GBG 333 - Review Questions Chapter 14
Capital Markets
Choose the best answer from the choices provided.
(1) If you were interested in temporary financing of inventory over the Christmas sales rush, you should consider the following:
(a) issue commercial paper.
(b) issue new common stock.
(c) issue long term bonds.
(d) consider any financing option that is cheapest in the capital markets.
(2) If you were considering financing options for new plant and machinery that should last at least 10 years, you should consider the following:
(a) issue commercial paper.
(b) a short term floating rate bank loan.
(c) issuing long term bonds or medium term notes.
(d) consider any financing option that is cheapest in the money markets.
(3) An example of a security issued by a federally-sponsored credit agency is:
(a) U.S. Treasury bills.
(b)
(c) Federal Home Loan Bank Bonds.
(d) tax-free municipal bonds.
(4) What is a key characteristic associated with state and local (municipal) securities?
(a) Interest payments are exempt from federal taxes and income taxes levied by the state of issue.
(b) Investors with low marginal tax rates generally purchase the securities.
(c) The securities are attractive to be included as part of a tax exempt retirement portfolio such as an IRA.
(d) The stated rates of return on these securities are higher than comparable corporate and government bonds of similar term and risk.
(3) Which observation is true with respect to the use of internal and external use of funds as sources of financing?
(a) Internally generated funds usually decrease as corporate profitability increases.
(b) Internally generated funds are a minor component of corporate financing, usually 10 percent or less of total financing.
(c) Externally generated funds are a minor component of corporate financing, usually 10 percent or less of total financing.
(d) In highly profitable years for the corporation, retained earnings can account for over 60 percent of total internal funds generated.
(4) Financial intermediaries in the private sector play an important role in the economy by:
(a) funneling savings from households into investments in the capital market.
(b) redirecting funds from the private sector to the public sector.
(c) facilitating the initial sale of US Treasury securities to the public.
(d) regulating the level of interest rates in the economy.
(5) Secondary trading of securities involves:
(a) the initial offering of a stock to the public.
(b) the interaction (buying and selling of outstanding stock) among investors.
(c) the corporate issuer of the security in the transaction.
(d) the sale of the security for the first time.
(6) Securities brokers are:
(a) agents who act of behalf of buyers and sellers of outstanding securities.
(b) agents who act on behalf of the corporation initially selling the securities to the public.
(c) scalpers who act on behalf of ticket holder speculators who cannot attend a key playoff game.
(d) those who allow buyers and sellers to conduct transactions on the floor of the stock exchange.
(7) The New York Stock Exchange is:
(a)
a popular bar and restaurant in downtown
(b)
a regional stock exchange serving
(c)
the largest screen-based market in the
(d) a national stock exchange, trading in the issues of large, national companies.
(8) The American Stock Exchange:
(a)
is a regional stock exchange serving the states of
(b) is a national stock exchange, somewhat smaller than the New York Stock Exchange.
(c) severed its relationship with the NASDAQ exchange in 1998 to operate as a separate unit.
(d)
is located in
(9) A screen-based market:
(a) means that there is no physical location, but trading is based on computers and other communication mediums.
(b) exists at the New York Stock Exchange.
(c)
is a regional stock exchange serving all those with home PCs located
in states west of the
(d)
is located at the American Stock Exchange in
(10) Dual trading:
(a)
accounts for less than 10 percent of the stock traded on the
(b) means that regional exchanges can trade common stock in the same companies that are traded on the New York Stock Exchange.
(c) means that regional exchanges can issue new common stock on more than one exchange at the same time.
(d) means that you as an investor can sell your stock twice, once on a regional exchange, and another time on a national exchange.
(11) Listing requirements:
(a) are much more stringent for the American Stock Exchange than the New York Stock Exchange.
(b) are evaluated carefully by management of companies, by evaluating the costs and financial reporting requirements against the benefits of stockholder value and ease of raising new capital.
(c) once met by a company, cannot ever be used by a stock exchange to delist the company in the future.
(d) are non-existent at the regional exchanges, making them attractive to list new, emerging companies that have limited resources to meet stringent listing requirements.
(12) The Over-the-Counter (OTC) market:
(a) handles the sale of securities of very large companies only.
(b) utilizes brokers similar to the stock exchanges.
(c)
exists at a physical location in
(d) utilizes dealers who own the securities they trade.
(13) Which statement is true about the Nasdaq National Market?
(a) The Securities and Exchange Commission, a federal agency, regulates the Nasdaq.
(b) The Nasdaq has become known as the technology market as it is the most popular market for technology and internet companies.
(c)
The Nasdaq
has a trading floor located in
(d) The high prices of stocks traded at the Nasdaq distorts the volume comparisons between Nasdaq and the New York Stock Exchange.
(14) Which of the following is an incorrect statement about the concept of market efficiency?
(a) It helps us appreciate to what degree information about the security has been incorporated into its price.
(b) It provides focus to securities laws that attempt to support market efficiency, by requiring full disclosure of corporate data.
(c) The strong form of the concept states that all information, both private and public, is immediately reflected in stock prices.
(d) The weak form of the concept states that past price information can be used to make fairly reliable forecasts of future prices.
(15) The following are statements about the features and purposes of the Securities Act of 1933. Which statement is incorrect?
(a) Its primary purpose was to provide full disclosure of all pertinent investment information whenever a corporation sold a new issue of securities.
(b) The Securities and Exchange Commission (SEC) established in 1934, reviews the prospectus of information submitted by the corporation issuing the new securities. The SEC can delay the offering of new shares if it finds the information incomplete or misleading.
(c) The SEC certifies that the securities are fairly priced.
(d) Officers of the company can be held liable for presentation of information that fraudulent, factually wrong, or omitted.
(16) The following are statements about the features and purposes of the Securities Exchange Act of 1934, and Securities Act Amendments of 1975. Which statement is incorrect?
(a) Guidelines for insider trading were established.
(b) Insiders has a broad definition, including anyone who had business dealings with a firm issuing new stock.
(c) The 1975 Act directed the SEC to supervise the development of a national securities market.
(d) The US Treasury Department became responsible for setting margin requirements to determine how much credit would be available to purchasers of securities.