1. Which of the following statements is CORRECT? 

• While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
• A liquid security is a security whose value is derived from the price of some other “underlying” asset. Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
• Money markets are markets for long-term debt and common stocks.
• The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.

 2. Which of the following statements is CORRECT? 

• If expected inflation increases, interest rates are likely to increase.
• If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
• If companies have fewer good investment opportunities, interest rates are likely to increase.
• Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
• Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

 3. Money markets are markets for 

• Foreign stocks.
• Consumer automobile loans
• Short-term debt securities.
• Long-term bonds

 4. Which of the following statements is CORRECT?

• The corporate bylaws are a standard set of rules established by the state of incorporation.These rules are identical for all corporations in the state, and their purpose is to ensure that the firm’s managers run the firm in accordance with state laws.
• The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm’s managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter. Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted.
• Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.
• The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.

5. Which of the following statements is CORRECT? 

• In a regular partnership, liability for other partners’ misdeeds is limited to the amount of a particular partner’s investment in the business.
• Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
• A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster-growing company.
• In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business.
• Also, the limited partners are individually responsible, on a pro rata basis, for the firm’s debts in the event of bankruptcy.
• A major disadvantage of all partnerships relative to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.