Securities Markets
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Course Introduction
This course provides an in-depth exploration of securities markets, focusing on their structure, functioning, and significance within the broader financial system. It covers various types of securities, including stocks, bonds, and derivatives, and examines the roles of key market participants such as investors, issuers, intermediaries, and regulators. Students will learn about primary and secondary market mechanisms, trading strategies, market efficiency, and regulatory frameworks. Through case studies and real-world examples, the course also addresses issues related to market trends, pricing, risk management, and the impact of technological advancements on securities trading.
Recommended Textbook Financial Markets and Institutions 12th Edition by Jeff Madura
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Chapter 1: Role of Financial Markets and Institutions
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Q1) The Securities Act of 1933
A) required complete disclosure of relevant financial information for publicly offered securities in the primary market.
B) declared trading strategies to manipulate the prices of public secondary securities illegal.
C) imposed heavy penalties for insider trading.
D) required complete disclosure of relevant financial information for securities traded in the secondary market.
E) all of the above
Answer: A
Q2) Behavioral finance
A) applies concepts from sociology and anthropology to the behavior of market participants.
B) studies the behavior of financial markets in response to changes in Federal Reserve policy.
C) applies psychology to financial decision making.
D) explains why markets are efficient.
Answer: C
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Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) The federal government's demand for funds is ________, and municipal governments' demand for funds is somewhat ____________.
A) interest-inelastic; interest-inelastic
B) interest-elastic; interest-elastic
C) interest-inelastic; interest-elastic
D) interest-elastic; interest-inelastic
Answer: C
Q2) Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds.
A)True
B)False
Answer: True
Q3) If the real interest rate was negative for a period of time, then
A) inflation is expected to exceed the nominal interest rate in the future.
B) inflation is expected to be less than the nominal interest rate in the future.
C) actual inflation was less than the nominal interest rate.
D) actual inflation was greater than the nominal interest rate.
Answer: D
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Chapter 3: Structure of Interest Rates
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Q1) Credit (default) risk is likely to be highest for
A) short-term Treasury securities.
B) AAA corporate securities.
C) long-term Treasury securities.
D) BBB corporate securities.
Answer: D
Q2) The preference for more liquid short-term securities places downward pressure on the slope of the
A)True
B)False
Answer: False
Q3) Which of the following is not a characteristic affecting the yields on debt securities?
A) credit (default) risk
B) liquidity
C) tax status
D) term to maturity
E) All of the above affect yields on debt securities.
Answer: A
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Chapter 4: Functions of the Fed
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Q1) The ____ is directly responsible for conducting monetary policy.
A) Federal Advisory Council
B) FOMC
C) Senate
D) President of the United States
Q2) Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.
A)True
B)False
Q3) When open market operations are used to ____ bank funds, the yield on debt instruments ____.
A) reduce; decreases
B) reduce; increases
C) increase; increases
D) none of the above
Q4) The euro has been adopted by all of the major countries of Western Europe, including Switzerland and the United Kingdom.
A)True
B)False
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Chapter 5: Monetary Policy
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Q1) Economists who work at the Fed recognize that a stimulative monetary policy will not always reduce a high unemployment rate and could even ignite inflation.
A)True
B)False
Q2) If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raisestheTreasury security rate to 6 percent, the cost of borrowing for the firm will be ________.
A) 7 percent; 10 percent
B) 4 percent; 6 percent
C) 7 percent; 9 percent
D) 1 percent; 3 percent
Q3) When the Fed uses open market operations to sell some of its Treasury securities, there will be
A) an outward shift in the supply schedule of loanable funds.
B) an inward shift in the supply schedule of loanable funds.
C) no shift in the supply schedule of loanable funds.
D) an outward shift in the demand schedule for loanable funds.
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Chapter 6: Money Markets
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Q1) Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.
A)True
B)False
Q2) A major drawback to investing in Treasury bills is that they cannot easily be liquidated.
A)True
B)False
Q3) The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.
A) increased
B) reduced
C) always negative
D) unaffected
Q4) ____ is/are sold at an auction at a discount from par value.
A) Treasury bills
B) Repurchase agreements
C) Banker's acceptances
D) Commercial paper
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Chapter 7: Bond Markets
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Q1) Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the interest or principal payments generated by the debt securities.
A) collateralized debt obligations (CDOs)
B) credit default swaps
C) reverse loans
D) inverted bonds
Q2) Interest earned from Treasury bonds is
A) exempt from all income tax.
B) exempt from federal income tax.
C) exempt from state and local taxes.
D) subject to all income taxes.
Q3) Bonds issued by ____ are backed by the federal government.
A) the Treasury
B) AAA-rated corporations
C) state governments
D) city governments
Q4) Bond dealers do not have an inventory of bonds.
A)True
B)False
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Chapter 8: Bond Valuation and Risk
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Q1) From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.
A) high yield; appreciates
B) high yield; remains stable
C) low yield; appreciates
D) low yield; depreciates
Q2) Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Hurricane intends to sell the bonds in two years and expects investors' required rate of return on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?
