Deck 9: Securities Markets : Trading Financial Resources

Question 1

When the market price of a bond is above its par value,it sells at a premium; if it's below its par value,it is selling at a discount.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

A convertible bond is a bond that gives its holder the right to exchange it for a stated number of shares of common stock at some specified time period.

Answer 3

True

Question 4

A coupon rate is the penalty the issuing company must pay to bondholders when it redeems bonds before their maturity date.

Question 5

Three key types of securities issued by corporations to meet their long-term financial needs are common stock,preferred stock,and bonds.

Question 6

A bond's maturity date is the date when a bond will come due and the issuing company must pay the principal amount owed to the bondholder.

Question 7

Preferred shareholders are guaranteed to receive a dividend every quarter.

Question 8

A debenture is a bond that is backed by a pledge of a specific asset,such as property or equipment.

Question 9

Common stock is the basic form of ownership in a corporation.

Question 10

A bond is a long-term debt instrument issued by a corporation or government entity.

Question 11

A callable bond allows the person holding the bond to redeem it before its maturity date for the par value.

Question 12

When a company issues preferred stock with a cumulative feature,any time it skips a preferred dividend in one quarter,the amount it owes the next quarter is equal to the dividend for that quarter plus the dividend it skipped in the previous quarter.

Question 13

Bonds are shares of ownership in a corporation.

Question 14

A secured bond is a bond that is backed by a pledge of specific assets.

Question 15

Securities markets are where firms raise funds needed primarily to meet their short-term financial needs.

Question 16

A capital gain is an additional payment the company makes to the holder of one of its securities over and above the normal dividend or interest payment.

Question 17

Serial bonds are a series of bonds that were issued on different dates but all come due at the same time.This arrangement is designed to simplify the repayment of the principal.

Question 18

Callable bonds and convertible bonds are examples of sinking funds.

Question 19

A sinking fund consists of funds set aside to retire bonds over a period of time.Money deposited into a sinking fund is used to call in bonds or purchase bonds on the open market over a period of several years.

Question 20

Corporations use securities markets to raise long-term financial capital from investors.

Question 21

Joe owns some stock in the Eck-Witty Corporation,while Sharon owns a bond in the same company.Eck-Witty must pay a dividend to Joe before it can pay any interest to Sharon.

Question 22

An electronic communications network (ECN)is an automated,computerized securities trading system that automatically matches buyers and sellers,allowing trades to be executed very quickly and at times when markets are normally closed.

Question 23

Warren paid $50 a share for NIKE stock in May 2005.In October 2006,NIKE introduced a new tennis shoe line.If Warren sells his stock today,he is guaranteed to a capital gain.

Question 24

KelliMac Enterprises is a middle-sized firm that has had some minor but well-publicized financial problems over the past few years.Given its size and financial history,investors are more likely to buy KelliMac's debentures than other types of bonds.

Question 25

John bought some stock in McKelly Inc.,last year.The company has just reported record earnings.This means John is guaranteed to receive a nice increase in his dividend this year.

Question 26

Last year Jenny paid $1000 to purchase a convertible bond issued by the Megabux Corporation.The bond had a par value of $1000 and a conversion ratio of 20.When she bought the bond,the company's common stock was selling for $41 per share.Megabux's stock is now selling for $61 per share.This turn of events is likely to make Jenny very unhappy.

Question 27

An investment bank is a financial intermediary that specializes in helping firms raise financial capital in primary markets.

Question 28

Only accredited investors can legally buy stocks offered in an initial public offering.

Question 29

Carrie owns a lot of stock in the Roan Hill Corporation.Based on recent developments,she is thinking about exercising her pre-emptive rights.This means that Roan Hill has decided to issue more shares of its common stock.

Question 30

An initial public offering (IPO)is the first time a company issues stock to be purchased by the general public.

Question 31

Jason owns a bond with a par value of $1000 issued by Ozemoore Corporation that will mature in seven years.The coupon rate on the bond is 7 percent,and he bought the bond for $900.Assuming Ozemoore lives up to its financial obligations and that he doesn't sell the bond,Jason can expect to receive $70 in interest from Ozemoore's bond over the next year.

Question 32

Hillier owns some common stock in a company that is experiencing serious financial problems and may have to declare bankruptcy.Hillier shouldn't worry,because as a common shareholder,his claims on the company's assets must be paid before the claims of any other stakeholders.

Question 33

The secondary market is where previously issued securities are traded.

Question 34

In general,a public offering of newly issued securities is simpler than and less expensive to organize than a private placement.

Question 35

Most of the largest,best-known corporations are listed on the NASDAQ exchange.

Question 36

The managers at the Lottadoe Corporation need to issue some bonds to raise funds for a major expansion.However,interest rates are currently high by historical standards,and some of the managers at Lottadoe predict that a few years from now,interest rates will be several percentage points below their current levels.Under these circumstances,the managers might decide to issue callable bonds.

Question 37

Underwriting is an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed upon price.

Question 38

A private placement is a primary market issue of securities negotiated between the issuing corporation and a small group of accredited investors.

Question 39

Owners of common stock have ownership rights that include voting rights and rights to residual claims on assets.

Question 40

Pam bought 500 shares of stock in the Lottadoe Corporation last year at a price of $24 per share.The market price has now risen to $35 per share.This result indicates that Pam could realize a capital gain if she sold her stock.

