in all countries, except for those countries that have a large agricultural sector. Answer: False 331) The International Monetary Fund funds national improvements by making loans to build road, school, power plants, and hospitals. Answer: True 332) The securities market is the place where financial firms sell the collateral that they hold as security for business loans. Answer: False 333) Primary securities markets are those that handle the most important stock and bond issues, while secondary markets are those which handle the less important issues. Answer: False 334) An investment banker helps firms create new securities but does not buy or sell them. Answer: False 335) Par value is the amount an investor can get for selling a specific stock. Answer: False 336) The par value of a stock is an arbitrary accounting value that is of little interest to stock purchasers. Answer: True 337) The par value of a stock reflects a buyer's willingness to invest in a business firm. Answer: False 338) The face value of stock is also known as its book value. Answer: False 339) The real value of a share of common stock is its market value. Answer: True 340) The book value of a common stock is a firm's shareholders' equity divided by the number of outstanding shares of common stock. Answer: True 341) If the market value of a stock falls to approximately the book value, many investors will buy the stock. Answer: True 342) Common stocks are among the riskiest of securities. Answer: True 343) If the price of Microsoft's shares are $30.00 and there are 3 million shares outstanding, then Microsoft's market capitalization would be $9 million. Answer: False 344) A preferred stock is usually issued with a stated par value, and dividends are typically expressed as a percentage of that par value. Answer: True 345) Buying and selling existing stock is accomplished through a business firm with a seat on a stock exchange. Answer: True 346) All stock exchanges have trading floors. Answer: False 347) The popularity of online trading stems from convenient access to the Internet, fast no-nonsense transactions, and the opportunity for self-directed investors to manage their own portfolios while paying low fees for trading. Answer: True 348) The OTC market consists of many people in different locations who hold an inventory of securities that are not listed on any of the major exchanges. Answer: True 349) Bonds differ in terms of maturity dates, tax status, level of risk, and interest rate. Answer: True 350) Bonds are usually classified as high grade, investment grade, speculative, and poor grade. Answer: True 351) The issuer of a callable bond has the right to raise the interest rate and extend the maturity date at any time. Answer: False 352) Bond prices usually move in the same direction as interest rates. Answer: False 353) Bonds are never retired, they are just re-issued. Answer: False 354) A bond is basically an IOU. Answer: True 355) Bonds differ in terms of riskiness, but they are identical in terms of maturity dates. Answer: False 356) Bearer bonds require the owner to clip coupons and send them to the issuer in order to receive their interest payments. Answer: True 357) Convertible bonds give investors the possibility of capital gains. Answer: True 358) A mutual fund pools investments from individuals and firms to purchase a portfolio of stocks, bonds, and short-term securities. Answer: True 359) An ethical mutual fund is one in which the managers that work for the fund must sign a commitment statement that they will behave in an ethical fashion when dealing with clients. Answer: False 360) Ethical mutual funds have not performed as well as other mutual funds. Answer: True 361) Mutual funds vary according to the investment goals emphasized by the fund managers. Answer: True 362) Hedge funds are not allowed to engage in risky practices such as short selling and leveraging. Answer: False 363) A futures contract is an agreement to purchase a specified amount of a mutual fund at a given price on a set date in the future. Answer: False 364) Selling prices in the commodities market reflect traders' beliefs about the future prices of commodities, such as coffee beans, livestock, and gold. Answer: True 365) Hedge funds try to give their investors a positive return no matter how the stock market is performing. Answer: True 366) Buying securities on margin is risky because margin securities are investments in companies that are not performing well. Answer: False 367) Most commodities investors have no intention of ever taking possession of the commodities in which they trade. Answer: True 368) A call option requires brokers to call their clients before buying or selling stocks. Answer: False 369) A corporation bond selling at 155(1/4) would cost a buyer $1552.50 plus commission. Answer: True 370) Periods of falling stock prices are called bull markets. Answer: False 371) A stop order prevents the broker from selling a client's stock. Answer: False 372) In a short sale of stocks you sell stocks that you don't own. Answer: True 373) Financing of securities purchases may be accomplished by margin trading. Answer: True 374) Bond prices are expressed in terms of $10,000 increments. Answer: False 375) The market value of a bond depends on its stated interest rate, the going rate of interest, and its maturity date. Answer: True 376) A market order requests the broker to buy or sell a certain security at the prevailing market price at the time. Answer: True 377) A prospectus is a statement filed by the issuing company before the issuance of a new security that contains detailed information about the company and the proposed new issue. Answer: True 378) Insider trading is an illegal act in which an individual with special knowledge about a firm trades on that information for profit. Answer: True SHORT ANSWER QUESTIONS. Write the word or phrase that best completes each statement or answers the question. 