Question

1. All of the following are benefits of owning equity in a firm, except:
   1. Your potential upside is unlimited
   2. You get a say in how the firm is run
   3. You are first in line to get paid in bankruptcy
   4. Your expected return is typically higher than that on debt
2. Principal-agent conflicts are the result of
   1. Actively managed portfolios rarely outperforming passively managed ones
   2. Managers and owners having different incentives
   3. Weak form market efficiency
   4. Risk aversion
3. The main benefit of municipal bonds is:
   1. Their coupons are not generally taxable
   2. They are backed by the full faith and credit of the US government
   3. High liquidity
   4. They are protected against inflation
4. Stock exchanges are generally:
   1. Dealer markets
   2. Direct search markets
   3. Auction markets
   4. Brokered markets
5. All else being equal, if the rate of inflation increases, it will decrease:
   1. The real rate of return
   2. The riskless rate of return
   3. The nominal rate of return
   4. The market price of risk

Answer 1

Answer(1): You are first in line to get paid in bankruptcy.

This option is not correct in case of owning equity in the firm.

Equity is a part of company's share capital. When you own equity in a firm, you have ownership and voting rights. You are the part owner of the company. Equity shareholders do not get any preference in dividend and capital repayment. They get the dividend only after distributing to the preferred shareholders and they get capital repayment only after repaying back to debt holders and preferred shareholders.

Question: Principal-agent conflicts are the result of-

Answer: Managers and owners having different incentives.

Managers want profit maximization to raise their incentives and shareholders want wealth management to raise their wealth that is the reason, principal-agent conflict arises.

Question: The main benefit of municipal bonds is:

Answer: Their coupons are not generally taxable.

Interest on municipal bond is free from Federal, local and state tax.

Question: Stock exchanges are generally:

Answer: Brokered markets

Brokered markets work as mediator between buyers and sellers. Stock market is the example of brokered market.