LSUS MBA 727 CHOI EXAM 1 CORRECT
100%
Financial market participants who provide funds are called - ANSWER Surplus units
Those financial markets that facilitate the flow of short-term funds are known as -
ANSWER Money markets
Which of the following is a capital market instrument? - ANSWER A ten-year bond
Which of the following is a money market security? - ANSWER commercial paper
Money market securities generally have - ANSWER relatively high liquidity, low
expected return, and a low degree of credit risk
The Securities and Exchange Commission(SEC) was established by the - ANSWER
Securities Exchange Act of 1934
Which of the following is a nondepository financial institution? - ANSWER Mutual fund
_____________securities have a maturity of one year or less;
_____________securities generally have relatively high liquidity. - ANSWER Money
market; money market
Which of the following transactions would not be considered a secondary market
transaction? - ANSWER A firm that was privately held engages in an offering of stock to
the public
Which of the following are not considered money market securities? - ANSWER
Mortgage backed securities
The Securities Exchange Commission(SEC) does NOT - ANSWER decide whether a
public issue is fairly priced.
Discuss how secondary markets benefit funds issuers - ANSWER The secondary
markets provide liquidity to investors after their initial purchase of the security. This
liquidity encourages them to purchase the security at the initial offer. The current market
price also reflects current prospects for the firm and the competitiveness of the issue
relative to similar securities. Corporate treasurers follow their stocks' price closely
because the stock price reflects how well their firm and the market are performing. The
current security price also provides information about the cost of obtaining any
additional funds.
, What determines the price of financial instruments? Which are riskier, capital market
instruments or money market instruments? Why? - ANSWER The price of any financial
instrument is the present value of future cash flows discounted at an appropriate rate. A
small change in interest rates causes a large change in present value of distant cash
flows. Hence, the prices of long-term instruments. In addition, distant cash flows for
stocks are not known with certainty. Changing economic prospects can cause very
large changes in current stock values. Money market instruments have predictable cash
flows and mature in one year or less, so they are much less risky.
Distinguish between primary and secondary markets. Distinguish between money and
capital markets. - ANSWER primary markets are used for the issuance of new securities
while secondary markets are used for trading of existing securities. Money markets
facilitate the trading of short-term(money market) instruments while capital markets
facilitate the trading of long-term (capital market) instruments.
Distinguish between perfect and imperfect security markets. Explain why the existence
of imperfect markets creates a need for finacial intermediaries. - ANSWER With perfect
financial markets, all information about any securities for sale would be freely available
to investors, information about surplus and deficit units would be freely available, and all
securities could be unbundled into any size desired. In reality, markets are imperfect, so
that surplus and deficit units do not have free access to information, and securities
cannot be unbundled as desired. Financial intermediaries are needed to facilitate the
exchange of funds between surplus and deficit units. They have the information to
provide this service and can even repackage deposits to provide the amount of funds
that borrowers desire.
What was the purpose of the Securities Act of 1933? What was the purpose of the
Securities Exchange Act of 1934? Do these laws prevent investors from making poor
investment decisions? Explain. - ANSWER The Securities Act of 1933 was intended to
assure complete disclosure of relevant financial information on publicly offered
securities, and prevent fraudulent practices when selling these securities. The
Securities Exchange act of 1934 extended the disclosure requirements to secondary
market issues. it also declared a variety of deceptive practices illegal, but does not
prevent poor investments.
