120 Questions
What is a major reason why finance has recently become an active research area?
The availability of high-frequency transactions data.
What is one way the government influences finance?
By imposing taxes on investors and financial intermediaries.
What is the primary goal of mainstream theoretical research in finance?
To seek rational explanations for observed phenomena.
What is an example of a research question in finance?
How do companies decide how much of their profits to distribute as dividends to shareholders?
What is the purpose of empirical research in finance?
To test whether rational theories can explain observed practice.
What is an example of a financial transaction that involves the government?
Issuing government bonds.
What is the role of the Financial Services Authority?
To regulate financial intermediaries.
What is a common research goal in finance?
To value a firm's proposed investment.
What is the main difference between incorporated and unincorporated businesses?
The legal identity of the business
What is a characteristic of private limited companies?
They can only sell their shares or debentures privately
What is a disadvantage of unincorporated businesses?
They are subject to unlimited liability
What is the primary advantage of unincorporated businesses in terms of financial accounts?
They do not have to be made public
What percentage of the top 700 companies in the UK are quoted on the stock market?
80%
What is the main difference between public limited companies and private limited companies?
The ability to sell shares to the public
What is a limitation of unincorporated businesses in terms of growth?
They are limited in their ability to raise funds
What is the primary goal of shareholders in a PLC?
To gain through increases in the company's value
What is the term used to describe the liability of unincorporated businesses?
Unlimited liability
What is debt capital in a PLC?
Money borrowed by the firm in return for regular interest payments
What is the most common type of incorporated business?
Companies limited by shares
What is the relationship between debt holders and the company's assets?
Debt holders have first claim on the company's assets
What is the maximum amount shareholders can lose in a PLC?
Their initial investment
Who selects the managers of a PLC?
The Board of Directors
What is a characteristic of a PLC that distinguishes it from unincorporated businesses?
It is difficult and expensive to set up
What is a potential disadvantage of a PLC?
It is difficult and expensive to set up
Which of the following entities typically fall into the first category?
Firms
What is the term for the return promised on the sum lent?
Price of borrowing
What is the primary function of financial intermediaries in sophisticated financial systems?
To facilitate the movement of funds
What is the main purpose of the primary market function of the stock market?
To allow companies to raise new equity capital
What motivates investors to trade shares when they believe a share is underpriced or overpriced?
Information motivation
What is a characteristic of both public debt/bond markets and stock markets?
The distinction between primary and secondary markets
What is the main advantage of having a secondary market?
It provides liquidity to investors
What is the purpose of the secondary market function of the stock market?
To allow investors to buy and sell previously issued equity shares
What was the main function of jobbers in the pre-Big Bang era?
To make markets in specific stocks
What was a major concern in the stock market during the 1970s and 1980s?
Dominance of a few jobbing firms
What was the primary role of brokers in the pre-Big Bang era?
To act as agents on behalf of investors
What was the impact of fixed commission charges on the market?
Discouraged price competition and encouraged non-price competition
What was the significance of Big Bang in 1986?
A major change in the dealing system on the London Stock Exchange
What was the result of the dominance of a few jobbing firms?
Decreased competition in the market
How did jobbers operate in the pre-Big Bang era?
As principals in making markets in specific stocks
What was the significance of Big Bang II in 1997?
A further change in the dealing system on the London Stock Exchange
Why do taxation rates on dividends and shares affect share values?
Because tax rates affect after-tax returns
What perspective of finance focuses on a firm's operations?
Corporate finance perspective
What is the primary difference between corporate finance and accounting?
Accounting focuses on book value, corporate finance on market value
Which of the following is NOT a category of financial transactions?
Assets
Why do investors fall into different tax brackets?
Because of varying income levels
What is the primary difference between corporate finance and financial markets?
Corporate finance focuses on firms, financial markets on transactions
What is the relationship between taxation and share values?
Taxation affects share values due to varying tax rates
What is the primary goal of corporate finance decisions?
Maximizing shareholder value
What is the primary function of financial intermediaries, such as banks, in the financial system?
To act as a go-between or agent for individual investors and companies
What is the main difference between investing in a company's equity shares and investing in other securities, such as bonds?
The type of asset being invested in
What is the primary focus of the sub-field of finance known as market microstructure?
The way securities are traded in financial markets
What is the primary role of financial markets in the financial system?
To facilitate the flow of funds between individual investors and companies
What is the primary advantage of investing in a diversified portfolio of securities, such as stocks, bonds, and options?
Lower risk and increased stability
What is the primary role of individual investors in the financial system?
To provide capital to companies through investments
What is the primary difference between investing in a company's equity shares and investing in its debt securities, such as bonds?
The ownership stake in the company
What is the primary function of financial intermediaries, such as pension funds, in the financial system?
To manage and invest funds on behalf of individual investors
What is the primary reason why the government issues government bonds through financial markets?
To finance government expenditure
What is the key objective of mainstream theoretical research in finance?
To develop rational explanations for observed financial phenomena
What is the primary purpose of empirical research in finance?
To test whether rational theories can explain observed practice
What is a key aspect of the government's influence on finance?
The government's role as a player in financial markets
What is a common area of research in finance?
Understanding the relative share prices of different companies
What is the primary function of the Financial Services Authority?
To oversee the regulation of financial services
What is an example of a research question in finance that involves understanding company decision-making?
