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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The main functions of the financial system most likely include:

A) determining equilibrium interest rates and allocating capital to its most productive uses.

B) determining the supply of money and determining equilibrium interest rates.

C) allocating capital to its most productive uses and determining the supply of money.

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The main functions of the financial system are to allow individuals and organizations to save, borrow, raise capital, and manage risks; to determine equilibrium rates of return that equate the amounts of lending and borrowing; and to allocate capital to its most productive uses. The money supply is typically controlled by countries’ central banks.

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Markets for financial assets with maturities of one year or less are best characterized as:

A) primary markets.

B) capital markets.

C) money markets.

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“Money markets” generally refers to markets for debt securities maturing in one year or less. Capital markets refer to markets for equities and for debt securities with maturities greater than one year. Primary markets are the markets for newly issued securities.

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The “real assets” classification most likely includes:

A) bonds.

B) stocks.

C) commodities.

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Real assets include commodities, real estate, durable equipment, and other physical assets. Bonds and stocks are classified as financial assets.

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A securities exchange where traders buy and sell long-term government bonds from and to other traders would best be described as part of the:

A) capital market.

B) primary market.

C) money market.

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The exchange can be described as part of the secondary capital markets. A security is first issued in the primary market, and then it trades among investors in the secondary market. The money market refers to the market for short-term debt instruments (usually with maturities of less than one year) such as T-bills.

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The prospectus for the Horizon Fund states that it invests only in real assets. Which of the following would the Horizon Fund most likely include in its portfolio?

A) Holdings of foreign currencies.

B) Common stock of a technology company.

C) An investment in an apartment complex.

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Real assets are assets with a physical presence such as real estate, equipment, and commodities. Financial assets include stocks, bonds, derivatives, and currencies. An investment in an apartment complex is a real estate investment and therefore would be considered a real asset.

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Jorman Inc. stock is cross-listed on exchanges in Tokyo and New York. Jorman stock is best described as a:

A) private security.

B) public security.

C) primary market security.

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Jorman stock is a public security because it is traded on public exchanges that are subject to regulatory oversight. A private security is a security that is not offered for sale on a public exchange and is not subject to regulation. Securities are issued in the primary market (i.e., initial public offerings) and subsequently trade in the secondary market (e.g., stock exchanges).

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Which of the following assets are best characterized as contracts?

A) Currency swaps.

B) Commercial paper.

C) Depository receipts.

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Contracts include forwards, futures, options, swaps, and insurance contracts. Commercial paper is a debt security. Depository receipts are shares in a pooled investment vehicle, such as a mutual fund or an exchange-traded fund.

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Equity securities most likely include:

A) preferred stock and certificates of deposit.

B) commercial paper and repurchase agreements.

C) common stock and warrants.

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Common stock, preferred stock, and warrants are equity securities. Certificates of deposit, commercial paper, and repurchase agreements are debt securities.

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In contrast with a typical forward contract, futures contracts have:

A) standardized terms.

B) greater counterparty risk.

C) less liquidity.

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Futures are forward contracts that trade on exchanges and have standardized terms, in contrast with forward contracts, which are customized instruments. A futures clearinghouse reduces counterparty risk by guaranteeing the performance of buyers and sellers. Futures contracts trade on organized exchanges and are more liquid than forward contracts.