Deck 20: The Truth About Regulation Fd and Stock Holdings: Debunking Common Myths in the Financial Market

Question 1

A share of corporate stock is a priority claim against the assets and earnings of a business firm.

Answer 1

False

Question 2

In the U.S. stock market the bulk of trading activity takes place in the secondary (resale) market rather than the primary (new capital funds) market.

Answer 2

True

Question 3

Trading in the stock market, according to your text, is closely linked to the savings-investment process in the economy.

Answer 3

False

Question 4

The stock market is a barometer of business expectations regarding future investment, but because it has no tangible impact on interest rates it likely does not influence employment, growth and the general health of the economy.

Question 5

Stockholders are liable for a business's losses up to an amount equal to the value of the equity shares plus the amount of any mortgage bonds outstanding.

Question 6

A corporation cannot pay any dividends to stockholders which would reduce the company's net worth per share below the par value of its stock.

Question 7

Program trading involves continuous trading as relative prices between two financial instruments change.

Question 8

According to virtually all analysts, program trading had no effect on the stock crash in October 1987.

Question 9

The New York Stock Exchange generally requires a parent company to have 1.1 million shares available for public trading.

Question 10

The majority of U.S. government and corporate bonds are traded on the organized exchanges.

Question 11

The third market for trading equity shares has been growing in importance (trading volume) in recent years relative to the exchanges due, in part, to deregulation of the financial sector.

Question 12

Shelf registration allows firms to issue new stock anytime within two years of initially registering the issue.

Question 13

A call option on stocks grants the option buyer the right to sell a specific number of equity shares at a set price on or before the option's expiration date.

Question 14

Dynamic hedging programs consider the current prices of stock, options, futures and futures options, among other factors.

Question 15

The holder of a put option hopes the stock underlying his option will decline in price before the option expires.

Question 16

Stock market trading is becoming increasingly a 24 hour business.

Question 17

At year-end 2009, the U. S. equity market was valued at slightly more than $20 trillion.

Question 18

An option that expires without being exercised is worthless.

Question 19

Put and call options purchased at the same time for the same stock and maturing on the same date cannot both be profitable.

Question 20

Research suggests that the semi-strong form of the efficient markets hypotheses is not valid.

Question 21

A stock-index option contract may be settled through either payment of cash or through the delivery of stock.

Question 22

Options permit a risk-averse investor to shift market risk to someone else.

Question 23

According to efficient markets research a "buy and hold" strategy coupled with the random selection of securities from the entire market's portfolio will, in most cases, yield returns at least as good as those returns earned by professional traders who rapidly turn over their portfolios.

Question 24

The weekend effect suggests that stock prices tend to be lower on Fridays than on Mondays.

Question 25

When adjusted for risk larger firms tend to post higher returns on their stock than the stock returns of smaller companies; this phenomenon is known as the small firm effect.

Question 26

According to the January effect stock prices tend to be lowest in January and highest in December.

Question 27

Signaling occurs when insiders in a corporation take actions that reach public notice.

Question 28

The concept of asymmetrical information suggests that some data relevant to the true value of securities is accessible only to selected traders.

Question 29

ADRs are negotiable warehouse receipts for deposits in foreign banks that are denominated in a currency other than U.S. dollars.

Question 30

ADRs are not sensitive to currency risk.

Question 31

Today it takes about two days to settle the average stock transaction in the United States.

Question 32

All ADRs have corporate sponsors.

Question 33

The Nikkei Index contains prices only for the stock of companies represented on the TSE's second section.

Question 34

The TOPIX includes the prices of all stock traded on the Tokyo Stock Exchange.

Question 35

Households continue to be the dominant holders of corporate stock in the United States.

Question 36

Mutual funds are particularly attractive to wealthy investors.

Question 37

The over-the-counter market is the market for large institutional investors.

Question 38

Investors use a put option contract to protect their profit potential while hedging against a price decline.

Question 39

Cross-listing of stocks internationally is prohibited under the Securities Act of 1975.

Question 40

The portion of the global market for corporate stock that is devoted to new stock issues is declining rapidly today.

Question 41

A growing volume of stock trading at exchanges outside the U.S. is due, in part, to privatization of many state-owned businesses.

Question 42

Foreign companies whose stock is traded in the U.S. must register with the SEC.

Question 43

Trading in sponsored SDRs is the largest and fastest growing market for the shares of foreign companies traded in U.S. markets.

Question 44

Those possessing private or inside information or special skills do, at times, appear to earn excess returns.

Question 45

Recent research has definitely established that stock prices display mean reversion over time.

Question 46

The market for Initial Public Offerings (IPOs) is growing rapidly worldwide.

Question 47

The ability for people to live longer helps explain some of the stock market's growth.

Question 48

An analysis of earlier decades suggests that the stock market is indeed more volatile than it was during the 1960s, 1970s and 1980s.

Question 49

Employee stock options are contracts that allow employees to purchase a defined number of equity shares at a lower-than-market price during a set time period.

Question 50

The goal of Regulation FD (Fair Disclosure) was to give all market professionals access to significant new information about a company.

Question 51

Holdings of stock by households, which are individuals and families, represent the largest share of investors in corporate stock in the United States; in 2007 was nearly $6.5 trillion.

Question 52

The value of corporate stock in the United States at the end of 2009 was about $20.451 trillion.

