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Finance
Q:
Name the benefits derived from the existence of stock exchanges.
Q:
Explain the difference between (a) public offerings and private placements, (b) primary markets and secondary markets, (c) the money market and the capital market, and (d) organized security exchanges and over-the-counter markets.
Q:
The New York Stock Exchange (NYSE) is
A) an automated electronic trading platform.
B) an auction market with face-to-face trading on the floor of the stock exchange in addition to automated, electronic trading.
C) a hybrid market, allowing for face-to-face trading on the floor of the stock exchange in addition to automated, electronic trading.
D) primarily a futures market.
Q:
The Securities and Exchange Commission (SEC)
A) regulates only initial public offerings, or IPOs.
B) regulates only primary market transactions to ensure investors are provided with adequate and accurate information on new securities.
C) regulates both primary and secondary markets.
D) regulates initial public offerings, but not seasoned equity offerings, in the primary market.
Q:
Prices of securities that are traded in the Over-the-Counter Markets are determined by
A) the Federal Trade Commission.
B) a continuous modified auction process.
C) the buyers of these securities.
D) a "bid" and "ask" negotiation process of broker-dealers of these securities.
Q:
Prices of securities that are traded on the organized exchanges are determined by
A) a "bid" and "ask" negotiation process amongst brokers who hold these securities in their own account.
B) the Securities Exchange Commission.
C) a continuous auction process reflecting the sentiments of buyers and sellers.
D) the sellers of the securities.
Q:
Capital market transactions include which of the following?
A) any security that is purchased from a brokerage firm that is well capitalized
B) common stock of a public corporation
C) all securities that are purchased in the open market
D) U.S. Treasury bills
Q:
Money-market transactions include which of the following?
A) any security that is paid for with cash
B) 30-year U.S. Treasury bonds
C) all securities paid for with the proceeds of a money-market account
D) securities that have a maturity of less than one year
Q:
In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an example of
A) a primary market transaction.
B) a secondary market transaction.
C) a venture capital firm transaction.
D) a money-market transaction.
Q:
Which of the following is NOT a benefit provided by the existence of organized security exchanges?
A) providing a continuous market
B) establishing and publicizing fair security prices
C) helping businesses raise new capital
D) standardization of all debt agreements
Q:
Which of the following refers to all institutions and procedures that provide for transactions in short-term debt instruments generally issued by borrowers with very high credit ratings?
A) capital market
B) commercial banks
C) money market
D) stock market
Q:
Insurance companies invest in the "long-end" of the securities market by purchasing securities with longer maturities. In which of the following instruments would an insurance company be least likely to invest most of its assets?
A) corporate stocks
B) corporate bonds
C) mortgages
D) commercial paper
Q:
The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called
A) NCIS.
B) NSQA.
C) NASDAQ.
D) NASQ.
Q:
Financial intermediaries
A) offer indirect securities.
B) include the national and regional stock exchange.
C) usually are underwriting syndicates.
D) constitute the various secondary markets.
Q:
An example of a secondary market transaction involving a capital market security is
A) a new issue of a security with a very short maturity.
B) a new issue of a security with a very long maturity.
C) the transfer of a previously-issued security with a very short maturity.
D) the transfer of a previously-issued security with a very long maturity.
Q:
An example of a primary market transaction involving a money-market security is
A) a new issue of a security with a very short maturity.
B) a new issue of a security with a very long maturity.
C) the transfer of a previously-issued security with a very short maturity.
D) the transfer of a previously-issued security with a very long maturity.
Q:
An example of a primary market transaction is
A) a new issue of common stock by AT&T.
B) a sale of some outstanding common stock of AT&T by an investor.
C) AT&T repurchasing its own stock from a stockholder.
D) all of the above
Q:
Capital market instruments include
A) negotiable certificates of deposit.
B) corporate equities.
C) commercial paper.
D) Treasury bills.
Q:
Bill is a public accountant auditing Expo Corporation. Based on information in Expo's confidential records, Bill recommends the purchase of Expo stock to his brother.
A) Bill is involved in insider trading prohibited by the SEC.
B) Bill's brother has no direct connection to Expo Corporation and therefore his purchase of the stock is not prohibited by insider trading laws.
C) Bill is not an insider because he is not an officer or employee of Expo Corporation
D) If Bill told a non-relative who purchases Expo stock, no insider trading laws would be violated.
Q:
The stock market with the most stringent listing requirements is the
A) New York Stock Exchange (NYSE).
B) NASDAQ Stock Market.
C) American Stock Exchange (AMEX).
