Part 1
1. Which of the following statements is CORRECT?
The New York Stock Exchange is an auction market with a physical location.
Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.
If an investor sells shares of stock through a broker, then this would be a primary market transaction.
Consumer automobile loans are evidenced by legal documents called “promissory notes,” and these individual notes are traded in the money market.
While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
2. Which of the following statements is CORRECT?
It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
Corporate shareholders are exposed to unlimited liability.
Corporations generally face fewer regulations than sole proprietorships.
Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.
3. Which of the following statements is CORRECT?
While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
A security whose value is derived from the price of some other “underlying” asset is called a liquid security.
Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
Money markets are markets for common stocks and long-term debt.
The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.
4. Which of the following statements is CORRECT?
Capital market instruments include both long-term debt and common stocks.
An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.
If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
5. Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?
Corporations generally find it relatively difficult to raise large amounts of capital.
Less of a corporation’s income is generally subjected to taxes than would be true if the firm were a partnership.
Corporate shareholders escape liability for the firm’s debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
Corporate investors are exposed to unlimited liability.
Corporations generally face relatively few regulations.