Question 1

The London gold fixing is an example of a(n)
A) dealer market.
B) Walrasian auction market.
C) brokered market.
D) secondary market.

Accepted Answer

B

Question 2

When investment bankers underwrite new stock, they
A) sell them on one of the stock exchanges.
B) auction them off to the public.
C) sell them to commercial banks who in turn find buyers.
D) place them with ultimate investors and some intermediaries throughout the country.

Accepted Answer

Investment bankers underwriting new stock place them with ultimate investors and some intermediaries throughout the country. They do not sell them on one of the stock exchanges, auction them off to the public, or sell them to commercial banks who in turn find buyers.

Question 3

The best known financial auction market is the
A) New York Stock Exchange.
B) American Stock Exchange.
C) Pacific Stock Exchange.
D) Nasdaq.

Accepted Answer

The New York Stock Exchange (NYSE) is the best-known financial auction market worldwide. It is the largest stock exchange globally by market capitalization of listed companies and the most reputable and influential based on its history, size, and influence on global financial markets. The NYSE is a hybrid market that combines electronic trading systems and human auctioneers on the trading floor, making it an essential hub for trading equity, bonds, mutual funds, and other financial securities.

Question 4

The greater the number of buyers and sellers with access to securities markets, the
A) higher the true equilibrium price will be.
B) higher the yields on securities will be.
C) lower the yields on securities will be.
D) closer securities prices will be to the true equilibrium price.

Accepted Answer

When there are more buyers and sellers with access to securities markets, there is greater competition and information available, which leads to more efficient pricing of securities. This leads to securities prices being closer to their true equilibrium price. Therefore, choice D is the best answer.

Question 5

When an investment bank guarantees an issuer of new securities a certain price it is acting as a(n)
A) auctioneer.
B) underwriter.
C) broker.
D) dealer.

Accepted Answer

An investment bank that guarantees an issuer of new securities a certain price is acting as an underwriter. Underwriters basically buy new securities from the issuer and then sell them to the public. They assume the risk of not being able to sell the securities at a profit, and therefore, they charge a fee for their services.

Question 6

On the New York Stock Exchange, the specialist at a "post" acts as a(n)
A) broker.
B) auctioneer.
C) dealer.
D) underwriter.

Accepted Answer

The specialist on the New York Stock Exchange acts as an auctioneer, facilitating the buying and selling of stocks by matching buy and sell orders.

Question 7

__________ are the best example of securities that trade primarily in a brokered market.
A) Common stocks
B) Corporate bonds
C) Municipal bonds
D) Tombstones

Accepted Answer

Municipal bonds primarily trade in a brokered market, where transactions are facilitated by brokers rather than through a centralized exchange. This is because municipal bonds, often issued by local governments, have a wide variety of issuers and terms, making them less standardized and more suited to brokered transactions.

Question 8

The three main types of securities market organization are
A) primary, secondary, and tertiary markets.
B) stock, money, and bond markets.
C) public, private, and government markets.
D) auction, dealer, and brokered markets.

Accepted Answer

The three main types of securities market organization are auction, dealer, and brokered markets. Primary and secondary markets refer to the stages of issuance and subsequent trading of securities, while stock, money, and bond markets refer to the types of instruments being traded. Public, private, and government markets are not distinct types of securities markets.

Question 9

An individual who continuously bids for securities that investors want to sell and offers securities that investors want to buy is known as a(n)
A) dealer.
B) auctioneer.
C) broker.
D) underwriter.

Accepted Answer

An individual who continuously bids for securities that investors want to sell and offers securities that investors want to buy is known as a dealer. A broker acts as an intermediary between buyers and sellers, while an underwriter is responsible for issuing and selling new securities to the public. An auctioneer oversees the bidding process for goods or services being sold to the highest bidder.

Question 10

In financial markets, actual market prices sometimes diverge from the equilibrium price because
A) supply is often greater than demand.
B) demand is often greater than supply.
C) supply is equal to demand.
D) of geographical and temporal fragmentation.

Accepted Answer

Geographical and temporal fragmentation refer to differences in supply and demand across different locations and time periods. This can lead to differences in market prices that temporarily diverge from the equilibrium price. In the long run, however, market forces should work to bring prices back to equilibrium. Choices A, B, and C relate to the basic principles of supply and demand and do not provide a sufficient explanation for the phenomenon of diverging market prices.

Question 11

An individual who arranges for buyers and sellers to exchange securities and earns a commission in return is a
A) dealer.
B) auctioneer.
C) broker.
D) underwriter.

Accepted Answer

A broker is an individual who facilitates transactions between buyers and sellers of securities and earns a commission for their services. They do not own the securities themselves, unlike dealers, who buy and sell securities for their own account. Auctioneers are typically utilized in the sale of physical assets, not securities. Underwriters are involved in the initial public offering (IPO) process by purchasing securities from the issuing company and reselling them to investors, but they are not typically involved in the ongoing buying and selling transactions between buyers and sellers.

Question 12

Newly issued stocks and bonds are bought and sold in
A) primary markets.
B) auction markets.
C) futures markets.
D) commodity markets.

