Lesson #14 Quiz :Financial Markets (Financial Markets) answer 2025

Question 1

Which of the following two options are deals that underwriters make with corporations? (Select all that apply)

✅ Best efforts: the underwriter tries to sell shares at some price, and the deal collapses if they don’t.
❌ Short cut: the underwriters will cut the price of the shares if some of them remain unsold.
❌ Loss safe: the underwriter will pay a penalty if not all shares sell.
✅ Bought deal: the underwriter will purchase all unsold shares.

Explanation:
The two standard underwriting agreements are Best Efforts and Bought Deal (Firm Commitment). The other options are not recognized underwriting contracts.

Question 2

Why do underwriters usually underprice IPOs?

❌ They don’t know how much the company is really worth
✅ They want to create public excitement
❌ They do not want the company to make as much money as it could
❌ They want their favorite customers to buy cheaper shares

Explanation:
Underpricing helps ensure strong demand and positive first-day performance, creating excitement and reducing the risk of unsold shares.

Question 3

Which of the following was NOT a feature that Charles Ellis believed made Goldman Sachs successful?

❌ Personal anonymity
❌ Absolute loyalty to the firm
✅ Making money
❌ Becoming prestigious

Explanation:
Ellis argued that Goldman Sachs focused on culture, loyalty, and long-term reputation, not short-term profit maximization.

Question 4

What is a rating agency?

❌ An agency which assigns credit scores to individuals
✅ An agency which publishes its ratings on the reliability of securities
❌ An agency which rates business practices of corporations
❌ Any agency which refuses to take money from corporations

Explanation:
Rating agencies evaluate the creditworthiness of securities, such as bonds, and publish ratings for investors.

Question 5

Why was the Glass–Steagall Act of 1933 repealed in 1999?

❌ Investment banking was too costly for companies
❌ Investors felt inconvenienced
❌ It was ruled unconstitutional
✅ American banks argued it hurt competitiveness with European banks

Explanation:
US banks claimed Glass–Steagall limited their ability to compete globally with universal banks in Europe.

Question 6

What were the two biggest assets of the average (not median) US household in 2015?

❌ Real estate and corporate equities
❌ Mutual funds and corporate equities
❌ Real estate and mutual funds
✅ Real estate and pension funds

Explanation:
On average, households held most wealth in real estate and retirement/pension assets.

Question 7

Which best describes the “prudent person” rule?

❌ A guideline to look for prudent fund managers
✅ A law requiring managers to act as a reasonable, educated investor would
❌ A law limiting all risk-taking
❌ A new rule for future regulations

Explanation:
The rule requires managers to behave as a prudent expert would under similar circumstances, focusing on process rather than outcomes.

Question 8

Which of the following is NOT true of mutual funds?

❌ They are defined and regulated by the SEC
✅ Mutual funds are closed-end funds
❌ You join the fund at 4:00 PM on the day you invest
❌ Massachusetts Investment Trust was an early model

Explanation:
Most mutual funds are open-end funds, not closed-end funds.

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