Chapter 6

The Structure and Performance of Securities Markets

D2Interpretive
1. In financial markets, actual market prices sometimes diverge from the equilibrium price because A) supply is often greater than demand. B) demand is often greater than supply. C) supply is equal to demand. ) of geographical and temporal fragmentation. Ans!er"

D1Factual
#. $he three main types of securities market organi%ation are A) primary, secondary, and tertiary markets. B) stock, money, and bond markets. C) public, private, and government markets. ) auction, dealer, and brokered markets. Ans!er"

D2Factual
&. $he type of market in !hich there is direct interaction bet!een buyers and sellers is a'n) A) brokered market. B) auction market. C) dealer market. ) primary market. Ans!er" B

D2Factual
(. )n the *e! +ork ,tock -.change, the specialist at a /post0 acts as a'n) A) broker. B) auctioneer. C) dealer. ) under!riter. Ans!er" B

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641itter2,ilber23dell Money, Banking, and Financial Markets , -leventh -dition

D1Factual
4. $he best kno!n financial auction market is the A) *e! +ork ,tock -.change. B) American ,tock -.change. C) 5acific ,tock -.change. ) *asdaq. Ans!er" A

D2Factual
6. $he *e! +ork ,tock -.change is an auction market in !hich the role of auctioneers is played by A) brokers. B) traders. C) specialists. ) agents. Ans!er" C

D2Factual
7. 888888888888888888 are the best e.ample of securities that trade primarily in a brokered market. A) Common stocks B) Corporate bonds C) 9unicipal bonds ) Certificates of deposit Ans!er" C

D1Factual
:. An individual !ho continuously bids for securities that investors !ant to sell and offers securities that investors !ant to buy is kno!n as a'n) A) dealer. B) auctioneer. C) broker. ) under!riter. Ans!er" A

D1Factual
;. $he over<the<counter ')$C) market is an e.ample of a'n) A) dealer market. B) brokered market. C) auction market. ) equilibrium market. Ans!er" A

Chapter 6$he ,tructure and 5erformance of ,ecurities 9arkets 65

D2Factual
1=. An individual !ho arranges for buyers and sellers to e.change securities and earns a commission in return is a A) dealer. B) auctioneer. C) broker. ) under!riter. Ans!er" C

D2Factual
11. $he effectiveness !ith !hich markets bring buyers and sellers together is called A) pricing efficiency. B) operating efficiency. C) the theory of efficient markets. ) bid<asked spread efficiency. Ans!er" B

D1Interpretive
1#. $he greater the number of buyers and sellers !ith access to securities markets, the A) higher the true equilibrium price !ill be. B) higher the yields on securities !ill be. C) lo!er the yields on securities !ill be. ) closer securities prices !ill be to the true equilibrium price. Ans!er"

D1Factual
1&. A security !ith a high degree of marketability sells at a price that is A) highly volatile. B) unpredictable. C) lo!er than other securities. ) higher than the equilibrium price of less marketable securities. Ans!er"

D1Factual
1(. *e!ly issued stocks and bonds are bought and sold in A) primary markets. B) auction markets. C) futures markets. ) commodity markets. Ans!er" A

661itter2,ilber23dell Money, Banking, and Financial Markets , -leventh -dition

D1Interpretive
14. >hen an investment bank guarantees an issuer of ne! securities a certain price it is acting as a'n) A) auctioneer. B) under!riter. C) broker. ) dealer. Ans!er" B

D2Factual
16. In return for their services in the primary securities market, investment banks earn a fee called a'n) A) under!riting spread. B) bid<asked spread. C) dealer?s spread. ) broker?s spread. Ans!er" A

D3Interpretive
17. >hich of the follo!ing is not true !ith respect to under!riting@ A) Announcements of successful under!ritings are called tombstones. B) )ften a number of investments banks band together in a syndicate to market a ne! issue. C) 3nder!ritings of ne! issues take place on the floor of the *e! +ork ,tock -.change. ) $he investment bank typically guarantees an issuer of securities a price on the ne! issue. Ans!er" C

D1Factual
1:. >hen investment bankers under!rite ne! stock, they A) sell them on one of the stock e.changes. B) auction them off to the public. C) sell them to commercial banks !ho in turn find buyers. ) place them !ith ultimate investors and some intermediaries throughout the country. Ans!er"

D1Interpretive
1;. $he spread bet!een the bid price and the offer price is a measure of A) the under!ritersA spread. B) brokersA fees. C) liquidity costs. ) sunk costs. Ans!er" C

