FINANCE 409 EXAM 1 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026

FINANCE 409 EXAM 1 QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026 What are the three areas of Finance? - Answers Institutions and Markets, Investments, Financial Management The financial system, financial markets, financial institutions or intermediaries, business firms, individuals, government and global interaction all make up what? - Answers The Financial Environment Physical locations or electronic - Answers Financial Markets What handles the transfer of funds from savers to investors and individuals, businesses, and governments? - Answers Financial Institutions/Intermediaries What handles the sale of securities, analysis of securities, and management of investment risks? - Answers Investments What handles financial planning, asset management, and fund-raising decisions designed to increase the value of the business? - Answers Financial Management What are the six principles of finance? - Answers Time Value of Money, Risk vs. Return, Diversification of Risk, Efficient Markets, Management vs. Owner, and Reputation Why does higher risk have a higher return? - Answers Because since people are risk averse they require a high rate of return on a high risk investment When are markets said to be "information efficient?" - Answers when the prices of securities reflect all information available to the public What is the study of how individuals, institutions, and businesses acquire, spend and manage money and other financial resources. - Answers Finance What provides the mechanism for allocating financial resources or funds from savers to borrowers? - Answers Financial Markets The goal of a financial manager in a profit-seeking organization should be to... - Answers maximize the owner's wealth The _____ securities markets are involved in creating and issuing new securities, mortgages, and other claims to wealth. - Answers Primary _____ markets are the markets where debt securities with maturities of one year or less are issued and traded. - Answers Money _____ finance is the study of how growth-driven performance-focused, early-stage firms raise financial capital and manage operations and assets. - Answers Entrepreneurship What type of markets are markets where debt securities with maturities of greater than on year and equity securities are issues and traded (stocks never mature)? - Answers Capital ______ markets are markets where equity securities and debt securities with maturities of greater than on year are traded. - Answers Capital The principle of finance that states that "money has a time value" implies that money in hand today is worth ______ than the promise of receiving the same amount in the future. - Answers more (money in hand today could be invested and grow over time) The principle that "financial markets are efficient" implies that the prices of securities reflect _______ of the information available to the public. - Answers all The principle of finance that "management objectives may differ from owner objectives" can be resolved by increasing manager salaries. True or False? - Answers False (tie manager pay to measures of performance, and they will perform better for the owner) ________ is primarily responsible for the amount of money that is created in the U.S. economy. - Answers The Federal Reserve System The functions of _______________ include accumulating savings and lending funds. - Answers financial institutions The three financial system components are.... - Answers monetary system, financial institutions, and financial markets _______ securities may be used to speculate on the future price direction of the underlying financial assets or to reduce price risk associated with holding the underlying financial assets. - Answers Derivative Because the relative values of currencies may change, firms cannot use the currency exchange markets to reduce the risk of holding too much of certain currencies. True or False - Answers False ____ finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth. - Answers Personal The role of financial institutions in a country's financial system is to accumulate and invest savings. T/F - Answers True The role of financial markets in a country's financial system is to accumulate and invest savings. - Answers False (not markets) The primary goal of the financial manager of a profit seeking organization should be to... - Answers maximize the owners wealth Finance has its origins in.... - Answers accounting and economics Crucial elements of the three areas of finance include: - Answers financial institutions, financial markets, and investments and financial management An area of finance that involves the sale or marketing of securities, the analysis of securities, and the management of investment risk through portfolio diversification is referred to as ..... - Answers investments The issuing of new securities, mortgages, and other claims to wealth takes place in the - Answers Primary Market An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments is called: - Answers financial market An area of finance that involves financial planning, asset management and fund-raising decisions to enhance the value of business is called... - Answers financial management An area of finance that involves the study of organizations or intermediaries that help the financial system operate