Introduction #zto #zCorporate #zFinance, #zFifth Booth, #zCleary,
#zEdition #zRakita
Chapter 1: An Introduction to Finance
Multiple Choice Questions
1. Section: 1.1 Finance Defined
Learning Objective: 1.1
Level of difficulty: Basic
CPA: Finance
Solution: A
2. Section: 1.2 Real versus Financial Assets
Learning Objective: 1.2
Level of difficulty: Intermediate
CPA: Finance
Solution: C
Stocks are financial assets. Examples of real assets are residential structures, non-residential
structures, machinery and equipment, durables, inventories, and land.
3. Section: 1.2 Real versus Financial Assets
Learning Objective: 1.2
Level of difficulty: Basic
CPA: Finance
Solution: D
4. Section: 1.2 Real Versus Financial Assets
Learning Objective 1.2
Level of difficulty: Basic
CPA: Finance
Solution:
Liquidity is typically characterized as the ability to change an asset into cash quickly. Many
financial assets, for example investments such as stocks and bonds, trade on public financial
markets, and their monetary value can be readily realized. In contrast, the process of converting a
real asset, such as real estate, into cash is considered to be much more time consuming.
5. Section: 1.3 The Financial System
Learning Objective: 1.3
Level of difficulty: Basic
CPA: Finance
Solution: B
6. Section: 1.3 The Financial System
Learning Objective: 1.3
Level of difficulty: Intermediate
CPA: Finance
Solution: A
Solutions 1 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
,Introduction #zto #zCorporate #zFinance, #zFifth Booth, #zCleary,
#zEdition #zRakita
In #zthe #zfinancial #zsystem, #zhouseholds #zare #zthe #zprimary #zfund #zproviders #zto #zgovernment #zand
#zbusinesses.
7. Section: #z1.3 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution: #zC
Banks, #zpension #zfunds, #zand #zinsurance #zfirms #ztransform #zthe #znature #zof #zthe #zunderlying
#zfinancial #zsecurities. #zHowever, #zmutual #zfunds #zdo #znot #ztransform #zthe #znature #zof #zthe
#zunderlying #zfinancial #zsecurities.
8. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution: #zC
9. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zIntermediate
#zCPA: #zFinance
Solution:
A #zmarketable #zasset #zis #zone #zthat #zcan #zbe #ztraded #zbetween #zor #zamong #zinvestors #zafter #zissuance,
#zbut #zbefore #zexpiry. #zThe #zasset‘s #zmarket #zvalue #zwill #zalso #zchange #zover #ztime #zwhile #zthe #zasset
#zis #zoutstanding. #zIn #zcontrast, #znon-marketable #zassets #zcannot #zbe #ztraded #zbetween #zor #zamong
#zinvestors.
10. Section #z1.5 #zThe #zGlobal #zFinancial
#zCommunity #z Learning #zObjective: #z1.5
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution: #zC
Practice
#zProblems
#zIntermediate
11. Section: #z1.2 #zReal #zversus #zFinancial
#zAssets #zLearning #zObjective: #z1.2
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution:
Balance #zsheet:
Residential #zstructures: #z$1,000 #z+ #z$3,000 #z+ #z$1,500 #z= #z$5,500
As #zthere #zare #zno #zforeign #zassets #zor #zliabilities, #zthe #znet #zworth #zor #zequity #zof #zthe # z island #zis #z$5,500
Solutions 2 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
,Introduction #zto #zCorporate #zFinance, #zFifth Booth, #zCleary,
#zEdition #zRakita
This #zshows #zall #zof #zthe #zassets #zand #z liabilities:
Assets Liabilities
Fred
House $1,000
Debt #zto #zFriday $ #z500
Robinson
House 3,000
Debt #zto #zFriday 2,000
Friday
House 1,500
Loan #zto #zFred 500
Loan #zto #zRobinson 2,000
Totals $8,000 $2,500
The #znet #z worth #zof #zthe #zeconomy #zequals #ztotal #zassets #zminus #ztotal #zliabilities, #zor #z$5,500.
