Deck 3: The Financial Environment: Markets, Institutions, and Investment Banking

Question 1

Unlike physical asset markets, which deal with products such as wheat, autos, real estate, and machinery, financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows generated by such assets.

Answer 1

True

Question 2

The debt markets are segmented based on the maturity of the debt instruments, the type of debt instruments, and the participants in the market.

Answer 2

True

Question 3

Dual listing of a stock is advantageous to a company. It is not of any benefit to the stock exchanges, but they allow dual listing because of regulatory requirements.

Answer 3

False

Question 4

An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.

Question 5

A money market is the market for trading in securities with maturities over one year and includes such financial assets as stocks and long-term corporate bonds.

Question 6

Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock markets fiercely competitive.

Question 7

Primary markets are exchanges with physical locations, whereas secondary markets are over-the-counter markets.

Question 8

An individual investor is using the services of a broker to buy and sell stocks currently being traded in the stock market. This transaction is referred to as a primary market transaction.

Question 9

In the United States, sales of new stocks and bonds are regulated by the Securities and Exchange Commission (SEC).

Question 10

The trade-through rule states that a stock trade should be executed at the best price that is available in all of the stock markets. In other words, a trade order continues to pass through the markets until the best price is reached.

Question 11

The Securities Exchange Commission is a major U.S. stock exchange that facilitates trading in listed securities.

Question 12

The Securities and Exchange Commission (SEC) cannot exercise control over stock trades by corporate insiders.

Question 13

A primary market is that segment of the financial markets where the instruments that are traded have original maturities equal to one year or less.

Question 14

The Securities and Exchange Commission (SEC) regulations are intended to ensure that investors receive fair disclosure of financial and nonfinancial information from privately held companies.

Question 15

An over-the-counter market is a network of brokers and dealers, connected electronically by telephones and computers that provides for trading in securities not listed on the physical stock exchanges.

Question 16

Electronic communications networks (ECNs) provide an alternative trading medium, which has increased competition with the stock exchanges.

Question 17

The mandatory trade-through rule followed for trading in securities leads does not work to the benefit of the shareholders.

Question 18

Dual listing of a stock leads to a decrease in the liquidity of the stock.

Question 19

The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.

Question 20

The New York Stock Exchange (NYSE) is an example of an over-the-counter exchange.

Question 21

Which of the following example involves transferring income to the future as well as transferring income from the future?

A) Buying a car with own surplus funds
B) Buying a car with a bank loan
C) Buying a security with own funds
D) Buying a security with borrowed funds
E) Selling a security to buy an insurance policy

Question 22

When a business sells its stocks or bonds to investors without going through any type of intermediary or financial institution, this process is known as a(an) _____.

A) initial public offering
B) best-effort arrangement
C) underwriting
D) direct transfer
E) primary market offering

Question 23

Under a best efforts arrangement, the investment bank purchases all of the shares from the issuing firm and then resells the shares to the public. Under this arrangement, the investment banks assume significant risk.

Question 24

Whole-life polices offer both insurance coverage and a savings feature, whereas term life policies do not.

Question 25

Which of the following are the correct classifications of informational efficiency?

A) Weak-form, semistrong-form, and strong-form
B) Past-form, present-form, and future-form
C) Normal-form, and abnormal-form
D) Primary-form, and secondary-form
E) Physical-form, and over-the counter-form

Question 26

The form of informational market efficiency that states that current market prices of securities reflect all information contained in past price movements is known as the _____.

A) economic efficiency
B) semistrong-form efficiency
C) strong-form efficiency
D) weak-form efficiency
E) real-time efficiency

Question 27

The international market for bonds has grown at a slower rate as compared to the international stock markets.

Question 28

Which of the following terms refers to the process of converting an exchange that is a not-for-profit organization and is owned by its members, to a stock ownership organization?

A) Privatization
B) Diversification
C) Demutualization
D) Consolidation
E) Flotation

Question 29

Primary markets are markets _____.

A) where the instruments traded have original maturities equal to one year or less
B) where loans are traded
C) where options and futures are issued by corporations
D) where financial assets that have previously been issued by various organizations are traded among investors
E) in which various organizations raise funds by issuing new securities

Question 30

Which form of informational market efficiency states that current market prices of securities reflect all pertinent information?

