Question 1

The Sarbanes-Oxley Act,or SOX

Accepted Answer

The Sarbanes-Oxley Act (SOX) aims to hold corporate advisors strictly accountable in a legal sense for any instances of misconduct, while also protecting the interests of shareholders by providing greater protection against accounting fraud and financial misconduct. Therefore, option D, which states that SOX accomplishes both A and B, is the correct choice. Option C is incorrect because SOX actually increases the cost of financial reporting by introducing new requirements and standards.

Question 2

Within the financial markets,explain what we mean by "private placements" and name the advantages and disadvantages.

Accepted Answer

The answer of Within the financial markets,explain what we mean...

Question 3

The Sarbanes-Oxley Act of 2002,in order to protect investors,requires a higher level of accountability for which of the following groups?

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires a higher level of accountability for all of the above- corporate officers, public accountants, and boards of directors- in order to protect investors. This includes requiring corporate officers to certify the accuracy of their company's financial statements, setting standards for public accounting firms' independence and objectivity, and establishing new requirements for boards of directors, such as having independent directors and establishing audit committees.

Question 4

What are the three major functions of an investment banker?

Accepted Answer

The answer of What are the three major functions of...

Question 5

The costs associated with issuing securities to the public can be high.Some types of securities have greater expenses associated with them than others.Which of the following is the most costly security to issue?

Accepted Answer

Issuing common stock is generally the most costly due to underwriting fees, legal and accounting expenses, and the need for extensive marketing efforts to attract investors.

Question 6

The prime lending rate is the base rate on

Accepted Answer

The prime lending rate is the base rate used by banks and other financial institutions to set interest rates on loans to their most creditworthy customers, typically large corporations. Therefore, the best choice is D - corporate loans.

Question 7

Which of the following would NOT normally be considered a "flotation cost"?

Accepted Answer

Flotation costs are expenses incurred by a company in issuing new securities, such as underwriter's spread, legal fees, printing and engraving expenses. Dividends are a distribution of a company's earnings to its shareholders and are not associated with the issuance of new securities, so they would not be considered a flotation cost.

Question 8

A basis point is equal to

Accepted Answer

A basis point is one-hundredth of one percent or 0.01%. Therefore, option C is the correct answer. Options A, B, and D are incorrect as they do not represent the precise definition of a basis point.

Question 9

Advantages of private placements do NOT include which of the following?

Accepted Answer

Private placements do not offer investor protection through extensive regulation as public offerings do. Private placements are exempt from certain securities laws and regulations, which may increase the risk for investors. However, private placements do offer advantages such as more financing flexibility, lower flotation costs, and funds which are available more quickly than through a public offering.

Question 10

All of the following are typically advantages of private placements EXCEPT

Accepted Answer

Private placements are typically exempt from SEC registration requirements, which can save issuers significant time and money. However, if the issuer eventually wants to register the securities with the SEC, they may face additional costs and regulatory requirements. Therefore, the possibility of future SEC registration is not an advantage of private placements.

Question 11

A commitment fee is

Accepted Answer

A commitment fee is an amount charged by lenders to compensate them for holding funds that are not yet disbursed. In the case of a loan in a private placement, the commitment fee is paid on the unused portion of the loan.

Question 12

The real rate of return is the return earned above the

Accepted Answer

The real rate of return is the return earned above the inflation risk premium. In other words, it is the actual purchasing power gained on an investment after adjusting for inflation. The default risk premium, risk-adjusted return, and variability of returns measured by standard deviation do not directly factor into the calculation of the real rate of return.

Question 13

Investors expect to receive the highest returns from government-issued securities because the government will not default on securities that it has issued.

Accepted Answer

Government-issued securities are generally considered low-risk investments, which typically offer lower returns compared to higher-risk investments. The expectation of high returns is usually associated with higher-risk investments, not government securities.

Question 14

What are the five key methods by which securities are distributed to final investors?

Accepted Answer

The answer of What are the five key methods by...

Question 15

Private placements usually have several advantages associated with them,but also tend to suffer from specific disadvantages.Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities?

Accepted Answer

Private placements typically involve higher interest costs as investors who are willing to invest in a private placement may demand a higher return due to the perceived higher risk associated with investing in a private placement. This is a disadvantage compared to other methods of selling new securities, such as a public offering, where interest costs may be lower due to the larger pool of potential investors. A is incorrect as private placements do not have strictly standardized features/terms. C is incorrect as private placements typically have reduced flotation costs compared to public offerings. D is incorrect as avoiding registration with the SEC is actually a benefit of private placements.

Question 16

The rate of return available on the next best investment alternative for the saver refers to the opportunity cost of funds.

Accepted Answer

This statement is true. Opportunity cost refers to the cost of choosing one option over another, and in this case, the opportunity cost of using funds to invest in a certain option is the rate of return that could have been earned from the next best investment alternative.

Question 17

Over time,there has been a high correlation between actual rates of return on securities and the securities' standard deviations of returns.

Accepted Answer

This is a true statement. The concept is known as the risk-return tradeoff, which suggests that higher returns tend to come with higher risk (as measured by standard deviation). This relationship has been observed and studied in finance for many years.

Question 18

The Sarbanes-Oxley Act of 2002 holds all of the following groups strictly accountable in a legal sense for any instances of misconduct EXCEPT

Accepted Answer

While the Sarbanes-Oxley Act of 2002 holds company officers, outside members of the board of directors, and lawyers strictly accountable in a legal sense for any instances of misconduct, it does not hold investors accountable.

Question 19

The nominal interest rate is 7% and the expected inflation rate is 2%.Based on the Fisher effect,the real rate of interest is

Accepted Answer

The answer of The nominal interest rate is 7% and...

Question 20

Private placements are

Accepted Answer

Private placements are especially appealing to new, small, and medium-sized companies because they offer a way to raise capital without the regulatory requirements and costs associated with public offerings.

Quiz 2: The Financial Markets and Interest Rates