D) All organized exchanges have the same listing requirements in order to make trading fair for all investors.
Q:
All of the following are benefits of organized stock exchanges EXCEPT
A) increased stock price volatility.
B) continuous markets.
C) fair security prices.
D) easier access to new capital for business expansion.
Q:
Which of the following is an advantage of organized stock exchanges?
A) increased stock price volatility
B) screening companies to ensure only low risk stocks are sold
C) providing a continuous market
D) Only profitable companies may issue new securities on an organized exchange.
Q:
All of the following securities are sold in money markets EXCEPT
A) common stock.
B) commercial paper.
C) 3-month U.S. Treasury bills.
D) 6-month certificates of deposit.
Q:
Which of the following is an example of both a capital market and a primary market transaction?
A) The U.S. Government sells 3-month Treasury bills.
B) Microsoft common stock owned by an individual investor is sold to another investor.
C) Ford Motor Company sells a new issue of common stock to raise funds through a public offering.
D) No transactions occur in both primary and capital markets at the same time.
Q:
General Motors raises money by selling a new issue of common stock. This transaction occurs in
A) the secondary market.
B) the capital market.
C) the money market.
D) the futures market.
Q:
A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore
A) the corporate bonds are indirect securities and the life insurance policies are direct securities.
B) the corporate bonds are indirect securities and the life insurance policies are indirect securities.
C) the corporate bonds are direct securities and the life insurance policies are indirect securities.
D) the corporate bonds are direct securities and the life insurance policies are direct securities.
Q:
John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common stock. This transaction occurs in the
A) secondary market.
B) primary market.
C) credit market.
D) futures market.
Q:
Common examples of financial intermediaries include all of the following EXCEPT
A) Venture Capital Firms.
B) Life Insurance Companies.
C) Pension Funds.
D) Mutual Funds.
Q:
A wealthy private investor providing a direct transfer of funds is called
A) a venture capitalist.
B) an investment banker.
C) a financial intermediary.
D) an angel investor.
Q:
Three ways that savings can be transferred through the financial markets include all of the following EXCEPT
A) direct transfer of funds.
B) indirect transfer using the investment banker.
C) indirect transfer using the venture capital firm.
D) indirect transfer using the financial intermediary.
Q:
ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration. Therefore, ExxonMobil is an example of a(n)
A) savings surplus unit.
B) savings deficit unit.
C) investment banker.
D) financial intermediary.
Q:
Money-market instruments include
A) common stock.
B) preferred stock.
C) T-bonds.
D) T-bills.
Q:
General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be describe as
A) an initial public offering.
B) a secondary market transaction because GE common stock has been trading for years.
C) a seasoned equity offering because GE has sold common stock before.
D) a money-market transaction because GE raises new money to fund its business.
Q:
Which of the following statements is an example of a futures market transaction?
A) An investor purchases 100 shares of IBM hoping to sell it in two years for a profit.
B) A company purchases an option to buy 1000 barrels of oil anytime between now and the end of the year.
C) A company agrees to purchase 1000 barrels of oil for delivery in six months at a price of $70 per barrel.
D) An executive has a portion of his current year salary deferred until he retires.
Q:
The process of shelf-registration is beneficial to the issuing firm because it will reduce the time needed for the firm to take an issue to market.
Q:
Registration of securities by the SEC indicates to investors that the risk of those securities is reasonable.
Q:
Transactions in common stock occur in the money market, due to the large amount of money involved in such transactions.
Q:
Cash markets are often referred to as spot markets.
Q:
Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct securities of other economic units.
Q:
Primary market transactions cannot be undertaken in over the counter markets.
Q:
A seasoned equity offering is the sale of additional shares by a company whose shares are already publicly traded.
Q:
Financial markets exist in order to allocate savings in the economy to the demanders of those savings.
Q:
The vast majority of corporate bond business takes place over the counter.
Q:
For a firm to have its securities listed on an exchange, it must meet certain requirements. These usually include measures of profitability, size, market value, and public ownership.
Q:
Over-the-counter markets include all security markets, with the exception of organized exchanges.
Q:
The money market includes transactions in short-term financial instruments.
Q:
Each purchase occurring in the secondary markets increases the total stock of financial assets that exist in the economy.
Q:
Flotation costs are typically greater in the secondary market than in the primary market.
Q:
Three ways that savings can be transferred through the financial markets to those in need of funds include direct transfers, indirect transfers using the investment banker, and indirect transfers using the financial intermediary.