A) Strong-form
B) Semistrong-form
C) Weak-form
D) Economic-form
E) Real-form

Question 31

Identify the various types of efficiencies that market efficiency refers to.

A) Economic efficiency and trading efficiency
B) Transactional efficiency and economic efficiency
C) Transactional efficiency and informational efficiency
D) Transactional efficiency and trading efficiency
E) Economic efficiency and informational efficiency

Question 32

A stock with a dual listing is _____.

A) registered to be traded in more than one money market
B) registered to be traded in the money market as well as the capital market
C) registered to be traded in the debt market and the stock market
D) registered to be traded in more than one capital market
E) registered to be traded in the primary market as well as the secondary market

Question 33

In an underwritten arrangement, the investment banker assures the company coming up with a new issue of securities that the entire issue will be sold, so the investment banker bears significant risks in such an offering.

Question 34

Identify the form of market efficiency where the information about past trends in investment prices is of no use in selecting winning investments, but the investors can still make use of privately held information to earn abnormal return.

A) economic efficiency
B) strong-form efficiency
C) semistrong-form efficiency
D) weak-form efficiency
E) real-time efficiency

Question 35

If you wanted to purchase previously issued shares of stock from another investor, you would trade in the _____.

A) primary market
B) debt market
C) IPO market
D) secondary market
E) derivatives market

Question 36

When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of _____.

A) an investment banker
B) a commercial lender
C) the Securities and Exchange Commission (SEC)
D) the New York Stock Exchange (NYSE)
E) an over the counter derivatives market

Question 37

As compared to U.S banks, foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue. Therefore, foreign banks often engage in numerous aspects of multilayer financial deals.

Question 38

Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently.

Question 39

The existence of financial intermediaries greatly increases the efficiency of financial markets because, without them, savers would have to provide funds directly to borrowers, which would be a costlier process.

Question 40

William and Kate invest in two different securities carrying the same amount of risk. However, William earned a 10 percent return and Kate earned a 7 percent return on their investments. The additional return on William's investment is considered a(n) _____.

A) risk adjusted return
B) justified return
C) abnormal return
D) efficient return
E) premium return

Question 41

Zinc Corporation, a large, well-known public company that frequently issues securities, files a master registration statement with the Securities and Exchange Commission (SEC) and then updates it with a short-form statement just prior to each individual offering. The company is making use of which of the following procedures?

A) Underwriting registration
B) Shelf registration
C) Best-effort registration
D) Securities diversification
E) Initial public offering registration

Question 42

Zync Corporation decides that instead of simply offering a block of its debt securities for sale to the investment banker that submits the highest price, it should come up with a plan with a single investment banker. The procedure that the company has decided to follow is known as a _____.

A) best-efforts arrangement
B) competitive bid
C) negotiated deal
D) trade-through arrangement
E) financial intermediation

Question 43

Organizations that create various loans and investments from funds provided by depositors are known as _____.

A) investment banks
B) financial intermediaries
C) derivatives markets
D) over-the-counter markets
E) designated market makers

Question 44

Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all interested investment bankers. This procedure is known as a _____.

A) financial intermediation
B) negotiated deal
C) competitive bid
D) shelf registration
E) dual listing

Question 45

Listing requirements of a security, which has no maturity date, refer to the _____.

A) characteristics a firm must possess to be listed on a stock exchange
B) characteristics a firm must possess to be listed with the securities and exchange commission
C) characteristics a firm must possess to be listed on a debt exchange
D) characteristics a firm must possess to be listed on an options exchange
E) characteristics a firm must possess to be listed on a primary exchange

Question 46

An arrangement for the sale of a new issue of debt securities in which the investment banking firm typically buys the securities from the issuing firm and then sells the securities in the primary markets, hoping to make a profit, is called a(n) _____.

A) best-efforts arrangement
B) underwritten arrangement
C) guaranteed capital arrangement
D) privately placed arrangement
E) accelerated securities exchange arrangement

Question 47

An agreement for the distribution of an issue of securities in which the investment bank handling the transaction gives no assurance that the entire issue will be sold is called a(n) _____.

A) private placement
B) guaranteed issue arrangement
C) underwritten arrangement
D) best-efforts arrangement
E) shelf registration

Question 48

The expenditure incurred by a company in connection with its initial public offer is called the _____.