12. Section: #z1.2 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution:
In #zthe #zfinancial #zsystem, #zthere #zare #zfour #zmajor #zsectors: #zhouseholds, #zgovernment, #zbusiness,
#zand #znon- #zresidents. # z Within #zthe #zfield #zof #zfinance, #zthere #zare #zfour #zmajor #zareas: #zpersonal
#zfinance, #zgovernment #zfinance, #zcorporate #zfinance, #zand #zinternational #zfinance. #zThey #zclosely
#zinterrelate #zto #zeach #zother.
Because #zthey #zare #zall #zmajor #zparts #zof #zthe #zwhole #zfinancial #zsystem, #zwhat #zhappens #zin #zone
#zmarket #zwill #zaffect #zall #zthe #zother #zmarkets.
13. Section: #z1.3 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution:
Banks #ztake #zin #zdeposits #zand #zloan #zthem #zout #zto #zfund #zborrowers. #zPension #zfunds #ztake #zin
#zpension #zcontributions #zand #zpay #zout #zpensions #zto #zplan #zparticipants #zwhen #zthey #zretire.
#z Insurance #zfirms #ztake #zin #zpremiums #zand #zpay #zout #zwhen #za #zcertain #zevent #zoccurs. #zMutual
#zfunds #zpool #zsmall #zfunds #ztogether #zand #zmake #zlarge #zinvestments #zthat #zsmall #zinvestors #zcannot
#zmake. #zMutual #zfunds #zalso #zoffer #zinvestment #zexpertise #zto #zordinary #zinvestors.
14. Section: #z1.3 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solutions 3 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
, Introduction #zto #zCorporate #zFinance, #zFifth Booth, #zCleary,
#zEdition #zRakita
Solution:
Five #zmain #zreasons #zwhy #zfinancial #zand #zmarket #zintermediaries #zexist #zare:
i) They #zprovide #zanonymousness #zand #zconvenience #zto #zall #ztransaction #zparties.
ii) They #zefficiently #zmatch #zthe #zneeds #zof #zthe #zparticipants #zin #zthe #zfinancial #zmarket #zand
#zaggregate #zall #zthe #zsmall #ztransactions.
iii) They #zhave #zprocedures #zfor #zdocumentation #zof #zlegal #zcontracts #zto #zensure #zsecurity.
iv) The #zrisk #zof #znon-payment #zis #zalleviated #zby #zmaintaining #zcredit #zratings #zand #zby
#zcontrolling #zother #zaccounts.
v) Financial #zinstitutions #ztransform #zthe #znature #zof #zthe #zunderlying #zfinancial #zsecurities.
15. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zIntermediate
CPA:
#zFinance
#zCPA:
#zFinance
#zSolution:
The #ztwo #zmajor #ztypes #zof #zsecondary #zmarkets #zare #zexchanges #zor #zauction #zmarkets, #zand #zdealer
#zor #zover- #zthe-counter #z(OTC) #zmarkets. #zExchanges #zhave #zbeen #zreferred #zto #zas #zauction #zmarkets
#zbecause #zthey #zinvolve #za #zbidding #zprocess #zthat #ztakes #zplace #zin #za #zspecific #zlocation #z(i.e.,
#zsimilar #zto #zan #zauction). #zOTC #zor #zdealer #zmarkets #zdo #znot #zhave #za #zphysical #zlocation, #zbut
#zrather #zconsist #zof #za #znetwork #zof #zdealers #zwho #ztrade #zdirectly #zwith #zone #zanother.
Challenging
16. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zChallenging
CPA: #zFinance
Solution:
Secondary #zmarket #ztransactions #zare #zthose #zwhere #zownership #zof #zexisting #zshares #zchanges
#zhands, #zbut #zthe #zcorporations #zor #zgovernments #zwho #zoriginally #zissued #zthe #zsecurities #zreceive
#zno #zfinancing; #ztrading #ztakes #zplace #zbetween #zinvestors. # z This #zis #zcritical #zto #zthe #zfunctioning
#zof #zthe #zprimary #zmarkets, #zbecause #zgovernments #zand #zcompanies #zwould #znot #zbe #zable #zto
#zraise #zfinancing #zif #zinvestors #zwere #zunable #zto #zsell #ztheir #zinvestments #zif #znecessary.
