TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 7
PRIMARY AND SECONDARY MARKETS
MULTIPLE CHOICE
1. Financial markets dealing with financial claims that are newly issued are called:
[E]
2. The secondary market is the market for the trading of:
[E]
3. The activities of underwriters are regulated by:
[E]
4. The preliminary prospectus, which may be distributed to the public during the waiting
period for the registration of the security to become effective, is referred to as:
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5. Rule 415, which permits certain issuers to file a single registration document indicating
that it intends to sell a certain amount of a certain class of securities at one or more times
within the next two years, is popularly referred to as:
[M]
6. SEC regulation, which exempts some issues from registration, is the:
[M]
7. Rule 144A will contribute to the growth of the private placement market by:
[M]
8. An underwriting arrangement whereby an investment banking firm or group of firms
offers a potential issuer of debt securities a firm bid to purchase a specified amount of the
securities with a certain coupon rate and maturity is known as:
[M]
9. Some underwriting firms have found the bought deal to be attractive because it:
[M]
10. When the issuer announces the terms of the issue and interested parties submit bids for
the entire issue, the arrangement is referred to as:
[M]
11. Competitive bidding underwriting is mandated for certain securities of:
[M]
12. When all bidders pay the highest winning yield bid in a competitive bidding
underwriting, this type of auction is referred to as:
[M]
13. An underwriting arrangement in which the underwriter buys the firm’s unsubscribed
shares is known as:
[M]
14. A corporation can issue new common stock directly to existing stockholders through a:
15. When world capital markets are mildly segmented, there are opportunities to:
[M]
16. A firm may seek to raise funds outside its domestic capital market for one or more of the
following reasons:
[E]
17. In a completely integrated capital market:
[M]
18. When the issuer of a security files a registration statement with the SEC, part I of the
registration is:
[E]
19. Any company that publicly offers a security in the U.S. becomes a reporting company
and, as such, is subject to:
20. Non-U.S. companies, which publicly offer a security in the U.S., must file financial
statements based on:
[E]
21. The key distinction between a primary market and a secondary market is that:
[M]
22. Investors in financial assets receive several benefits from a secondary market including:
[M]
23. In the U.S., secondary trading of common stock occurs on:
[E]
24. Secondary markets outside the U.S. are located in:
25. When prices of securities are determined continuously throughout the trading day as
buyers and sellers submit orders, the market is called:
[M]
26. When orders are batched or grouped together for simultaneous execution at the same
price, the marked is known as:
[M]
27. A perfect market results when:
[M]
28. Financial markets are not frictionless because of:
[M]
29. Conditional orders include:
30. A stop order that designates a price limit is a:
[M]
31. For common stock, an order of 100 shares is called:
[E]
32. A short sale involves:
[E]
33. A transaction in which an investor borrows to buy additional securities using the
securities themselves as collateral is called:
[E]
34. The interest rate that banks charge brokers for margin transactions is called:
43
35. An investor receives a margin call from the broker when:
[M]
36. The major difference between the broker and the dealer is that:
[D]
37. A market is price efficient if:
[M]
38. If investors can obtain transaction services as cheaply as possible, the market is said to
be:
[M]
39. If the price of a security reflects all information, whether or not it is publicly available,
the market is said to be:
40. The difference between the execution price of a security and the price that would have
existed in the absence of the trade is referred to as:
TRUE/FALSE
1. One of the most important duties of an underwriter is to perform “due diligence.”
[E]
2. In a preemptive rights offering, the price at which new shares can be purchased is called
[E]
3. SEC Rule 144A has decreased foreign private placements.
[M]
4. Private placement requires more disclosure.
[M]
5. Real world capital markets are completely segmented.
[E]
6. The secondary market is where already-issued financial assets are traded.
45
7. The costs associated with frictions generally result in buyers paying less than in the
absence of frictions, and/or sellers receiving more.
[M]
8. Because of imperfections in real markets, brokers and dealers are necessary to the smooth
functioning of a secondary market.
[M]
9. Investors who take positions in securities are required to satisfy initial and maintenance
margin requirements.
[E]
10. Transactions costs include commissions, fees, execution costs, and opportunity costs.
ESSAY QUESTIONS
1. What is SEC Rule 144A and its potential impact on the private placement market?
Key Issues:
2. Explain what a preemptive rights offering is and why a standby underwriting
arrangement may be needed.
Key Issues:
3. Discuss the reasons why a corporation may seek to raise funds outside of its domestic
market.
Key Issues:
4. Explain the differences and similarities between brokers and dealers.
Key Issues:
5. Discuss the frictions that cause actual financial markets to differ from a perfect market.
Key Issues:
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6. Differentiate between operational efficiency and pricing efficiency.
Key Issues: