Financial Management: Core Concepts, 4e (Brooks)
Chapter 1 Financial Management
1.1 The Cycle of Money
1) At its most basic level, the function of financial intermediaries is to ________.
A) track and report interest rates
B) move money from lenders to borrowers and back again
C) report all financial transactions to the federal government
D) effect a transfer of wealth in society
Answer: B
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
2) Which of the following is NOT an example of a financial transaction?
A) Your parents use their credit card to pay for your current term's college tuition.
B) You use the ATM at Heathrow airport in London to withdraw British pounds.
C) Your roommate lends you $20 and you repay it in one week.
D) All of the above are financial transactions.
Answer: D
Diff: 2
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
3) The movement of money from lender to borrower and back again is known as ________.
A) the circle of life
B) corporate finance
C) the cycle of money
D) money laundering
Answer: C
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
1
Copyright © 2019 Pearson Education, Inc.
,4) The common objective of borrowing and lending is to ________.
A) make all parties better off
B) gain a profit at the other's expense
C) make a firm or individual appear more liquid than is really the case
D) thwart regulatory authority
Answer: A
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
5) Which of the following is NOT a function of a financial intermediary in the
lending/borrowing process?
A) To help establish terms of the lending/borrowing agreement
B) To match the borrower and the lender
C) To bear the risk that the lender will not repay
D) To bear the risk that the borrower will not repay
Answer: C
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
6) Professor Gaston, your History teacher, borrows money at a rate of 6% per year from the
Valley State Bank for a tuition loan for her son. You have $1,200 deposited into your checking
account at the same bank earning a rate of 0.5% per year. Which of the following statements is
TRUE?
A) The bank is criminally liable to you for paying an interest rate lower than the expected rate of
inflation.
B) You and your professor have an obvious conflict of interest because you have accounts at the
same financial institution.
C) You benefit from earning interest on your deposit, safety for your funds, and having a
recognizable means for paying for your financial obligations without having to hold cash.
D) Your professor is the only party to be made worse off by this example because she is the only
party paying net interest.
Answer: C
Explanation: Both you and your professor are using services typically provided by banks. There
is no conflict of interest.
Diff: 2
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
2
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,7) The basic function of financial intermediaries is to move advice from lenders to borrowers and
back to lenders.
Answer: FALSE
Explanation: The basic function of financial intermediaries is to move MONEY from lenders to
borrowers and back to lenders.
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
8) In the lending/borrowing process, a financial intermediary function is to bear the risk that the
borrower will not repay.
Answer: TRUE
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
9) All financial transactions have a buyer and a seller.
Answer: TRUE
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
10) Give three examples of a financial transaction.
Answer: (1) Your parents use their credit card to pay some of your college expenses.
(2) You use the ATM to withdraw funds so you can buy your best friend a birthday gift.
(3) Your roommate lends you $20 and you repay it when you get your next pay check.
Diff: 2
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
3
Copyright © 2019 Pearson Education, Inc.
, 1.2 Overview of Finance Areas
1) Which of the following best identifies the four main areas of finance?
A) Exchange rate management, investments, financial institutions and markets, international
finance
B) Corporate finance, investments, capital structure, international finance
C) Corporate finance, investments, financial institutions and markets, international finance
D) Corporate finance, capital budgeting, financial institutions and markets, regulation
Answer: C
Explanation: Exchange rate management, capital structure, and capital budgeting are activities
within the functional areas of finance.
Diff: 2
Topic: 1.2 Overview of Finance Areas
AACSB: Analytical Thinking
LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities
that each encompasses.
2) Of the following, which is NOT one of the four main areas of finance?
A) International finance
B) Corporate finance
C) Investments
D) Working capital management
Answer: D
Explanation: WCM is a primary function of corporate finance.
Diff: 1
Topic: 1.2 Overview of Finance Areas
AACSB: Analytical Thinking
LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities
that each encompasses.
3) The set of financial activities that support the OPERATIONS of a business is best described
by which main area of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance
Answer: A
Diff: 1
Topic: 1.2 Overview of Finance Areas
AACSB: Analytical Thinking
LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities
that each encompasses.
4
Copyright © 2019 Pearson Education, Inc.
Chapter 1 Financial Management
1.1 The Cycle of Money
1) At its most basic level, the function of financial intermediaries is to ________.
