Introduction to Corporate Finance 5th Canadian Edition by Laurence Booth test bank

CPA:  Finance
 
 
51. Explain what an auction market is and how it works.
 
Answer: Stock exchanges are auction markets. Brokers act on behalf of their clients and arrange to match buyers and sellers through an auction system. Trading takes place either on the floor of an exchange or by computer link. For their services, brokers charge a commission that is a percentage of the value of the transaction.
 
Type: Definition
Difficulty: Easy
Learning Objective: Identify the basic types of financial instruments that are available and explain how they are traded.
Section Reference: Financial Instruments and Markets
Blooms:  Knowledge
AACSB:  Analytic
CPA:  Finance
 
 
52. Define and describe the difference between the third and fourth markets.
 
Answer: The third market is an OTC market for the trading of securities that are listed on organized exchanges. The fourth market refers to transactions made directly between large institutions and/or wealthy individuals, thereby bypassing brokers and dealers. The third market involves extremely large transactions and is used primarily to avoid exchange commission fees. The fourth market involves relatively smaller trades and is used to avoid information leaks regarding who is trading which stock(s).
 
Type: Definition
Difficulty: Easy
Learning Objective: Identify the basic types of financial instruments that are available and explain how they are traded.
Section Reference: Financial Instruments and Markets
Blooms:  Knowledge
AACSB:  Analytic
CPA:  Finance
 
 
53. Explain why primary markets are the key to the wealth creation process.
 
Answer: In a primary market, new securities are issued. In these transactions, a financial obligation in the form of new debt or new equity is created in exchange for capital. Without the primary market, governments and companies would be unable to raise money. A primary market that is regulated, reliable, and accessible is highly important to a well-functioning economy, where those entities with saved capital can be matched with those entities that are seeking capital.
 
Type: Concept
Difficulty: Medium
Learning Objective: Identify the basic types of financial instruments that are available and explain how they are traded.
Section Reference: Financial Instruments and Markets
Blooms:  Comprehension
AACSB:  Reflective Thinking
CPA:  Finance
 
 

 
 
 
 
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