Deck 2: The Financial Market Environment

Question 1

NASDAQ is considered an OTC market since it is not recognized by the SEC as a "listed exchange."

Answer 1

False

Question 2

In the Eurobond market,corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States.

Answer 2

True

Question 3

Primary and secondary markets are markets for short-term and long-term securities,respectively.

Answer 3

False

Question 4

Which of the following provides savers with a secure place to invest funds and offer both individuals and companies loans to finance investments?

A)investment banks
B)securities exchanges
C)mutual funds
D)commercial banks

Question 5

Government is typically a ________.

A)net provider of funds because it borrows more than it saves
B)net demander of funds because it borrows more than it saves
C)net provider of funds because it can print money at will
D)net demander of funds because it saves more than it borrows

Question 6

Capital markets are for investors who want a safe temporary place to deposit funds where they can earn interest and for borrowers who have a short-term need for funds.

Question 7

Money markets are markets for long-term funds such as bonds and equity.

Question 8

An efficient market is a market that establishes correct prices for the securities that firms sell and allocates funds to their most productive use as a result of the intense competition among investors.

Question 9

The shadow banking system describes a group of institutions that engage in lending activities,much like traditional banks.

Question 10

In the OTC market,the ask price is the highest price offered by a dealer to purchase a given security.

Question 11

Which of the following assists companies in raising capital,advise firms on major transactions such as mergers or financial restructuring,and engage in trading and market making activities?

A)investment banks
B)securities exchanges
C)mutual funds
D)commercial banks

Question 12

Money markets involve the trading of securities with maturities of one year or less.

Question 13

Commercial banks advise firms on major transactions such as mergers or financial restructurings.

Question 14

Firms that require funds from external sources can obtain them ________.

A)through financial institutions
B)from central bank directly
C)through the foreign exchange market
D)by issuing T-bills

Question 15

As a key participant in financial transactions,individuals are ________.

A)net demanders of funds because they save more money than they borrow
B)net users of funds because they save less money than they borrow
C)net suppliers of funds because they save more money than they borrow
D)net purchasers of funds because they save more money than they borrow

Question 16

Government can obtain funds ________.

A)by trading in the equity market
B)by issuing financial instruments such as futures and options
C)through the foreign exchange market
D)by selling debt securities

Question 17

Which of the following serves as an intermediary channeling the savings of individuals,businesses,and governments into loans and investments?

A)financial institutions
B)financial markets
C)Securities and Exchange Commission
D)OTC market

Question 18

Investment banks are institutions that ________.

A)perform all activities of commercial banks and retail banks
B)are exempted from Securities and Exchange Commission regulations
C)engage in trading and market making activities
D)are only limited to capital market activities

Question 19

The over-the-counter (OTC)market is a market for trading smaller and unlisted securities.

Question 20

A financial institution is an intermediary that channels the savings of individuals,businesses,and governments into loans or investments.

Question 21

Eurocurrency deposits arise when a corporation or individual makes a deposit in a bank in a currency other than the local currency of the country where the bank is located.

Question 22

The ________ is created by a number of institutions and arrangements that allow the suppliers and demanders of long-term funds to make transactions.

A)forex market
B)capital market
C)money market
D)commodities market

Question 23

The ________ is created by a financial relationship between suppliers and demanders of short-term funds.

A)stock market
B)capital market
C)forex market
D)money market

Question 24

Which of the following is TRUE of preferred stock?

A)It has features of bonds and a common stock.
B)It has a claim on assets prior to creditors in the event of liquidation.
C)Its dividends can be paid only after paying dividends to the common stockholders.
D)It usually has a maturity of thirty years.

Question 25

Financial markets are intermediaries that channel the savings of individuals,businesses,and government into loans or investments.

Question 26

Which of the following is TRUE of international equity markets?

A)In the international equity market,corporations cannot raise capital through IPOs,instead they can raise capital by trading in the secondary market.
B)In the international equity market,corporations can easily manipulate the price of the shares since it is not regulated by any regulatory bodies.
C)In the international equity market,corporations can only sell blocks of shares to institutional investors from European Union.
D)In the international equity market,corporations can sell blocks of shares to investors in a number of different countries simultaneously.

Question 27

Long-term debt instruments used by both government and business are known as ________.

A)preferred stocks
B)T-bills
C)bonds
D)equities

Question 28

In a ________ market,the buyer and seller are brought together to trade securities in an organization called ________.

A)dealer; securities market
B)broker; over-the -counter market
C)broker; securities market
D)dealer; over-the-counter market

Question 29

The Eurocurrency market is a market for short-term bank deposits denominated in U.S.dollars or other easily convertible currencies.

Question 30

Which of the following is TRUE of a dealer market?

A)Buyers and sellers are never brought together directly.
B)Brokers execute the buy or sell orders in a dealer market.
C)It has centralized trading floors.
D)It is a part of the broker market.