A) track and report interest rates
B) move money from lenders to borrowers and back again
C) report all financial transactions to the federal government
D) effect a transfer of wealth in society
Answer: B
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
2) Which of the following is NOT an example of a financial transaction?
A) Your parents use their credit card to pay for your current term's college tuition.
B) You use the ATM at Heathrow airport in London to withdraw British pounds.
C) Your roommate lends you $20 and you repay it in one week.
D) All of the above are financial transactions.
Answer: D
Diff: 2
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
3) The movement of money from lender to borrower and back again is known as ________.
A) the circle of life
B) corporate finance
C) the cycle of money
D) money laundering
Answer: C
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
1
Copyright © 2019 Pearson Education, Inc.
,4) The common objective of borrowing and lending is to ________.
A) make all parties better off
B) gain a profit at the other's expense
C) make a firm or individual appear more liquid than is really the case
D) thwart regulatory authority
Answer: A
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
5) Which of the following is NOT a function of a financial intermediary in the
lending/borrowing process?
A) To help establish terms of the lending/borrowing agreement
B) To match the borrower and the lender
C) To bear the risk that the lender will not repay
D) To bear the risk that the borrower will not repay
Answer: C
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
6) Professor Gaston, your History teacher, borrows money at a rate of 6% per year from the
Valley State Bank for a tuition loan for her son. You have $1,200 deposited into your checking
account at the same bank earning a rate of 0.5% per year. Which of the following statements is
TRUE?
A) The bank is criminally liable to you for paying an interest rate lower than the expected rate of
inflation.
B) You and your professor have an obvious conflict of interest because you have accounts at the
same financial institution.
C) You benefit from earning interest on your deposit, safety for your funds, and having a
recognizable means for paying for your financial obligations without having to hold cash.
D) Your professor is the only party to be made worse off by this example because she is the only
party paying net interest.
Answer: C
Explanation: Both you and your professor are using services typically provided by banks. There
is no conflict of interest.
Diff: 2
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
2
Copyright © 2019 Pearson Education, Inc.
,7) The basic function of financial intermediaries is to move advice from lenders to borrowers and
back to lenders.
Answer: FALSE
Explanation: The basic function of financial intermediaries is to move MONEY from lenders to
borrowers and back to lenders.
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
8) In the lending/borrowing process, a financial intermediary function is to bear the risk that the
borrower will not repay.
Answer: TRUE
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
9) All financial transactions have a buyer and a seller.
Answer: TRUE
Diff: 1
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
10) Give three examples of a financial transaction.
Answer: (1) Your parents use their credit card to pay some of your college expenses.
(2) You use the ATM to withdraw funds so you can buy your best friend a birthday gift.
(3) Your roommate lends you $20 and you repay it when you get your next pay check.
Diff: 2
Topic: 1.1 The Cycle of Money
AACSB: Analytical Thinking
LO: 1.1 Describe the cycle of money, the participants in the cycle, and the common objective of
borrowing and lending.
3
Copyright © 2019 Pearson Education, Inc.
, 1.2 Overview of Finance Areas
1) Which of the following best identifies the four main areas of finance?
A) Exchange rate management, investments, financial institutions and markets, international
finance
B) Corporate finance, investments, capital structure, international finance
C) Corporate finance, investments, financial institutions and markets, international finance
D) Corporate finance, capital budgeting, financial institutions and markets, regulation
Answer: C
Explanation: Exchange rate management, capital structure, and capital budgeting are activities
within the functional areas of finance.
Diff: 2
Topic: 1.2 Overview of Finance Areas
AACSB: Analytical Thinking
LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities
that each encompasses.
2) Of the following, which is NOT one of the four main areas of finance?
A) International finance
B) Corporate finance
C) Investments
D) Working capital management
Answer: D
Explanation: WCM is a primary function of corporate finance.
Diff: 1
Topic: 1.2 Overview of Finance Areas
AACSB: Analytical Thinking
LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities
that each encompasses.
3) The set of financial activities that support the OPERATIONS of a business is best described
by which main area of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance
Answer: A
Diff: 1
Topic: 1.2 Overview of Finance Areas
AACSB: Analytical Thinking
LO: 1.2 Distinguish the four main areas of finance and briefly explain the financial activities
that each encompasses.
4
Copyright © 2019 Pearson Education, Inc.
