Question 1

When an investor buys stock in the stock market, he is purchasing shares from a company.
Investors purchase shares from the company only in the initial offering.

Accepted Answer

Investors can continue to purchase shares from a company even after the initial public offering (IPO) in the secondary market through stock exchanges.

Question 2

Households and the government are mainly considered to be suppliers of funds, while corporations are generally considered users of funds.

Accepted Answer

As the "flow of funds" in Figure 14-3 illustrates, the flow of funds can occur between these three entities in either direction.

Question 3

Financial intermediaries channel funds into the capital markets from the household sector.

Accepted Answer

Financial intermediaries, such as banks and mutual funds, collect funds from households and other investors and then invest them in the capital markets on their behalf. Therefore, they act as a channel for funds from the household sector into the capital markets.

Question 4

A key variable of market efficiency is the certainty of the income stream. The most efficient market is for corporate securities.
The most efficient market is for U.S. securities, particularly the short-term U.S. Treasury Bill.

Accepted Answer

The answer of A key variable of market efficiency is...

Question 5

Securities issued by states and municipalities are referred to as statutory bonds and municipal bonds, respectively.
Both are referred to collectively as "municipal securities" in general, or in this case, "municipal bonds."

Accepted Answer

The answer of Securities issued by states and municipalities are...

Question 6

Brokers on an organized stock exchange act as an agent for the person buying or selling securities.

Accepted Answer

Brokers on an organized stock exchange act as an intermediary between buyers and sellers, executing their trades and receiving a commission for their services. They act as an agent for the person buying or selling securities, communicating the order to the exchange floor and finding a counterparty to complete the transaction.

Question 7

Regional exchanges are primarily engaged in dual trading activities, although some local stocks are listed on regional exchanges only.

Accepted Answer

Regional exchanges typically allow for dual trading activities, where brokers are able to trade stocks on both the regional exchange and the national exchange. However, they may also have some local stocks listed exclusively on the regional exchange.

Question 8

The NASDAQ Market is composed of large nationwide companies that are traded in the over-the-counter market.

Accepted Answer

The answer of The NASDAQ Market is composed of large...

Question 9

The NASDAQ Small-Cap Market is composed of smaller regionally based companies that often remain controlled by their founders so that fewer shares are available to the public.

Accepted Answer

The statement accurately describes the NASDAQ Small-Cap Market.

Question 10

Retained earnings account for the majority of internally generated corporate funds.
On average, less than half of U.S. corporations' funding come from retained earnings, rather than the issuance of new securities.

Accepted Answer

The statement is incorrect as it states that retained earnings account for the majority of internally generated corporate funds and that less than half of U.S. corporations' funding come from retained earnings, which contradicts each other. In reality, retained earnings do account for a significant portion of internally generated corporate funds for most companies.

Question 11

The highest suppliers of funds to the U.S. credit markets are foreign investors.

Accepted Answer

As illustrated in Figure 14-4, the largest supplier is currently from mutual funds and exchange-traded funds.

Question 12

The NASDAQ market is the primary market for international securities.

Accepted Answer

The NASDAQ market is a stock exchange in the United States and primarily lists securities of American companies. It is not the primary market for international securities.

Question 13

The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible, as is the interest paid on bonds.

Accepted Answer

Dividends on preferred stock are not tax deductible, while interest paid on bonds is tax deductible. This makes bonds a more attractive financing option for companies, resulting in a smaller amount of financing with preferred stock.

Question 14

Without financial intermediaries, the cost of funds would be about the same as with financial intermediaries.
Intermediaries expedite the flow of funds efficiently, thereby reducing the cost of these funds.

Accepted Answer

Financial intermediaries help reduce the cost of funds by pooling resources and spreading risks, which would not be possible without their involvement. Therefore, without intermediaries, the cost of funds would likely be higher due to the lack of these efficiency gains.

Question 15

Financial intermediaries help eliminate inefficiencies such as indirect investment by households.
While intermediaries do reduce inefficiencies, indirect investment by households is not an inefficiency.

