Chapter 2

Question 2

What is one of the central duties of a financial manager?

Answer 2

To acquire capital—that is to raise funds.

Question 3

What are economic units in the U.S. economy?

Answer 3

Individuals or entities that generate and spend money, including governments, businesses, and households.

Question 4

What is a Surplus Economic Unit?

Answer 4

An entity that generates more funds than it expends.

Question 5

What is a Deficit Economic Unit?

Answer 5

An entity that generates less funds than it expends.

Question 6

What are securities?

Answer 6

Documents that represent the right to receive funds in the future.

Question 7

Who is the bearer of a security?

Answer 7

The holder of the security.

Question 8

What is a maturity date?

Answer 8

The date when the bearer of a security is to be paid the principal or face value of the security.

Question 9

What are financial intermediaries?

Answer 9

Institutions that take in funds from surplus economic units and make those available to deficit economic units.

Question 10

What are the three types of financial intermediaries?

Answer 10

Brokers, Investment Bankers, and Dealers.

Question 11

What is the role of investment banking firms?

Answer 11

They help issuers sell their securities and provide other financial services.

Question 12

What is underwriting?

Answer 12

The process by which investment banking firms purchase a new security issue in its entirety and resell it to investors.

Question 13

What is a broker?

Answer 13

A person who brings buyers and sellers together, often acting as an account representative for an investment banking firm.

Question 14

What is a dealer?

Answer 14

A person who makes a living buying and selling assets.

Question 15

What are financial markets?

Answer 15

Exchanges or over-the-counter mechanisms where securities are traded.

Question 16

What is the primary market?

Answer 16

The market where deficit economic units sell directly to surplus economic units and financial institutions.

Question 17

What is the secondary market?

Answer 17

The market where investors trade previously issued securities among themselves.

Question 18

What is the money market?

Answer 18

Where short-term securities are traded.

Question 19

What is the capital market?

Answer 19

Where long-term securities are traded.

Question 20

What are security exchanges?

Answer 20

Facilitators of trading stocks and bonds among investors.

Question 21

What is the over-the-counter market?

Answer 21

A network of dealers who purchase securities and maintain inventories for sale.

Question 22

What is market efficiency?

Answer 22

The relative ease, speed, and cost of trading securities.

Question 23

What are money market securities?

Answer 23

Very liquid securities that mature quickly and have a low degree of risk.

Question 24

What are Treasury Bills?

Answer 24

Securities issued by the federal government in minimum denominations of $100 with maturities of 4, 13, 26, and 52 weeks.

Question 25

What are negotiable certificates of deposits?

Answer 25

Deposit securities issued by financial institutions that can be traded in the money market.

Question 26

What is commercial paper?

Answer 26

A short-term, unsecured debt instrument issued by a large corporation.

Question 27

What are banker’s acceptances?

Answer 27

Securities that represent a promise by a bank to pay a certain amount of money if the original note maker doesn’t pay.

Question 28

What are bonds?

Answer 28

Securities that promise to pay the bearer a certain amount at a future time and may pay interest at regular intervals.

Question 29

What are the major types of bonds?

Answer 29

Treasury Bonds, Municipal Bonds, and Corporate Bonds.

Question 30

What is stock?

Answer 30

Certificates of ownership interest in a corporation.

Question 31

What are dividends?

Answer 31

Payments made to stockholders at the discretion of the board of directors.

Question 32

What are capital gains?

Answer 32

The profit made when an asset is sold at a price higher than the price paid at the time of purchase.

Question 33

What is the nominal interest rate?

Answer 33

The rate observed in the financial marketplace that includes the real rate of interest and various premiums.

Question 34

What is the real rate of interest?

Answer 34

The rate that compensates lenders for postponing consumption.

Question 35

What is the inflation premium?

Answer 35

The extra interest that compensates lenders for the expected erosion of purchasing power due to inflation.

Question 36

What is the default risk premium?

Answer 36

The extra interest lenders demand to compensate for the risk that promised payments may be made late or not at all.

Question 37

What is the yield curve?

Answer 37

A graphical depiction of interest rates on securities that differ only in the time remaining until their maturity.