Deck 16: Managing Finances

Question 1

Unlike the Dow and the S&P 500, all NASDAQ-listed companies, not just a selected few, are included in the index for a total of some 3,800 firms across six continents.

Answer 1

True
Explanation:NASDAQ is one of the largest stock indexes in the world.

Question 2

Initial public offerings (IPOs) are the first sale of a company's stock to the general public and are a major source of funds that fuel continued growth for many firms.

Answer 2

True
Explanation:IPOs generate a lot of funding for companies that engage in public trading of stock.

Question 3

In a secondary securities market, new stocks and bonds are bought and sold by firms and governments.

Answer 3

False
Explanation:Existing stocks and bonds are sold in a secondary securities market.

Question 4

A bond is said to be in default if the borrower fails to make payment when due to lenders.

Question 5

An investment bank is a financial institution that specializes in issuing and reselling new securities.

Question 6

Municipal bonds may be issued by federal, state, or local governments.

Question 7

A stock exchange is an organization of individuals coordinated to provide an institutional auction setting in which stocks can be bought and sold.

Question 8

Because of the uncertainties involved in stock prices, investment professionals believe day-to-day prices to be a generally poor indicator of any stock's real value.

Question 9

The Dow Jones Industrial Average (DJIA) has remained unchanged in recent years.

Question 10

Stocks are known as securities because they represent a secured interest in a company.

Question 11

Stock brokers earn commissions from the individuals and organizations for whom they place orders.

Question 12

An exchange-traded fund (ETF) is a bundle of stocks (or bonds) that are in an index that tracks the overall movement of a market.

Question 13

The market in which mutual funds are sold are called securities markets.

Question 14

The investment industry categorizes firms according to size of capitalization.

Question 15

The New York Stock Exchange, the world's oldest electronic stock market, has orders gathered and executed on a computer network.

Question 16

The New York Stock Exchange is one of the smaller exchanges.

Question 17

The largest stock exchange in the world is the Tokyo exchange.

Question 18

Bankruptcy is the court-granted permission not to pay some or all debts.

Question 19

In case of financial distress, the firm would pay its stockholders before paying its bondholders.

Question 20

The NASDAQ is the largest exchange.

Question 21

Lito is working with a discount broker. Which service would Lito NOT be likely to receive?

A) stock research
B) industry analysis
C) face-to-face consultations
D) screening for specific types of stocks
E) quality suggestions for investments

Question 22

Which of the following statements is NOT True about dividend payments?

A) Many companies distribute between 30 and 70 percent of their profits to shareholders.
B) Some firms, especially fast-growing companies, do not pay dividends.
C) Many fast-growing companies use cash earnings for expanding the company so that future earnings can grow even faster.
D) During unprofitable years, companies are still required by law to pay dividends to their stockholders.
E) Dividend payments are made to stockholders on a regular basis.

Question 23

Hugh is an investor who opts for no-risk U.S. Treasury Bills and intermediate-term high-grade corporate bonds. What kind of investor is Hugh?

A) professional
B) aggressive
C) amateur
D) conservative
E) sporadic

Question 24

What value of a stock is calculated by dividing total shareholders' equity by the total number of shares of stock issued?

A) par value
B) market value
C) book value
D) chime value
E) total value

Question 25

Which of the following is a summary of price trends in a specific industry and/or the stock market as a whole?

A) investment index
B) average index
C) market indicator
D) market index
E) prospectus

Question 26

Which of the following is an organization of individuals coordinated to provide an institutional setting in which stock can be bought and sold?

A) stock exchange
B) brokerage
C) server
D) over-the-counter market
E) commission

Question 27

Which of the following are stocks, bonds, and mutual funds representing secured, or financially viable, claims on the part of investors?

A) private placements
B) securities
C) exchanges
D) commodities
E) dividends

Question 28

Which of the following is a requirement for a firm to be listed on the New York Stock Exchange?

A) capital value of at least $35 million
B) total value of outstanding stock
C) number of shareholders must exceed 100
D) number of shares of stock must exceed 1 million
E) company must be headquartered in North America

Question 29

Kim has investments in stocks, and wants to calculate her total return. What should she do?

A) Divide the yearly dollar amount of dividend income by the investment's current market value.
B) Compare the dividend against current yields from other investments.
C) Subtract the cost of the stock from what she sold it for.
D) Divide the current dividend payment plus capital gain by the original investment.
E) Subtract current liabilities from current assets.

