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1. Which form of informational efficiency states that current market prices of securities reflect all pertinent information?
a. Strong-form
b. Semistrong-form
c. Weak-form
d. Economic-form
e. Real-form
2. When a business sells its stocks or bonds to investors without going through any type of intermediary or financial
institution, this process is known as a(n) _____.
a. investment transfer
b. best-effort arrangement
c. underwriting
d. direct transfer
e. positive intermediation
3. Which of the following examples involves the sacrifice of current income for greater expected earnings in the future?
a. Buying a car with own surplus funds
b. Buying a car with a bank loan
c. Buying a financial security (e.g., a bond or a stock) with one’s own funds
d. Buying a security with borrowed funds
e. Buying a house
4. Which of the following are the degrees of informational efficiency described in the book?
a. Weak form, semistrong form, and strong form
b. Past form, present form, and future form
c. Normal form and abnormal form
d. Primary form and secondary form
e. Physical-form and over-the-counter form
5. The form of informational market efficiency that states that current market prices fully reflect all information contained
in past price movements is known as the _____.
a. economic efficiency
b. semistrong-form efficiency
c. strong-form efficiency
d. weak-form efficiency
e. real-time efficiency
6. If William earns a 10 percent return and Kate earns a 7 percent return on investments with the same risk, the additional
3 percent return on William’s investment is a(n) _____.
a. risk adjusted return
b. justified return
c. abnormal return
d. efficient return
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e. premium return
7. Which form of market efficiency that states that it does no good to scrutinize such publicly available information as a
company’s financial statements to seek abnormal returns, because market prices will adjust to any good news or bad news
contained in such reports as soon as they are made public?
a. Economic efficiency
b. Strong-form efficiency
c. Semistrong-form efficiency
d. Weak-form efficiency
e. Real-time efficiency
8. When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of _____.
a. an investment banker
b. a commercial lender
c. the Securities and Exchange Commission (SEC)
d. the New York Stock Exchange (NYSE)
e. an over-the-counter derivatives market
9. Which of the following terms refers to the process of converting a not-for-profit stock exchange owned by its members
to a for-profit organization with publicly-traded stocks that are owned by outside shareholders?
a. Privatization
b. Diversification
c. Demutualization
d. Consolidation
e. Flotation
10. An investor who wants to purchase previously issued shares of stock from another investor would trade in the _____.
a. primary market
b. debt market
c. IPO market
d. secondary market
e. derivatives market
11. A stock with a dual listing is _____.
a. registered to be traded in more than one money market
b. registered to be traded in the money market as well as the capital market
c. registered to be traded in the debt market and the stock market
d. registered to be traded in more than one stock market
e. registered to be traded in the primary market as well as the secondary market
12. Primary markets are the financial markets where _____.
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a. already issued instruments with original maturities equal to one year or less are traded
b. outstanding loans are traded
c. options and futures are issued by corporations
d. where previously issued financial assets are traded among investors
e. corporations and governments raise funds by issuing new securities
13. In the trading of a security, the dealer’s spread refers to _____.
a. the sum of the bid and asked prices of a security, which represents the dealer’s revenue from a security transaction
b. the sum of the bid and asked prices of a security, which represents the dealer’s markup, or profit from a security
transaction
c. the difference between the bid and asked prices of a security, which represents the dealer’s markup, or profit from
a security transaction
d. the difference between the bid and asked prices of a security, which represents the dealer’s expenses from a
security transaction
e. the ratio of the bid price of a security to its asked price, which represents the dealer’s markup, or profit from a
security transaction
14. Listing requirements of a security refer to the _____.
a. quantitative and qualitative characteristics a firm must possess to be listed on a stock exchange
b. quantitative and qualitative characteristics a firm must possess to be listed with the Securities and Exchange
Commission (SEC)
c. quantitative and qualitative characteristics a firm must possess to go public for the first time (i.e., an IPO)
d. quantitative and qualitative characteristics a firm must possess to be listed with the IRS
e. quantitative and qualitative characteristics a firm must possess to be listed with an underwriting syndicate
15. Treasury bills are issued by the U.S. government. In which type of financial market do already issued treasury bills
trade?
a. Capital market
b. Primary market
c. Stock market
d. Money market
e. Derivatives market
16. An agreement for the sale of securities in which the investment bank handling the transaction gives no assurance that
the entire issue will be sold is called a(n) _____.
a. private placement
b. guaranteed issue arrangement
c. underwritten arrangement
d. best-efforts arrangement
e. shelf registration
17. An arrangement in which the investment banking firm typically buys the securities from the issuing firm and then sells
the securities in the primary markets, hoping to make a profit, is called a(n) _____.
