Profits that a firm keeps and reinvests in equipment, buildings and research are a source of financial capital for many established companies.
Correct Answer
True
True. A profitable firm can fund new investment out of its own earnings instead of borrowing or selling stock. Young firms, by contrast, often have good opportunities but few profits to reinvest.
Category: Sources of Capital
Question 2
Early-stage investors accept that many of the young firms they back will fail because a few large successes can more than make up for those losses.
Correct Answer
True
True. Most startups fail, sometimes within a few years, but a rare company that grows enormously can return far more than the investor lost on the failures.
Category: Sources of Capital
Question 3
When an investor buys existing shares of a company from another investor on a stock exchange, the company receives the money paid for the shares.
Correct Answer
False
False. The money goes to the investor who sold the shares. A company receives money from stock only when it sells newly issued shares itself, as in an initial public offering.
Category: Corporate Stock
Question 4
A firm's first sale of its stock to the public is called an initial public offering.
Correct Answer
True
True. An initial public offering turns a private company into a public one and can both raise money for expansion and let early investors sell their stakes.
Category: Corporate Stock
Question 5
A private corporation's shares are bought and sold by the general public on stock exchanges.
Correct Answer
False
False. A private company has no publicly traded stock; its shares are held by a small group, often the same people who run it. Shares that trade on exchanges belong to public companies.
Category: Corporate Stock
Question 6
Borrowing through bank loans or bonds lets a firm's owners keep control, but the firm must make the scheduled interest payments whether or not its income is high enough.
Correct Answer
True
True. Lenders do not gain ownership, so control stays with the existing owners. In exchange, the firm takes on a fixed obligation, and missing payments can lead lenders to court.
Category: Sources of Capital
Question 7
Selling new shares of stock obligates a firm to repay the shareholders' money on a fixed schedule.
Correct Answer
False
False. Stock carries no repayment obligation. Shareholders become part owners and are rewarded through dividends and capital gains, though the firm must share control with them.
Category: Sources of Capital
Question 8
Large shareholders such as pension funds and mutual funds can help oversee the top executives of a public company.
Correct Answer
True
True. Along with the board of directors and outside auditors, large institutional investors are part of corporate governance because they have the resources and incentive to watch how managers run the firm.
Category: Corporate Governance
Question 9
Bank loans tend to suit large, well-known firms better than bonds do, while small firms usually raise money by issuing bonds.
Correct Answer
False
False. It is the reverse. Banks can monitor a smaller firm's deposits and withdrawals, so bank loans suit smaller firms, while large, well-known firms usually issue bonds.
Category: Bonds and Borrowing
Question 10
When market interest rates fall, a previously issued bond with a higher fixed coupon rate sells for more than its face value.
Correct Answer
True
True. A bond paying more than new bonds is attractive, so buyers bid its price above face value. Bond prices move in the opposite direction from market interest rates.
Category: Bonds and Borrowing
Question 11
The U.S. federal government typically pays higher interest rates on its bonds than risky corporations pay on theirs.
Correct Answer
False
False. U.S. Treasury bonds pay relatively low rates because the chance of default is very low. Riskier corporations must pay higher rates to compensate lenders.
Category: Bonds and Borrowing
Question 12
The S&P 500 is a stock market measure based on the share prices of 500 large U.S. companies.
Correct Answer
True
True. The S&P 500 tracks 500 large U.S. firms and is often used as a benchmark for the stock market as a whole, which is why many index funds are built to match it.
Category: Investment Tradeoffs
Question 13
Checking accounts typically pay higher interest rates than certificates of deposit.
Correct Answer
False
False. Checking accounts pay little or no interest. Certificates of deposit pay more because the saver gives up liquidity by agreeing to leave the money on deposit for a fixed term.
Category: Bank Accounts
Question 14
Housing is a highly liquid investment because a home can be sold for cash almost instantly and at little cost.
Correct Answer
False
False. Housing has low liquidity. Selling a home takes time and involves significant costs, so it cannot quickly be turned into spendable money the way a bank deposit can.
Category: Investment Tradeoffs
Question 15
Owning a single company's stock is generally less risky than owning a mutual fund that holds the stocks of many companies.
Correct Answer
False
False. A fund spread across many companies is less risky than a single stock, because one firm's poor results have only a small effect on the whole fund.
Category: Investment Tradeoffs
Question 16
Over periods of several decades, stocks have tended to earn higher average returns than bank savings accounts.
Correct Answer
True
True. Stocks are volatile from month to month and year to year, but over long periods their higher average returns have compensated investors for that risk. Savings accounts are safe but pay low interest.
Category: Investment Tradeoffs
Question 17
Investments that offer higher expected rates of return tend to carry lower risk.
Correct Answer
False
False. Higher expected returns generally come with higher risk. Investors would not hold risky assets unless they expected to be paid more for doing so.
Category: Investment Tradeoffs
Question 18
Many professionally managed mutual funds that try to beat the market average end up earning less than that average.
Correct Answer
True
True. Looking back over time, a large share of funds that tried to outperform the market fell short of it, which shows how hard it is to predict which stocks will do best.
Category: Building Wealth
Question 19
Simple interest is paid on both the original principal and the interest already earned.
Correct Answer
False
False. Simple interest is paid only on the original principal. Interest earned on both the principal and past interest is compound interest.
Category: Building Wealth
Question 20
Starting to save at a younger age gives compound interest more years to increase the value of those savings.
Correct Answer
True
True. Each year of compounding earns interest on the interest from earlier years, so money saved early has more time to grow than the same amount saved later.
Category: Building Wealth