Which of the following statements is CORRECT?

Question

BlackTom AI · Accepted Answer

Question restatement: Which of the following statements is CORRECT?

Option 1: 'The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.' This is inaccurate because the NYSE historically operates as a physical exchange with trading floors, and while electronic trading is prevalent, it does not equal a purely virtual, loose collection of dealers. Hence, this characterization is misleading.

Option 2: 'An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.' Primary market transactions involve new securities being issued to raise new capital, such as an initial public offering or a new share issuance. A gift transfer is merely a secondary transfer of already outstanding shares between private individuals, so it does not constitute a primary market transaction.

Option 3: 'Capital market instruments include both long-term debt and common stocks.' This statement correctly describes the scope of capital market instruments. The capital market typically encompasses longer-duration securities like long-term debt (bonds) and equity instruments (common stock). It contrasts with the money market, which deals with short-term instruments.

Option 4: 'If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.' This would be a secondary market transaction because the shares being traded are existing, already issued securities changing hands between investors, rather than new issuance to raise capital.

Option 5: 'While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.' This reverses typical roles: commercial banks handle deposits and lending, while investment banks assist with capital raising and advisory services for issuing securities; the statement is a mischaracterization of typical roles, so it is incorrect.

In short, the only statement that accurately reflects the nature of capital market instruments and market structure is Option 3, which correctly identifies long-term debt and common stocks as capital market instruments. The other options misstate market locations, primary vs. secondary market definitions, or institutional roles, leading to their incorrectness.

Which of the following statements is CORRECT?

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