effectively and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds in physical assets is called: - Answers Financial Institutions An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called: - Answers not an area of finance The ____ is a term used to describe the financial system, institutions, markets, businesses, individuals, and global interactions that help the economy operate efficiently - Answers Financial Environment What are the markets where financial assets such as stocks and bonds are initially issued? - Answers Primary Securities Markets _____ provide the record-keeping mechanism for showing ownership of the financial instruments used in the flow of financial funds between savers and borrowers and record revenues, expenses, and profitability of organizations that produce and exchange goods and services. - Answers Accountants ____ are intermediaries, such as banks, insurance companies, and investment companies that engage in financial activities to aid the flow of funds from savers to borrowers or investors. - Answers Financial Institutions _____ in business involves making decisions relating to the efficient use of financial resources in the production and sale of goods and services. - Answers Financial Management Maximizing ______ is accomplished through effective financial planning and analysis, asset management, and the acquisition of financial capital. - Answers the owners wealth Successful businesses typically progress through a series of life cycle stages, from the idea stage to exiting the business, these five stages include the : - Answers development, startup, survival, rapid growth, and maturity stage Reasons we study finance include all of the following except: - Answers to make informed medical decisions 1,000 invested today at 6% interest would be worth _____ on year from now. - Answers 1060 If the interest rate is equal to 0%, then a dollar today is worth... - Answers the same as a dollar tomorrow A basic requirement for an effective financial system is a monetary system that performs which of the following financial functions: - Answers formation and transferring of money Rational investors would consider an investment in a risky business venture only if they feel the expected return is high enough to justify.... - Answers the greater risk Two risky assets can be combined to lower overall risk. This principle is commonly referred to as.... - Answers diversification In the United States, most money is created by..... - Answers depository institutions Basic requirements of an effective financial system include what three tasks? - Answers creating money, transferring money, accumulating savings The theory of ____ implies that information is quickly embedded in prices making it difficult for investors to "beat the market." - Answers efficient markets The basic requirements for an effective financial system in a developed economy include what three things? - Answers a monetary system, a savings-investment process, and markets for the transfer of financial assets The possible conflict between managers and owners is sometimes called the... - Answers principal-agent problem _____ behavior refers to how an individual or organization treats others legally, fairly, and honestly. - Answers Ethical Career opportunities in finance involving both treasury and control functions are generally associated with: - Answers business financial management Intermediaries that help the financial system operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that seek to spend or invest the funds are known as.... - Answers financial institutions An economy's _______ is the interaction of policy makers, a monetary system, financial institutions, and financial markets to expedite the flow of financial capital from savings into investment. - Answers Financial System An efficient ______ that is comprised of a central bank and a banking system that is able to create and transfer a stable medium of exchange called money. - Answers monetary system Accumulating Savings is apart of the monetary system. T/F - Answers False (part of financial institutions) ___ markets are where debt securities with maturities of one year or less are issued and traded. - Answers Money ______ markets are where debt instruments or securities with maturities longer than on year and corporate stocks or equity are issued and traded. - Answers Capital ______ markets are where the initial offering or origination of debt and equity securities takes place. - Answers Primary _____ markets are physical locations or electronic forums where debt (bonds and mortgages) and equity securities are traded. - Answers Secondary The two basic components of the US money supply (M1) are physical money and demand deposits. T/F - Answers True What type of money consists of paper money fully backed by a precious metal? - Answers Representative full bodied Fiat money must be backed by a specific amount of gold or silver. t/f - Answers False Demand deposits are issued by commercial banks and savings banks. T/F - Answers True Our monetary standard today is the paper dollar, issued by the Federal Reserve, and can be exchanged for gold or silver. T/F - Answers False (we use fiat money) Almost all of the paper money in use in the US today is fiat money. T/F - Answers True No other asset is as liquid as money. T/F - Answers True Fiat money is legal tender proclaimed