Ch19 Securities Markets & Investing Test Questions & Answers - Understanding Business 12e Complete Test Bank by William Nickels. DOCX document preview.
Understanding Business, 12e (Nickels)
Chapter 19 Using Securities Markets for Financing and Investing Opportunities
1) Securities markets represent the financial marketplaces for stocks and bonds.
2) Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.
3) An initial public offering (IPO) represents the first time a corporation's stock is offered and sold to persons outside of the company.
4) The proceeds from a secondary market sale of securities go to the corporation whose security is being traded.
5) In a secondary market sale of stock, the proceeds go to the investor selling the stock, not to the corporation.
6) Corporations sell a new issuance of securities in the primary market.
7) The primary market allows an investor to purchase financial securities from other investors.
8) The secondary market is where investors (both individuals and companies) go to find someone who is interested in selling their investments to them.
9) When given a choice, businesses prefer to obtain long-term financing through retained earnings or by borrowing from a lending institution such as a bank instead of issuing stock.
10) Issuing stock is considered equity financing.
11) Issuing bonds is considered debt financing.
12) It is easier for a small business to raise funds through a stock issuance than for a large, well-known company.
13) Before issuing stock or bonds, corporations must meet the disclosure requirements of the Federal Trade Commission (FTC).
14) An investment banking firm assists corporations in selling the new security issue.
15) When investment bankers underwrite an issue, they buy at a discounted price the entire stock issue of a firm and then sell the stock, at full price, to private investors.
16) Only government employees represent institutional investors.
17) Examples of institutional investors are pension funds, mutual funds, and insurance companies.
18) Securities markets help companies raise long-term debt and equity financing.
19) Many observers suggest that the stock market is dominated by the buying and selling activities of institutional investors.
20) Investment bankers assist in the issuing and selling of new securities.
21) Institutional investors include insurance companies, individual investors, and mutual funds.
22) Corporations receive needed funds when they sell a new issuance of a security in the primary market.
23) Investors who trade securities buy securities they are interested in holding or sell securities to make a profit or cut losses by trading in the secondary market.
24) The Securities and Exchange Commission does not intercede in any way in the process of an IPO. Doing so would disrupt the natural process of the capital markets.
25) Government employees, public school system employees, and even employees of some large companies pay a percentage of their monthly earnings into pension funds. These funds collect a large pool of money that they invest in securities. Large organizations—such as pension funds, mutual funds, and insurance companies—that invest their own funds or the funds of others into stocks, bonds, or other securities are called institutional investors.
26) Investment bankers are in the business of underwriting securities. They profit from purchasing the new stock offering of a corporation at a discount, and then selling those shares of stock to the public at the market price.
27) Your company is privately held but needs additional funding for a planned expansion. Having never issued stock to the public, your firm is well advised to seek the assistance of an investment banker prior to an initial public offering of stock.
28) Leafy Greens wants to raise an undisclosed amount of funds in order to expand the company-owned vegetarian restaurants overseas. The CFO of the company will negotiate with an expert at the FTC who will underwrite the issue of stock that Leafy Greens plans to offer.
29) Katherine inherited $35,000 when her grandfather died and decided to invest it in the Leafy Greens restaurants. As a student of business, you inform her that she can call a stockbroker who will help her purchase stock on the secondary market.
30) Jason, a stockbroker at Securitas Financial Services, called you the other day asking if you would like to purchase an IPO. "The hot new company, Leafy Greens, is going public, and I thought you might want to get in on it," he exclaimed. If you agree to buy shares of this company, this trade will occur on the secondary market.
31) Game Guys, Inc. needs several million dollars in order to expand and become the international company that it says it wants to be in its strategic plan. After consulting with an investment banker who is willing to underwrite the issue, it learned that investors will purchase the stock for $32/share. Game Guys will receive a smaller amount for each share that is sold.
32) If an investor, Cora, buys a share of stock in Epic Electronics from another investor, Nathan, Epic Electronics automatically receives a fixed percentage of the selling price.
33) Stocks that are not listed as trading on one of the national or international stock exchanges can be traded on the OTC, over-the-counter exchange.
34) A stock exchange provides a marketplace where the public can directly buy and sell securities without the need for a membership.
35) Only those with a membership on a stock exchange can buy and sell securities on that stock exchange.
36) Securities and Exchange Commission (SEC) rules prohibit the listing of the stock of foreign firms on U.S. stock exchanges.
37) The over-the-counter market utilizes an electronic securities trading system.
38) The stock of companies that fail to meet a stock exchange's minimum requirements can be delisted.
39) The NASDAQ is a floor-based exchange.
40) Stock exchanges compete with each other for the listing of a corporation's stock.
41) The Federal Trade Commission (FTC) regulates the security markets in the United States.
42) Before a corporation's stock can be sold on a major stock exchange, the firm must provide detailed financial information to the Securities and Exchange Commission (SEC).
43) Insider trading involves the sale of stock to employees at discounted prices.
44) The Securities and Exchange Commission (SEC) requires that all prospective investors receive a copy of a firm's prospectus prior to investing.
45) Insider trading refers to someone who benefits unfairly from information about a security not available to the general public.
46) Insider trading laws prevent employees from buying or selling the securities of their employers.
47) Well-known foreign exchanges that also exchange the securities of U.S. firms include the Sydney Exchange and the Tokyo Exchange.
48) The number of U.S. companies that are listed on foreign stock exchanges is declining.
49) The prospectus is summarization of the results of detailed financial documents that a firm files with the SEC prior to being given approval to issue securities.
50) Once a stock exchange agrees to list a company, the firm can be assured that it will always be listed by that exchange.
51) With recent mergers of stock exchanges, beginning with the New York Stock Exchange merger with Archipelago, and subsequently with Euronext and eventually the Intercontinental Exchange (ICE) in Atlanta purchase of the NYSE Euronext for $8.2 billion. Most exchange floors are symbolic because trades today usually take place on computers.
52) According to the Securities Act of 1933 it is against the law for a firm that is publicly trading securities to deny an investor from knowing how the firm is doing financially.
53) According to the Connecting Through Social Media box, one goal of the JOBS Act of 2012 (Jumpstart Our Business Startups Act) is to make crowdinvesting more accessible to small businesses.
54) In an effort to profit from stock market trading, Tony landed a job with the Newport Group. Tony intends to use his position to obtain privileged information about his new employer that would not be available to the public. While he realizes that he may be benefiting unfairly, he is not acting illegally because he is an employee.
55) Avery, an executive assistant at the Newport Group, photocopied documents detailing a major merger that will be finalized in two weeks. Avery is thrilled to read about the merger, plans to call her broker immediately and buy stock in the company, and suggests that you should also act on her stock tip. Since you are not employed at her firm your purchase is legal.
56) Stocks represent shares of ownership in a company.
57) Stock certificates identify per share dividends, expressed as a percentage of par value.
58) Par value reflects the current market price for a stock.
59) Dividends represent a portion of a firm's profits that are distributed to bondholders first then stockholders.
60) Although companies that issue bonds are required to pay interest, companies issuing stock are not required to pay dividends.
61) When a corporation enjoys a profitable year, dividends must be paid.
62) Issuing new common stock usually expands ownership, giving all owners the right to vote for the firm's board of directors.
63) Issuing new stock increases the firm's outstanding debt on their balance sheet.
64) If paid, dividends come from any profits remaining after the firm has paid taxes. The company cannot deduct dividends as an expense of doing business.
65) Corporate management decisions are influenced by the desire to keep stockholders happy.
66) Preferred stockholders have voting rights, privileges not shared by common stockholders.
67) Preferred stockholders receive dividend payments before common stockholders are paid any dividends.
68) If the firm should find itself in bankruptcy, preferred stockholders would have claim to the value of any remaining assets before common stockholders.
69) Preferred stock may include callable and convertible provisions.
70) Preemptive rights provide common stockholders the first right to purchase any new shares of common stock issued by the firm.
71) Cumulative preferred stockholders enjoy the first right to purchase any new shares of stock issued by the firm.
72) Cumulative preferred stockholders enjoy a promise that missed dividends will accumulate and be paid later, before any dividends are paid to common stockholders.
73) Both preferred stocks and bonds represent funding sources that require repayment to investors.
74) Corporations that issue preferred stock incur a legal obligation to pay dividends to those stockholders.
75) For the firm, the cost of paying dividends to common stockholders is higher than the cost of the same amount of interest paid to bondholders.
76) The similarities between common stocks and bonds include a face or par value and a fixed rate of return for investors.
