Deck 19: Understanding Securities and Investments

Question 1

Which market handles the buying and selling of new stocks and bonds by business firms or governments?

A) The primary securities market
B) The tertiary security market
C) The over-the-counter market
D) The commodities market
E) The secondary securities market

Answer 1

A
The primary securities market

Question 2

Mega Computer's financial statements show 1000 shares of common stock with a par value of $10 000,retained earnings of $20 000,additional paid in capital of $10 000,and long-term debt of $30 000.What is the book value of a share of Mega's stock?

A) $70.00
B) $20.00
C) $40.00
D) $30.00
E) $50.00

Answer 2

C
$40.
00

Question 3

Deprenyl Research Ltd.makes a drug that is used to control Parkinson's disease.When the company convinced a Wall Street health care analyst to recommend the company's stock to his clients,this was an example of

A) a prospectus.
B) publicity.
C) insider trading.
D) investor relations.
E) margin trading.

Answer 3

D
investor relations.

Question 4

Which of the following represents a stock's real value?

A) Profitability ratio
B) Market value
C) Price earnings ratio
D) Par value
E) Book value

Question 5

Which of the following is correct with respect to the value of a share of common stock?

A) The par value is generally the best indicator of the real value of a share of stock.
B) The market value of a share of stock is determined by objective,financial considerations.
C) The book value of a share of stock is calculated by dividing shareholders' equity by the current market price of the stock.
D) A company's market capitalization is determined by multiplying the number of a company's outstanding shares times the market value of each share.
E) By law,subjective factors like rumours and stockbroker recommendations are not allowed to influence the market price of a share of stock.

Question 6

Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each.Ted bought 10 shares at that price.Today,Ted sold his shares to David for $25.00 each.What are Ted's capital gains?

A) $19.99
B) $20.00
C) $25.00
D) $50.00
E) $0.01

Question 7

Suppose you were interested in purchasing a printing company.This might be an attractive target if the ________ value of the stock were less than the ________ value.

A) book; market
B) par; market
C) book; par
D) market; book
E) market; par

Question 8

Regarding the issue of investor relations,it is correct to say that

A) investor relations activities do not have much impact on the price of a firm's shares.
B) investor relations may include inviting financial analysts to one of the operating sites of a firm.
C) investor relations is a relatively new idea that began to be practised in the late 1990s.
D) investor relations are not that important to a firm's success.
E) investor relations targets individual buyers of corporate stock rather than brokers and financial analysts.

Question 9

Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each.Ted bought 10 shares at that price.Today,Ted sold his shares to David for $25.00 each.What is the market value of the stock?

A) $50.00
B) $25.00
C) $20.00
D) $19.99
E) $0.01

Question 10

Investors are concerned primarily with the ________ of a stock.

A) earnings value
B) par value
C) resale value
D) market value
E) book value

Question 11

The book value of a company's common stock is determined by

A) what buyers are willing to invest in a firm.
B) dividing total assets by the number of outstanding shares.
C) dividing total shareholders' equity by the number of outstanding shares.
D) dividing net profit by the number of outstanding shares.
E) stockbrokers' opinions and ratings.

Question 12

What is the meaning of par value when discussing common stock?

A) The current price of a share of stock
B) The selling price of the previous day's last transactions involving that stock
C) The average price paid on the previous day's trades
D) The face value of a share of common stock
E) One dollar

Question 13

When an investment bank "underwrites" a new security,it is

A) assessing the risk of that new security.
B) privately supporting the issuing organization.
C) buying the new security.
D) co-signing the bonds.
E) attesting to the good investment potential of the new security.

Question 14

Why are stocks and bonds called "securities"?

A) Because investors have financial security by owning them
B) Because they are used to secure sales revenue for companies
C) Because they represent secured,or asset-based,claims on the part of investors
D) Because they are guaranteed by the Government of Canada
E) All of these are reasons

Question 15

The market value of a share of stock is determined by

A) dividing total assets by the number of outstanding shares.
B) stockbrokers' opinions and ratings.
C) dividing total shareholders' equity by the number of outstanding shares.
D) what buyers are willing to pay for the shares.
E) dividing net profit by the number of outstanding shares.

Question 16

Mega Computer issued stock with a face value of one cent and then sold the shares to the public for $20.00 each.Ted bought 10 shares at that price.Today,Ted sold his shares to David for $25.00 each.What is the par value of the stock?

A) $20.00
B) $25.00
C) $5.00
D) $19.99
E) $0.01

Question 17

Mega Computer's financial statements show 1000 shares of common stock with a par value of $10 000,retained earnings of $20 000,additional paid in capital of $10 000,and long-term debt of $30 000.What is the market value of a share of Mega's stock?

