Question_Doc4_2_15Dec

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%