77) While common stockholders of corporations have voting rights, preferred stockholders generally do not.
78) A preferred stock's par value establishes the base used for calculating the preferred stockholders' dividend.
79) A company with cash flow shortages must pay common stockholders their dividends before paying preferred stockholders their dividends.
80) Preferred stockholders possess the first right to purchase any new stock the company issues.
81) Lucas purchased 250 shares of Marshall Manufacturing last year but was not paid dividends. He now is going to hire an attorney to sue the company for failure to pay dividends. If he follows through with his plan, Lucas will probably win the lawsuit because companies are obligated to pay their stockholders dividends for owning and holding the firm's stock.
82) Through disciplined investing, Ella now owns 10% or 60,000 shares of PharmaONE. Although she has enjoyed a lot of control, she realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Her regret is that it will dilute her ownership.
83) A share of preferred stock is currently selling for $160. It offers the investor a dividend rate of 7%, with a par value of $100. If the company is able to pay dividends, preferred stockholders would receive a dividend of $11.20 per share.
84) When acquiring funds through the sale of a bond, the business incurs a legal obligation to pay regular interest payments.
85) A bond represents a contract of indebtedness issued by a corporation that promises payment of a principal amount plus interest at a specified future date.
86) The interest paid to bondholders represents the principal of the bond.
87) The interest rate paid to bondholders is sometimes called the coupon rate.
88) Although the interest rate is fixed when the bond is issued, the interest rate that one firm must pay compared to another may vary depending upon risk factors such as the reputation of the firm.
89) U.S. government bonds are considered safe investments. Therefore such government bonds usually have a lower interest rate than corporate bonds.
90) The maturity date of a bond refers to the date on which the interest payment is due to be paid.
91) Bond classifications include, but are not limited to corporate bonds, treasury bonds, treasury notes, and municipal bonds.
92) Standard and Poor's and Fitch Ratings are well-known companies that rate bonds.
93) Bond interest is usually paid in two times each year, even though the interest rate that is usually quoted is an annual rate.
94) Interest rates vary with changes in the state of the economy.
95) Bonds represent a permanent source of funding for companies. The money firms acquire by issuing bonds does not need to be repaid.
96) In the language of bonds, the terms "principal" and "face value" are synonymous.
97) Bondholders represent creditors of a firm.
98) As a legal contract, bonds issued by different companies carry the same level of risk.
99) Firms are at a disadvantage when issuing bonds because the interest rate that they must pay to bondholders is not tax deductible.
100) As creditors of a firm, bondholders enjoy voting privileges for the firm's board of directors' elections.
101) Both stocks and bonds represent temporary sources of funding for a firm. Eventually they must be repaid.
102) By issuing bonds, a firm's debt level increases, which may adversely affect the firm's image in the financial community.
103) Debenture bonds represent bonds that are not secured by collateral.
104) A sinking fund is a reserve account where the firm will periodically deposit funds in anticipation of repayment of a bond issue on the maturity date.
105) A callable bond allows a bondholder to exchange his/her bond for shares of common stock in the same corporation.
106) The owner of a convertible bond can exchange the bond for a specified number of shares of common stock in the same corporation.
107) Raising long-term funds through the sale of bonds requires the firm to make debt repayment when and if the organization has sufficient cash flow.
108) With everything else constant, investors prefer a bond issued with a sinking fund compared to a bond without a sinking fund.
109) A bond sold with a sinking fund provision requires the firm to allow a stockholder to exchange his/her bond for a specified number of shares of common stock.
110) A company often exercises the call provision of a bond if it's available when prevailing interest rates fall below the interest rate currently being paid to bondholders.
111) Taking into account the risk/return trade-off, it would stand to reason that a secured bond holds a lower interest rate than an unsecured bond.
112) A sinking fund provision decreases the risk of repayment in the minds of the investors.
113) As he was approaching retirement, Gabriel began a search for a low-risk investment. He should consider buying a secured bond of a major corporation.
114) The U.S. government just announced an increase in the interest rate paid on U.S. government bonds. This will likely cause a decrease in the interest rates paid on corporate bonds.
115) Michael is looking for an investment that will pay a little better than what he can get from a government bond. You suggest that he consider a new issue of debenture bonds by Leafy Greens that pay 7.5% annually. You explain that Leafy Greens has been in business a long time, and the debenture feature makes these bonds more secure than others.
116) Investors and corporations are on the opposite sides of the interest rate risk scenario. If interest rates go up to 7%, the bondholder holding a bond with a 6% interest rate knows that he could do better. If he is forced to sell his bond on the secondary market before it matures, he will receive less than the face value.
117) As a registered representative of a stock brokerage firm, a stockbroker works as an intermediary to buy and sell securities for clients.
118) The high start-up costs of online businesses cause online brokers to charge higher commissions than traditional brokerage firms.
119) Online investors expect more expert advice than investors using traditional brokerage firms.
120) Young investors place more importance on low-risk investments, while elderly investors prefer significant growth in the value of their investments.
121) Diversification means buying several different types of investments with the funds you have available for investment.
122) For starters, investors should consider the return on investment, the liquidity, and riskiness of an investment.
123) A well-diversified portfolio would consist of a variety of investments and even cash for emergencies. The important thing is that the choice of investments spreads the risk. Some investments may perform very well in any one year while others may lag. Those performing well will balance out those that are underperforming.
124) The advantage of using an online broker is that these services usually provide you with a wealth of information and help you allocate your assets. Sometimes they even help you create an investment plan for life!
125) In the Adapting to Change box, Millennials, who distrusted and overlooked traditional financial advisors, started using robo-advisors when investing.
126) In the Adapting to Change box, inaccuracies in robo-advisor algorithms have led more investors back to traditional financial advisors.
127) Last week, Caitlin met with her financial planner, Derek. Derek urged Caitlin to consider only government bonds and mutual funds in her portfolio. Since she is in her 20s, Caitlin thinks she can accept a little more risk. You suggest that it is a better plan to follow Derek's advice, rather than research her choices on her own.
128) Julio and his grandfather receive individualized investment advice from the same chartered financial analyst. When comparing their customized investment recommendations, it is likely that Julio's strategy targets lower-risk investment options than the advice received by his grandfather.
129) Will just returned from Afghanistan and has $25,000 in his savings account. His girlfriend recommends he speak with a financial advisor and let his money "make more money." Will has his eye on a new truck, but knows that his old Jeep will most likely last another four years. By then, though, he will definitely need this money to buy something new. Not to mention, he also knows he will have other needs too. Will should buy high-growth stock with his funds because even though they are risky, they also have the greatest potential of bringing in a better return on his investment.
130) Buying a stock makes the investor an owner in the firm.
131) Investors earn a capital gain when they sell a stock for more than they paid for it.
132) The market price and growth potential of a common stock depends heavily on the performance of the firm in meeting its objectives.
133) A bull market occurs when overall stock prices increase.
134) A bear is an investor that expects stock prices to rise.
135) Growth stocks are the stocks of corporations whose earnings are expected to grow faster than the overall economy.
136) Growth stocks offer investors the attractive combination of low risk and high returns.
137) A blue chip stock represents a highly speculative stock investment.
138) An income stock offers investors a relatively high dividend yield on their investment.
139) A penny stock generally sells for a low initial price, pays regular dividends, and provides consistent growth in the stock's value.
140) Penny stocks represent a high-risk stock investment.
141) When you place a limit order, it means you are willing to buy or sell the stock at the best price available.
142) An investor placing a market order with a broker agrees to buy or sell a stock immediately at the best price available.
143) If a company announces a stock split, the investor may receive two or more shares of the company stock, for every one share that he/she holds.
144) A stock split immediately increases the value of an investor's holdings.
145) The stocks of high-quality companies such as Coca-Cola and IBM are called blue chip stocks.
146) Buying stock on margin lowers the overall risk for the investor.
147) A margin call requires an investor to repay money borrowed from the broker used to purchase the stock.
148) Buying on margin means you are borrowing part of the value of the stock purchase from the brokerage firm.
149) Buying on margin is a relatively risk-free way of investing in the stock market.
150) A stock split refers to buying a share of stock at a discounted price if full payment is made at the time of purchase.
151) Investing in common stock can give an individual the opportunity to participate in the success or failure of a corporation.
152) If you are willing to hold on to your growth stock long enough, at least five years or more, you will realize capital gains.
153) Buying stock on margin allows investors to increase the potential rate of return made on a stock investment.