Question 53

Holdings of foreign equities by US residents total around $9 trillion, which is approximately three trillion more than foreign investors' holdings of US stocks.

Question 54

Most corporations rely primarily on retained earnings to meet their funding needs, but these earnings may not always be sufficient to match the investment expenditures a corporation would like to make and therefore the firm needs to turn to the debt and equity markets.

Question 55

Most firms rely upon a mix of retained earnings, debt and equity to fund their ongoing capital investment programs and to this mix of funding may well change depending on where the firm's is in its industry's lifecycle.

Question 56

If a firm relies too lightly on equity for financing it may send a signal to the market that its stock is overvalued, at which point investors may sell the stock decreasing the price of the stock.

Question 57

Treasury shares can be reissued without additional filing fees in the future, should the firm wish to tap the equity market for funds.

Question 58

The process in the equity markets to determine the value placed on shares of stock is referred to as price association.

Question 59

Organized exchanges are auction markets, where buyers and sellers call out orders to a specialist on the floor of the exchange who acts as an intermediary for stocks listed on the exchange by matching open buy and sell orders and is referred to as "open outcry."

Question 60

The specialist firms operating in the stock exchange act as both brokers and dealers, buying and selling for other brokers and for themselves when there is any imbalance between supply and demand.

Question 61

The second largest economy in the world is China.

Question 62

The NASDAQ, an over-the-counter (OTC) market has registered and supervises more than 8000 brokerage firms and more than 650,000 securities representatives.

Question 63

Foreign companies with more than $5 million in assets and at least 500 shareholders whose stock is traded in the United States must register with the securities and exchange commission.

Question 64

Electronic communication networks (ECNs) allowed trading to take place in stocks listed on virtually all major equity markets with trading hours each day substantially lengthened.

Question 65

NASDAQ has created its own automated electronic trading platform, called Super Montage.

Question 66

The New York Stock Exchange recently merged with our Archipelago Exchange and plans to fully integrate the latter's electronic system into the New York Stock Exchange's traditional open outcry auction system.

Question 67

Market microstructure research is devoted to studying the functional organization of a particular country.

Question 68

The daily trading activity seems to matter with early trades often having more price impact than trades that are the same size occurring late in the day.

Question 69

An important leading indicator of subsequent changes in economic conditions, especially of future developments in industrial production, employment and total spending (GNP), according to your text, is the:

A) Money supply
B) Rate of interest, particularly rates on corporate bonds
C) Standard and Poor's 500 Composite Index
D) Unemployment rate
E) Dun and Bradstreet's Index of Business Failures
F) None of the above

Question 70

An individual stockholder is entitled to purchase any new voting stock, convertible bonds or preferred stock issued by the firm in order to maintain his or her pro rata share of ownership. This is known as the:

A) Preemptive right
B) Right of first refusal
C) Right of access
D) Proportionate share rule
E) None of the above

Question 71

Preferred stock issued by ABC Corporation has a par value of $30 per share with a 7 percent dividend rate. How much in annual dividends is each preferred shareholder entitled to receive on each share owned, provided the company declares a dividend?

A) $3.00
B) $0.70
C) $2.10
D) $4.20
E) None of the above

Question 72

Gemstar Pencil Company issued participating preferred stock last year with a 9 percent dividend rate and $50 par value. The board of directors has just voted to pay preferred shareholders their regular annual dividend, but also has declared a $10 per share common stock dividend. The participation formula calls for common and preferred stockholders to share equally in any net earnings. How much in additional earnings beyond the regular annual dividend will the preferred shareholders receive?

A) $10
B) $4.50
C) $5.50
D) $5.00
E) None of the above

Question 73

The principal investor group in the United States holding shares of corporate stock is:

A) Pension funds
B) Commercial banks
C) Insurance companies
D) Mutual funds
E) Households
F) None of the above

Question 74

The largest institutional holder of corporate stock in the United States is:

A) Commercial banks
B) Insurance companies
C) Pension funds
D) Mutual funds
E) None of the above

Question 75

The listing of stock on an exchange:

A) Is automatic for most stock provided the company issuing the stock pays an annual membership fee
B) Is not dependent on the earning power of the company whose stock is a candidate for listing
C) Is not dependent on the number of common shares held by the public
D) Is a significant influence on the stock's liquidity, enhancing the liquidity of exchange-traded stock relative to that of unlisted stock
E) None of the above is correct

Question 76

Participants on an exchange who trade in one or a limited number of shares of stock are called:

A) Floor brokers
B) Specialists
C) Odd-lot traders
D) Floor traders
E) None of the above

Question 77

Traders on an exchange who are employed by member brokerage firms to represent the orders of their customers on the exchange floor are known as:

A) Floor brokers
B) Floor traders
C) Specialists
D) Commission brokers
E) None of the above

Question 78

The market for securities listed on a stock exchange but traded over the counter is known as the:

A) Over-the-counter market
B) Third market
C) Curb market
D) Straddle market
E) None of the above

Question 79

The view of the market that says stock prices reflect all publicly available information is known as the ______ form of the efficient markets hypothesis.

A) Weak
B) Semi-strong
C) Strong
D) Random walk
E) Fundamental

Question 80

The price of a stock option is known as the:

A) Call price
B) Straddle price
C) Option premium
D) Index fee
E) None of the above