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Midterm Examination in Capital Markets

The document discusses various topics related to capital markets, including the four forms of financial regulation (disclosure, activity, institutions, foreign participants), three types of regulators (market stability, prudential, business conduct), differences between internal/external markets and money market instruments like T-bills, commercial paper, CDs, repos and bankers acceptances. It also differentiates between common/preferred stock, bank loans/debt securities, cash/derivative markets, order-driven/quote-driven structures, and exchanges/OTC markets. Finally, it elaborates on the three levels of market efficiency.

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Nekki Joy Langcuyan
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343 views3 pages

Midterm Examination in Capital Markets

The document discusses various topics related to capital markets, including the four forms of financial regulation (disclosure, activity, institutions, foreign participants), three types of regulators (market stability, prudential, business conduct), differences between internal/external markets and money market instruments like T-bills, commercial paper, CDs, repos and bankers acceptances. It also differentiates between common/preferred stock, bank loans/debt securities, cash/derivative markets, order-driven/quote-driven structures, and exchanges/OTC markets. Finally, it elaborates on the three levels of market efficiency.

Uploaded by

Nekki Joy Langcuyan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Midterm Examination in Capital Markets

1. Explain the four (4) forms of regulation which are:

a. Disclosure regulation - is a rule passed by the Securities and Exchange Commission


(SEC) in an effort to prevent selective disclosure by public companies to market
professionals and certain shareholders. In the financial world, disclosure refers to the
timely release of all information about a company that may influence an investor's
decision. It reveals both positive and negative news, data, and operational details that
impact its business. The best example is, on March 2020, the world face the problem
which is the COVID19, which led the SEC to advise all public companies to make
appropriate disclosures to their shareholders of the likely impact of the crisis on their
future operations and financial results.

b. Financial activity regulation - is a form of regulation or supervision, which subjects


financial institutions to certain requirements, restrictions and guidelines, it aims to
maintain the stability and integrity of the financial system. For example, in the USA
banking is regulated by a lot of regulators, such as the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the National Credit Union Administration, the Office of Thrift Supervision,
as well as regulators at the state level.

c. Regulation of financial institution – it is a form of governmental institution that


restrict their activities. Such regulation is justified by governments because of the
vital role played by financial institutions in the country’s economy.

d. Regulation of foreign participants – it involves the imposition of restrictions on he


roles that the foreign participants involves the imposition of restrictions on the roles
that the foreign firms can play in a country’s internal market and the ownership or
control of financial institutions.

2. Elaborate the three (3) regulators:


a. Market stability regulator – is the one who take on the traditional role of the Federal
Reserve by giving it the responsibility and authority to ensure overall financial market
stability.

b. Prudential regulator – is the one whom responsible for the safety and soundness of
firms with federal guarantees.

c. Business conduct regulator – is the one who regulate business conduct across all
types of financial firms.
3. Differentiate internal market from external market. Cite Examples.
Answer: The difference between internal market from external market is, internal market
is a system in which goods and services are sold by the provider to a range of purchasers
within the same organization, who compete to establish the price of the product. For
example, delivering product marketing developed for customers to employees and this
may be presented alongside internal information such as product training. And external
market is also called euro market, the market or trade of any securities that are offered to
investors in multiple countries and are outside the jurisdiction of any particular country.
For example, a British company may issue a bond on an external market if it issues it in
Germany and France and denominates it in U.S. dollars.

4. Discuss the following money market financial instruments and give examples:
a. Treasury bills – also known as T-bills. It is a short-term securities issued by the U.S
government and it’s maturities is either three months or six months. For examples, a
26week T-bill is priced at 29,600 and issuance to pay 30,000 in six months.

b. Commercial paper – it is a type of an unsecured, short term debt instrument issued by


the corporations. The best example is, it is typically used fort the financing of payroll,
accounts payable and inventories.

c. Negotiable certificates of deposit - are CDs with a minimum face value of $100,000.
They are guaranteed by banks, cannot be redeemed before their maturation date, and
can usually be sold in highly liquid secondary markets.

d. Repurchase agreements - is a form of short-term borrowing for dealers in government


securities and it allow the sale of a security to another party with the promise that it'll
be purchased again later at a higher price. For example, in the case of a repo, a dealer
sells government securities to investors, usually on an overnight basis, and buys them
back the following day at a slightly higher price.

e. Bankers acceptance – are short-term loans usually to importers and exporters, made
by the banks to finance specific transactions and it is also is a form of payment that is
guaranteed by a bank rather than an individual account holder. For example, bank
check which is simply an order directing a bank to pay a third party.

5. Distinguished between common stock equity and preferred stock equity. Give examples.
Answer: Common stock equity is a security that represents ownership in a corporation.
Holders of common stock elect the board of directors and vote on corporate policies. For
examples, a company had 100 shares outstanding, one share would be equal to one
percent ownership of the company. A preferred stock is a class of stock that is granted
certain rights that differ from common stock and it gives no voting rights to shareholders.
6. Differentiate between bank loan and debt securities. Give examples.
Answer: Bank loan is an amount of money loaned at interest by a bank to a borrower,
usually on collateral security, for a certain period of time and a good example is a
mortgage loan. Debt securities are financial assets that entitle their owners to a stream of
interest payments. And the examples of debt securities are government bonds, corporate
bonds, municipal bonds, collateralized bonds, and zero-coupon bonds.

7. Discuss the distinctions between cash market and derivative market. Cite examples.
Answer:
8. Describe the activities in Public Market Issuance. Cite examples.
Answer: The public market offering of new issues typically involves the used of an
investment bank. Investment banks are involved in this process, which is referred to as
the underwriting of securities. Another method of offering new issues is through an
auction process. Bonds by certain entities such as municipal governments and some
regulated entities are issues in this way.

9. Differentiate order-driven market structure versus a quote-driven market structure. Give


examples.
Answer: The difference between order-driven market structure and a quote-driven market
structure is, order-driven market is also referred to as an auction market and it is also
displays all the bids and offers for a security in the open marketplace or exchange. A
quote-driven market only displays bids and asks of designated market makers and
specialists for a specific traded security.

10. Elaborate Exchange vs. Over-the-Counter in Secondary Markets. Cite examples.


Answer: Secondary market refers to a market wherein already issued securities and
financial instruments are traded. It includes both Exchanges and (OTC) Over-the-counter
market. Exchange is the marketplace for the trading of commodities, derivates with a
centralized method to ensure fair and efficient trading. Over-the-counter (OTC) refers to
a process of how securities are traded for companies without following any formal
obligations

11. Discuss the three (3) levels of market efficiency and gives examples to better explain the
topic:
a. Weak form efficient - claims that past price movements, volume and earnings data do
not affect a stock's price and can't be used to predict its future direction.
b. Semi strong efficient - is a reflection of price and volume variations in response to
any specific information.
c. Strong form efficient - is the most stringent version of the efficient market hypothesis
(EMH) investment theory, stating that all information in a market, whether public or
private, is accounted for in a stock's price.

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