154) If you buy 100 shares of IBM for $120/share, and the margin on your account is 50%, the broker will float you an interest-free loan of $6,000, until the price of IBM sufficiently rises to the point where you are willing to sell. You pay the broker back its $6,000, and you enjoy the capital gain.
155) Gregory bought a share of stock in the Marshall Manufacturing for $70. When he sold the stock later that year, he received $90. The par value of the stock is $5. Gregory capital gain is $25.
156) Victoria places a limit order at $48 and the stock currently sells for $61 per share, the broker will buy the stock for her.
157) Levi owns 100 shares of stock in Epic Electronics that currently sell for $100 per share. Epic just announced a two-for-one stock split for all current stockholders. Levi now owns $20,000 worth of stock in Epic Electronics.
158) Ryan owns 100 shares in Marshall Manufacturing, currently selling for $80 per share. His stock split yesterday 3-for-1. The number of shares that Ryan owns has tripled.
159) Tomas purchased on margin 100 shares of stock in the Marshall Manufacturing for $50 per share yesterday. Today, the price of the shares dropped by $20 per share. Tomas expects his broker to issue a margin call.
160) For investors who desire the least possible risk, a share of stock in an established corporation provides the safest investment.
161) The interest earned on municipal bonds is often tax-free at the state level.
162) From an investor's point of view, corporate bonds offer less risk than government bonds.
163) Corporate bonds provide investors the option of reselling the bond back to the issuing corporation at any time during the life of the bond.
164) A corporate bond provides the owner with the right to sell the bond to other investors at any time during the life of the bond.
165) Unlike stocks, for selling purposes, bond prices remain stable over the life of the bond.
166) Normally, the higher the risk associated with a bond issue, the higher the interest rate the organization must offer potential investors.
167) Bonds, like stocks, trade daily on major security exchanges.
168) Bonds sold at a discount are sold for more than the bond's face value.
169) As interest rates increase, bond prices fall.
170) From an investor's viewpoint, bonds generally provide a safer investment option than does the stock of the same corporation.
171) If an investor owns a bond that pays a higher rate of interest than other bonds of similar risk, the investor should be able to sell the bond on the secondary market for more than its face value.
172) Junk bonds are offered at higher interest rates than government bonds or corporate bonds with good ratings.
173) A bond offering description reads: "6s of 2020." This means the bond pays 3% interest semi-annually and matures in 2020.
174) A U.S. government bond paying 3.25% interest annually is a lower risk than a Bathtub Brewing Company bond paying 6%.
175) Therese prefers corporate bonds as an investment option because investors always receive the face value of the bond whenever it is sold.
176) John invested in a new issue corporate bond on the primary market for $1,000, with a coupon rate of 7%, and a maturity date of 2025. The bond was held in his brokerage account electronically, so he did not think about it on a daily basis. In 2020, he thought about selling the bond on the secondary market to help pay for his school tuition. At that time, interest rates had climbed to 8.5%. This was great news for John because now he could sell his bond for more than the principal amount he would receive in 2025.
177) Recently, Josiah bought a bond with face value of $1,000. He paid $1,150 for the bond. His bond investment undoubtedly pays a higher interest rate than the going rate for similar bonds currently out on the market.
178) A mutual fund pools investors' money and then buys stocks and bonds in many companies in accordance with the purpose of the fund.
179) A mutual fund's purpose is rapid investment growth, not to provide diversification for investors.
180) When investing in mutual funds, the investor will buy shares of a fund that consists of stocks or bonds; the fund will hold shares of many companies.
181) Americans have invested over $15 trillion in mutual funds.
182) Small investors can spread the risk of investing by purchasing shares of mutual funds or ETFs.
183) Most mutual funds provide investors an opportunity to buy shares directly without using a stockbroker.
184) A mutual fund that carries a load will require the investor to pay a commission, only if the fund appreciates in price.
185) A no-load mutual fund charges no commission fees to buy or sell its shares.
186) When comparing the investments of different mutual funds, little variation in the risk level exists.
187) Index funds invest in one specific type of investment; for example, an index fund might only invest in income stocks, companies whose stocks pay dividends.
188) Exchange traded funds (ETFs) are like mutual funds because these funds permit the investor to buy shares of a collection of several stocks or shares of a collection of stocks and bonds, but, unlike mutual funds, they are traded during the day on the exchanges.
189) The investor always pays a fee when purchasing a share of a mutual fund.
190) Mutual funds offer small investors an opportunity to diversify their investments.
191) The degree of risk in mutual fund investments remains nearly the same from one fund to the next.
192) Most investment advisors put mutual funds high on the list of recommended investments for experienced investors, but consider them too risky for beginning investors.
193) From a risk standpoint, stocks are considered the riskiest investments, followed by mutual funds, preferred stock, and ETFs. Bonds represent a lower-risk investment.
194) Natalie landed her first job after from college. The same year, she also started her first investment account. Having met with several brokers before choosing someone to work with, Natalie wanted to make certain that her investment choices would provide for long-term growth, yet satisfy her concern for diversification. The person who won her business prepared an asset allocation plan that would start her account by investing in several index funds. Her advisor has offered her a sound way to combine the concern for diversification since index funds are a sensible way for Natalie to start.
195) Every time someone sells a stock believing the price has reached its maximum, someone else buys it believing the price will go still higher.
196) The Dow Jones Industrial Average reflects the daily average price of all the stocks traded on the New York Stock Exchange.
197) The Dow Jones Industrial Average utilizes the prices of the same 30 companies' stocks each year to ensure consistency.
198) The Dow Jones Industrial Average provides us with a sense of direction (up or down) of the overall stock market.
199) The NASDAQ reports its own average that investors follow to observe trends in the market.
200) Black Tuesday refers to the stock market crash that occurred in October 1987.
201) Program trading refers to computer trading software that automatically sells stocks when their price dips to a predetermined level.
202) Trading curbs motivate traders to utilize their computerized programs to reduce overall market volatility.
203) Stock market circuit breakers stop stock trading for a short time when the stock market experiences a significant drop in stock values.
204) Many stock market analysts suggest that program trading was a big cause of the stock market crash of 1987.
205) The largest one-day drop in the stock market occurred in 1987—a 22% drop.
206) Changes in investor trust and confidence strongly influence stock market prices.
207) The Dow Jones Industrial Average reflects the average of the eleven largest corporations traded on the New York Stock Exchange as originally selected by Charles Dow.
208) One of the criticisms of the Dow Jones Industrial Average is that it does not include enough stocks to provide a good representation of the entire stock market.
209) Like many stock analysts, Layla believes that program trading greatly decreases the volatility of stock market prices.
210) Corporations benefit from securities markets primarily by
A) creating an efficient mechanism to invest in stocks and bonds.
B) obtaining the capital they need to finance their operations.
C) securing memberships on various stock exchanges.
D) participating in the mutual funds of investment bankers.
211) Private investors benefit from securities markets primarily by
A) having a place to buy and sell stocks and bonds.
B) obtaining the capital they need to finance their operations.
C) securing memberships on various stock exchanges.
D) participating in the primary markets of investment bankers.
212) A(n) ________ refers to the first public offering of a corporation's stock.
A) primary market offer (PMO)
B) initial securities proposal (ISP)
C) initial public offering (IPO)
D) primary public sale (PPS)
213) Trading in newly issued securities takes place in the
A) primary market.
B) secondary market.
C) initial offerings market.
D) corporate trading market.
214) The trading of previously issued securities from one investor to another takes place in the
A) primary market.
B) secondary market.
C) initial offerings market.
D) corporate trading market.
215) When retained earnings are not enough to meet their long-term funding needs, businesses may be able to raise funds by
A) selling common stock.
B) petitioning the government for a loan.
C) purchasing additional assets.
D) decreasing their accounts payable.
216) ________ represent a powerful force in the buying and selling of corporate securities.
A) Individual investors
B) Mutual banks
C) Institutional investors
D) Investment banks
217) Investment bankers ________ new issues of bonds or stocks by purchasing, at a discount, the entire stock or bond issue of a firm and selling the issue to interested investors at a higher price.
A) syndicate
B) underwrite
C) guarantee
D) sanction
218) Corporations receive the proceeds for the sale of their stock in
A) the primary market.
B) the secondary market.
C) both primary and secondary markets.
D) venture capital markets.
219) Security markets assist businesses in performing their ________ function.
A) long-term investing
B) long-term planning
C) long-term financing
D) concurrent controlling
220) Which of the following would be classified as an institutional investor?
