CHAPTER 2 - Chapter 2 Exercise: . Key terms 1. Asset...

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Chapter 2 Exercise: . Key terms 1. Asset transformation 2. Adverse selection 3. Asymmetric information 4. Brokers 5. Capital market 6. Dealers 7. Diversification 8. Dividends 9. Economies of scale .Multiple choice: 1. Financial markets improve economic welfare because a. they allow funds to move from those without productive investment opportunities to those who have such opportunities. b. they allow consumers to time their purchase better. c. they weed out inefficient firms. d. they do each of the above. e. they do (a) and (b) of the above. 2. Which of the following can be described as direct finance? a. You take out a mortgage from your local bank. b. You borrow $2500 from a friend. c. A pension fund lends money to General Motors. d. You buy shares in a mutual fund. e. None of the above. 3. Assume that you borrow $2000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is a. $400. b. $201. c. $200. d. $199. e. $101. 4. Which of the following can be described as involving direct finance? a. A corporation issues new shares of stock. b. People buy shares in a mutual fund. c. A pension fund manager buys a short-term corporate security in the secondary market. d. An insurance company buys shares of common stock in the over-the- counter markets. 5. Which of the following can be described as involving direct finance? a. A corporation takes out loans from a bank. b. People buy shares in a mutual fund. c. A corporation buys a short-term corporate security in a secondary market. d. An insurance company buys shares of common stock in the primary markets. 6. Which of the following can be described as involving indirect finance? a. A corporation takes out loans from a bank.
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b. People buy shares in a mutual fund. c. A corporation buys a short-term security issued by another corporation. d. Both (a) and (b) of the above. 7. Which of the following can be described as involving indirect finance? a. A bank buys a U.S. Treasury bill from one of its depositors. b. A corporation buys a short-term security issued by another corporation. c. A pension fund manager buys a short-term corporate security the primary market. d. Both (b) and (c) of the above. 8. Which of the following can be described as involving indirect finance? a. People buy shares in a mutual fund. b. A pension fund manager buys a short-term corporate security in the secondary market. c. A corporation’s stock is issued in an over-the-counter market. d. All of the above. e. Only (a) and (b) of the above. 9. Which of the following statements about the characteristics of debt and equity are true? a. They can both be long-term financial instruments. b. They can both be short-term financial instruments.
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CHAPTER 2 - Chapter 2 Exercise: . Key terms 1. Asset...

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