Question 1

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

Private markets are those where securities are not publicly traded, while public markets are those where securities are publicly traded, such as the NYSE and Nasdaq. Both the NYSE and Nasdaq are public markets, but they differ in their structure and operation.

Question 2

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

When a corporation's shares are owned by a small number of people who are often closely associated with the management of the company, it is considered closely held. This is in contrast to publicly traded companies, where ownership is spread out among many individual shareholders.

Question 3

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

This statement is true. The term "over-the-counter" (OTC) arose because trades occurred through a telephone or electronic network rather than on a centralized exchange, and initially involved physical documentation being passed between parties.

Question 4

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

The answer of Each stock's rate of return in a...

Question 5

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 and can give an idea of stock market returns for the year.

Question 6

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 is the formula for calculating the total return of a stock for a given year. It takes into account both the dividends received and the change in price, and is expressed as a percentage of the beginning-of-year price.

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 refers to the first time a company sells shares of its stock to the public. It is a way for a company to raise capital and become publicly traded.

Question 8

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 NYSE being a spot market is not solely defined by its physical location but also by the fact that its transactions are immediate, with buyers and sellers physically present in the trading floor. The Nasdaq, although lacking a physical location, is still considered a spot market because its transactions are also immediate and conducted electronically.

Question 9

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 accurately describes a Dutch auction for new stock where individual investors place bids for shares directly and the market clearing price is determined based on the highest price that allows the company to sell all the shares it wants to sell, and all bidders who specified this price or higher can purchase their shares at that price.

Question 10

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 as benchmarks to measure the performance of the stock market and can be used to examine historical rates of return for stocks.

Question 11

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 index.

Question 12

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 accurately describes the role of a financial intermediary, and the example given is an accurate portrayal of how a bank can act as a financial intermediary.

Question 13

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

The statement is false. The Nasdaq operates as a dealer market, not an auction market, where market makers buy and sell securities from their own inventory. Prices are negotiated privately between market participants, not on the exchange floor.

Question 14

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

Accepted Answer

This statement is incorrect. While primary markets are certainly important as they are where new securities are issued and companies raise capital, secondary markets are also significant as they provide liquidity and facilitate the trading of securities. Furthermore, secondary markets can be quite large, such as the stock exchanges, and involve significant amounts of trading activity.

Question 15

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 also known as a public company, and its shares are publicly traded on a stock exchange. This means that anyone can buy and sell shares of the company, including individual investors, other corporations, and institutional investors such as pension funds or mutual funds.

Question 16

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 occurs when investors buy or sell securities on an exchange such as the NYSE or NASDAQ, while a primary market transaction occurs when companies issue new securities and sell them to investors directly. When buying shares of Google, you would be buying them from a previous owner on the secondary market, not directly from Google on the primary market.

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 an individual asset, while an option to buy the stock is a type of derivative because its value is derived from the value of the underlying stock.

Question 18

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 regulated, have more flexibility, and are restricted to wealthy, sophisticated investors.

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

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

Accepted Answer

As stated in the passage, financial institutions are now more diversified than in the past and offer a variety of services that were previously kept separate due to federal laws.

Quiz 2: Financial Markets