1
Fundamentals of Investing, 13e (Smart)
Chapter 2 Securities Markets and Transactions
2.1 Learning Goal 1
1) Stocks, bonds and mutual fund shares are bought and sold in the capital market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2) Capital markets deal exclusively in stock. Money markets deal exclusively in debt
instruments.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3) Primary markets deal in the stocks of larger, well-known companies; secondary markets deal
in the stocks of smaller, less well-known companies.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
4) Short-term securities are bought and sold in the
A) capital market.
B) primary market.
C) money market.
D) stock market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2
5) The governmental agency that oversees the capital markets is the
A) Federal Trade Commission.
B) Federal Reserve.
C) Securities and Exchange Commission.
D) Fair Trade and Banking Agency.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
6) Stocks purchased in the secondary market are purchased
A) directly from the issuing corporation.
B) from other investors.
C) from small, little-known brokerages.
D) indirectly through financial institutions.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) Stocks and bonds are traded in
A) securities and exchange commissions.
B) money markets.
C) federal trade commissions.
D) capital markets.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3
8) The primary market tends to be more active when
A) the economy is slowing and stock prices are falling.
B) the economy is expanding and stock prices are rising.
C) interest rates are rising.
D) early in the calendar year.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
2.2 Learning Goal 2
1) Underwriters are responsible for promoting and facilitating the sale of securities.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
2) The preliminary version of a prospectus is called a red herring.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
3) The purpose of the “quiet period” a company must observe from the time it files a
registration statement with the SEC until after an IPO is complete is to assure that all investors
receive the same information.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
4
4) IPOs are typically underpriced so that the price rises during the first few days of trading.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5) IPOs are relatively safe investments.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
6) The price of stock sold in an IPO is set by bids submitted in the month before trading begins.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
7) Which one of the following statements concerning the primary market is correct?
A) A transaction in the primary market is between two private stockholders.
B) The first public sale of a company’s stock in the primary market is called a seasoned new
issue.
C) The first public sale of a company’s stock is called an IPO.
D) A rights offering is a direct sale of stock to an institution that participates in the primary
market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5
8) A rights offering is the
A) initial offering of securities to the public.
B) offering of new securities to current shareholders on a pro-rata basis.
C) sale of newly issued shares of stock to the general public.
D) sale of securities directly to a select group of investors.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9) IPO activity tends to peak when stock prices
A) have fallen sharply.
B) have risen sharply.
C) are volatile and unstable.
D) Stock prices have relatively little influence on IPO activity.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
10) The document that describes the issuer of a security’s management and financial position is
known as a
A) balance sheet.
B) 10-K report.
C) prospectus.
D) red herring.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
6
11) Companies offering their stock to the public for the first time usually seek the assistance of
A) investment bankers.
B) the Securities and Exchange Commission.
C) the Federal Reserve Bank.
D) prospectors.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12) The financial crisis of 2008 resulted in
A) a steep increase in the price of newly issued stock because supply was limited.
B) new regulations affecting initial public offerings.
C) a sharp reduction in the number of initial public offerings.
D) B and C, but not A.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
13) Investment bankers who join together to share the financial risk associated with buying an
entire issue of new securities and reselling them to the public is called a(n)
A) selling group.
B) tombstone group.
C) underwriting syndicate.
D) primary market group.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7
14) Describe the initial public offering (IPO) process and explain the role of the underwriter,
the Securities and Exchange Commission (SEC), and the red herring.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
15) Explain the role of investment bankers and brokerage firms in the issuance of new
securities.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8
2.3 Learning Goal 3
1) The NYSE and AMEX are examples of dealer markets.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
2) Only U.S. corporations can list their stocks on the NYSE.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
3) Firms that list their stock on an exchange can be delisted for failing to meet the requirements
of the exchange.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
4) The NYSE is part of the world’s largest international trading network known as NYSE
Euronext.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
9
5) Exchange traded funds (ETFs) perform like a broad market index but are bought and sold
like individual stocks.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
6) Most commodity futures are traded on the NYSE Amex.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7) Securities that trade in the over-the-counter market are called unlisted securities.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8) A market maker brings together buyers and sellers in an auction market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
9) The income paid to a market maker is referred to as the spread.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
10
10) Federal laws that control the sale of securities are called blue sky laws.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
11) Federal securities laws are designed to protect financial institutions.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12) Stocks of many large foreign companies such as Toyota trade on the NYSE as well as on
exchanges in their own country.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13) The majority of bonds trade in the OTC market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3