TEST BANK FOR ESSENTIALS OF INVESTMENTS, 12TH
EDITION BY BODIE, ALEX KANE AND ALAN MARCUS
COMPLETE CHAPTERS 1-22 UPDATED A+
Chapter 1: The Investment Environment
Q1. Which of the following is a financial asset?
A. Machinery
B. Land
C. Bonds
D. Patents
Answer: C – Bonds
Rationale: Financial assets represent claims on real assets or
income streams (e.g., bonds, stocks). Land, machinery, and patents
are real assets.
Q2. Which market participants are typically net suppliers of
capital?
A. Corporations
B. Households
C. Governments
D. Banks
Answer: B – Households
Rationale: Households usually supply capital by saving and
,investing, while corporations and governments are net
demanders. Banks act as intermediaries.
Q3. Which of the following best describes the agency problem?
A. Mispricing of securities
B. Conflict between managers and shareholders
C. Risk of default in bond markets
D. Poor diversification of portfolios
Answer: B – Conflict between managers and shareholders
Rationale: The agency problem arises when managers pursue
personal goals rather than maximizing shareholder wealth.
Q4. Which of the following is a real asset?
A. Stock
B. Corporate bond
C. Factory building
D. Treasury bill
Answer: C – Factory building
Rationale: Real assets generate goods/services (factories, land).
Stocks and bonds are financial claims.
Q5. Which of the following is an example of equity security?
A. Treasury bill
B. Common stock
,C. Corporate bond
D. Commercial paper
Answer: B – Common stock
Rationale: Equity securities represent ownership (e.g., common
stock). Others are debt instruments.
Q6. Which of the following statements is TRUE about financial
markets?
A. They eliminate all risks for investors
B. They facilitate capital allocation
C. They guarantee positive returns
D. They prevent economic recessions
Answer: B – They facilitate capital allocation
Rationale: Markets allocate funds from savers to borrowers,
supporting economic growth. They cannot eliminate risks or
prevent recessions.
Q7. Which asset class historically has offered the highest long-
term returns?
A. Treasury bills
B. Government bonds
C. Corporate bonds
D. Common stocks
, Answer: D – Common stocks
Rationale: Equities have outperformed other asset classes in the
long run, though with higher volatility.
Q8. Which of the following best describes the role of financial
intermediaries?
A. Eliminate risk completely
B. Directly issue securities
C. Channel funds between savers and borrowers
D. Eliminate the need for markets
Answer: C – Channel funds between savers and borrowers
Rationale: Intermediaries (banks, mutual funds) pool capital and
allocate it efficiently. They cannot remove risk entirely.
Q9. Which of the following describes a bondholder’s position
compared to a stockholder?
A. Higher ownership rights
B. Residual claim on assets
C. Priority in bankruptcy
D. Voting rights in corporate decisions
Answer: C – Priority in bankruptcy
Rationale: Bondholders have priority claims in liquidation, unlike
stockholders who are residual claimants.
EDITION BY BODIE, ALEX KANE AND ALAN MARCUS
COMPLETE CHAPTERS 1-22 UPDATED A+
Chapter 1: The Investment Environment
Q1. Which of the following is a financial asset?
A. Machinery
B. Land
C. Bonds
D. Patents
Answer: C – Bonds
Rationale: Financial assets represent claims on real assets or
income streams (e.g., bonds, stocks). Land, machinery, and patents
are real assets.
Q2. Which market participants are typically net suppliers of
capital?
A. Corporations
B. Households
C. Governments
D. Banks
Answer: B – Households
Rationale: Households usually supply capital by saving and
,investing, while corporations and governments are net
demanders. Banks act as intermediaries.
Q3. Which of the following best describes the agency problem?
A. Mispricing of securities
B. Conflict between managers and shareholders
C. Risk of default in bond markets
D. Poor diversification of portfolios
Answer: B – Conflict between managers and shareholders
Rationale: The agency problem arises when managers pursue
personal goals rather than maximizing shareholder wealth.
Q4. Which of the following is a real asset?
A. Stock
B. Corporate bond
C. Factory building
D. Treasury bill
Answer: C – Factory building
Rationale: Real assets generate goods/services (factories, land).
Stocks and bonds are financial claims.
Q5. Which of the following is an example of equity security?
A. Treasury bill
B. Common stock
,C. Corporate bond
D. Commercial paper
Answer: B – Common stock
Rationale: Equity securities represent ownership (e.g., common
stock). Others are debt instruments.
Q6. Which of the following statements is TRUE about financial
markets?
A. They eliminate all risks for investors
B. They facilitate capital allocation
C. They guarantee positive returns
D. They prevent economic recessions
Answer: B – They facilitate capital allocation
Rationale: Markets allocate funds from savers to borrowers,
supporting economic growth. They cannot eliminate risks or
prevent recessions.
Q7. Which asset class historically has offered the highest long-
term returns?
A. Treasury bills
B. Government bonds
C. Corporate bonds
D. Common stocks
, Answer: D – Common stocks
Rationale: Equities have outperformed other asset classes in the
long run, though with higher volatility.
Q8. Which of the following best describes the role of financial
intermediaries?
A. Eliminate risk completely
B. Directly issue securities
C. Channel funds between savers and borrowers
D. Eliminate the need for markets
Answer: C – Channel funds between savers and borrowers
Rationale: Intermediaries (banks, mutual funds) pool capital and
allocate it efficiently. They cannot remove risk entirely.
Q9. Which of the following describes a bondholder’s position
compared to a stockholder?
A. Higher ownership rights
B. Residual claim on assets
C. Priority in bankruptcy
D. Voting rights in corporate decisions
Answer: C – Priority in bankruptcy
Rationale: Bondholders have priority claims in liquidation, unlike
stockholders who are residual claimants.
