Financial Markets and Institutions

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CHAPTER 2
FINANCIAL MARKETS AND INSTITUTIONS

1.You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?

a.This is an example of a direct transfer of capital.
b.This is an example of a primary market transaction.
c.This is an example of an exchange of physical assets.
d.This is an example of a money market transaction.
e.This is an example of a derivative market transaction.
Answer: a

2.Which of the following statements is CORRECT?

a.The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. b.An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift. c.Capital market instruments include both long-term debt and common stocks. d.If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. e.While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors. Answer: c

3.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. Answer: c

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

a.Commercial paper.
b.Preferred stock.
c.U.S. Treasury bills.
d.Banker's acceptances.
e.Money market mutual funds.
Answer: b

5.Money markets are markets for

a.Foreign currencies.
b.Consumer automobile loans.
c.Common stocks.
d.Long-term bonds.
e.Short-term debt securities such as Treasury bills and commercial paper. Answer: e

6.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. Answer: e

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

a.A money market transaction.
b.A primary market transaction.
c.A secondary market transaction.
d.A futures market transaction.
e.An over-the-counter market transaction.
Answer: c

8.Which of the following statements is CORRECT?

a.Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. b.Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. c.Hedge funds have more in common with investment banks than with any other type of financial institution. d.Hedge funds have more in common with commercial banks than with any other type of financial institution. e.Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only...
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