Multiple

Choice Questions N° 1

1. A market where new securities are bought and sold for the first time is known as a
__________ market.
A. primary
B. secondary
C. tertiary
D. capital
2. A market for existing (used) securities, such as the NYSE or AMEX, rather than new issues is
known as the __________ market.
A. primary
B. secondary
C. tertiary
D. capital
3. Which of the following is not a method a firm can use to finance their long-term needs
externally?
A. Retained earnings
B. Public issue
C. Privileged subscription
D. Private placement
4. How are investment bankers generally compensated under traditional underwriting?
A. The stockbroker, representing the investment banker, charges a commission to investors
B. The leader underwriter in the underwriting syndicate dictates the commission that the
other firms must charge so that investors pay for a majority of the underwriting expense
C. Investment bankers earn a spread based on the difference between the purchase price
from the firm and the sales price to investors of the securities being underwritten
D. The issuing firm pays a flat fee, usually $1 million, plus all of the commissions charge by
stockbrokers who are ultimately selling the securities to investors
5. The New York Stock Exchange (NYSE) can be considered as being a part of the __________
and the __________.
A. capital market; money market
B. capital market; primary market for long-term securities

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 Multiple Choice Questions N° 1

C. OTC market; secondary market for long-term securities
D. secondary market for long-term securities; capital market
6. Which of the following is not a method a firm can use to publicly issue common stock?
A. Private placement
B. Firm commitment underwriting
C. Shelf registration
D. Best efforts offering
7. Which of the following statements is correct regarding asymmetric information?
A. Asymmetric information is a theory of information flow, which has been proven to not
have relevance in the financial market place
B. This is a theory where investors have better information than myopic (shortsighted)
management
C. This occurs when one party, say management, has better information than another
party, say investors, about relevant information to each party
D. This occurs when one party has relevant information and uses it to intentionally damage
another party
8. What happens to the average common stock price immediately after the announcement of
a new equity issue by a publicly traded firm?
A. The average stock price increases a few percentage points
B. The average stock price decreases a few percentage points
C. The average stock price does not generally change because no new information is
provided to investors
D. The average stock price does not generally change because of asymmetric information
9. Which of the following is a short-term option to buy a certain number of securities from the
issuing corporation?
A. Red herring
B. Letter stock
C. Initial public offering
D. Right
10. When a stock goes "ex-rights," its market price theoretically declines.

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 Multiple Choice Questions N° 1

A. True
B. False
11. The value of a right will often differ from its theoretical value due to speculation and
transaction costs.
A. True
B. False
12. A venture capitalist is the slang term used by the SEC to represent individuals who are
involved in insider trading.
A. True
B. False
13. FIs perform their intermediary function via:
A. Transforming assets by purchasing primary securities and issuing secondary securities
B. Transforming assets by making efficient transactions
C. Transforming assets by purchasing secondary securities and issuing primary securities
D. Specializing as brokers between households and corporations by purchasing primary
securities and issuing secondary securities
E. Specializing as brokers between households and corporations by purchasing secondary
securities and issuing primary securities

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