Equity - Rd 44 (Market Org & Structure)

Question 1

(Basic) Which type of financial intermediary is a corporation most likely to use if it wants to issue new common stock to investors?

A) Block broker.
B) Investment bank.
C) Securitizer.

Answer 1

B
Investment banks are financial intermediaries through which corporations and other entities issue new securities to investors.
C - Securitizers create pools of securities or loans and sell interests in these pools to investors.
A - Block brokers are typically used to execute large trades in the secondary market.

Question 2

_____, _____, and alternative trading systems connect buyers and sellers of the same security at the same location and time. They provide a centralized location for trading.

Answer 2

Brokers, exchanges

Question 3

_____ match buyers and sellers of the same security at different points in time.

Answer 3

Dealers

Question 4

_____ connect buyers and sellers of the same security at the same time but in different venues. They also connect buyers and sellers of non-identical securities of similar risk.

Answer 4

Arbitrageurs

Question 5

______ and _____ package assets into a diversified pool and sell interests in it. Investors obtain greater liquidity and choose their desired risk level.

Answer 5

Securitizers and depository institutions

Question 6

_______ create a diversified pool of risks and manage the risk inherent in providing insurance.
Clearinghouses reduce counterparty risk and promote market integrity.

Answer 6

Insurance companies

Question 7

Brokers, exchanges, and alternative trading systems ____ at the same location and time. They provide ____ for trading.

Answer 7

connect buyers and sellers of the same security;

a centralized location

Question 8

Dealers match buyers and sellers of ____ at ____ time.

Answer 8

the same security; different points in

Question 9

Insurance companies create a _____ pool of risks and manage the risk inherent in providing insurance.

Answer 9

diversified

Question 10

Arbitrageurs connect buyers and sellers of the same ____ at the ____ time in ____ venues. They also connect buyers and sellers of _____ securities of ____ risk.

Answer 10

security; same; different

non-identical; similar

Question 11

Securitizers and depository institutions package assets into a ____ and sell interests in it. Investors obtain ____ liquidity and choose ____ risk level.

Answer 11

diversified pool; greater; their desired

Question 12

Clearinghouses reduce _____ risk and promote _____

Answer 12

counterparty; market integrity.

Question 13

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

A) Continuous markets are markets where trades occur 24 hours per day.
B) Setting a negotiated price to clear the market is a method used to set the closing price in major continuous markets.
C) Call markets are markets in which the stock is only traded at specific times.

Answer 13

C
A - 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).
B - Setting one negotiated price is a method used in major continuous markets to set the opening price.

Question 14

There are three main categories of securities markets:

Answer 14

Quote-driven markets
Order-driven markets
Brokered markets

Question 15

In ___ markets, securities are only traded at specific times. In _____ markets, trades occur at any time the market is open.

Answer 15

call; continuous

Question 16

_____ markets: Investors trade with dealers that maintain inventories of securities, currencies, or contracts.

Answer 16

Quote-driven

Question 17

Brokered markets: Brokers locate a _____ to ____

Answer 17

counterparty; take the other side of a buy or sell order.

Question 18

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

A) quote-driven market.
B) order-driven market.
C) brokered market.

Answer 18

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

Question 19

Quote-driven markets: Investors trade with dealers that _____

Answer 19

maintain inventories of securities, currencies, or contracts.

Question 20

Order-driven markets: _____ and ____ are used to match the orders of buyers and sellers.

Answer 20

Order-matching and trade-pricing rules

This system most likely matches buyers and sellers based on price and time precedence

Question 21

(Advanced) Which of the following is most likely an objective of market regulation?

A) Preserve or increase liquidity.
B) Educate unsophisticated investors.
C) Limit downside risk to investors.

Answer 21

A
Rules against insider trading and enforcement of laws regarding fraud and theft by corporate managers are intended to preserve trust in the markets of public investors. Trust in markets increases participation and, thereby, liquidity of markets.
C - While clear and honest disclosure and fraud prevention are goals, limiting the downside risk of equities markets is not a likely objective of financial regulation.
B - Neither is the education of unsophisticated investors.

Question 22

____ markets: Brokers locate a counterparty to take the other side of a buy or sell order.

Answer 22

Brokered

Question 23

____ markets: Order-matching and trade-pricing rules are used to match the orders of buyers and sellers.

Answer 23

Order-driven

Question 24

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

A) Prices adjust quickly when new information becomes available.
B) Prices change significantly from one transaction to the next.
C) Reliable information is available on price and volume.

Answer 24

B
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.

Question 25

(Intermediate) Which of the following statements regarding margin accounts is most accurate?

A) Maintenance margin refers to the amount of funds the investor can borrow.
B) Margin accounts can be used to purchase securities by borrowing part of the purchase price.
C) The total equity in the margin account cannot fall below the initial margin requirement.

Answer 25

B

Margin accounts are brokerage accounts that allow investors to borrow part of the purchase price from the broker.