Question 30

Dividend payments are optional and variable-the corporation's CEO decides whether and when a dividend will be paid, as well as the amount that is best for the future of the company and its employees.

Question 31

Which of the following is the federal government agency that regulates U.S. securities markets?

A) New York Stock Exchange
B) Federal Reserve
C) Commerce Department
D) Securities and Exchange Commission
E) Treasury Department

Question 32

Which of the following is an advantage of ETFs over mutual funds?

A) ETFs can be traded throughout the day like a stock.
B) ETFs have high operating expenses.
C) ETFs do not require high initial investments.
D) ETFs are not regulated by the government.
E) ETFs are difficult to sell in a timely manner.

Question 33

What is the formula for measuring a firm's working capital?

A) current assets = working capital /current liabilities
B) working capital = current assets - current liabilities
C) current liabilities = current assets + working capital
D) working capital = current assets x current liabilities
E) current liabilities = current assets / working capital

Question 34

An investment bank operates in the secondary securities market.

Question 35

If you purchased a share of GE stock for $33.82, then sold it one year later for $36.50, what would the price appreciation be?

A) $1.68
B) $2.68
C) $33.82
D) $36.50
E) $67.24

Question 36

Although advising and underwriting may be tasks of an investment bank, distribution of new securities is NOT one of their services.

Question 37

New stocks and bonds are sold in what market?

A) private placement market
B) secondary market
C) primary market
D) tertiary market
E) open market

Question 38

When an investment bank engages in underwriting, that investment bank is taking on risk in the process of launching new securities.

Question 39

Aggressive growth funds are designed for investors who can accept the risk of loss inherent in common stock investing with severe price fluctuations, but also the potential for superior returns over time.

Question 40

Which of the following receives and executes buy-and-sell orders for other people in return for commissions?

A) stock exchanges
B) stock brokers
C) investment banks
D) stock agents
E) savings banks

Question 41

Javier wants to invest, but wants to reduce his risk of loss by spreading the total investment across more stocks. Javier would be most interested in which of the following?

A) spreading
B) shorting
C) margin buying
D) diversification
E) asset allocation

Question 42

What is the term for buying several different kinds of investments rather than just one?

A) spreading
B) shorting
C) margin buying
D) diversification
E) management

Question 43

Don Dillon is a 24-year-old graphic designer. He eventually wants to get married, raise a family, and buy a house. He knows that he has to start putting money away so that his goals can someday become a reality. He has heard that investing is risky because you can lose money as well as make money. So Don decides to play it safe and deposit money in a bank on a regular basis. Why might this not be his best strategy?

A) Stock investments will always result in high returns.
B) It pays to take chances with your money.
C) You can actually lose money with bank savings due to inflation and taxes.
D) People usually benefit from risky investments.
E) Most savings accounts are insured by the FDIC.

Question 44

Which of the following is figured by dividing the yearly dollar amount of dividend income by the investment's current market value?

A) bond yield
B) current dividend yield
C) debenture
D) trading volume
E) EBIDA

Question 45

Which of the following is a formal pledge (an IOU) obligating the issuer to pay interest periodically and repay the principal at maturity (a preset future date) to the lender?

A) commercial bank loan
B) corporate bond
C) mutual fund
D) bond indenture
E) prospectus

Question 46

Diamond Electronics has ascertained that it is has positive working capital. Which of the following must be True of Diamond Electronics?

A) The firm's current liabilities are large enough to pay off current assets.
B) The firm may need to borrow money from a commercial bank.
C) The firm's current assets are large enough to pay off current liabilities.
D) The firm does not need to issue stock.
E) The firm would be a bad risk for any investor to consider.

Question 47

Marty and his sister Robin both invested in shares of the Heavy Metal Steel Company. Marty bought common shares and Robin bought the company's preferred shares. The two had been holding their stock for several years and had been pleased with their stock's performance. But sadly, Heavy Metal's business took a turn for the worse. After several quarters of disappointing numbers, the company suddenly announced it was going out of business. Marty and Robin, had they seen this coming, could have sold their shares at any time. But now it was too late. Which one of the following is the most likely outcome?

A) Marty loses his entire investment, but Robin might receive a partial repayment after Heavy Metal's bondholders are repaid.
B) Marty and Robin lose their entire investment.
C) Robin is repaid immediately, while Marty is eventually repaid after the sale of all of the company's assets.
D) Marty and Robin are repaid all of their initial investment due to a successful shareholder lawsuit.
E) Marty and Robin's investments regain value once Heavy Metal restarts operations.