Question 41

A limit order is an order to a broker to buy a specific stock within a specific timeline.This allows the investor to confirm purchases are made by the end of the specified trading day.

Question 42

The stocks of many of the best-known high-tech stocks are listed on the NASDAQ exchange.

Question 43

In general,the riskier an investment alternative is,the lower its expected return.

Question 44

While stocks and bonds are issued first in the primary market,firms actually receive most of their financing through the sale of securities in the secondary market.

Question 45

A market order is an order directing a broker to buy or sell a specific security at the best available price.

Question 46

The New York Stock Exchange (NYSE)and the NASDAQ are the two largest securities exchanges in the United States.

Question 47

Although they are bitter rivals,the NYSE and NASDAQ have historically used very similar methods for trading stocks.

Question 48

Over-the-counter (OTC)stocks are traded through a network of securities dealers,which is unlike the stocks that are traded on the NASDAQ exchange.However,trading of most OTC stocks is much more active than for stocks listed on the major exchanges.

Question 49

Historically,the NYSE has operated as an auction market.In an auction market,brokers representing buyers and sellers of securities meet at a physical location to conduct their business.

Question 50

Portia qualifies as an accredited investor.This means that,unlike most investors,she can buy stocks and bonds on the secondary market.

Question 51

An investment banker's main responsibilities are to help firms work out the financial details of issuing new securities before a public offering.The investment banker's responsibilities are usually completed prior to the date on which the offer is actually carried out.

Question 52

Public offerings of newly issued securities normally raise larger amounts of money than private placements.

Question 53

Diversification is a common strategy for dealing with risk.

Question 54

The NASDAQ operates the world's largest trading floor where thousands of brokers meet to buy and sell stocks for their clients.

Question 55

The price of MacTek's stock on the NYSE has dropped dramatically in the past month.While this might be bad news for some shareholders,MacTek's top management is unlikely to be concerned,because trades on the NYSE are part of the secondary market.

Question 56

The KelliMac Corporation is issuing new securities,and its investment bank has arranged to underwrite the issue.Under this arrangement,KelliMac's financial managers can count on raising a known amount of financial capital from the sale.

Question 57

Investment strategies require individuals to find the right balance between risk and return.

Question 58

Stox & Sellers is a relatively new corporation that has been working with an investment bank to carry out an initial public offering for its stock.The investment bank has agreed to a best efforts approach to selling the shares.This is good news for Stox & Sellers,because it means the investment bank has guaranteed that all of the shares will be sold at the agreed-upon offer price.

Question 59

Firms that issue securities receive financial capital from the sale of these securities when they are sold on the primary market,but not when they are sold on the secondary market.

Question 60

The two basic methods of issuing securities on the secondary market are public offerings and private placements.

Question 61

Some mutual funds invest in only a single sector of the economy.

Question 62

In recent years the distinction between full-service brokers and discount brokers has become less pronounced as full-service brokers have lowered commissions while discount brokers have begun offering more services.

Question 63

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

Question 64

Exchange traded funds are simply mutual funds that invest in safe and highly liquid assets.

Question 65

Investors who want to generate a steady and predictable flow of income often find bonds and preferred stocks to be attractive investments.

Question 66

A drawback of mutual funds is that once you invest in them,you can't withdraw your funds without giving at least a 10-day notice.

Question 67

Rob's investment strategy is to purchase a diversified set of securities and hold them for a long period of time.He is not concerned with detailed analysis of individual stocks,because he does not intend to sell anytime soon.Rob's approach is consistent with the buy and hold approach to investing.

Question 68

An advantage of mutual funds is that they pool the funds of many investors so that these investors can own a broader portfolio of securities than they could not afford if they tried to purchase these securities individually.

Question 69

Carl would like to sell 500 shares of the stock he owns in the Megabux Corporation,but only if he can sell them for at least $30 per share.He could ensure that his stock is only sold at or above $30 by placing a market order with his broker.

Question 70

The Dow Jones Industrial Average,also known as the Dow,is a security exchange where stocks are traded.

Question 71

Harry is thinking about investing in ETFs.If he decides to do so,he could make the purchase by calling up his broker.

Question 72

Stock indices provide investors with a way to track the performance of individual stocks.

Question 73

Exchange traded funds (ETF)are certificates traded on securities markets that represent the legal right of ownership over part of a basket of individual stock certificates or other securities.

Question 74

Investors who use a buy and hold approach carefully analyze stocks in order to identify those that offer the greatest growth potential.They buy these specific stocks in large quantities with the intention of holding them for at least six months,and possibly as long as a year.

Question 75

Harriette has $6000 that she would like to invest.She wants to diversify her investment,but she feels that $6000 isn't enough to buy many different securities.Besides,she doesn't know much about picking good stocks and doesn't want the hassle of trying to make investment decisions.Harriette is likely to find mutual funds an attractive way to invest her $6000.

Question 76

The Dow is based on the adjusted average price of 30 stocks picked by the editors of the Wall Street Journal.

Question 77

The NASDAQ Composite Index is a stock index based on the prices of the stocks of 30 large well-known corporations in the technology sector of the economy.

Question 78

Standard & Poor's 500 is a stock index based on stock prices of 500 major U.S.corporations in a variety of industries and market sectors.

Question 79

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

Question 80

There are only two stock indices in the U.S.market,the NASDAQ Composite Index and the Dow Jones Industrial Average.