Capital Markets Overview
40 Questions
42 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary goal of financial managers in relation to the stock market?

  • To ensure the reliability of stock market information
  • To minimize operating costs
  • To increase the number of shares issued
  • To maximize their firms' stock prices (correct)

    • Which of the following describes a physical location stock exchange?

  • A venue conducting auction markets for listed securities (correct)
  • A network of brokers trading electronically
  • A system allowing for trading in unlisted securities
  • A platform offering real-time stock price information

    • What type of market consists of brokers and dealers connected electronically for trading unlisted securities?

  • Physical Location Exchange
  • Over-The-Counter (OTC) Market (correct)
  • Market Maker System
  • Exchange Market

    • Which of the following is NOT a component of the dealer market system?

    <p>Auction markets for listed securities</p> Signup and view all the answers

    Why is knowledge of the stock market important for anyone managing a business?

    <p>To optimize the company's stock price</p> Signup and view all the answers

    Which statement about physical location stock exchanges is true?

    <p>They occupy tangible buildings with structured trading activities.</p> Signup and view all the answers

    Which of the following options correctly defines the role of brokers in the dealer market system?

    <p>They act as agents to connect dealers with investors.</p> Signup and view all the answers

    For the most updated information in finance, what should one rely on?

    <p>Official sources and relevant publications</p> Signup and view all the answers

    What primarily influences the changes in the real risk-free rate over time?

    <p>Expected returns on productive assets and time preferences for consumption</p> Signup and view all the answers

    Which of the following correctly defines the nominal risk-free rate of interest, rRF?

    <p>The interest rate on a risk-free security including the inflation premium</p> Signup and view all the answers

    What does the liquidity premium (LP) reflect in the context of debt securities?

    <p>The speed at which an asset can be converted to cash</p> Signup and view all the answers

    Which component is specifically added to the real risk-free rate to account for expected inflation?

    <p>Inflation premium (IP)</p> Signup and view all the answers

    How does an increased risk of default affect the market interest rate on a bond?

    <p>It raises the market interest rate the higher the risk of default</p> Signup and view all the answers

    Which of the following best describes a 'liquid' asset?

    <p>An asset that can be quickly converted to cash at fair market value</p> Signup and view all the answers

    What is the definition of the nominal risk-free rate when referred to without any modifiers?

    <p>The quoted (or nominal) rate that includes an inflation premium</p> Signup and view all the answers

    Which factor does NOT affect the market interest rate on bonds?

    <p>Stock market performance</p> Signup and view all the answers

    What is a key difference in how losses are deducted between corporations and sole proprietors?

    <p>Corporations can deduct losses without evidence of profit intent.</p> Signup and view all the answers

    What is the federal corporate tax rate in the U.S.?

    <p>21%</p> Signup and view all the answers

    How do tax credits differ from deductions?

    <p>Tax credits lower the overall tax obligation.</p> Signup and view all the answers

    What typically influences the percentage of income that is taxed for individuals?

    <p>How much the individual earns and their filing status.</p> Signup and view all the answers

    What does tax planning involve?

    <p>Analyzing financial situations to minimize taxes.</p> Signup and view all the answers

    Which statement best describes the U.S. income tax system?

    <p>It is progressive, where higher earners pay a higher percentage.</p> Signup and view all the answers

    What allows corporations to potentially avoid higher tax obligations?

    <p>Utilizing deductions and loopholes.</p> Signup and view all the answers

    Which of the following best explains adjusted gross income (AGI)?

    <p>Total income less eligible deductions.</p> Signup and view all the answers

    What does a positive cash margin indicate about a company?

    <p>It reflects the ability to convert sales to cash.</p> Signup and view all the answers

    What is a limitation of cash flow analysis?

    <p>It does not include non-cash items.</p> Signup and view all the answers

    Which accounting method reports revenue when it is earned rather than when cash is received?

    <p>Accrual accounting</p> Signup and view all the answers

    In cash accounting, what determines when revenues and expenses are recorded?

    <p>When cash is received or paid.</p> Signup and view all the answers

    Why might investors find cash flow data insufficient on its own?

    <p>It does not provide a forecast of future cash flow.</p> Signup and view all the answers

    What happens when a company records a sale under accrual accounting?

    <p>Revenue is recognized even if payment is delayed.</p> Signup and view all the answers

    What is a key characteristic of cash accounting compared to accrual accounting?

    <p>It focuses on cash transactions exclusively.</p> Signup and view all the answers

    What may prevent net income from accurately reflecting a company's financial health under accrual accounting?

