Question 1

Money markets refer to markets where excess corporate cash is exchanged for foreign currencies that can earn a higher return than domestic money.

Accepted Answer

Money markets refer to markets where short-term financial instruments (such as Treasury bills and commercial paper) and deposits with maturities of one year or less are traded. It is not specifically focused on exchanging corporate cash for foreign currencies.

Question 2

When a company is looking to raise money through issuing more shares of stock, that is considered in the secondary market.

Accepted Answer

When a company issues more shares of stock to raise money, it is participating in the primary market. The secondary market is where investors buy and sell shares among themselves.

Question 3

The secondary market characteristically has had stable prices over the past 20 years.

Accepted Answer

The secondary market has not had stable prices over the past 20 years. Prices have fluctuated based on market conditions and external factors such as economic events and regulatory changes.

Question 4

The ultimate measure of performance is not what the firm profits, but how the profits are valued by the investor.

Accepted Answer

The ultimate measure of performance is not just the profit earned by the firm, but also the perception of the investors towards those profits. The investors may value profits differently based on various factors such as sustainability, quality, growth potential, etc. Hence, a firm's performance cannot solely be assessed by its profits, but also by how the investors perceive them.

Question 5

In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered sold in the primary market.

Accepted Answer

Stocks sold on the New York Stock Exchange or NASDAQ are traded in the secondary market, where existing shares are bought and sold among investors. The primary market refers to the issuance of new shares directly from companies to investors.

Question 6

The primary market includes the sale of securities by way of initial public offerings.

Accepted Answer

The primary market is where the sale of securities takes place for the first time through initial public offerings (IPOs).

Question 7

Because socially desirable goals can hinder profitability in many instances, managers should not try to operate under the assumption of wealth maximization.

Accepted Answer

Managers should always operate under the assumption of wealth maximization as it is their primary goal to maximize shareholder wealth. While socially desirable goals should be considered, they should not hinder profitability as that will ultimately impact shareholder wealth.

Question 8

Insider trading involves the use of information not available to the general public to make profits from trading in a company's stock.

Accepted Answer

Insider trading is illegal and involves using information that is not available to the general public to make profits from trading in a company's stock. It is considered unethical and can lead to penalties including fines, imprisonment, and loss of professional licenses.

Question 9

Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.

Accepted Answer

This statement accurately describes the nature of financial markets as a global network of various individuals and institutions involved in lending, borrowing, and ownership of public companies worldwide.

Question 10

Capital markets refer to those markets dealing with short-term securities that have a life of one year or less.

Accepted Answer

Capital markets actually refer to markets that deal with long-term securities, such as stocks, bonds, and other financial instruments with a maturity of more than one year.

Question 11

High-quality initial public offerings are usually sold in a primary market, such as the New York Stock Exchange. However, low-quality stocks must usually be sold in secondary markets, such as NASDAQ.

Accepted Answer

This statement is false. Both high-quality and low-quality stocks can be sold in both primary and secondary markets. The decision of where to list a stock depends on various factors such as the company's size, industry, and investor demand.

Question 12

New issues are sold in the secondary market.

Accepted Answer

New issues are sold in the primary market, while the secondary market deals with the trading of previously issued securities.

Question 13

Irrational exuberance is when companies have stock that is undervalued.

Accepted Answer

Irrational exuberance is actually the opposite - it's when companies have stock that is overvalued due to excessive optimism or hype in the market.

Question 14

Social responsibility and profit maximization are synonymous.

Accepted Answer

Social responsibility and profit maximization are not synonymous as social responsibility is concerned with the impact of business activities on society and the environment, while profit maximization is focused on maximizing the financial gains of the business. A socially responsible business may prioritize ethical and sustainable practices over maximizing profits, while a business solely focused on profit maximization may disregard the social and environmental consequences of their actions.

Question 15

Although NASDAQ is a secondary market, some of the firms traded there, such as Microsoft, are large enough to move to the primary market if they so desire.

Accepted Answer

The primary market is where securities are created (i.e., a company issues new shares to the public for the first time through an IPO), while the secondary market, such as NASDAQ, is where investors buy and sell securities they already own. The size of a company like Microsoft does not determine its ability to "move" between these markets, as they serve different purposes.

Question 16

Existing securities are traded in the secondary market.

Accepted Answer

Existing securities, such as stocks and bonds that have already been issued, are traded in the secondary market. The primary market, on the other hand, deals with the sale of newly issued securities.

Question 17

Many companies have cross-listed their stock on multiple international stock exchanges and more than several hundred foreign companies have listed their shares on the New York Stock Exchange.

Accepted Answer

Many companies have cross-listed their stock on multiple international stock exchanges and foreign companies have indeed listed their shares on the New York Stock Exchange.

Question 18

If an investor hears of a large change that a company is going to make through a news article and reacts quicker than any other investor, it is considered insider trading.

Accepted Answer

Insider trading refers to buying or selling securities based on non-public information that could impact the price of the stock. In this scenario, the information was revealed through a news article, making it public knowledge and not insider information. Therefore, the investor's reaction would not be considered insider trading.

Question 19

When an investor has the ability to control how the stock price changes, that is considered insider trading.

Accepted Answer

Insider trading refers to trading based on confidential or non-public information. It is illegal and unethical. Having control over stock price is not considered insider trading, as long as the trader does not use any confidential or privileged information to influence the stock price. However, manipulating the stock price through illegal means is a form of securities fraud.

Question 20

Money markets refer to those markets dealing with short-term securities having a life of one year or less.

Accepted Answer

Money markets include trading in short-term securities such as treasury bills, commercial paper, certificates of deposit, and short-term bonds that have a maturity of one year or less.

Quiz 1: The Goals and Activities of Financial Management