Q:
One advantage of organized stock exchanges is increased stock price volatility resulting from the efficient exchange of pricing information.
Q:
One advantage of being listed on the NYSE is that all trades are made in an auction setting with face-to-face trading between individuals on the floor of the stock exchange.
Q:
Stocks listed on the New York Stock Exchange must be traded exclusively on the NYSE in order to maintain the high standards set by the exchange.
Q:
On the basis of number of shares traded, more stocks are traded over the counter than on organized exchanges.
Q:
Organized stock exchanges provide the benefits of a continuous market, fair security pricing, and helping businesses raise new capital.
Q:
Transactions in the futures markets involve current payments for goods which will be delivered at some future agreed upon date.
Q:
Capital markets are all the financial institutions that help a business raise long-term capital.
Q:
Seasoned secondary offerings occur in the secondary market.
Q:
Venture capitalists typically provide funds to high-risk startup companies but take no active role in their management.
Q:
Part of the U.S. Government's huge deficit is financed by foreign countries, such as China, which is a savings surplus unit.
Q:
A corporation needing cash sells securities to investors in the secondary market.
Q:
Individuals, corporations, and governments can be either savings deficit units or savings surplus units.
Q:
Saving surplus units include individuals and governments, but not corporations.
Q:
Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year.
Q:
Identify three prominent theories that attempt to explain the term structure of interest rates.
Q:
The yield curve in 2009 was very low, with short-term rates close to zero and long-term rates below 5 percent. What factors contributed to such low interest rates?
Q:
Given the anticipated rate of inflation (i) of 2.13% and the real rate of interest (R) of 3.1%, find the nominal rate of interest (r).
Q:
If provided the nominal rate of interest (r) of 7.4% and the anticipated rate of inflation (i) of 4.5%, what is the real rate of interest (R)?
Q:
The date today is January 1, 2010. A one-year security maturing on 1/1/11 yields 3%. A two-year security maturing on 1/1/12 yields 6%. A three-year security maturing on 1/1/13 yields 11%. Calculate the expected annual return on a two-year security beginning 1/1/11 and maturing on 1/1/13.
Q:
The current rate of return on a one-year U.S. Government security is 3%. The rate of return on a two-year U.S. Government security is 5%. According to the expectations theory, what is the return on a one-year U.S. Government security purchased one year from today?
Q:
An investor buys a 20-year Bbb-rated corporate bond with a nominal annual rate of return of 10%. The average inflation rate is expected to be 2%. The default risk premium is expected to be 5% and the maturity premium is 4%. Calculate the real rate of interest.
Q:
Given the rate information in the table below, estimate the nominal rate for a AA-rated corporate bond. Assume a liquidity premium of 8 basis points. Identify as part of your answer the inflation risk premium, the default risk premium, the maturity premium, and the liquidity premium.
3-month T-bills 2.0%
30-year Treasury bonds 5.0%
AA-rated corp. bonds 8.0%
Inflation Rate 1.0%
Q:
Given the anticipated rate of inflation (i) of 1.7% and the real rate of interest (R) of 1.4%, find the nominal rate of interest (r).
Q:
The ________ is the premium to compensate for the price change expected to occur over the life of the bond or investment instrument.
A) inflation-risk premium
B) maturity premium
C) real risk-free interest rate premium
D) default-risk premium
Q:
Which of the following premiums is NOT factored into the price of a long-term Treasury bond?
A) a real risk-free interest rate
B) a maturity premium
C) a default-risk premium
D) an inflation-risk premium
Q:
A "normal" yield curve is
A) downward sloping.
B) downward sloping, then upward sloping.
C) upward sloping.
D) upward sloping, then downward sloping.
Q:
Which of the following is NOT a valid theory that attempts to explain the shape of the term structure of interest rates?
A) the unbiased expectations theory
B) the liquidity preference theory
C) the market segmentation theory
D) the Fisher Effect theory
Q:
What is the term for a graphical representation of the relationship between interest rates and the maturities of debt securities?
A) term curve
B) maturity chart
C) yield curve
D) inflationary expectations
Q:
You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?
A) 8.5%
B) 6.0%
C) 5.0%
D) 2.5%
Q:
You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. Treasury bond pay?
A) 8.5%
B) 6.0%
C) 5.0%
D) 2.5%
Q:
The one-year interest rate is 4%. The interest rate for a two-year security is 6%. The one-year interest rate one year from now is 8.34%. According to the liquidity preference theory, the risk premium for the second one-year investment is
A) 0.50%.
B) 0.34%.
C) 0.30%.
D) 1.66%.