379) What are the four characteristics of money? Answer: Portability, divisibility, durability, and stability. 380) List the three functions of money. Answer: Medium of exchange, store of value, and unit of account. 381) Identify the components of the M-1 money supply. Answer: Currency and demand deposits. 382) What is a demand deposit? Answer: Demand deposits are bank account funds that may be withdrawn at any time. 383) Identify the components of the M-2 money supply. Answer: M-2 includes time deposits, money market mutual funds, and savings deposits, as well as the components of M-1. 384) What is a letter of credit? Answer: A promise by the bank to pay a certain amount if specified conditions are met. 385) What is the prime rate of interest? Answer: The lowest interest rate charged to borrowers. 386) How do banks create money? Answer: By taking in deposits and then making loans, banks expand the money supply. 387) What is a reserve requirement? Answer: The reserve requirement is the percentage of its deposits that a bank must hold, in cash or on deposit, with the Bank of Canada. This requirement was phased out in 1991. 388) What is a smart card? Answer: A smart card is a plastic card with an embedded computer chip that can be programmed with electronic money. 389) What is a debit card? Answer: A debit card is a credit card-size plastic card that allows for the transfer of money between accounts. 390) What is e-cash? Answer: E-cash is electronic money that moves between consumers and businesses via digital electronic transmissions. 391) What are open-market operations? Answer: Open-market operations are the Bank of Canada's sales and purchases of securities in the open market. 392) What feature of a credit union makes it different from all the other financial institutions? Answer: A credit union provides financial services for a particular group of people. Often this group will be employees of a particular employer. 393) How are factoring companies and financial corporations different? Answer: Factoring companies buy accounts receivable from a firm and pay less than the face value of the receivables. They then collect the face value of the receivables, and the amount of the difference is their profit. By contrast, financial corporations loan money to individuals and companies for the purchase of durable goods. 394) What is the World Bank? Answer: The World Bank is a United Nations agency that provides a limited scope of financial services, such as funding national improvements in underdeveloped countries. 395) How are the World Bank and the International Monetary Fund different? Answer: The World Bank funds national improvements by making loans to build roads, schools, and power plants. By contrast, the International Monetary Fund is a group of 186 countries that try to promote stable exchange rates, provide short-term loans to member nations, and encourage cooperation on international monetary issues. 396) What is a security? Answer: A security is a stock or bond representing a secured or asset-based claim by investors against issuers. 397) Of par value, market value, and book value, which is the most important to investors and why? Answer: Market value is of most importance to investors, as it represents the current price of a share of stock in the market. 398) What is par value? Answer: Par value is the arbitrary value of a stock set by the company's board of directors, and stated on stock certificates, and used by accountants but of little significance to investors. 399) Identify the major Canadian securities exchanges. Answer: The major securities exchanges are the Toronto Stock Exchange, the Canadian Venture Exchange and the Montreal Stock Exchange 400) What is a bond? Answer: A bond is an IOU, i.e., a written promise that the borrower will pay the lender, at some stated future date, a sum of money and a stated rate of interest. 401) What is a debenture? Answer: Debentures are bonds which are unsecured. In other words, no specific property has been pledged as security to back up the borrowing. 402) What is the difference between registered bonds and bearer bonds? Answer: The issuing company mails interest cheques to owners of registered bonds, but a bearer bond owner must clip coupons and send them to the issuer in order to receive interest payments. 403) What is a mutual fund? Answer: A mutual fund is a company that pools investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities. 404) What is a hedge fund? Answer: Hedge funds are private pools of money that try to give investors a positive return regardless of stock market performance. Hedge funds often engage in risky practices like short selling and leveraging 405) What is a call option? Answer: A call option is the right to buy or sell a stock at a particular price during a specified period of time. 406) Differentiate between bull and bear markets. Answer: A bull market is a period of rising stock prices, while a bear market is a period of falling stock prices. 407) Differentiate between odd and round lots. Answer: A round lot is a purchase or sale of stock in units of 100 shares, while an odd lot is the purchase or sale of stock in fractions of round lots. 408) What is a short sale? Answer: A short sale is a stock sale in which an investor borrows securities from a broker to be sold and then replaced at a specified future date. 409) What is insider trading? Answer: Insider trading is the use of special knowledge about a firm, and using that knowledge for personal profit or gain. ESSAY QUESTIONS. Write your answer in the space provided or on a separate sheet of paper. 