Deck 2: Financial Markets and Institutions

Question 1

A primary market would be utilized when:

A)Investors buy or sell existing securities.
B)Shares of common stock are exchanged.
C)Securities are initially issued.
D)A commission must be paid on the transaction.

Answer 1

Securities are initially issued.

Question 2

When corporations need to raise funds through stock issues, they rely upon the:

A)Primary market.
B)Secondary market.
C)Over-the-counter market.
D)Centralized NASDAQ exchange.

Answer 2

Primary market.

Question 3

The primary distinction between securities sold in the primary and secondary markets is the:

A)Riskiness of the securities.
B)Price of the securities.
C)Previous issuance of the securities.
D)Profitability of the issuing corporation.

Answer 3

Previous issuance of the securities.

Question 4

One reason suggesting that banks may be better than individuals at matching lenders to borrowers is that banks:

A)Can shift loan risk to their deposit customers.
B)Are motivated by the potential for profit.
C)Do not have any income tax liability.
D)Have information to evaluate creditworthiness.

Question 5

An example of how financial intermediaries can assist in shifting an individual's consumption to the future is:

A)Lending money to the individual.
B)Providing a checking account.
C)Opening a savings account.
D)Requiring purchases to be in cash.

Question 6

Which of the following financial assets might be least likely to have an active secondary market?

A)Common stock of a large firm
B)Bank loans made to smaller firms
C)Bonds of a major, multinational corporation
D)Debt issued by the United States Treasury

Question 7

Which of the following is not typically considered a function of financial intermediaries?

A)Providing a payment mechanism
B)Investing in real assets
C)Accumulating funds from smaller investors
D)Spreading, or pooling risk among individuals

Question 8

Short-term financing decisions commonly occur in the:

A)Primary markets.
B)Secondary markets.
C)Capital markets.
D)Money markets.

Question 9

A financial institution:

A)Is a kind of financial intermediary.
B)Simply pools and invests savings.
C)raises financing by selling shares or policies.
D)Invests primarily in securities.

Question 10

Which of the following mutual funds has a tax advantage?

A)Balanced funds.
B)Pension funds.
C)Bond funds.
D)Funds that invest in foreign countries.

Question 11

Primary markets can be distinguished from secondary markets in that primary markets sell:

A)Lower valued shares.
B)Previously unsold shares.
C)Only the shares of large firms.
D)Shares with greater profit potential.

Question 12

Corporate debt instruments are most commonly traded in the:

A)TSX
B)Money market.
C)Over-the-counter market.
D)Corporation's headquarters.

Question 13

Which of the following financial intermediaries has shown a preference for investing in long-term financial assets?

A)Commercial banks
B)Insurance companies
C)Finance companies
D)Savings-and-loan associations

Question 14

Which of the following financial markets is located in one, centralized location?

A)TSX.
B)NASDAQ.
C)Over-the-counter market.
D)European Monetary Union.

Question 15

When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of General Motors stock, General Motors receives:

A)The dollar value of the transaction.
B)The dollar amount of the transaction, less brokerage fees.
C)Only the par value of the common stock.
D)Nothing.

Question 16

Corporations that do not issue financial securities such as stock or debt obligations:

A)Will not be able to increase sales.
B)Cannot be profitable.
C)Generate sufficient funds to fulfill their needs.
D)Do not face double taxation of their profits.

Question 17

Banks cover the costs of the service they provide primarily via:

A)A management fee.
B)A service charge.
C)An interest rate differential.
D)An operating fee.

Question 18

A share of IBM stock is purchased by an individual investor for $75 and later sold to another investor for $125.Who profits from this sale?

A)IBM.
B)The first investor.
C)The second investor.
D)Profit is split between IBM and the investor.

Question 19

Financial markets are used for trading:

A)Both real assets and financial assets.
B)The goods and services produced by a firm.
C)Securities, such as shares of IBM.
D)The raw materials used in manufacturing.

Question 20

Which of the following financial markets is not located in one, centralized location?

A)TSX
B)CDNX
C)NASDAQ
D)AT&T

Question 21

A financial market is where securities are issued and traded.

Question 22

A capital investment that generates a 10 percent rate of return is worthwhile if:

A)Corporate bonds of similar risk offer 8 percent rates of return.
B)Corporate bonds of similar risk offer 10 percent rates of return.
C)top-quality corporate bonds offer 10 percent rates of return.
D)The expected rate of return on the stock market is 12 percent.

Question 23

Which of the following financial intermediaries can loan money directly to businesses?

A)Mutual funds
B)Pension funds
C)Insurance companies
D)Mutual funds, pension funds, and insurance companies.

Question 24

The opportunity cost of capital for a safe investment is:

A)The rate of return on U.S.Treasury notes.
B)The expected rate of return on the stock market.
C)The interest rate that the firm pays on a loan from a bank or insurance company.
D)The interest rate that the firm receives on its checking account.

Question 25

for the consumer, a credit card:

A)Transports money forward in time.
B)Provides liquidity.
C)Is a convenient way to pay?
D)Is both (a) and (b)

Question 26

An IPO is an acronym that stands for:

A)Immediate Price Offering
B)International Public Office
C)Initial Price Order
D)Initial Public Offering

Question 27

The opportunity cost of capital:

A)Is the same for all projects requiring the same amount of capital investment.
B)Is the same for all the projects of a particular firm.
C)Is the same for all firms that undertake a particular project.
D)Is the same at all times for a particular project.

