chapter 14 Flashcards
discuss the importance of security markets for both the corporation and the shareholder or bondholder
14-8. First, they enable corporations to raise funds by selling new issues of securities rapidly and at fair competitive prices for reinvestment in real assets. Second, they allow the investor who purchases securities to sell them with relative ease and speed and thereby to turn a paper asset into cash (they provide liquidity). Third, the market allocates capital to the most efficient users (some would argue that governments get allocated capital regardless of efficiency) and as such provide a barometer as to which companies are managing their assets best. Price will reflect that judgment.
what is the difference between organized exchanges and over the counter markets
14-9. The organized exchanges have one central location and operate as auction markets. The over-the-counter markets have no central location; instead a network of dealers all over the country is linked by computer display terminals, telephones, and teletypes.
how would you define efficient securities markets
14-11. Markets that: (1) are liquid, (2) have prices that react quickly to new information and (3) have prices that to a great extent reflect all available information. (NPV = 0). Proper compensation for risk assumed.
the efficient market hypothesis is interpreted in a weak form a semistrong form and a strong form. how can we differentiate its various forms
14-12. The weak form of efficient markets simply states that past price information is unrelated to future prices and that since no trends are predictable, investors cannot take advantage of them. The semi-strong form states that prices reflect all public information, while the strong form states that all information, both public and private, is reflected in the stock prices.
discuss the characteristics that would make a market efficient
14-14. Discussion could center on the number of buyers and sellers, liquidity, degree of analysis, newspaper reporting, securities regulation, minimal transaction costs, and perceptions of a fair game by investors. Anything that aids information flow and its reflection in share prices.
