Question 1

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.

Accepted Answer

This statement accurately describes a financial intermediary and its role in the financial system.

Question 2

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."

Accepted Answer

False

Question 3

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price.

Accepted Answer

This calculation represents the formula for calculating the total return of a stock for a given year. Subtract the ending price from the beginning price, add the annual dividend, and then divide by the beginning price to calculate the annual rate of return.

Question 4

In a "Dutch auction" for new stock individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the "market clearing price." All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.

Accepted Answer

This is an accurate description of a Dutch auction for stock.

Question 5

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."

Accepted Answer

This is an accurate description of how the return on the market is calculated using the S&P 500.

Question 6

Primary markets are large and important, while secondary markets are smaller and less important.

Accepted Answer

This statement is false. While primary markets are important as they involve the initial issuance of securities, secondary markets are also essential as they provide liquidity and allow investors to buy and sell securities after the initial offering. Secondary markets are often larger than primary markets and can have a significant impact on the price of securities.

Question 7

The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock.

Accepted Answer

The term IPO actually stands for "initial public offering," which is when a company first offers its shares to the public for purchase.

Question 8

Financial institutions are more diversified today than they were in the past, when federal laws kept investment banking houses, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage.

Accepted Answer

This statement is true. Federal laws that kept different types of financial institutions separated have been relaxed or eliminated, allowing for greater diversification within the industry.

Question 9

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

Accepted Answer

Hedge funds are less highly regulated than mutual funds and have more flexibility in their investment choices. They are also restricted to wealthy, sophisticated investors, while mutual funds are open to the general public.

Question 10

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question.

Accepted Answer

This is a correct method for calculating the average rate of return for a portfolio of stocks, which can give an idea of the overall stock market returns for the year.

Question 11

If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the Nasdaq Index.

Accepted Answer

The Dow Jones Industrial Index, the S&P 500 Index, and the Nasdaq Index are all commonly used benchmarks to track the performance of stocks and provide data on historical returns.

Question 12

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

Accepted Answer

A publicly owned corporation is commonly referred to as a public company, and its shares are traded on a stock exchange or over-the-counter market. As a result, ownership in the company is spread among numerous individuals and institutions, rather than being controlled by a small group of private individuals or companies.

Question 13

The NYSE is defined as a "spot" market purely and simply because it has a physical location. The Nasdaq, on the other hand, is not a spot market because it has no one central location.

Accepted Answer

The statement incorrectly defines a spot market as having a physical location. A spot market is actually where assets are traded for immediate delivery, while futures markets involve contracts for delivery at a later date. The NYSE is a hybrid market that combines both spot and futures market characteristics by offering both immediate and delayed trading options. The Nasdaq is an electronic market, also known as an over-the-counter (OTC) market, where buyers and sellers are connected through a computer network rather than a physical trading floor.

Question 14

Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the Nasdaq, where anyone can make transactions.

Accepted Answer

The statement is incorrect. Private markets are those that are not open to the general public, such as venture capital firms or private equity firms. Public markets, like the NYSE and Nasdaq, are open to the public and anyone can make transactions.

Question 15

If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.

Accepted Answer

A secondary market transaction is when the shares are bought and sold between investors on an exchange, whereas a primary market transaction is when the company issues new shares and sells them to investors directly. Buying shares from a broker on the secondary market is a common way for investors to purchase stocks.

Question 16

Trades on the NYSE are generally completed by having a brokerage firm acting as a "dealer" buy securities and adding them to its inventory or selling from its inventory. The Nasdaq, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange.

Accepted Answer

Trades on the NYSE can also be made through the auction market system, and the Nasdaq also has market makers who act as dealers buying and selling securities from their own inventory.

Question 17

A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

Accepted Answer

A share of common stock is a direct ownership in the company's assets, while an option is a financial instrument that derives its value from the underlying stock. Therefore, an option is considered a derivative.

Question 18

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held.

Accepted Answer

This statement is true. When a corporation's shares are mostly owned by a small group of individuals who are involved in running the company, the stock is considered closely held. This is in contrast to publicly traded companies, where ownership is spread out among many shareholders.

Question 19

The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.

Accepted Answer

The answer of The NYSE is defined as a "primary"...

Question 20

The "over-the-counter" market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.

Accepted Answer

The statement is true.

Quiz 2: Financial Markets