Question 1

A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies.Therefore

Accepted Answer

The life insurance policies are the direct securities because they represent a direct contractual relationship between the policyholder and the insurance company. The corporate bonds, on the other hand, are indirect securities because they represent a claim on the assets of the issuing corporation, rather than a direct relationship with the bondholder. Therefore, the correct choice is C, where the corporate bonds are indirect securities and the life insurance policies are direct securities.

Question 2

Registration of securities by the SEC indicates to investors that the risk of those securities is reasonable.

Accepted Answer

Registration of securities by the SEC does not indicate the level of risk associated with those securities. It simply means that the company issuing the securities has complied with certain disclosure and reporting requirements. Investors should still conduct their own research and risk assessment before investing in any securities.

Question 3

Financial markets exist in order to allocate savings in the economy to the demanders of those savings.

Accepted Answer

Financial markets serve the purpose of connecting savers with those who demand those savings in order to access funding for investments, spending, or other activities. This helps to enable economic growth and activity by putting capital to work in the most efficient and productive manners possible.

Question 4

Transactions in common stock occur in the money market,due to the large amount of money involved in such transactions.

Accepted Answer

Transactions in common stock occur in the stock market, not in the money market. The money market is a market for short-term financial instruments, such as treasury bills and commercial paper.

Question 5

Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units.

Accepted Answer

This statement is true. Financial intermediaries, such as banks and mutual funds, issue their own securities (such as stocks or bonds) to raise funds from investors. They then use these funds to purchase direct securities, such as stocks or bonds, issued by other economic units like corporations or governments. This allows them to pool funds from many individual investors and create diversified portfolios of investments.

Question 6

A wealthy private investor providing a direct transfer of funds is called

Accepted Answer

An angel investor is a wealthy private individual who invests directly in startups or early-stage companies, usually in exchange for equity in the company. Unlike venture capitalists, they often invest their own personal funds and can provide smaller amounts of funding.

Question 7

The vast majority of corporate bond business takes place over the counter.

Accepted Answer

Over the counter (OTC) trading refers to direct, dealer-to-dealer trading without the use of a centralized exchange. This is how most corporate bond trading takes place, as opposed to exchange-traded trading, which is more common for stocks.

Question 8

Money-market instruments include

Accepted Answer

Money-market instruments refer to short-term, low-risk and highly liquid investments that are typically issued by governments, banks and corporations. Common stock and preferred stock are not considered money-market instruments as they are more long-term investments that carry greater risk. T-bonds, while issued by the government, have longer maturities than typical money-market instruments. T-bills, on the other hand, are short-term, highly liquid, and considered the quintessential money-market instrument.

Question 9

A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded.

Accepted Answer

A seasoned equity offering (SEO) is a way for a publicly-traded company to raise additional capital by selling newly issued shares of its common stock to the market. This is different than an initial public offering (IPO), which is the first time a company issues shares to the public.

Question 10

Which of the following statements is an example of a futures market transaction?

Accepted Answer

This statement describes a contract in which a company agrees to buy a specific amount of a commodity (oil) at a specific price in the future (six months from now), which is an example of a futures market transaction. Option B describes a purchase of an option, which is another type of derivative but not a futures contract. Option A is a purchase of a stock, which is not a futures contract at all. Option D describes a deferred compensation arrangement, which is also not a futures contract.

Question 11

General Electric (GE)has been a public company for many years with its common stock traded on the New York Stock Exchange.If GE decides to sell 500,000 shares of new common stock,the transaction will be describe as

Accepted Answer

C) A seasoned equity offering (SEO) is the correct term because it refers to the process of a company that has already gone public issuing additional shares to the market. Since GE has previously sold common stock, any new issuance of shares would be considered a seasoned equity offering.

Question 12

John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock.This transaction occurs in the

Accepted Answer

The secondary market is where investors buy and sell securities they already own. In this case, John is buying shares of Microsoft Corporation from another investor, not directly from the company, which characterizes a secondary market transaction.

Question 13

Cash markets are often referred to as spot markets.

Accepted Answer

Cash markets are referred to as spot markets because transactions in these markets involve the immediate delivery or settlement of the traded asset.

Question 14

Which of the following is an example of both a capital market and a primary market transaction?

Accepted Answer

Ford Motor Company selling a new issue of common stock to raise funds through a public offering is an example of both a primary market transaction, as the securities are being issued for the first time, and a capital market transaction, as the securities are being sold to investors seeking to invest funds for the long-term. Choices A and B are only examples of capital market transactions, while choice D is incorrect as there are transactions that occur in both primary and capital markets.

Question 15

General Motors raises money by selling a new issue of common stock.This transaction occurs in

Accepted Answer

The capital market is where new securities are issued, such as stocks and bonds, to raise funds for companies. The secondary market is where already issued securities are bought and sold by investors. The money market is where short-term debt securities are traded, and the futures market is where contracts for future delivery of securities or commodities are traded. Therefore, the best choice for this transaction is B, the capital market.

Question 16

The process of shelf-registration is beneficial to the issuing firm because it will reduce the time needed for the firm to take an issue to market.

Accepted Answer

Shelf-registration allows an issuing firm to register securities in advance, without selling them immediately. This reduces the time needed to take an issue to market because the registration process is already underway, and the firm can sell the securities when market conditions are favorable without having to go through the registration process again.

Question 17

Three ways that savings can be transferred through the financial markets include all of the following EXCEPT

Accepted Answer

All of the other options mentioned (direct transfer, indirect transfer using investment bankers, and indirect transfer using financial intermediaries) are common ways that savings can be transferred through financial markets. However, venture capital firms are a type of financial intermediary and are involved in providing funding for startups or other firms with high growth potential, rather than simply transferring savings between investors and borrowers. Therefore, option C is the choice that does not fit with the others.

Question 18

Common examples of financial intermediaries include all of the following EXCEPT

Accepted Answer

The given options are all examples of financial intermediaries, but Venture Capital Firms are not one of the options as they are considered a type of private equity investment firm, rather than a financial intermediary.

Question 19

Primary market transactions cannot be undertaken in over the counter markets.

Accepted Answer

Primary market transactions can be undertaken in over the counter (OTC) markets. In fact, many securities are offered and sold through private placements in the OTC market, which is an alternative to public offerings on stock exchanges. Therefore, primary market transactions can occur both on stock exchanges and in OTC markets.

Question 20

ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration.Therefore,ExxonMobil is an example of a(n)

Accepted Answer

ExxonMobil generates more cash than it invests, which makes it a savings surplus unit.

Quiz 2: The Financial Markets and Interest Rates