TCU FINANCE CORRECT STUDYS ANSWERS AND
QUESTIONS SET A+
✔✔What are 3 ways to minimize the agency problem? - ✔✔-Performance-based
compensation
-Direct influence by shareholders
-Threat of firing
✔✔Increase in the firm's debt will __________ the firm's value. - ✔✔Increase
✔✔Increase in the firm's debt will __________ the cost of debt. - ✔✔Increase
✔✔Increase in the firm's debt will __________ the cost of equity. - ✔✔Increase
✔✔Too much increase in the firm's debt will __________ the value of the firm. -
✔✔Decrease
✔✔A term in Corporate Finance used to indicate a condition when promises to creditors
of a company are broken or honored with difficulty - ✔✔Financial Distress
✔✔Why will increasing the debt increase the cost of financial distress? - ✔✔Because
stockholders will be worried that if company the liquidates then bond holders will be paid
first
✔✔How are market interest rates determined? - ✔✔Determined by the interaction of the
supply of and demand for funds in the money market
✔✔An ____________ in demand for credit increases market interest rates, while a
___________ will decrease rates. - ✔✔Increase; decrease
✔✔The __________ the level of inflation, the more interest rates will rise. - ✔✔Higher
, ✔✔When economy is growing, Fed raises short term interest rates by ____________
treasuries to keep from building too fast and risking inflation. - ✔✔Selling
✔✔When economy is contracting, the Fed lowers interest rates by __________
treasuries to encourage borrowing. - ✔✔Buying
✔✔Why does the funds rate rise as the supply of reserves goes down? - ✔✔Because
banks will then need to borrow more to meet the minimum reserve requirement.
✔✔What is the term structure of interest rates? - ✔✔Also called yield curve; the yield
curve displays the relationship between interest rates and their term to maturity
✔✔Generally, interest rates (yield) increase as the maturity ____________. -
✔✔Increases
✔✔Term structure of interest rates.
Curve related to when short term yields are lower than long term yields. - ✔✔Normal
Curve
✔✔Term structure of interest rates.
Curve related to when short term yields are higher than long term yields (can be a sign
of a recession). - ✔✔Inverted Curve
✔✔Term structure of interest rates.
Curve related to when there is no variation between short and long term yields (can also
be a predictor of economic transition). - ✔✔Flat Curve
✔✔What is the primary purpose of the foreign exchange? - ✔✔To assist international
trade and investment, by allowing businesses to convert one currency to another
currency
✔✔The value of a foreign nation's currency in terms of the home nation's currency -
✔✔Exchange Rate
✔✔What are the 5 primary functions of financial institutions? - ✔✔• Accepting Deposits
• Providing Commercial Loans
• Providing Real Estate Loans
• Providing Mortgage Loans
• Issue share certificates
QUESTIONS SET A+
✔✔What are 3 ways to minimize the agency problem? - ✔✔-Performance-based
compensation
-Direct influence by shareholders
-Threat of firing
✔✔Increase in the firm's debt will __________ the firm's value. - ✔✔Increase
✔✔Increase in the firm's debt will __________ the cost of debt. - ✔✔Increase
✔✔Increase in the firm's debt will __________ the cost of equity. - ✔✔Increase
✔✔Too much increase in the firm's debt will __________ the value of the firm. -
✔✔Decrease
✔✔A term in Corporate Finance used to indicate a condition when promises to creditors
of a company are broken or honored with difficulty - ✔✔Financial Distress
✔✔Why will increasing the debt increase the cost of financial distress? - ✔✔Because
stockholders will be worried that if company the liquidates then bond holders will be paid
first
✔✔How are market interest rates determined? - ✔✔Determined by the interaction of the
supply of and demand for funds in the money market
✔✔An ____________ in demand for credit increases market interest rates, while a
___________ will decrease rates. - ✔✔Increase; decrease
✔✔The __________ the level of inflation, the more interest rates will rise. - ✔✔Higher
, ✔✔When economy is growing, Fed raises short term interest rates by ____________
treasuries to keep from building too fast and risking inflation. - ✔✔Selling
✔✔When economy is contracting, the Fed lowers interest rates by __________
treasuries to encourage borrowing. - ✔✔Buying
✔✔Why does the funds rate rise as the supply of reserves goes down? - ✔✔Because
banks will then need to borrow more to meet the minimum reserve requirement.
✔✔What is the term structure of interest rates? - ✔✔Also called yield curve; the yield
curve displays the relationship between interest rates and their term to maturity
✔✔Generally, interest rates (yield) increase as the maturity ____________. -
✔✔Increases
✔✔Term structure of interest rates.
Curve related to when short term yields are lower than long term yields. - ✔✔Normal
Curve
✔✔Term structure of interest rates.
Curve related to when short term yields are higher than long term yields (can be a sign
of a recession). - ✔✔Inverted Curve
✔✔Term structure of interest rates.
Curve related to when there is no variation between short and long term yields (can also
be a predictor of economic transition). - ✔✔Flat Curve
✔✔What is the primary purpose of the foreign exchange? - ✔✔To assist international
trade and investment, by allowing businesses to convert one currency to another
currency
✔✔The value of a foreign nation's currency in terms of the home nation's currency -
✔✔Exchange Rate
✔✔What are the 5 primary functions of financial institutions? - ✔✔• Accepting Deposits
• Providing Commercial Loans
• Providing Real Estate Loans
• Providing Mortgage Loans
• Issue share certificates