Question 48

What is the term for the proportion of funds invested in each of several investment alternatives?

A) spreading
B) shorting
C) margin buying
D) asset allocation
E) diversification

Question 49

Which stock exchange has the highest volume of shares traded?

A) American Stock Exchange
B) New York Stock Exchange
C) NASDAQ
D) Philadelphia Stock Exchange
E) SEC

Question 50

Which of the following is considered by many to be the best single indicator of the U.S. equities market?

A) NASDAQ Composite
B) Russell 2000
C) Dow Jones Industrial Average
D) Standard & Poor's 500
E) New York Stock Exchange

Question 51

What is the term for a division of stock that gives stockholders a greater number of shares but does not change each individual's proportionate share of ownership?

A) stock dividend
B) stock split
C) stock yield
D) stock warrant
E) stock exchange

Question 52

Peter Kim wanted to buy a new car. To help finance the purchase, he decided to sell his Organic Markets bond in the secondary market. Peter's bond had a par value of $10,000 and a coupon of 6 percent. Current interest rates were 3 percent. What would Peter's bond sell for?

A) for par value
B) for $10,600
C) at a discount to par value
D) for $9,700
E) at a premium to par value

Question 53

Hector Rivera was interested in buying shares of ABC Computer Corp, which was currently trading at $50 per share. Analysts expected the share price to rise sharply in the next few months. Hector decided to buy a call option for $400, giving him the right to purchase 100 shares of ABC Computer for $60 per share at any time between his purchase and the option's expiration date. Three months later at the expiration date, ABC stock was trading at $73. Hector used his option and purchased 100 shares of ABC Computer. How much money could Hector have saved had he bought the shares three months earlier instead of the call option?

A) $1,400
B) $400
C) $1,000
D) $2,300
E) $200

Question 54

What is a stock's market value?

A) the current price of a share of stock in the stock market
B) the average price of one share of stock over the past year
C) the face value of a share of stock, set by the issuing company's board of directors
D) the price of the stock plus the previous year's dividend
E) the monthly average of a stock's price over a year

Question 55

What is a stock's book value?

A) the current price of a share of stock in the stock market
B) the average price of one share of stock over the past year
C) the face value of a share of stock, set by the issuing company's board of directors
D) the value of a common stock expressed as total stockholders' equity divided by the total number of shares of stock issued
E) the value of a preferred stock as expressed by the number of stock shares issued by the board of directors

Question 56

The stock of Simonsen, Inc. is being bought up by an individual who intends to take over Simonsen and sell off its assets for a profit. What is the individual in this scenario called?

A) angel investor
B) corporate raider
C) inside trader
D) stock broker
E) bondholder

Question 57

Which of the following allows after-hours trading and protects traders' anonymity?

A) National Association of Securities Dealers Automated Quotation (NASDAQ)
B) New York Stock Exchange (NYSE)
C) Electronic Communication Networks (ECNs)
D) Standard & Poor's 500
E) mutual funds

Question 58

Which of the following is a function performed by an investment bank?

A) handling a client's portfolio in the secondary market
B) establishing relationships for a client with a commercial bank
C) underwriting purchases of stocks and bonds
D) arranging travel abroad for purchasers of foreign currencies
E) providing insurance services for clients

Question 59

Twenty-six-year-old Lisa Lamont became an investor one day after a friend explained that there was a much better way to make her money work for her than by letting it sit in a savings account earning a very low rate of interest. Lisa decided to withdraw $10,000 from her savings account and invest it in stocks. She wanted to invest it in such a way as to minimize her risk. Which one of the following strategies makes the most sense for a new investor like Lisa?

A) Invest all $10,000 in a small fast-growing computer company.
B) Invest $5,000 in a gold mining company and $5,000 in a silver mine.
C) Invest the $10,000 in four different home builders.
D) Invest $10,000 in ten different oil companies.
E) Invest $10,000 in a large-cap mutual fund.

Question 60

Which of the following is an electronic securities exchange?

A) Pacific Stock Exchange
B) NASDAQ
C) Osaka Securities Exchange
D) Securities and Exchange Commission
E) Europa

Question 61

Differentiate between market value and book value.

Question 62

While it's invested, money grows by earning interest or yielding some other form of return. What is this known as?

