BigDaddy U | CPCU 410 Module 9 Test Bank

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1. Secondary markets allow investors to purchase and sell securities that have been previously issued. Even though corporations issue securities in the primary market, the secondary market is still of critical importance to corporations because:

A. The corporation does not have to pay interest or dividends if securities trade on the secondary market.

B. The secondary market eliminates the search for a best price.

C. Buyers and sellers know they can resell their securities whenever they desire.

D. The secondary market establishes the offering price for any future equity or debt issues to the public.

2. RonCo recently raised capital by selling their common stock in an initial public offering. They also issued debt securities. After the issue, the stock and debt securities trade in the:

A. Secondary market.

B. Primary market.

C. Private placement market.

D. Auction market.

3. Which one of the following statements is correct regarding financial markets?

A. The capital market is a market in which short-term securities are traded.

B. Financial markets provide liquidity by establishing a security pricing mechanism.

C. Financial markets typically place a discount on risky enterprises.

D. The capital market identifies the assets needed to support the cost of capital.

4. Which one of the following statements is correct regarding financial markets?

A. Capital markets trade exclusively in short-term securities.

B. Money markets trade in securities that must be sold on the secondary market to achieve maturity.

C. Over-the-counter stocks are not listed on any exchange.

D. The financial markets contain tools for capital budgeting.

5. Which one of the following statements is correct regarding the different types of primary market structures?

D. Auction market participants compete against other investors through an intermediary.

A. Dealer market participants find their trading partners using agents.

B. Direct search market participants are provided with a mechanism to locate trading partners.

C. Broker market participants trade with dealers who hold themselves out as buyers and sellers.

6. The virtual elimination of the search for a best price is an advantage of the:

A. Direct market structure.

B. Dealer market structure.

C. Broker market structure.

D. Auction market structure.

7. Which one of the following statements is correct regarding the financial markets?

A. Brokers can provide clients with a guaranteed price and can guarantee that the orders will be executed immediately.

B. The price at which a dealer is willing to sell a security to an investor is referred to as the bid price.

C. The dealer assumes the price risk when securities are sold through a firm commitment underwriting.

D. A company wanting to improve its financial position could sell new shares through the secondary market.

8. U.S. Treasury securities are sold through the:

A. Broker market.

B. Direct search market.

C. Auction market.

D. Dealer market.

9. Which one of the following statements is correct regarding the secondary markets?

A. The largest financial market is the currency market, which operates as a dealer market.

B. The majority of transactions in the secondary market are executed through best efforts underwriting.

C. The equity securities of most large U.S. companies trade in over-the-counter dealer markets.

D. Because companies only sell their securities on the primary market, the secondary market is not relevant to them.

10. An indicator that attempts to gauge the direction of the secondary market by analyzing the number of companies advancing relative to the number declining is:

A. Working capital.

B. Market breadth.

C. Market depth.

D. Bid-ask spread.

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11. John established a small bank in a rural part of Texas. He would like to grow the bank by raising capital through the issue of common stock. He plans on using his connections in the local community, as well as word-of-mouth communication, to locate potential investors. Which one of the following types of primary market structures does this represent?

A. Broker structure.

B. Direct search structure.

C. Dealer structure.

D. Auction structure.

12. Which one of the following statements is correct regarding financial intermediaries?

A. Property-casualty insurers are the most prominent financial intermediaries.

B. A financial intermediary is a mechanism by which newly issued securities are sold, with the proceeds going directly to the issuer.

C. The claims produced by financial intermediaries are often less liquid than the financial claims issued directly by corporations.

D. A benefit of financial intermediaries is that they match parties with disparate needs.

13. Which one of the following is an example of a financial intermediary?

A. Property-casualty insurer.

B. U.S. Treasury auction.

C. Stock exchange.

D. Broker market.

14. Which one of the following statements is correct regarding financial institutions as intermediaries?

A. Investment banks accept deposits from savers and issue short- and long-term loans to borrowers.

B. Commercial banks facilitate the purchase of stocks and other securities by investors.

C. Investment companies market and manage investments such as mutual funds.

D. Property-casualty insurers specialize in making long-term investments with maturities geared to their long-term liabilities.