Accepted Answer

Newly issued stocks and bonds are offered to the public in primary markets, where investors can purchase them directly from the issuing company or its underwriters. This is different from auction markets, which involve bidding on existing securities, and futures and commodity markets, which deal in contracts for future delivery of goods or financial instruments.

Question 13

A security with a high degree of marketability sells at a price that is
A) highly volatile.
B) unpredictable.
C) lower than other securities.
D) higher than the equilibrium price of less marketable securities.

Accepted Answer

A security with a high degree of marketability is more desirable and easier to trade, leading to higher demand and a higher price. As a result, the price would be higher than the equilibrium price of less marketable securities.

Question 14

The New York Stock Exchange is an auction market in which the role of auctioneers is played by
A) brokers.
B) traders.
C) specialists.
D) agents.

Accepted Answer

Specialists are responsible for maintaining an orderly market by buying and selling securities on their own account as necessary to ensure that there is always a market for a particular stock. They act as auctioneers by matching buy and sell orders and setting the opening and closing prices for each stock.

Question 15

Which of the following is not true with respect to underwriting?
A) Announcements of successful underwritings are called tombstones.
B) Often a number of investments banks band together in a syndicate to market a new issue.
C) Underwritings of new issues take place on the floor of the New York Stock Exchange.
D) The investment bank typically guarantees an issuer of securities a price on the new issue.

Accepted Answer

Underwritings of new issues do not take place on the floor of the New York Stock Exchange. They are typically handled by investment banks through a syndicate, who sell the new securities to investors outside of the exchange. Choices A, B, and D are true statements about underwriting.

Question 16

In return for their services in the primary securities market, investment banks earn a fee called a(n)
A) underwriting spread.
B) bid-asked spread.
C) dealer's spread.
D) broker's spread.

Accepted Answer

Investment banks earn a fee called an underwriting spread for their services in the primary securities market. This fee is calculated as the difference between the price at which the securities are sold to the public and the price paid to the issuer of the securities. The underwriting spread compensates the investment bank for the risk it takes on in underwriting the securities, as well as for its services in marketing and distributing the securities to investors.

Question 17

The over-the-counter (OTC)market is an example of a(n)
A) dealer market.
B) brokered market.
C) auction market.
D) equilibrium market.

Accepted Answer

The over-the-counter (OTC) market is a decentralized market where participants trade directly with one another rather than through a centralized exchange. In this market, dealers act as intermediaries between buyers and sellers, buying and selling securities from their own inventory. This makes it an example of a dealer market.

Question 18

The effectiveness with which markets bring buyers and sellers together is called
A) pricing efficiency.
B) operating efficiency.
C) the theory of efficient markets.
D) bid-asked spread efficiency.

Accepted Answer

Operating efficiency refers to how well a market facilitates transactions between buyers and sellers, minimizing costs and maximizing speed and ease of trading.

Question 19

The type of market in which there is direct interaction between buyers and sellers is a(n)
A) brokered market.
B) auction market.
C) dealer market.
D) primary market.

Accepted Answer

An auction market is a type of market in which buyers and sellers interact directly by submitting bids and offers for securities. The market price is determined by the highest bid and lowest offer that meet, resulting in immediate execution of the trade. In contrast, brokered and dealer markets involve intermediaries who facilitate trades and typically charge fees or commissions. The primary market is where new securities are issued, while the secondary market involves the trading of existing securities.

Question 20

The spread between the bid price and the offer price is a measure of
A) the underwriters' spread.
B) brokers' fees.
C) liquidity costs.
D) sunk costs.

Accepted Answer

The spread between the bid price and the offer price reflects the liquidity costs, which are the costs incurred when buying or selling an asset due to the difference between the buying and selling price. This spread is a measure of how easy or difficult it is to trade an asset in the market. The underwriters' spread refers to the difference between the offer price and the amount paid to the issuer, and brokers' fees are commissions charged by brokers for their services. Sunk costs are costs that have already been incurred and cannot be recovered.

Quiz 6: The Structure and Performance of Securities Markets

The London gold fixing is an example of a(n)

When investment bankers underwrite new stock, they

The best known financial auction market is the

The greater the number of buyers and sellers with access to securities markets, the

When an investment bank guarantees an issuer of new securities a certain price it is acting as a(n)

On the New York Stock Exchange, the specialist at a "post" acts as a(n)

__________ are the best example of securities that trade primarily in a brokered market.

The three main types of securities market organization are

An individual who continuously bids for securities that investors want to sell and offers securities that investors want to buy is known as a(n)

In financial markets, actual market prices sometimes diverge from the equilibrium price because

An individual who arranges for buyers and sellers to exchange securities and earns a commission in return is a

Newly issued stocks and bonds are bought and sold in

A security with a high degree of marketability sells at a price that is

The New York Stock Exchange is an auction market in which the role of auctioneers is played by

Which of the following is not true with respect to underwriting?

In return for their services in the primary securities market, investment banks earn a fee called a(n)

The over-the-counter (OTC) market is an example of a(n)

The effectiveness with which markets bring buyers and sellers together is called

The type of market in which there is direct interaction between buyers and sellers is a(n)

The spread between the bid price and the offer price is a measure of