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Finance and Investments Quiz

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38 Questions

What is the primary function of the executive board?

To manage the day-to-day operations and report to the supervisory board

What is the main difference between a primary market and a secondary market?

The primary market is for issuing new securities, while the secondary market is for buying and selling existing shares

What is the role of financial markets in facilitating the exchange of financial claims?

To allow investors to buy and sell financial claims

What is the purpose of a secondary market?

To provide liquidity to investors

What is the advantage of investment in the primary market?

Investment advantage

What is the role of financial intermediaries in the financial markets?

To facilitate the exchange of financial claims between investors

What is the main purpose of the supervisory board?

To monitor the performance of the executive board

What is the primary objective of theoretical research in finance?

To develop models and theories to explain financial phenomena

What is a major disadvantage of an unincorporated business structure?

There is unlimited liability for the business owner

What is the relation between finance and other disciplines?

Finance is related to economics, accounting, sociology, psychology, and law

What is the primary focus of empirical research in finance?

To test the performance of financial theories using actual data

What is a characteristic of unincorporated business structures?

They have unlimited liability for the business owner

What is the primary goal of finance research?

To explain financial phenomena and value securities

What is an advantage of an unincorporated business structure?

Ownership and control are concentrated

What type of finance do commercial and investment banks provide to corporations?

Tailored finance

What is the primary function of the London Stock Exchange (LSE) in the corporate sector?

To facilitate the trading of new equity issues

What was the main problem with the pre-Big Bang era in the London Stock Exchange?

Increased concentration and reduced competition in jobbing

What is the term for the initial sale of shares to the public by a company?

Initial public offering (IPO)

What is the term for the market where new securities are issued to raise capital?

Primary market

What is the term for the market where existing securities are traded?

Secondary market

What was the major change introduced in the London Stock Exchange on 27 October 1986?

Introduction of dual capacity

What is the primary role of financial intermediaries in the financial market?

Act as a middleman between investors and financial markets

Which of the following is NOT a function of financial intermediaries?

Determining the value of securities

What is the primary difference between primary and secondary markets?

Primary markets involve IPOs, while secondary markets involve trading existing securities

What is the primary function of the London Stock Exchange?

To act as a platform for buying and selling existing securities

What is the role of financial markets in the economy?

To provide liquidity and facilitate investments

What is the primary characteristic of financial intermediaries in the financial market?

They act as a middleman between investors and financial markets

What is the relationship between financial markets and financial intermediaries?

Financial intermediaries act as a middleman between investors and financial markets

What is the primary source of financing for companies limited by shares?

Share capital

What is a characteristic of companies limited by shares?

Limited liability

What is an advantage of companies limited by shares?

Ownership can be transferred by selling shares

Who elects the Board of Directors in single-tier board countries?

Shareholders

What is a disadvantage of companies limited by shares?

Difficult to establish

How many boards are there in two-tier board countries?

Two

What is a characteristic of partnerships in the UK?

A corporate entity

What is a characteristic of companies limited by shares in terms of life?

Infinite life

What is a source of financing for companies limited by shares?

Debt capital

Who are the residual owners of a company limited by shares?

Shareholders

Study Notes

Executive Board and Supervisory Board

  • The executive board manages the day-to-day operations of a company.
  • The supervisory board monitors the executive board's performance.

Business Structures

  • Incorporated firms have different names in various countries, such as joint stock companies, public limited companies, and limited liability companies.
  • Table 2.1 (page 20) of the course textbook provides information on the different types of names used in international corporations.

Financial Markets and Intermediaries

  • Financial markets allow investors to buy and sell financial claims (securities) and facilitate this exchange.
  • Stock markets have two types of markets:
    • Primary market, where companies raise new equity finance by issuing new securities.
    • Secondary market, where investors buy and sell existing shares.

Theories in Finance

  • Theoretical research develops models and theories to explain financial phenomena or to value securities (future cash flows).
  • Theories aim to explain:
    • Relative prices of different securities.
    • Share price movements.
    • Companies' dividend decisions.
    • How to value real investments.
    • How to value share options and other securities.

Forms of Business Structure

  • Unincorporated business structures:
    • Advantages: cheap and easy to establish, ownership and control concentrated, no requirement to publish accounts.
    • Disadvantages: difficult to sell, finite life, business owner has unlimited liability, difficult to raise funds to grow.
  • Incorporated business structures:
    • Advantages: ownership can be transferred by selling shares, infinite life, business is legally separate from its owners, limited liability, funds can be raised publicly through equity and debt markets.
    • Disadvantages: difficult and expensive to establish, tax disadvantages, management is separate from owners, requirement to publish accounts.

Business Structures in Other Countries

  • Most countries have similar structures relating to unincorporated and incorporated companies, though the rules and regulations may differ.
  • The definition of 'partnership' varies across Europe.
  • Directors of incorporated firms in Europe are elected in two main ways:
    • In single-tier board countries (UK, Ireland, Sweden), shareholders elect the board of directors who then select the managers.
    • In two-tier board countries (Denmark, Germany, the Netherlands), there are two boards.

Test your knowledge of finance and investments, including debt finance, equity finance, and marketability. This quiz covers topics such as intermediaries, commercial banks, and the London Stock Exchange.

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