A) pension funds
B) federal Reserve banks
C) stock exchanges
D) commodity brokers
221) Most businesses prefer to meet their long-term financial needs through
A) debt financing.
B) capital from the sale of stock.
C) retained earnings.
D) capital from the sale of bonds.
222) Investment bankers provide ________ services by purchasing the entire new security issue from a corporation seeking to raise capital, and selling it to interested investors.
A) underwriting
B) investing
C) leveraging
D) discounting
223) How do investment bankers generate revenues for their firms?
A) They invest their own funds, or the funds of others, in mutual funds and commodities.
B) They earn commissions by managing the investments of insurance companies and mutual funds.
C) They buy, at a discount, the entire issue of a new security and then sell the issue to investors at full price.
D) They receive consulting revenues from the advice they offer the Securities and Exchange Commission.
224) Marshall Manufacturing plans to issue $100 million of common stock. The firm will likely rely on the advice and assistance of a(n)
A) Federal Reserve bank.
B) commercial bank.
C) mutual fund.
D) investment banker.
225) Christopher, a Leafy Greens shareholder, sells 100 shares of Leafy Greens stock to Martin. This transaction takes place in the
A) primary market.
B) secondary market.
C) initial offerings market.
D) security resale market.
226) As the chief financial officer (CFO), you identify that your firm needs to raise additional funds by selling new shares of stock. Which of the following refers to a specialist that assists corporations in the issue and sale of new securities?
A) an investment banker
B) a commodities broker
C) an officer of the Securities and Exchange Commission (SEC)
D) an institutional investor advisor
227) As a new father, Dan plans to accumulate funds over the next 18 years to help pay for his son's college education. Security markets provide Dan with
A) financing opportunities.
B) investing opportunities.
C) opportunities to reduce his taxes.
D) borrowing opportunities.
228) Samantha has a brokerage account with a large investment firm. This morning her broker called asking if she is interested in participating in an IPO. He went on to say that he could get her 300 shares for $33/share. If Samantha agrees to buy the IPO, the trade will take place in the
A) fair trade market.
B) outer market.
C) primary market.
D) secondary market.
229) Game Guys, Inc., needs several million dollars to expand and follow its strategic plan. In negotiations with the investment banker, they agree to issue 50 million shares of common stock, at $25/share. If the investment banker's fee for underwriting the total sale is 5.82%, what is the discounted price that the investment bank is willing to pay Game Guys for the shares?
A) around $120,000,000
B) around $1,200,000,000
C) around $140,000,000
D) around $14,000
230) Tee Time Golf Resort found that Jordan Spieth wants to put his name on golf course designs. However, for any course to be acceptable, it will cost at least $20 million to build. The plan is to purchase real estate for four new golf resorts. Proceeding with their venture, the owners have calculated that they will need approximately $100 million. But putting together an IPO is another matter. After meeting with their investment banker, they believe that investors will be willing to pay $22/share for the IPO. As the ________ for this issue, the investment bank requires 3% of the revenues generated by the sale. Tee Time will need to issue ________ shares in order to have the $100 million they need to proceed with their plan.
A) underwriter; 6.25 million shares
B) underwriter; more than 6.25 million shares
C) regulator; 6.25 million shares
D) regulator; more than 6.25 million shares
231) Which of the following terms best describes the relationship between the New York Stock Exchange and the NASDAQ?
A) cooperative
B) dependent
C) competitive
D) disastrous
232) An organization whose members can buy and sell securities for companies and investors is known as a
A) public securities dealer.
B) securities facilitator.
C) transfer medium.
D) stock exchange.
233) A company's stock does not have to be listed on one of the major stock exchanges in order to trade. It can be traded on
A) over-the-counter market.
B) NYSE Euronext.
C) NASDAQ.
D) AMEX.
234) If a publicly traded corporation fails to maintain specific minimum requirements, the exchange can ________ the firm's securities.
A) relist
B) transfer ownership of
C) delist
D) provide preemptive rights to
235) The ________ is a large national electronic stock trading market.
A) SEC
B) NYSE
C) NASDAQ
D) NLRB
236) Which of the following trades corporate stocks not listed on the national securities exchanges?
A) Federal Investment Assurance Agency
B) American Stock Exchange
C) over-the-counter market
D) Chicago Board of Trade
237) A(n) ________ represents a condensed version of the registration statement that enables prospective investors to evaluate a stock for possible purchase.
A) insider report
B) securities disclosure
C) evaluative report
D) prospectus
238) Which of the following federal government agencies has responsibility for regulating the various stock exchanges in the U.S.?
A) SEC
B) NASDAQ
C) FCC
D) ICC
239) Using information not available to the public to unfairly benefit in the stock market represents
A) security fraud.
B) an unethical, but a legal activity.
C) blue-sky violations.
D) insider trading.
240) Which of the following legislative acts created the Securities and Exchange Commission?
A) Dealers Trust and Assistance Act of 1933
B) Federal Trade Commission Act of 1933
C) Securities and Exchange Act of 1934
D) Bond Trading Act of 1934
241) Which of the following statements best describes the current legal interpretation of insider trading?
A) Is only possible when you are a board member or a chief officer of a company.
B) Can be any employee and relatives or friends of the employee.
C) Would involve members of the SEC (Securities and Exchange Commission) and the investment banker who handles most of a firm's transactions.
D) Anyone who has securities information about a particular firm that is not known by the general public.
242) According to the Connecting Through Social Media box, which of the following is a way the SEC changes altered securities laws following the JOBS Act?
A) No longer required crowdinvestors to disclose their financial information to the SEC.
B) Required small businesses to have at least 100 employees before allowing crowdinvestors to be pursued.
C) Allowed a maximum of 20 crowdinvesting groups to invest in projects.
D) Allows businesses to accept crowdinvestments from both accredited and unaccredited investors.
243) After operating for years as a privately held corporation, Iron Age Metalworks plans to publicly trade its stock. As a midsized firm, Iron Age wants to avoid excessive paperwork, and the fear of being delisted in the future. The ________ provides the best fit for Iron Age's plans.
A) over-the-counter market
B) New York Stock Exchange
C) American Stock Exchange
D) secondary market
244) Tressan wants to purchase stock in a company that is headquartered in Australia. Tressan
A) will have to place her order through the Sydney Stock Exchange.
B) cannot legally own the stock of a Australian corporation.
C) can buy the shares from a broker on a U.S. exchange.
D) must obtain an investor visa to complete the purchase.
245) The Securities and Exchange Commission has accused Martha of benefiting unfairly from information secured from a corporate officer of Stewart Engineering. Because Martha used that information to profit in the stock market, she faces ________ charges.
A) insider trading
B) security tampering
C) corporate fraud
D) short selling
246) Which of the following situations would be considered insider trading?
A) You read online that Marshall Manufacturing has a new CEO, who plans to bring in his own team. You decide to call your broker and buy shares of Marshall Manufacturing.
B) Your Uncle Tim works for Marshall Manufacturing and sends you a news release put out by the company that talks about the acquisition of a Korean company. You believe this will significantly boost Marshall Manufacturing revenues so you buy 200 shares through an online service.
C) You buy 500 shares of Marshall Manufacturing because you just heard from the CEO's administrative assistant that the CEO was just fired. You figure that this emotional news has got to help the stock price.
D) Your stockbroker recommends that you diversify your portfolio with a few shares of Marshall Manufacturing because its request through the FTC and several international trade commissions to finalize the purchase of two oil companies was successful. You act on this information.
247) Although you were not fortunate enough to get Tee Time Golf Resort stock as an IPO, you are still thinking about trying to add some to your portfolio. Last week when you mentioned it to your broker, he said that there are plenty of shares trading on ________, but he wanted to send you the company's financial disclosures provided in the ________ before you finalize your decision.
A) the secondary market; prospectus
B) the NASDAQ; regulatory agreement
C) the OTC; regulatory agreement
D) the primary market; prospectus
248) Which of the following securities provides the owner the right to vote for the corporate board of directors?
A) common stock
B) bonds
C) preferred stock
D) callable bonds
249) Two kinds of equity financing are
A) common and preferred stock.
B) convertible and superior stock.
C) fixed and variable stock.
D) common and superior stock.
250) A ________ certificate provides evidence of ownership in a specific corporation.
A) stock
B) bond
C) debt
D) capital
251) ________ represents the most basic form of company ownership and includes voting rights and dividends, if and when the firm elects to pay dividends.
