Finance Chapter 2

Financial institutions are more _________ 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.

diversified

In a ________, 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.

dutch auction

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

e

future markets=markets in which participants agree today to buy or sell an asset ______________.

at some future date

Includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.

dealer markets

Any financial asset whose value is derived from the value of some other "underlying" asset.

derivatives

An organization that underwrites and distributes new investment securities and helps businesses obtain financing.

investment banks

Capital market instruments include both _________ and ________.

long-term debt and common stocks

Markets in which securities and other financial assets are traded among investors after they have been issued by corporations.

secondary markets

money markets are the financial markets in which funds are borrowed or loaned for ___________

short periods, less than a year

money market funds are mutual funds that invest in___________ and allow investors to write checks against their accounts.

short-term, low-risk securities

The markets in which assets are bought or sold for "on-the-spot" delivery.

spot markets

What are the two leading stock markets?

The two leading stock markets today are the New York Stock Exchange and the Nasdaq stock market.

________ is a large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.

over-the-counter market

What are the three primary ways in which capital is transferred between savers and borrowers? Describe each one.

(1) by direct transfer of money and securities- business sells it's stocks and bonds directly to investors w/out any type of institution (2) through an investment bank- invesment bank serves as a middleman (3) through a financial intermediary- savers invest funds with the intermediary, which then issues its own securities in exchange

What is a market?

A market is a venue where assets are bought and sold

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? a. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. b. Financing risky projects with additional debt. c. Compensating managers with stock options. d. Abolishing the Security and Exchange Commission. e. The threat of hostile takeovers.

a

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to a. Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. b. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. c. Maximize the firm's expected EPS, which must also maximize the firm's price per share. d. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. e. Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

b

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

c

New York Stock Exchange is an example of a ___________.

capital market

what are financial markets for stocks and for intermediate- or long-term debt (one year or longer)?

capital markets

A corporation that is owned by a few individuals who are typically associated with the firm's management.

closely held corporations

___________ are the traditional department store of finance serving a variety of savers and borrowers.

commercial banks

Why are financial markets essential for a healthy economy and economic growth?

economic development is highly correlated with the level and efficiency of financial markets and institutions. It is difficult, if not impossible, for an economy to reach its full potential if it doesn't have access to a well-functioning financial system.

_____=a firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.

financial services corporation

_____________=The act of selling stock to the public at large by a closely held corporation or its principal stockholders.

going public

___________ 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 __________, and they understand the risks.

hedge funds

initial public offering market=the market for stocks of companies that are ___________________.

in the process of going public

what does IPO stand for?

initial public offering

Both NASDAQ dealers and specialists on the NYSE hold ___________.

inventories of stocks

___________ are the markets in which debt securities with maturities of less than one year are traded. Longer-term securities, including stocks and bonds, are traded in the _____________.

money markets, capital markets

_________=organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.

mutual funds

Financial markets differ from physical asset markets in that real, or tangible, assets such as machinery, real estate, and agricultural products are traded in the _________, but financial securities representing claims on assets are traded in the __________.

physical asset markets financial markets

__________ are formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities.

physical location exchanges

Markets in which corporations raise capital by issuing new securities.

primary markets

_____________ are markets in which corporations raise capital by issuing new securities, while ____________ are markets in which securities and other financial assets are traded among investors after they have been issued by corporations.

primary markets, secondary markets

__________ are markets in which transactions are worked out directly between two parties.

private markets

__________, where transactions are worked out directly between two parties, are differentiated from public markets, where _________ are traded on organized exchanges.

private markets, standardized contracts

__________=markets in which standardized contracts are traded on organized exchanges.

public markets

A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.

publicly owned corporations

__________ are markets in which assets are bought or sold for "on-the-spot" delivery, while _____________ are markets in which participants agree today to buy or sell an asset at some future date.

spot markets, futures markets

The threat of __________ tends to reduce potential conflicts between stockholders and managers.

takeovers

true or false: data from the Dow Jones Industrial Average, the S&P 500 Index, and the NASDAQ Composite Index give information about past stock returns.

true

Hedge funds are largely ________ and are marketed primarily to institutions and individuals with high net worths.

unregulated