Deck 2: The Financial Markets and Interest Rates

Question 1

One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of pricing information.

Answer 1

False

Question 2

A corporation needing cash sells securities to investors in the secondary market.

Answer 2

False

Question 3

One advantage of being listed on the NYSE is that all trades are made in an auction setting with face-to-face trading between individuals on the floor of the stock exchange.

Answer 3

False

Question 4

Part of the U.S.Government's huge deficit is financed by foreign countries,such as China,which is a savings surplus unit.

Question 5

Stocks listed on the New York Stock Exchange must be traded exclusively on the NYSE in order to maintain the high standards set by the exchange.

Question 6

Over-the-counter markets include all security markets,with the exception of organized exchanges.

Question 7

Individuals,corporations,and governments can be either savings deficit units or savings surplus units.

Question 8

Seasoned secondary offerings occur in the secondary market.

Question 9

Capital markets are all the financial institutions that help a business raise long-term capital.

Question 10

Transactions in the futures markets involve current payments for goods which will be delivered at some future agreed upon date.

Question 11

Organized stock exchanges provide the benefits of a continuous market,fair security pricing,and helping businesses raise new capital.

Question 12

For a firm to have its securities listed on an exchange,it must meet certain requirements.These usually include measures of profitability,size,market value,and public ownership.

Question 13

On the basis of number of shares traded,more stocks are traded over the counter than on organized exchanges.

Question 14

The money market includes transactions in short-term financial instruments.

Question 15

Flotation costs are typically greater in the secondary market than in the primary market.

Question 16

Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year.

Question 17

Each purchase occurring in the secondary markets increases the total stock of financial assets that exist in the economy.

Question 18

Venture capitalists typically provide funds to high-risk startup companies but take no active role in their management.

Question 19

Saving surplus units include individuals and governments,but not corporations.

Question 20

Three ways that savings can be transferred through the financial markets to those in need of funds include direct transfers,indirect transfers using the investment banker,and indirect transfers using the financial intermediary.

Question 21

A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies.Therefore

A) the corporate bonds are indirect securities and the life insurance policies are direct securities.
B) the corporate bonds are indirect securities and the life insurance policies are indirect securities.
C) the corporate bonds are direct securities and the life insurance policies are indirect securities.
D) the corporate bonds are direct securities and the life insurance policies are direct securities.

Question 22

Registration of securities by the SEC indicates to investors that the risk of those securities is reasonable.

Question 23

Financial markets exist in order to allocate savings in the economy to the demanders of those savings.

Question 24

Transactions in common stock occur in the money market,due to the large amount of money involved in such transactions.

Question 25

Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units.

Question 26

A wealthy private investor providing a direct transfer of funds is called

A) a venture capitalist.
B) an investment banker.
C) a financial intermediary.
D) an angel investor.

Question 27

The vast majority of corporate bond business takes place over the counter.

Question 28

Money-market instruments include

A) common stock.
B) preferred stock.
C) T-bonds.
D) T-bills.

Question 29

A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded.

Question 30

Which of the following statements is an example of a futures market transaction?

A) An investor purchases 100 shares of IBM hoping to sell it in two years for a profit.
B) A company purchases an option to buy 1000 barrels of oil anytime between now and the end of the year.
C) A company agrees to purchase 1000 barrels of oil for delivery in six months at a price of $70 per barrel.
D) An executive has a portion of his current year salary deferred until he retires.

Question 31

General Electric (GE)has been a public company for many years with its common stock traded on the New York Stock Exchange.If GE decides to sell 500,000 shares of new common stock,the transaction will be describe as

A) an initial public offering.
B) a secondary market transaction because GE common stock has been trading for years.
C) a seasoned equity offering because GE has sold common stock before.
D) a money-market transaction because GE raises new money to fund its business.

Question 32

John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock.This transaction occurs in the

A) secondary market.
B) primary market.
C) credit market.
D) futures market.

Question 33

Cash markets are often referred to as spot markets.

Question 34

Which of the following is an example of both a capital market and a primary market transaction?

