Deck 12: Financial Markets and Institutions

Question 1

Which is more important, the primary market for stocks or the secondary market?

Answer 1

The secondary market is more important for two reasons:
$\bullet$ The overwhelming majority of trades occur in the secondary market, so it has more impact on the lives of investors; and
$\bullet$ Without a successful secondary market for stocks, there would be no primary market.

Question 2

On January 28, Krumholz Industries announced in their annual report and in their annual analyst call with Wall Street that earnings for the prior year were down 6.2% over the prior year. On January 29, Krumholz' common stock had a capital gain of 3.6%. What reason could there be for the increase in the stock price?

Answer 2

If analysts expected Krumholz' earnings to fall by more than 6.2%, this would have been good news.

Question 3

Yancy Products' common stock has a required return of 14.65% and a beta of 1.33. The risk-free rate is 2.66%, and the return to the stock market is 12.12%. Is Yancy beating the market? Prove your answer using the data.

Answer 3

Based on Yancy's level of systematic risk, it should be earning 15.24%, so Yancy is underperforming the market.

Question 4

Based on the efficient market hypothesis, what type of data may be used to earn excess returns if the market is:

Question 5

What are the forces that help make markets efficient?

Question 6

What are institutional investors?

Question 7

What do all money market securities have in common?

Question 8

There are two big differences between common and preferred equity. What are they?

Question 9

What are the two main differences between a forward contract and a futures contract?

Question 10

What does a call option offer the purchaser?

Question 11

Starbucks' common stock (SBUX) is currently selling for $64.24. SBUX has call options with a strike price of $62.50 and three weeks remaining until maturity that sell for $2.28. Determine the following things with regard to the SBUX call options:

Question 12

What are the three tasks mandated to the Federal Reserve Bank?

Question 13

What does the Federal Open Market Committee do?

Question 14

What is the difference between a defined benefit retirement plan and a defined contribution retirement plan?