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1Copyright©2010PearsonEducationInc.PublishingasPrenticeHallFoundationsofFinancialMarketsandInstitutions,4e(Fabozzi/Modigliani/Jones)Chapter14SecondaryMarketsMultipleChoiceQuestions1FunctionofSecondaryMarkets1)Thekeydistinctionbetweenaprimarymarketandasecondarymarketisthat,inthesecondarymarket,________.A)fundsflowfromtheselleroftheassettothebuyer.B)theissueroftheassetreceivesfundsfromthebuyer.C)fundsflowfromthebuyeroftheassettotheseller.D)theexistingissuechangeshandsintheprimarymarket.Answer:CComment:Thekeydistinctionbetweenaprimarymarketandasecondarymarketisthat,inthesecondarymarket,theissueroftheassetdoesnotreceivefundsfromthebuyer.Rather,theexistingissuechangeshandsinthesecondarymarket,andfundsflowfromthebuyeroftheassettotheseller.Diff:2Topic:14.1FunctionofSecondaryMarketsObjective:14.1thedefinitionofasecondarymarket2)Withoutasecondarymarket,issuerswouldbeunableto________,ortheywouldhavetopayahigherrateofreturn,asinvestorswould________incompensationforexpectedilliquidityinthesecurities.A)sellnewsecurities;increasethediscountrateB)sellnewsecurities;decreasethediscountrateC)buynewsecurities;decreasethepriceD)sellnewsecurities;increasethepriceAnswer:ADiff:2Topic:14.1FunctionofSecondaryMarketsObjective:14.12theimplicationsofpricingefficiencyformarketparticipants2Copyright©2010PearsonEducationInc.PublishingasPrenticeHall3)Investorsinfinancialassetsreceive________.A)illiquidityfortheirassets.B)informationabouttheassets'fairorconsensusvalues.C)increasedthecostsofsearchingforlikelybuyersandsellersofassets.D)thedisadvantageofhighertransactioncosts.Answer:BComment:Investorsinfinancialassetsreceiveseveralbenefitsfromasecondarymarket.Suchamarketobviouslyoffersthemliquidityfortheirassetsaswellasinformationabouttheassets’fairorconsensusvalues.Furthermore,secondarymarketsbringtogethermanyinterestedpartiesandtherebyreducethecostsofsearchingforlikelybuyersandsellersofassets.Moreover,byaccommodatingmanytrades,secondarymarketskeepthecostoftransactionslow.Bykeepingthecostsofbothsearchingandtransactinglow,secondarymarketsencourageinvestorstopurchasefinancialassets.Diff:2Topic:14.1FunctionofSecondaryMarketsObjective:14.12theimplicationsofpricingefficiencyformarketparticipants2TradingLocations1)Oneindicationoftheusefulnessofsecondarymarketsisthattheyexistthroughout________.A)theUnitedStates.B)EuropeandAsia.C)eachstate.D)theworld.Answer:DDiff:1Topic:14.2TradingLocationsObjective:14.2theneedforsecondarymarketsforfinancialassets2)IntheUnitedStates,secondarytradingofcommonstockoccurs________.A)inanumberoftradinglocations.B)inDallas,Texas.C)ineachmajorcity.D)NoneoftheseAnswer:ADiff:1Topic:14.2TradingLocationsObjective:14.2theneedforsecondarymarketsforfinancialassets3Copyright©2010PearsonEducationInc.PublishingasPrenticeHall3)WhichofthebelowstatementsisTRUE?A)IntheUnitedStates,secondarysharesaretradedonmajornationalstockexchanges(thelargestofwhichistheAmericanStockExchange)andregionalstockexchanges.B)IntheUnitedStates,significanttradinginstocktakesplaceontheso-calledover-the-counterorOTCmarket,whichinvolvesspecificgeographicallocations.C)IntheUnitedStates,thedominantOTCmarketforstocksintheUnitedStatesistheNewYorkStockExchange.D)IntheUnitedStates,somebondsaretradedonexchanges,butmosttradinginbondsintheUnitedStatesandthroughouttheworldoccursintheOTCmarket.Answer:DComment:IntheUnitedStates,secondarytradingofcommonstockoccursinanumberoftradinglocations.Manysharesaretradedonmajornationalstockexchanges(thelargestofwhichistheNewYorkStockExchange)andregionalstockexchanges,whichareorganizedandsomewhatregulatedmarketsinspecificgeographicallocations.Additionalsignificanttradinginstocktakesplaceontheso-calledover-the-counterorOTCmarket,whichisageographicallydispersedgroupoftraderslinkedtooneanotherviatelecommunicationsystems.ThedominantOTCmarketforstocksintheUnitedStatesisNasdaq.Somebondsaretradedonexchanges,butmosttradinginbondsintheUnitedStatesandthroughouttheworldoccursintheOTCmarket.Diff:2Topic:14.2TradingLocationsObjective:14.2theneedforsecondarymarketsforfinancialassets3MarketStructures1)Inacontinuousmarket,pricesmayvary________.A)becauseofthebasicsituationofsupplyanddemand.B)aredetermineddiscontinuouslythroughoutthetradingday.C)aredeterminedcontinuouslythroughoutthetradingdayevenifbuyersandsellersarenotsubmittingorders.D)withthepatternofordersreachingthemarket.Answer:DComment:Manysecondarymarketsarecontinuous,whichmeansthatpricesaredeterminedcontinuouslythroughoutthetradingdayasbuyersandsellerssubmitorders.Forexample,giventheorderflowat10:00A.M.,themarketclearingpriceofastockonsomeorganizedstockexchangemaybe$70;at11:00A.M.ofthesametradingday,themarket-clearingpriceofthesamestock,butwithdifferentorderflows,maybe$70.75.Thus,inacontinuousmarket,pricesmayvarywiththepatternofordersreachingthemarketandnotbecauseofanychangeinthebasicsituationofsupplyanddemand.Diff:2Topic:14.3MarketStructuresObjective:14.3thedifferencebetweenacontinuousandacallmarket4Copyright©2010PearsonEducationInc.PublishingasPrenticeHall2)________,ordersaregroupedtogetherfors