A) Capital stock
B) Common stock
C) Preferred stock
D) Carrier stock
252) ________ are the firm's after tax profits that are distributed to stockholders.
A) Equity capital
B) Interest payments
C) Dividends
D) Retained earnings
253) The dollar amount assigned to shares of stock by the corporation's charter represents the stock's
A) net asset value.
B) legal value.
C) market value.
D) par value.
254) When investors purchase ________ stock, they receive a priority claim in the payment of dividends, as well as assets if the business is liquidated. However, these investors do not have voting rights.
A) common
B) preferred
C) secured
D) debenture
255) Investors in ________ preferred stock receive a guarantee that missed dividends will accumulate and potentially be paid later.
A) participating
B) superior
C) convertible
D) cumulative
256) Each share of common stock provides the investor with a ________ right that offers the investor the first right to purchase any new shares of common stock the firm decides to issue. This allows common stockholders to maintain a proportional share of ownership in the company.
A) participating
B) preemptive
C) cumulative
D) convertible
257) When issuing stock to obtain long-term funding, dividend payments are
A) tax deductible.
B) legally required.
C) intended to discourage firms from issuing an excessive number of shares.
D) not tax deductible.
258) Similar to bond investments, preferred shares can be ________, meaning the firm may buy them back.
A) cumulative
B) callable
C) responsive
D) retroactive
259) Stock certificates represent evidence of ownership in an organization. A stock certificate contains which of the following?
A) current market value of the stock
B) the total number of shares issued by the company
C) the type of stock the investor is buying
D) the stock symbol and trading exchange of the company
260) Dividends are paid out of a corporation's
A) profit, before taxes.
B) profit, after taxes.
C) sales revenue.
D) capital contributed by bondholders.
261) Dividends on preferred stock are
A) paid after common stockholders receive their dividends.
B) guaranteed, except in the event of bankruptcy.
C) normally fixed, if and when dividends are paid.
D) always greater than dividends on common stock.
262) Which of the following securities guarantees preferred stockholders payment of missed dividends before any dividends are paid to common stockholders?
A) call provision
B) cumulative preferred
C) participating preferred
D) convertible preferred
263) The disadvantages of issuing stock to obtain long-term financing include
A) the legal obligation to pay dividends if the company is profitable.
B) the funds contributed by stockholders must be repaid from after-tax profits.
C) a reduction in the market value of the firm's products.
D) a possible change in management and policies in the company.
264) Jacob impresses his friends by stating that he just cast four votes in the election of the board of directors of Epic Electronics, indicating that Jacob owns ________ stock in Epic Electronics.
A) preferred
B) cumulative preferred
C) registered
D) common
265) After many years as a privately held corporation, Greeley Industries decided to offer stock to the general public. Greeley may discover that stockholders
A) expect to be repaid at a future date.
B) can legally demand dividend payments if the corporation maintains profitability.
C) adversely affect the company's debt level.
D) can exercise a significant impact on company management and policies.
266) When Ira purchased 500 shares of preferred stock in the Fairlawn Corporation, his certificate indicated the stock had a par value of $50 per share. This means that Ira
A) will never get less than $50 per share when selling his stock.
B) has shares that are currently worth $50 per share.
C) may receive dividends based on this value per share.
D) must receive a $5 dividend each and every year.
267) Iron Age Metalworks, known for its very generous dividend policy, easily attracts investors. These dividend payments basically represent
A) a part of the firm's profit distributed to stockholders.
B) the increase in market share the company has earned.
C) current value of the firm's stock holdings.
D) income that is sheltered from taxes.
268) Juanita owns stock in Elite Technologies. Her stock provides a priority claim on dividend payments and on the firm's assets in the event of liquidation. However, her ________ stock ownership does not offer her voting rights.
A) common
B) preferred
C) superior
D) callable
269) Hallie owns 20% of the common stock of the Bean Brothers Coffee Company. The company announced plans to offer an additional 10,000 shares of common stock for sale. If Hallie exercises her preemptive rights, Bean Brothers must offer her the opportunity to purchase
A) 8,000 shares.
B) 2,000 shares.
C) as many of the new shares as the investor is willing and able to buy.
D) 20% of the outstanding preferred stock.
270) Greg purchased 2,000 shares of common stock of the Rite Track Corporation last year. He learned several months later that the stock does not pay a dividend. Greg should proceed to
A) hire an attorney and file a lawsuit.
B) hire an attorney and go after the registered representative that brokered the trade.
C) do the proper research before he invests.
D) immediately proceed to sell the shares.
271) Maggie owns 10% or 50,000 common shares of a small biotech company. Although she has enjoyed a lot of control, Maggie realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Unless she and others exercise preemptive rights,
A) the company will surely begin to pay dividends.
B) the new issue will dilute her ownership.
C) the new issue will decrease the market price of the stock.
D) The new issue will be traded on the secondary market.
272) A share of preferred stock for Marshall Manufacturing currently sells for $120. It offers the investor a dividend rate of 8%, on a par value of $100. If the investor owns 500 shares, her total annual dividend will equal
A) $800
B) $8.00
C) $2,000
D) $4,000
273) The corporate certificate issued to an investor that has loaned money to the corporation or government is called a
A) common stock.
B) preferred stock.
C) bond.
D) debt document.
274) Issuing bonds to obtain long-term funds legally compels a firm to pay regular ________ payments and repay the ________ at the maturity date.
A) dividend; par value
B) interest; bond premium
C) dividend; maturity value
D) interest; principal
275) The cost of a firm borrowing money is called the
A) interest rate.
B) dividend payment.
C) prime charge.
D) opportunity charge.
276) Another name for the fixed rate of interest attached to a bond is the
A) yield to maturity.
B) dividend.
C) coupon rate.
D) security rate.
277) A bond's face value is the same as its
A) risk rating.
B) principal.
C) coupon value.
D) yield.
278) Government bonds can vary in denomination, but most corporate bonds are issued in
A) discounted denominations.
B) $1,000 denominations.
C) $100 denominations.
D) $5,000 denominations.
279) Which of the following accurately describes an advantage of selling bonds to raise long-term capital?
A) Interest is a legal obligation.
B) Face value must be repaid.
C) Bondholders have voting rights.
D) Interest is a tax-deductible expense.
280) Issuing ________ increases a firm's debt and may adversely affect the financial community's perception of the firm.
A) common stock
B) bonds
C) preferred stock
D) retained earnings
281) An unsecured bond, backed only by the well-respected name of the organization, is called a ________ bond.
A) mortgage
B) leveraged
C) debenture
D) convertible
282) Corporations issuing ________ bonds pledge a tangible asset as collateral to reduce the risk incurred by a bondholder.
A) secured
B) endorsement
C) escrow
D) replacement
283) Firms establish a ________ so that sufficient funds are available to repay bondholders on the maturity date.
A) mutual fund
B) sinking fund
C) retirement account
D) encumbered account
284) By issuing bonds with a ________, the corporation retains the right to pay off the bond prior to the maturity date.
A) redemption feature
B) discount clause
C) retirement privilege
D) call provision
285) By buying a ________ bond, investors will have an option to exchange their bond for shares of common stock in the company at a future date.
A) discount
B) contingent
C) convertible
D) preferred
286) According to the Standard & Poor's Investor Services ratings, which of these ratings indicates a highly speculative bond?
A) AA
B) B
C) C
D) BBB
287) Which of the following represents a disadvantage of issuing bonds?
A) Bonds are permanent debt on the firm's balance sheet.
B) Dividends are legally required.
C) Bonds increase the firm's debt.
D) Bondholders receive voting rights.
288) Bonds perceived as high risk typically pay ________ interest rates.
A) higher
B) lower
C) more volatile
D) less volatile
289) The investor will receive the face value of the bond on the ________ date.
A) purchase anniversary
B) declaration
C) maturity
D) annual interest
290) Which of these represents a special feature included with some bond issues?
A) no repayment of par value
B) no obligation to pay dividends
C) no increase in the firm's debt level
D) convertibility of a debt security (bond) into an equity security (stock)
291) A convertible bond allows the bondholder to exchange the bond for
A) preferred stock.
B) common stock.
C) collateral.
D) debt holder privileges.
292) Melodic Music, Inc., recently offered bonds for sale to the public. The unsecured corporate bond paid interest of 8% to investors for the 20-year life of the bonds. Melodic Music is obligated to
A) represent each bondholder as an owner in the company.
B) pay interest semi-annually.
C) pay stockholders their dividends, before paying bondholders their interest.
