QUESTIONS

5-1 How does a cost-efficient capital market help to reduce the prices of goods and services?

5-2 Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.

5-3 Is an initial public offering an example of a primary or a secondary market transaction?

5-4 Indicate whether the following instruments are examples of money market or capital market transactions.

  1. U.S. Treasury bills
  2. Long-term corporate bonds
  3. Common stocks
  4. Preferred stocks
  5. Dealer commercial paper

5-5 What would happen to the U.S. standard of living if people lost faith in the safety of our financial institutions? Why?

5-6 What types of changes have financial markets experienced during the last two decades? Have they been perceived as positive or negative changes? Explain.

5-7 Differentiate between dealer markets and stock markets that have a physical location.

5-8 Identify and briefly compare the two leading stock exchanges in the United States today.

5-9 Describe the three different forms of market efficiency.

5-10 Investors expect a company to announce a 10 percent increase in earnings, but instead the company announces a 1 percent increase. If the market is semistrong-form efficient, which of the following would you expect to happen?

  • The stock’s price increases slightly because the company had a slight increase in earnings.
  • The stock’s price falls because the earnings increase was less than expected.
  • The stock’s price stays the same because earnings announcements have no effect if the market is semistrong-form efficient.

5-11 Explain whether the following statements are true or false.

  1. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns.
  2. Hedge funds generally charge higher fees than mutual funds.
  3. Hedge funds have traditionally been highly regulated.
  4. The New York Stock Exchange is an example of a stock exchange that has a physical location.
  5. A larger bid-ask spread means that the dealer will realize a lower profit.
  6. The efficient market hypothesis assumes that all investors are rational.