    <p>It includes non-cash accounting adjustments.</p> Signup and view all the answers

    What primary purpose did banks serve at their inception?

    <p>Offering security for individuals' money</p> Signup and view all the answers

    Which of the following is a way banks act as payment agents?

    <p>Arranging wire transfers</p> Signup and view all the answers

    Why is maturity transformation important in banking?

    <p>It enables banks to borrow short-term and lend long-term</p> Signup and view all the answers

    How do banks contribute to the settlement of payments?

    <p>By ensuring proper account crediting and debiting</p> Signup and view all the answers

    What role do banks play in credit intermediation?

    <p>They collect deposits to lend money to other borrowers</p> Signup and view all the answers

    What type of financial instrument do banks use to underwrite transactions?

    <p>Pay orders</p> Signup and view all the answers

    What is one benefit of using debit cards issued by banks?

    <p>They facilitate immediate and convenient transactions</p> Signup and view all the answers

    What is a common misconception about the role of banks in financial transactions?

    <p>Banks provide security but do not influence transactions</p> Signup and view all the answers

    Study Notes

    ### Capital Markets

    • Stock Markets: Determine the prices of firms' stocks.
      • Physical Location Stock Exchanges: Formal organizations with physical locations for trading designated securities.
        • Occupy buildings, allow limited traders on their floor, and have elected governing bodies.
      • Over-the-Counter (OTC): A collection of brokers and dealers connected electronically, trading in unlisted securities.
        • Dealer Markets: Facilitate security transactions outside of physical exchanges.
          • Dealers: Hold security inventories, making a market.
          • Brokers: Act as agents between dealers and investors.
          • Computers: Provide communication links between dealers and brokers.

    Risk-Free Rate

    • Real Risk-Free Rate: Changes over time based on economic conditions, particularly:
      • Corporate Expected Returns: Returns corporations expect on assets.
      • Time Preferences: People’s preferences for present consumption over future consumption.
    • Nominal Risk-Free Rate: The rate on a security free of all risk, proxied by T-bill or T-bond rates. Includes an inflation premium.

    Interest Rate Premiums

    • Inflation Premium (IP): Added to the real risk-free rate to account for expected inflation.
    • Default Risk Premium (DRP): Added based on the risk of a borrower defaulting on interest or principal payments.
    • Liquidity Premium (LP): Added to the rate on less liquid assets, accounting for the time and cost of converting an asset to cash.

    Corporate Taxation

    • Corporate Tax: A flat rate tax (21% in the US) levied on profits.
      • Income: Revenue minus expenses.
      • State Taxes: Some states also impose corporate taxes.
    • Tax Optimization: Companies seek to lower their tax obligations through:
      • Deductions
      • Loopholes
      • Subsidies
      • Other practices

    Individual Income Taxation

    • Individual Income Tax (Personal Income Tax): Tax levied on wages, salaries, and other income sources.
      • State Tax: Typically a state tax.
      • Exemptions, Deductions, and Credits: Reduce taxable income or tax liability.
    • Progressive Income Tax System: Higher earners pay a higher percentage of their income in taxes.

    Cash Flow Analysis

    • Cash Flow Statement: Presents past cash flow data, useful but not the whole story.
      • Limitations:
        • Doesn't present net income, as it excludes non-cash items.
        • Only shows cash available at the end of a period.
    • Accounting Methods:
      • Accrual Accounting: Reports revenue when it is earned, even if cash is not received yet. Reports expenses when incurred, even without payment.
      • Cash Accounting: Records revenue when cash is received and expenses when cash is paid out.

    Role of Banks

    • Security and Convenience: Banks provide a safe place for money and facilitate transactions.
      • Vaults and Safe Deposit Boxes: Banks offer storage and rent out safe deposit boxes.
    • Payment Agents: Banks help settle domestic and international payments.
      • Debit Cards: Allow account holders to make purchases electronically.
      • Wire Transfers: Facilitates money transfers.
    • Role in the Economy:
      • Settlement of Payments: Banks process millions of payments daily, both cash and electronic.
      • Credit Intermediation: Banks collect deposits and lend to borrowers, creating a chain of debts.
      • Maturity Transformation: Borrow funds on a short-term basis (deposits) and lend for longer terms (loans), making a profit on the rate difference.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    CFMS Coverage Topic & Reviewer PDF

    Description

    This quiz covers key concepts related to capital markets, focusing on stock markets and different trading platforms like physical stock exchanges and over-the-counter markets. It also discusses the real risk-free rate and its factors such as corporate expected returns and time preferences. Test your understanding of these vital financial topics.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser