978-0134083285 Chapter 2 Part 1

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Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 2 The Financial Markets and Interest Rates

Learning Objective 2.1

1) Common stock is considered a short-term security because it has no maturity date and a long-term

security is one with a maturity date of more than one year.

Keywords: Long-term Capital

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

2) Saving surplus units include individuals and governments, but not corporations.

Keywords: Capital Markets, Savings Surplus Units

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

3) Individuals, corporations, and governments can be either savings deficit units or savings surplus units.

Keywords: Capital Markets, Savings Surplus Units, Savings Deficit

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

4) A corporation needing cash sells securities to investors in the secondary market.

Keywords: Secondary Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

5) Part of the U.S. Government’s huge deficit is financed by foreign countries, such as China, which is a

savings surplus unit.

Keywords: Capital Markets, Savings Surplus Units

Learning Obj.: L.O. 2.1

AACSB: Diverse and multicultural work environments

6) Venture capitalists typically provide funds to high-risk startup companies but take no active role in

their management.

Keywords: Venture Capitalist

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

7) Seasoned secondary offerings occur in the secondary market.

Keywords: Seasoned Secondary Offering, Secondary Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

8) Capital markets are all the financial institutions that help a business raise long-term capital.

Keywords: Capital Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

9) Transactions in the futures markets involve current payments for goods which will be delivered at

some future agreed upon date.

Keywords: Futures Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

10) Organized stock exchanges provide the benefits of a continuous market, fair security pricing, and

helping businesses raise new capital.

Keywords: Organized Stock Exchanges

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

11) On the basis of number of shares traded, more stocks are traded over the counter than on organized

exchanges.

Keywords: Organized Stock Exchanges, Over-The-Counter Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

12) Stocks listed on the New York Stock Exchange must be traded exclusively on the NYSE in order to

maintain the high standards set by the exchange.

Keywords: New York Stock Exchange, NYSE

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

13) One advantage of being listed on the NYSE is that all trades are made in an auction setting with face–

to-face trading between individuals on the floor of the stock exchange.

Keywords: New York Stock Exchange, NYSE

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

14) One advantage of organized stock exchanges is increased stock price volatility resulting from the

efficient exchange of pricing information.

Keywords: Stock Exchange, Price Volatility

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

15) Three ways that savings can be transferred through the financial markets to those in need of funds

include direct transfers, indirect transfers using the investment banker, and indirect transfers using the

financial intermediary.

Keywords: Capital Markets, Direct Transfer, Indirect Transfer

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

16) Flotation costs are typically greater in the secondary market than in the primary market.

Keywords: Flotation Costs, Secondary Market, Primary Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

17) Each purchase occurring in the secondary markets increases the total stock of financial assets that

exist in the economy.

Keywords: Secondary Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

18) The money market includes transactions in short-term financial instruments.

Keywords: Money Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

19) Over-the-counter markets include all security markets, with the exception of organized exchanges.

Keywords: Over-the-Counter Markets, Organized Exchanges

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

20) For a firm to have its securities listed on an exchange, it must meet certain requirements. These

usually include measures of profitability, size, market value, and public ownership.

Keywords: Stock Exchange, Listing Requirements

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

21) The vast majority of corporate bond business takes place over the counter.

Keywords: Corporate Bonds, Over the Counter Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

22) Financial markets exist in order to allocate savings in the economy to the demanders of those savings.

Keywords: Financial Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

23) A seasoned equity offering is the sale of additional shares by a company whose shares are already

publicly traded.

Keywords: Seasoned Equity Offering

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

24) Primary market transactions cannot be undertaken in over the counter markets.

Keywords: Primary Market, Over the Counter Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

25) Financial intermediaries issue their own indirect securities and use the proceeds to purchase the direct

securities of other economic units.

Keywords: Financial Intermediaries, Indirect Securities, Direct Securities

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

26) Cash markets are often referred to as spot markets.

Keywords: Spot Markets, Cash Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

27) Transactions in common stock occur in the money market, due to the large amount of money

involved in such transactions.

Keywords: Money Market, Common Stock

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

28) Registration of securities by the SEC indicates to investors that the risk of those securities is

reasonable.

Keywords: SEC, Registration of Securities

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

29) The process of shelf-registration is beneficial to the issuing firm because it will reduce the time needed

for the firm to take an issue to market.

Keywords: Shelf Registration, Securities

Learning Obj.: L.O. 2.1

AACSB: Analytical Thinking

30) Which of the following statements is an example of a futures market transaction?

A) An investor purchases 100 shares of IBM hoping to sell it in two years for a profit.

B) A company purchases an option to buy 1000 barrels of oil anytime between now and the end of the

year.

C) A company agrees to purchase 1000 barrels of oil for delivery in six months at a price of $70 per barrel.

D) An executive has a portion of his current year salary deferred until he retires.

Keywords: Futures Market

Learning Obj.: L.O. 2.1

AACSB: Analytical Thinking

31) General Electric (GE) has been a public company for many years with its common stock traded on the

New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will

be describe as

A) an initial public offering.

B) a secondary market transaction because GE common stock has been trading for years.

C) a seasoned equity offering because GE has sold common stock before.

D) a money-market transaction because GE raises new money to fund its business.

Keywords: Seasoned Equity Offering

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

32) Money-market instruments include

A) common stock.

B) preferred stock.

C) T-bonds.

D) T-bills.

