Question 1

On average,stock markets in emerging economies have grown much more rapidly than stock markets in developed economies during the past decade.

Accepted Answer

According to various reports, such as the one from MSCI, emerging market equities have outperformed developed market equities over the last decade. This can be attributed to various factors such as strong economic growth, favorable demographics, and increasing foreign investment.

Question 2

After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

The marginal investor is the one who sets the price for a stock. This is because they are willing to buy or sell at the current market price, and their actions can influence the overall demand and supply for the stock, thereby affecting its price.

Question 3

The cost of meeting SEC and possible additional state reporting requirements regarding disclosure of certain financial information about the firm,the danger of losing control,and the possibility of an inactive market or low stock price are all potential disadvantages of going public.

Accepted Answer

These potential disadvantages of going public are all true.

Question 4

Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares.

Accepted Answer

Going public does establish a market value for the firm based on supply and demand, but it does not ensure that a liquid market will always exist for the firm's shares. Market liquidity can vary greatly over time due to various factors including investor interest, market conditions, and the overall economic environment.

Question 5

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

Accepted Answer

The OTC (Over-The-Counter) market is not a physical exchange, but rather a decentralized market where securities that are not listed on formal exchanges are traded directly between buyers and sellers.

Question 6

Investment bankers are not really like commercial "bankers" in the sense of taking deposits and issuing loans;rather,they help firms issue securities in the secondary market and their activities are limited to raising new equity capital.

Accepted Answer

Investment banking is different from commercial banking as investment bankers do not take deposits or issue loans but instead help companies issue securities in the secondary market to raise new equity capital.

Question 7

If Firm A owns no real assets of its own,but simply accepts the savings of individuals and invests them in financial assets issued by other firms or individuals,Firm A is a financial intermediary.

Accepted Answer

A financial intermediary is a firm that accepts funds from savers and then invests them in financial assets issued by other firms or individuals. Such intermediaries include banks, insurance companies, pension funds, and mutual funds, among others. Since Firm A operates in this manner, it can be considered a financial intermediary.

Question 8

The conversion of stock exchanges from not-for-profit mutual ownership organizations to for profit organizations is called what?

Accepted Answer

The conversion of stock exchanges from not-for-profit mutual ownership organizations to for-profit organizations is called demutualization. This involves the sale of memberships or equity to shareholders, which results in a shift from the previous mutual ownership structure. Going public refers to the process of a private company becoming a publicly traded company by offering its shares to the general public through an initial public offering (IPO). Privatization refers to the transfer of ownership and control of a government-owned entity to a private sector entity. Communion is not related to this context.

Question 9

____ represent(s)ownership in a company and entitle(s)the holder to future cash distributions from the operations of the firm.

Accepted Answer

Equity represents ownership in a company and entitles the holder to future cash distributions from the operations of the firm, such as dividends. Debt represents borrowed money that must be repaid with interest, and does not entitle the holder to ownership or future cash distributions. Swaps and options are financial derivatives that involve the exchange of cash flows based on future events or prices, but do not represent ownership in a company.

Question 10

When stock in a closely held corporation is offered to the public for the first time the transaction is called "going public" and the market for such stock is called the initial public offering,or IPO,market.

Accepted Answer

This statement is correct. When a closely held corporation makes its shares available to the general public for the first time, the process is known as "going public." The market for such shares is called the initial public offering (IPO) market.

Question 11

Recently,Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share.Hale sold the stock to investment bankers,who in turn sold it to individual and institutional investors.A transaction such as this is said to be a primary market transaction.

Accepted Answer

A primary market transaction is when a company issues new shares and sells them to investors for the first time, as in this case where Hale Corporation announced the sale of 2.5 million newly issued shares of its stock.

Question 12

The percentage of flotation costs associated with a new equity issue is usually quite high for small issues as a consequence of certain fixed costs which must be incurred regardless of the issue size.

Accepted Answer

This statement is true. Flotation costs, which are the costs associated with issuing new securities, consist of both fixed and variable costs. Fixed costs, such as legal and underwriting fees, must be incurred regardless of the size of the issue, which can lead to a higher percentage of flotation costs for small issues.

Question 13

In general,when a firm decides to raise capital there are stage I and stage II decisions.Stage I decisions include the amount to be raised and the type of security to be issued.Once the type of security is chosen this is a decision that cannot be changed in stage II.

Accepted Answer

In stage II decisions, a firm can still make choices regarding the specific terms and conditions of the security to be issued, such as pricing and timing, even though the type of security (e.g., debt or equity) has been chosen in stage I.

Question 14

The market value of the Japanese stock markets exceeds the market value of the major exchanges in the United States.

Accepted Answer

The market value of the major exchanges in the United States, such as the New York Stock Exchange and NASDAQ, exceeds the market value of the Japanese stock markets.

Question 15

The primary role of financial markets is to help bring together borrowers and savers by facilitating the flow of funds from individuals and businesses that have surplus funds to individuals,businesses,and governments that have needs for funds in excess of their income.

Accepted Answer

This is the primary role of financial markets as they work to ensure the efficient allocation of resources and the transfer of risk between savers and borrowers.

Question 16

The trade-through rule states that

Accepted Answer

The trade-through rule requires that a stock trade be executed at the best price available in all of the stock markets. This means that if a better price is available in another market, the trade must be routed to that market to ensure the best price for the investor. This rule helps ensure fair and efficient markets and prevent trade fragmentation. The other options are incorrect; new securities are not traded through the secondary market but are issued through an IPO, securities in the secondary market do not involve the issuing corporation, and the approval of a related firm is not required for trading derivatives.

Question 17

One reason investment bankers form syndicates is to spread the risk of potential losses.

Accepted Answer

Syndicates allow investment bankers to share the risk among multiple firms, reducing the potential for one firm to suffer a significant loss.

Question 18

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

Accepted Answer

Primary market transactions involve the issuance of new securities by a company to raise capital directly from investors. Buying and selling existing stocks through a broker occur in the secondary market.

Question 19

When a firm issues new equity,market pressure applies first to the new shares issued and then to existing shares.Subsequent to the new issue,the value of the new shares will rise to the equilibrium price of the old shares.

Accepted Answer

When a firm issues new equity, market pressure applies to all shares, not just the new shares. Therefore, it is not necessarily true that the value of the new shares will rise to the equilibrium price of the old shares. The market will determine the price of all shares based on supply and demand.

Question 20

The derivatives market allows for

Accepted Answer

The derivatives market allows for both investors to speculate on price movements and the hedging of exposure to price movements, making choice D the correct answer. However, the purchase of corporate debt is not a feature of the derivatives market, therefore excluding choices B and E.

Quiz 3: Financial Markets and the Investment Banking Process