How do companies decide how much of their profits to distribute as dividends to shareholders?
What is a key aspect of the government's influence on finance through the Inland Revenue?
The government's role in imposing taxes on investors and financial intermediaries
What is the primary function of financial markets?
To allow units to lend savings to units who wish to borrow funds
What is the main difference between a primary and a secondary market?
The primary market is where securities are first issued and new capital is raised, while the secondary market allows sellers to pass ownership to buyers
What motivates investors to trade shares when they have surplus funds compared with expenditure?
Liquidity-motivated reasons
What is the key role of figure 2 in illustrating the stock market?
It illustrates the two main activities of the stock market
What is the term used to describe the price of borrowing?
Return promised
What is the main advantage of having a secondary market?
It provides a platform for investors to trade shares
What is the primary market function of the stock market?
It allows quoted companies to raise new equity capital
What motivates investors to trade shares when they believe a share is underpriced?
Information-motivated reasons
What was the primary function of jobbers in the pre-Big Bang era?
To make a market in specific stocks and quote buying and selling prices
What was a major concern in the stock market during the 1970s and 1980s?
The increasing dominance of a few jobbing firms
What was the primary role of brokers in the pre-Big Bang era?
To act as agents on the investor's behalf and find the best deal
What was the impact of fixed commission charges on the market?
It discouraged price competition and encouraged non-price competition
What was the significance of Big Bang in 1986?
It changed the dealing system on the London Stock Exchange
What was the result of the dominance of a few jobbing firms?
Reduced competition between jobbers
How did jobbers operate in the pre-Big Bang era?
As principals, making a market in specific stocks
What was the significance of Big Bang II in 1997?
It changed the dealing system on the London Stock Exchange again
What determines the current equilibrium price of a company's shares?
The market's valuation of the future monetary return
What comprises the monetary return for shareholders?
The remaining value of the shares and dividends paid
Why do investors make estimates about future dividends and share prices?
Because they do not know future dividends and share prices for certain
What happens to a company's share price when new information becomes available?
The share price changes
What is an effect of asymmetric information between investors and managers?
Managers have more information than investors
What may signal management's confidence in the company's future prospects?
Announcing a dividend higher than expected
What is the main concern of corporate finance in terms of financial decisions?
Long-term operating decisions
Why do share prices change over time?
Because investors' expectations about future dividends and share prices change
What is the primary goal of researching empirical anomalies in finance?
To develop theories that explain actual data
What resolves uncertainty about a company's value?
New information about the company
Which disciplines are increasingly offering new insights into finance?
Sociology and psychology
What is the primary role of the legal framework in finance?
To provide the institutional backdrop to many financial decisions
Why are theories assuming some degree of investor irrationality likely to become increasingly important in finance?
Because they provide a more complete understanding of actual data
What is the primary difference between corporate finance and management accounting?
Corporate finance focuses on long-term decisions, while management accounting focuses on short-term decisions
What is the primary reason why a good working knowledge of theoretical economics is essential for understanding finance?
Because finance is a subfield of economics
What is the significance of financial reporting in finance?
The valuation of many securities relies on reported accounting information
What is the primary role of academics in the field of finance?
To subject theories to healthy criticism and rigorous testing
What skill is vital for empirical research in finance?
Econometrics
What is the primary difference between finance and accounting?
Finance is concerned with the investment of money, while accounting is concerned with the recording of money
What is the primary goal of researchers in the field of finance?
To discover empirical anomalies and develop theories to explain them
What is the primary concern of financial statement analysis?
To analyze reported accounting information
What is the relationship between reported values and market values in finance?
There are crucial differences between reported values and market values
What is the primary function of the Board of Directors in a PLC?
To select the managers of the business
What is the primary advantage of empirical research in finance?
It allows for the development of theories that explain actual data
What is the primary characteristic of empirical research in finance?
It involves the testing of hypotheses on actual data
What is the primary advantage of a PLC over an unincorporated business?
Limited liability for shareholders
What is the relationship between shareholders and the company's assets in a PLC?
Debt holders have first claim on the company's assets
What is the primary difference between share capital and debt capital?
Share capital is permanent, while debt capital is temporary
What happens to the PLC when existing shareholders sell their ownership shares to new shareholders?
The PLC continues to operate without changes
What is the primary goal of shareholders in a PLC?
To maximize the company's value
What is a disadvantage of a PLC?
It is difficult and expensive to set up
What is the percentage of the top 700 companies in the UK that are quoted on the stock market?
80 percent
In 1979, what action was taken by the government regarding the LSE rulebook?
It was referred to the Restrictive Practices Court
What was the main concern of the LSE following financial deregulation around the world?
Loss of business to international competitors
What was the result of the changes made by the LSE on 27 October 1986?
The LSE became more competitive
What role did broker/dealers take on in addition to their traditional role after the Big Bang?
Market makers
What was the requirement for broker/dealers operating in different capacities?
They had to declare their capacity at the time of the trade
What percentage of dealing was accounted for by three investment houses after the Big Bang?
75%
What was the name given to the changes made by the LSE on 27 October 1986?
Big Bang
What was the impact of the dominance of a few jobbing firms in the pre-Big Bang era?
It reduced competition
This quiz covers the role of government in finance, including government expenditure, government bonds, and taxation. It also touches on how government influences financial markets and institutions. Test your knowledge of the relationship between government and finance.
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