A) shelf registration cost
B) underwriter's spread
C) initiation cost
D) flotation cost
E) bid spread

Question 49

Welsh Corporation wants to raise capital to invest in a new project. The capital investment in the project is estimated at $525,000. The firm plans to raise the needed funds by issuing new debt. It is required to pay its investment banker 5 percent of the issue's total value. How much debt does the firm need to issue?

A) $525,000
B) $552,632
C) $498,750
D) $551,250
E) $575,886

Question 50

Financial intermediaries spread their risk by providing funds to a large number and variety of borrowers by offering many different types of loans. Due to this, the loan portfolios of intermediaries are said to be _____.

A) well diversified
B) well consolidated
C) economically efficient
D) partially underwritten
E) partially shelf registered

Question 51

Which of the following is the correct expression for the amount of common stock or debt that a company needs to issue after taking into account the flotation costs?

A) Amount of issue = (Net proceeds - Other flotation costs in dollars) / (1 - Percentage flotation costs)
B) Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 - Percentage flotation costs)
C) Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 + Percentage flotation costs)
D) Amount of issue = (Net proceeds - Other flotation costs in dollars) / (1 + Percentage flotation costs)
E) Amount of issue = (Net proceeds + Other flotation costs in dollars) × (1 - Percentage flotation costs)

Question 52

Which of the following is the reason for the formation of underwriting syndicates?

A) To ensure that the auction trading process is completed in a fair and efficient manner
B) To enhance liquidity in large block trades by maintaining continuous up-to-date prices for the securities they are assigned
C) To regulate the issuance and trading of stocks and bonds
D) To provide the issuing company with the most competitive underwriting bids
E) To spread the risk associated with the purchase and distribution of a new issue of securities

Question 53

Which of the following steps is a part of a company's Stage II decisions of raising capital?

A) Deciding whether to go for a competitive bid or negotiated deal with the investment bank
B) Deciding on the type of securities to be issued
C) Deciding whether to go for a best-efforts or underwritten issue
D) Deciding on an investment banker
E) Deciding on the amount of capital to be issued

Question 54

Dealer's spread refers to the _____.

A) the sum of the bid and asked prices of a security and represents the dealer's revenue from the transaction
B) the sum of the bid and asked prices of a security and represents the dealer's markup, or profit
C) the difference between the bid and asked prices of a security and represents the dealer's markup, or profit
D) the difference between the bid and asked prices of a security and represents the dealer's revenue from the transaction
E) the ratio of the bid price of a security to its asked price and represents the dealer's markup, or profit

Question 55

The process by which commercial banks transform funds provided by savers into funds used by borrowers is called _____.

A) investment banking
B) shelf registration
C) diversification
D) underwriting
E) financial intermediation

Question 56

Which of the following steps is a part of a company's Stage I decisions of raising capital?

A) Deciding whether to go for a competitive bid or a negotiated deal with the investment bank
B) Deciding whether to go for a best-efforts or an underwritten issue
C) Determining the flotation costs
D) Deciding the offering price
E) Reevaluating the decisions about the size of the issue and the type of securities to be issued

Question 57

A document describing a new security issue and the issuing company is called a(n) _____.

A) registration statement
B) underwriting statement
C) prospectus statement
D) shelf statement
E) abridged statement

Question 58

The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the issuing firm is known as the _____.

A) offering price
B) flotation cost
C) underwriter's spread
D) bid price
E) premium cost

Question 59

Treasury bills are issued by the U.S. government. In which type of financial market do outstanding, or already issued treasury bills trade?

A) Capital market
B) Primary market
C) Stock market
D) Money market
E) Derivatives market

Question 60

Which of the following is true about the process of setting the offering price of an issue?

A) The offering price of the initial public offering of the stock of a privately held company is determined by a financial intermediary, whereas the offering price of the seasoned offering of a public company is determined by an investment bank.
B) An investment banker has an easier job of selling the issue if it carries a relatively high price.
C) An investment bank finds it easier to set the offering price of an initial public offering as compared to that of a seasoned offering.
D) An investment bank finds it easier to set the offering price of a seasoned offering of a private company as compared to a seasoned offering of a public company.
E) If the company is already publicly owned, the offering price will be based on the existing market price of the stock or the yield on the firm's existing bonds.

