Deck 10: Financial Markets: Allocating Financial Resources

Question 1

The Federal Deposit Insurance Corporation was established by the Banking Act of 1933 and insures depositors against financial loss if a bank fails.

Answer 1

True

Question 2

The _____ of 2010 expanded the Fed's regulatory authority over nondepository financial institutions, such as hedge funds and mortgage brokers that had previously operated with little regulatory oversight or accountability.

A)Sarbanes-Oxley Act
B)Dodd-Frank Act
C)Glass-Steagall Act
D)Gramm-Bliley-Leach Act

Answer 2

B

Question 3

The difference between the prices at which securities are bought and sold is called a thrift.

Answer 3

False

Question 4

A(n)_____ is an example of a depository institution.

A) commercial bank​
B)investment bank
C)mutual fund
D)insurance company

Question 5

The FTSE 100 is an index of the stock prices of the largest traded companies on the London Stock Exchange.

Question 6

Mrs. Jamieson likes to buy stock of relatively small, new companies with innovative products in a rapidly expanding sector of the economy. She believes that the value of many of these stocks will rise significantly over time. Mrs. Jamieson's approach is an example of the market timing strategy.

Question 7

Which of the following is a difference between credit unions and commercial banks?

A)Unlike commercial banks, credit unions are not-for-profit organizations.
B)Unlike credit unions, commercial banks are non-depository organizations.
C)Unlike credit unions, commercial banks are owned by their depositors.
D)Unlike commercial banks, credit unions charge very high interest rates on loans.

Question 8

Which of the following was the major outcome of the Financial Services Modernization Act of 1999?

A)It reversed the Glass-Steagall Act's prohibition of commercial banks selling insurance or acting as investment banks.
B)It established the Federal Reserve Insurance Corporation, which insured depositors against financial losses when a bank failed.
C)It prohibited misrepresentation or other forms of fraud in the sale of newly issued stocks and bonds.
D)It required that all publicly traded firms with at least 500 shareholders and $10 million in assets file quarterly and annual financial reports with the SEC.

Question 9

Mr. Joe Lewis bought 650 shares of stocks in the Garrett Corp. last year at a price of $19 per share. The market price has now risen to $25 per share. This result indicates that Mr. Lewis could realize a capital gain if he sells his stock.

Question 10

The par value of a bond is the value of that bond at its maturity. It represents what a firm must pay the bondholder when the bond matures.

Question 11

Which of the following is true of a securities broker?

A)They sell securities for higher prices than they paid to purchase them.
B)They collect premiums from policy holders.
C)They act as agents for investors who want to buy or sell financial securities.
D)They issue new securities to raise financial capital.

Question 12

The Securities Exchange Act of 1934 required that all publicly traded firms with at least _____ shareholders and $10 million in assets file quarterly and annual financial reports with the Securities and Exchange Commission (SEC).

A)100
B)200
C)250​
D)500

Question 13

Dividends to common stockholders of a company are:

A)a distribution of earnings that are paid only if declared by the company's board of directors.
B)a legally required payment to the company's shareholders.
C)a tax-deductible expense.
D)the result of a rise in the market price of the firm's stock in the secondary market.

Question 14

Institutional investors amass large pools of financial capital by accepting savings account deposits.

Question 15

The Securities Act of 1933 created the Federal Reserve System to serve as the central bank in the United States.

Question 16

A(n)_____ is a financial intermediary that specializes in helping firms raise financial capital by issuing securities in primary markets.

A)credit union
B)commercial bank
C)savings and loan association
D)investment bank

Question 17

Mr. Troy Samson wants to buy stocks of a local retail company. He needs some help with market research and financial planning for the venture. Mr. Samson should contact a(n)_____.

A)accredited investor
B)credit union
C)institutional investor
D)securities broker

Question 18

National Association of Securities Dealers Automated Quotation System (NASDAQ)is a physical location where brokers meet to buy and sell stocks for their clients.

Question 19

Which of the following was a major outcome of the Banking Act of 1933?