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a. best-efforts arrangement
b. underwritten arrangement
c. guaranteed capital arrangement
d. privately placed arrangement
e. accelerated securities exchange arrangement
18. Zinc Corporation, a large, well-known public company that frequently issues securities, filed a master registration
statement with the Securities and Exchange Commission (SEC). This master statement is updated with a short-form
statement just prior to each individual security offering. What is this arrangement called?
a. Underwriting registration
b. Shelf registration
c. Best-effort registration
d. Multiple registration
e. Initial public offering registration
19. Zync Corporation offers a block of its securities for sale to the investment banker that submits the highest price of all
interested investment bankers. This procedure is known as a _____.
a. financial intermediation
b. negotiated deal
c. competitive bid
d. shelf registration
e. dual listing
20. Zync Corporation decides that instead of simply offering a block of its debt securities for sale to the investment banker
that submits the highest price, it should do business with a single (one) investment banker. In this case, the issuing costs
are determined by using _____.
a. the Securities and Exchange Commission (SEC)
b. a competitive bid
c. a negotiated deal
d. a trade-through arrangement
e. a financial intermediation arrangement
21. What is the primary reason an investment banking firm often forms an underwriting syndicate to sell new securities?
a. To ensure that the auction trading process is completed in a fair and efficient manner
b. To enhance liquidity in high-volume trade of securities by maintaining continuous up–to-date prices for the
securities assigned to them
c. To regulate the issuance and trading of stocks and bonds
d. To provide the issuing company with the most competitive underwriting bids
e. To spread the risk associated with the purchase and distribution of a new issue of securities
22. When issuing new securities, which of the following decisions does the firm make by itself?
a. Deciding whether to go for a competitive bid or a negotiated deal with an investment banker
b. Deciding whether to go for a best-efforts or an underwritten issue
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c. Determining the flotation costs
d. Deciding the offering price
e. Reevaluating the decisions about the size of the issue and the type of securities to be issued
23. When issuing new securities, which of the following decisions is made jointly by a corporation and its investment
banker?
a. Deciding whether to go for a competitive bid or a negotiated deal with the investment banker
b. Deciding which investment banker to use
c. Deciding whether to go for a best-efforts or underwritten issue
d. Deciding on the investment project for which to raise additional capital
e. Deciding which member of the senior management team deals with the investment banker
24. Which of the following is true about the process of setting the offering price of a security issue?
a. The offering price of an initial public offering (IPO) of the stock of a privately held company is determined by a
financial intermediary.
b. An investment banker has an easier job of selling the issue if it carries a relatively high price.
c. An investment bank finds it easier to set the offering price of an initial public offering as compared to that of a
seasoned offering.
d. An investment bank finds it easier to set the offering price of a seasoned offering of a private company than a
seasoned offering of a public company.
e. If the company is already publicly owned, the offering price will be based on the existing market price of the
stock or the yield on the firm’s existing bonds.
25. The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the
issuing firm is known as the _____.
a. offering price
b. efficiency return
c. underwriter’s spread
d. bid price
e. premium cost
26. Welsh Corporation wants to issue debt of $525,000 to invest in a new project. Welsh is required to pay its investment
banker 5 percent of the issue’s total value. There are no other floatation costs. Compute the amount of debt that the firm
must issue to net $525,000 after flotation costs.
a. $525,347
b. $552,632
c. $498,752
d. $551,257
e. $575,886
27. Persian Rugs needs $600 million to support growth next year. If it issues new common stock to raise the funds, the
flotation (issuance) costs will be 4 percent. If Persian can issue stock at $125 per share, how many shares of common
stock must be issued so that it has $600 million after flotation costs to use for its planned growth?
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a. 5,000,000
b. 4,800,000
c. 4,992,000
d. 4,512,000
e. 4,000,000
28. Devine Linens (DL) must raise $14,000,000 to support future growth. If it raises the funds by issuing stock, DL must
pay an investment banker 5 percent of the total amount issued plus $250,000 in other costs associated with the issue. What
is the amount of stock that DL must issue to net $14,000,000 after flotation costs?
a. $14,962,500
b. $14,950,000
c. $14,737,092
d. $15,000,000
e. $13,537,500
29. Ship Shape Marine (SSM) needs $92 million to support future growth. If SSM issues bonds to raise funds, flotation
(issuance) costs will be 8 percent. Each bond will be sold for $1,000; fractions of bonds cannot be issued. How many
bonds must be issued so that SSM has $92 million after flotation costs to use for its planned growth?
a. 99,360
b. 92,000
c. 100,000
d. 84,640
e. 108,000
30. Which of the following equations is used to compute the dollar amount of common stock or debt that a company must
issue after taking into account the flotation costs?
