44) In a securities market, the bid price is typically higher than the ask price.
45) A ________ is someone who helps facilitate securities trading by offering to buy or sell them at stated
bid/ask prices.
A) market maker
B) stockbroker
C) day trader
D) middle man
46) Apex Inc. issues a bond of $1,000 which pays interest semiannually at a coupon interest rate of 8%.
The maturity of the bond is 15 years. Where should this bond be traded?
A) forex market
B) money market
C) capital market
D) commodities market
47) One piece of evidence suggesting that the stock market is efficient is that most individual investors
cannot earn returns that beat the overall market average return, but professional investors such as mutual
fund and pension fund managers generally do earn higher-than-average returns.
48) One sign that the stock market is efficient is that prices in the market move seemingly at random,
display almost no predictable, repeating patterns.
2.3 Regulation of financial markets and institutions
1) The Glass-Steagall Act was imposed to allow commercial and investment banks to combine and work
together.
2) The Glass-Steagall Act ________.
A) was intended to regulate the activities in the secondary market
B) created the Securities Exchange Commission
C) separated the activities of commercial and investment banks
D) was intended to regulate the activities in the primary market
3) The Securities Act of 1933 focuses on regulating the sale of securities in the primary market, whereas
the 1934 Act deals with the regulations governing the transactions in the secondary market.
4) The Federal Deposit Insurance Corporation (FDIC) ________.
A) is an agency, created by the Glass-Steagall Act ,that monitors banks on a regular basis to ensure that
they were safe and sound
B) is an agency that monitors business combinations between commercial banks, investment banks, and
insurance companies
C) guarantees individuals will not lose any money held at any type of financial institution that fails
D) guarantees individuals will not lose any money, up to a specified amount, held at any type of financial
institution that fails
5) The Gramm-Leach-Bliley Act ________.
A) is created to monitor banks on a regular basis to ensure that they were safe and sound
B) allows business combinations between commercial banks and investment banks, but not insurance
companies
C) allows business combinations between commercial banks, investment banks, and insurance companies
D) was signed during the Great Depression because of the financial crisis
6) Which of the following acts regulates the secondary market?
A) The Securities Act of 1933
B) The Gramm-Leach-Bliley Act
C) The Securities Exchange Act of 1934
D) The Glass-Steagall Act
7) The ________ created new agencies including the Financial Stability Oversight Council and the Bureau
of Consumer Financial Protection.
A) Securities Exchange Act of 1934
B) Dodd-Frank Wall Street Reform and Consumer Protection Act
C) Securities Act of 1933
D) Gramm-Leach-Bliley Act
8) Which of the following acts regulates the primary market in which securities are originally issued to
the public?
A) The Securities Act of 1933
B) The Gramm-Leach-Bliley Act
C) The Securities Exchange Act of 1934
D) The Glass-Steagall Act
2.4 The securities issuing process
1) A firm conducting an IPO of common stock sold 1 million new shares in the offering at an offer price of
$10 per share. After the offering, the firm had 5 million shares outstanding, and the price of those shares
in the secondary market was $12. The firm’s market capitalization is ________.
A) $60 million
B) $50 million
C) $12 million
D) $10 million
2) A firm conducting an IPO of common stock sold 1 million new shares in the offering at an offer price of
$10 per share. After the offering, the firm had 5 million shares outstanding, and the price of those shares
in the secondary market was $12. The firm’s IPO was underpriced by ________.
A) 0%
B) 100%
C) 20%
D) 16.7%
3) A firm conducting an IPO of common stock sold 1 million new shares in the offering at an offer price of
$10 per share. After the offering, the firm had 5 million shares outstanding, and the price of those shares
in the secondary market was $12. The total proceeds from the firm’s IPO were ________.
A) $60 million
B) $50 million
C) $10 million
D) $12 million
4) Small business investment companies (SBICs) are corporations chartered by the federal government
that can borrow at attractive rates from the U.S. Treasury and use the funds to make venture capital
investments in private companies.
5) Angel capitalists or angels are wealthy individual investors who do not operate as a business but
invest in early-stage companies in exchange for a portion of equity.
6) A prospectus is another term for a firm’s annual report showing the firm’s prospects for the coming
year.
7) Which of the following is an attribute of investment bankers?
A) They make long-term investments for banking institutions.
B) They bear the risk of selling a security issue.
C) They act as middlemen between the issuer and the banker.
D) They provide the issuer with advice relating to the amounts of dividend to be paid.
8) A prospectus is a portion of the security registration statement that describes the key aspects of the
issue, the issuer, and its management and financial position.
9) An underwritten issue of common stock is one in which a firm purchases insurance to cover
unexpected losses suffered by shareholders.
10) A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue.
A) securities analyst
B) trust officer
C) commercial loan officer
D) investment banker
11) When an investment bank buys new securities from a firm and takes on the responsibility of reselling
those securities to the public it is engaged in ________.
A) market manipulation
B) underwriting
C) the road show
D) underpricing the security offering
12) ________ is a financial intermediary that specializes in selling new security issues.
A) An investment bank
B) A commercial bank
C) A securities dealer
D) A stock exchange
13) The term red herring refers to ________.
