Market Securities Quiz Prep

Question 1

What is the required rate of return composed of?

Answer 1

The investor evaluates the Required Rate of Return, which is the rate of return which compensates for the time, the rate of inflation, and the uncertainty of the return

Question 2

What are the risks associated with investments?

Answer 2

1. ) Business Risk
2. ) Financial Risk
3. ) Liquidity Risk
4. ) Exchange Rate Risk
5. ) Country Risk

Question 3

Business Risk

Answer 3

Uncertainty of income flows caused by the nature of a firm’s business

Question 4

Financial Risk

Answer 4

Uncertainty caused by the use of debt financing.

Question 5

Liquidity Risk

Answer 5

How long will it take to convert an investment into cash?

Question 6

Exchange Rate Risk

Answer 6

Uncertainty of return is introduced by acquiring securities denominated in a currency different from that of the investor.

Question 7

Country Risk

Answer 7

Political risk is the uncertainty of returns caused by the possibility of a major change in the political or economic environment in a country.

Question 8

The ability to sell an asset quickly at a fair price is associated with what risk?

Answer 8

Liquidity Risk

Question 9

The variability of operating earnings is associated with what risk?

Answer 9

Business Risk

Question 10

What are the components of the required rate of return?

Answer 10

The investor evaluates the Required Rate of Return, which is the rate of return which compensates for the time, the rate of inflation, and the uncertainty of the return

Question 11

How are corporations financed (or raise capital)?

Answer 11

Stocks
Preferred stocks
Bonds

Question 12

What is an initial public offering, and how is it implemented?

Answer 12

1.) First, there is an initial transaction.
The firm issues shares and sell them to investors through investment bankers. That is the primary market.

2.)Then, those shares are sold again in the secondary market, in which is exchanged over and over.

Question 13

What is the difference between the primary and secondary markets?

Answer 13

1.) The firm issues shares and sell them to investors through investment bankers.
It is the primary market.

2.)Then, after that those shares are sold again in the secondary market, in which is exchange over and over.

Question 14

Describe the financial cycle of a start-up.

Answer 14

Reference chart

Question 15

What are depositary institutions?

Answer 15

Financial entities that accept deposits.

Ex: Commercial banks, Savings and loans (S&L), Savings banks, Credit unions

Question 16

What are non-depository institutions?

Answer 16

Serves as an intermediary between savers and borrowers, but does not accept time deposits.

Ex: Insurance companies, Pension funds, Investment companies such as mutual funds, close-end funds, unit trust.
This part is investment analysis and also portfolio management.

Question 17

What are the role of investment banks?

Answer 17

Firms that want to issue stocks, preferred stocks or bonds don’t do it by themselves. They use investment banks to do the work for them.

1. ) They value the firm
2. ) They organize the advertisement of the selling of the securities
3. ) They organize the selling of securities on secondary markets such as the stock market or bond market.

Question 18

How does the government get funded?

Answer 18

To get funded, then it can:

A. Use taxes
B. Raise money through debt. It issues what we call Treasuries:
1.) Treasury bills (maturity less than 1 year)
2.) Treasury notes (maturity more than 1 year and less than 10 years)
3.)Treasury bonds (maturities more than 10 years)

Question 19

What is the role of a central bank?

Answer 19

It plays a role of last resort when panic is installed and severe crisis affect the good functioning of the banking system.

1. ) It establishes the monetary policy with the objective to stabilize the economy and prevent disruptive and aggravated business cycles.
2. ) The goal is to achieve full employment and stability of prices.

Question 20

How can a central bank intervene into the economy?

Answer 20

There are 3 ways a central bank can intervene into the economy:
1.) The central bank can buy or sell treasury bonds through what is called open market operations.
If it buys treasury bonds, it increases the amount of money into the financial system, so it lowers the federal fund rate which is the rate at which borrow and lend to each others, and it supposes to stimulate the economy.
If it sells treasury bonds, it retracts the amount of money into the financial system, so it increases the federal fund rate, and it supposes to slow down the economy.
2.) The central bank can change the discount rate, which is the rate at which the central bank lends money to banks.
By increasing the discount rate, it diminishes the capability for banks to lend and vice versa.
3.) The central bank can change the level of reserve required in banks. By increasing the level of reserve, it diminishes the capability for banks to lend, and vice versa.

Question 21

What is the difference between the money market and the capital market?

Answer 21

1. ) If the maturity of the security is less than one year, then it is in the money market. It includes mainly debt securities such as Treasury bills, commercial papers, banker’s acceptances, etc…
2. ) The other securities are in the capital market. It includes notes, bonds, equities, etc…

Question 22

What is a sovereign wealth fund?

Answer 22

They are state own investment funds. They are a vehicle that allow foreign states to invest in real assets and financial assets such as bonds, stocks, real estate, derivatives, etc… and even in private equity firms or hedge funds. Their money, for examples US dollars may come from: commodity export (such as for Norway, Saudi Arabia…) or a Trade surplus (such as China…)