FIN 306 MIDTERM 7 TEST PAPER WITH
COMPLETE SOLUTIONS
◉ Which of the following is an example of a capital market
instrument? A. Commercial paper.
B. U.S. Treasury bills.
C. Banker's acceptances.
D. Preferred stock.
E. Money market mutual funds.
Answer: D. Preferred stock.
◉ Which of the following is a primary market transaction?
A. IBM issues 2,000,000 shares of new stock and sells them to the
public through an investment banker.
B. IBM sells 2,000,000 shares of treasury stock to its employees
when they exercise options that were granted in prior years.
C. You sell 200 shares of IBM stock on the NYSE through your broker.
D. One financial institution buys 200,000 shares of IBM stock from
another institution. An investment banker arranges the transaction.
E. 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.
,Answer: A. IBM issues 2,000,000 shares of new stock and sells them
to the public through an investment banker.
◉ Which of the following statements is CORRECT?
A. An example of a primary market transaction would be your uncle
transferring 100 shares of Wal-Mart stock to you as a birthday gift.
B. The NYSE does not exist as a physical location; rather it
represents a loose collection of dealers who trade stock
electronically.
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. Capital market instruments include both long-term debt
and common stocks.
◉ Money markets are markets for A. Corporate stocks.
B. Foreign currencies.
C. Long-term bonds.
D. Consumer automobile loans.
,E. Short-term debt securities such a Treasury bills.
Answer: E. Short-term debt securities such a Treasury bills.
◉ Which of the following statements is CORRECT?
A. Capital market transactions involve only the purchase and sale of
equity securities.
B. The New York Stock Exchange is an auction market with a
physical location.
C. Consumer automobile loans are traded in the money market.
D. If an investor sells shares of stock through a broker, then it would
be a primary market transaction.
E. While the distinctions are blurring, investment banks generally
specialize in lending money, whereas commercial banks generally
help companies raise capital from other parties.
Answer: B. The New York Stock Exchange is an auction market with
a physical location.
◉ If the stock market is semistrong-form efficient, which of the
following statements is CORRECT?
A. All stocks should have the same expected returns. However, they
may end up with different realized returns.
B. Investors can outperform the market if they have access to
information that has not yet been publicly revealed.
, C. In equilibrium, stocks and bonds should have the same expected
returns.
D. If the stock market has been performing strongly over the past
several months, stock prices are more likely to decline than increase
over the next several months.
E. High-risk stocks should have the same expected return as low-risk
stocks.
Answer: B. Investors can outperform the market if they have access
to information that has not yet been publicly revealed.
◉ Which of the following statements is CORRECT?
A. If Disney issues additional shares of common stock through an
investment banker, this would be a secondary market transaction.
B. The NYSE is an example of an over-the-counter market.
C. As they are generally defined, money market transactions involve
debt securities with maturities of less than one year.
D. Only institutions, and not individuals, can engage in the
derivatives markets.
E. If you purchase 100 shares of Disney stock from your brother-in-
law, this is an example of a primary market transaction.
Answer: C. As they are generally defined, money market transactions
involve debt securities with maturities of less than one year.
◉ If the stock market is semistrong-form efficient, which of the
following statements would be CORRECT?
COMPLETE SOLUTIONS
◉ Which of the following is an example of a capital market
instrument? A. Commercial paper.
B. U.S. Treasury bills.
C. Banker's acceptances.
D. Preferred stock.
E. Money market mutual funds.
Answer: D. Preferred stock.
◉ Which of the following is a primary market transaction?
A. IBM issues 2,000,000 shares of new stock and sells them to the
public through an investment banker.
B. IBM sells 2,000,000 shares of treasury stock to its employees
when they exercise options that were granted in prior years.
C. You sell 200 shares of IBM stock on the NYSE through your broker.
D. One financial institution buys 200,000 shares of IBM stock from
another institution. An investment banker arranges the transaction.
E. 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.
,Answer: A. IBM issues 2,000,000 shares of new stock and sells them
to the public through an investment banker.
◉ Which of the following statements is CORRECT?
A. An example of a primary market transaction would be your uncle
transferring 100 shares of Wal-Mart stock to you as a birthday gift.
B. The NYSE does not exist as a physical location; rather it
represents a loose collection of dealers who trade stock
electronically.
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. Capital market instruments include both long-term debt
and common stocks.
◉ Money markets are markets for A. Corporate stocks.
B. Foreign currencies.
C. Long-term bonds.
D. Consumer automobile loans.
,E. Short-term debt securities such a Treasury bills.
Answer: E. Short-term debt securities such a Treasury bills.
◉ Which of the following statements is CORRECT?
A. Capital market transactions involve only the purchase and sale of
equity securities.
B. The New York Stock Exchange is an auction market with a
physical location.
C. Consumer automobile loans are traded in the money market.
D. If an investor sells shares of stock through a broker, then it would
be a primary market transaction.
E. While the distinctions are blurring, investment banks generally
specialize in lending money, whereas commercial banks generally
help companies raise capital from other parties.
Answer: B. The New York Stock Exchange is an auction market with
a physical location.
◉ If the stock market is semistrong-form efficient, which of the
following statements is CORRECT?
A. All stocks should have the same expected returns. However, they
may end up with different realized returns.
B. Investors can outperform the market if they have access to
information that has not yet been publicly revealed.
, C. In equilibrium, stocks and bonds should have the same expected
returns.
D. If the stock market has been performing strongly over the past
several months, stock prices are more likely to decline than increase
over the next several months.
E. High-risk stocks should have the same expected return as low-risk
stocks.
Answer: B. Investors can outperform the market if they have access
to information that has not yet been publicly revealed.
◉ Which of the following statements is CORRECT?
A. If Disney issues additional shares of common stock through an
investment banker, this would be a secondary market transaction.
B. The NYSE is an example of an over-the-counter market.
C. As they are generally defined, money market transactions involve
debt securities with maturities of less than one year.
D. Only institutions, and not individuals, can engage in the
derivatives markets.
E. If you purchase 100 shares of Disney stock from your brother-in-
law, this is an example of a primary market transaction.
Answer: C. As they are generally defined, money market transactions
involve debt securities with maturities of less than one year.
◉ If the stock market is semistrong-form efficient, which of the
following statements would be CORRECT?
