Exam 2: Financial Markets and Institutions

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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 Walmart 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.

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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.

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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.

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A) Commercial paper.
B) Preferred stock.
C) U.S. Treasury bills.
D) Banker's acceptances.
E) Money market mutual funds.

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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.

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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 these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

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E

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 well-diversified 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.

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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.

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False

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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.

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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 this situation, the IPO is said to be oversubscribed.
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.

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