410) Briefly describe the attributes an object must possess to be used as money. Answer: • portability: must be able to take it places • divisibility: must be able to break it into smaller forms (change) • durability: must be able to last a long time, and take abuse • stability: the value of money must have no shelf life 411) Explain why beef would not make an appropriate form of currency in modern society. Answer: • Beef is not portable, how would it be taken on a shopping trip?it would likely go bad in a purse or over any length of time! • It is divisible, but how would we divide it? Would we take knives on a shopping trip? • It is not durable because it will spoil if not stored properly. Beef has a shelf life. • It is not stable, there are so many farmers who may raise cows and have an almost unlimited supply of currency. 412) What three functions does money perform in our society? Answer: • medium of exchange: for trading goods and services • store of value: for saving • unit of account: for measuring the value of things 413) What is M-1 and what are the major elements that make it up? Answer: • Measure of money supply that includes only the most liquid forms such as currency, demand deposits, and other chequable deposits. 414) What is included in the M-1 measurement of the money supply? In M-2? Answer: • M-1: only the most liquid forms of money (currency and demand deposits) • M-2: M-1 plus savings deposits, time deposits, and money market mutual funds. 415) What is M-2 and what are the major elements that make it up? Answer: • measure of money supply that includes all the components of M-1 plus forms of money that can easily be converted into spendable forms: time deposits, money market mutual funds and savings deposits 416) Why are credit cards so popular? Answer: They are convenient for consumers to use, and they are very profitable for the companies that issue the credit cards because of the fees they collect (annual fees to card holders, interest on unpaid balances, and fees paid by merchants who accept the cards). 417) What steps have credit card issuers taken to deal with credit card fraud? Answer: The main action credit card companies have taken is to adopt encryption technology. This involves issuing new cards to credit card holders; these new cards contain a computer chip. Consumers insert their new card into the merchant's machine and then enter a PIN number. In a test of these new cards in Kitchener, there was an 80 percent decrease in the amount of credit card fraud. 418) Identify the types of businesses that make up the Canadian financial system. Answer: • chartered banks: privately owned, profit-seeking firm that serves individuals, non-business organizations, and businesses as a financial intermediary • alternate banks: trust companies, credit unions/caisses populaires • specialized lending and savings intermediaries: life insurance companies, factoring companies, financial corporations, venture capital or development firms, pension funds • investment dealers 419) Describe the changes that have taken place in banking as a result of deregulation. Answer: • banks are shifting away from their historical role as intermediaries between depositors and borrowers • sell wider array of financial products • more training is provided for bankers • banks will begin to sell commercial paper 420) What is the difference between a letter of credit and a banker's acceptance? Answer: If a Canadian company wants to purchase goods from a foreign supplier, it can pay a bank a fee to provide either a letter of credit (a promise by the bank to pay a foreign firm a certain amount of money if specified conditions are met) or a banker's acceptance (a promise that the bank will pay some specified amount of money at a future date). 421) Compare and contrast the services offered by chartered banks and credit unions. Answer: • chartered banks: pension services, trust services, international services, financial advice, electronic technologies, bank deposits, bank loans, creators of money • credit unions: cooperative savings and lending association formed by a group with common interests, lenders of money to buy durable goods such as cars and furniture, offer short-term, long-term and mortgage loans 422) Briefly explain three electronic technologies. Answer: • automated teller machines: automatic terminals that let you bank at almost any time of day or night, used with a special card and a personal identification number • pay-by-phone systems: let you telephone your financial institution and instruct it to pay certain bills or to transfer funds between accounts merely by pushing the proper buttons on your phone • direct deposits and withdrawals: allow you to authorize in advance specific, regular deposits or withdrawals from your account • point-of-sale transfers: such as a debit card transfer the funds from your account to the stores account immediately upon purchase • smart card: is a credit card-sized computer that can be programmed with "electronic money" • E-cash: is money that moves along multiple channels of consumers and businesses via digital electronic transmissions 423) Why are banks considered to be creators of money? Answer: By taking in deposits and making loans, they expand the money supply 424) Summarize the changes in banking that have occurred over the past decade or so. Answer: Deregulation is one major change. Banks have been allowed to go beyond their historical role as intermediaries between depositors and borrowers, and to provide more services to customers (for example, bereavement services). Banks have also gotten involved in selling insurance. Banks are also getting more involved in investment banking because the fees contribute to their profits. Customer needs have changed as well. They are no longer content to simply keep money in a bank when they have other alternatives that yield higher interest rates. 