II. Structure of Financial Markets

Question 1

T or F. A firm or an individual can obtain funds in a financial market through 2 ways.

Answer 1

True.

Question 2

What are the ways in which a firm or an individual can raise funds?

Answer 2

Debt instrument and issuance of equities

Question 3

T or F. Issuing equities is the most common method to obtain funds.

Answer 3

False. Should be debt instrument

Question 4

______ is a contractual agreement by the borrower to pay the holder fixed dollar amounts at regular intervals until it reaches maturity. Examples of this are bonds or mortgages.

Answer 4

Debt instrument

Question 5

What is the term called for the expiration date of the debt instrument?

Answer 5

Maturity

Question 6

What are the terms under a debt installment?

Answer 6

short-term, long-term, and intermediate-term

Question 7

Less than a year of a debt installment’s maturity.

Answer 7

Short-term

Question 8

Equal or more than 10 years of a debt installment’s maturity.

Answer 8

Long-term

Question 9

Debt instruments with a maturity between 1 and 10 years are said to be what term?

Answer 9

Intermediate-term

Question 10

T or F. Common stock is a common example of equities.

Answer 10

True

Question 11

____ are claims to share in the net income and the assets of a business.

Answer 11

Equities

Question 12

Equities usually make periodic payments to their holders, what is this called?

Answer 12

Dividends

Question 13

T or F. Dividends are considered short-term securities because they have no maturity date.

Answer 13

False. It is considered long-term securities

Question 14

Owning stock means that you own a portion of the firm and thus have the right to ______ and to ____.

Answer 14

to vote on issues important to the firm and to elect its directors.

Question 15

What is the main disadvantage of owning a corporation’s equities?

Answer 15

An equity holder is a residual claimant - the corporation must pay its debt holders before its equity holders.

Question 16

What is the advantage of holding equities which is not possible for debt holders?

Answer 16

Equity holders benefit directly from any increases in the corporation’s profitability or asset value because it confers ownership rights which is not present in debt holders because their dollar payments are fixed.

Question 17

T or F. The total value of equities in the US has typically fluctuated between $1 and $10 trillion since the late 1970s, depending on the prices of shares.

Answer 17

False. It fluctuated between $1 and $10 trillion since the early 1970s.

Question 18

T or F. The size of the debt market is on par with that of the equities market: having a value of $19 trillion worth of debt instruments and $20 trillion worth of equities at the end of 1999.

Answer 18

True.

Question 19

_______ is a financial market where new issues of a security, such as a bond or a stock are sold to initial buyers by the corporation or government agency borrowing the funds.

Answer 19

Primary Market

Question 20

_______ is a financial market where securities that have been previously issued (secondhand) can be resold.

Answer 20

Secondary market

Question 21

T or F. Selling securities to initial buyers in the primary market are held privately behind closed doors.

Answer 21

True

Question 22

What financial institution is important in assisting in the initial sale of securities in the primary market?

Answer 22

Investment bank

Question 23

How does an investment bank perform the initial sale of securities where it guarantees a price for a corporation’s securities and then sells them to the public?

Answer 23

by underwriting securities

Question 24

What is the best-known example of a secondary market?

Answer 24

stock exchange

Question 25

T or F. Stock exchange actually has a larger trading volume than bond markets

Answer 25

False. bond markets have a larger trading volume.

Question 26

Other examples of secondary market

Answer 26

foreign exchange market, futures markets, and options markets

Question 27

T or F. The Secondary market would be able to function well even without its securities brokers and dealers.

Answer 27

False. brokers and dealers are crucial

Question 28

_______ are agents of investors who match buyers with sellers of securities, while _______ link buyers and sellers by buying and selling securities at stated prices.

Answer 28

Brokers; dealers

Question 29

Will the corporation that issued the security acquire funds after an individual buys a security in the secondary market?

Answer 29

No. Only the person who sold the security will receive money in exchange for the security from the individual. The corporation will only acquire new funds when its securities are first sold in the primary market.

Question 30

What are the two important functions of the secondary market?

Answer 30

- they make it easier to sell these financial instruments to raise cash; hence, making it more liquid. - they determine the price of the security that the issuing firm sells in the primary market.

Question 31

How does the liquidity from the secondary market affect the selling of securities in the primary market?

Answer 31

The increased liquidity from the financial instruments (secondary market) makes them more desirable and thus easier for the issuing firm to sell in the primary market.

Question 32

The higher the security's price in the secondary market, the higher will be the ___________ and hence the greater the ____________.

Answer 32

the price that the issuing firm will receive for a new security in the primary market; the amount of financial capital it can raise.

Question 33

T or F. Conditions in the Primary market are therefore the most relevant to corporations issuing securities.

Answer 33

False. It should be conditions in the secondary market.

Question 34

In what ways can a secondary market be organized?

Answer 34

Organize exchanges or have an over-the-counter market.

Question 35

Buyers and sellers of securities meet in one central location to conduct trades

Answer 35

Exchanges

Question 36

Examples of organized exchanges

Answer 36

- New York and American stock exchanges (stocks) - Chicago board of trade (commodities)

Question 37

Method of organizing a secondary market wherein dealers at different locations have an inventory of securities and stand ready to buy and sell securities to anyone who comes to them and is willing to accept their prices.

Answer 37

Over-the-counter (OTC) market

Question 38

Why is the OTC market very competitive and not very different from an organized exchange market?

Answer 38

because OTC dealers are in computer contact and they know the prices set by each one.

Question 39

T or F. Many stocks are traded over the counter, although the largest corporations usually have their shares traded at organized stock exchanges.

Answer 39

True

Question 40

Other over-the-counter markets include those that trade other types of financial instruments such as?

Answer 40

negotiable certificates of deposits, federal funds, banker's acceptances, and foreign exchange.

Question 41

What are other ways of distinguishing markets that are based on the tenor of the securities traded in each market?

Answer 41

money market and capital market

Question 42

A financial market where only short-term debt instruments are traded

Answer 42

Money market

Question 43

A financial market where longer-term debt and equity instruments are traded

Answer 43

Capital Market

Question 44

T or F. Money markets are usually more widely traded than shorter-term securities and tend to be more liquid.

Answer 44

False. longer-term securities.

Question 45

What makes short-term securities a safer investment than long-term securities?

Answer 45

It has smaller fluctuations in prices

Question 46

Capital market securities such as stocks and long-term bonds are often held by what financial intermediaries?

Answer 46

insurance companies and pension funds.

Question 47

Why do corporations and banks use the money market more?

Answer 47

to earn interest on surplus funds that they expect to have only temporarily.