Deck 2: The Creation of Financial Assets

Question 1

If the underwriter overprices a new issue,the market price of the securities will rise.

Answer 1

False

Question 2

The cost of an underwriting (to the firm issuing the securities)is the difference between the price of the public and the proceeds received by the firm.

Answer 2

True

Question 3

The preliminary prospectus ("red herring")does not include the offer price of a new stock issue.

Answer 3

True

Question 4

The primary role of organized security exchanges is to raise capital (money)for firms.

Question 5

The SEC establishes the price of a new stock issue.

Question 6

There is no secondary market for negotiable CDs (i.e.,jumbo certificates of deposit).

Question 7

Commercial banks offer money market accounts to compete with money market mutual funds.

Question 8

A "lock-up" refers to a security transaction with an assured profit.

Question 9

If the price of an initial public offering of stock rises,the windfall gain goes to the underwriter.

Question 10

The "syndicate's" role in an underwriting is to sell the new issue of securities.

Question 11

A shelf-registration involves the selling of new securities without having them registered with the SEC.

Question 12

In a "best effort" sale of securities,the risk of the sale rests with the investment banker.

Question 13

Financial intermediaries facilitate the flow of funds from firms to savers.

Question 14

A commercial bank is an example of a financial intermediary.

Question 15

A new issue of corporate securities sold to the general public must be registered with the SEC.

Question 16

In an "underwriting" the investment banker guarantees the firm selling the securities a specified amount.

Question 17

A prospectus is required when a corporation issues new securities that are sold to the general public.

Question 18

Bank deposits are safe since they are insured by the Securities and Exchange Commission (SEC).

Question 19

A direct transfer of funds from savers to firms occurs when new securities are issued in the primary market.

Question 20

The direct sale of new securities to a pension plan is a private placement,and the securities do not have to be registered with the SEC.

Question 21

An investment banker

A) issues checking and savings accounts
B) facilitates the sale of new securities
C) is another name for a brokerage firm
D) makes loans to new firms

Question 22

Money market mutual funds acquire short-term money market instruments such as commercial paper.

Question 23

The syndicate
1)facilitates the sale of new securities
2)is formed by the originating house
3)creates a secondary market in stocks

A)1 and 2
B)1 and 3
C)2 and 3
D)all of these choices

Question 24

Treasury bills have no risk of default but risk of loss of interest payments.

Question 25

Money market mutual funds invest in
1)commercial paper
2)repurchase agreements
3)corporate bonds

A)1 and 2
B)1 and 3
C)2 and 3
D)all of these choices

Question 26

A new issue of corporate securities sold to the general public must be

A) registered with the SEC
B) initially sold through brokers
C) offered initially to existing stockholders
D) bought by specialists in corporate securities

Question 27

If the initial offer price of a new issue is too low,

A)1 and 3
B)1 and 4
C)2 and 3
D) 2 and 4

Question 28

Which of the following is not a short-term,liquid asset?

A) negotiable certificate of deposit
B) U.S. Treasury bills
C) corporate stock
D) commercial paper

Question 29

Which of the following is not a financial intermediary?

A) commercial bank
B) stock exchange
C) savings and loan association
D) credit union

Question 30

Commercial banks issue
1)demand deposits (checking accounts)
2)negotiable certificates of deposit
3)money market accounts

A)1 and 2
B)1 and 3
C)2 and 3
D)all of these choices

Question 31

A Eurodollar CD is a certificate of deposit issued in the United States by a foreign bank.

Question 32

When a seller executes a repurchase agreement,the seller agrees to repurchase the asset at a lower price.

Question 33

One of the major advantages associated with liquid money market securities is safety of principal.

Question 34

Commercial paper is a secured,short-term note.

Question 35

The shares of money market mutual funds are insured by the federal government up to $100,000.

Question 36

Which of the following is not part of the underwriting process?

A) the prospectus
B) the originating house
C) the SIPC
D) the SEC

Question 37

Funds invested in a money market mutual fund are insured by FDIC.

Question 38

The deregulation of the banking system has

A) increased the growth of money market mutual funds
B) resulted in lower interest rates
C) blurred distinctions among financial intermediaries
D) reduced the power of the SEC

Question 39

The final prospectus does not include

A) the firm's balance sheet
B) the price of the securities sold to the public
C) the underwriter's profit on the sale
D)the underwriting discount

Question 40

Financial intermediaries
1)transfer funds from borrowers to savers
2)create claims on themselves
3)transfer funds from savers to borrowers
4)create claims on lenders

A)1 and 2
B)1 and 4
C)2 and 3
D)only 3

Question 41

Commercial paper is

A) a short-term unsecured debt of a corporation
B) a short-term secured debt of a corporation
C) a long-term unsecured debt of a corporation
D) a long-term secured debt of a corporation

Question 42

Which of the following does not have default risk?

A) money market mutual funds
B) commercial paper
C) negotiable certificates of deposit
D) treasury bills

Question 43

FDIC insures

A) treasury bills
B) money market mutual funds
C) savings accounts
D) repurchase agreements