Solutions 4 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
#zEdition #zRakita
Chapter 1: An Introduction to Finance
Multiple Choice Questions
1. Section: 1.1 Finance Defined
Learning Objective: 1.1
Level of difficulty: Basic
CPA: Finance
Solution: A
2. Section: 1.2 Real versus Financial Assets
Learning Objective: 1.2
Level of difficulty: Intermediate
CPA: Finance
Solution: C
Stocks are financial assets. Examples of real assets are residential structures, non-residential
structures, machinery and equipment, durables, inventories, and land.
3. Section: 1.2 Real versus Financial Assets
Learning Objective: 1.2
Level of difficulty: Basic
CPA: Finance
Solution: D
4. Section: 1.2 Real Versus Financial Assets
Learning Objective 1.2
Level of difficulty: Basic
CPA: Finance
Solution:
Liquidity is typically characterized as the ability to change an asset into cash quickly. Many
financial assets, for example investments such as stocks and bonds, trade on public financial
markets, and their monetary value can be readily realized. In contrast, the process of converting a
real asset, such as real estate, into cash is considered to be much more time consuming.
5. Section: 1.3 The Financial System
Learning Objective: 1.3
Level of difficulty: Basic
CPA: Finance
Solution: B
6. Section: 1.3 The Financial System
Learning Objective: 1.3
Level of difficulty: Intermediate
CPA: Finance
Solution: A
Solutions 1 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
,Introduction #zto #zCorporate #zFinance, #zFifth Booth, #zCleary,
#zEdition #zRakita
In #zthe #zfinancial #zsystem, #zhouseholds #zare #zthe #zprimary #zfund #zproviders #zto #zgovernment #zand
#zbusinesses.
7. Section: #z1.3 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution: #zC
Banks, #zpension #zfunds, #zand #zinsurance #zfirms #ztransform #zthe #znature #zof #zthe #zunderlying
#zfinancial #zsecurities. #zHowever, #zmutual #zfunds #zdo #znot #ztransform #zthe #znature #zof #zthe
#zunderlying #zfinancial #zsecurities.
8. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution: #zC
9. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zIntermediate
#zCPA: #zFinance
Solution:
A #zmarketable #zasset #zis #zone #zthat #zcan #zbe #ztraded #zbetween #zor #zamong #zinvestors #zafter #zissuance,
#zbut #zbefore #zexpiry. #zThe #zasset‘s #zmarket #zvalue #zwill #zalso #zchange #zover #ztime #zwhile #zthe #zasset
#zis #zoutstanding. #zIn #zcontrast, #znon-marketable #zassets #zcannot #zbe #ztraded #zbetween #zor #zamong
#zinvestors.
10. Section #z1.5 #zThe #zGlobal #zFinancial
#zCommunity #z Learning #zObjective: #z1.5
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution: #zC
Practice
#zProblems
#zIntermediate
11. Section: #z1.2 #zReal #zversus #zFinancial
#zAssets #zLearning #zObjective: #z1.2
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution:
Balance #zsheet:
Residential #zstructures: #z$1,000 #z+ #z$3,000 #z+ #z$1,500 #z= #z$5,500
As #zthere #zare #zno #zforeign #zassets #zor #zliabilities, #zthe #znet #zworth #zor #zequity #zof #zthe # z island #zis #z$5,500
Solutions 2 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
,Introduction #zto #zCorporate #zFinance, #zFifth Booth, #zCleary,
#zEdition #zRakita
This #zshows #zall #zof #zthe #zassets #zand #z liabilities:
Assets Liabilities
Fred
House $1,000
Debt #zto #zFriday $ #z500
Robinson
House 3,000
Debt #zto #zFriday 2,000
Friday
House 1,500
Loan #zto #zFred 500
Loan #zto #zRobinson 2,000
Totals $8,000 $2,500
The #znet #z worth #zof #zthe #zeconomy #zequals #ztotal #zassets #zminus #ztotal #zliabilities, #zor #z$5,500.
12. Section: #z1.2 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution:
In #zthe #zfinancial #zsystem, #zthere #zare #zfour #zmajor #zsectors: #zhouseholds, #zgovernment, #zbusiness,
#zand #znon- #zresidents. # z Within #zthe #zfield #zof #zfinance, #zthere #zare #zfour #zmajor #zareas: #zpersonal
#zfinance, #zgovernment #zfinance, #zcorporate #zfinance, #zand #zinternational #zfinance. #zThey #zclosely
#zinterrelate #zto #zeach #zother.