Question 61

Creation of new organizations to monitor rules associated with the capital, liquidity, and risk of institutions to help prevent future failures of mega financial organizations was proposed in which of the following acts?

A) Securities and Exchange Commission Act
B) Wall Street Transparency and Accountability Act
C) Emergency Economic Stabilization Act of 2008
D) Basel III Accord (2010)
E) Dodd-Frank Wall Street Reform and Consumer Protection Act

Question 62

Which of the following agreements were made as a part of the Basel III Accord (2010)?

A) Agreement to increase banks' capital (owners' equity) requirements in an effort to reduce the risk that mega bank failures will cause future financial crises
B) Agreement to put restrictions on the ability of the U.S. government to use taxpayers' funds to bail out large financial institutions
C) Agreement to create new organizations to help provide consumers clear and accurate information related to credit so that better-informed decisions can be made
D) Agreement to permit the U.S. government to purchase up to $700 billion in troubled mortgages in an attempt to improve liquidity in the financial markets
E) Agreement to limit the salaries of executives whose companies received Troubled Asset Relief Program (TARP) funds.

Question 63

The decision to limit salaries of executives whose companies received Troubled Asset Relief Program (TARP) funds was under which of the following acts?

A) Basel III Accord (2010)
B) Emergency Economic Stabilization Act of 2008
C) Dodd-Frank Wall Street Reform and Consumer Protection Act
D) Wall Street Transparency and Accountability Act
E) Securities and Exchange Commission Act

Question 64

Which of the following financial intermediaries operates as a not-for-profit organization?

A) Commercial bank
B) Credit union
C) Thrift institution
D) Mutual fund
E) Whole-life insurance company

Question 65

Credit unions, mutual funds, and thrift institutions are all examples of _____.

A) financial intermediaries
B) investment banks
C) regulatory bodies
D) underwriters
E) over-the-counter markets

Question 66

Investment companies that use the money provided by savers to buy various types of financial assets, including stocks and bonds are called _____.

A) commercial banks
B) investment banks
C) credit unions
D) mutual funds
E) thrift institutions

Question 67

A depository institution that is owned by its depositors, who are often members of a common organization or association, such as an occupation, a religious group, or a community is called a(an) _____.

A) underwriting syndicate
B) mutual fund
C) investment bank
D) credit union
E) commercial bank

Question 68

During the past decade, the areas of greatest worldwide growth lay in the emerging markets of _____.

A) China, India, and Brazil
B) China, India, and Argentina
C) India, Brazil, and South Africa
D) China, Brazil, and Argentina
E) China, South Africa, and Argentina

Question 69

Which of the following statements about term life insurance is correct?

A) It is administered primarily by the trust departments of commercial banks.
B) The premiums associated with a term insurance policy are fixed payments computed as an average of the premiums required over the expected life of the insured person.
C) It offers both insurance coverage and a savings feature.
D) It is a relatively short-term contract that provides financial protection for a temporary period.
E) Investors who prefer to receive current income can invest in income policies, and investors who are willing to accept higher risks in hopes of obtaining higher returns can invest in growth funds.

Question 70

Mutual funds _____.

A) are depository institutions that are owned by its depositors, who are often members of a common organization or association
B) are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds in the financial markets
C) cater to savers, especially individuals who have relatively small savings or need long-term loans to purchase houses
D) are organizations that distribute new issues of securities for corporations
E) are groups of investment banking firms formed to spread the risk associated with the purchase and distribution of a new issue of securities

Question 71

Which of the following is true about financial institutions in the United States and those in other countries?

A) U.S. financial institutions have been much more heavily regulated as compared to their foreign counterparts with regard to expansion (branching) and the services that could be offered.
B) U.S. financial institutions have been much more leniently regulated as compared to their foreign counterparts with regard to expansion (branching) and the services that could be offered.
C) U.S. financial institutions and their foreign counterparts have similar regulations with regard to expansion (branching) and the services that could be offered.
D) Most U.S. intermediaries are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of foreign financial institutions have been severely restricted until recently.
E) U.S. financial institutions and their foreign counterparts have similar regulations with regard to engaging in nonbanking activities.

Question 72

Which of the following financial intermediaries is also known as a savings and loan association?

A) Commercial bank
B) Credit union
C) Mutual fund
D) Thrift institution
E) Pension fund