Financial Markets and Securities Offerings Paper 1
Which of the following economic functions is provided by the securities markets?
Answer (D) is correct. Securities markets facilitate investment by providing a marketplace for investors to conduct inexpensive transactions efficiently. Thus, investors are assured that they will have a place to buy and sell securities. Securities markets can handle continuous transactions that are based on the values and judgments of investors. Securities markets increase liquidity of securities by providing a marketplace. Thus, prices are relatively stable due to smaller price changes. Securities markets also facilitate the issuance and purchase of new securities.
Which of the following is not true about financial markets?
Answer (C) is correct. Financial markets bring entities that have funds to invest together with entities that have financing needs. They facilitate the transfer of assets and obligations. Due to this activity, financial markets cause people to adjust their consumption patterns. Financial intermediaries increase the efficiency of financial markets through better allocation of financial resources, not by clearing the market.
The financial markets that trade debt securities with maturities of less than 1 year and are dealer-driven are
Answer (D) is correct. Money markets trade debt securities with maturities of less than 1 year. These markets are dealer-driven because dealers are the principals who buy and sell instruments at their own risk. Money markets are marketable and short-term with low default risk. They can be found in New York, London, and Tokyo.
Which of the following financial instruments can be traded in international money markets?
Answer (C) is correct. Funds are borrowed or lent for short periods (less than 1 year) in money markets. Examples of instruments traded in money markets are U.S. Treasury bills, bankers’ acceptances, commercial paper, negotiable certificates of deposit, money market mutual funds, Eurodollar market time deposits, and consumer credit loans. Capital markets trade stocks and long-term debt.
In capital markets, the primary market is concerned with the provision of new funds for capital investments through
Answer (A) is correct. The primary market is the market for new stocks and bonds. In this market, wherein investment money flows directly to the issuer, securities are initially sold by investment bankers who purchase them from issuers and sell them through an underwriting group. Later transactions occur on securities exchanges or other markets.
If a multinational firm were to raise equity capital on the London Stock Exchange, this would be referred to as a
Answer (B) is correct. The primary market is one in which a firm raises additional long-term debt or equity capital. It is a market in which newly created securities are bought and sold for the first time.
The over-the-counter (OTC) market is
Answer (B) is correct. The OTC market is a dealer market, in which brokers and dealers are linked by telecommunications equipment. Securities not traded on the stock exchanges are traded in the OTC market. The dollar volume of trading is much greater on the stock exchanges than the OTC market because the largest companies are usually listed on the stock exchanges. However, the majority of all stocks are traded in the OTC market.
The market for outstanding, listed common stock is called the
Answer (D) is correct. Previously issued (outstanding) stocks of publicly owned companies are traded among investors in the secondary market. The original issuer receives no additional capital as a result of such trades.
Which of the following is a financial intermediary?
Answer (A) is correct. Financial intermediaries increase the efficiency of financial markets. A financial intermediary is a specialized firm that obtains funds from savers, issues its own securities, and uses the money to purchase a business’s securities. Accordingly, they create new forms of capital. Mutual funds are corporations that use funds from savers to invest in stocks, long-term bonds, or short-term debt.
James Wills, the treasurer of a major multinational company, needs to borrow $50 million to finance new production facilities. Wills is deciding between direct financing or a public offering. All of the following statements in regard to these two alternatives are correct except that
Answer (C) is correct. Public debt tends to have lower interest rates because of its higher liquidity.