425) Describe the functions of the Bank of Canada and describe the tools it uses to control the money supply Answer: • the Bank of Canada manages the Canadian economy, controls the money supply, and regulates certain aspects of chartered banking operations • if the Bank of Canada wants to increase the money supply, it can buy government securities or lower the bank rate • if the Bank of Canada wants to decrease the money supply, it can sell government securities or increase the bank rate 426) Explain how the Bank of Canada manages the money supply in Canada. Answer: Expansionary policy (buy government securities, lower the bank rate) or restrictive policy (sell government securities, raise the bank rate). 427) Describe the kinds of business firms that make up "pillar #3" of the Canadian financial system. Answer: • life insurance company: a mutual or stock company that shares risk with its policyholders for payment of premiums • factoring company: buys accounts receivable from a firm for less than their face value, and then collects the face value of the receivables • sales finance company: specializes in financing instalment purchases made by individuals or firms • consumer finance company: makes personal loans to consumers • venture capital or development firms: provides funds for new or expanding firms thought to have significant potential • pension funds: accumulates money that will be paid out to plan subscribers in the future 428) Describe the two types of financial corporations. Answer: • sales finance companies and consumer finance companies are specialized lenders • sales finance company: specializes in financing instalment purchases made by individuals or firms • consumer finance company: makes personal loans to consumers 429) What sources of funds are available to business firms in addition to the institutions that make up the "4 pillars" of the Canadian financial system? Answer: • government financial institutions and granting agencies: such as the IDB and the FBDB • international sources of funds: borrowing from other countries 430) Explain the law of one price and the term "Big MacCurrencies." Answer: • the law of one price is a method of determining whether or not the currency in one country is over or undervalued in comparison to the rest of the world • it is the principle that identical products should sell for the same price in all countries • for example, the price of Big Macs should be the same in every country after currency exchange calculations 431) Explain the differences between primary and secondary securities markets. Answer: • primary securities markets: involve the buying and selling of new securities, either in public offerings or through private placements • secondary securities markets: involve the trading of existing stocks and bonds through such familiar bodies as the New York Stock Exchange and Toronto Stock Exchange 432) What is the difference between par value, market value, and book value? Answer: • different ways of evaluating a stock's worth • par: is the face amount of the stock and it never changes • market: is the price investors are currently willing to pay for the stock • book value: is the calculated value taken from the firm's financial statements 433) Discuss the value of common stock and preferred stock to shareholders and describe the secondary market for each type of security. Answer: • common stock affords investors the prospect of capital gains, dividend income, or both • preferred stock is less risky than common stock and it offers the prospect of steadier income than common stock. Shareholders of preferred stock must be paid dividends before shareholders of common stock • both common and preferred stock are traded on stock exchanges and in over-the-counter markets 434) What is investor relations? Answer: Investor relations involves publicizing the positive aspects of a company's financial position to financial analysts and financial institutions. It is done in an attempt to create more demand for a stock, which will cause its price to increase. 435) Discuss the investment traits of preferred stock. Answer: • stocks are issued with a stated par value • dividends are a percentage of the par value • some preferred stock may be callable • dividends are not as certain as interest payments from bonds issued by the same company 436) What factors influence the market value of a stock? Answer: The market value of a share of stock can be influenced by objective factors (for example, company profits) and subjective factors (for example, rumours, investor relations activities, and recommendations by stockbrokers). 437) What should an investor consider when selecting an investment broker? Answer: • determine what assistance one needs in buying and selling securities • if considerable assistance is needed, then one may want a full-service brokerage • if the investor is going to find all the information and only needs someone to execute trades, then a discount brokerage house may be best • discount broker fees are much lower because they don't offer services such as investment advice and person-to-person sales conversations 438) Identify the major stock exchanges in Canada and in the United States. Answer: • The Toronto Stock Exchange—largest stock exchange in Canada • The Canadian Venture Exchange—focuses on junior companies • The New York Stock Exchange—largest of all U.S. exchanges • The American Stock Exchange—second-largest floor-based U.S. exchange • The Over-the-Counter Market—does not have a trading floor • NASDAQ —the world's first electronic stock market 439) Identify the three major types of bonds and identify the biggest advantage of each. Answer: • government bonds: