Business Finance - HW2

Which of the following statements is NOT CORRECT? a. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. b. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself. c. When a corporation's shares are owned by a few individuals, we say that the firm is "closely, or privately, held." 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. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC.

a. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.

Money markets are markets for a. Short-term debt securities such as Treasury bills and commercial paper. b. Common stocks. c. Consumer automobile loans. d. Long-term bonds. e. Foreign currencies.

a. Short-term debt securities such as Treasury bills and commercial paper.

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 an exchange of physical assets. c. This is an example of a money market transaction. d. This is an example of a primary market transaction. e. This is an example of a derivative market transaction.

a. This is an example of a direct transfer of capital.

Which of the following statements is CORRECT? a. The NYSE is an example of an over-the-counter market. b. As they are generally defined, money market transactions involve debt securities with maturities of less than one year. c. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. d. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. e. Only institutions, and not individuals, can engage in derivative market transactions.

b. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

Which of the following statements is CORRECT? a. 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. b. 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. c. Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks. d. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar. e. Capital market transactions involve only preferred stock or common stock.

c. Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks.

Which of the following is a primary market transaction? a. 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. b. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. c. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years. d. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. e. You sell 200 shares of IBM stock on the NYSE through your broker.

d. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

Which of the following is an example of a capital market instrument? a. Money market mutual funds. b. Commercial paper. c. Banker's acceptances. d. Preferred stock. e. U.S. Treasury bills.

d. Preferred stock.

Which of the following statements is CORRECT? a. Home mortgage loans are traded in the money market. b. If an investor sells shares of stock through a broker, then it would be a primary market transaction. c. Capital markets deal only with common stocks and other equity securities. d. The New York Stock Exchange is an auction market, and it has a physical location. e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

d. The New York Stock Exchange is an auction market, and it has a physical location.

You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: a. A primary market transaction. b. A money market transaction. c. An over-the-counter market transaction. d. A futures market transaction. e. A secondary market transaction.

e. A secondary market transaction.

Which of the following statements is CORRECT? a. 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. b. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. c. 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. d. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. e. Capital market instruments include both long-term debt and common stocks.

e. Capital market instruments include both long-term debt and common stocks.