Deck 3: Financial Markets and the Investment Banking Process

Question 1

Money markets are markets for

A) Foreign currency exchange.
B) Consumer automobile loans.
C) Corporate stocks.
D) Long-term bonds.
E) Short-term debt securities.

Answer 1

Short-term debt securities.

Question 2

Which of the following assets are traded in the derivative markets?

A) Stocks, bonds, and options
B) Stocks, futures, and options
C) Options, futures, and swaps
D) Futures, bonds, and swaps

Answer 2

Options, futures, and swaps

Question 3

You have just purchased shares in the Hi-Tech Long-Term Bond Fund, a mutual fund that invests in long-term corporate bonds.Your purchase constitutes

A) A direct transfer of funds.
B) An indirect transfer through an investment banker.
C) An indirect transfer through a financial intermediary.
D) A money market transaction.
E) All of the above.

Answer 3

An indirect transfer through a financial intermediary.

Question 4

If you purchase stock from a firm conducting a seasoned equity offering, this transaction will take place in ____ markets and ____ markets.

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

Question 5

Which of the following statements about listing on a stock exchange is most correct?

A) Listing is a decision of more significance to a firm than going public.
B) Any firm can be listed on the NYSE as long as it pays the listing fee.
C) Listing provides a company with some "free" advertising, and status as a listed company may enhance the firm's prestige.
D) Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.
E) Statements b and c are both correct.

Question 6

____ efficiency states that all private and publicly available information is reflected in the current market prices.

A) Weak-form
B) Semistrong-form
C) Strong-form
D) Economic

Question 7

Most American investors who are interested in investing in companies listed on foreign exchanges do so by purchasing ____.

A) Foreign stocks directly from brokers that do business in the country where the company is located.
B) Foreign stocks from brokers in the United States.
C) American Depository Receipts (ADRs) or mutual funds that hold international stocks.
D) Stocks directly from the foreign company.
E) None of the above.

Question 8

The New York Stock Exchange is primarily

A) A secondary market.
B) An organized auction market.
C) An over-the-counter market.
D) Answers a and b above are both correct.
E) Answers b and c above are both correct.

Question 9

Large, well-known public companies can reduce the time required to register and issue securities by using a(n)

A) Shelf registration.
B) Subchapter S registration.
C) Underwriting syndicate.
D) Secondary market registration.
E) "Red herring" registration.

Question 10

Financial markets are important because they

A) allow individuals to transfer purchasing power over time.
B) provide for the efficient transfer funds to businesses.
C) facilitate exchanges between the providers and users of capital.
D) all of the above

Question 11

Students emerging from college and entering the work force typically consume ____ than their income resulting in ____.

A) less; saving
B) more; borrowing
C) less; borrowing
D) more; saving

Question 12

Which of the following is not a task that investment bankers perform?

A) They buy securities from corporations trying to raise funds.
B) They take deposits from investors and make loans to corporations.
C) They resell securities purchased from corporations to investors.
D) They help corporations design securities with the features that are most attractive to investors given existing market conditions.

Question 13

When a firm makes an earnings announcement that is different than what the analysts expected the market price of the firm's stock adjusts immediately.This is evidence consistent with markets being ____ efficient but not ____ efficient.

A) weak-form; strong-form
B) weak-form; semistrong-form
C) strong-form; semistrong-form
D) semistrong-form; strong-form

Question 14

Machina Corporation is financing an ongoing construction project.The firm needs $8 million of new capital during each of the next three years.The firm has a choice of issuing new debt and equity each year as the funds are needed, or issuing the debt now and the equity later.The firm's capital structure is 40 percent debt and 60 percent equity.Flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds.Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount.Ignoring time value effects due to timing of the cash flows, what is the absolute difference in dollars saved by raising the needed debt all at once in a single issue rather than in three separate issues?

A) $0
B) $171,387
C) $140,809
D) $156,098
E) $134,400

Question 15

If you purchase commercial paper that matures in 180 days from the issuing firm this transaction will take place in ____ markets and ____ markets.

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

Question 16

Which of the following statements is correct?

A) Flotation costs under a best-efforts arrangement typically are less for a given new equity issue than the costs associated with an underwritten offering, and the corporation is more certain of getting the needed funds under a best-efforts offering.This is why best efforts deals are most common.
B) If a firm decides to issue securities through a direct (or private) placement, then the underwriting syndicate that is formed to distribute the securities to the public may, at its discretion, decide either to guarantee or not to guarantee the sale of the securities.
C) If the demand curve for a firm's stock is relatively flat, the firm will have a more difficult time raising a large amount of new equity funds for expansion than would be true if this demand curve were steeper.
D) It is possible for a firm to go public, and yet not raise any additional capital.
E) None of the above is a correct statement.

Question 17

____ are individuals employed by brokerage firms that are members of the exchange.

A) Commission brokers
B) Floor brokers
C) Competitive traders
D) Specialists

Question 18

____ efficiency states that all publicly available information is reflected in current market prices.

A) Weak-form
B) Semistrong-form
C) Strong-form
D) Economic

Question 19

Which of the following statements is correct?

A) The SEC must approve the price at which a stock is to be offered to the public when a company "goes public."
B) If a company's stock is listed, then it trades in the over-the-counter (OTC) market.
C) If the "preemptive right" exists in a company's charter, then the holders of its Class A shares have the right to receive a specified amount of dividends before dividends can be paid on Class B shares.
D) A "prospectus" is a document which describes a company and the securities it plans to offer, and the prospectus generally must be approved by the SEC before a public offering of new securities can be made.
E) The decision to list a company's stock generally is more important to the company than the decision to go public, i.e., listing has a larger impact on the way the firm is operated than does going public.

Question 20

____ efficiency states that all information contained in past price movements only is fully reflected in the current market prices.

A) Weak-form
B) Semistrong-form
C) Strong-form
D) Economic

Question 21

The trade-through rule states that

A) new securities are traded through the secondary market.
B) a stock trade should be executed at the best price that is available in all of the stock markets.
C) securities traded in the secondary market are traded through the issuing corporation
D) derivatives should be traded only with the approval of the related firm

Question 22

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.

Question 23

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

Question 24

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.

Question 25

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.

Question 26

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

A) Equity
B) Debt
C) Swaps
D) Options

Question 27

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

Question 28

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.

Question 29

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

Question 30

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.

Question 31

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.

Question 32

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.

Question 33

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

Question 34

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.

Question 35

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

Question 36

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

A) Going public
B) Privatization
C) Demutualization
D) Communion

Question 37

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

Question 38

The derivatives market allows for

A) investors to speculate on price movements.
B) the purchase corporate debt.
C) the hedging of exposure to price movements
D) two of the above
E) all of the above

Question 39

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.

Question 40

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

Question 41

A prospectus is a document describing a new security issue and the issuing company.

Question 42

All financial markets are physical locations in which parties meet to exchange financial assets.

Question 43

The largest segment of the U.S.debt market is represented by the bond markets, where government, corporate, and foreign bonds are traded.

Question 44

A best efforts arrangement is an agreement for the sale of securities in which the investment bank guarantees the sale by purchasing the securities from the issuer, thus agreeing to bear any risks involved in the transaction.

Question 45

Informational efficiency generally exists when the financial markets have a large number of participants in search of the most profitable investments.

Question 46

The primary function of the money markets is to provide liquidity to businesses, governments, and individuals so that they can meet their short-term needs for cash.

Question 47

Market efficiency refers only to the speed at which financial transactions occur.