Deck 9: Financial Markets: Allocating Financial Resources

Question 1

Bondholders are more likely to receive a financial return than shareholders.

Answer 1

True

Question 2

Financial institutions not federally regulated are governed by legislation in the province in which they are registered.

Answer 2

True

Question 3

Banks are the most common depository institutions.

Answer 3

True

Question 4

Without financial markets, companies would find it difficult to obtain the financial resources needed to meet payrolls, invest in new facilities, develop new products, and compete effectively in global markets.

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

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

Question 7

Bonds are shares of ownership in a corporation.

Question 8

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 9

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 10

Preferred shareholders are guaranteed to receive a dividend every quarter.

Question 11

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 12

Self-regulatory organizations are non-governmental organizations operating in the securities industry that develop and enforce rules and standards governing the behaviour of their members.

Question 13

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

Question 14

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.

Question 15

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

Question 16

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.

Question 17

Canada is moving toward one regulatory body across the country. The passport system allows a company wanting to enter the securities market to deal with only one provincial securities commission.

Question 18

Depository institutions are financial intermediaries that obtain funds from individuals, businesses, and other institutions, and then lend those funds to borrowers.

Question 19

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

Question 20

Credit unions and caisse populaires are much larger players in financial markets than banks.

Question 21

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

Question 22

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 23

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 in a few years from now, interest rates will be several percentage points below their current levels. Under these circumstances, the managers might decide to utilize their right to residual claim on assets.

Question 24

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

Question 25

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 26

Investors who own a bond with a par value of $1000 and a coupon rate of 7.5 percent receive $75 in interest each year until the bond reaches maturity.

Question 27

Preferred shareholders normally do NOT have voting rights.

Question 28

When a bond's market price is above its par value, it is selling at a premium.

Question 29

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

Question 30

Last year Jenny paid $1000 to purchase Megabux Corporation stock. When she bought the stock, 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 31

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 32

A bond or share of preferred stock that gives its holder the right to exchange it for a stated number of shares of common stock is called a "changeable security."

Question 33

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

Question 34

Diversification is a common strategy for dealing with risk.

Question 35

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 36

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

Question 37

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 38

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 39

Bondholders may NOT sell their bonds to other investors before they mature.

Question 40

Unlike dividends on stock, a firm has a legal obligation to pay interest on bonds.

Question 41

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

Question 42

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 43

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 44

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

Question 45

Each stock exchange establishes requirements for the stocks it lists.

Question 46

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

Question 47

The secondary market is where previously issued securities are traded.

Question 48

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

Question 49

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 50

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

Question 51

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

Question 52

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

Question 53

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 54

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

Question 55

The Toronto Stock Exchange is for more established companies, and the TSX Venture Exchange is for early-stage companies.

Question 56

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

Question 57

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 58

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

Question 59

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

Question 60

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

Question 61

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

Question 62

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

Question 63

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

Question 64

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 65

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 66

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 67

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

Question 68

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 69

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 70

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

Question 71

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

Question 72

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

Question 73

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

Question 74

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

Question 75

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 76

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 77

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 78

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 79

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 80

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.