A) $70.00
B) $20.00
C) $40.00
D) $30.00
E) It is not possible to tell from the information given.

Question 18

Which of the following business firms serve as financial specialists in issuing new securities?

A) Speculators
B) Venture capitalists
C) Financial managers
D) Institutional investors
E) Investment bankers

Question 19

Corporation B had sales revenue last year of $20 million,operating expenses of $16 million,and net profit of $4 million.There are 2 million shares of stock oustanding.What is the par value of the company's stock?

A) $5
B) $4.83
C) $4
D) $10
E) The par value cannot be determined with the information given.

Question 20

New securities are traded in the ______________,while existing securities are traded in the _____________.

A) primary securities market; secondary securities market
B) equity market; debt market
C) debt market; equity market
D) secondary securities market; primary securities market
E) common stock market; preferred stock market

Question 21

Les says that it is foolish to invest in the stock market because you can lose money.It is much better to simply put your money in a savings account where it is safe.Laura agrees that investing is risky,but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in a savings account.What are Les and Laura disagreeing about?

A) Whether the risk of investing is worthwhile
B) Whether savings accounts earn more interest than the return on stocks
C) Whether companies tell the truth about their financial status
D) Whether anyone can make money by investing in stocks
E) Whether investing always involves risk,or only sometimes involves risk.

Question 22

Which of the following statements is correct with regard to market capitalization?

A) There is considerable stability in the market capitalization of companies from year to year.
B) Market capitalization is computed by dividing owners' equity by the number of outstanding shares.
C) Currently,in Canada,the companies with the highest market capitalization are financial institutions or resource companies.
D) There is general agreement that market capitalization really doesn't tell us very much about the real value of a company.
E) All of these statements are correct.

Question 23

Online trading is becoming increasingly popular because

A) experts manage the traders' portfolios.
B) traders do not need to use a broker to buy and sell stocks.
C) online brokerages provide investment advice.
D) it is facilitated by convenient access to the internet.
E) all of these are reasons.

Question 24

Which of the following is true with regard to preferred stock?

A) Dividends must be paid each year on preferred stock.
B) The growth potential of preferred stock is limited due to its fixed dividend.
C) Preferred stock is more risky than common stock.
D) The usual par value of a preferred share is $1.
E) It cannot be callable.

Question 25

Independent dealers who own the securities that they buy and sell do their trading

A) on the Toronto Stock Exchange.
B) only at par value.
C) with investors who want to hide their identity.
D) in the over-the-counter market.
E) only on foreign stock exchanges.

Question 26

Les says that it is foolish to invest in the stock market because you can lose money.It is much better to simply put your money in a savings account where it is safe.Laura agrees that investing is risky,but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in a savings account.What assumption is Les making when he makes his argument?

A) Some people do,in fact,make money by investing.
B) Interest earned on money in a savings account is the only thing that affects the value of the savings account.
C) The typical person wants to save money instead of spending it.
D) Companies issue stock only if there is no other way to make money.
E) There are only a few companies whose stock always grows in value.

Question 27

What is cumulative preferred stock?

A) By law,the preferred stock cannot pay dividends out every year.
B) Preferred shareholders vote whereas common shareholders do not.
C) This stock's dividend payments are automatically reinvested into the firm,thus allowing for compounding the return on investment.
D) If dividend payments are missed in one year,they are paid later and are paid before any common stock dividends.
E) Cumulative preferred shareholders have the right to purchase shares of a new stock issue before it is offered to the general public.

Question 28

A(n)________ is an individual or organization who receives and executes buy and sell orders on behalf of other people in return for commissions.

A) commodities market
B) broker
C) stock exchange
D) agent
E) investment bank

Question 29

Which of the following is correct with respect to stock exchanges?

A) All of the people working on the trading floor are employed by the exchange.
B) Anyone is allowed to trade on the exchange.
C) The general public is allowed to participate in the actual buying and selling of stock on the exchange floor.
D) Memberships on a stock exchange cannot be bought or sold.
E) Most are non-profit organizations.

Question 30

What is an advantage of purchasing common stock?

A) Stocks with high interest rates are desirable for individuals living on a fixed income.
B) Common stock pays out interest at regular intervals.
C) Common stock has first claim on dividends ahead of preferred stock.
D) Common stock offers high growth potential for investors.
E) Common stock is less risky than bonds.