Because #zthey #zare #zall #zmajor #zparts #zof #zthe #zwhole #zfinancial #zsystem, #zwhat #zhappens #zin #zone
#zmarket #zwill #zaffect #zall #zthe #zother #zmarkets.
13. Section: #z1.3 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solution:
Banks #ztake #zin #zdeposits #zand #zloan #zthem #zout #zto #zfund #zborrowers. #zPension #zfunds #ztake #zin
#zpension #zcontributions #zand #zpay #zout #zpensions #zto #zplan #zparticipants #zwhen #zthey #zretire.
#z Insurance #zfirms #ztake #zin #zpremiums #zand #zpay #zout #zwhen #za #zcertain #zevent #zoccurs. #zMutual
#zfunds #zpool #zsmall #zfunds #ztogether #zand #zmake #zlarge #zinvestments #zthat #zsmall #zinvestors #zcannot
#zmake. #zMutual #zfunds #zalso #zoffer #zinvestment #zexpertise #zto #zordinary #zinvestors.
14. Section: #z1.3 #zThe #zFinancial #zSystem
Learning #zObjective: #z1.3
Level #zof #zdifficulty: #zIntermediate
CPA: #zFinance
Solutions 3 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
, Introduction #zto #zCorporate #zFinance, #zFifth Booth, #zCleary,
#zEdition #zRakita
Solution:
Five #zmain #zreasons #zwhy #zfinancial #zand #zmarket #zintermediaries #zexist #zare:
i) They #zprovide #zanonymousness #zand #zconvenience #zto #zall #ztransaction #zparties.
ii) They #zefficiently #zmatch #zthe #zneeds #zof #zthe #zparticipants #zin #zthe #zfinancial #zmarket #zand
#zaggregate #zall #zthe #zsmall #ztransactions.
iii) They #zhave #zprocedures #zfor #zdocumentation #zof #zlegal #zcontracts #zto #zensure #zsecurity.
iv) The #zrisk #zof #znon-payment #zis #zalleviated #zby #zmaintaining #zcredit #zratings #zand #zby
#zcontrolling #zother #zaccounts.
v) Financial #zinstitutions #ztransform #zthe #znature #zof #zthe #zunderlying #zfinancial #zsecurities.
15. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zIntermediate
CPA:
#zFinance
#zCPA:
#zFinance
#zSolution:
The #ztwo #zmajor #ztypes #zof #zsecondary #zmarkets #zare #zexchanges #zor #zauction #zmarkets, #zand #zdealer
#zor #zover- #zthe-counter #z(OTC) #zmarkets. #zExchanges #zhave #zbeen #zreferred #zto #zas #zauction #zmarkets
#zbecause #zthey #zinvolve #za #zbidding #zprocess #zthat #ztakes #zplace #zin #za #zspecific #zlocation #z(i.e.,
#zsimilar #zto #zan #zauction). #zOTC #zor #zdealer #zmarkets #zdo #znot #zhave #za #zphysical #zlocation, #zbut
#zrather #zconsist #zof #za #znetwork #zof #zdealers #zwho #ztrade #zdirectly #zwith #zone #zanother.
Challenging
16. Section: #z1.4 #zFinancial #zInstruments #zand
#zMarkets #zLearning #zObjective: #z1.4
Level #zof #zdifficulty: #zChallenging
CPA: #zFinance
Solution:
Secondary #zmarket #ztransactions #zare #zthose #zwhere #zownership #zof #zexisting #zshares #zchanges
#zhands, #zbut #zthe #zcorporations #zor #zgovernments #zwho #zoriginally #zissued #zthe #zsecurities #zreceive
#zno #zfinancing; #ztrading #ztakes #zplace #zbetween #zinvestors. # z This #zis #zcritical #zto #zthe #zfunctioning
#zof #zthe #zprimary #zmarkets, #zbecause #zgovernments #zand #zcompanies #zwould #znot #zbe #zable #zto
#zraise #zfinancing #zif #zinvestors #zwere #zunable #zto #zsell #ztheir #zinvestments #zif #znecessary.
Solutions 4 Chapter
Copyright
#z Manual #z© #z2020 #zJohn #zWiley #z& #zSons #zCanada, #zLtd. #z Unauthorized #zcopying, #zdistribution, #zor #ztransmission #zis
#z1
#zstrictly #zprohibited.