A) the fact that most firms conducting an IPO are losing money, also known as running red ink
B) a firm that is conducting an IPO without fully complying with all government regulations
C) the fact that IPOs are typically underpriced
D) an early version of the prospectus with red printing to indicate that the information the document
contains is not final
14) The IPO offer price is the price at which a newly public firm’s shares begin trading in the secondary
market.
15) Which ordering below best describe the level of responsibility for helping a firm conduct an IPO
offering (ordering goes from most responsible to least responsible)?
A) originating investment bank > underwriting syndicate > selling group
B) originating investment bank > selling group > underwriting syndicate
C) underwriting syndicate > originating investment bank > selling group
D) selling group > underwriting syndicate > originating investment bank
16) A group formed by an investment banker to share the financial risk associated with underwriting new
securities is called a(n) ________.
A) underwriting syndicate
B) selling group
C) investment banking consortium
D) broker pool
17) The term initial public offering describes a transaction in which a firm sells securities directly to an
investor or to a small group of investors.
18) The document that a company conducting an initial public offering produces to describe the key
aspects of the securities offered for sale is called the ________.
A) annual report to stockholders
B) term sheet
C) prospectus
D) tombstone
19) When a firm sells stock to the public for the first time the transaction is called ________.
A) an initial public offering
B) a seasoned equity offering
C) a private placement
D) a secondary market offering
20) A venture capitalist is considering investing in a very risky, early stage startup. Compared to
investments that the VC might make in less risky companies ________.
A) the VC will pay more for the equity it receives and it will demand a greater share of the startup’s
equity
B) the VC will pay less for the equity it receives and it will demand a greater share of the startup’s equity
C) the VC will pay more for the equity it receives and it will be willing to take a smaller share of the
startup’s equity
D) the VC will pay less for the equity it receives and it will be willing to take a larger share of the startup’s
equity
21) Based on the risks of the investments that they make, venture capital firms generally look for rates of
return in the 5% to 15% range.
22) Venture capital firms are usually organized as corporations, and the public shareholders of the VC
firm have a stake in the investments that the firm makes.
23) One difference between angel investors and venture capitalists is ________.
A) venture capitalists are typically businesses, whereas angel investors are usually individuals
B) venture capitalists invest in risky startups, whereas angel investors put their money into more mature
businesses
C) venture capitalists make private equity investments whereas angel investors buy shares in companies
in the same way that the rest of the investing public does
D) angel investors are active and typically take a seat of the board of directors of any firm that they
provide financing for, whereas venture capital investors are more passive
24) When venture capitalists invest money in a firm, they are making a private equity investment.
2.5 Financial markets in crisis
1) When home prices are rising it is easier for homeowners who have fallen behind on their mortgages to
get caught up because ________.
A) they can sell their house and buy a smaller one
B) lenders will allow homeowners to use the built-up equity in their home to refinance their mortgages
C) they can rent out an extra room in their homes to earn extra income
D) with rising home prices homeowners will pay less in property taxes and use the savings to make
mortgage payments
2) Subprime mortgages are ________.
A) mortgages that charge the borrower an interest rate that is less than the prime rate of interest
B) mortgages on pieces of real estate located in less than prime neighborhoods
C) loans to borrowers with lower incomes and/or poorer credit histories compared to prime borrowers
D) mortgages on which the borrower has already fallen behind on payments or defaulted
3) Securitization is the process of pooling mortgages or other types of loans and selling the claims or
securities against that pool in the secondary market.
4) A crisis in the financial sector often spills over into other industries because when financial institutions
________ borrowing, activity in most other industries ________.
A) increase; slows down
B) contract; slows down
C) increase; increases
D) contract; increases
5) Securitization made it harder for banks to lend money because they could not pass the risk on to other
investors.
6) Mortgage-backed securities are securities that represent claims on the cash flows generated by a pool of
mortgages.
7) Prior to the 2008 financial crisis, most investors viewed mortgage–backed securities as relatively safe
investments.
8) Subprime mortgages are mortgage loans made to borrowers with high incomes and better than
average credit histories.
9) Recessions associated with a banking crisis tend to be more severe than other recessions because many
businesses rely on credit to operate.
10) The process of pooling mortgages or other types of loans and selling the claims or securities against
that pool in the secondary market is called ________.
A) valuation
B) securitization
C) private placement
D) capital restructuring
11) The primary risk of mortgage-backed securities is ________.
A) that the prices of have high volatility
B) that the prices of housing will increase
C) that the government will not be able to meet the guarantees on the cash flows
D) that homeowners may not be able to, or choose not to, repay their loans
12) Which of the following is true of mortgage-backed securities?
A) Mortgage-backed securities assure a flat 15% return.
B) Mortgage-backed securities are guaranteed by the U.S. government.
C) Mortgage-backed securities can only be purchased by investment banks.
D) Mortgage-backed securities represent claims on the cash flows generated by a pool of homeloans.
13) When home prices are falling, we would expect a(n) ________.
A) high mortgage default rates
B) low mortgage default rates
C) unchanged mortgage default rates
D) higher percentage of owner home equity