Deck 2: The Financial Market Environment

Question 1

Most businesses raise money by selling their securities in a ________.

A) public offering
B) forex market
C) futures market
D) commodities market

Answer 1

public offering

Question 2

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

Answer 2

financial institutions

Question 3

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

Answer 3

through financial institutions

Question 4

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

Question 5

A primary market is a financial market in which pre-owned securities are traded.

Question 6

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

Question 7

Financial markets are intermediaries that channel the savings of individuals, businesses, and government into loans or investments.

Question 8

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

Question 9

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

Question 10

Commercial banks advise firms on major transactions such as mergers or financial restructurings.

Question 11

The Glass-Steagall Act was imposed to allow commercial and investment banks to combine and work together.

Question 12

A financial institution is an intermediary that channels the savings of individuals, businesses, and governments into loans or investments.

Question 13

Primary and secondary markets are markets for short-term and long-term securities, respectively.

Question 14

A public offering is the sale of a new security issue-typically debt or preferred stock-directly to an investor or group of investors.

Question 15

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

Question 16

The shadow banking system describes a group of institutions that engage in lending activities, much like traditional banks.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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.

Question 22

NASDAQ is considered an OTC market since it is not recognized by the SEC as a "listed exchange."

Question 23

In the OTC market, the ask price is the highest price offered by a dealer to purchase a given security.

Question 24

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.

Question 25

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

Question 26

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

Question 27

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.

Question 28

Money markets involve the trading of securities with maturities of one year or less.

Question 29

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.

Question 30

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

Question 31

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.

Question 32

The over-the-counter (OTC) market is a market for trading smaller and unlisted securities.

Question 33

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.

Question 34

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.

Question 35

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.

Question 36

Money markets are markets for long-term funds such as bonds and equity.

Question 37

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.

Question 38

In the Eurobond market, corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States.

Question 39

The Eurocurrency market is a market for short-term bank deposits denominated in U.S. dollars or other easily convertible currencies.

Question 40

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.

Question 41

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

Question 42

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.

Question 43

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

Question 44

The primary risk of mortgage-backed securities is ________.

A) that the prices of have high volatality
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

Question 45

Mortgage-backed securities are securities that represent claims on the cash flows generated by a pool of mortgages.

Question 46

Long-term debt instruments used by both government and business are known as ________.

A) preferred stocks
B) T-bills
C) bonds
D) equities

Question 47

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

Question 48

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

Question 49

Which of the following is an example of marketable securities?

A) U.S.Treasury bills
B) treasury stock
C) mortgage backed securities
D) loans

Question 50

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

Question 51

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

Question 52

Most money market transactions are made in ________.

A) common stock
B) marketable securities
C) commodities market
D) preferred stock

Question 53

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

Question 54

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

Question 55

Securitization made it harder for banks to lend money because they could not pass the risk on to other investors.

Question 56

Recessions associated with a banking crisis tend to be more severe than other recessions because many businesses rely on credit to operate.

Question 57

Subprime mortgages are mortgage loans made to borrowers with high incomes and better than average credit histories.

Question 58

Prior to the 2008 financial crisis, most investors viewed mortgage-backed securities as relatively safe investments.

Question 59

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

Question 60

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

Question 61

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

Question 62

The average tax rate paid on the firm's ordinary income can be calculated by dividing its taxes by its taxable income.

Question 63

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

Question 64

All dividend income received by a corporation is exempted from taxation.

Question 65

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

Question 66

The marginal tax rate represents the rate at which the next dollar of income is taxed.

Question 67

Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax rate for Jennings, Inc.?

A) 34 percent
B) 46 percent
C) 25 percent
D) 40 percent

Question 68

The ordinary income of a corporation is income earned through the sale of goods or services and is currently taxed subject to the individual income tax rates.

Question 69

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

Question 70

The marginal tax rate paid on a firm's ordinary income can be calculated by dividing its taxes by its net income.

Question 71

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

Question 72

The tax liability of a corporation with ordinary income of $1,500,000 is ________. Range of taxable income Marginal rate
$ 0 to $ 50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35

A) $498,250
B) $510,000
C) $585,000
D) $690,000

Question 73

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.

Question 74

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

Question 75

The tax liability of a corporation with ordinary income of $1,100,000 is ________. Range of taxable income Marginal rate
$ 0 to $ 50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35

A) $362,250
B) $340,000
C) $374,000
D) $390,000

Question 76

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.

Question 77

The tax deductibility of various expenses such as general and administrative expenses ________.

A) increases their pretax cost
B) reduces their after-tax cost
C) has no effect on their after-tax cost
D) has an unpredictable effect on their after-tax cost

Question 78

The tax liability of a corporation with ordinary income of $105,000 is ________. Range of taxable income Marginal rate
$ 0 to $ 50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35

A) $42,000
B) $35,700
C) $23,950
D) $24,450

Question 79

Dividends received by a corporation on an investment in the common and preferred stock of another corporation, where ownership in the dividend paying corporation is less than 20%, is subject to 70 percent exclusion for tax purposes.

Question 80

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