15. ABC Company, a manufacturing company, issued AAA-rated bonds at a sizable discount. XYZ Insurance Company purchased the bonds with money raised from auto insurance premiums. Which one of the following is correct regarding this scenario?

A. XYZ Insurance Company is a financial intermediary.

B. ABC Company is a financial intermediary.

C. The auto policy owners are financial intermediaries.

D. This represents a secondary market transaction.

16. Which one of the following represents a type of credit risk?

A. Systemic risk.

B. Local risk.

C. Industry-specific risk.

D. Organizational risk.

17. Because of the nature of systemic credit risk, managing it involves:

A. Vigilant risk management.

B. Agreement from all parties involved.

C. Regulatory oversight.

D. Diversification.

18. Which one of the following represents the risk that an asset cannot be sold on short notice without incurring a loss?

A. Credit risk.

B. Liquidity risk.

C. Market risk.

D. Reinvestment risk.

19. Which one of the following assets would subject the owner to the most liquidity risk?

A. Certificates of deposit.

B. Publicly traded stocks.

C. Government bonds.

D. Real estate.

20. Which one of the following statements best describes market risk?

A. The inability of an investor to reinvest funds at a rate as favorable as the rate they are earning on their existing investments.

B. The potential decline in the future value of a security due to changes in interest rates.

C. The potential for market prices to move in an adverse direction.

D. The inability of an investor to sell their assets quickly without incurring a loss.

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21. Cash matching provides a means of eliminating interest rate risk because it:

A. Doesn’t depend on investments tied to variable interest rates.

B. Removes the concern of interest rates completely.

C. Allows the assets invested to remain liquid.

D. Provides a predictable stream of income until losses are due.

22. Which one of the following investments is most appropriate for an investor implementing a cash matching strategy?

A. Oil and gas limited partnership.

B. Zero-coupon bond.

C. Real estate.

D. Publicly traded stock.

23. Which one of the following statements is correct regarding financial institution risks?

A. Credit risk is an exposure that has both upside and downside to the financial institution.

B. Cash matching is a strategy that eliminates reinvestment risk.

C. Banks can be subject to liquidity risk because they typically have obligations that must be met on demand.

D. Pricing risk is especially severe for an insurer attempting to expand its market share within an existing line of business.

24. Big data can best be described as:

A. Data for an insurance company’s 10 largest clients as determined by premium income.

B. Financial information for a Fortune 500 company.

C. Sets of data too large to be gathered and analyzed by traditional methods.

D. Loss history information for property and casualty insurers.

25. The first step in the process of using big data to power fintech and insurtech is data:

A. Analytics.

B. Storage.

C. Capture.

D. Encryption.

26. Which one of the following represents the use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to business or government agencies?

A. Internet of Things (IoT).

B. Telematics.

C. Machine learning.

D. Data science.

27. Which one of the following is an example of the way blockchain technology can be applied to insurtech?

A. The use of a cryptocurrency as an investment strategy for an insurer.

B. Sensors installed in a vehicle that transmits data about the driver’s speed and braking patterns back to the insurer.

C. A cell phone app that connects users to a secure, verifiable record of a driver’s auto insurance status.

D. The use of cloud computing to provide agents with remote access to company databases.

28. Which one of the following is an example of an insurtech startup?

A. Crowdfunding.

B. Microinsurance.

C. Financial transaction security.

D. Point-of-sale payment facilitation.

29. Hall’s Limo is a limousine service that operates a fleet of four limousines and five town cars. They are revising their risk management plan to incorporate elements of big data and technology. Which of the following may be of particular interest to Hall’s Limo?

A. Wearables.

B. Building sensors.

C. Internet of Things (IoT).

D. Telematics.

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