Chapter 14 Discussion Questions 14-1 In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets? The federal government, government agencies, and state and local governments 14-2. Are federally sponsored cred it agency issues directly backed by the U.s Federally sponsored credit agency issues are not directly backed by the U.s 14-3 What is a key tax characteristic associated with state and local(municipal) They are tax exempt, meaning the interest on them is normally exempt from federal income taxes and from state income taxes in the state of issue 14-4 What are three forms of corporate securities discussed in the chapter? Corporate bonds, preferred stock, and common stock are the three forms of corporate securities discussed in the chapter 14-5 Do corporations rely more on external or internal funds as sources of financing? Corporations rely more heavily on external funds as sources of financing. Sixty percent of corporate funds came from external sources during the time period nder study 14-6 Explain the role of financial intermediaries in the flow of funds through the three-sector economy In a three-sector economy consisting of business, households, and government financial intermed iaries such as commercial banks mutual saving banks insurance companies, mutual funds, pension funds, and credit unions provide the mechanism for reallocating funds from one surplus sector to a deficit sector These institutions ind irectly invest excess funds in areas of the economy where S-521 Copyright C2005 by The McGraw-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-521 Chapter 14 Discussion Questions 14-1. In addition to U.S. corporations, what government groups compete for funds in the U.S. capital markets? The federal government, government agencies, and state and local governments all compete for funds. 14-2. Are federally sponsored credit agency issues directly backed by the U.S. Treasury? Federally sponsored credit agency issues are not directly backed by the U.S. Treasury. 14-3. What is a key tax characteristic associated with state and local (municipal) securities? They are tax exempt, meaning the interest on them is normally exempt from federal income taxes and from state income taxes in the state of issue. 14-4. What are three forms of corporate securities discussed in the chapter? Corporate bonds, preferred stock, and common stock are the three forms of corporate securities discussed in the chapter. 14-5. Do corporations rely more on external or internal funds as sources of financing? Corporations rely more heavily on external funds as sources of financing. Sixty percent of corporate funds came from external sources during the time period under study. 14-6. Explain the role of financial intermediaries in the flow of funds through the three-sector economy. In a three-sector economy consisting of business, households, and government, financial intermediaries such as commercial banks, mutual saving banks, insurance companies, mutual funds, pension funds, and credit unions provide the mechanism for reallocating funds from one surplus sector to a deficit sector. These institutions indirectly invest excess funds in areas of the economy where funds are needed
In what two ways do security markets provide liquid ity? First, they enable corporations to raise funds by selling new issues of securities rapidly and at fair competitive prices. Second, they allow the investor who purchases securities to sell them with relative ease and speed and thereby to turn a paper asset into cash 14-8 What is the difference between organized exchanges and over-the-counter markets? The organized exchanges have one central location and operate as auction markets. The over-the-counter markets have no central location: instead a network of dealers all over the country is linked by computer d isplay terminals telephones, and teletypes What is the difference between dealers on the over-the-counter(OTC) markets and brokers on the exchanges? The difference between dealers in the otc markets and brokers on exchanges is that dealers own the securities they trade while brokers act as agents for the buyers and sellers 14-10 How would you define efficient security markets? Markets are efficient when(1)prices adjust rapidly to new information;(2 there is a continuous market, in which each successive trade is made at a price close to the previous price; and (3)the market can absorb large dollar amounts of securities without destabilizing the price 14-11 The efficient market hypothesis is interpreted in a weak form, a semistrong form, and a strong form. How can we differentiate its various forms? The weak form of efficient markets simply states that past price information is unrelated to future prices and that since no trends are predictable, investors cannot take advantage of them. The semi-strong form states that prices reflect ll public information, while the strong form states that all information, both public and private, is reflected in the stock prices 14-12 What was the primary purpose of the Securities Act of 1933? The primary purpose of the Securities Act of 1933 was to provide full disclosure of all pertinent information whenever a corporation sold anew issue of securities CopyrightC 2005 by The McGray-Hill Companies, Inc. S-522
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-522 14-7. In what two ways do security markets provide liquidity? First, they enable corporations to raise funds by selling new issues of securities rapidly and at fair competitive prices. Second, they allow the investor who purchases securities to sell them with relative ease and speed and thereby to turn a paper asset into cash. 14-8. What is the difference between organized exchanges and over-the-counter markets? The organized exchanges have one central location and operate as auction markets. The over-the-counter markets have no central location; instead a network of dealers all over the country is linked by computer display terminals, telephones, and teletypes. 14-9. What is the difference between dealers on the over-the-counter (OTC) markets and brokers on the exchanges? The difference between dealers in the OTC markets and brokers on exchanges is that dealers own the securities they trade, while brokers act as agents for the buyers and sellers. 14-10. How would you define efficient security markets? Markets are efficient when (1) prices adjust rapidly to new information; (2) there is a continuous market, in which each successive trade is made at a price close to the previous price; and (3) the market can absorb large dollar amounts of securities without destabilizing the price. 14-11. The efficient market hypothesis is interpreted in a weak form, a semistrong form, and a strong form. How can we differentiate its various forms? The weak form of efficient markets simply states that past price information is unrelated to future prices and that since no trends are predictable, investors cannot take advantage of them. The semi-strong form states that prices reflect all public information, while the strong form states that all information, both public and private, is reflected in the stock prices. 14-12. What was the primary purpose of the Securities Act of 1933? The primary purpose of the Securities Act of 1933 was to provide full disclosure of all pertinent information whenever a corporation sold anew issue of securities
14-13 What act of Congress created the Securities and Exchange Commission? The Securities Exchange act of 1934 created the Securities and Exchange Commission 14-14. What was the purpose of the Sarbanes-Oxley Act of 2002? The intent was to restore confidence in the integrity of the financial markets through insuring accuracy in financial reporting -523 CopyrightC2005 by The McGraw-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-523 14-13. What act of Congress created the Securities and Exchange Commission? The Securities Exchange Act of 1934 created the Securities and Exchange Commission. 14-14. What was the purpose of the Sarbanes-Oxley Act of 2002? The intent was to restore confidence in the integrity of the financial markets through insuring accuracy in financial reporting