a. Amount of issue = (Net proceeds – Other flotation costs in dollars) / (1 – Flotation costs in decimal form)
b. Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 – Flotation costs in decimal form)
c. Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 + Flotation costs in decimal form)
d. Amount of issue = (Net proceeds – Other flotation costs in dollars) × (1 + Flotation costs in decimal form)
e. Amount of issue = (Net proceeds + Other flotation costs in dollars) × (1 – Flotation costs in decimal form)
31. The expenditure incurred by a company in connection with its initial public offer is called the _____.
a. shelf registration cost
b. competitive spread
c. initiation cost
d. flotation cost
e. bid spread
32. A document describing a new security issue and the issuing company is called a(n) _____.
a. registration statement
b. underwriting statement
c. prospectus
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d. footnote
e. abridged statement
33. The process by which commercial banks transform funds provided by savers into funds used by borrowers is called
_____.
a. investment banking
b. shelf registration
c. diversification
d. underwriting
e. financial intermediation
34. Organizations that create various loans and investments from funds provided by depositors are known as _____.
a. investment banks
b. financial intermediaries
c. derivatives markets
d. over-the-counter markets
e. designated market makers
35. Financial intermediaries spread their risk by providing funds to a large number and variety of borrowers by offering
many different types of loans. Due to this, the loan portfolios of intermediaries are said to be _____.
a. well diversified
b. well consolidated
c. economically efficient
d. partially underwritten
e. partially shelf registered
36. Credit unions, mutual funds, and thrift institutions are all examples of _____.
a. financial intermediaries
b. investment banks
c. regulatory bodies
d. underwriters
e. over-the-counter markets
37. A depository institution that is owned by its depositors, who are often members of a common organization or
association, such as an occupation, a religious group, or a community, is called a(an) _____.
a. underwriting syndicate
b. mutual fund
c. investment bank
d. credit union
e. commercial bank
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38. Which of the following financial intermediaries operates as a not-for-profit organization?
a. Commercial bank
b. Credit union
c. Thrift institution
d. Mutual fund
e. Whole-life insurance company
39. Investment companies that use the money provided by savers to invest in various types of financial assets, including
stocks and bonds, are called _____.
a. commercial banks
b. investment banks
c. credit unions
d. mutual funds
e. thrift institutions
40. Mutual funds _____.
a. are depository institutions that are owned by its depositors, who are often members of a common organization or
association
b. are investment companies that use funds provided by savers to buy various types of financial assets, including
stocks and bonds, in the financial markets
c. cater to savers, especially individuals who have relatively small savings or need long-term loans to purchase
houses
d. are organizations that distribute new issues of securities for corporations
e. are groups of investment banking firms formed to spread the risk associated with the purchase and distribution of
a new issue of securities
41. Which of the following statements is true of a term life insurance?
a. A term life insurance policy is administered primarily by the trust departments of commercial banks.
b. The premiums associated with a term insurance policy are fixed payments computed as an average of the
premiums required over the expected life of the insured person.
c. A term life insurance offers both insurance coverage and a savings feature.
d. A term life insurance is a relatively short-term contract that provides financial protection for a temporary period.
e. The cost of a term life insurance generally decreases with each renewal as the risk of premature death increases as
the insured ages.
42. Which of the following financial intermediaries is also known as a savings and loan association?
a. Commercial bank
b. Credit union
c. Mutual fund
d. Thrift institution
e. Pension fund
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43. Which of the following plans is administered primarily by the trust departments of commercial banks or by life
insurance companies?
a. Health insurance plans
b. Underwriting plans
c. Shelf plans
d. Pension plans
e. Initial expansion plans
44. During the past decade, the areas of greatest worldwide growth in the financial markets have occurred in _____.
a. China, India, and Brazil
b. China, India, and Argentina
c. India, Brazil, and South Africa
d. China, Brazil, and Argentina
e. China, South Africa, and Argentina
45. Which of the following is true about financial institutions in the United States compared to those in other countries?
a. U.S. financial institutions have been much more heavily regulated than their foreign counterparts with regard to
expansion (branching) and the services that could be offered.
b. U.S. financial institutions have been regulated less than their foreign counterparts with regard to expansion
(branching) and the services that could be offered.
c. U.S. financial institutions and their foreign counterparts have similar regulations with regard to expansion
(branching) and the services that could be offered.
d. Most U.S. intermediaries are allowed to engage in nonbanking (nonfinancial) business activities, whereas the
nonbanking activities of foreign financial institutions have been severely restricted until recently.
e. U.S. financial institutions and their foreign counterparts have similar regulations with regard to engaging in
nonbanking activities.
