Chapter 02: Financial Markets and Institutions
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Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in
multiple-choice questions.
Multiple Choice: True/False
1. A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who
need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one
example of a financial intermediary.
a. True
b. False
2. The NYSE is defined as a “spot” market purely and simply because it has a physical location. The NASDAQ, on the
other hand, is not a spot market because it has no one central location.
a. True
b. False
3. The NYSE is defined as a “primary” market because it is one of the largest and most important stock markets in the
world.
a. True
b. False
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4. Primary markets are large and important, while secondary markets are smaller and less important.
a. True
b. False
5. Private markets are those like the NYSE, where transactions are handled by members of the organization, while public
markets are those like the NASDAQ, where anyone can make transactions.
a. True
b. False
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21. You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave
you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this
transaction?
a. This is an example of a direct transfer of capital.
b. This is an example of a primary market transaction.
c. This is an example of an exchange of physical assets.
d. This is an example of a money market transaction.
e. This is an example of a derivative market transaction.
22. Which of the following statements is CORRECT?
a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock
electronically.
b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you
as a birthday gift.
c. Capital market instruments include both long-term debt and common stocks.
d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this
would be a primary market transaction.
e. While the two frequently perform similar functions, investment banks generally specialize in lending money,
whereas commercial banks generally help companies raise large blocks of capital from investors.
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25. Money markets are markets for
a. Foreign currencies.
b. Consumer automobile loans.
c. Common stocks.
d. Long-term bonds.
e. Short-term debt securities such as Treasury bills and commercial paper.
26. Which of the following statements is CORRECT?
a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market
transaction.
b. If Disney issues additional shares of common stock through an investment banker, this would be a secondary
market transaction.
c. The NYSE is an example of an over-the-counter market.
d. Only institutions, and not individuals, can engage in derivative market transactions.
e. As they are generally defined, money market transactions involve debt securities with maturities of less than one
year.
Chapter 02: Financial Markets and Institutions
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a. The term “IPO” stands for Introductory Price Offered, and it is the price at which shares of a new company are
offered to the public.
b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at
the close of trading on the day the stock is offered to the public.
c. In a “Dutch auction,” investors who want to buy shares in an IPO submit bids indicating how many shares they
want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest
price that enables the company to sell the desired number of shares is the price that all buyers must pay.
d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the
company wants to sell. In this situation, the IPO is said to be oversubscribed.
e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company
wants to sell. In that case, the company will have to issue more shares than it wants to sell.
32. Which of the following statements is CORRECT?
a. The most important difference between spot markets versus futures markets is the maturity of the instruments that
are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets
transactions involve securities with maturities greater than one year.
b. Capital market transactions involve only preferred stock or common stock.
c. If General Electric were to issue new stock this year, this would be considered a secondary market transaction
since the company already has stock outstanding.
d. Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks.
e. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
