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Exam 14: Capital Markets

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Question 1

True/False

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When an investor buys stock in the stock market, he is purchasing shares from a company. Investors purchase shares from the company only in the initial offering.

A) True
B) False

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Question 2

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The Federal National Mortgage Association buys mortgage loans from local lenders, bundles them together, and resells them as securities.

A) True
B) False

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Question 3

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The most important capital markets in the world (in terms of dollar value) are located in

Brokers on an organized stock exchange act as an agent for the person buying or selling securities.

Without financial intermediaries, the cost of funds would be about the same as with financial intermediaries. Intermediaries expedite the flow of funds efficiently, thereby reducing the cost of these funds.

The NASDAQ market is the primary market for international securities.

The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for the accuracy of their firm's financial statements.

The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible, as is the interest paid on bonds.

Financial instruments in the capital markets generally fall under which category in the balance sheet?

One of the advantages of the BATS exchange stems from its home in Kansas.

The "capital structure" of the firm consists of long-term debt and equity.

The major supplier of funds for investment in the whole economy is

Corporations prefer bonds over preferred stock for financing their operations because

The Sarbanes-Oxley Act of 2002 holds a firm's internal auditors legally accountable for the accuracy of their firm's financial statements. Internal auditors have no such accountability (although, of course, they are held to professional standards of conduct). Within the firm, SOX legal accountability applies to the CEO and CFO.

Which of the following is not an example of indirect investment by a household?

The weak form of the efficient market hypothesis states that an investor can profit by using past price data. The weak form indicates that past pricing is unrelated to future pricing, and therefore has no predictive value.

In times of recession, retained earnings decline as a percent of internal funds.

The Securities Exchange Act of 1934 is primarily concerned with

The Sarbanes-Oxley Act of 2002 has ensured that financial executives refrain from fraudulent activities. SOX is a preventive measure, but it does not provide complete assurance against fraud.

Brokers actually own the securities they buy and sell on the floor of the exchange. While "brokers" in general act as agents for buyers and sellers, those who actually take title to and maintain inventories of shares are referred to as "specialists," "dealers," or more recently, "designated market-makers."