Deck 17: Securities Markets

Question 1

Unlike brokers who , dealers .

A)buy and sell securities for others; buy and sell securities for themselves
B)sell securities for others; buy securities for others
C)conduct market research; buy and sell securities for others
D)trade in derivatives; trade in stocks and bonds.

Answer 1

buy and sell securities for others; buy and sell securities for themselves

Question 2

An investment bank's duties include:

A)underwriting large investments and providing financial advice.
B)taking deposits and making loans to households.
C)making mortgage loans to noncitizens.
D)repossessing small real assets.

Answer 2

underwriting large investments and providing financial advice.

Question 3

In 1983, about of households owned stock.

A)19%
B)50%
C)37%
D)10%

Answer 3

19%

Question 4

Subprime mortgages are made:

A)at an interest rate below the prime rate.
B)to borrowers with weak credit histories.
C)by lenders expecting below average returns.
D)at interest rates below those paid by traditional borrowers.

Question 5

Pension funds are established to:

A)provide income to retired workers.
B)allow wealthy households to make risky investments.
C)insure against future risks.
D)provide social security payments.

Question 6

Which of the following are functions of an investment bank? I. provide advice on mortgages II. take household deposits
III. give small loans to households

A)I only
B)II and III
C)I and III
D)None of the Answer s is correct.

Question 7

Pension funds obtain funds from:

A)commercial and investment bank loans.
B)contributions by employers and/or workers.
C)premiums paid by insurance companies.
D)short-term loans from hedge funds.

Question 8

Primary markets are where:

A)firms and governments issue new securities.
B)firms issue new securities.
C)individual households buy and sell existing securities.
D)firms buy real assets.

Question 9

Most households that buy and sell securities do so:

A)from a bank teller.
B)in the primary market.
C)in the tertiary market.
D)in the secondary market.

Question 10

In 2007, the wealthiest 1 percent of American households owned about of held by individuals.

A)38%; stocks
B)19%; stocks and bonds
C)28%; bank deposits
D)50%; treasury bills

Question 11

Which of the following securities are held by mutual funds? I. stocks II. bonds
III) real estate

A)I only
B)II only
C)I and II
D)II and III

Question 12

The primary assets of commercial banks are , but they also earn income from holdings of .

A)loans; stocks
B)deposits; derivatives
C)loans; bonds
D)cash; bonds

Question 13

The key difference between mutual funds and hedge funds is that mutual funds are:

A)more heavily regulated to protect small investors.
B)less heavily regulated to protect large investors.
C)heavily regulated to protect large investors.
D)only able to purchase bonds.

Question 14

An asset allocation is a decision by individuals or institutions about:

A)what assets to hold.
B)what assets to use to finance the purchase of a real asset.
C)how to hedge inflation.
D)the cost of risk.

Question 15

Commercial banks' main function(s) is/are to:

A)take deposits and make loans.
B)underwrite initial public offerings.
C)provide brokerage services.
D)make loans to the federal government.

Question 16

Which of the following are functions of an investment bank? I. provide advice on acquisitions and mergers II. underwriter for firms
III) provide mortgage loans

A)I only
B)II and III
C)II only
D)I and II

Question 17

An agent who matches security buyers and sellers, but does not hold an inventory of securities, is called a:

A)bank.
B)dealer.
C)hedge fund.
D)broker.

Question 18

In 2007, U.S. citizens directly owned about of the stock of U.S. companies.

A)25%
B)19%
C)28%
D)50%

Question 19

Hedge funds often use , which is/are defined as .

A)derivatives; short-term T-bills
B)leverage; borrowing money to buy other assets
C)dividends; profits earned from bonds
D)mutual funds; bundles of paper assets

Question 20

The novel feature of mortgage-backed securities issued by investment banks in the 2000s was that the mortgages backing securities were made to:

A)borrowers with weak credit histories.
B)borrowers from foreign countries.
C)government-insured borrowers.
D)hedge funds and speculators.

Question 21

One of the main reasons that investment banks are used to underwrite initial public offerings is they:

A)help to reduce the problem of adverse selection.
B)increase the problem of asymmetric information.
C)usually have sufficient funds to do so.
D)increase moral hazard.

Question 22

By using an investment bank to underwrite securities, firms are hoping to use the of the investment bank to the new firm.

A)reputation; reduce uncertainty about
B)funds; reduce uncertainty about
C)funds; accurately price
D)information; increase certainty about

Question 23

With an electronic communications network, trades are a(n) , except that .