Accepted Answer

Indirect investment by households is a legitimate way for them to invest their money. It may not be the most direct or efficient way, but it is not considered an inefficiency. Financial intermediaries can still provide benefits by pooling resources and diversifying risks, but their role is not to eliminate all indirect investments by households.

Question 16

Internal funds generated by corporations include retained earnings and non-cash expenses such as depreciation.

Accepted Answer

Internal funds generated by corporations can come from retained earnings, which are profits that are not distributed to shareholders but are instead kept within the company for future use. Non-cash expenses such as depreciation also contribute to these internal funds, as they represent expenses that do not involve an actual outflow of cash but still reduce the company's taxable income.

Question 17

The NYSE purchased Archipelago (an ECN) in order to expand its floor-trading capabilities.
The acquisition was actually to bring electronic trading capabilities and expertise as a complement to the NYSE's established floor-trading skills.

Accepted Answer

The answer of The NYSE purchased Archipelago (an ECN) in...

Question 18

NASD regulates stockbrokers and brokerage firms.

Accepted Answer

The NASD (National Association of Securities Dealers) is a self-regulatory organization that oversees the activities of stockbrokers and brokerage firms. It has since been merged into FINRA (Financial Industry Regulatory Authority).

Question 19

Brokers actually own the securities they buy and sell on the floor of the exchange.
While "brokers" in general act as agents for buyers and sellers, those who actually take title to and maintain inventories of shares are referred to as "specialists," "dealers," or more recently, "designated market-makers."

Accepted Answer

Brokers do not own the securities they buy and sell on the exchange. They act as intermediaries between buyers and sellers and do not take title or maintain inventories of shares. That role is fulfilled by specialists, dealers, or designated market-makers.

Question 20

The major suppliers of funds to the U.S. credit markets are foreign suppliers, mutual funds, and federal, state, and local governments.
In this case, the governments are not direct suppliers of funds into the U.S. credit markets.

Accepted Answer

The statement is false. The governments are indeed direct suppliers of funds into the U.S. credit markets.

Quiz 14: Capital Markets

When an investor buys stock in the stock market, he is purchasing shares from a company. Investors purchase shares from the company only in the initial offering.

Households and the government are mainly considered to be suppliers of funds, while corporations are generally considered users of funds.

Financial intermediaries channel funds into the capital markets from the household sector.

A key variable of market efficiency is the certainty of the income stream. The most efficient market is for corporate securities. The most efficient market is for U.S. securities, particularly the short-term U.S. Treasury Bill.

Securities issued by states and municipalities are referred to as statutory bonds and municipal bonds, respectively. Both are referred to collectively as "municipal securities" in general, or in this case, "municipal bonds."

Brokers on an organized stock exchange act as an agent for the person buying or selling securities.

Regional exchanges are primarily engaged in dual trading activities, although some local stocks are listed on regional exchanges only.

The NASDAQ Market is composed of large nationwide companies that are traded in the over-the-counter market.

The NASDAQ Small-Cap Market is composed of smaller regionally based companies that often remain controlled by their founders so that fewer shares are available to the public.

Retained earnings account for the majority of internally generated corporate funds. On average, less than half of U.S. corporations' funding come from retained earnings, rather than the issuance of new securities.

The highest suppliers of funds to the U.S. credit markets are foreign investors.

The NASDAQ market is the primary market for international securities.

The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible, as is the interest paid on bonds.

Without financial intermediaries, the cost of funds would be about the same as with financial intermediaries. Intermediaries expedite the flow of funds efficiently, thereby reducing the cost of these funds.

Financial intermediaries help eliminate inefficiencies such as indirect investment by households. While intermediaries do reduce inefficiencies, indirect investment by households is not an inefficiency.

Internal funds generated by corporations include retained earnings and non-cash expenses such as depreciation.

The NYSE purchased Archipelago (an ECN) in order to expand its floor-trading capabilities. The acquisition was actually to bring electronic trading capabilities and expertise as a complement to the NYSE's established floor-trading skills.

NASD regulates stockbrokers and brokerage firms.

The major suppliers of funds to the U.S. credit markets are foreign suppliers, mutual funds, and federal, state, and local governments. In this case, the governments are not direct suppliers of funds into the U.S. credit markets.