A) The U.S. Government sells 3-month Treasury bills.
B) Microsoft common stock owned by an individual investor is sold to another investor.
C) Ford Motor Company sells a new issue of common stock to raise funds through a public offering.
D) No transactions occur in both primary and capital markets at the same time.

Question 35

General Motors raises money by selling a new issue of common stock.This transaction occurs in

A) the secondary market.
B) the capital market.
C) the money market.
D) the futures market.

Question 36

The process of shelf-registration is beneficial to the issuing firm because it will reduce the time needed for the firm to take an issue to market.

Question 37

Three ways that savings can be transferred through the financial markets include all of the following EXCEPT

A) direct transfer of funds.
B) indirect transfer using the investment banker.
C) indirect transfer using the venture capital firm.
D) indirect transfer using the financial intermediary.

Question 38

Common examples of financial intermediaries include all of the following EXCEPT

A) Venture Capital Firms.
B) Life Insurance Companies.
C) Pension Funds.
D) Mutual Funds.

Question 39

Primary market transactions cannot be undertaken in over the counter markets.

Question 40

ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration.Therefore,ExxonMobil is an example of a(n)

A) savings surplus unit.
B) savings deficit unit.
C) investment banker.
D) financial intermediary.

Question 41

All of the following securities are sold in money markets EXCEPT

A) common stock.
B) commercial paper.
C) 3-month U.S. Treasury bills.
D) 6-month certificates of deposit.

Question 42

An example of a secondary market transaction involving a capital market security is

A) a new issue of a security with a very short maturity.
B) a new issue of a security with a very long maturity.
C) the transfer of a previously-issued security with a very short maturity.
D) the transfer of a previously-issued security with a very long maturity.

Question 43

Prices of securities that are traded on the organized exchanges are determined by

A) a "bid" and "ask" negotiation process amongst brokers who hold these securities in their own account.
B) the Securities Exchange Commission.
C) a continuous auction process reflecting the sentiments of buyers and sellers.
D) the sellers of the securities.

Question 44

Bill is a public accountant auditing Expo Corporation.Based on information in Expo's confidential records,Bill recommends the purchase of Expo stock to his brother.

A) Bill is involved in insider trading prohibited by the SEC.
B) Bill's brother has no direct connection to Expo Corporation and therefore his purchase of the stock is not prohibited by insider trading laws.
C) Bill is not an insider because he is not an officer or employee of Expo Corporation
D) If Bill told a non-relative who purchases Expo stock, no insider trading laws would be violated.

Question 45

An example of a primary market transaction involving a money-market security is

A) a new issue of a security with a very short maturity.
B) a new issue of a security with a very long maturity.
C) the transfer of a previously-issued security with a very short maturity.
D) the transfer of a previously-issued security with a very long maturity.

Question 46

Money-market transactions include which of the following?

A) any security that is paid for with cash
B) 30-year U.S. Treasury bonds
C) all securities paid for with the proceeds of a money-market account
D) securities that have a maturity of less than one year

Question 47

The stock market with the most stringent listing requirements is the

A) New York Stock Exchange (NYSE).
B) NASDAQ Stock Market.
C) American Stock Exchange (AMEX).
D) All organized exchanges have the same listing requirements in order to make trading fair for all investors.

Question 48

Capital market transactions include which of the following?

A) any security that is purchased from a brokerage firm that is well capitalized
B) common stock of a public corporation
C) all securities that are purchased in the open market
D) U.S. Treasury bills

Question 49

Which of the following refers to all institutions and procedures that provide for transactions in short-term debt instruments generally issued by borrowers with very high credit ratings?

A) capital market
B) commercial banks
C) money market
D) stock market

Question 50

All of the following are benefits of organized stock exchanges EXCEPT

A) increased stock price volatility.
B) continuous markets.
C) fair security prices.
D) easier access to new capital for business expansion.

Question 51

Which of the following is NOT a benefit provided by the existence of organized security exchanges?

A) providing a continuous market
B) establishing and publicizing fair security prices
C) helping businesses raise new capital
D) standardization of all debt agreements

Question 52

Capital market instruments include

A) negotiable certificates of deposit.
B) corporate equities.
C) commercial paper.
D) Treasury bills.

