Deck 3: The Financial Environment: Markets, institutions, and Investment Banking

Question 1

Financial asset markets deal with stocks,bonds,mortgages,and other claims on real assets with respect to the distribution of future cash flows.

Answer 1

True

Question 2

When a corporation wants to raise funds by issuing new stocks or bonds,it generally uses the services of

A) an investment banker.
B) a commercial lender.
C) the Securities and Exchange Commission (SEC).
D) the New York Stock Exchange (NYSE).
E) None of the above.

Answer 2

A

Question 3

Money markets are markets for

A) Foreign currency exchange.
B) Consumer automobile loans.
C) Corporate stocks.
D) Long-term bonds.
E) Short-term debt securities.

Answer 3

E

Question 4

One of the benefits from financial intermediation is risk diversification in that the pool of funds collected can be spread across a variety of investments.

Question 5

Because foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue than their U.S.counterparts,such banks often engage in numerous aspects of multi-layer financial deals.

Question 6

The money market is the market for securities with maturities over one year and includes such financial assets as stocks and long-term corporate bonds.

Question 7

The existence of financial intermediaries greatly increases the efficiency of financial markets because,without them,savers would have to provide funds directly to borrowers,which would be a much costlier process.

Question 8

The securities exchange commission is the U.S.government agency that regulates the issuance and trading of stocks and bonds.

Question 9

Under a best efforts arrangement,the investment bank purchases all of the shares from the firm and then resells the share to the public.Under this arrangement the investment banks assumes significant risk.

Question 10

Treasury bills,which represent debt of the U.S.government,have maturities less than one year.As a result,in which type of financial market do outstanding,or already issued,Treasury bills trade?

A) capital market
B) primary market
C) money market
D) stock markets
E) Treasury bills trade in more than one of the above markets.

Question 11

The over-the-counter market is a network of dealers that provides for trading securities not listed on organized exchanges.

Question 12

A corporate stock that was issued last year would now trade in the __________ market.

A) primary
B) secondary
C) money
D) debt
E) government securities

Question 13

One advantage of common stock as a source of funds is that the underwriting and distribution costs of common stock are usually much lower than those for debt.

Question 14

The OTC market is a physical exchange,much like the New York Stock Exchange,where securities dealers provide trading in unlisted securities.

Question 15

American depository receipts are foreign stocks that sell in American stock exchanges and are denominated in dollar prices.

Question 16

If an individual investor buys and sells existing stocks through a broker,these are primary market transactions.

Question 17

If a corporation that has been in business for many years (for example IBM)wants to raise funds by issuing new common stock,its stock will be sold in the __________ market.

A) primary
B) secondary
C) debt
D) money
E) In this case, the stock can be sold in more than one of the above markets.

Question 18

One advantage of using common stock as a source of funds is that common stock does not legally obligate the firm to make payments to stockholders.

Question 19

A publicly owned corporation is simply a company whose shares are held by the investing public,which may include other corporations and institutions.

Question 20

The debt markets are segmented based on the maturity of the debt instruments,the type of debt instruments,and the participants in the market.

Question 21

Which of the following transactions takes place in secondary markets?

A) New stock sold in an initial public offering.
B) Treasury securities auctioned off by the government.
C) Stock sold by an insurance company to adjust its portfolio of assets'.
D) Stock sold in a seasoned equity offering.
E) None of the above.

Question 22

Which of the following factors distinguish the banking system in the United States from banking structures in other countries?

A) Financial institutions in the United States are less regulated than their foreign counterparts.
B) Financial institutions in the United States have fewer limitations with regard to branching activity than their foreign counterparts.
C) Financial institutions in the United States have greater limitations with regard to non-banking business relationships than their foreign counterparts.
D) Financial institutions in the United States have been able to grow much larger in size than their foreign counterparts.
E) Financial institutions in the United States dominate international banking activities.

Question 23

An agreement for the sale of securities in which the investment bank handling the transaction gives no guarantee that the securities will be sold is a(n)__________.

A) best efforts arrangement
B) guaranteed issue arrangement
C) underwritten arrangement
D) private placement
E) None of the above

Question 24

A _______ option gives the _________ the right to _________ a fixed number of shares at a specified price for a certain amount of time.