Question 31

Which of the following is TRUE of a secondary market?

A)It is a market for an unlisted company to raise equity capital.
B)It is a market where securities are issued through private placement
C)It is a market in which short-term money market instruments such as Treasury bills are traded.
D)It is a market in which preowned securities are traded.

Question 32

A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses is called a(n)________.

A)future market
B)forex market
C)efficient market
D)weak-form market

Question 33

By definition,the money market involves the buying and selling of ________.

A)stocks and bonds
B)short-term securities
C)all financial instruments except derivatives
D)secured premium notes

Question 34

Which of the following is TRUE of a primary market?

A)It is an organized market in which all financial derivatives are traded.
B)It is regulated by The Sarbanes-Oxley Act.
C)It is a market where smaller,unlisted securities are traded.
D)It is the only market in which the issuer is directly involved in the transaction.

Question 35

The money market is a financial relationship created by a number of institutions and arrangements that allows suppliers and demanders of long-term funds to make transactions.

Question 36

Which of the following is an example of marketable securities?

A)U.S.Treasury bills
B)treasury stock
C)mortgage backed securities
D)loans

Question 37

Which of the following is TRUE of a securities exchange?

A)It serves as an intermediary by channeling the savings of individuals,businesses,and governments into loans or investments.
B)It borrows funds directly from the financial institutions.
C)It is an association of banks who meet to buy and sell stocks and bonds.
D)It provides a marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities.

Question 38

The key securities traded in the capital markets are ________.

A)commercial papers and Treasury bills
B)Treasury bills and certificates of deposit
C)stocks and bonds
D)bills of exchange and commercial papers

Question 39

Most money market transactions are made in ________.

A)common stock
B)marketable securities
C)commodities market
D)preferred stock

Question 40

The over-the-counter (OTC)market is ________.

A)a highly liquid market as compared to NASDAQ
B)a market in which low risk-high return securities are traded
C)an organized market in which all financial derivatives are traded
D)a market where smaller,unlisted securities are traded

Question 41

The ________ market is where securities are initially issued and the ________ market is where pre-owned securities (not new issues)are traded.

A)primary; secondary
B)money; capital
C)secondary; primary
D)primary; money

Question 42

The market for short-term bank deposits denominated in dollars and other currencies is the ________.

A)money market
B)Eurocurrency market
C)primary market
D)broker market

Question 43

In a securities market,the bid price is typically higher than the ask price.

Question 44

An efficient market is one where ________.

A)prices of stocks move up and down widely without apparent reason
B)prices of stocks remain low for long periods of time
C)prices of stocks are unaffected by market news
D)the price of a security is an unbiased estimate of its true value

Question 45

The sale of a new security directly to an investor or a group of investors is called ________.

A)arbitraging
B)short selling
C)a capital market transaction
D)a private placement

Question 46

A public offering is the sale of a new security issue-typically debt or preferred stock-directly to an investor or group of investors.

Question 47

The Glass-Steagall Act was imposed to allow commercial and investment banks to combine and work together.

Question 48

One sign that the stock market is efficient is that prices in the market move seemingly at random,display almost no predictable,repeating patterns.

Question 49

Which of the following is a means of selling bonds or stocks to the public?

A)private placement
B)public offering
C)organized selling
D)direct placement

Question 50

Which of the following is a forum in which suppliers and demanders of funds can transact business directly?

A)shadow banking system
B)financial markets
C)commercial banks
D)financial institutions

Question 51

You submit an order to buy 100 shares of stock.The price that you pay for the stock is more likely to be the ask price rather than the bid price.

Question 52

One piece of evidence suggesting that the stock market is efficient is that most individual investors cannot earn returns that beat the overall market average return,but professional investors such as mutual fund and pension fund managers generally do earn higher-than-average returns.

Question 53

The ________ represents income to a market maker who helps facilitate securities trading.

A)commission
B)IPO underpricing
C)bid/ask spread
D)cost of doing business

Question 54

A primary market is a financial market in which pre-owned securities are traded.

Question 55

The money market is a market where investors trade highly liquid securities with maturities of 1 year or less.

Question 56

Most businesses raise money by selling their securities in a ________.

A)public offering
B)forex market
C)futures market
D)commodities market

Question 57

Apex Inc.issues a bond of $1,000 which pays interest semiannually at a coupon interest rate of 8%.The maturity of the bond is 15 years.Where should this bond be traded?

A)forex market
B)money market
C)capital market
D)commodities market

Question 58

A ________ is someone who helps facilitate securities trading by offering to buy or sell them at stated bid/ask prices.

A)market maker
B)stockbroker
C)day trader
D)middle man

Question 59

The Eurocurrency market is a market where investors can exchange currencies,for example by trading dollars for euros.