Chapter 6$he ,tructure and 5erformance of ,ecurities 9arkets 67

D2Factual
#=. $he Bondon gold fi.ing is an e.ample of a'n) A) dealer market. B) auction market. C) brokered market. ) secondary market. Ans!er" B

D2Factual
#1. A key difference bet!een a >alrasian market and most auction markets is that in most auction markets A) transactions occur continuously. B) bid prices e.ceed offer prices. C) only dealers have complete information. ) offer prices e.ceed bid prices. Ans!er" A

D2Applied
##. Cigh transactions costs are reflected in A) !ide bid<asked spreads. B) narro! bid<asked spreads. C) high equilibrium prices. ) lo! equilibrium prices. Ans!er" A

D2Applied
#&. A narro! bid<asked spread indicates that a security has A) small price fluctuations. B) high liquidity costs. C) lo! transaction volume. ) a thin market. Ans!er" A

D2Applied
#(. A narro! bid<asked spread on a security can be e.pected if A) price fluctuations are large. B) liquidity costs are high. C) transactions volume is large. ) the market is thin. Ans!er" C

D2Applied
#4. >hich of the follo!ing is likely to have the !idest bid<asked spread@ A) A 3., $reasury bill B) A 3.,. $reasury note C) A 3.,. $reasury bond ) A municipal bond Ans!er"

681itter2,ilber23dell Money, Banking, and Financial Markets , -leventh -dition

D2Interpretive
#6. $he 888888888888888888 market liquidity is, the 888888888888888888 the bid<asked spread !ill be. A) higherD !ider B) lo!erD narro!er C) higherD narro!er ) *one of the above Ans!er" C

D3Applied
#7. >hich of the follo!ing is likely to have the narro!est bid<asked spread@ A) A 3.,. $reasury note B) A 3.,. $reasury bill C) A 3.,. $reasury bond ) A Eannie 9ae bond Ans!er" B

D2Applied
#:. Compared !ith a 3.,. $reasury note, a corporate bond is likely to have a A) !ider bid<asked spread. B) narro!er bid<asked spread. C) higher bid price. ) higher asked price. Ans!er" A

D2Interpretive
#;. $he bid<asked spread is likely to be greater on securities that are A) issued in larger denominations. B) have lo! market risk. C) less liquid. ) traded in a deep market. Ans!er" C

D2Factual
&=. If it is easy to uncover buy and sell orders above and belo! current transactions prices, a market is said to A) be primary. B) lack breadth. C) be deep. ) be resilient. Ans!er" C

Chapter 6$he ,tructure and 5erformance of ,ecurities 9arkets 69

D2Factual
&1. A resilient market is one in !hich A) !ide price s!ings occur !hen orders decline. B) volume picks up quickly !hen prices change. C) bid<asked spreads are large. ) volume is large. Ans!er" B

D2Factual
&#. If orders e.ist in large volume, then the market has A) depth. B) breadth. C) resiliency. ) *one of the above Ans!er" B

D1Factual
&&. If only a small volume of trading can be absorbed !ithout producing !ide price s!ings, a market is A) liquid. B) thin. C) broad. ) resilient. Ans!er" B

D2Factual
&(. A market in !hich orders e.ist in large volume is said to have A) depth. B) breadth. C) resiliency. ) efficiency. Ans!er" B

D2Interpretive
&4. A characteristic of an efficient market is that A) prices are equal for all securities. B) bid<asked spreads are large. C) prices reflect all available information. ) all investors receive a positive rate of return. Ans!er" C

D2Factual
&6. $he reason computers have not yet replaced trading floors can be attributed to A) lack of sellers. B) lack of buyers. C) lack of liquidity. ) lack of technology. Ans!er" C

701itter2,ilber23dell Money, Banking, and Financial Markets , -leventh -dition

D2Factual
&7. If all information is reflected in current prices, the market is A) resilient. B) deep. C) primary. ) efficient. Ans!er"

D1Factual
&:. -nsuring that all information relevant for the pricing of securities is available to the public is the responsibility of the A) Eederal 1eserve. B) ,ecurities and -.change Commission. C) *e! +ork ,tock -.change. ) Eederal eposit Insurance Corporation. Ans!er" B

D2Interpretive
&;. An important implication of the idea that markets are efficient is that A) an investor can make money by buying undervalued stocks and selling overvalued ones. B) the price of a share immediately incorporates ne! publicly available information that affects its value. C) dealers can ignore some ne! information on a share that affects its value. ) an investor can make above average returns in the stock market by doing careful research of public information about selected stocks. Ans!er" B

D2Applied
(=. According to academic research, securities prices reflect ne! information A) !ithin a fe! minutes. B) !ithin a day. C) !ithin a !eek. ) !ithin a month. Ans!er" B