Chapter 5 - CHAPTER 5 FINANCIAL MARKETS AND INSTITUTIONS...

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Multiple Choice: Conceptual Note to Professors: We designated most of these questions as being MEDIUM. However, their difficulty as seen by students will depend on (1) what was discussed in class and (2) how long students have to answer the questions. If time is not an issue, then many of the questions should be classified as EASY, but under exam conditions with time pressure, they might be regarded as being HARD. So, consider the amount of time students have when selecting questions for an exam. Financial markets Answer: c EASY 1 . 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. Hedge funds Answer: e EASY 2 . 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 “sophisticated” investors (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and such investors supposedly can do the necessary “due diligence” on their own rather than have it done by the SEC or some other regulator. Chapter 5: Financial Markets and Institutions Page 21 CHAPTER 5 FINANCIAL MARKETS AND INSTITUTIONS
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IPOs Answer: c EASY 3 . Which of the following statements is CORRECT? a. The term “IPO” stands for introductory price offered, and it is the price at which shares of a new company are offered to the public. b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public. c. In a “Dutch auction,” investors who want to buy shares in an IPO
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This note was uploaded on 05/05/2010 for the course FIN 221 taught by Professor Dyer during the Fall '09 term at University of Illinois, Urbana Champaign.

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Chapter 5 - CHAPTER 5 FINANCIAL MARKETS AND INSTITUTIONS...

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