Keywords: Money Market, T–bills

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

33) ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of

that on new exploration. Therefore, ExxonMobil is an example of a(n)

A) savings surplus unit.

B) savings deficit unit.

C) investment banker.

D) financial intermediary.

Keywords: Capital Markets, Savings Surplus Units

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

34) Three ways that savings can be transferred through the financial markets include all of the following

EXCEPT

A) direct transfer of funds.

B) indirect transfer using the investment banker.

C) indirect transfer using the venture capital firm.

D) indirect transfer using the financial intermediary.

Keywords: Capital Markets, Venture Capital Firm

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

35) A wealthy private investor providing a direct transfer of funds is called

A) a venture capitalist.

B) an investment banker.

C) a financial intermediary.

D) an angel investor.

Keywords: Capital Markets, Angel Investor

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

36) Common examples of financial intermediaries include all of the following EXCEPT

A) Venture Capital Firms.

B) Life Insurance Companies.

C) Pension Funds.

D) Mutual Funds.

Keywords: Capital Markets, Financial Intermediaries

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

37) John calls his stockbroker and instructs him to purchase 100 shares of Microsoft Corporation common

stock. This transaction occurs in the

A) secondary market.

B) primary market.

C) credit market.

D) futures market.

Keywords: Secondary Market, Primary Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

38) A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life

insurance policies. Therefore

A) the corporate bonds are indirect securities and the life insurance policies are direct securities.

B) the corporate bonds are indirect securities and the life insurance policies are indirect securities.

C) the corporate bonds are direct securities and the life insurance policies are indirect securities.

D) the corporate bonds are direct securities and the life insurance policies are direct securities.

Keywords: Direct Securities, Indirect Securities

Learning Obj.: L.O. 2.1

AACSB: Analytical Thinking

39) General Motors raises money by selling a new issue of common stock. This transaction occurs in

A) the secondary market.

B) the capital market.

C) the money market.

D) the futures market.

Keywords: Capital Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

40) Which of the following is an example of both a capital market and a primary market transaction?

A) The U.S. Government sells 3-month Treasury bills.

B) Microsoft common stock owned by an individual investor is sold to another investor.

C) Ford Motor Company sells a new issue of common stock to raise funds through a public offering.

D) No transactions occur in both primary and capital markets at the same time.

Keywords: Primary Market, Capital Market

Learning Obj.: L.O. 2.1

AACSB: Analytical Thinking

41) All of the following securities are sold in money markets EXCEPT

A) common stock.

B) commercial paper.

C) 3-month U.S. Treasury bills.

D) 6-month certificates of deposit.

Keywords: Money Market, Commercial Paper, Treasury Bills

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

42) Which of the following is an advantage of organized stock exchanges?

A) increased stock price volatility

B) screening companies to ensure only low risk stocks are sold

C) providing a continuous market

D) Only profitable companies may issue new securities on an organized exchange.

Keywords: Organized Stock Exchanges, Continuous Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

43) All of the following are benefits of organized stock exchanges EXCEPT

A) increased stock price volatility.

B) continuous markets.

C) fair security prices.

D) easier access to new capital for business expansion.

Keywords: Stock Exchange, Price Volatility, Continuous Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

44) The stock market with the most stringent listing requirements is the

A) New York Stock Exchange (NYSE).

B) NASDAQ Stock Market.

C) American Stock Exchange (AMEX).

D) All organized exchanges have the same listing requirements in order to make trading fair for all

investors.

Keywords: Listing Requirements, NYSE, AMEX, NASDAQ

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

45) Bill is a public accountant auditing Expo Corporation. Based on information in Expo’s confidential

records, Bill recommends the purchase of Expo stock to his brother.

A) Bill is involved in insider trading prohibited by the SEC.

B) Bill’s brother has no direct connection to Expo Corporation and therefore his purchase of the stock is

not prohibited by insider trading laws.

C) Bill is not an insider because he is not an officer or employee of Expo Corporation

D) If Bill told a non-relative who purchases Expo stock, no insider trading laws would be violated.

Keywords: Insider Trading, SEC, Securities Regulation

Learning Obj.: L.O. 2.1

AACSB: Analytical Thinking

46) Capital market instruments include

A) negotiable certificates of deposit.

B) corporate equities.

C) commercial paper.

D) Treasury bills.

Keywords: Capital Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

47) An example of a primary market transaction is

A) a new issue of common stock by AT&T.

B) a sale of some outstanding common stock of AT&T by an investor.

C) AT&T repurchasing its own stock from a stockholder.

D) all of the above

Keywords: Primary Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

48) An example of a primary market transaction involving a money-market security is

A) a new issue of a security with a very short maturity.

B) a new issue of a security with a very long maturity.

C) the transfer of a previously-issued security with a very short maturity.

D) the transfer of a previously-issued security with a very long maturity.

Keywords: Primary Market, Money Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

49) An example of a secondary market transaction involving a capital market security is

A) a new issue of a security with a very short maturity.

B) a new issue of a security with a very long maturity.

C) the transfer of a previously-issued security with a very short maturity.

D) the transfer of a previously-issued security with a very long maturity.

Keywords: Secondary Market, Capital Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

50) Financial intermediaries

A) offer indirect securities.

B) include the national and regional stock exchange.

C) usually are underwriting syndicates.

D) constitute the various secondary markets.

Keywords: Financial Intermediaries

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking