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Chapter 14: Capital Markets
14-1
Chapter 14
Capital Markets
Discussion Questions
14-1.
In addition to U.S. corporations, what government groups compete for funds in
the U.S. capital markets?
The federal government, government agencies, and state and local governments
all compete for funds.
14-2.
What foreign industry has privatization been most important in?
Telecommunications
14-3.
How does foreign investment help the U.S. government?
It helps finance the deficit.
14-4.
What is a key tax characteristic associated with state and local (municipal)
securities?
They are tax exempt, meaning the interest paid is normally exempt from federal
income taxes and from state income taxes in the state of issue.
14-5.
What are three forms of corporate securities discussed in the chapter?
Corporate bonds, preferred stock, and common stock are the three forms of
corporate securities discussed in the chapter.
14-6.
Do corporations rely more on external or internal funds as sources of financing?
Corporations rely more heavily on external funds as sources of financing.
Sixty percent of corporate funds came from external sources during the time
period under study.
Chapter 14: Capital Markets
14-2
14-7.
Explain the role of financial intermediaries in the flow of funds through the
three-sector economy.
In a three-sector economy consisting of business, households, and government,
financial intermediaries such as commercial banks, mutual saving banks,
insurance companies, mutual funds, pension funds, and credit unions provide
the mechanism for reallocating funds from one surplus sector to a deficit sector.
These institutions indirectly invest excess funds in areas of the economy where
funds are needed.
14-8.
What are electronic communication networks (ECNs)? Generally speaking, are
they currently part of the operations of the New York Stock Exchange and the
Nasdaq Stock Market?
ECNs are electronic trading systems that automatically match buy and sell
orders at specific prices via computers. They are now part of the operations of
the two major markets (at one time they competed with them).
14-9.
Why is secondary trading in the security markets important?
It provides liquidity and keeps prices competitive among alternative
investments.
14-10.
How would you define efficient security markets?
Markets are efficient when (1) prices adjust rapidly to new information;
(2) there is a continuous market, in which each successive trade is made at a
price close to the previous price; and (3) the market can absorb large dollar
amounts of securities without destabilizing the price.
14-11.
The efficient market hypothesis is interpreted in a weak form, a semistrong
form, and a strong form. How can we differentiate its various forms?
The weak form of efficient markets simply states that past price information is
unrelated to future prices and that since no trends are predictable, investors
cannot take advantage of them. The semistrong form states that prices reflect all
public information, while the strong form states that all information, both public
and private, is reflected in the stock prices.
Chapter 14: Capital Markets
14-3
14-12.
What was the primary purpose of the Securities Act of 1933?
The primary purpose of the Securities Act of 1933 was to provide full
disclosure of all pertinent information whenever a corporation sold a new issue
of securities.
14-13.
What act of Congress created the Securities and Exchange Commission?
The Securities Exchange Act of 1934 created the Securities and Exchange
Commission.
14-14.
What was the purpose of the Sarbanes-Oxley Act of 2002?
The intent was to restore confidence in the integrity of the financial markets
through insuring accuracy in financial reporting.