D) pay each owner their principal if and when they want to cash in their investment.
293) Your Uncle Mike is approaching retirement and he asks for your advice for a safe place to invest several thousand dollars. He wants to receive some kind of payment each year for investing his money without a great deal of risk. You explain
A) Yankee bonds are certain not to default.
B) common stock always pays quarterly dividends.
C) junk bonds do not pay annual interest.
D) treasury and top-grade corporate bonds pay interest two times each year.
294) Marshall Manufacturing issues a $1,000 bond, with an interest rate of 10%, and a maturity date of 2025. This creates a liability for Marshall Manufacturing to pay the bondholder
A) $100 interest per year and $1,000 in the year 2025.
B) 10% of the selling price of the bond.
C) an interest payment equal to the dividend payment distributed to the common stockholders.
D) $1,100 annually until the year 2025.
295) Standard & Poor's currently rates Careful Corporation bonds as a D grade. This indicates that these bonds are
A) of the highest quality with lowest default risk.
B) moderately speculative.
C) corporate bonds with variable interest rates.
D) the lowest quality and the highest risk.
296) Epic Electronics decides to pay off its bonds several years before the maturity date. Apparently, the bonds
A) contain an early dismissal clause.
B) have an early retirement option.
C) are callable.
D) have discount authorization.
297) Mineral Mining Corporation makes regular monetary deposits that will accumulate and provide for an orderly retirement of their bonds when they come due in 2025. Mineral Mining appears to be utilizing a
A) call provision.
B) sinking fund.
C) compensating balance system.
D) retirement escrow account.
298) Teeny Toys hopes to raise long-term capital by promising in writing to repay the principal provided by potential creditors in ten years. Additionally, the certificate issued by Teeny Toys promises to pay 5% interest annually for the ten-year life of the security. Teeny Toys intends to issue
A) stocks.
B) bonds.
C) mutual funds.
D) commodities.
299) After owning a Maplewood Company bond for five years, Michelle exercised an option that allowed her to exchange her bond for 20 shares of the company stock. Michelle owned a
A) callable bond.
B) revenue bond.
C) junk bond.
D) convertible bond.
300) Matthew recently invested in 15-year Bathtub Brewing Company bonds paying 8% interest annually, with a maturity date of 2035. The bonds are callable in 2030. If interest rates go down to 5.5% in the year 2030, the brewery is likely to
A) not exercise the call.
B) exercise the call.
C) give bondholders a choice of whether they want to turn the bonds back to the brewery.
D) decrease the interest rate that they are willing to pay the holder.
301) Investors buying bonds and corporations issuing bonds (both) accept investment risk. Which of the following statements is most correct when it comes to the investment risks that one or the other party accepts?
A) If investor Joe is holding a bond that pays 5% and market interest rates on similar bonds go down, Joe must hold the bond until maturity because if he were to sell it today, he would have to sell it at a discount.
B) If investor Joe is holding a bond that pays 5% and market interest rates on similar bonds go down, Joe's bond is now worth more than its face value, and if he needed to sell it on the secondary market, he could probably sell it at a premium.
C) If investor Joe is holding a bond that pays 5% and interest rates on similar bonds go up, Joe stands to gain more than the face value of the bond if he were to sell it on the secondary market today.
D) If XYZ Corporation wants to issue bonds to pay for an expansion project, and analysts predict that interest rates are projected to climb over the next few years, it is to the corporation's advantage to wait until next year to issue the bonds.
302) A ________ is a registered representative acting as an intermediary to buy and sell securities for clients.
A) certified stock underwriter
B) stockbroker
C) securities banker
D) trading accountant
303) Investors trading online
A) receive more advice than offered by traditional stockbrokers.
B) buy and sell securities without using a brokerage firm.
C) generally do their own research and make their own investment decisions.
D) generally were insured against the market downturn of the early and late 2000s.
304) Investing online is usually ________ than trading through a traditional stock brokerage firm.
A) more expensive
B) less expensive
C) more volatile
D) less profitable
305) Creating a portfolio by buying several different types of investments to spread the risk of investing is called
A) modulation.
B) diversification.
C) re-allocation.
D) formula investing.
306) Another term for portfolio strategy is
A) modulation model.
B) formula model.
C) allocation model.
D) equity model.
307) When an investor purchases a security, the investor does so with the expectation of
A) maintaining his or her capital position.
B) minimizing risk.
C) making a profit.
D) providing commissions.
308) Online trading services target those investors who
A) require the research and advice of a licensed stockbroker.
B) are interested in purchasing government bonds.
C) are willing to do their own research.
D) trade the securities of foreign firms.
309) Which of the following measures how quickly an investor has access to his/her invested funds, if they are needed?
A) risk
B) tax consequences
C) yield
D) liquidity
310) Diversification means
A) allocating all your investment funds into one type of investment.
B) buying investments on margin.
C) being knowledgeable about the various types of investment opportunities.
D) allocating your investment funds to several types of investments.
311) The risk/return trade-off investors assume means
A) the less you risk, the more you stand to gain.
B) the same as diversification of your portfolio.
C) you will assume added risk, if you believe you can get a greater return.
D) the goal is to never risk liquidity; your investments should always be liquid and of short duration.
312) Callahan and Megan plan to invest in corporate securities. While Callahan plans to retire next year on his 65th birthday, Megan is celebrating her first job after college and her 22nd birthday. Which of the two investors would be well advised to choose a more conservative investment strategy?
A) Callahan
B) Megan
C) A conservative investment strategy is always the best strategy for both of them.
D) It depends on whether they want to invest in stocks or bonds.
313) Though Miguel relies on his stockbroker to execute his buy and sell orders for shares of stock, he has found that the process of buying or selling a share of stock on a major stock exchange normally takes
A) weeks.
B) seconds.
C) days.
D) months.
314) Having just returned from serving with the U.S. Marines in Afghanistan, Nick has managed to save most of his earnings. He has enrolled in the local community college and he is back living with his parents while he assimilates back into U.S. life. As his business major friend, he has come to you for advice. He would like to see his $40,000 savings grow, yet he knows that he will need it in about five years when he and his girlfriend are out of school and make plans to get married. He also worries that his car may break down and he will need to invest in another used car. Which of the following would you suggest for Nick?
A) In order for Nick to see growth, he will need to place the entire $40,000 in one stock offering. You suggest a biotech stock that promises growth.
B) Nick is still young. He needs to consider high-growth, higher-risk stocks and corporate bonds. He is young enough to recoup his investment if it should experience a loss.
C) Nick should determine what types of companies he is passionate about. He should lead with his heart, but should be warned that some of those companies will produce better yields than others.
D) Since liquidity is a concern, Nick would do best to diversify into four to eight different investments, and keep a reasonable amount in cash (a savings account) for emergencies.
315) An investor who purchases stock in a company becomes a(n)
A) creditor.
B) owner.
C) blue chip master.
D) speculator.
316) The market price of a share of common stock depends heavily on
A) the number of stocks traded on the New York Stock Exchange.
B) the default rate on U.S. government bonds.
C) the overall performance of the company.
D) the relative value of the U.S. dollar compared to the euro.
317) When an investor sells a security for more than the purchase price, the investor earns a(n)
A) dividend payment.
B) appreciated interest receipt.
C) corporate benefit.
D) capital gain.
318) The term ________ refers to investors who anticipate increases in stock prices.
A) bears
B) bulls
C) dogs
D) lions
319) When stock prices decline steadily, investors refer to the market as a ________ market.
A) bear
B) bull
C) dog
D) lion
320) Stocks of corporations with earnings expected to increase faster than other stocks are called ________ stocks.
A) penny
B) growth
C) preferred
D) blue sky
321) Some analysts refer to ________ stocks as issues that sell for less than $2 (others say for less than $5).
A) dollar
B) growth
C) penny
D) discount
322) Which of the following securities are historically considered high quality and usually pay dividends?
A) dollar stocks
B) growth stocks
C) preferred stocks
D) blue chip stocks
323) Stocks offering investors a high dividend yield are called
A) growth stocks.
B) blue chip stocks.
C) income stocks.
D) penny stocks.
324) An investor places a ________ order with a broker to buy a particular stock at a specific price, if and when that price becomes available.
A) call
B) market
C) put
D) limit
325) An investor places a ________ order with a broker to sell a stock at the best price available at that time.
A) discretionary
B) market
C) limit
D) leveraged
326) When corporations elect to issue two or more shares of stock to existing stockholders for each share they currently own, they have initiated a(n)
A) stock split.
