47) One piece of evidence suggesting that the stock market is efficient is that most individual
investors cannot earn returns that beat the overall market average return, but professional
investors such as mutual fund and pension fund managers generally do earn higher-than-average
returns.
48) One sign that the stock market is efficient is that prices in the market move seemingly at
random, display almost no predictable, repeating patterns.
1) The Glass-Steagall Act was imposed to allow commercial and investment banks to combine
and work together.
2) The Glass-Steagall Act ________.
A) was intended to regulate the activities in the secondary market
B) created the Securities Exchange Commission
C) separated the activities of commercial and investment banks
D) was intended to regulate the activities in the primary market
3) The Securities Act of 1933 focuses on regulating the sale of securities in the primary market,
whereas the 1934 Act deals with the regulations governing the transactions in the secondary
market.
4) The Federal Deposit Insurance Corporation (FDIC) ________.
A) is an agency, created by the Glass-Steagall Act, that monitors banks on a regular basis to
ensure that they were safe and sound
B) is an agency that monitors business combinations between commercial banks, investment
banks, and insurance companies
C) guarantees individuals will not lose any money held at any type of financial institution that
fails
D) guarantees individuals will not lose any money, up to a specified amount, held at any type of
financial institution that fails
5) The Gramm-Leach-Bliley Act ________.
A) is created to monitor banks on a regular basis to ensure that they were safe and sound
B) allows business combinations between commercial banks and investment banks, but not
insurance companies
C) allows business combinations between commercial banks, investment banks, and insurance
companies
D) was signed during the Great Depression because of the financial crisis
6) Which of the following acts regulates the secondary market?
A) The Securities Act of 1933
B) The Gramm-Leach-Bliley Act
C) The Securities Exchange Act of 1934
D) The Glass-Steagall Act
7) The ________ created new agencies including the Financial Stability Oversight Council and
the Bureau of Consumer Financial Protection.
A) Securities Exchange Act of 1934
B) Dodd-Frank Wall Street Reform and Consumer Protection Act
C) Securities Act of 1933
D) Gramm-Leach-Bliley Act
8) Which of the following acts regulates the primary market in which securities are originally
issued to the public?
A) The Securities Act of 1933
B) The Gramm-Leach-Bliley Act
C) The Securities Exchange Act of 1934
D) The Glass-Steagall Act
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2.4 The securities issuing process
1) A firm conducting an IPO of common stock sold 1 million new shares in the offering at an
offer price of $10 per share. After the offering, the firm had 5 million shares outstanding, and the
price of those shares in the secondary market was $12. The firm’s market capitalization is
________.
A) $60 million
B) $50 million
C) $12 million
D) $10 million
2) A firm conducting an IPO of common stock sold 1 million new shares in the offering at an
offer price of $10 per share. After the offering, the firm had 5 million shares outstanding, and the
price of those shares in the secondary market was $12. The firm’s IPO was underpriced by
________.
A) 0%
B) 100%
C) 20%
D) 16.7%
3) A firm conducting an IPO of common stock sold 1 million new shares in the offering at an
offer price of $10 per share. After the offering, the firm had 5 million shares outstanding, and the
price of those shares in the secondary market was $12. The total proceeds from the firm’s IPO
were ________.
A) $60 million
B) $50 million
C) $10 million
D) $12 million
4) Small business investment companies (SBICs) are corporations chartered by the federal
government that can borrow at attractive rates from the U.S. Treasury and use the funds to make
venture capital investments in private companies.
5) Angel capitalists or angels are wealthy individual investors who do not operate as a business
but invest in early-stage companies in exchange for a portion of equity.
6) A prospectus is another term for a firm’s annual report showing the firm’s prospects for the
coming year.
7) Which of the following is an attribute of investment bankers?
A) They make long-term investments for banking institutions.
B) They bear the risk of selling a security issue.
C) They act as middlemen between the issuer and the banker.
D) They provide the issuer with advice relating to the amounts of dividend to be paid.
8) A prospectus is a portion of the security registration statement that describes the key aspects
of the issue, the issuer, and its management and financial position.
9) An underwritten issue of common stock is one in which a firm purchases insurance to cover
unexpected losses suffered by shareholders.
10) A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue.
A) securities analyst
B) trust officer
C) commercial loan officer
D) investment banker
11) When an investment bank buys new securities from a firm and takes on the responsibility of
reselling those securities to the public it is engaged in ________.
A) market manipulation
B) underwriting
C) the road show
D) underpricing the security offering
12) ________ is a financial intermediary that specializes in selling new security issues.
A) An investment bank
B) A commercial bank
C) A securities dealer
D) A stock exchange
13) The term red herring refers to ________.
A) the fact that most firms conducting an IPO are losing money, also known as running red ink
B) a firm that is conducting an IPO without fully complying with all government regulations
C) the fact that IPOs are typically underpriced
D) an early version of the prospectus with red printing to indicate that the information the
document contains is not final
14) The IPO offer price is the price at which a newly public firm’s shares begin trading in the
secondary market.
