finance chapter 2

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

A secondary market transaction.

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.

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

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

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.

The acronym IPO stands for "independent public offering."

False - initial public offering

One of the following statements about issuing and owning securities is incorrect. Which statement is NOT CORRECT?

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

Which of the following statements about hedge funds is CORRECT?

Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only the wealthiest investors invest in hedge funds, and they understand the risks.

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.

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

Preferred Stock

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

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

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.

Which of the following statements about financial markets is CORRECT?

The New York Stock Exchange is an auction market, and it has 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.

A corporation is said to be publicly owned if its shares are held by the investing public, which may include individuals, other corporations, and institutional investors.

True

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 stock is considered to be closely held if the corporation's shares are owned by a few individuals who are associated with the firm's management.

True

A stock's return can be broken out into its dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). These returns can be calculated for all of the stocks in the S&P 500. You can find an indicator of the "return on the market" by calculating the weighted average of those returns, using each stock's total market value.

True

Data from the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite Index give information about past stock returns.

True

Financial institutions are more diversified today than they were in the past, when federal separated investment banks, commercial banks, insurance companies, and other financial companies. Today, large financial services corporations offer services that they could not in the past.

True

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

The equation used to find the annual rate of return on any given stock is the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price. When applied to a large portfolio of stocks, like those in the S&P 500, the average of the returns on each stock can be used to find stock market returns for the year in question.

True

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