B) dividend spread.
C) share dividend.
D) earnings split.
327) Which of the following describes the process where an investor borrows a percentage of the purchase price of stocks from the brokerage firm?
A) margin call
B) futures trading
C) buying on margin
D) dealer's account trading
328) What agency sets the margin rates for purchasing stock in the U.S.?
A) high commissioners of the Securities and Exchange Commission
B) board of governors of the Federal Reserve System
C) Securities Division of the Treasury Department
D) Federal Trade Commission on Exchange Markets
329) If a stock's closing price for the day is 32.47, the stock's price in U.S. dollars would be
A) $32 plus a $.47 commission.
B) $32.47.
C) in between a low of $32 and a high of $47.
D) $3,247.
330) If an investor's strategy is: "buy low, and sell high," we could conclude that his optimism regarding future stock price increases indicates that he is
A) bullish.
B) bearish.
C) only marginally confident about the stock market.
D) lionish.
331) In the securities markets, capital gains take place when
A) the value of the Dow Jones Industrial Average appreciates.
B) a security sells for more than the original purchase price.
C) additional investors buy stock in an existing corporation.
D) stockholders profit from the firm's use of leverage.
332) ________ stocks represent investments in emerging fields that have the potential to realize better than average increases in the stock's prices.
A) Blue chip
B) Penny
C) Growth
D) Income
333) The stock of well-known, high-quality firms, such as Coca-Cola, General Electric, and Procter & Gamble, fit the characteristics of ________ stocks, because investors can almost always be assured a dividend and consistent stock price appreciation.
A) growth
B) blue chip
C) income
D) callable
334) Corporations that want to attract more investors by lowering the selling price of their common stock might consider declaring a
A) bankruptcy filing.
B) cash dividend.
C) margin call.
D) stock split.
335) Buying stock on margin allows an investor to borrow funds from the brokerage company as part of the transaction. This ________ the potential return to the investor and ________ the risk.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
336) Amy plans to buy 100 shares of common stock in Marshall Manufacturing. She willingly accepts the risk of this investment because she
A) understands that creditors are protected from risk.
B) desires an opportunity to share in the success of this company.
C) knows that every gambler wins occasionally.
D) believes that a bear market is on the way.
337) After buying 200 shares of common stock in Epic Electronics for $20 per share, Rashad later sold the same shares for $25 per share. Rashad's capital gain on the total transaction is:
A) $10.
B) $110.
C) $1,000.
D) $1,500.
338) Norman wants to supplement his current investments with a high-risk, low-priced security. Which of these best fits his strategy of high risk, low price and a potentially high rate of return?
A) time deposits
B) penny stocks
C) blue chip stocks
D) split stocks
339) Ernesto told his broker to buy 75 shares of PharmaONE at the best possible price available that day. These directions indicate that Ernesto placed a ________ order with his broker.
A) market
B) limit
C) margin
D) split
340) Realizing that Iron Age Metalworks stock currently sells for $37 a share, Alex directed her broker to buy 100 shares if and when the price dropped to $31. Alex placed a ________ order with her broker.
A) market
B) limit
C) margin
D) confirmation
341) Brad told his stockbroker to buy 100 shares of Mineral Mining common stock if and when the price falls to $18 per share. Brad placed a(n)
A) market order.
B) odd-lot order.
C) limit order.
D) contingent order.
342) Game Guys announced a 2-for-1 common stock split for investors on record. Which of the following will occur?
A) The stock price will increase to reflect the value of two shares for every one share.
B) Each share will be worth ½ of its previous value, but shareholders' total value of Game Guys will remain the same.
C) The value of Game Guys common stock will remain the same, for a short period of time, and then experience a guaranteed growth spurt.
D) The shareholders will sell their shares immediately after the split and take their capital gains, as well as provide others an opportunity to invest in Game Guys.
343) Before the announcement of a three-for-one stock split, the selling price for a share of stock in Fossil Oil Refineries was $150 per share. Immediately after the stock split, the probable price per share is
A) $450.
B) $ 50.
C) $350.
D) $150.
344) Anjali's stockbroker called to inform her of a margin call that requires that she pay $1,000. This indicates that the value of Anjali's stock has
A) just split.
B) decreased.
C) increased.
D) changed causing the Federal Reserve to increase the margin rate.
345) Brittany read about PharmaONE and wants to buy 100 common shares at $40 per share. Unfortunately, she only has $3,000 available to invest. One risky strategy Brittany could consider is
A) buying on margin.
B) buying from the dealer's account.
C) arranging for security funding.
D) Leveraging her future professional earnings.
346) Bondholders can sell their bonds
A) on the secondary market prior to the maturity date.
B) early if the bonds were issued with a callable option.
C) after the bonds are converted into common stock.
D) after receiving the written permission of other stakeholders.
347) Which of the following organizations provides an assessment of the relative level of risk of a particular firm's bond issue?
A) Securities and Exchange Commission
B) E*trade
C) Wall Street Journal
D) Standard & Poor's
348) Bonds sold at a ________ sell for less than face value.
A) secondary market
B) discount
C) premium
D) date before the maturity date
349) Bonds offering a higher interest rate than other bonds of similar risk will likely sell at a
A) secondary market.
B) discount.
C) premium.
D) price equal to the face value of the bond.
350) The higher the risk associated with a bond issue, the ________ the interest rate the organization must offer investors.
A) higher
B) lower
C) more stable
D) less stable
351) Which of the following offers low risk, guaranteed income, backed by the full faith and credit of the federal government?
A) municipal bonds
B) U.S. government preferred stocks
C) common stock in the U.S. postal service
D) U.S. government bonds
352) Bonds that pay very high interest rates and typically have a higher risk of default are known as
A) zero-coupon bonds
B) bearer bonds
C) junk bonds
D) volatile bonds
353) High-risk, high-interest bonds are called
A) convertible bonds.
B) preferred bonds.
C) discount bonds.
D) junk bonds.
354) Bond prices in the newspaper or online are quoted as a percentage of their face value of $1,000. If the bond price is 103.25, this bond's value is equal to
A) $103.25
B) $1,032.50
C) $10,325.00
D) $10.33
355) A recent publication referred to a series of bonds as "the 6s of 35." What does this mean?
A) They were issued in 2006, and they mature in 2035.
B) That any bond in this issue, whose series' numbers end in "6" are callable in the year 2035.
C) They are 35-year bonds that were due in 2006.
D) They pay 6% interest and they mature in 2035.
356) When market interest rates increase, the selling price of existing bonds will
A) increase.
B) decrease.
C) remain constant.
D) be less volatile.
357) The risk associated with Firm A's bond is greater than the risk of Firm B's bond. All other things being equal, investors would be willing to pay ________ for Firm B's bond.
A) less
B) more
C) the same
D) a premium
358) U.S. government bonds are considered a secure investment because
A) the interest rates are protected from inflation and tied to the consumer price index.
B) they are backed by the full faith and credit of the federal government.
C) the interest rates are higher than for corporate bonds of equal duration.
D) if they are lost or stolen the federal government promises to replace them when the proof of purchase is provided.
359) Abraham found a $1,000 face value bond that belonged to his father. He checked The Wall Street Journal and found the bond was currently selling for $1,220. This bond sells at a
A) discount.
B) premium.
C) price that is overvalued.
D) primary market.
360) The new issue $1,000 face value bonds due in 2030 issued by Bathtub Brewing Company are seen by investors as less attractive than other bonds offered by other businesses at the same time. The coupon rate attached to these bonds will need to be ________ than other corporate bond issues in order to attract investors.
A) the same
B) lower
C) higher
D) not important because it is a new issue
361) Andrea invests $5,000 in five Epic Electronics bonds that mature in 10 years. Unexpectedly just the week after she invests, she has the opportunity to work abroad, which she has always wanted to do, but she needs cash. Which of the following most likely applies to Andrea?
A) She can immediately sell the bonds for $5,000 plus interest for the week.
B) She is out of luck. She must keep the bonds for the full 10 years.
C) She may immediately sell the bonds but it is unclear how much money they will sell for.
D) She will be able to sell the bonds immediately on the primary market.
362) An investment that pools together investors' money in order to buy securities in many different companies or governments is a
A) commercial fund.
B) mutual fund.
C) holding company.
D) public investment corporation.
363) A mutual fund company buys securities from corporations and governments and packages them together into a mutual fund. It then
A) sells shares of this packaged investment to interested investors.
