Question_Doc4_2_15Dec

| August 14, 2017

1.
A financial intermediary is a corporation that takes funds from investors
and then
provides those funds to those who need capital. A bank that
takes in
demand deposits and then uses that money to make long-term
mortgage
loans is one example of a financial intermediary.
a. True
b. False

2.
The NYSE is defined as a “spot” market purely and simply because it
has a
physical
location. The Nasdaq, on the other hand, is not a spot market
because
it has no one central location.
a. True
b. False

3.
The NYSE is defined as a “primary” market because it is one of the
largest
and most important stock markets in the world.
a. True
b. False

4.
Primary markets are large and important, while secondary markets are
smaller
and less important.
a. True
b. False
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5.
Private markets are those like the NYSE, where transactions are handled
by
members of the organization, while public markets are those like the
Nasdaq,
where anyone can make transactions.
a. True
b. False

6.
A share of common stock is not a derivative, but an option to buy the
stock is
a derivative because the value of the option is derived from the
value of
the stock.
a. True
b. False

7.
Financial institutions are more diversified today than they were in the
past,
when federal laws kept investment banking houses, commercial banks,
insurance
companies, and so on quite separate. Today the larger
financial
corporations offer a variety of services, ranging from checking
accounts,
to insurance, to underwriting securities, to stock brokerages.
a. True
b. False

8.
Hedge funds are somewhat similar to mutual funds. The primary
differences
are that hedge funds are less highly regulated, have more
flexibility
regarding what they can buy, and restrict their investors to
wealthy,
sophisticated individuals and institutions.
a. True
b. False

9.
Investment banking houses today often have divisions that engage in
traditional
investment banking and other divisions that engage in regular
commercial
banking.
a. True
b. False

10.
Trades on the NYSE are generally completed by having a brokerage firm
acting
as a “dealer” buy securities and adding them to its inventory or
selling
from its inventory. The Nasdaq, on the other hand, operates as
an
auction market, where buyers offer to buy, and sellers to sell, and
the
price is negotiated on the floor of the exchange.
a. True
b. False

11.
The “over-the-counter” market received its name years ago because
brokerage
firms would hold inventories of stocks and then sell them by
literally
passing them over the counter to the buyer.
a. True
b. False

12.
If you decide to buy 100 shares of Google, you would probably do so by
calling
your broker and asking him or her to execute the trade for you.
This
would be defined as a secondary market transaction, not a primary
market
transaction.
a. True
b. False

13.
The term IPO stands for “individual purchase order”, as when an
individual
(as opposed to an institution) places an order to buy a stock.
a. True
b. False

14.
The term “Dutch auction” in a new stock offering refers to a
situation
where
each potential bidder indicates the price they are willing to pay
and how
many shares they will buy at that price. The highest price that
permits
the company to sell all the shares it wants to sell is
determined–it
is the “market clearing price,” and all bidders who
specified
that price or higher are allowed to buy their shares at the
market
clearing price.
a. True
b. False

15.
When a corporation’s shares are owned by a few individuals who are
associated
with the firm’s management, we say that the stock is closely
held.
a. True
b. False

16.
A publicly owned corporation is a company whose shares are held by the
investing
public, which may include other corporations as well as
institutional
investors.
a. True
b. False

17.
If you wanted to know what rate of return stocks have provided in the
past,
you could examine data on the Dow Jones Industrial Index, the S&P
500
Index, or the Nasdaq Index.
a. True
b. False

18.
The annual rate of return on any given stock can be found as the stock’s
dividend
for the year plus the change in the stock’s price during the
year,
divided by its beginning-of-year price.
a. True
b. False

19.
The annual rate of return on any given stock can be found as the stock’s
dividend
for the year plus the change in the stock’s price during the
year,
divided by its beginning-of-year price. If you obtain such data on
a large
portfolio of stocks, like those in the S&P 500, find the rate of
return
on each stock, and then average those returns, this would give you
an idea
of stock market returns for the year in question.
a. True
b. False