A) compound growth
B) dividend
C) capital gains
D) security
E) diversity

Question 63

What are low grade bonds usually called?

A) bankruptcy
B) default bonds
C) junk bonds
D) corporate bonds
E) grade B bonds

Question 64

Trina is a loan borrower, and the terms of her loan say she must keep a portion of the loan amount on deposit with the bank in a non-interest-bearing account. What is Trina required to have?

A) a compensating balance
B) an unsecured loan
C) an angel investor
D) venture capital
E) collateral

Question 65

Explain the principle of compound growth.

Question 66

The profit realized when the market value of an investment increases is known as which of the following?

A) capital gains
B) asset allocation
C) diversification
D) price appreciation
E) profiteering

Question 67

Marco is a bullish investor, but the stock market is currently bearish. What is Marco most likely to do?

A) sell every stock and go to a 100 percent cash position
B) sell certain winning stocks to realize a profit and put the cash to work when the market decline appears to have ended
C) maintain all stock positions until the market completely recovers and then buy more stocks
D) sell losing stocks to avoid further losses, and hold onto winners
E) buy defensive stocks in the expectation that they will not fall much

Question 68

Marcia has purchased some corporate bonds, which come with bond indentures that stipulate the terms. What is the most important detail of the bond indenture that Marcia should pay attention to?

A) maturity date
B) face value
C) par value
D) dividend payments
E) amount invested

Question 69

Tonio has some stocks and is carefully watching the stock market. Which of the following should he pay attention to in order to find out the performance of the largest companies?

A) Standard & Poor's 500
B) the NYSE index
C) Dow Jones Industrial Average
D) Moody's Stock List
E) the NASDAQ

Question 70

The time it takes to double an investment can be estimated by using which of the following?

A) book value
B) the Rule of 72
C) blue-chips
D) dividends
E) market value

Question 71

"I am a chemist with the nation's largest chemical company. We have secretly developed a cure for three of the world's most serious epidemics. Before this news breaks out, I'm going to buy as many shares of stock in my company as I can get my hands on. Then I'll sit back and watch the stock price head for the sky." What is the person making this statement about to engage in?

A) selling shares of stock
B) insider trading
C) blue-sky trading
D) open-market operations
E) investment banking

Question 72

Explain the Rule of 72.

Question 73

Tim wants to invest in stocks and bonds that will double his money in seven years. Which of the following interest rates should he be targeting?

A) 7%
B) 7.2%
C) 8%
D) 10%
E) 10.3%

Question 74

Before Allied Corporation sells securities, it is required by law to offer future investors the opportunity to read through a document which contains complete information on both the new issue and the corporations. What is that required document called?

A) book report
B) affidavit
C) prospectus
D) portfolio
E) balance sheet

Question 75

Which of the following statements is True about common stocks as investments?

A) Stocks are among the riskiest of all investments.
B) Stocks are most suitable for investors who seek security.
C) Stocks will never become worth less than their purchase price.
D) Stock prices reflect only government action.
E) Stock prices are easily manipulated.

Question 76

Shawna has gotten into investing and is interested in aggressive growth funds. Which of the following must be True about Shawna?

A) She is interested in the best possible returns over time.
B) She is interested in making money as quickly as possible.
C) She has comparatively little money to invest.
D) She wants to make as secure an investment as possible.
E) She is investing for a financial thrill ride.

Question 77

Jessica Jenkins, a 30-year-old history teacher, planned to invest $10,000 in an equity mutual fund. She wanted a fund with maximum geographical diversification. Jessica was seeking high capital gains from her investment and was comfortable with a fair amount of risk. Which one of the following types of mutual fund would Jessica most likely choose?

A) large-cap technology fund
B) global large-cap value fund
C) global small-cap growth fund
D) Asian large-cap growth fund
E) foreign medium-cap growth fund

Question 78

Which is the most widely cited U.S. stock market index?

A) Standard & Poor's Composite Index of 500 Stocks
B) the NYSE index
C) Dow Jones Industrial Average
D) Moody's Stock List
E) the NASDAQ

Question 79

Dynamo Motors has begun to sell corporate securities. Dynamo is required by law to offer future investors the opportunity to read a document that contains complete information on both the new issue and the corporation itself. What is that required document called?

A) book report
B) affidavit
C) prospectus
D) order blank
E) corporate profile

Question 80

Which of the following is the name for a portion of the ownership of a corporation?

A) Schedule C
B) stock
C) partnership
D) LLC
E) dividend