B) deposits the mutual fund into a pension fund for institutional investors.
C) charges investors a fee to find out how these investments fared, so that investors can decide for themselves as to whether they want to own the investments.
D) gives investors the option to bid on a share of this investment.
364) Which of the following describes a benefit enjoyed by investors in mutual funds?
A) Guaranteed dividend payments are received annually.
B) Investment risk is eliminated.
C) Investors buy an ownership interest in many different companies.
D) Investors exercise managerial authority in many different companies.
365) New investors may want to consider ________ funds, which are mutual funds that invest in one particular kind of stock or a particular kind of bond, or even stocks that are representative of the entire market.
A) international
B) index
C) global
D) relief
366) ________ are collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds.
A) REITs
B) ETFs
C) LOCs
D) SRTs
367) Buying several different investment alternatives to spread the risk helps an investor achieve
A) lower rates of return.
B) lower commission fees.
C) isolation.
D) diversification.
368) ________ means that the mutual fund company does not show a fee or commission for investing in the fund.
A) Front load
B) Back load
C) Double load
D) No load
369) ________ have a set dollar goal the fund manager wants to manage. Once the fund has reached that goal, it does not accept new investors.
A) No-load funds
B) Closed-end funds
C) Drop-off funds
D) Zero-sum load funds
370) ________ represent the best way for investors to have their investments managed by a trained specialist for a fee.
A) Individual stocks
B) Mutual funds
C) Corporate bonds
D) Government bonds
371) To reduce the risk of investing in an individual stock, an ownership position in many different companies can be achieved by purchasing shares in a(n)
A) indexed security.
B) mutual fund.
C) diversification bond.
D) stock cooperative.
372) Which of the following describes a mutual fund that charges no commission to buy or sell its shares?
A) open-end fund
B) closed-end fund
C) no-load fund
D) front-load fund
373) Mutual fund investors will note that
A) fund managers have not yet added foreign securities into their funds.
B) mutual funds cannot be purchased through a traditional brokerage house.
C) loads can vary from one mutual fund to another. The fund manager dictates the commissions and fees.
D) by law, mutual funds can no longer charge loads.
374) The initial cost of investing in mutual funds depends in part on
A) whether the fund is a load or no-load fund.
B) the risk tolerance of the companies in the fund.
C) the tax rate on capital gains.
D) the imposition of government tariffs.
375) Elisa has an ownership interest in many different companies, yet she owns the shares of stock of just one organization. Elisa undoubtedly owns shares in a(n)
A) investment trust.
B) security account.
C) options association.
D) mutual fund.
376) Orlando, a recent graduate of a community college, is about to make his first investment in the stock market. Which of the following would be a cautious way for Orlando to start investing?
A) future contracts in oil
B) index funds
C) short-selling technology stocks
D) commodity market transactions in precious metals
377) Applying what you have learned about investments as introduced to you in Chapter 19, put the following investments in order from least risky to riskiest. Which of following lists begin with the least risky investment and ends with the most risky? Least risky = 1; most risky = 5.
A) 1) Bonds; 2) Mutual Funds; 3) ETFs; 4) Preferred Stock; 5) Common Stock
B) 1) Preferred Stock; 2) Common Stock; 3) Mutual Funds; 4) ETFs; 5) Bonds
C) 1) Common Stock; 2) Bonds; 3) Mutual Funds; 4) ETFs; 5) Preferred Stock
D) 1) Bonds; 2) Common Stock 3) Mutual Funds 4) ETFs 5) Preferred Stock
378) The traditional market barometer used to measure the direction of the stock market is the
A) Value Line Composite (VLC).
B) Moody's Investment Index (MII).
C) Dow Jones Industrial Average (the Dow).
D) Fitch's Industrial Index (FIA).
379) The Dow Jones Industrial Average represents the average price of ________ industrial stocks.
A) 11
B) 30
C) 500
D) all the above
380) ________ involve(s) computer instructions that automatically sell stocks whose value has dropped by a predetermined amount.
A) Software action
B) Program trading
C) Curbs
D) Circuit breakers
381) To reduce market volatility, ________ require that a key computer is turned off so that program trading is halted.
A) ultra restraints
B) trading curbs
C) market stops
D) nutmeg halts
382) The Securities and Exchange Commission developed ________ to halt trading in the stock market for a short time when the market has experienced a dramatic decrease in prices.
A) program trading
B) online investing
C) circuit breakers
D) insider trading
383) One criticism of the Dow Jones Industrial Average suggests that it
A) magnifies the fluctuations in the stock market.
B) does not indicate the cause of changes in stock prices.
C) is too small (too few companies) to get a good statistical representation.
D) is biased causing an overstatement of bond price increases and an understatement of stock price decreases.
384) Daily reporting of the Dow Jones Industrial Average serves to
A) show the direction of the market over time.
B) distort short-term fluctuations for the financial community.
C) identify the beginning of a recession in the economy.
D) disclose the average price of a share of stock on the major exchanges.
385) The purpose of the SEC's circuit breakers rule is to
A) prevent market disruption caused by a communication malfunction.
B) halt trading for a short time following a dramatic drop in stock prices.
C) allow floor traders to specialize in trading the securities of specific industries.
D) prevent individuals from profiting from information not available to the general public.
386) Bill is reviewing the firms whose stocks have comprised the Dow Jones Industrial Average over the years. He discovers
A) the same 30 stocks have been used since the inception of the indicator.
B) different companies are used each year.
C) these stocks change periodically as deemed appropriate.
D) there is an even mix between big and small companies.
387) Bonds represent a major source of long-term financing. What is a bond? Explain the major elements that must be in a bond issue.
388) Explain the major advantages and disadvantages of issuing stock as a source of long-term financing.
389) Discuss the role of investment bankers in the securities markets.
390) Explain the differences between preferred stock and common stock.
391) The risk/return trade-off is inherent in any investment strategy. What are the five key criteria investors should consider when selecting investment options?
392) Describe four different types of common stock that an investor may consider, depending upon the investor's strategy and risk tolerance.
Mini-Case
Penny Stock is the chairperson of Pirate Recording Company Inc. She is the person responsible for the tremendous growth this company has enjoyed over the past three years. It was Penny's intuition and clever negotiating that enabled the company to sign two very hot recording artists: Half a Dollar and N'elli. These groups have generated profits of over $25 million.
The future looks even brighter at the firm because several current and aspiring entertainers have indicated an interest in signing on with Pirate Recording. This incredible growth has delighted everyone at the company, but it has also created a major problem for Penny. Pirate Recording has never been a major player in the recording industry, primarily because of limited capital. In order to take the company to the next level Penny realizes that she will need to expand the firm's personnel and equipment. The amount of new funds required to finance this needed expansion is $150 million. Penny has started to consult with others about how to finance this major expansion of the company.
393) One funding source under consideration is the issuance of $150 million worth of corporate bonds. A financial advisor predicted that in order for the fast growing company to attract investors, it would have to put up collateral to back up the bond issue. The type of bond the financial advisor suggests is
A) debenture bonds.
B) asset bonds.
C) secured bonds.
D) preferred bonds.
394) Penny is concerned about the interest rate risk if the company decides to issue bonds. Penny would like protection from interest rate fluctuation. Therefore, the bond issue's features should include a(n)
A) equity proposition.
B) call provision.
C) convertibility clause.
D) collateral agreement.
395) If Pirate Recording elects to offer an Initial Public Offering (IPO), it will involve preparing full financial disclosure with the ________. The firm is advised to solicit the services of an investment banker/underwriter, who will analyze the market and determine the best price for the new issue of Pirate Recording stock. The offering will then be sold on the ________.
A) Internal Revenue Service; secondary market
B) Fair Trade Commission; primary market
C) Federal Trade Commission; secondary market
D) Securities and Exchange Commission; primary market
396) If stock is issued in Pirate Recording, analysts predict that the company has potential for strong growth. The prospects for dividend payments to stockholders, at least in the beginning, are not good. Pirate Recording will need to retain its earnings in order to grow rapidly. The firm's stock would most likely be classified as a(n)
A) blue chip stock.
B) income stock.
C) growth stock.
D) capital stock.
397) Penny is impressed with contemporary high-tech companies that have listed their stock on an electronic telecommunications network of securities dealers who trade the stock. She is referring to firms such as Microsoft, Google, and Apple. Penny ideally would like her company's stock listed on the
A) AMEX.
B) NASDAQ.
C) OTC.
D) NYSE Euronext.
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