CHAPTER 4

THE FINANCIAL ENVIRONMENT:

MARKETS, INSTITUTIONS, AND INTEREST RATES

(Difficulty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Conceptual

Easy:
Financial markets Answer: d Diff: E
1. The New York Stock Exchange is primarily

a. A secondary market.
b. A physical location auction market.
c. An over-the-counter market.
d. Statements a and b are correct.
e. Statements b and c are correct.

Financial markets Answer: c Diff: E

2. Which of the following statements is most 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 is buying 100 shares of
Wal-Mart stock from your uncle.
c. Capital market instruments include long-term debt and common stock.
d. Statements b and c are correct.
e. Statements a, b, and c are correct.

Financial markets Answer: d Diff: E

3. Which of the following statements is most correct?

a. If an investor sells 100 shares of Microsoft to his brother-in-law,

this is a primary market transaction.
b. Private securities are generally less liquid than publicly traded
securities.
c. Money markets are where short-term, liquid securities are traded,
whereas capital markets represent the markets for long-term debt and
common stock.
d. Statements b and c are correct.
e. All of the statements above are correct.

Chapter 4 - Page 1
Financial markets Answer: d Diff: E
4. Which of the following is a secondary market transaction?

a. You sell 200 shares of IBM stock in the open market.

b. You buy 200 shares of IBM stock from your brother.
c. IBM issues 2 million shares of new stock to the public.
d. Statements a and b are correct.
e. All of the statements above are correct.

Financial markets Answer: c Diff: E

5. Which of the following statements is most correct?

a. Money markets are markets for long-term debt and common stocks.
b. Primary markets are markets where existing securities are traded
among investors.
c. A derivative is a security whose value is derived from the price of
some other “underlying” asset.
d. Statements a and b are correct.
e. Statements b and c are correct.

Financial markets Answer: c Diff: E N

6. Which of the following statements is most correct?

a. While the distinctions are blurring, investment banks generally

specialize in lending money, whereas commercial banks generally help
companies raise capital from other parties.
b. Money market mutual funds usually invest their money in a well-
diversified portfolio of liquid common stocks.
c. The NYSE operates as an auction market, whereas NASDAQ is an example
of a dealer market.
d. Statements b and c are correct.
e. All of the statements above are correct.

Capital market instruments Answer: b Diff: E

7. Which of the following is an example of a capital market instrument?

a. Commercial paper.
b. Preferred stock.
c. U.S. Treasury bills.
d. Banker’s acceptances.
e. Money market mutual funds.

Money markets Answer: e Diff: E

8. Money markets are markets for

a. Foreign currency exchange.

b. Consumer automobile loans.
c. Corporate stocks.
d. Long-term bonds.
e. Short-term debt securities.

Chapter 4 - Page 2