lowest risk • municipal bonds: tax free interest income • corporate bonds: large number which gives more variety of risk-return options 440) Discuss the methods by which bonds may be retired. Which method offers the greatest security for investors? Which method does the issuing firm prefer? Answer: • callable bonds: a bond that may be paid off by the issuer before the maturity date • sinking-fund provision: a clause in the bond indenture that requires the issuing company to put enough money into a special account each year to cover the retirement of the bond issue on schedule—this is the safest for investors • serial bond: a bond issue in which redemption dates are staggered so that a firm pays off portions of the issue at different predetermined dates • convertible bond: any bond that offers bondholders the options of accepting common stock instead of cash in repayment—preferred method by the issuing firm 441) Why are convertible bonds attractive to investors? Answer: They are attractive because they give the owner the option to convert the bond to common shares at a certain price (known as the strike price). If the price of the company's stock is above the strike price, the bondholder makes a profit (in addition to the interest the bondholder collected along the way). 442) Explain the operation of a mutual fund. What are the advantages to a small investor? Answer: • a mutual fund is any company that pools the resources of many investors and uses those funds to purchase various types of financial securities, depending on the fund's financial goals • advantageous for small investors because they get access to professional financial management 443) How do the commodity markets work? What are the risks involved when investing in the commodities market? What are the rewards or potential rewards? Answer: • commodities markets sell futures contracts on specific commodities • most of the time futures are bought on margin • can be riskier because: • price volatility is high • exposure is greater through margins • rewards can be higher because the use of margins allow relatively small fluctuations to translate into high returns on investment 444) What are stock options? Describe the two types of options available to investors. Answer: • stock option—the purchased right to buy or sell a stock • call option—the purchased right to buy a particular stock at a certain price until a specified date • put option—the purchased right to sell a particular stock at a certain price until a specified date 445) What is a market index? Identify and describe the major market indices in Canada and the United States. Answer: • market index: a measure of the market value of stocks; provides a summary or price trends in a specific industry or of the stock market as a whole • Major market indices: • The TSE 300 Average—The TSE 300 index is an average computed from 300 different top Canadian stocks from 14 different industry groups such as gold and silver, forest products, metals and minerals, transportation, and financial services • The Dow Jones Industrial Average—the Dow is the sum of market prices for 30 of the largest industrial firms listed on the NYSE • The S&P 500—consists of 500 stocks, including 400 industrial firms, 40 utilities, 40 financial institutions, and 20 transportation companies—the index average is weighted according to market capitalization of each stock • The NASDAQ Composite Index—all NASDAQ-listed companies are included in the index and it includes U.S. and non-U.S. based common stocks listed on the NASDAQ market 446) Identify some of the different types of orders that you can place when you decide to buy or sell a security. Answer: • market order: an order to a broker to buy or sell a certain security at the current market price • limit order: an order to a broker to buy a certain security only if its price is less than or equal to a given limit • stop order: an order to a broker to sell a certain security if its price falls to a certain level or below • round lot: the purchase or sale of stock in units of 100 shares • odd lots: the purchase or sale of stock in units other than 100 shares 447) Explain the process by which securities are bought and sold. Answer: Investors generally use such financial information services as newspaper and online stock, bond, and OTC quotations to learn about possible investments. Market Indexes such as the S&P/TXS index, the Dow Jones Industrial Average, Standard & Poor's Composition Index and the NASDAQ Composite Index provide useful summaries of trends, both in specific industries and in the market as a whole. Investors can then place different types of orders. Market orders are orders to buy or sell at current market prices. Because investors do not know exactly what prices will be when market orders are executed, they may issue limit or stop orders that are to be executed only if prices rise to or fall below specified levels. Rounds lots are purchased in multiples of 100 shares. Odd lots are purchases in fractions of round lots. Securities can be bought on margin or as part of short sales — sales in which investors sell securities that are borrowed from brokers and returned at a later date. 448) What is the purpose of the various provincial securities commissions? What are some of the difficulties these agencies encounter as they try to protect investors? Answer: • three areas: • blue-sky laws: laws that regulate how corporations back up securities • prospectus: requirement for a detailed registration statement about a new stock • insider trading: prohibition of the use of special knowledge about a firm to make a profit on the stock market Test Bank for Business Essentials Ronald J. Ebert, Ricky W. Griffin, Frederick A. Starke, George Dracopoulos 9780132479769, 9780134384733