46. Which of the following agreements is included in the Basel III Accord (2010)?
a. Agreement to increase banks’ capital (owners’ equity) requirements in an effort to reduce the risk that mega bank
failures will cause future financial crises
b. Agreement to put restrictions on the ability of the U.S. government to use taxpayers’ funds to bail out large
financial institutions
c. Agreement to create new organizations to help provide consumers clear and accurate information related to credit
so that better-informed decisions can be made
d. Agreement to permit the U.S. government to purchase up to $700 billion in troubled mortgages in an attempt to
improve liquidity in the financial markets
e. Agreement to limit the salaries of executives whose companies received Troubled Asset Relief Program (TARP)
funds.
47. Which of the following acts limits the salaries of executives whose companies received Troubled Asset Relief
Program (TARP) funds?
a. Basel III Accord (2010)
b. Emergency Economic Stabilization Act of 2008
c. Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
d. Wall Street Transparency and Accountability Act
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e. Securities and Exchange Commission Act
48. Which of the following acts proposed the creation of new organizations to monitor rules associated with the capital,
liquidity, and risk of financial institutions to help prevent future failures of mega financial organizations?
a. Securities and Exchange Commission Act
b. Wall Street Transparency and Accountability Act
c. Emergency Economic Stabilization Act of 2008
d. Basel III Accord (2010)
e. Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
49. Unlike physical asset markets, which deal with products such as wheat, autos, real estate, and machinery, financial
asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future
cash flows generated by such assets.
a. True
b. False
50. The New York Stock Exchange (NYSE) is an example of an over-the-counter exchange.
a. True
b. False
51. The Securities and Exchange Commission (SEC) regulations are intended to ensure that investors receive fair
disclosure of financial and nonfinancial information from privately held companies.
a. True
b. False
52. The Securities and Exchange Commission (SEC) cannot exercise control over stock trades by corporate insiders.
a. True
b. False
53. Dual listing of a stock leads to a decrease in the marketability of the stock.
a. True
b. False
54. Dual listing of a stock is advantageous to a company. It is not beneficial for stock exchanges, but they allow dual
listing because of regulatory requirements.
a. True
b. False
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55. The mandatory trade-through rule followed for trading in securities does not work to the benefit of shareholders.
a. True
b. False
56. A primary market is that segment of the financial markets where the instruments that are traded have original
maturities equal to one year or less.
a. True
b. False
57. The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.
a. True
b. False
58. Electronic communications networks (ECNs) provide an alternative trading medium, which has increased competition
among the stock exchanges.
a. True
b. False
59. A money market is the market for trading in securities with maturities greater than one year and includes such
financial assets as stocks and long-term corporate bonds.
a. True
b. False
60. The trade-through rule states that a stock trade should be executed at the best price that is available in all of the stock
markets.
a. True
b. False
61. Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock
markets extremely competitive.
a. True
b. False
62. In the United States, sales of new stocks and bonds are regulated by the Securities and Exchange Commission (SEC).
a. True
b. False
63. The Securities Exchange Commission is a major U.S. stock exchange that facilitates trading in listed securities.
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a. True
b. False
64. An over-the-counter market is a network of brokers and dealers, connected electronically, that provides for trading in
securities not listed on the physical stock exchanges.
a. True
b. False
65. If an individual investor uses the services of a broker to buy and sell stocks that are currently being traded in the stock
market, the transaction is referred to as a primary market transaction.
a. True
b. False
66. An over-the-counter (OTC) market is a physical exchange, much like the New York Stock Exchange, where securities
dealers provide trading in unlisted securities.
a. True
b. False
67. The debt markets are segmented based on the maturity of the debt instruments, the type of debt instruments, and the
participants in the market.
a. True
b. False
68. Primary markets are exchanges with physical locations, whereas secondary markets are over-the-counter markets.
a. True
b. False
69. In an underwritten arrangement, the investment banker assures the company that is issuing new securities that the
entire issue will be sold, which means the investment banker bears significant risks in such an offering.
a. True
b. False
70. Under a best efforts arrangement, the investment banker purchases all of the shares from the issuing firm and then
resells them to the public. Under this arrangement, the investment bank assumes significant risk.
a. True
b. False
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71. The existence of financial intermediaries greatly increases the efficiency of financial markets because, without them,
savers would have to provide funds directly to borrowers, which would be a costlier process.
a. True
b. False
72. Whole-life polices offer both insurance coverage and a savings feature, whereas term life policies do not.
a. True
b. False
73. As compared to U.S banks, foreign banks are less regulated and have fewer restrictions concerning the types of
business activities they can pursue. Therefore, foreign banks often engage in numerous aspects of multilayer financial
deals.
a. True
b. False
74. The international market for bonds has grown at a slower rate as compared to the international stock markets.
a. True
b. False
75. Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the
nonbanking activities of U.S. intermediaries have been severely restricted until recently.
a. True
b. False