A) call; seller; sell
B) put; owner; buy
C) call; owner; buy
D) put; seller; sell

Question 25

Which of the following is not a considered financial intermediary?

A) commercial bank
B) savings and loan association
C) pension fund
D) investment bank
E) All of the above are financial intermediaries.

Question 26

The facilities needed to conduct over-the-counter market transactions include all of the following except:

A) physical stock exchange to sell and buy stocks
B) securities dealers who make the market
C) brokers acting as agent to bring investors and dealers together
D) electronic networks that provide communication links between brokers and dealers.
E) all of the above are needed for over-the-counter market transactions.

Question 27

Which of the following advantages of going public simultaneously implies a potential disadvantage of going public?

A) Facilitates in stockholder diversification.
B) Changes liquidity of the firm's stock.
C) Alters the difficulty associated with obtaining capital.
D) Establishes a market value for the firm.
E) Changes name recognition of the company.

Question 28

An agreement for the sale of securities in which the investment bank guarantees the sale by purchasing the securities from the issuer and then sells the securities in the primary is a(n)__________.

A) best efforts arrangement
B) guaranteed issue arrangement
C) underwritten arrangement
D) private placement
E) None of the above

Question 29

Which of the following is not an advantage of going public?

A) It allows a firm's founders to diversify their holdings.
B) It increases the liquidity of the stock.
C) It establishes a value for the firm.
D) It makes it easier to raise new equity capital in the future.
E) All of the above are advantages of going public.

Question 30

A corporation that is owned by a few individuals who are typically associated with the firm's management is a __________ corporation.

A) private
B) public
C) diversified
D) closely held
E) listed

Question 31

Which of the following is usually cited as a disadvantage of issuing new common stock as a method of financing?

A) Common stock does not have a maturity date, thus it is an open-end commitment of the firm's earnings.
B) Since sale of common stock increases the number of owners and the amount of capital at risk, the firm's bond rating is usually negatively affected and its cost of debt rises.
C) If the firm currently has more equity than its optimal capital structure dictates and it issues more equity, then the average cost of capital will most likely rise.
D) Common stock is not an attractive option if the firm seeks to increase its reserve borrowing capacity.

Question 32

Large,well-known public companies can reduce the time required to register and issue securities by using a(n)

A) Shelf registration.
B) Subchapter S registration.
C) Underwriting syndicate.
D) Secondary market registration.
E) "Red herring" registration.

Question 33

The process of converting an exchange from a mutual ownership structure to a stock owned is known as what?

A) Privatization
B) Diversification
C) Demutualization
D) Industrialization

Question 34

If you wanted to purchase previously issued shares of stock from another investor you would find the shares in the

A) primary market.
B) debt market.
C) IPO market.
D) secondary market.
E) SEO market.

Question 35

The market for newly issued stock by firms that were private is normally called

A) the seasoned equity market.
B) the over-the-counter market.
C) the initial public offering market.
D) the secondary market.
E) the stock market.

Question 36

Which of the following is not a benefit of financial intermediation?

A) Reduced costs.
B) Risk diversification.
C) Tax-free returns.
D) Financial flexibility.

Question 37

Which of the following is considered an organized stock exchange?

A) New York Stock Exchange (NYSE)
B) National Association of Security Dealers Automated Quotation System (NASDAQ)
C) Over-the-Counter (OTC) market
D) All of the above are organized exchanges.
E) None of the above is an organized exchange.

Question 38

Certificates representing ownership in stocks of foreign companies,which are held in a trust bank located in the country the stock is traded are called __________.

A) Certificates of Ownership
B) Foreign Stock Funds
C) Mutual Funds
D) American Depository Receipts
E) Investment Bankers

Question 39

Capital markets are markets for

A) commercial paper.
B) short-term debt securities.
C) long-term debt securities.
D) Treasury notes.
E) none of the above.

Question 40

Which form of informational market efficiency states that the market price of an asset contains all of the pertinent information regarding the value of that security?

A) Strong-form
B) Semistrong-form
C) Weak-form
D) Economic-form