Chapter 7 PRIMARY AND SECONDARY MARKETS

Private placement requires more disclosure

False

SEC Rule 144A has decreased foreign private placements

False

The costs associated with frictions generally result in buyers paying less than in the absence of frictions, and/or sellers receiving more.

False

Real world capital markets are completely segmented

False.

Financial markets are not frictionless because of:

-Commissions charged by brokers. -Bid-ask spreads charged by dealers. -Trading restrictions. -Costs of acquiring information about financial assets.

The key distinction between a primary market and a secondary market is that:

-In the secondary market the issuer of the asset does not receive funds from the buyer. -In the secondary market the existing issue changes hands.

Conditional orders include

-Limit orders. -Stop orders

Investors in financial assets receive several benefits from a secondary market including

-Liquidity of their assets. -Information about the assets' fair values. -Lower search and transactions costs

Secondary markets outside the U.S. are located in

-London. -Paris. -Frankfurt. -Osaka.

In the U.S., secondary trading of common stock occurs on

-Major national stock exchanges. -Regional stock exchanges. -The OTC marke

The major difference between the broker and the dealer is that

-The broker receives a commission for receiving, transmitting, and executing investors' orders. -The broker does not buy and hold in inventory or sells from inventory the financial asset that is subject of a trade

An investor receives a margin call from the broker when:

-The investor's margin account falls below the minimum maintenance margin. -The investor's margin account reaches zero.

A perfect market results when

-The number of buyers and seller is sufficiently large. -All buyers and sellers are price takers. -No transactions costs. -No taxes.

In a completely integrated capital market:

-There are no restrictions to prevent investors from investing in securities issued in any capital market throughout the world. -The required return on securities of comparable risk will be the same in all capital markets after adjusting for taxes and foreign exchange rates.

When orders are batched or grouped together for simultaneous execution at the same price, the marked is known as:

A call market

When prices of securities are determined continuously throughout the trading day as buyers and sellers submit orders, the market is called

A continuous market

For common stock, an order of 100 shares is called

A round lot

A market is price efficient if:

At all times prices fully reflect all available information that is relevant to the valuation of securities.

When the issuer announces the terms of the issue and interested parties submit bids for the entire issue, the arrangement is referred to as

Auction process

An underwriting arrangement whereby an investment banking firm or group of firms offers a potential issuer of debt securities a firm bid to purchase a specified amount of the securities with a certain coupon rate and maturity is known as:

Bought deal.

A transaction in which an investor borrows to buy additional securities using the securities themselves as collateral is called:

Buying on margin.

The interest rate that banks charge brokers for margin transactions is called

The call money rate.

Rule 144A will contribute to the growth of the private placement market by:

Improving the liquidity of securities issued. Reducing the cost of raising funds. Attracting new large institutional investors into the market.

Some underwriting firms have found the bought deal to be attractive because it:

Offers timing flexibility. Reduces the risk of capital loss.

If investors can obtain transaction services as cheaply as possible, the market is said to be:

Operationally efficient

A corporation can issue new common stock directly to existing stockholders through a:

Preemptive rights offering

The secondary market is the market for the trading of:

Previously issued securities. Seasoned securities.

Financial markets dealing with financial claims that are newly issued are called:

Primary market.

When world capital markets are mildly segmented, there are opportunities to

Raise funds at a lower cost in capital markets of another country.

The preliminary prospectus, which may be distributed to the public during the waiting period for the registration of the security to become effective, is referred to as:

Red herring.

Competitive bidding underwriting is mandated for certain securities of

Regulated public utilities. Municipal debt obligations

SEC regulation, which exempts some issues from registration, is the:

Regulation D.

A short sale involves

Selling securities that are not owned at the time of sale

Rule 415, which permits certain issuers to file a single registration document indicating that it intends to sell a certain amount of a certain class of securities at one or more times within the next two years, is popularly referred to as:

Shelf registration

When all bidders pay the highest winning yield bid in a competitive bidding underwriting, this type of auction is referred to as:

Single price auction. Dutch auction

An underwriting arrangement in which the underwriter buys the firm's unsubscribed shares is known as:

Standby underwriting arrangement.

A stop order that designates a price limit is a

Stop-limit order

If the price of a security reflects all information, whether or not it is publicly available, the market is said to be:

Strong form efficient

Any company that publicly offers a security in the U.S. becomes a reporting company and, as such, is subject to:

The Securities Exchange Act of 1934.

The activities of underwriters are regulated by:

The Securities and Exchange Commission.

A firm may seek to raise funds outside its domestic capital market for one or more of the following reasons:

The amount of capital sought cannot be raised in its local market. There is an opportunity to raise funds at a lower cost. Funds denominated in another currency are sought. The firm seeks to diversify funding costs

The difference between the execution price of a security and the price that would have existed in the absence of the trade is referred to as

The execution cost

When the issuer of a security files a registration statement with the SEC, part I of the registration is:

The prospectus.

Because of imperfections in real markets, brokers and dealers are necessary to the smooth functioning of a secondary market

True

In a preemptive rights offering, the price at which new shares can be purchased is called the subscription price

True

Investors who take positions in securities are required to satisfy initial and maintenance margin requirements

True

One of the most important duties of an underwriter is to perform "due diligence."

True

The secondary market is where already-issued financial assets are traded

True

Transactions costs include commissions, fees, execution costs, and opportunity costs.

True

Non-U.S. companies, which publicly offer a security in the U.S., must file financial statements based on

U.S. GAAP