Principles of Managerial Finance, Brief, 7e (Gitman)
Chapter 2 The Financial Market Environment
2.1 Understand the role that financial institutions play in managerial finance.
1) A financial institution is an intermediary that channels the savings of individuals, businesses,
and governments into loans or investments.
2) Commercial banks advise firms on major transactions such as mergers or financial
restructurings.
3) As a key participant in financial transactions, individuals are ________.
A) net demanders of funds because they save more money than they borrow
B) net users of funds because they save less money than they borrow
C) net suppliers of funds because they save more money than they borrow
D) net purchasers of funds because they save more money than they borrow
4) Government is typically a ________.
A) net provider of funds because it borrows more than it saves
B) net demander of funds because it borrows more than it saves
C) net provider of funds because it can print money at will
D) net demander of funds because it saves more than it borrows
5) Government can obtain funds ________.
A) by trading in equity market
B) by issuing financial instruments such as futures and options
C) through forex market
D) by selling debt securities
6) Firms that require funds from external sources can obtain them ________.
A) through financial institutions
B) from central bank directly
C) through forex market
D) by issuing T-bills
7) Investment banks are institutions that ________.
A) perform all activities of commercial banks and retail banks
B) are exempted from Securities and Exchange Commission regulations
C) engage in trading and market making activities
D) are only limited to capital market activities
8) Which of the following serves as an intermediary channeling the savings of individuals,
businesses, and governments into loans and investments?
A) financial institutions
B) financial markets
C) Securities and Exchange Commission
D) OTC market
9) The shadow banking system describes a group of institutions that engage in lending activities,
much like traditional banks.
10) Which of the following provides savers with a secure place to invest funds and offer both
individuals and companies loans to finance investments?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks
11) Which of the following assists companies in raising capital, advise firms on major
transactions such as mergers or financial restructuring, and engage in trading and market making
activities?
A) investment banks
B) securities exchanges
C) mutual funds
D) commercial banks
2.2 Contrast the functions of financial institutions and financial markets.
1) Primary and secondary markets are markets for short-term and long-term securities,
respectively.
2) Financial markets are intermediaries that channel the savings of individuals, businesses, and
government into loans or investments.
3) A public offering is the sale of a new security issue—typically debt or preferred stock—
directly to an investor or group of investors.
4) A primary market is a financial market in which pre-owned securities are traded.
5) The Glass-Steagall Act was imposed to allow commercial and investment banks to combine
and work together.
6) Most businesses raise money by selling their securities in a ________.
A) public offering
B) forex market
C) futures market
D) commodities market
7) Which of the following is a means of selling bonds or stocks to the public?
A) private placement
B) public offering
C) organized selling
D) direct placement
8) Which of the following is a forum in which suppliers and demanders of funds can transact
business directly?
A) shadow banking system
B) financial markets
C) commercial banks
D) financial institutions
9) The sale of a new security directly to an investor or a group of investors is called ________.
A) arbitraging
B) short selling
C) a capital market transaction
D) a private placement
10) The ________ market is where securities are initially issued and the ________ market is
where pre-owned securities (not new issues) are traded.
A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money
2.3 Describe the differences between the capital markets and the money markets.
1) The over-the-counter (OTC) market is a market for trading smaller and unlisted securities.
2) NASDAQ is considered an OTC market since it is not recognized by the SEC as a “listed
exchange.”
3) In the OTC market, the ask price is the highest price offered by a dealer to purchase a given
security.
4) In the Eurobond market, corporations and governments typically issue bonds denominated in
dollars and sell them to investors located outside the United States.
5) Capital markets are for investors who want a safe temporary place to deposit funds where they
can earn interest and for borrowers who have a short-term need for funds.
6) Money markets are markets for long-term funds such as bonds and equity.
7) An efficient market is a market that establishes correct prices for the securities that firms sell
and allocates funds to their most productive use as a result of the intense competition among
investors.
8) Money markets involve the trading of securities with maturities of one year or less.
9) Eurocurrency deposits arise when a corporation or individual makes a deposit in a bank in a
currency other than the local currency of the country where the bank is located.
10) The Eurocurrency market is a market for short-term bank deposits denominated in U.S.
dollars or other easily convertible currencies.