A) $9.33 million
B) $11.00 million
C) $10.64 million
D) $9.82 million
E) none of the above
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Chapter 9: Mortgage Markets
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Q1) The secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before maturity.
A)True
B)False
Q2) From the perspective of the lending financial institution, interest rate risk is
A) lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
B) lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
C) higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
D) higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.
Q3) The valuation of mortgage-backed securities is difficult because of limited transparency.
A)True
B)False
Q4) In the earlier years of a mortgage,
A) most of the monthly payment reflects principal reduction.
B) most of the monthly payment reflects interest.
C) about half of the monthly payment reflects interest.
D) all of the monthly payment reflects principal reduction.
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Chapter 10: Stock Offerings and Investor Monitoring
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Q1) ____ are acquisitions that require substantial amounts of borrowed funds.
A) Stock repurchases
B) Corporate controls
C) Leveraged buyouts
D) Stock splits
Q2) Venture capital (VC) funds commonly serve as advisers to the businesses in which they invest.
A)True
B)False
Q3) The largest organized exchange in the United States, listing the largest firms, is the
A) New York Stock Exchange.
B) American Stock Exchange.
C) Midwest Stock Exchange.
D) Pacific Stock Exchange.
Q4) Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Q1) A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from theexpected outcome. The stock's expected daily return is .2 percent. The lower boundary is
A) -1.45 percent.
B) -1.85 percent
C) 0 percent.
D) -1.65 percent.
Q2) If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are
A) weak-form efficient
B) semistrong-form efficient.
C) strong-form efficient.
D) B and C
E) none of the above
Q3) A stock portfolio has more volatility when its individual stock returns are uncorrelated.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Q1) Mark would like to purchase a stock priced at $70. Mark thinks he can sell the stock for $100 after one year. If Mark does not borrow any money from his brokerage firm, what is the estimatedreturn on the stock?
A) 30.00 percent
B) -42.86 percent
C) -30.00 percent
D) 42.86 percent
E) none of the above
Q2) Traders that engage in high frequency trading commonly close out their positions in:
A) one day.
B) one month
C) three months
D) one year
Q3) ____ may facilitate transactions on a stock exchange by executing stock transactions for their clients.
A) Board members
B) Capstone members
C) Floor brokers
D) None of the above
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Chapter 13: Financial Futures Markets
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Q1) ____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices.
A) Hedgers
B) Day traders
C) Position traders
D) None of the above
Q2) ___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.
A) Dynamic asset allocation
B) Cross-hedging
C) Index arbitrage
D) Net hedging
Q3) The prices of stock index futures
A) are always the same as the prices of the stocks representing the index.
B) are always a little above the prices of the stocks representing the index.
C) are always a little below the prices of the stocks representing the index.
D) none of the above
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Chapter 14: Options Markets
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Sample Questions
Q1) The sale of a call option on a stock the seller already owns is referred to as
A) a covered call.
B) a naked call.
C) call on futures.
D) futures on options.
Q2) Which of the following can normally be found in quotations for stock options provided by the financial media?
A) exercise price, expiration date, and implied volatility
B) exercise price, expiration date, and most recently quoted premium
C) expiration date, implied volatility, and trading volume
D) expiration date, most recently quoted premium, and implied volatility
Q3) Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.
A)True
B)False
Q4) The longer a call option's time to maturity, the lower the call option premium, other things being equal.
A)True
B)False
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Chapter 15: Swap Markets
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Q1) ____ swap provides the party making the floating-rate payments with a right to terminate the swap.
A) callable
B) extendable
C) plain vanilla
D) putable
E) none of the above
Q2) Which of the following is not a typical provision of an interest rate swap?
A) the notional principal value to which the interest rates are applied to determine the interest payments involved
B) the fixed interest rate
C) the formula and type of index used to determine the floating interest rate
D) the underwriter of the bond
E) All of the above are provisions of an interest rate swap.
Q3) An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Q1) Central bank intervention can be overwhelmed by market forces and may not always succeed in reversing exchange rate movements.
A)True
B)False
Q2) Currency futures contracts are standardized, whereas forward contracts are more flexible and can specify whatever amount and maturity date are desired.
A)True
B)False
Q3) The Bretton Woods era was the era
A) of free-floating exchange rates.
B) of floating rates without boundaries, but subject to government intervention.
C) in which governments maintained exchange rates within 1 percent of a specified rate.
D) in which exchange rates were maintained within 10 percent of a specified rate.
Q4) Financial institutions rarely use the forward market.
A)True
B)False
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Chapter 17: Commercial Bank Operations
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Q1) The operations, management, and regulation of a commercial bank are the same irrespective of the types of services offered.
A)True
B)False
Q2) A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, a minimum deposit of $100,000 or more, and a secondary market.
A) retail CD
B) negotiable CD
C) market CD
D) protective CD
Q3) When banks obtain funds in the federal funds market, the providers of the funds are A) other depository institutions.
B) nonfinancial corporations.
C) consumers.
D) the Federal Reserve.