20.
Each stock’s rate of return in a given year consists of a dividend yield
(which
might be zero) plus a capital gains yield (which could be
positive,
negative, or zero). Such returns are calculated for all the
stocks
in the S&P 500. A weighted average of those returns, using each
stock’s
total market value, is then calculated, and that average return
is often
used as an indicator of the “return on the market.”
a. True
b. False

21.
Each stock’s rate of return in a given year consists of a dividend yield
(which
might be zero) plus a capital gains yield (which could be
positive,
negative, or zero). Such returns are calculated for all the
stocks
in the S&P 500. A simple average of those returns is then
calculated,
and that average is called “the return on the S&P Index,” and
it is
often used as an indicator of the “return on the market.”
a. True
b. False

22.
You recently sold 100 shares of Microsoft stock to your brother at a
family
reunion. At the reunion your brother gave you a check for the
stock
and you gave your brother the stock certificates. Which of the
following
best describes this transaction?
a. This
is an example of a direct transfer of capital.
b. This
is an example of a primary market transaction.
c. This
is an example of an exchange of physical assets.
d. This
is an example of a money market transaction.
e. This
is an example of a derivative market transaction.

23.
Which of the following statements is CORRECT?
a. The
NYSE does not exist as a physical location. Rather it
represents
a loose collection of dealers who trade stock
electronically.
b. An
example of a primary market transaction would be your uncle
transferring
100 shares of Wal-Mart stock to you as a birthday gift.
c.
Capital market instruments include both long-term debt and common
stocks.
d. If
your uncle in New York sold 100 shares of Microsoft through his
broker
to an investor in Los Angeles, this would be a primary market
transaction.
e. While
the two frequently perform similar functions, investment banks
generally
specialize in lending money, whereas commercial banks
generally
help companies raise large blocks of capital from
investors.

24.
Which of the following is a primary market transaction?
a. You
sell 200 shares of IBM stock on the NYSE through your broker.
b. You
buy 200 shares of IBM stock from your brother. The trade is not
made
through a broker–you just give him cash and he gives you the
stock.
c. IBM
issues 2,000,000 shares of new stock and sells them to the public
through
an investment banker.
d. One
financial institution buys 200,000 shares of IBM stock from
another
institution. An investment banker arranges the transaction.
e. IBM
sells 2,000,000 shares of treasury stock to its employees when
they
exercise options that were granted in prior years.

25.
Which of the following is an example of a capital market instrument?
a.
Commercial paper.
b.
Preferred stock.
c. U.S.
Treasury bills.
d.
Banker’s acceptances.
e. Money
market mutual funds.

26.
Money markets are markets for
a.
Foreign currencies.
b.
Consumer automobile loans.
c.
Common stocks.
d.
Long-term bonds.
e.
Short-term debt securities such as Treasury bills and commercial
paper.

27.
Which of the following statements is CORRECT?
a. If
you purchase 100 shares of Disney stock from your brother-in-law,
this is
an example of a primary market transaction.
b. If
Disney issues additional shares of common stock through an
investment
banker, this would be a secondary market transaction.
c. The
NYSE is an example of an over-the-counter market.
d. Only
institutions, and not individuals, can engage in derivative
market
transactions.
e. As
they are generally defined, money market transactions involve debt
securities
with maturities of less than one year.

28.
You recently sold 200 shares of Disney stock, and the transfer was made
through
a broker. This is an example of:
a. A
money market transaction.
b. A
primary market transaction.
c. A
secondary market transaction.
d. A futures
market transaction.
e. An
over-the-counter market transaction.

29.
Which of the following statements is CORRECT?
a. Hedge
funds are legal in Europe and Asia, but they are not permitted
to
operate in the United States.
b. Hedge
funds are legal in the United States, but they are not
permitted
to operate in Europe or Asia.
c. Hedge
funds have more in common with investment banks than with any
other
type of financial institution.
d. Hedge
funds have more in common with commercial banks than with any
other
type of financial institution.
e. Hedge
funds are not as highly regulated as most other types of
financial
institutions. The justification for this light regulation
is that
only “sophisticated” investors (i.e., those with high net
worths
and high incomes) are permitted to invest in these funds, and
such
investors supposedly can do any necessary “due diligence” on
their
own rather than have it done by the SEC or some other
regulator.