11) The money market is a financial relationship created by a number of institutions and
arrangements that allows suppliers and demanders of long-term funds to make transactions.
12) The over-the-counter (OTC) market is ________.
A) a highly liquid market as compared to NASDAQ
B) a market in which low risk-high return securities are traded
C) an organized market in which all financial derivatives are traded
D) a market where smaller, unlisted securities are traded
13) Which of the following is true of a primary market?
A) It is an organized market in which all financial derivatives are traded.
B) It is regulated by The Sarbanes-Oxley Act.
C) It is a market where smaller, unlisted securities are traded.
D) It is the only market in which the issuer is directly involved in the transaction.
14) Which of the following is true of a secondary market?
A) It is a market for an unlisted company to raise equity capital.
B) It is a market where securities are issued through private placement
C) It is a market in which short-term money market instruments such as Treasury bills are traded.
D) It is a market in which preowned securities are traded.
15) Which of the following is true of preferred stock?
A) It has features of bonds and a common stock.
B) It has a claim on assets prior to creditors in the event of liquidation.
C) Its dividends can be paid only after paying dividends to the common stockholders.
D) It usually has a maturity of thirty years.
16) The key securities traded in the capital markets are ________.
A) commercial papers and Treasury bills
B) Treasury bills and certificates of deposit
C) stocks and bonds
D) bills of exchange and commercial papers
17) Which of the following is true of international equity markets?
A) In the international equity market, corporations cannot raise capital through IPOs, instead
they can raise capital by trading in the secondary market.
B) In the international equity market, corporations can easily manipulate the price of the shares
since it is not regulated by any regulatory bodies.
C) In the international equity market, corporations can only sell blocks of shares to institutional
investors from European Union.
D) In the international equity market, corporations can sell blocks of shares to investors in a
number of different countries simultaneously.
18) Which of the following is true of a dealer market?
A) Buyers and sellers are never brought together directly.
B) Brokers execute the buy or sell orders in a dealer market.
C) It has centralized trading floors.
D) It is a part of the broker market.
19) Which of the following is true of a securities exchange?
A) It serves as an intermediary by channeling the savings of individuals, businesses, and
governments into loans or investments.
B) It borrows funds directly from the financial institutions.
C) It is an association of banks who meet to buy and sell stocks and bonds.
D) It provides a marketplace in which firms can raise funds through the sale of new securities
and purchasers can resell securities.
20) A market that establishes correct prices for the securities that firms sell and allocates funds to
their most productive uses is called a(n) ________.
A) future market
B) forex market
C) efficient market
D) weak-form market
21) The ________ is created by a financial relationship between suppliers and demanders of
short-term funds.
A) stock market
B) capital market
C) forex market
D) money market
22) By definition, the money market involves the buying and selling of ________.
A) stocks and bonds
B) short-term securities
C) all financial instruments except derivatives
D) secured premium notes
23) Most money market transactions are made in ________.
A) common stock
B) marketable securities
C) commodities market
D) preferred stock
24) The ________ is created by a number of institutions and arrangements that allow the
suppliers and demanders of long-term funds to make transactions.
A) forex market
B) capital market
C) money market
D) commodities market
25) Long-term debt instruments used by both government and business are known as ________.
A) preferred stocks
B) T-bills
C) bonds
D) equities
26) Which of the following is an example of marketable securities?
A) U.S.Treasury bills
B) treasury stock
C) mortgage backed securities
D) loans
27) In a ________ market, the buyer and seller are brought together to trade securities in an
organization called ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
28) In a ________ market, the buyer and seller are not brought together to trade securities
directly but instead have their orders executed on the ________.
A) dealer; securities market
B) broker; over-the -counter market
C) broker; securities market
D) dealer; over-the-counter market
29) An efficient market is one where ________.
A) prices of stocks move up and down widely without apparent reason
B) prices of stocks remain low for long periods of time
C) prices of stocks are unaffected by market news
D) the price of a security is an unbiased estimate of its true value
30) The money market is a market ________.
A) that enables suppliers and demanders of long-term funds to make transactions
B) which brings together suppliers and demanders of short-term funds
C) where smaller, unlisted securities are traded
D) where all derivatives are traded