Financial Market Environment

Question 1

This is a type of financial market?

Answer 1

Capital markets, money markets, and derivative markets are all types of financial markets.

Question 2

A company needs funds to expand its business by purchasing new equipment. Which financial market should the company use to raise money?

Answer 2

Capital markets are used to finance long-term projects.

Question 3

Financial markets can address which problem faced by a company’s management?

Answer 3

Information asymmetry

Question 4

According to the Insider Trading Act of 1988, the SEC is allowed to order a penalty of up to how much of the profit of the guilty parties?

Answer 4

The act allows the SEC to order a penalty of up to three times the profit.

Question 5

Which regulation’s primary purpose is to ensure that buyers of securities receive complete and accurate information before they invest?

Answer 5

The Securities Act of 1933

Question 6

Which statement does not accurately describe the Sarbanes-Oxley Act of 2002?

Answer 6

This act was amended by the Maloney Act, which authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.

Question 7

Market oscillation is a result of

Answer 7

the flow of positive/negative information.

Question 8

The Securities Exchange Act of 1934 is

Answer 8

a law governing the secondary trading of securities, financial markets and their participants.

Question 9

A financial market is an

Answer 9

aggregate of possible buyers and sellers of financial securities, commodities, and other fungible items, as well as the transactions between them.

Question 10

The term “financial markets” is often used to refer

Answer 10

solely to the markets that are used to raise finance: for long-term finance, capital markets are used; for short-term finance (maturity up to one year), money markets are used.

Question 11

Stock markets and bond markets are two types of capital markets that provide

Answer 11

financing through the issuing of shares of stock or the issuing of bonds, respectively.

Question 12

A key division within the capital markets is between the

Answer 12

primary markets and secondary markets.

Question 13

While capital markets and money markets constitute the narrower definition of financial markets, other markets, such as derivatives and currency markets, are often

Answer 13

included in the more general sense of the word.

Question 14

Derivative is…

Answer 14

a financial instrument whose value depends on the valuation of an underlying asset; such as a warrant, an option, etc.

Question 15

Maturity is…

Answer 15

date when payment is due.

Question 16

Capital is…

Answer 16

money and wealth; the means to acquire goods and services, especially in a non-barter system.

Question 17

Fungible is…

Answer 17

able to be substituted for something of equal value or utility; interchangeable, exchangeable, replaceable.

Question 18

A financial market is an aggregate of

Answer 18

possible buyers and sellers of financial securities, commodities, and other fungible items, as well as the transactions between them.

Question 19

Examples of financial markets include

Answer 19

capital markets, derivative markets, money markets, and currency markets.

Question 20

For long-term finance, what markets are used

Answer 20

capital markets

Question 21

For short-term finance (maturity up to one year), what markets are used

Answer 21

money markets

Question 22

For short-term finance (maturity up to one year), what markets are used

Answer 22

money markets

Question 23

A key division within the capital markets is between the

Answer 23

primary markets and secondary markets.

Question 24

Newly formed (issued) securities are bought or sold in

Answer 24

primary markets, such as during initial public offerings.

Question 25

Secondary markets are for the secondary trade of securities, providing a

Answer 25

continuous and regular market for the buying and selling of securities.

Question 26

The derivatives market is the financial market for derivatives–financial instruments like

Answer 26

futures contracts or options–which are derived from other forms of assets.

Question 27

Currency markets, enabled by foreign exchange (or forex) markets enable

Answer 27

currency conversion and determine the relative value of world currencies.

Question 28

One of the main functions of financial markets is to

Answer 28

allocate capital, matching those who have capital to those who need it.

Question 29

Capital markets especially facilitate the

Answer 29

raising of capital

Question 30

money markets facilitate the

Answer 30

transfer of liquidity

Question 31

Exchange is…

Answer 31

a place for conducting trading.

Question 32

Capital is…

Answer 32

money and wealth; the means to acquire goods and services, especially in a non-barter system.

Question 33

Liquidity is…

Answer 33

availability of cash over short term; ability to service short-term debt.

Question 34

One of the main functions of financial markets is to

Answer 34

allocate capital

Question 35

Financial markets can provide feedback to management by

Answer 35

showing signals of the demand to supply funds to that enterprise.

Question 36

the price discovery process is when…

Answer 36

Financial markets provide a sign for the allocation of funds in the economy based on the demand and supply

Question 37

The Securities Act of 1933

Answer 37

ensures investors receive complete and accurate information before they invest.

Question 38

The Securities Act of 1933’s objectives are to

Answer 38

provide investors with material financial and other corporate information about issuers of public securities.

Question 39

Among other things, registration forms call for:

Answer 39

a description of the securities to be offered for sale; information about the management of the issuer; information about the securities (if other than common stock); and financial statements certified by independent accountants.

Question 40

Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited circumstances,

Answer 40

the sale of restricted and controlled securities without registration.

Question 41

Regulation S is a

Answer 41

“safe harbor” that defines when an offering of securities is deemed to be executed in another country and therefore not be subject to the registration requirement under section 5 of the 1933 Act.