How might expectations of higher global oil prices affect the demand for loanable funds,
the supply of loanable funds, and the interest rates in the United States? Will this affect
the interest rates of other countries in the same way? Explain. - ANSWER The
expectations of higher oil prices will cause concern about the possible increase in
inflation. Since higher inflation can increase rates, it will cause an expectation of higher
interest rates in the US Firms and government agencies may borrow more funds now
before prices increase and before interest rates increase. Consumers may use their
savings now to buy products before the prices increase. Therefore, the demand for
loanable funds should increase, the supply of loanable funds should decrease, and
interest rates should increase in the US. The impact of higher global oil prices in other
countries is not necessarily the same. If the country produces its own oil, it can set the
100%
Financial market participants who provide funds are called - ANSWER Surplus units
Those financial markets that facilitate the flow of short-term funds are known as -
ANSWER Money markets
Which of the following is a capital market instrument? - ANSWER A ten-year bond
Which of the following is a money market security? - ANSWER commercial paper
Money market securities generally have - ANSWER relatively high liquidity, low
expected return, and a low degree of credit risk
The Securities and Exchange Commission(SEC) was established by the - ANSWER
Securities Exchange Act of 1934
Which of the following is a nondepository financial institution? - ANSWER Mutual fund
_____________securities have a maturity of one year or less;
_____________securities generally have relatively high liquidity. - ANSWER Money
market; money market
Which of the following transactions would not be considered a secondary market
transaction? - ANSWER A firm that was privately held engages in an offering of stock to
the public
Which of the following are not considered money market securities? - ANSWER
Mortgage backed securities
The Securities Exchange Commission(SEC) does NOT - ANSWER decide whether a
public issue is fairly priced.
Discuss how secondary markets benefit funds issuers - ANSWER The secondary
markets provide liquidity to investors after their initial purchase of the security. This
liquidity encourages them to purchase the security at the initial offer. The current market
price also reflects current prospects for the firm and the competitiveness of the issue
relative to similar securities. Corporate treasurers follow their stocks' price closely
because the stock price reflects how well their firm and the market are performing. The
current security price also provides information about the cost of obtaining any
additional funds.
, What determines the price of financial instruments? Which are riskier, capital market
instruments or money market instruments? Why? - ANSWER The price of any financial
instrument is the present value of future cash flows discounted at an appropriate rate. A
small change in interest rates causes a large change in present value of distant cash
flows. Hence, the prices of long-term instruments. In addition, distant cash flows for
stocks are not known with certainty. Changing economic prospects can cause very
large changes in current stock values. Money market instruments have predictable cash
flows and mature in one year or less, so they are much less risky.
Distinguish between primary and secondary markets. Distinguish between money and
capital markets. - ANSWER primary markets are used for the issuance of new securities
while secondary markets are used for trading of existing securities. Money markets
facilitate the trading of short-term(money market) instruments while capital markets
facilitate the trading of long-term (capital market) instruments.
Distinguish between perfect and imperfect security markets. Explain why the existence
of imperfect markets creates a need for finacial intermediaries. - ANSWER With perfect
financial markets, all information about any securities for sale would be freely available
to investors, information about surplus and deficit units would be freely available, and all
securities could be unbundled into any size desired. In reality, markets are imperfect, so
that surplus and deficit units do not have free access to information, and securities
cannot be unbundled as desired. Financial intermediaries are needed to facilitate the
exchange of funds between surplus and deficit units. They have the information to
provide this service and can even repackage deposits to provide the amount of funds
that borrowers desire.
What was the purpose of the Securities Act of 1933? What was the purpose of the
Securities Exchange Act of 1934? Do these laws prevent investors from making poor
investment decisions? Explain. - ANSWER The Securities Act of 1933 was intended to
assure complete disclosure of relevant financial information on publicly offered
securities, and prevent fraudulent practices when selling these securities. The
Securities Exchange act of 1934 extended the disclosure requirements to secondary
market issues. it also declared a variety of deceptive practices illegal, but does not
prevent poor investments.
How might expectations of higher global oil prices affect the demand for loanable funds,
the supply of loanable funds, and the interest rates in the United States? Will this affect
the interest rates of other countries in the same way? Explain. - ANSWER The
expectations of higher oil prices will cause concern about the possible increase in
inflation. Since higher inflation can increase rates, it will cause an expectation of higher
interest rates in the US Firms and government agencies may borrow more funds now
before prices increase and before interest rates increase. Consumers may use their
savings now to buy products before the prices increase. Therefore, the demand for
loanable funds should increase, the supply of loanable funds should decrease, and
interest rates should increase in the US. The impact of higher global oil prices in other
countries is not necessarily the same. If the country produces its own oil, it can set the
