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CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
1. If an individual investor buys and sells existing stocks through a broker, these are primary market transactions.
a. True
b. False
2. Financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the
distribution of future cash flows.
a. True
b. False
3. 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 much costlier process.
a. True
b. False
4. American depository receipts are foreign stocks that sell in American stock exchanges and are denominated in dollar
prices.
a. True
b. False
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
5. Because foreign banks are less regulated and have fewer restrictions concerning the types of business activities they
can pursue than their U.S. counterparts, such banks often engage in numerous aspects of multi-layer financial deals.
a. True
b. False
6. One advantage of using common stock as a source of funds is that common stock does not legally obligate the firm
to make payments to stockholders.
a. True
b. False
7. One advantage of common stock as a source of funds is that the underwriting and distribution costs of common
stock are usually much lower than those for debt.
a. True
b. False
8. The over-the-counter market is a network of dealers that provides for trading securities not listed on organized
exchanges.
a. True
b. False
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
9. The securities exchange commission is the U.S. government agency that regulates the issuance and trading of stocks
and bonds.
a. True
b. False
10. The 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
11. A publicly owned corporation is simply a company whose shares are held by the investing public, which may include
other corporations and institutions.
a. True
b. False
12. The money market is the market for securities with maturities over one year and includes such financial assets as
stocks and long-term corporate bonds.
a. True
b. False
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
13. 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
14. One of the benefits from financial intermediation is risk diversification in that the pool of funds collected can be
spread across a variety of investments.
a. True
b. False
15. Under a best efforts arrangement, the investment bank purchases all of the shares from the firm and then resells the
shares to the public. Under this arrangement the investment banks assumes significant risk.
a. True
b. False
16. Money markets are markets for
a. Foreign currency exchange.
b. Consumer automobile loans.
c. Corporate stocks.
d. Long-term bonds.
e. Short-term debt securities.
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
17. A corporate stock that was issued last year would now trade in the market.
a. primary
b. secondary
c. money
d. debt
e. government securities
18. 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. None of the above.
19. If a corporation that has been in business for many years (for example IBM) wants to raise funds by issuing new
common stock, its stock will be sold in the market.
a. primary
b. secondary
c. debt
d. money
e. In this case, the stock can be sold in more than one of the above markets.
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
20. Treasury bills, which represent debt of the U.S. government, have maturities less than one year. As a result, in
which type of financial market do outstanding, or already issued, Treasury bills trade?
a. capital market
b. primary market
c. money market
d. stock markets
e. Treasury bills trade in more than one of the above markets.
21. Capital markets are markets for
a. commercial paper.
b. short-term debt securities.
c. long-term debt securities.
d. Treasury notes.
e. none of the above.
22. The facilities needed to conduct over-the-counter market transactions include all of the following except:
a. physical stock exchange to sell and buy stocks
b. securities dealers who make the market
c. brokers acting as agent to bring investors and dealers together
d. electronic networks that provide communication links between brokers and dealers.
e. all of the above are needed for over-the-counter market transactions.
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
23. Which of the following is considered an organized stock exchange?
a. New York Stock Exchange (NYSE)
b. National Association of Security Dealers Automated Quotation System (NASDAQ)
c. Over-the-Counter (OTC) market
d. All of the above are organized exchanges.
e. None of the above is an organized exchange.
24. Which of the following is not a considered financial intermediary?
a. commercial bank
b. savings and loan association
c. pension fund
d. investment bank
e. All of the above are financial intermediaries.
25. Which of the following transactions takes place in secondary markets?
a. New stock sold in an initial public offering.
b. Treasury securities auctioned off by the government.
c. Stock sold by an insurance company to adjust its portfolio of assets'.
d. Stock sold in a seasoned equity offering.
e. None of the above.
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
26. Which of the following factors distinguish the banking system in the United States from banking structures in other
countries?
a. Financial institutions in the United States are less regulated than their foreign counterparts.
b. Financial institutions in the United States have fewer limitations with regard to branching activity than their
foreign counterparts.
c. Financial institutions in the United States have greater limitations with regard to non-banking business
relationships than their foreign counterparts.
d. Financial institutions in the United States have been able to grow much larger in size than their foreign
counterparts.
e. Financial institutions in the United States dominate international banking activities.
27. Which of the following is not an advantage of going public?
a. It allows a firm's founders to diversify their holdings.
b. It increases the liquidity of the stock.
c. It establishes a value for the firm.
d. It makes it easier to raise new equity capital in the future.
e. All of the above are advantages of going public.
28. Large, well-known public companies can reduce the time required to register and issue securities by using a(n)
a. Shelf registration.
b. Subchapter S registration.
c. Underwriting syndicate.
d. Secondary market registration.
e. "Red herring" registration.
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
29. A corporation that is owned by a few individuals who are typically associated with the firm's management is a
corporation.
a. private
b. public
c. diversified
d. closely held
e. listed
30. If you wanted to purchase previously issued shares of stock from another investor you would find the shares in the
a. primary market.
b. debt market.
c. IPO market.
d. secondary market.
e. SEO market.
31. The market for newly issued stock by firms that were private is normally called
a. the seasoned equity market.
b. the over-the-counter market.
c. the initial public offering market.
d. the secondary market.
e. the stock market.
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
32. Certificates representing ownership in stocks of foreign companies, which are held in a trust bank located in the
country the stock is traded are called .
a. Certificates of Ownership
b. Foreign Stock Funds
c. Mutual Funds
d. American Depository Receipts
e. Investment Bankers
33. An agreement for the sale of securities in which the investment bank guarantees the sale by purchasing the
securities from the issuer and then sells the securities in the primary is a(n) .
a. best efforts arrangement
b. guaranteed issue arrangement
c. underwritten arrangement
d. private placement
e. None of the above
34. An agreement for the sale of securities in which the investment bank handling the transaction gives no guarantee
that the securities will be sold is a(n) .
a. best efforts arrangement
b. guaranteed issue arrangement
c. underwritten arrangement
d. private placement
e. None of the above
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
35. Which of the following is usually cited as a disadvantage of issuing new common stock as a method of financing?
a. Common stock does not have a maturity date, thus it is an open-end commitment of the firm's earnings.
b. Since sale of common stock increases the number of owners and the amount of capital at risk, the firm's bond
rating is usually negatively affected and its cost of debt rises.
c. If the firm currently has more equity than its optimal capital structure dictates and it issues more equity, then
the average cost of capital will most likely rise.
d. Common stock is not an attractive option if the firm seeks to increase its reserve borrowing capacity.
36. Which of the following advantages of going public simultaneously implies a potential disadvantage of going public?
a. Facilitates in stockholder diversification.
b. Changes liquidity of the firm's stock.
c. Alters the difficulty associated with obtaining capital.
d. Establishes a market value for the firm.
e. Changes name recognition of the company.
37. The process of converting an exchange from a mutual ownership structure to a stock owned is known as what?
a. Privatization
b. Diversification
c. Demutualization
d. Industrialization
CFIN4
Chapter 3 – The Financial Environment: Markets, Institutions, and Investment Banking
38. A
of time. option gives the the right to a fixed number of shares at a specified price for a certain amount
a. call; seller; sell
b. put; owner; buy
c. call; owner; buy
d. put; seller; sell
39. Which form of informational market efficiency states that the market price of an asset contains all of the pertinent
information regarding the value of that security?
a. Strong-form
b. Semistrong-form
c. Weak-form
d. Economic-form
40. Which of the following is not a benefit of financial intermediation?
a. Reduced costs.
b. Risk diversification.
c. Tax-free returns.
d. Financial flexibility.
