Deck 7: Primary and Secondary Markets

Question 1

Financial markets dealing with financial claims that are newly issued are called:

A) Initial public offering market.
B) Primary market.
C) Secondary market.
D) Seasoned market.
E) None of the above.

Answer 1

Primary market.

Question 2

The secondary market is the market for the trading of:

A) Newly issued securities.
B) Previously issued securities.
C) Seasoned securities.
D) b and c only.
E) None of the above.

Answer 2

b and c only.

Question 3

The activities of underwriters are regulated by:

A) The Securities Act of 1933.
B) The Securities and Exchange Commission.
C) The Securities Exchange Act of 1934.
D) The Investment Bankers Association.
E) None of the above.

Answer 3

The Securities and Exchange Commission.

Question 4

The preliminary prospectus, which may be distributed to the public during the waiting period for the registration of the security to become effective, is referred to as:

A) Red warning.
B) Red herring.
C) Initial prospectus.
D) Interim offering.
E) None of the above.

Question 5

SEC regulation, which exempts some issues from registration, is the:

A) Regulation Q.
B) Regulation M.
C) Regulation D.
D) Regulation A.
E) None of the above.

Question 6

Rule 144A will contribute to the growth of the private placement market by:

A) Improving the liquidity of securities issued.
B) Reducing the cost of raising funds.
C) Attracting new large institutional investors into the market.
D) a and b only.
E) All of the above.

Question 7

An underwriting arrangement whereby an investment banking firm or group of firms offers a potential issuer of debt securities a firm bid to purchase a specified amount of the securities with a certain coupon rate and maturity is known as:

A) Firm commitment underwriting.
B) Bought deal.
C) Dutch auction.
D) Underwriting process.
E) None of the above.

Question 8

Some underwriting firms have found the bought deal to be attractive because it:

A) Offers timing flexibility.
B) Reduces the risk of capital loss.
C) Requires greater amounts of funds.
D) a and b only.
E) All of the above.

Question 9

When the issuer announces the terms of the issue and interested parties submit bids for the entire issue, the arrangement is referred to as:

A) Bought deal.
B) Auction process.
C) Firm commitment underwriting.
D) Underwriting.
E) None of the above.

Question 10

Competitive bidding underwriting is mandated for certain securities of:

A) Regulated public utilities.
B) Industrials.
C) Municipal debt obligations.
D) a and c only.
E) All of the above.

Question 11

When all bidders pay the highest winning yield bid in a competitive bidding underwriting, this type of auction is referred to as:

A) Single price auction.
B) Dutch auction.
C) Multiple price auction.
D) a and b only.
E) None of the above.

Question 12

An underwriting arrangement in which the underwriter buys the firm's unsubscribed shares is known as:

A) Firm commitment underwriting.
B) Preemptive rights offering.
C) Standby underwriting arrangement.
D) Bought deal.
E) None of the above.

Question 13

A corporation can issue new common stock directly to existing stockholders through a:

A) Warrant.
B) Preemptive rights offering.
C) Initial public offering.
D) Leveraged buyout.
E) None of the above.

Question 14

When world capital markets are mildly segmented, there are opportunities to:

A) Raise funds at a lower cost in capital markets of another country.
B) Reduce the risks of doing business in foreign markets.
C) Earn the same required rate of return on securities of comparable risk.
D) All of the above.
E) None of the above.

Question 15

A firm may seek to raise funds outside its domestic capital market for one or more of the following reasons:

A) The amount of capital sought cannot be raised in its local market.
B) There is an opportunity to raise funds at a lower cost.
C) Funds denominated in another currency are sought.
D) The firm seeks to diversify funding costs.
E) All of the above.

Question 16

In a completely integrated capital market:

A) There are no restrictions to prevent investors from investing in securities issued in any capital market throughout the world.
B) The required return on securities of comparable risk will be the same in all capital markets before adjusting for risk.
C) The required return on securities of comparable risk will be the same in all capital markets after adjusting for taxes and foreign exchange rates.
D) a and c only.
E) All of the above.

Question 17

When the issuer of a security files a registration statement with the SEC, part I of the registration is:

A) The prospectus.
B) Supplemental information.
C) A letter of comments.
D) A deficiency letter.
E) None of the above.

Question 18

Any company that publicly offers a security in the U.S. becomes a reporting company and, as such, is subject to:

A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The SEC.
D) The NASD.
E) None of the above.

Question 19

Non-U.S. companies, which publicly offer a security in the U.S., must file financial statements based on:

A) Their home country's GAAP.
B) U.S. GAAP.
C) International accounting standards.
D) Foreign accounting rules.
E) None of the above.