Question 42

Private placements: Private placement (or non-public offering) is

Answer 42

a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.

Question 43

The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a

Answer 43

federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States.

Question 44

The Securities Act of 1933 (also known as the ‘33 Act) is essentially a consumer protection law for

Answer 44

“retail” investors (i.e., not money managers, foundations, pensions, etc.)

Question 45

Many transactions are exempt from regulation under the Securities Act. Section 4 of the Act limits its application to public offerings (according to SEC guidelines, more than 25 offerees) by issuers and their underwriters (i.e., investment banks). This means that the Act primarily applies to companies offering securities to the public, and not to

Answer 45

transactions between investors or to sales of stock to small groups of investors (i.e., private placements.)

Question 46

Among other things, registration forms call for

Answer 46

a description of the securities to be offered for sale
information about the management of the issuer
information about the securities (if other than common stock)
financial statements certified by independent accountants

Question 47

For public offerings, the main requirement of the Securities Act is

Answer 47

registration

Question 48

Rule 144, promulgated by the SEC under the 1933 Act, permits (under limited circumstances)

Answer 48

the sale of restricted and controlled securities without registration.

Question 49

The amount of securities sold during any subsequent three-month period generally does not exceed any of the following limitations:

Answer 49

1% of the stock outstanding
the average weekly reported volume of trading in the securities on all national securities exchanges for the preceding four weeks
the average weekly volume of trading of the securities reported through the consolidated transactions reporting system (NASDAQ)
Notice of resale is provided to the SEC if the amount of securities sold in reliance on Rule 144 in any three-month period exceeds 5,000 shares or if they have an aggregate sales price in excess of $50,000. After one year, Rule 144(k) allows for the permanent removal of the restriction except as to ‘insiders’.
In cases of mergers, buyouts, or takeovers, owners of securities who had previously filed Form 144 and still wish to sell restricted and controlled securities must refile Form 144 once the merger, buyout, or takeover has been completed.

Question 50

The Securities Exchange Act of 1934 is a

Answer 50

law governing the secondary trading of securities, financial markets and their participants.

Question 51

One area subject to 34 Act regulation is the actual securities exchange:

Answer 51

the New York Stock Exchange, the American Stock Exchange, and regional exchanges like the Cincinnati Stock Exchange, Philadelphia Stock Exchange and Pacific Stock Exchange.

Question 52

The ‘34 Act also regulates

Answer 52

broker-dealers without a status for trading securities. A telecommunications infrastructure was developed to provide for trading without a physical location.

Question 53

In 1938 the Exchange Act was amended by the

Answer 53

Maloney Act, which authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.

Question 54

The Maloney Act

Answer 54

authorized the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC.

Question 55

The alternative trading system, or ATS, is a

Answer 55

quasi-exchange where stocks are commonly purchased and sold through a smaller, private network of brokers, dealers, and other market participants.

Question 56

NASDAQ is

Answer 56

the National Association of Securities Dealers Automated Quotations; this is an electronic stock market.

Question 57

The Securities Exchange Act of 1934 is also called…

Answer 57

the Exchange Act, ‘34 Act, or Act of ‘34

Question 58

In contrast with the Securities Act of 1933, which regulates these original issues, the Securities Exchange Act of 1934 regulates

Answer 58

the secondary trading of those securities between persons often unrelated to the issuer, in most cases through brokers or dealers. Trillions of dollars are made and lost each year through trading in the secondary market.

Question 59

In 1938, the Exchange Act was amended by the Maloney Act, which authorized

Answer 59

the formation and registration of national securities associations to supervise the conduct of their members subject to the oversight of the SEC. That amendment led to the creation of the National Association of Securities Dealers, Inc.—the NASD, which is a Self-Regulatory Organization (or SRO). The NASD had primary responsibility for the oversight of brokers and brokerage firms, and later, the NASDAQ stock market.

Question 60

ATS acts as a niche market, a private pool of liquidity. Reg ATS, an SEC regulation issued in the late 1990s, requires these small markets to

Answer 60

1) register as a broker with the NASD, 2) register as an exchange, or 3) operate as an unregulated ATS, staying under low trading caps.

Question 61

The Sarbanes–Oxley Act is to

Answer 61

set new or enhanced standards for all U.S. public company boards, management, and public accounting firms.

Question 62

As a result of SOX, top management must now

Answer 62

individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe.

Question 63

Off-balance sheet (OBS), or Incognito Leverage, usually means

Answer 63

an asset or debt or financing activity not on the company’s balance sheet.

Question 64

The Sarbanes-Oxley Act of 2002 is a federal law that set new or enhanced standards for all public company boards, management, and public accounting firms in the United States. It is also known as the

Answer 64

Public Company Accounting Reform and Investor Protection Act (in the Senate) and Corporate and Auditing Accountability and Responsibility Act (in the House) and more commonly called Sarbanes-Oxley, Sarbox or SOX.