Question 31

A cumulative preferred stock with a $100 par value and 6% dividend is currently trading on the market at $110 per share.What is the amount of the dividend the holder is entitled to receive each year?

A) $66
B) 6% of the company's net profit
C) $6% of the total book value of preferred shares
D) $6
E) $0

Question 32

The world's first electronic stock market is known as

A) the TSE.
B) the IMF.
C) AMEX.
D) NASDAQ.
E) the NYSE.

Question 33

In order for a security to be listed on the Toronto Stock Exchange,the issuing corporation must

A) have at least 200 employees.
B) have paid a fee.
C) have a market capitalization of at least $1 million.
D) be making a profit.
E) provide physical goods,not services.

Question 34

________buy and sell stocks and bonds on stock exchanges for investors.

A) Finance companies
B) Chartered banks
C) Pension services
D) Credit unions
E) Brokers

Question 35

Dennis computes the market capitalization of the company he works for by

A) adding up all the fixed assets the company owns and subtracting the money still owed on those fixed assets.
B) multiplying the market price of one share of the company's stock by the total number of shares outstanding.
C) adding up all the funds the company has received through selling its stock.
D) adding up the book value,par value,and market value of the company's stock.
E) adding up the company's assets and subtracting its liabilities.

Question 36

The market value of a company's stock,computed by multiplying the number of a company's outstanding shares times the value of each share,is called ________.

A) net book value
B) shareholder's equity
C) equity
D) goodwill
E) market capitalization

Question 37

Common stock issued by a well-established company with a sound financial history and a stable pattern of dividend payouts is a(n)

A) preferred stock.
B) market leader stock.
C) blue chip stock.
D) blue sky stock.
E) IPO.

Question 38

Les says that it is foolish to invest in the stock market because you can lose money.It is much better to simply put your money in a savings account where it is safe.Laura agrees that investing is risky,but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in a savings account.Which of the following undermines Les's argument?

A) The value of some companies' stocks have grown.
B) The stock market can experience a decline in its overall value.
C) The return on a savings account is not as high as the return on some stocks.
D) The interest rate earned in a savings account may be lower than the rate of inflation.
E) A minimum balance must be maintained in a savings account.

Question 39

Bob's Barbecue has issued preferred stock that is callable.Which of the following is possible with this stock?

A) The investors can make Bob buy the stock back if it falls to a given price.
B) The investors can choose to receive interest payments instead of dividends.
C) The investors can exchange the preferred stock for common stock.
D) Bob can make the investors trade their preferred stock for common stock.
E) Bob can make the investors sell the stock back to the company.

Question 40

A ________ is an organization of individuals formed to provide an institutional setting where stocks can be bought and sold.

A) credit union
B) commodity exchange
C) stock exchange
D) bank
E) market

Question 41

Les says that it is foolish to invest in the stock market because you can lose money.It is much better to simply put your money in a savings account where it is safe.Laura agrees that investing is risky,but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in a savings account.Which of the following assumptions is Laura making?

A) Inflation will be higher than the interest rate paid on a savings account.
B) Any stock will eventually go up in value,given enough time.
C) Riskier investments have more value over a long period of time.
D) If you invest in more stocks,their value will be higher.
E) The stock market will experience net growth over time.

Question 42

Issuers of bonds are most likely to call them in when

A) the prevailing rate of interest exceeds that stipulated on the bonds.
B) investor confidence goes down.
C) the prevailing rate of interest is less than that stipulated on the bonds.
D) investor confidence goes up.
E) the government revises its capital gains tax law.

Question 43

Barry holds a ________ for which no specific property is pledged as collateral.

A) secured bond
B) bearer bond
C) callable bond
D) debenture
E) registered bond

Question 44

When interest rates move up,bond prices tend to

A) move down.
B) stay about the same.
C) move up.
D) move up,but only if the company is making a profit.
E) there is no general pattern of movement.

Question 45

What is a mutual fund?

A) A mutual fund is a pool of funds established by corporate financial managers to provide for short-term business loans.
B) A mutual fund is a loan to the federal government made by a business firm.
C) Investors pool resources from individuals and business firms to purchase a portfolio of stocks,bonds,and short-term securities.
D) A mutual fund consists of money raised by selling a share of ownership in a business firm.
E) A mutual fund is a product sold by mutual life companies.

Question 46

Issuers reduce the risk to bondholders by pledging certain assets in the event of default.These bonds are

A) callable.
B) secured.
C) registered.
D) bearer.
E) debenture.

Question 47

In practical terms,what is the difference between registered bonds and bearer bonds?

