CHAPTER 02 14FINANCIAL MARKETS AND INSTITUTIONS 1

Topics: Stock, Stock market, Stock exchange Pages: 7 (2428 words) Published: March 10, 2015
Chapter 2: Financial Markets and Institutions

Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in multiple-choice questions.

Multiple Choice: True/False

1. A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary. a. True

b. False

ANSWER: True

2. The NYSE is defined as a “spot” market purely and simply because it has a physical location. The NASDAQ, on the other hand, is not a spot market because it has no one central location. a. True
b. False

ANSWER: False

3. The NYSE is defined as a “primary” market because it is one of the largest and most important stock markets in the world. a. True
b. False

ANSWER: False

4. Primary markets are large and important, while secondary markets are smaller and less important. a. True
b. False

ANSWER: False

5. Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions. a. True

b. False

ANSWER: False

6. A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock. a. True
b. False

ANSWER: True

7. 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. a. True

b. False

ANSWER: True

8. 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. a. True

b. False

ANSWER: True

9. Trades on the NYSE are generally completed by having a brokerage firm acting as a “dealer” buy securities and adding them to its inventory or selling from its inventory. The NASDAQ, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange. a. True

b. False

ANSWER: False

10. The “over-the-counter” market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer. a. True

b. False

ANSWER: True

11. If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction. a. True

b. False

ANSWER: True

12. The term IPO stands for “individual purchase order,” as when an individual (as opposed to an institution) places an order to buy a stock. a. True
b. False

ANSWER: False

13. 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. True

b. False

ANSWER: True

14. When a corporation’s shares are owned by a few individuals who are associated with the firm’s management, we say that the stock is closely held. a. True
b. False

ANSWER: True

15. A...
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