finance chp. 2

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If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan?

10 percent, nominal interest rate=5%+5%=10%

Which of the following statements is incorrect?

A highly liquid financial instrument with a maturity of 90 days would be traded in the capital market. The secondary markets are not well known to the general public because they are wholesale markets and the sales take place outside of the public view.

Which one of the following parties can sell shares of ABC stock in the primary market?

ABC Company

Ted currently owns 100 shares of a publicly traded stock which he would like to sell. Which one of the following provides the most efficient means for Ted to sell his shares?

Secondary market transaction

Which of the following statements is correct?

Secondary markets are like used-car markets in that they allow investors to buy or sell previously owned securities for cash. In a weak-form efficient market, it would not be possible to earn abnormally high returns by looking for patterns in security prices.

Which of the following statements is correct?

Secondary markets are where the owners of outstanding securities can resell them to other investors and the secondary markets provide the means for investors to convert their securities into cash. Capital markets are markets where equity and debt instruments with maturities of greater than one year are traded. Money market instruments are generally issued by firms of the highest credit rating. Equities with maturities greater than one year generally are traded in the capital market. Investment funds, such as mutual funds, sell shares to investors and use the funds to purchase securities.

Which one of the following transactions occurred in the primary market?

South Wind Products sold 1,000 shares of newly issued stock to Mike.

Which of the following statements is incorrect?

The loans of the business finance companies are never secured by accounts receivable or inventory but rather based on trust among the companies. Money markets are global markets where long-term debt instruments, which have maturities of greater than one year, are traded. Dow Jones Industrial average (DJIA. is a price index that measures the change in prices of a market basket of goods and services that a typical consumer purchases. The FED is responsible for overseeing the securities industry and regulating all primary and secondary markets in which securities are traded.

Which of the following statements is incorrect?

The loans of the business finance companies are never secured by accounts receivable or inventory but rather based on trust among the companies. ---Private markets are organized financial markets where the general public buys and sells initial public offerings (IPOs) through their stockbrokers, and the NYSE, for example, is a private market.

Which of the following is the process by which investment bankers purchase new securities directly from the issuing company and resell them to the public?

Underwriting

The financial market where a new security is sold for the first time is

a primary market

If you just purchased a share of IBM through a New York Stock Exchange-based transaction, you participated in

a secondary market transaction.

Investment brokers are:

agents who work on the behalf of an investor

If a firm sells common stock to the public for the very first time, it is known as ______________.

an IPO

The nominal rate of interest is made up of

both real rate of interest and compensation for inflation

Investment dealers:

brokers who make money by buying and selling securities at bid prices to make profits from the difference.

If a firm needs to finance a new corporate headquarters building, then it would most likely seek the funds in the

capital market

The real rate of return can be justified, at a basic level, by

compensation for deferring consumption.

According to the weak-form of the efficient market hypothesis, the market for a security is perfectly informationally efficient if the security's price always reflects all information both public and private.

f

Capital budgeting is concerned with whether a firm has enough money to pay its bills and how it invests its spare cash to earn

f

Decreases in the money supply put downward pressure on long-term interest rates

f

Deflation is the amount by which aggregate price levels rise over time at significant rates.

f

Financial securities with maturities less than one year generally are traded in the capital market.

f

In an informationally efficient market, market prices adjust slowly to new or old information as it becomes available through postal mailing and the fliers in the mail.

f

In the most common type of underwriting arrangement, called best efforts underwriting, the insurance firm sells the entire security issue to the company at varying prices, and therefore the issuing company is never guaranteed a fixed price.

f

In the most common type of underwriting arrangement, called best-efforts underwriting, the pension plans sell the new securities to the issuing company and rebuys them for the investors.

f

Liquidity is the ability to convert an asset into common stocks or preferred stocks quickly with some loss of value.

f

Primary markets are markets for securities that were previously issued.

f

Stocks that are traded in the over-the-counter market are typically those of smaller and less known firms.

f

The FED obtains money from employee and employer contributions during the employee's working years, and they provide monthly cash payments upon retirement.

f

The FED regulates public securities markets in the United States.

f

The FED sell shares to investors and use the funds to purchase securities to trade and profit from security trading.

f

The Fed manages a key component of the nation's economy by conducting fiscal policy, which affects how much of the individual and corporate taxes are collected.

f

The financial market where a new security is sold for the first time is a secondary market.

f

The loans of the business finance companies are never secured by accounts receivable or inventory but rather based on trust among the companies.

f

The real rate of interest is equal to: the nominal rate of interest plus the expected rate of inflation.

f

The term money market reflects the idea that the instruments traded in the money market are not highly marketable and not easily converted into cash.

f

Traditional exchanges, such as the New York Stock Exchange (NYSE), does not provide a physical meeting place and communication facilities for members to buy and sell securities or other assets, such as commodities like oil or wheat, under a specific set of rules and regulations because it is expensive.

f

Money market instruments are generally issued by

firms of the highest credit rating.

One of the main services offered by investment banks to companies is

helping companies sell new debt or equity issues in the security markets.

The price of borrowing money is called

interest

During an economic recession, we would expect

interest rates to decrease.

During an economic expansion, we would expect

interest rates to increase.

____________ make money by buying and selling securities at bid ask prices.

investment dealers

Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market?

secondary market

) According to the strong-form efficiency, security prices reflect all information, whether public or private.

t

A secondary market is any market where owners of outstanding securities can sell them to other investors.

t

According to the strong-form of the efficient market hypothesis, the market for a security is perfectly informationally efficient if the security's price always reflects all information both public and private.

t

After the Great Depression (1929-1933), commercial banks were prohibited from engaging in investment banking activities because it was believed that these activities encouraged them to take too many risks.

t

Casualty insurance companies sell protection against loss of property from fire, theft, accidents, and other causes.

t

Compared with money market instruments, capital market instruments are less marketable, have higher default risk, and have longer maturities.

t

In a weak-form efficient market, it would not be possible to earn abnormally high returns by looking for patterns in security prices.

t

In an informationally efficient market, market prices adjust quickly to new information as it becomes available.

t

In the most common type of underwriting arrangement, called firm-commitment underwriting, the investment banker buys the entire security issue from the company at a fixed price, and therefore the issuing company is guaranteed that price.

t

Liquidity is the ability to convert an asset into cash quickly without loss of value.

t

Money market instruments are generally issued by firms of the highest credit rating.

t

Money markets are global markets where short-term debt instruments, which have maturities of less than one year, are traded.

t

Pension funds obtain money from employee and employer contributions during the employee's working years, and they provide monthly cash payments upon retirement.

t

Primary markets are markets in which new securities are sold for the first time.

t

Secondary markets are markets for securities that were previously issued.

t

The financial market where a new security is sold for the first time is a primary market.

t

The nominal rate of interest is composed of two parts: (1) the real rate of interest and (2) the expected rate of inflation.

t

The rate that we actually observe in the marketplace at a given time is unadjusted for inflation and is called the nominal rate of interest.

t

Underwriting is the process by which the investment banker helps the company sell its new security issue.

t

The general level of interest rates tends to follow

the business cycle

A highly liquid financial instrument with a maturity of 90 days would be traded in

the money market

If a firm needs to adjust its liquidity position, then it would participate in

the money market.

The term money market came about because

the securities traded in this market are a close substitute for cash.

The most common reason that corporate firms use the futures and options markets is

to hedge risk

If investment bank analysts decide that the applicant firm has excellent prospective for raising capital then, they will offer a contract on:

underwriting basis


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