Equity Investments【Reading 47】Sample 2012, system

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The main functions of the financial system least likely include:

A) preventing investors from generating abnormal profits by trading on information.

B) allocating financial resources to their most productive uses.

C) bringing together savers and borrowers.

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One of the purposes of the financial system is to allow investors to trade on (public) information. Other purposes of the financial system include allocating financial capital to its most productive uses, and bringing together those who wish to save with those who wish to borrow.

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An objective of financial market regulation is to:

A) reduce information gathering costs by requiring common financial reporting standards.

B) ensure that inside information is made public in a timely manner.

C) prevent uninformed investors from participating in financial markets.

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One of the objectives of market regulation is to require firms to report their financial performance according to a single set of standards, such as those of the IASB or FASB, thereby reducing market participants’ cost of gathering information. Market regulation is not designed to prevent uninformed investors from trading, but to protect unsophisticated investors and thereby preserve trust in the financial markets. An objective of market regulation is to prevent those with non-public information from profiting at the expense of other investors, but not necessarily to make all inside information public.

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Which of the following is least likely a characteristic of a well-functioning market?

A) Reliable information is available on price and volume.

B) Prices adjust quickly when new information becomes available.

C) Prices change significantly from one transaction to the next.

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In a well-functioning market, prices should not typically change much from one transaction to the next because many buyers and sellers are willing to trade at prices near the current price. Characteristics of a well-functioning market include availability of reliable information on prices and transaction volume; liquidity (marketability and price continuity); prices that react quickly to new information; and low transactions costs.

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A unique item such as fine art is most likely to be exchanged in a(n):

A) quote-driven market.

B) brokered market.

C) order-driven market.

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Brokered markets are typically the best market structure for unique items. A broker adds value by locating a counterparty to take the opposite side of a trade of such an item.

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Which of the following statements about securities exchanges is most accurate?

A) Call markets are markets in which the stock is only traded at specific times.

B) Continuous markets are markets where trades occur 24 hours per day.

C) Setting a negotiated price to clear the market is a method used to set the closing price in major continuous markets.

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Continuous markets are markets where trades occur at any time the market is open (i.e. they do not need to be open 24 hours per day). Setting one negotiated price is a method used in major continuous markets to set the opening price.

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Which of the following statements about securities exchanges is NOT correct?

A) In call markets, there is only one negotiated price set to clear the market for a given stock.

B) Securities exchanges may be structured as call markets or continuous markets.

C) In continuous markets, prices are set only by the auction process.

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In continuous markets, the price is set by either the auction process or by dealer bid-ask quotes.

LiquidAssets10

A trading system that matches buyers and sellers based on price and time precedence is most likely a(n):

A) quote-driven market.

B) brokered market.

C) order-driven market.

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In an order-driven market, buy orders and sell orders are matched up by the exchange according to order matching rules. In a quote-driven market, customers trade with dealers at bid and ask prices set by the dealers. In a brokered market, brokers organize trades among their clients.

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Which of the following statements regarding secondary markets is least accurate? Secondary markets are important because they provide:

A) investors with liquidity.

B) firms with greater access to external capital.

C) regulators with information about market participants.

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Secondary markets are important because they provide liquidity and continuous information to investors. The liquidity of the secondary markets adds value to both the investor and firm because more investors are willing to buy issues in the primary market, when they know these issues will later become liquid in the secondary market. Therefore, the secondary market makes it easier for firms to raise external capital.

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Which of the following is a difference between primary and secondary capital markets?

A) Primary markets are where stocks trade while secondary markets are where bonds trade.

B) Primary capital markets relate to the sale of new issues of bonds, preferred, and common stock, while secondary capital markets are where securities trade after their initial offering.

C) Secondary capital markets relate to the sale of new issues of bonds, preferred, and common stock, while primary capital markets are where securities trade after their initial offering.

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Bonds and stocks are traded on both the primary and secondary markets.

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Which of the following statements about primary and secondary markets is least accurate?

A) The proceeds from a sale in the secondary market go to the issuer.

B) A primary market is a market in which new securities are sold.

C) The primary market benefits from the liquidity provided by the secondary market.

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Proceeds in a primary market go to the issuing firm. Proceeds from a sale in the secondary market go to the current owner who is selling the securities.