Question 28

A Seasoned Equity Offering refers to companies:

A)Offering new securities after their IPO
B)Offering new securities each season
C)Testing whether there is a market for the shares
D)Delisting certain amount of their stock

Question 29

Which of the following functions does not require financial markets?

A)Transporting cash across time.
B)Provision of liquidity.
C)Risk reduction by investment in diversified portfolios.
D)Provision of trade information.

Question 30

IPOs for smaller corporations are sold in secondary markets.

Question 31

Which of the following information is not provided by the financial markets?

A)The price of six ounces of gold.
B)The cost of borrowing $500,000 for five years.
C)Microsoft's earnings in 2002.
D)The cost of wiring one million yen to Japan.

Question 32

Which of the following is least liquid?

A)Foreign currency.
B)U.S.Treasury bonds.
C)Rare coins.
D)Savings deposit.

Question 33

Liquidity is important to a mutual fund because:

A)A fund that is more liquid will attract more investors.
B)The fund's shareholders may want to redeem their shares at any time.
C)The fund's managers need liquidity to trade actively.
D)The fund needs to distribute payouts to its shareholders and managers periodically.

Question 34

Property insurance companies protect themselves against the extensive damage caused by hurricanes and earthquakes by:

A)Selling thousands of polices to different homeowners.
B)Factoring the cost into the price of the policies.
C)Buying reinsurance against such catastrophes.
D)Declaring bankruptcy when the need arises.

Question 35

Excess cash held by a firm should be:

A)Reinvested by the firm in projects offering the highest rate of return.
B)Reinvested by the firm in projects offering rates of return higher than the cost of capital.
C)Reinvested by the firm in the financial markets.
D)Distributed to shareholders in the form of dividends.

Question 36

A private equity fund is a financial intermediary that

A)Invests in the equity of private businesses
B)Provide financing and help nurture mature and troubled companies
C)Both A & C
D)Does not have the same need for financial disclosure

Question 37

Suppose Cryogenic Concepts expects a 10 percent return on a new product investment, when top-quality corporate bonds are also offering 10 percent rates of return.What should the firm do?

A)Invest in the new product.
B)Invest in the top-quality corporate bonds.
C)Pay out cash to its shareholders.
D)Either (a) or (b).

Question 38

The cost of capital:

A)Is the expected rate of return on capital investment
B)Is an opportunity cost determined by the risk-free rate of return.
C)Is the interest rate that the firm pays on a loan from a bank or insurance company.
D)For risky investments is normally higher than the firm's borrowing rate.

Question 39

An example of how financial intermediaries can assist in shifting an individual's consumption forward in time is:

A)Providing a line of credit.
B)Opening a passbook account.
C)Starting a life insurance policy.
D)Investing in an index fund.

Question 40

Which of the following actions does not help to reduce risk?

A)Extending the service warranty for your notebook.
B)Converting your money market account into a mutual fund account.
C)Contracting to sell your farm produce to the neighborhood grocery.
D)Buying Japanese yen now when you plan to study in Japan next year.

Question 41

Markets and intermediaries do not provide liquidity, that is, the ability to turn an investment back into cash when needed.

Question 42

Mutual fund managers also try their best to generate superior performance by finding the stock with better than average returns.

Question 43

The opportunity cost of capital is generally not the interest rate that the firm pays on a loan from a bank or insurance company.

Question 44

Do financial institutions have different functions? Explain.

Question 45

Larger Canadian companies having sizable global operations, such as Alcan or Canadian Imperial Bank of Commerce, tend to be cross-listed on the TSX as well as other large international exchanges such as New York Stock Exchange (NYSE)

Question 46

What is meant by over-the-counter trading?

Question 47

Financial managers do not look to financial markets to measure or estimate the cost of capital.

Question 48

Financial intermediaries are the same as manufacturing corporations, because they raise their funds in the same manner.

Question 49

Financial markets and intermediaries do not allow investors and businesses to reduce and reallocate risk.

Question 50

The cost of capital for corporate investment is set by the rates of return on investment opportunities in financial markets.

Question 51

Cash retained and reinvested in the firm's operations is cash saved and invested on behalf of the firm's shareholders.

Question 52

An IPO is not the only occasion on which newly issued stock is sold to the public.

Question 53

A new issue of securities increases both the amount of cash held by the company and the amount of stocks or bonds held by the public.

Question 54

How can an individual save and invest in a corporation?

Question 55

What are the functions of financial markets?

Question 56

What are the key advantages of mutual funds and pension funds?

Question 57

Why are secondary market transactions of importance to corporations?

Question 58

As corporations grow, their requirements for outside capital can expand dramatically.

Question 59

Why are secondary market transactions of importance to corporations?

Question 60

Most trading in the shares of large Canadian corporations takes place on stock exchanges such as the Toronto Stock Exchange (TSX)

Question 61

Explain the function of a hedge fund and some of the strategies it uses to maximize wealth.

Question 62

Discuss four types of information is provided by financial institutions provide

Question 63

Why do non-financial corporations need modern financial markets and institutions?

Question 64

Provide five functions of financial markets and intermediaries

Question 65

Why is there a need for a company to issue shares after its IPO? What are some implications of this?