Finance 3000: Chapter 2

Three years ago you purchased 500 shares in the Kellogg Company, but yesterday you sold 200 of those shares through your broker. This is:

A secondary market transaction (Secondary markets involve securities and other financial assets traded among investors after they have been issued by corporations

Of the following statements, which is CORRECT?

As they are generally defined, money market transactions involve debt securities with maturities of less than one year. (Money markets are the financial markets in which funds are borrowed or loaned for periods of less than one year.)

Thinking about the financial markets, which of the following statements is CORRECT?

Both NASDAQ dealers and specialists on the NYSE hold inventories of stocks. (Futures markets involve transactions set to close in the future, no matter how short or how long. Capital markets include long-term debt securities. A primary market transaction involves the issuance of new securities, and money markets may be denominated in any currency. Both dealers and specialists hold inventories of stock.)

Which of the following statements describes a primary market transaction?

Facebook issues 2,000,000 shares of new stock and sells them to the public through an investment banker. (A primary market transaction is one that brings an asset to the public markets for the first time.)

Which of the following statements about IPOs is CORRECT?

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. (IPO stands for initial public offering, in which the prices are usually determined by the investment bankers based on indications of interest from investors. This is less efficient but more popular than a Dutch auction, in which investors commit to buying shares at a specific price. An IPO is considered to be undersubscribed if investors don't want to buy the shares offered, and the company is not obligated to issue shares to satisfy demand.)

Which of the following is an example of a capital market instrument?

Preferred stock (Capital markets are markets for stocks and for intermediate- or long-term debt.)

Which of the following is an example of securities traded in money markets?

Short-term debt securities such as Treasury bills and commercial paper. (Money markets are the financial markets in which funds are borrowed or loaned for periods of less than one year.)

Which of the following statements about financial institutions and securities is CORRECT?

The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. (Commercial banks specialize in raising money, money market funds invest in short-term debt securities, and liquid securities are those that are easy to buy and sell. NASDAQ is a dealer market, which means it has all facilities needed to conduct security transactions without a physical location.)

You recently sold 100 shares of Facebook stock to your uncle. You had the certificates and gave them to him. In exchange, he wrote you a check. Which of the following best describes this transaction?

This is an example of a direct transfer of capital. (If one person transfers an asset to another without the involvement of a financial intermediary, then a direct transfer of capital has occurred.)

A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. One example is a commercial bank, which takes in demand deposits and then uses that money to make long-term mortgage loans.

True (A financial intermediary matches those who need money with those who supply it.)

Hedge funds are similar to mutual funds except that they are less regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

True (Hedge funds are largely unregulated and are marketed primarily to institutions and individuals with high net worths.)

To find the annual rate of return on any given stock, add the stock's dividend for the year plus the change in the stock's price during the year, then divide by its beginning-of-year price.

True (The return on a stock is a function of its dividend and the change in price.)