Question 1

The trade-through rule states that

Accepted Answer

The trade-through rule requires that when executing a stock trade, a broker must execute an order in the market that provides the best price available at that moment in time. This means that the broker must look at all the available markets for that particular stock and place the order at the best price available. This ensures that investors receive the best possible execution price and reduces the risk of price manipulation.

Question 2

In general, when a firm decides to raise capital there are stage I and stage II decisions.Stage I decisions include the amount to be raised and the type of security to be issued.Once the type of security is chosen this is a decision that cannot be changed in stage II.

Accepted Answer

In stage II decisions, a firm can still make choices regarding the specific terms and conditions of the security to be issued, such as pricing and timing, even though the type of security (e.g., debt or equity) has been chosen in stage I.

Question 3

One reason investment bankers form syndicates is to spread the risk of potential losses.

Accepted Answer

By forming a syndicate, investment bankers can pool their resources and share the risk of potential losses among multiple parties, reducing the individual risk for each member.

Question 4

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share.Hale sold the stock to investment bankers, who in turn sold it to individual and institutional investors.A transaction such as this is said to be a primary market transaction.

Accepted Answer

A primary market transaction involves the sale of newly issued securities directly from the issuer to investors, as in the case of Hale Corporation selling shares to investment bankers who then sold it to investors.

Question 5

The percentage of flotation costs associated with a new equity issue is usually quite high for small issues as a consequence of certain fixed costs which must be incurred regardless of the issue size.

Accepted Answer

This is because certain fixed costs, such as legal and underwriting fees, must be incurred regardless of the size of the issue, making the percentage of flotation costs higher for smaller issues.

Question 6

____ represent(s) ownership in a company and entitle(s) the holder to future cash distributions from the operations of the firm.

Accepted Answer

Equity represents ownership in a company and entitles the holder to future cash distributions, such as dividends, from the operations of the firm.

Question 7

The market value of the Japanese stock markets exceeds the market value of the major exchanges in the United States.

Accepted Answer

The market value of the major exchanges in the United States, such as the New York Stock Exchange and NASDAQ, are much higher than the Japanese stock markets.

Question 8

When stock in a closely held corporation is offered to the public for the first time the transaction is called "going public" and the market for such stock is called the initial public offering, or IPO, market.

Accepted Answer

Going public refers to the process of a private company becoming a publicly traded company by selling its shares to the public for the first time through an IPO. The market for such stock is indeed called the initial public offering (IPO) market.

Question 9

The OTC market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities.

Accepted Answer

The OTC market is not a physical exchange, but rather a decentralized network of securities dealers providing trading in unlisted securities electronically.

Question 10

If Firm A owns no real assets of its own, but simply accepts the savings of individuals and invests them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Accepted Answer

This is because a financial intermediary exists solely to bring together lenders and borrowers, or buyers and sellers of financial assets. They do not own any real assets of their own but instead facilitate the flow of funds from one party to another. Examples of financial intermediaries include banks, insurance companies, mutual funds, and pension funds.

Question 11

The primary role of financial markets is to help bring together borrowers and savers by facilitating the flow of funds from individuals and businesses that have surplus funds to individuals, businesses, and governments that have needs for funds in excess of their income.

Accepted Answer

This statement accurately describes the primary role of financial markets.

Question 12

When a firm issues new equity, market pressure applies first to the new shares issued and then to existing shares.Subsequent to the new issue, the value of the new shares will rise to the equilibrium price of the old shares.

Accepted Answer

Subsequent to the new issue, market pressure applies first to the existing shares, which may cause their value to decrease temporarily. Over time, the value of both the new and existing shares will adjust to reach a new equilibrium price.

Question 13

On average, stock markets in emerging economies have grown much more rapidly than stock markets in developed economies during the past decade.

Accepted Answer

According to data from the World Bank, emerging market stocks have outperformed developed market stocks over the past decade. For example, the MSCI Emerging Markets Index has grown at an average annual rate of around 10%, compared to around 5% for the MSCI World Index, which includes developed market stocks.

Question 14

The cost of meeting SEC and possible additional state reporting requirements regarding disclosure of certain financial information about the firm, the danger of losing control, and the possibility of an inactive market or low stock price are all potential disadvantages of going public.

Accepted Answer

These are all potential disadvantages of going public.

Question 15

Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares.

Accepted Answer

Going public does establish a market value for the firm based on supply and demand, but it does not ensure that a liquid market will always exist for the firm's shares. Market liquidity can vary greatly over time due to various factors including investor interest, market conditions, and the overall economic environment.

Question 16

The conversion of stock exchanges from not-for-profit mutual ownership organizations to for profit organizations is called what?

Accepted Answer

Demutualization refers to the conversion of a mutually owned organization, such as a stock exchange, into a for-profit company. It involves the distribution of ownership in the organization among its members, who are typically compensated with shares or cash.

Question 17

If an individual investor buys and sells existing stocks through a broker, these are primary market transactions.

Accepted Answer

Primary market transactions involve the issuance of new securities by companies to raise capital, whereas buying and selling existing stocks through a broker occurs in the secondary market.

Question 18

The derivatives market allows for

Accepted Answer

The derivatives market allows investors to speculate on price movements and also to hedge against exposure to price movements. However, it does not allow for the purchase of corporate debt.

Question 19

Investment bankers are not really like commercial "bankers" in the sense of taking deposits and issuing loans; rather, they help firms issue securities in the secondary market and their activities are limited to raising new equity capital.

Accepted Answer

Investment bankers primarily work in the areas of underwriting, selling, and trading securities, and assisting with mergers and acquisitions. They do not typically engage in deposit-taking or lending activities like commercial bankers.

Question 20

After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.

Accepted Answer

The marginal investor is the one who is willing to pay the highest price for the stock, and thus sets the initial price at which it will trade. Subsequent trades and market forces will then determine the stock's price over time.

Quiz 3: Financial Markets and the Investment Banking Process