Q4) A bank's sources of funds represent liabilities or equity of the bank.
A)True
B)False
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Chapter 18: Bank Regulation
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Q1) Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affectedby rising interest rates.
A)True
B)False
Q2) The Garn-St Germain Act of 1982
A) permitted depository institutions to offer money market deposit accounts.
B) prevented depository institutions from acquiring problem institutions across geographic boundaries.
C) required the Fed to explicitly charge depository institutions for its services.
D) allowed the Fed to provide check clearing to depository institutions at no charge.
Q3) The key reason for regulatory examinations (such as CAMELS ratings) is to A) rate past performance
B) detect problems of a bank in time to correct them.
C) check for embezzlement.
D) monitor reserve requirements.
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Chapter 19: Bank Management
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Q1) As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability.
A) higher; higher
B) lower; lower
C) higher; lower
D) lower; higher
Q2) The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses.
A) sale; increases
B) sale; reduces C) purchase; reduces
D) both A and C are correct
Q3) Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand.
A)True
B)False
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Chapter 20: Bank Performance
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Q1) Gross interest expenses of banks are normally higher in periods when market interest rates are higher
A)True
B)False
Q2) Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than the rates that larger banks charge on the loans they provide to large businesses.
A)True
B)False
Q3) ____ result(s) from a bank's sale of securities.
A) Noninterest income
B) Loan loss provision
C) Securities gains and losses
D) Noninterest expenses
E) none of the above
Q4) The loan loss provision should increase during periods when loan losses are more likely, such as during a recessionary period.
A)True
B)False
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Chapter 21: Thrift Operations
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Q1) The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk.
A) credit (default)
B) interest rate
C) liquidity
D) exchange rate
E) none of the above
Q2) Because credit unions ____ stock, they are technically owned by the ____.
A) issue; depositors
B) do not issue; depositors
C) issue; stockholders
D) do not issue; management
Q3) Credit unions obtain most of their funds from
A) issuing common stock.
B) retained earnings.
C) share deposits by members.
D) issuing long-term bonds.
Q4) Credit unions are unregulated as to the types of services they offer.
A)True
B)False
Page 23
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Chapter 22: Finance Company Operations
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Q1) If finance companies have liabilities that are more rate sensitive than their assets and want to reduce interest rate risk, they could
A) shorten their average asset life.
B) lengthen their average asset life.
C) shorten the maturity of debt that they issue.
D) make greater use of fixed-rate loans.
Q2) Finance companies are not subject to state regulations on intrastate business.
A)True
B)False
Q3) When a finance company purchases a firm's receivables at a discount and becomes responsible for processing and collecting the balances of these accounts, it acts as a
A) leasing agent.
B) lessor.
C) lessee.
D) factor.
Q4) Business finance companies focus on loans to very large businesses.
A)True B)False
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Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) If interest rates are expected to ________, mortgage real investment trusts (REITs)
A) decline; become less attractive
B) rise; become less attractive
C) rise; are not affected
D) decline; are not affected
Q2) Which of the following is not true with respect to venture capital funds?
A) They typically invest in young, growing firms that need equity funding but are not ready or willing to go public.
B) More than half of all VC investing is in businesses that are being created.
C) Venture capital funds tend to focus on technology firms, which have the potential for high returns but also exhibit a high level of risk.
D) Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail.
E) All of the above are correct with respect to venture capital funds.
Q3) A mutual fund's performance is usually unrelated to market conditions.
A)True
B)False
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Chapter 24: Securities Operations
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Q1) When a stock offering is based on a firm commitment, this means that the securities firm does not guarantee a price to the issuing corporation.
A)True
B)False
Q2) Unlike the standardized provisions of a publicly placed issue, the provisions of a privately placed bond issue can be tailored to the desires of the purchaser.
A)True
B)False
Q3) The Financial Reform Act created the Financial Stability Oversight Council, which is responsible for identifying risks to financial stability in the United States.
A)True
B)False
Q4) The compensation paid to securities firms for helping a firm raise funds is typically in the form of interest income.
A)True B)False
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Chapter 25: Insurance Operations
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Q1) Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
A)True
B)False
Q2) The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising premiums when interest rates decline is called: A) cyclical rate adjusting.
B) collateralizing premiums. C) cash flow underwriting.
D) reinsurance.
Q3) Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.
A) less; less B) more; more C) less; more D) none of the above
Q4) Group insurance policies are very popular for employers and employees. A)True B)False
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Chapter 26: Pension Fund Operations
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Q1) Pension funds managed by life insurance companies concentrate on A) common stock.
B) bonds and mortgages.
C) preferred stock.
D) money market instruments.
Q2) Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved.
A)True
B)False
Q3) To reduce interest rate risk, pension fund managers can
A) shift from variable-rate to fixed-rate bonds.
B) increase the average maturity on fixed-rate bonds.
C) sell bond futures contracts.
D) reduce the investment in money market securities.
Q4) Projective funding limits the manager's discretion, allowing only investments that match future payouts.
A)True
B)False
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