Question 53

Which of the following is an advantage of organized stock exchanges?

A) increased stock price volatility
B) screening companies to ensure only low risk stocks are sold
C) providing a continuous market
D) Only profitable companies may issue new securities on an organized exchange.

Question 54

The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called

A) NCIS.
B) NSQA.
C) NASDAQ.
D) NASQ.

Question 55

An example of a primary market transaction is

A) a new issue of common stock by AT&T.
B) a sale of some outstanding common stock of AT&T by an investor.
C) AT&T repurchasing its own stock from a stockholder.
D) all of the above

Question 56

Financial intermediaries

A) offer indirect securities.
B) include the national and regional stock exchange.
C) usually are underwriting syndicates.
D) constitute the various secondary markets.

Question 57

Prices of securities that are traded in the Over-the-Counter Markets are determined by

A) the Federal Trade Commission.
B) a continuous modified auction process.
C) the buyers of these securities.
D) a "bid" and "ask" negotiation process of broker-dealers of these securities.

Question 58

The Securities and Exchange Commission (SEC)

A) regulates only initial public offerings, or IPOs.
B) regulates only primary market transactions to ensure investors are provided with adequate and accurate information on new securities.
C) regulates both primary and secondary markets.
D) regulates initial public offerings, but not seasoned equity offerings, in the primary market.

Question 59

Insurance companies invest in the "long-end" of the securities market by purchasing securities with longer maturities.In which of the following instruments would an insurance company be least likely to invest most of its assets?

A) corporate stocks
B) corporate bonds
C) mortgages
D) commercial paper

Question 60

In August 2004,Google first sold its common stock to the public at $85 per share and raised $1.76 billion.This is an example of

A) a primary market transaction.
B) a secondary market transaction.
C) a venture capital firm transaction.
D) a money-market transaction.

Question 61

Name the benefits derived from the existence of stock exchanges.

Question 62

Because they occur in private,stricter regulations are placed on the private placement of securities.

Question 63

Explain the difference between (a)public offerings and private placements,(b)primary markets and secondary markets,(c)the money market and the capital market,and (d)organized security exchanges and over-the-counter markets.

Question 64

Investment banking firms are prohibited from selling securities due to conflicts of interest.

Question 65

The need for extensive regulation of investment banking firms is limited due to the highly competitive nature of that industry.

Question 66

Preferred stock is traded in the money market,while common stock is traded in the capital market.

Question 67

The syndicate can be thought of as a wholesaler of securities and the dealer organization as a retailer of securities.

Question 68

The competitive bid purchase is largely confined to railroad,public utility,and municipal bond issues.

Question 69

Only individual investors participate in public offerings,while institutional investors participate in private placements.

Question 70

The bid price is the price that a dealer will pay for a security; the asked price is the price at which she will sell a security.

Question 71

The investment banking business is dominated by a few very large,stand-alone investment banking firms.

Question 72

It is common practice among the largest corporations to sell their securities directly to investors.

Question 73

An investment banker assumes underwriting risk in both negotiated purchases and privileged subscriptions with standby agreements.

Question 74

The New York Stock Exchange (NYSE)is

A) an automated electronic trading platform.
B) an auction market with face-to-face trading on the floor of the stock exchange in addition to automated, electronic trading.
C) a hybrid market, allowing for face-to-face trading on the floor of the stock exchange in addition to automated, electronic trading.
D) primarily a futures market.

Question 75

The difference between the price the corporation gets and the public offering price is called the broker-dealer spread.

Question 76

The investment banker prefers to avoid a negotiated purchase because it tends to be the least profitable arrangement for the investment banker.

Question 77

A group of investment bankers organized to distribute large securities issues is known as a syndicate.

Question 78

The investment banker performs three basic functions: (1)underwriting,(2)distributing,and (3)advising.

Question 79

When the corporation sells securities directly to the investment public without involving an investment banker,it is called a privileged subscription.

Question 80

The negotiated purchase is the most prevalent method of securities distribution in the private sector.