Chapter 16 Understanding Financial Management and Securities Markets

Question 1

Questions

Answer 1

Answers

Question 2

The art and science of managing a firm’s money so that it can meet its goals is called __________.

Answer 2

financial management

Question 3

The inflow and outflow of cash for a firm are called ___________.

Answer 3

cash flows

Question 4

A(n) ___________ is an opportunity for profit.

Answer 4

return

Question 5

The potential for loss or the chance that an investment will not achieve the expected level of return is called ______________.

Answer 5

risk

Question 6

The ____________________ is a basic principle in finance that holds that the higher the risk, the greater the return that is required.

Answer 6

risk-return trade-off

Question 7

____________ is the process of making sure that a firm has enough cash on hand to pay bills as they come due and to meet unexpected expenses.

Answer 7

cash management

Question 8

___________________ are short-term investments that are easily converted into cash.

Answer 8

marketable securities

Question 9

Unsecured short-term debt, an IOU, issued by a financially strong corporation is ______________.

Answer 9

commercial paper

Question 10

Sales for which a firm has not yet been paid are _____________.

Answer 10

accounts receivable

Question 11

Investments in long-lived assets, such as land, buildings, machinery, equipment, and information services, that are expected to provide benefits over a period longer than one year are ___________.

Answer 11

capital expenditures

Question 12

The process of analyzing long-term projects and selecting those that offer the best returns while maximizing the firm’s value is called _______________.

Answer 12

capital budgeting

Question 13

Borrowers does not have to pledge specific assets as security for ____________ loans.

Answer 13

unsecured loans

Question 14

The extension of credit by the seller to the buyer between the time the buyer receives the goods or services and when it pays for them is called __________________.

Answer 14

trade credit

Question 15

Purchases for which a buyer has not yet paid the seller are ____________.

Answer 15

accounts payable

Question 16

An agreement between a bank and a business that specifies the maximum amount of unsecured short-term borrowing the bank will allow the firm over a given period, typically one year, is a(n) _______________.

Answer 16

line of credit

Question 17

A guaranteed line of credit whereby a bank agrees that a certain amount of funds will be available for a business to borrow over a given period, typically two to five years, is a(n) _______________.

Answer 17

revolving credit agreement

Question 18

Loans for which the borrower is required to pledge specific assets as collateral or security are ________________.

Answer 18

secured loans

Question 19

___________ is a form of short-term financing in which a firm sells its accounts receivable outright at a discount to a factor.

Answer 19

factoring

Question 20

______________ is the chance that a firm will be unable to make scheduled interest and principal payments on its debt.

Answer 20

financial risk

Question 21

An unsecured or secured business loan with a maturity of more than one year is called a(n) ___________.

Answer 21

term loan

Question 22

_________ are Long-term debt obligations (liabilities) issued by corporations and governments.

Answer 22

bonds

Question 23

A fixed amount of money paid by the issuer of a bond to the bondholder on a regular schedule, typically every six months is called ___________ and stated as the coupon rate.

Answer 23

interest

Question 24

The par value, or ______________, is the amount borrowed by the issuer of a bond.

Answer 24

principal

Question 25

A long-term loan made against real estate as collateral is a(n) ____________________.

Answer 25

mortgage loan

Question 26

____________ is a security that represents an ownership interest in a corporation.

Answer 26

common stock

Question 27

Payments to stockholders from a corporation’s profits are _________.

Answer 27

dividends

Question 28

Payments to stockholders in the form of more stock are called ______________. They may replace or supplement cash dividends.

Answer 28

stock dividends

Question 29

Profits that have been reinvested in a firm are _____________________.

Answer 29

retained earnings

Question 30

______________ is an equity security for which the dividend amount is set at the time the stock is issued and the dividend must be paid before the company can pay dividends to common stockholders.

Answer 30

preferred stock

Question 31

______________ are investment certificates issued by corporations or governments that represent either equity or debt.

Answer 31

securities

Question 32

Investment professionals who are paid to manage other people’s money are called ____________.

Answer 32

institutional investors

Question 33

The securities market where new securities are sold to the public is the ____________ market.

Answer 33

primary market

Question 34

The ________________ is a securities market where old (already issued) securities are bought and sold, or traded, among investors. It includes broker markets, dealer markets, the over-the-counter market, and the commodities exchanges.

Answer 34

secondary market

Question 35

Firms that act as intermediaries, buying securities from corporations and governments and reselling them to the public are called _________________.

Answer 35

investment bankers

Question 36

______________ is the process of buying securities from corporations and governments and reselling them to the public. This is the main activity of investment bankers.

Answer 36

underwriting

Question 37

A(n) ___________________ is a person who is licensed to buy and sell securities on behalf of clients.

Answer 37

stockbroker

Question 38

Bonds issued by states, cities, counties, and other state and local government agencies are called __________________.

Answer 38

municipal bonds

Question 39

____________ are letter grades assigned to bond issues to indicate their quality or level of risk They are assigned by rating agencies such as Moody’s and Standard & Poor’s (S&P).

Answer 39

bond ratings

Question 40

A financial-service company that pools investors’ funds to buy a selection of securities that meet its stated investment goals is a(n) ____________________.

Answer 40

mutual fund

Question 41

A security similar to a mutual fund is a(n) _____________. It holds a broad basket of stocks with a common theme but trades on a stock exchange so that its price changes throughout the day.

Answer 41

exchange traded fund (ETF)

Question 42

______________ are legally binding obligations to buy or sell specified quantities of commodities or financial instruments at an agreed-on price at a future date.

Answer 42

futures contracts

Question 43

Contracts that entitle holders to buy or sell specified quantities of common stocks or other financial instruments at a set price during a specified time are called __________.

Answer 43

options

Question 44

National and regional securities exchanges that bring buyers and sellers together through brokers on a centralized trading floor are called _________________.

Answer 44

broker markets

Question 45

Securities markets where buy and sell orders are executed through dealers, or “market makers,” linked by telecommunications networks are called ________.

Answer 45

dealer markets

Question 46

The __________________________ is the first and largest electronic stock market, which is a sophisticated telecommunications network that links dealers throughout the United States.

Answer 46

National Association of Securities Dealers Automated Quotation (NASDAQ) system

Question 47

Markets, other than the exchanges, on which small companies trade are called ___________ and includes the Over-the-Counter Bulletin Board (OTCBB) and the Pink Sheets.

Answer 47

over-the-counter (OTC) markets

Question 48

Private trading networks that allow institutional traders and some individuals to make direct transactions in the fourth market are _________________________.

Answer 48

electronic communications networks (ECNs)

Question 49

______________ is the use of information that is not available to the general public to make profits on securities transactions.

Answer 49

insider trading

Question 50

Corrective measures that, under certain conditions, stop trading in the securities markets for a short cooling-off period to limit the amount the market can drop in one day are called ____________.

Answer 50

circuit breakers