A)over-the-counter market; it (they) does (do) not require dealers
B)exchange; trades are conducted via computer
C)exchange; it (they) does (do) not require dealers
D)IPO; all prices are set in advance

Question 24

Which of the following cities have large stock market exchanges?

A)Barcelona
B)Frankfurt
C)Beijing
D)Boston

Question 25

The "bid-ask spread" is:

A)always equal to zero.
B)the gap between the price at which a dealer buys and sells a security.
C)the difference between the quantity a dealer wants to buy and what he actually buys.
D)the difference between the rate of inflation and the expected rate of inflation.

Question 26

According to the Modigliani-Miller theory, and are ways to raise funds.

A)stocks; cash; equally good
B)stocks; bonds; not equally good
C)stocks; bonds; equally good
D)bonds; loans; bad

Question 27

Initial public offerings are originally purchased by , which then turn around and sell them to .

A)investment banks; financial institutions
B)commercial banks; individual households
C)financial institutions; individual households
D)the federal reserve system; financial institutions

Question 28

A syndicate is a:

A)group of investment banks enlisted to underwrite an initial public offering.
B)group of private investors enlisted to underwrite an initial public offering.
C)single investment bank that enlists private investors to underwrite an initial public offering.
D)crime-fighting group.

Question 29

A limit order is a purchase of stocks:

A)only when a stock reaches a certain price.
B)with the best price a broker can find.
C)in which the broker specifies the number of stocks to buy at any price.
D)that limits the quantity of stocks to buy.

Question 30

Which of the following are reasons did Google chose to use an online auction rather than an investment bank to issue its IPO? I. It was less costly.
II) It wanted to avoid overpricing.
III) It allowed all profits to be garnered exclusively by large investors.

A)I only
B)II only
C)III only
D)I and II

Question 31

NASDAQ is a stock market where all trades are done:

A)via telephone.
B)at a centralized exchange.
C)via computer.
D)None of the Answer s is correct.

Question 32

The first sale of a company stock is called a(n):

A)pension fund.
B)secondary market sale.
C)initial public offering.
D)syndicate.

Question 33

Investment banks reduce the problem of by .

A)inflation; gathering information about a particular firm
B)moral hazard; withholding funds after an initial public offering is issued
C)inflation; reducing the amount of money that enters an economy
D)adverse selection; gathering information about a particular firm.

Question 34

When a firm expands it can raise funds , and once it does, it becomes a company.

A)in the primary market; public
B)in the secondary market; private
C)in the primary market; private
D)at a bank; private

Question 35

To buy a stock or bond, an individual saver:

A)can buy directly from a secondary market.
B)can choose whether to use a broker.
C)must use the services of a broker.
D)must use the services of a financial adviser.

Question 36

An over-the-counter market differs from a stock exchange because it:

A)is a physical location.
B)only trades small firm stocks.
C)is risk-free.
D)has no physical location.

Question 37

The capital structure of a firm is a mix of and issued by a firm.

A)stocks; bonds
B)cash; stocks
C)real assets; derivatives
D)stocks; real assets

Question 38

If you call your broker and tell her to buy Exxon-Mobil when the price falls to $75, you are placing a:

A)market order.
B)limit order.
C)401(k) contribution.
D)bid on an Exxon bond.

Question 39

When a firm issues new stock it:

A)must borrow more from commercial banks.
B)spreads ownership of the firm.
C)consolidates ownership within a smaller group of investors.
D)becomes more dependent on the Federal Reserve.

Question 40

A stock index tracks:

A)only stocks with largest amount of trades on a given day.
B)a fixed number of stocks.
C)only stocks that are considered the most important from day to day.
D)one stock a day.

Question 41

Your grandparents give you $1,000 as a graduation gift; you decide to save 25% in bonds and 75% in Ford stock. If the return to the bonds is 3% and the return to Ford is -5%, then your overall return on wealth would be about:

A)-3.0%.
B)-3.75%.
C)3.75%.
D)1%.

Question 42

According to the efficient-markets hypothesis, which is based on , assets do not exist.

A)the classical theory of asset prices; overvalued
B)adaptive expectations; overvalued
C)a random walk; undervalued
D)the Fisher equation; undervalued

Question 43

To disprove the efficient-markets hypothesis, financial analysts must be able to:

A)take advantage of old information.
B)identify undervalued stocks.
C)get insider information.
D)accurately identify perfectly valued stocks.

Question 44

When choosing which types of assets to hold, the buyer must determine the trade-off between:

A)unemployment and economic growth.
B)risk and inflation.
C)risk and return.
D)inflation and recession.