A)It established the Federal Reserve as the central bank in the U.S.
B)It banned commercial banks from competing with non-depository institutions.
C)It prohibited fraud in the sale of newly issued stocks and bonds.
D)It created the Securities and Exchange Commission to oversee the securities industry.

Question 20

An investment banker's main responsibility is to help firms work out the financial details of issuing new securities before a public offering. This can include assisting the firm with the planning and market assessment phase, providing assistance with SEC details, and deciding whether to sell the stock via a firm commitment or a best efforts approach.

Question 21

In order to access stock information for a particular corporation on a financial website, an individual normally types in the corporation's _____.

A)stock earnings per share
B)stock number
C)stock symbol
D)SEC registration number

Question 22

Cartman owns convertible securities in OctoCore Corp. If the conversion ratio for the convertible securities is 37, it means that:​

A)Cartman can convert 37 percent of the convertible securities that he owns for shares of common stock.
B)Cartman can convert 37 percent of the convertible securities that he owns for shares of preferred stock.
C)Cartman can exchange each convertible security that he owns for 37 shares of common stock.
D)Cartman can liquidate each convertible security that he owns for $37.

Question 23

A(n)_____ is the first time a company issues stock that may be bought by the general public.

A)alternative public offering
B)reverse public offering
C)initial public offering
D)direct public offering

Question 24

In order to determine market cap, the total market value of all shares of common stock outstanding of a company, an individual should:

A)multiply the number of shares outstanding by the price per share.
B)look at the total assets on the balance sheet of the firm.
C)calculate the net worth of the firm.
D)divide the number of shares outstanding by the par value per share.

Question 25

A drawback of actively managed funds is:

A)that mutual funds that are not specialized do not offer enough diversification.
B)that significant tax consequences occur when there is a lot of trading.
C)the difficulty in redeeming shares from the fund.
D)the uncertainty of recovering at least a portion of the initial investment.

Question 26

The stocks of firms that do not meet the listing requirements of stock exchanges are traded on the _____.

A)over-the-counter market
B)money market
C)margin market
D)private-player market

Question 27

Jack recently received a considerable sum of money by selling his property. He decides to invest this sum in a diversified set of securities. He plans to retain these securities for a long time until they have appreciated.Jack is using the _____ investment strategy.

A)market timing
B)investing for growth
C)value investing
D)buying and holding

Question 28

Which of the following is a disadvantage of strongly relying on market timing?

A)It requires the investor to make frequent trades.
B)It has steady but very low returns because the investments are low risk.
C)It requires huge, long term-investments on a single company, thus accentuating the risk.
D)It is very time consuming and takes a very long time to get the returns.

Question 29

The advantage of electronic communication networks (ECNs)is that they:

A)speed up transactions.
B)help firms to identify and contact accredited investors.
C)guarantee the sale of all the securities of listed firms.
D)eliminate fraud.

Question 30

Which of the following is true of personal investing?

A)Every security investment will generate money.
B)In general, riskier investment strategies offer the potential for higher returns.
C)Diversification is a personal investment strategy that increases the expected rate of return and risk.
D)Individuals who invest in securities must use the services of an investment bank.

Question 31

Mr. Arne Freidrich looks at SoTon Co.'s latest annual report and feels that the company is performing well. However, he believes it is not worth spending more than $70 per share of SoTon. He contacts his broker and tells him to acquire 50 shares of SoTon only if they are less than $70 a share. Which of the following orders has Mr.Freidrich placed to acquire the shares?

A)A stop-loss order
B)A liquidation order
C)A buy limit order
D)A market order

Question 32

Unlike the early stock exchanges, National Association of Securities Dealers Automated Quotation System (NASDAQ)has never:

A)maintained a physical trading location where dealers meet to trade securities.
B)listed stocks of large, well-known firms.
C)established formal listing requirements.
D)used a computerized network to trade securities.

Question 33

The price at which shares of an open-end mutual fund are issued and redeemed is based on the fund's _____.