30.
Which of the following statements is CORRECT?
a. While
the distinctions are becoming blurred, investment banks
generally
specialize in lending money, whereas commercial banks
generally
help companies raise capital from other parties.
b. The
NYSE operates as an auction market, whereas Nasdaq is an example
of a
dealer market.
c. Money
market mutual funds usually invest their money in a welldiversified
portfolio
of liquid common stocks.
d. Money
markets are markets for long-term debt and common stocks.
e. A
liquid security is a security whose value is derived from the price
of some
other “underlying” asset.

31.
Which of the following statements is CORRECT?
a. The
New York Stock Exchange is an auction market, and it has a
physical
location.
b. Home
mortgage loans are traded in the money market.
c. If an
investor sells shares of stock through a broker, then it would
be a
primary market transaction.
d.
Capital markets deal only with common stocks and other equity
securities.
e. While
the distinctions are blurring, investment banks generally
specialize
in lending money, whereas commercial banks generally help
companies
raise capital from other parties.

32.
Which of the following statements is CORRECT?
a. The
term “IPO” stands for Introductory Price Offered, and it is the
price at
which shares of a new company are offered to the public.
b. IPO
prices are generally established by the market, and buyers of the
new
stock must pay the price that prevails at the close of trading
on the
day the stock is offered to the public.
c. In a
“Dutch auction,” investors who want to buy shares in an IPO
submit
bids indicating how many shares they want to buy and the
price
they are willing to pay. The company determines how many
shares
it wants to sell. The highest price that enables the company
to sell
the desired number of shares is the price that all buyers
must
pay.
d. It is
possible that the price set in an IPO is so high that
investors
will refuse to buy the number of shares that the company
wants to
sell. In that case, the company is said to have “left
money on
the table.”
e. It is
possible that the price set in an IPO is so low that investors
will
want to buy more shares than the company wants to sell. In
that
case, the company will have to issue more shares than it wants
to sell.

33.
Which of the following statements is CORRECT?
a. The
most important difference between spot markets versus futures
markets
is the maturity of the instruments that are traded. Spot
market
transactions involve securities that have maturities of less
than one
year whereas futures markets transactions involve
securities
with maturities greater than one year.
b.
Capital market transactions involve only preferred stock or common
stock.
c. If
General Electric were to issue new stock this year, this would be
considered
a secondary market transaction since the company already
has
stock outstanding.
d. Both
Nasdaq dealers and “specialists” on the NYSE hold inventories of
stocks.
e. Money
market transactions do not involve securities denominated in
currencies
other than the U.S. dollar.

34.
Which of the following statements is NOT CORRECT?
a. When
a corporation’s shares are owned by a few individuals, we say
that the
firm is “closely, or privately, held.”
b.
“Going public” establishes a firm’s true intrinsic value and ensures
that a
liquid market will always exist for the firm’s shares.
c. The
stock of publicly owned companies must generally be registered
with and
reported to a regulatory agency such as the SEC.
d. When
stock in a closely held corporation is offered to the public
for the
first time, the transaction is called “going public, or an
IPO,”
and the market for such stock is called the new issue or IPO
market.
e. It is
possible for a firm to go public and yet not raise any
additional
new capital for the firm itself.

35.
You have the following data on three stocks shown below. You decide to
use the
data on these stocks to form an index, and you want to find the
average
earned rate of return for 2008 on your index. If you follow the
averaging
procedure used to calculate the S&P 500 Index return, what
would
your index’s rate of return be? Hints: Rates of return are based
on
beginning-of-year prices, and the S&P Index is weighted by market
values
of the companies in the index.
Shares
Beginning
Ending Outstanding
Stock
Dividend Pric e Pric e (millions )
A $1.50
$30.00 $32.00 5.00
B $2.00
$28.50 $27.00 4.50
C $0.75
$20.00 $24.00 20.00
a.
16.07%
b.
16.92%
c.
17.76%
d.
18.65%
e.
19.59%

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