SU3: Financial Markets

Question 1

Advantages of going public include

Answer 1

The ability to raise additional funds
The establishment of the firm’s value in the market
An increase in The liquidity of The firm’s stock

Question 2

Disadvantages of going public include

Answer 2

Costs of the reporting requirements of the SEC and other agencies
Access to the company’s operating data by competing firms
Access to net worth information of major shareholders
Limitations on self-dealing by corporate insiders, such as officers and major shareholders
Pressure from outside shareholders for earnings growth
Stock prices that do not accurately reflect the true net worth of the company
Loss of control by management as ownership is diversified
Need for improved management control as operations expand
Increased shareholder servicing costs

Question 3

Return

Answer 3

Amount received - amount invested

Question 4

Rate of Return

Answer 4

Return on investment / amount invested

Question 5

Systematic Risk is also known as

Answer 5

Market risk

Question 6

Market risk is

Answer 6

the rist faced by all firms

Question 7

Unsystematic risk is also known as

Answer 7

nonmarket or company risk CANNOT be offset by portfolio diversification

Question 8

Unsystematic risk defined

Answer 8

the risk inherent in a particular investment security

Question 9

Credit risk

Answer 9

the risk that an issuer of a debt security will default

Question 10

Foreign exchange risk

Answer 10

the risk that a foreign currency transaction will be affected by fluctuations in exchange rates

Question 11

Interest rate risk

Answer 11

the risk that an ivnestment security will fluctuate in value due to changes in interest rates

Question 12

Industry risk

Answer 12

risk that a change will affect securities issued by firms in a particular industry

Question 13

Political risk

Answer 13

is the probability of loss caused by such government actions as expropriation of assets or changes in laws

Question 14

Liquidity risk

Answer 14

is the risk that a security cannot be sold on short notice for its market value

Question 15

Financial risk

Answer 15

is the risk of an adverse outcome based on a change in the financial markets, such as changes in interest rates or changes in investors’ desired rates of return

Question 16

Purchasing power risk

Answer 16

is the risk that a general rise in the price level will reduce the quantity of goods that can be purchased with a fixed sum of money

Question 17

The systematic risk of an individual security is measured by the

Answer 17

Covariance between the securitys returns and the general market

Question 18

Stated Rate

Answer 18

What the bond will pay

Question 19

Market Rate

Answer 19

Current market rate

Question 20

Conversion Ratio

Answer 20

Par Value of Convertible Bond / Conversion Price

Question 21

The efficient markets hypothesis states that it is impossible to obtain abnormal returns consistently with either or analysis

Answer 21

Technical, Fundamental

Question 22

The term “underwriting spread” refers to the

Answer 22

Difference between the price the investment banker pays for a new security issue and the price at which the securities are resold.

Question 23

Describe the efficient market hypothesis

Answer 23

The expected return of each security is equal to the return required by the marginal investor given the risk of the security

Question 24

Define Fundamental Analysis

Answer 24

is a method of evaluating securities by attempting to measure the intrinsic value of a stock

Question 25

Define Technical Analysis

Answer 25

differs from fundamental analysis in that the stock’s price and volume are the only inputs

Question 26

Strong form (efficient market)

Answer 26

All public and private information is reflected in sales price. Insider trading cannot assume abnormal returns.

Question 27

Semistrong form (efficient market)

Answer 27

All public data are reflected in sales price, but insider/private information is not. Insider trading can result in abnormal returns.

Question 28

Weak form (efficient market)

Answer 28

Current securities prices only reflect past price movement data, technical analsys will not provide a basis for abnormal returns.

Question 29

What transaction involes a large number of new shares issued to replace all outstanding shares?

Answer 29

Stock split

Question 30

Where do bond issue costs show on the financial statements?

Answer 30

Direct deductions from the face amount of the debt.

Question 31

Debentures are

Answer 31

bonds secured by the full faith and credit of the issuing firm - unsecured.

Question 32

The par value of common stock represents

Answer 32

The liability ceiling of a shareholder when a company undergoes bankruptcy proceedings.

Question 33

The financial markets that trade debt securities with maturities of less than 1 year and are dealer-driven are

Answer 33

Money Markets