Question 45

The reason the Modigliani-Miller theory holds is because, according to the , the price of stock or bond equals the .

A)classical theory; present value of its expected income
B)expectations theory; average of expected interest rates
C)liquidity preference theory; average of expected interest rates
D)Fisher effect; expected rate of inflation

Question 46

You want to finance a new hot dog stand on campus. You would choose to use because .

A)short-term bonds; of the short lag between production and sales
B)long-term bonds; of inflation uncertainty
C)a bank loan; it (they) eradicate(s) moral hazard
D)commercial paper; of the long lag between production and sales

Question 47

If s is the percentage of stocks in your portfolio, your overall return on wealth would be:

A)return on wealth = s(return to stocks) + (1 - s)(return to bonds)
B)return on wealth = s(return to stocks)
C)return on wealth = s(return to stocks) ÷ s + (return to bonds) ÷ (1 - s)
D)return on wealth = [s(return to stocks)] ÷ [(1 - s) + (return to bonds)]

Question 48

When deciding an asset allocation, typically, households should hold:

A)only stocks when they are young.
B)more bonds when they are young.
C)only cash when they near retirement.
D)more stocks when they are young.

Question 49

According to the random walk, asset price movements occur because:

A)people know everything with certainty.
B)of information surprises.
C)of rational expectations.
D)of people's ability to ascertain changes in the macroeconomic fundamentals.

Question 50

If you are risk averse, you should choose an asset allocation that is:

A)more heavily weighted toward stocks.
B)more heavily weighted toward bonds.
C)equally weighted toward cash and stocks.
D)all stocks.

Question 51

Critics of the Modigliani-Miller theory argue which of the following are reasons why capital structure matters? I. taxes
II. subsidies
III. adverse selection

A)I only
B)I and II
C)I and III
D)All of the Answer s are correct.

Question 52

Your grandparents give you $1,000 as a graduation gift; you decide to save 25% in bonds and 75% in Apple stock. If the return to the bonds is 3% and the return to Apple is 15%, then your overall return on wealth would be about:

A)11.25%.
B)4%.
C)12%.
D)15%.

Question 53

When a firm issues bonds instead of stocks it is lessening the problem of because bonds .

A)adverse selection; pay a given amount as long as the firm does not default
B)moral hazard; pay dividends depending on the profits the firm makes
C)inflation; are indexed to inflation
D)uncertainty; have less moral hazard

Question 54

The efficient-markets hypothesis states:

A)The price of every stock equals the value of the stock, so no stock is a better buy than any other.
B)The price of every stock is greater than the value of the stock, so look for stocks with high prices.
C)Markets display cognitive dissonance, so look for stocks with high price-to-equity ratios.
D)Market participants can earn extra long-run returns, which drive up the price of a stock.

Question 55

You read the following on CNBC: "Ford Motor Company said Thursday its redesigned Ka city car will debut in the upcoming Bond film Quantum of Solace, scheduled for release in North America on Nov. 7." Using the efficient-markets hypothesis, you believe and expect .

A)Ford's stock price is currently undervalued; the stock price to rise
B)Ford's stock price is currently overvalued; the stock price to fall
C)Ford will go bankrupt; the stock price to fall
D)people will go buy Fords; the price of a Ford Ka to fall

Question 56

The justification for holding a majority of stocks in a savings portfolio is because, over the long run,

A)stocks are highly volatile.
B)stock returns are constant.
C)stocks are not as risky as they appear.
D)bonds are much riskier.

Question 57

Critics of the Modigliani-Miller theory argue which of the following are reasons why capital structure matters? I. taxes
II) bankruptcy
III) adverse selection

A)I only II
B)only III
C)only
D)I, II, and III

Question 58

Your grandparents give you $1,000 as a graduation gift; you decide to save 50% in bonds and 50% in Apple stock. If the return to the bonds is 3% and the return to Apple is 15%, then your overall return on wealth would be about:

A)6%.
B)9%.
C)7.5%.
D)2.5%.

Question 59

According to the efficient-markets hypothesis, which is based on , assets do not exist.

A)the classical theory of asset prices; riskless
B)adaptive expectations; riskless
C)the classical theory of asset prices; undervalued
D)the Fisher equation; inflation-indexed

Question 60

When calculating your return on wealth, which of the following could you use as a "safe" rate of return?

A)bonds
B)stocks
C)the euro
D)the yen

Question 61

According to behavioral finance:

A)there is considerable inertia in people's beliefs about a given firm.
B)traders respond immediately to new information.
C)you can never beat the market.
D)the market is efficient.