A)face value per share
B)open-end fund
C)net asset value per share
D)closed-end fund

Question 34

One drawback of exchange traded funds (ETFs)is that investors:

A)are not able to diversify their investments.
B)have to pay brokerage commissions every time they buy or sell shares.
C)are forced to pay higher fees as compared to mutual funds.
D)can buy or sell shares only after the major stock exchanges are closed.

Question 35

Richard has been following information about Pioneer Mobil on a financial website. He has noticed that the firm's price-to-earnings ratio (P/E)has been steadily rising. Richard can conclude from this result that the company:

A)is in serious financial trouble.
B)has just issued more shares of common stock.
C)has recently increased its dividend.
D)may have a growth in future earnings.

Question 36

The _____ tracks the stock prices of some of the largest and most actively traded companies listed on the Tokyo Stock Exchange.

A)Nikkei 225
B)SSE Composite
C)Standard & Poor's 500
D)FTSE 100

Question 37

Which of the following is true of the comparison between the Dow Jones Industrial Average (DJIA)stock index and the Standard & Poor's 500 (S&P 500)stock index?

A)The S&P 500 has a broader index than the DJIA.
B)All the firms included in the DJIA are large, whereas all the firms in the S&P 500 are small.
C)The stocks considered for S&P 500 are picked by the editors of The Wall Street Journal, whereas the ones for DJIA are selected by the stockholders.
D)All the DJIA firms are well-established, whereas all the S&P 500 firms are start-ups with low market value.

Question 38

If Carl is a preferred stockholder at Cedia Inc.and Cedia goes out of business, Carl's claim on the firm's assets:

A)takes precedence over common stockholders.
B)takes precedence over the claims of any creditors.
C)can be fulfilled only after the firm has paid dividends on its common stock.
D)is limited to any preferred dividends the company has not paid.

Question 39

The objective of the market timing strategy is to:

A)predict changes in stock prices in order to earn a quick profit by buying low and selling high.
B)minimize risk by getting completely out of the stock market when stock prices fall and investing heavily once prices begin to rise.
C)quickly identify new companies with long-term growth potential and buy their stock before other investors notice them.
D)hold a diversified portfolio of stocks for a long period of time in order to take advantage of the long-run upward trend in the stock market.

Question 40

Which of the following is a drawback of private placements?

A)They are more complex and expensive than public offerings.
B)Complex registration documents need to be prepared for their financing.
C)They are required to register with the Securities and Exchange Commission (SEC).
D)Unregistered securities cannot be sold to anyone except accredited investors.

Question 41

A _________ is the most common depository institution.

A)not-for-profit organization
B)savings and loan association
C)credit union
D)commercial bank

Question 42

How does an investor typically track the performance of specific stocks?

Question 43

Discuss how the government regulates securities markets.

Question 44

_________ overturned the section of the Banking Act of 1933 that prohibited commercial banks from selling insurance or performing the functions of investment banks.

A)The Sarbanes-Oxley Act of 2002
B)The Securities and Exchange Act of 1934
C)The Financial Services Modernization Act of 1999
D)The Securities Act of 1933

Question 45

A _________ issued by an investor instructs a broker to buy or sell a security at the current market price.

A)market order
B)limit order
C)safe order
D)security order

Question 46

David owns 15 percent of the shares of common stock currently held in BIGD Analytics Co. At the most recent meeting, the board of directors authorized the sale of 250,000 new shares of stock to raise funds. As an existing stockholder, David may have a _________ to buy up to 37,500 shares of the new stock before it is offered to the public.

A)preventive right
B)cumulative right
C)secondary right
D)preemptive right

Question 47

Investors who use analytical techniques to try to predict when prices of particular stocks are likely to rise and fall are relying on the _________ strategy.

A)market timing
B)buy-and-hold
C)market making
D)value investing

Question 48

List any two depository and nondepository institutions and describe their differences.

Question 49

Discuss the appeal to investors of mutual funds and exchange traded funds.

Question 50

Explain how securities are issued in the primary market and traded on secondary markets.