Question 60

The money market is a market ________.

A)that enables suppliers and demanders of long-term funds to make transactions
B)which brings together suppliers and demanders of short-term funds
C)where smaller,unlisted securities are traded
D)where all derivatives are traded

Question 61

Angel capitalists or angels are wealthy individual investors who do not operate as a business but invest in early-stage companies in exchange for a portion of equity.

Question 62

A firm conducting an IPO of common stock sold 1 million new shares in the offering at an offer price of $10 per share.After the offering,the firm had 5 million shares outstanding,and the price of those shares in the secondary market was $12.The total proceeds from the firm's IPO were ________.

A)$60 million
B)$50 million
C)$10 million
D)$12 million

Question 63

Which of the following is an attribute of investment bankers?

A)They make long-term investments for banking institutions.
B)They bear the risk of selling a security issue.
C)They act as middlemen between the issuer and the banker.
D)They provide the issuer with advice relating to the amounts of dividend to be paid.

Question 64

Small business investment companies (SBICs)are corporations chartered by the federal government that can borrow at attractive rates from the U.S.Treasury and use the funds to make venture capital investments in private companies.

Question 65

The term red herring refers to ________.

A)the fact that most firms conducting an IPO are losing money,also known as running red ink
B)a firm that is conducting an IPO without fully complying with all government regulations
C)the fact that IPOs are typically underpriced
D)an early version of the prospectus with red printing to indicate that the information the document contains is not final

Question 66

The Federal Deposit Insurance Corporation (FDIC)________.

A)is an agency,created by the Glass-Steagall Act,that monitors banks on a regular basis to ensure that they were safe and sound
B)is an agency that monitors business combinations between commercial banks,investment banks,and insurance companies
C)guarantees individuals will not lose any money held at any type of financial institution that fails
D)guarantees individuals will not lose any money,up to a specified amount,held at any type of financial institution that fails

Question 67

The Gramm-Leach-Bliley Act ________.

A)is created to monitor banks on a regular basis to ensure that they were safe and sound
B)allows business combinations between commercial banks and investment banks,but not insurance companies
C)allows business combinations between commercial banks,investment banks,and insurance companies
D)was signed during the Great Depression because of the financial crisis

Question 68

The Securities Act of 1933 focuses on regulating the sale of securities in the primary market,whereas the 1934 Act deals with the regulations governing the transactions in the secondary market.

Question 69

A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue.

A)securities analyst
B)trust officer
C)commercial loan officer
D)investment banker

Question 70

The Glass-Steagall Act ________.

A)was intended to regulate the activities in the secondary market
B)created the Securities Exchange Commission
C)separated the activities of commercial and investment banks
D)was intended to regulate the activities in the primary market

Question 71

Which of the following acts regulates the primary market in which securities are originally issued to the public?

A)The Securities Act of 1933
B)The Gramm-Leach-Bliley Act
C)The Securities Exchange Act of 1934
D)The Glass-Steagall Act

Question 72

________ is a financial intermediary that specializes in selling new security issues.

A)An investment bank
B)A commercial bank
C)A securities dealer
D)A stock exchange

Question 73

The ________ created new agencies including the Financial Stability Oversight Council and the Bureau of Consumer Financial Protection.

A)Securities Exchange Act of 1934
B)Dodd-Frank Wall Street Reform and Consumer Protection Act
C)Securities Act of 1933
D)Gramm-Leach-Bliley Act

Question 74

When an investment bank buys new securities from a firm and takes on the responsibility of reselling those securities to the public it is engaged in ________.

A)market manipulation
B)underwriting
C)the road show
D)underpricing the security offering

Question 75

A firm conducting an IPO of common stock sold 1 million new shares in the offering at an offer price of $10 per share.After the offering,the firm had 5 million shares outstanding,and the price of those shares in the secondary market was $12.The firm's IPO was underpriced by ________.

A)0%
B)100%
C)20%
D)16.7%

Question 76

A prospectus is a portion of the security registration statement that describes the key aspects of the issue,the issuer,and its management and financial position.

Question 77

Which of the following acts regulates the secondary market?

A)The Securities Act of 1933
B)The Gramm-Leach-Bliley Act
C)The Securities Exchange Act of 1934
D)The Glass-Steagall Act

Question 78

A prospectus is another term for a firm's annual report showing the firm's prospects for the coming year.

Question 79

A firm conducting an IPO of common stock sold 1 million new shares in the offering at an offer price of $10 per share.After the offering,the firm had 5 million shares outstanding,and the price of those shares in the secondary market was $12.The firm's market capitalization is ________.

A)$60 million
B)$50 million
C)$12 million
D)$10 million

Question 80

An underwritten issue of common stock is one in which a firm purchases insurance to cover unexpected losses suffered by shareholders.