to be money by law. T/F - Answers True Physical money includes coin and currency. T/F - Answers True "Continentals" were denominated in dollars and were backed by gold. T/F - Answers False (continentals had no backed by gold or silver) The use of "continentals" led to a long period of distrust of paper money. T/F - Answers True The faster the velocity of money, the greater the economy's GDP. True/False - Answers True Fiat money is a form of credit money. T/F - Answers True T/F: Deposit money is backed by the creditworthiness of the depository institution that issued the deposit. - Answers True Fiat money is paper money fully backed by a precious metal such as gold. T/F - Answers False Keynesians believe that when the supply of money exceeds the quantity demanded, the public will spend more, rapidly causing inflation. T/F - Answers False (Monetarists believe this) Keynesians believe that a change in the money supply first causes a change in interest rate levels, which, in turn, alters the demand for goods and services. - Answers True A bimetallic standard is a monetary standard based on two metals, usually silver and gold. T/F - Answers True Full bodied money is monetary standard based on two metals, usually silver and gold. - Answers False (bimetallic standard) Representative full-bodied money is paper money fully backed by a precious metal such as gold. T/F - Answers True With a mint ratio of 15 ounces of silver to 1 ounce of gold, and a market ratio of 15.5 ounces of silver to 1 ounce of gold.... which money should either dominate or go out of circulation? - Answers Gold coins should go out of circulation When is it a means of paying for goods and services and discharging debts, money is referred to as a: - Answers medium of exchange Under the Bretton Woods agreement, a fixed exchange rate system tied to gold and the US dollar dominated international trade during... - Answers What are coins containing metal of less value than their stated value? - Answers Token coins What is the basic function of money? - Answers Medium of exchange The M1 definition of the money supply includes what three things? - Answers travelers checks, currency, and demand deposits What does: a) issue shares to customers b) invest in liquid instruments c) invest in interest-bearing debt instruments - Answers money market mutual funds Increased credit card usage may ___ money supply. - Answers expand are outstanding balances on credit cards or credit card limits included in the money supply? - Answers no The supply of a currency in international markets depends largely on the.... - Answers imports of the issuing country The advantages claimed for a bimetallic standard were not gained in actual practice because... - Answers one of the metals disappeared from circulation because the mint and market ratios were not the same Barter involves the exchange of - Answers goods and services When coins have an intrinsic value equal to the value of the metal they contain, they are referred to as: - Answers full bodied money Is the federal reserve a depository institution? - Answers No "Continentals" were backed by what? - Answers possible future tax revenues Today's Federal Reserve notes are backed by..... - Answers fiat money Credit money is backed by... - Answers the creditworthiness of the issuer Deposit money is backed by.... - Answers creditworthiness of the depository institution Fiat money is paper money fully backed by a precious metal or gold. T/F - Answers False What involves the transfer in individual savings to business firms in exchange for their securities? - Answers Savings-investment process All money should performs the following functions except: - Answers guarantee of validity The velocity of money measures what? - Answers the rate of circulation of the money supply An increase in the general overall prices of goods and services that is not offset by increases in the quality of those goods and services is the definition of.... - Answers inflation Paper money backed by a precious metal is called... - Answers representative full bodied money If the money supply for an economy is 3 trillion, and the velocity of money is 4.5, then GDP is: - Answers 13.5 Trillion (MSxVM) If the money supply for an economy is 3 trillion and GDP is 10 trillion, then the velocity of money is? - Answers 3.33 trillion A major factor in the severity of the financial crisis was the massive amounts of debt taken on by....... - Answers none of the above A major factor in the severity of the 07-09 financial crisis was the massive reduction in the level of debt taken on by..... - Answers financial institution Historically speaking, _____ taken as a group has/have generally been a surplus economic unit in the past. - Answers individuals _____ include the direct ownership of land, buildings or homes, equipment, inventories, durable goods, and even precious metals. - Answers real assets ____ includes money, debt instruments, equity securities, and other financial contracts that are backed by real assets and the earning abilities of issuers. - Answers financial assets _____ is anything generally accepted as a means of paying for goods and services and paying off debts. It must be easily divisible, so that exchanges can take place in small or large quantities, relatively inexpensive to store and transfer, and reasonably stable in value over time. - Answers money