Question 62

When choosing which stocks to buy, billionaire Warren Buffet puts a lot of weight on:

A)the quality of the firm's managers.
B)empire-builders.
C)the good or service produced by the firm.
D)whether a firm produced abroad.

Question 63

A futures contract is:

A)a contract that will be signed at a specified time in the future.
B)an agreement to trade an asset for a range of prices at a specified time in the future.
C)an agreement to trade an asset for a certain price at a specified time in the future.
D)the option to buy a security at a specified price in the future.

Question 64

If you believe in the efficient-markets hypothesis, which type(s) of mutual fund should you buy?

A)a mix of managed funds and bonds
B)a managed fund
C)an index fund
D)a bond fund

Question 65

The winner and loser in a futures contract depend upon the:

A)interest rate.
B)amount of assets traded.
C)expected future spot price and the current price on the delivery date.
D)price in the futures contract and the current price on the delivery date.

Question 66

You are perusing the Reuters news Web page and read the following: "NEW YORK, Aug 18 (Reuters) Major U.S. airlines will see a 6 percent drop in passengers during the eight-day Labor Day holiday period as high oil prices continue to roil the industry, the airlines' trade organization predicted on Monday." Using the efficient-markets hypothesis, you believe and expect to see .

A)airlines will go bankrupt; stock prices fall
B)airline stock prices are currently undervalued; stock prices rise
C)airline stock prices are currently overvalued; stock prices fall
D)airline tickets will fall; fewer passengers traveling

Question 67

Which is the correct definition of a futures contract?

A)an asset trade that is made today for delivery in three days
B)the right to trade an asset before an expiration date
C)an agreement to trade an asset at a specified price at some point in the future
D)the difference between the bid and ask price of an asset on delivery day

Question 68

A credit default swap is a derivative that:

A)requires an asset be delivered at a specified price and delivery date.
B)allows its holder to trade a security at a specified price.
C)promises certain future payments based on a debt security.
D)provides loans to firms facing potential bankruptcy.

Question 69

Studies have shown that indexed funds can produce higher returns than managed funds; this is evidence in support of:

A)a random walk.
B)the efficient-markets hypothesis.
C)the effectiveness of adaptive expectations.
D)rational exuberance.

Question 70

The important feature of the credit default swaps (CDS) that caused financial losses at American International Group (AIG) in 2008 was that the CDS required AIG to make payments when:

A)houses financed by mortgage-backed securities went into foreclosure.
B)prices of mortgage-backed securities fell.
C)prices of mortgage-backed securities rose.
D)issuers of mortgage-backed securities defaulted.

Question 71

A "call" option allows a trader to a security, while a "put" option allows a trader to a security.

A)trade; renege on trading
B)sell; buy
C)buy; sell
D)None of the Answer s is correct.

Question 72

Credit default swaps:

A)are traded by brokers at the Chicago Mercantile Exchange.
B)require margin deposits be made by the seller.
C)require margin deposits be made by both the seller and buyer.
D)are privately negotiated between the buyer and the seller.

Question 73

Speculators are not necessarily interested in but rather in generating profits from changes in .

A)derivatives; cost structure
B)earning profits; attitudes toward risk
C)production; inflation
D)hedging risk; asset prices

Question 74

When an individual chooses to exercise an option, she agrees to a price.

A)strike
B)put
C)call
D)futures

Question 75

Which is the correct definition of an option?

A)the right to trade an asset before an expiration date
B)an agreement to trade an asset at specified price at some point in the future
C)an asset trade that is made today for delivery in three days
D)the difference between the bid and ask price of an asset

Question 76

Because the efficient-markets hypothesis states that analysts , it is best to choose a(n) mutual fund.

A)do no better than the market; indexed
B)can beat the market; managed
C)can beat the market; indexed
D)can move market expectations; managed

Question 77

A way to hedge risk is to use:

A)derivatives.
B)futures.
C)options.
D)All of the Answer s are correct.

Question 78

To "beat the market," traders must be able to:

A)have contact with other traders.
B)be aware of insider news.
C)instantly respond to new information.
D)rely on adaptive expectations.

Question 79

If you buy an option:

A)a transaction may or may not happen.
B)a transaction occurs 90 days hence.
C)you must deposit 10% of the value of the option with an exchange.
D)you assume all the risk associated with the trade.

Question 80

Billionaire stock analyst Warren Buffet lives in in a house he bought in .

A)Manhattan; 2002
B)Omaha, Nebraska; 1957
C)Los Angeles; 1991
D)Rome; 1968