Question 20

The key distinction between a primary market and a secondary market is that:

A) In the secondary market the issuer receives funds from the buyer.
B) In the secondary market the issuer of the asset does not receive funds from the buyer.
C) In the secondary market the existing issue changes hands.
D) b and c only.
E) None of the above.

Question 21

Investors in financial assets receive several benefits from a secondary market including:

A) Liquidity of their assets.
B) Information about the assets' fair values.
C) Lower search and transactions costs.
D) a and b only.
E) All of the above.

Question 22

In the U.S., secondary trading of common stock occurs on:

A) Major national stock exchanges.
B) Regional stock exchanges.
C) The OTC market.
D) All of the above.
E) a and b only.

Question 23

Secondary markets outside the U.S. are located in:

A) London.
B) Paris.
C) Frankfurt.
D) Osaka.
E) All of the above.

Question 24

When prices of securities are determined continuously throughout the trading day as buyers and sellers submit orders, the market is called:

A) A call market.
B) A bid market.
C) A continuous market.
D) An auction market.
E) None of the above.

Question 25

A perfect market results when:

A) The number of buyers and seller is sufficiently large.
B) All buyers and sellers are price takers.
C) No transactions costs.
D) No taxes.
E) All of the above.

Question 26

Financial markets are not frictionless because of:

A) Commissions charged by brokers.
B) Bid-ask spreads charged by dealers.
C) Trading restrictions.
D) Costs of acquiring information about financial assets.
E) All of the above.

Question 27

Conditional orders include:

A) Market orders.
B) Limit orders.
C) Stop orders.
D) b and c only.
E) All of the above.

Question 28

A stop order that designates a price limit is a:

A) Stop order.
B) Limit order.
C) Stop-limit order.
D) Market-if-touched order.
E) None of the above.

Question 29

A short sale involves:

A) Selling securities that are owned at the time of sale.
B) Selling securities that are not owned at the time of sale.
C) Buying the securities, which are subsequently sold.
D) All of the above.
E) None of the above.

Question 30

A transaction in which an investor borrows to buy additional securities using the securities themselves as collateral is called:

A) Leveraged buyout.
B) Buying on margin.
C) Short selling.
D) All of the above.
E) None of the above.

Question 31

An investor receives a margin call from the broker when:

A) The investor's margin account falls below the initial margin but is still above the maintenance margin..
B) The investor's margin account falls below the minimum maintenance margin.
C) The investor's margin account reaches zero.
D) b and c.
E) All of the above.

Question 32

The major difference between the broker and the dealer is that:

A) The broker receives a commission for receiving, transmitting, and executing investors' orders.
B) The broker does not buy and hold in inventory or sells from inventory the financial asset that is subject of a trade.
C) The broker acts as an auctioneer in some market structures.
D) a and b only.
E) All of the above.

Question 33

A market is price efficient if:

A) It is riskless.
B) It offers investors reasonably priced services related to buying and selling
C) At all times prices fully reflect all available information that is relevant to the valuation of securities.
D) There are no transactions costs and taxes.
E) None of the above.

Question 34

If investors can obtain transaction services as cheaply as possible, the market is said to be:

A) Price efficient.
B) Operationally efficient.
C) Weak form efficient.
D) Strong form efficient.
E) None of the above.

Question 35

If the price of a security reflects all information, whether or not it is publicly available, the market is said to be:

A) Weak form efficient.
B) Semi-strong form efficient.
C) Strong form efficient.
D) Operationally efficient.
E) None of the above.

Question 36

The difference between the execution price of a security and the price that would have existed in the absence of the trade is referred to as:

A) The bid-ask spread.
B) The execution cost.
C) The market timing costs.
D) Income spread.
E) None of the above.

Question 37

One of the most important duties of an underwriter is to perform "due diligence."

Question 38

In a preemptive rights offering, the price at which new shares can be purchased is called the subscription price.

Question 39

SEC Rule 144A has decreased foreign private placements.

Question 40

Private placement requires more disclosure.

Question 41

Real world capital markets are completely segmented.

Question 42

The costs associated with frictions generally result in buyers paying less than in the absence of frictions, and/or sellers receiving more.

Question 43

Because of imperfections in real markets, brokers and dealers are necessary to the smooth functioning of a secondary market.

Question 44

Investors who take positions in securities are required to satisfy initial and maintenance margin requirements.

Question 45

Transactions costs include commissions, fees, execution costs, and opportunity costs.

Question 46

What is SEC Rule 144A and its potential impact on the private placement market?

Question 47

Explain what a preemptive rights offering is and why a standby underwriting arrangement may be needed.

Question 48

Explain the differences and similarities between brokers and dealers.

Question 49

Discuss the frictions that cause actual financial markets to differ from a perfect market.