15) Which ordering below best describe the level of responsibility for helping a firm conduct an
IPO offering (ordering goes from most responsible to least responsible)?
A) originating investment bank > underwriting syndicate > selling group
B) originating investment bank > selling group > underwriting syndicate
C) underwriting syndicate > originating investment bank > selling group
D) selling group > underwriting syndicate > originating investment bank
16) A group formed by an investment banker to share the financial risk associated with
underwriting new securities is called a(n) ________.
A) underwriting syndicate
B) selling group
C) investment banking consortium
D) broker pool
17) The term initial public offering describes a transaction in which a firm sells securities
directly to an investor or to a small group of investors.
18) The document that a company conducting an initial public offering produces to describe the
key aspects of the securities offered for sale is called the ________.
A) annual report to stockholders
B) term sheet
C) prospectus
D) tombstone
19) When a firm sells stock to the public for the first time the transaction is called ________.
A) an initial public offering
B) a seasoned equity offering
C) a private placement
D) a secondary market offering
20) A venture capitalist is considering investing in a very risky, early stage startup. Compared to
investments that the VC might make in less risky companies ________.
A) the VC will pay more for the equity it receives and it will demand a greater share of the
startup’s equity
B) the VC will pay less for the equity it receives and it will demand a greater share of the
startup’s equity
C) the VC will pay more for the equity it receives and it will be willing to take a smaller share of
the startup’s equity
D) the VC will pay less for the equity it receives and it will be willing to take a larger share of
the startup’s equity
21) Based on the risks of the investments that they make, venture capital firms generally look for
rates of return in the 5% to 15% range.
22) Venture capital firms are usually organized as corporations, and the public shareholders of
the VC firm have a stake in the investments that the firm makes.
23) One difference between angel investors and venture capitalists is ________.
A) venture capitalists are typically businesses, whereas angel investors are usually individuals
B) venture capitalists invest in risky startups, whereas angel investors put their money into more
mature businesses
C) venture capitalists make private equity investments whereas angel investors buy shares in
companies in the same way that the rest of the investing public does
D) angel investors are active and typically take a seat of the board of directors of any firm that
they provide financing for, whereas venture capital investors are more passive
24) When venture capitalists invest money in a firm, they are making a private equity
investment.
1) When home prices are rising it is easier for homeowners who have fallen behind on their
mortgages to get caught up because ________.
A) they can sell their house and buy a smaller one
B) lenders will allow homeowners to use the built-up equity in their home to refinance their
mortgages
C) they can rent out an extra room in their homes to earn extra income
D) with rising home prices homeowners will pay less in property taxes and use the savings to
make mortgage payments
2) Subprime mortgages are ________.
A) mortgages that charge the borrower an interest rate that is less than the prime rate of interest
B) mortgages on pieces of real estate located in less than prime neighborhoods
C) loans to borrowers with lower incomes and/or poorer credit histories compared to prime
borrowers
D) mortgages on which the borrower has already fallen behind on payments or defaulted
3) Securitization is the process of pooling mortgages or other types of loans and selling the
claims or securities against that pool in the secondary market.
4) A crisis in the financial sector often spills over into other industries because when financial
institutions ________ borrowing, activity in most other industries ________.
A) increase; slows down
B) contract; slows down
C) increase; increases
D) contract; increases
5) Securitization made it harder for banks to lend money because they could not pass the risk on
to other investors.
6) Mortgage-backed securities are securities that represent claims on the cash flows generated by
a pool of mortgages.
7) Prior to the 2008 financial crisis, most investors viewed mortgage-backed securities as
relatively safe investments.
8) Subprime mortgages are mortgage loans made to borrowers with high incomes and better than
average credit histories.
9) Recessions associated with a banking crisis tend to be more severe than other recessions
because many businesses rely on credit to operate.
10) The process of pooling mortgages or other types of loans and selling the claims or securities
against that pool in the secondary market is called ________.
A) valuation
B) securitization
C) private placement
D) capital restructuring
11) The primary risk of mortgage-backed securities is ________.
A) that the prices of have high volatility
B) that the prices of housing will increase
C) that the government will not be able to meet the guarantees on the cash flows
D) that homeowners may not be able to, or choose not to, repay their loans
12) Which of the following is TRUE of mortgage-backed securities?
A) Mortgage-backed securities assure a flat 15% return.
B) Mortgage-backed securities are guaranteed by the U.S. government.
C) Mortgage-backed securities can only be purchased by investment banks.
D) Mortgage-backed securities represent claims on the cash flows generated by a pool of
homeloans.
13) When home prices are falling, we would expect a(n) ________.
A) high mortgage default rates
B) low mortgage default rates
C) unchanged mortgage default rates
D) higher percentage of owner home equity