Question 1

Unlike physical asset markets, which deal with products such as wheat, autos, real estate, and machinery, financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows generated by such assets.

Accepted Answer

Financial asset markets deal with claims on real assets and their future cash flows, while physical asset markets deal with actual physical products.

Question 2

The debt markets are segmented based on the maturity of the debt instruments, the type of debt instruments, and the participants in the market.

Accepted Answer

The debt markets are indeed segmented based on the maturity, type, and participants. For example, there are short-term debt markets (less than one year), medium-term debt markets (1-10 years), and long-term debt markets (over 10 years). There are also different types of debt instruments, including bonds, notes, and bills. Furthermore, the participants in the debt markets include issuers (such as corporations or governments) and investors (such as individuals or institutional investors).

Question 3

Dual listing of a stock is advantageous to a company. It is not of any benefit to the stock exchanges, but they allow dual listing because of regulatory requirements.

Accepted Answer

Dual listing can bring benefits to both the company and the stock exchanges. It can increase the company's visibility and access to more investors, while also increasing trading volumes and liquidity for the stock exchange. Additionally, exchanges may charge fees for dual listing services.

Question 4

An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.

Accepted Answer

An over-the-counter (OTC) market is not a physical exchange but a decentralized market where participants trade securities directly between two parties without a central exchange or broker, often involving unlisted securities.

Question 5

A money market is the market for trading in securities with maturities over one year and includes such financial assets as stocks and long-term corporate bonds.

Accepted Answer

A money market is actually the market for trading in short-term, highly liquid, and low-risk securities with maturities of less than one year, such as government and corporate treasury bills, commercial paper, and certificates of deposit. Stocks and long-term corporate bonds are traded in the capital market.

Question 6

Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock markets fiercely competitive.

Accepted Answer

Dual listing of stocks has increased competition by allowing companies to list their shares on multiple exchanges, which gives investors more options for buying and selling. The mandatory use of the trade-through rule has also increased competition by requiring traders to execute trades at the best available price, regardless of the exchange on which the trade is executed.

Question 7

Primary markets are exchanges with physical locations, whereas secondary markets are over-the-counter markets.

Accepted Answer

This statement is false. Primary markets refer to the market in which new securities are sold to the public, and can be both physical exchanges or over-the-counter markets. Secondary markets refer to markets in which previously issued securities are bought and sold, and can also be both physical exchanges or over-the-counter markets.

Question 8

An individual investor is using the services of a broker to buy and sell stocks currently being traded in the stock market. This transaction is referred to as a primary market transaction.

Accepted Answer

A primary market transaction refers to the buying and selling of securities directly from the issuer, typically through an initial public offering (IPO). When an individual investor uses the services of a broker to buy and sell stocks currently being traded in the stock market, it is referred to as a secondary market transaction.

Question 9

In the United States, sales of new stocks and bonds are regulated by the Securities and Exchange Commission (SEC).

Accepted Answer

The Securities and Exchange Commission (SEC) is responsible for regulating the sale of new stocks and bonds in the United States.

Question 10

The trade-through rule states that a stock trade should be executed at the best price that is available in all of the stock markets. In other words, a trade order continues to pass through the markets until the best price is reached.

Accepted Answer

The trade-through rule does indeed require that a stock trade be executed at the best price available in all markets, so it continues to pass through markets until that price is reached.

Question 11

The Securities Exchange Commission is a major U.S. stock exchange that facilitates trading in listed securities.

Accepted Answer

The Securities Exchange Commission (SEC) is a regulatory agency that oversees the U.S. securities markets and enforces securities laws to protect investors. It is not a stock exchange that facilitates trading in securities. Some major U.S. stock exchanges include the New York Stock Exchange (NYSE) and the NASDAQ.

Question 12

The Securities and Exchange Commission (SEC) cannot exercise control over stock trades by corporate insiders.

Accepted Answer

The SEC requires insiders (such as company executives and directors) to report their trades and prohibits insider trading based on non-public information. The SEC has the power to investigate and take legal action against insider trading.

Question 13

A primary market is that segment of the financial markets where the instruments that are traded have original maturities equal to one year or less.

Accepted Answer

A primary market is actually the segment of the financial markets where new securities are issued and sold for the first time, regardless of the original maturity of the instrument being traded.

Question 14

The Securities and Exchange Commission (SEC) regulations are intended to ensure that investors receive fair disclosure of financial and nonfinancial information from privately held companies.

Accepted Answer

The SEC primarily regulates public companies, and its regulations are intended to ensure fair disclosure of financial and nonfinancial information from these companies to investors. Private companies are subject to less regulation and are not required to provide the same level of public disclosure.

Question 15

An over-the-counter market is a network of brokers and dealers, connected electronically by telephones and computers that provides for trading in securities not listed on the physical stock exchanges.

Accepted Answer

An over-the-counter market, also known as OTC market, is a decentralized market where securities that are not listed on the physical stock exchanges are traded. Brokers and dealers are the key players in this market and they are electronically connected through telephones and computers. OTC market is also called a dealer market as the securities are traded directly between the buyers and sellers, unlike the exchange-traded securities that are traded through centralized exchanges.

Question 16

Electronic communications networks (ECNs) provide an alternative trading medium, which has increased competition with the stock exchanges.

Accepted Answer

ECNs have increased competition with traditional stock exchanges by offering an alternative trading medium.

Question 17

The mandatory trade-through rule followed for trading in securities leads does not work to the benefit of the shareholders.

Accepted Answer

The mandatory trade-through rule is designed to protect investors by ensuring that their orders are executed at the best available price, which benefits shareholders by potentially maximizing their returns.

Question 18

Dual listing of a stock leads to a decrease in the liquidity of the stock.

Accepted Answer

Dual listing of a stock actually increases the liquidity of the stock as it makes the stock available in multiple markets, allowing for more buyers and sellers to participate in trading the stock.

Question 19

The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.

Accepted Answer

Dual listing of stocks can actually enhance competition among stock exchanges by providing companies with more options for where to list their shares, potentially leading to better services and lower costs for issuers and investors.

Question 20

The New York Stock Exchange (NYSE) is an example of an over-the-counter exchange.

Accepted Answer

The NYSE is not an over-the-counter exchange, it is a traditional, centralized exchange. Over-the-counter exchanges involve the trade of securities directly between parties rather than through a centralized exchange.

Quiz 3: The Financial Environment: Markets, Institutions, and Investment Banking