Introduction to Corporate Finance 5th Canadian Edition by Laurence Booth test bank

Section Reference: The Global Financial Community
Blooms:  Knowledge
AACSB:  Analytic
CPA:  Finance
 
 
46. The spread of the financial crisis in the autumn of 2008 was NOT increased by
a) linkages between global financial markets.
b) the cross listing of firms in different markets.
c) the consolidation of the global financial system.
d) excessive debt of the government.
 
Answer: d
 
Type: Concept
Difficulty: Medium
Learning Objective: Explain the importance of the global financial system and how Canada is impacted by global events such as the recent U.S. financial crisis.
Section Reference: The Global Financial Community
Blooms:  Knowledge
AACSB:  Analytic
CPA:  Finance
 

 
PRACTICE PROBLEMS
 
 
47. How do financial intermediaries help those with “too much money today” and those with “not enough money today”?
 
Answer: Financial markets provide these surplus- and deficit-spending units with a way to improve their respective situations. Deficit-spending units do not have to postpone profitable investments today, and surplus-spending units can hold financial securities that generate a return. More importantly, financial markets provide a framework that facilitates the “meeting” of these two parties. Financial markets accelerate, simplify, and reduce the cost of contact between borrowers and lenders.
 
Type: Concept   
Difficulty: Medium
Learning Objective: Identify the basic types of financial instruments that are available and explain how they are traded.
Section Reference: Financial Instruments and Markets
Blooms:  Comprehension
AACSB:  Reflective Thinking
CPA:  Finance
 
 
48. What are the differences between the primary markets and the secondary markets?
 
Answer: The primary market is where a borrower issues new securities and exchanges these securities for cash from investors. The proceeds of the sale of securities in the primary market go to the issuing entity.
In secondary markets, investors trade previously issued securities with other investors. Securities may trade repeatedly in the secondary markets, however the original issuers will be unaffected in the sense that they will not receive any additional cash from these transactions.  The secondary markets are a key factor in the success of the primary market, for without the option or ability to be able to trade securities in the secondary market, investors would not be a quick to invest their dollars.
 
Type: Concept
Difficulty: Medium
Learning Objective: Identify the basic types of financial instruments that are available and explain how they are traded.
Section Reference: Financial Instruments and Markets
Blooms:  Comprehension
AACSB:  Reflective Thinking
CPA:  Finance
 
 
49. Why is the secondary market important?
 
Answer: The secondary market is where investors trade previously issued securities. It is important because it provides liquidity to investors. If an efficient secondary market did not exist, investors would be very reluctant to hold securities with longer maturities. If they are not willing to buy these securities, then securities in the primary market will become more difficult to sell. Hence, the secondary market is necessary for the proper functioning of the primary market.
 
Type: Definition
Difficulty: Medium
Learning Objective: Identify the basic types of financial instruments that are available and explain how they are traded.
Section Reference: Financial Instruments and Markets
Blooms:  Comprehension
AACSB:  Reflective Thinking
CPA:  Finance
 
 
50. What is an over-the-counter market? Do all bonds in Canada trade over-the-counter?
 
Answer: “Over-the-counter” means a large network of dealers make markets in both debt and equity securities. The market doesn’t have a physical location and instead consists of a network of dealers who trade with each other via telephone or computer networks. Investors can buy and sell with their brokers who then trade with other dealers.
The majority of bonds in Canada trade over-the-counter, although some bonds trade on stock exchanges such as the Toronto Stock Exchange (convertible bonds only).
 
Type: Concept   
Difficulty: Easy
Learning Objective: Identify the basic types of financial instruments that are available and explain how they are traded.
Section Reference: Financial Instruments and Markets
Blooms:  Knowledge
AACSB:  Analytic