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Exam 2: Financial Markets and Institutions

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Question 21

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​Which of the following is a primary market transaction?

A) ​You sell 200 shares of IBM stock on the NYSE through your broker.
B) ​You buy 200 shares of IBM stock from your brother.The trade is not made through a broker;you just give him cash and he gives you the stock.
C) ​IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
D) ​One financial institution buys 200,000 shares of IBM stock from another institution.An investment banker arranges the transaction.
E) ​IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.

F) B) and C)
G) A) and E)

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Question 22

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​Which of the following statements is CORRECT?

A) ​If you purchase 100 shares of Disney stock from your brother-in-law,this is an example of a primary market transaction.
B) ​If Disney issues additional shares of common stock through an investment banker,this would be a secondary market transaction.
C) ​The NYSE is an example of an over-the-counter market.
D) ​Only institutions,and not individuals,can engage in derivative market transactions.
E) ​As they are generally defined,money market transactions involve debt securities with maturities of less than one year.

F) A) and D)
G) C) and E)

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Question 23

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Primary markets are large and important,while secondary markets are smaller and less important.

Financial institutions are more diversified today than they were in the past,when federal laws kept investment banks,commercial banks,insurance companies,and similar organizations quite separate.Today the larger financial services corporations offer a variety of services,ranging from checking accounts,to insurance,to underwriting securities,to stock brokerage.

You recently sold 200 shares of Disney stock,and the transfer was made through a broker.This is an example of:

Which of the following statements is CORRECT?

The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution)places an order to buy a stock.

Which of the following is an example of a capital market instrument?

Hedge funds are somewhat similar to mutual funds.The primary differences are that hedge funds are less highly regulated,have more flexibility regarding what they can buy,and restrict their investors to wealthy,sophisticated individuals and institutions.

Each stock's rate of return in a given year consists of a dividend yield (which might be zero)plus a capital gains yield (which could be positive,negative,or zero).Such returns are calculated for all the stocks in the S&P 500. -A weighted average of those returns,using each stock's total market value,is then calculated,and that average return is often used as an indicator of the "return on the market."

If you wanted to know what rate of return stocks have provided in the past,you could examine data on the Dow Jones Industrial Index,the S&P 500 Index,or the NASDAQ Index.

In a "Dutch auction" for new stock,individual investors place bids for shares directly.Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price.The highest price that permits the company to sell all the shares it wants to sell is determined,and this is the "market clearing price." All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.

A publicly owned corporation is a company whose shares are held by the investing public,which may include other corporations as well as institutional investors.