A) Registered bonds have to be registered with the Government of Canada,but bearer bonds do not.
B) Registered bonds generally pay lower rates of interest than bearer bonds.
C) Registered bondholders automatically receive interest cheques,but holders of bearer bonds have to clip coupons and send them to the company.
D) Registered bonds have lower financial risk than bearer bonds.
E) There is really no practical difference between registered and bearer bonds.

Question 48

The bonds that are issued to finance schools,transportation,and airports are called

A) government bonds.
B) public bonds.
C) private bonds.
D) municipal bonds.
E) debentures.

Question 49

When a bond sells at a premium,

A) its selling price is below its redemption price.
B) its selling price is above its redemption price.
C) its price is getting into the range that is too high for most people.
D) its redemption price equals its face value.
E) its selling price equals its redemption price.

Question 50

________ are mostly used by financially strong corporations.

A) Callable bonds
B) Bearer bonds
C) Registered bonds
D) Debentures
E) Secured bonds

Question 51

Which of the following statements is correct with respect to bonds?

A) Nearly all secondary trading of bonds occurs in the over-the-counter market.
B) Over the years,bonds have become steadily less important as a source of long-term funds for corporations.
C) From an investor's perspective,debentures are generally a better investment than bearer bonds.
D) When an investor hears that a bond has a sinking fund,that is a sign that the company is in financial trouble.
E) All of these statements are correct.

Question 52

Jenny clips coupons from certificates and send them to the issuer in order to receive payment.Jenny has __________ bonds.

A) callable
B) secured
C) bearer
D) debenture
E) registered

Question 53

Janet holds a bond that permits the issuing firm to retire portions of the bond issue at different predetermined dates.Janet is holding a ______bond.

A) municipal
B) serial
C) secured
D) callable
E) convertible

Question 54

What is an advantage of issuing a bond with a sinking fund provision?

A) This provision offers greater security to an investor because funds to retire the bond issue are set aside each year into the sinking fund.
B) The bonds may be converted to a specified number of shares of common stock at the firm's convenience.
C) The firm has the right to call in the outstanding bonds at any time and thus "sink" the bond issue.
D) The firm can decide to redeem the fund at any time.
E) The firm may retire portions of the bond issue at different predetermined dates.

Question 55

At regular intervals,Harry receives a cheques from the Dow Corporation for bond interest.Harry has _________ bonds.

A) secured
B) registered
C) bearer
D) debenture
E) callable

Question 56

Bonds that receive poor ratings are likely to

A) be registered.
B) not be issued.
C) pay higher interest rates.
D) require more underwriting.
E) reduce the total amount issued.

Question 57

A ________ is a promise by the issuer to pay the buyer a certain amount of money at a stated future date,usually with interest paid at regular intervals.

A) preferred stock
B) bond
C) banker's acceptance
D) common stock
E) letter of credit

Question 58

What kind of bond gives the issuer the right to redeem the bond at almost any time?

A) Municipal bonds
B) Registered bonds
C) Convertible bonds
D) Promissory bonds
E) Callable bonds

Question 59

A ________ can pay the holder in stock instead of cash.

A) derivative
B) common share
C) callable bond
D) convertible bond
E) preferred share

Question 60

The type of bonds that are said to have "inferior claims" on a corporation's assets are

A) secured bonds.
B) debentures.
C) registered bonds.
D) callable bonds.
E) bearer bonds.

Question 61

Miklos has a mutual fund that includes long-term municipal bonds,corporate bonds,and common stocks with good dividend-paying records.Miklos' fund is emphasizing

A) growth.
B) stability.
C) aggressive growth.
D) high current income.
E) safety.

Question 62

Suppose that in June 2013 you bought a call option that allows you to buy 100 shares of a certain stock for $20 before October 2013.If the market price of the stock at some point before October 2013 is $23,and you exercise your option,what will happen?

A) You will make a $30.00 profit.
B) You will make a $300.00 profit.
C) You will make a $3000.00 profit.
D) You will incur a loss of $30.00.
E) You will incur a loss of $300.00.

Question 63

________ is the proportion of funds invested in each of several investment alternatives.

A) Asset allocation
B) Shorting
C) Spreading
D) Margin buying
E) Diversification

Question 64

A(n)________ is a summary of price trends in a specific industry and/or the stock market as a whole.

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

Question 65

A ________ is the right to buy a particular stock at a certain price until a particular date,while a ________ gives the owner the right to sell a particular stock at a specified price until a particular date.

A) put option; call option
B) limit order; sales order
C) call option; put option
D) sales order; limit order
E) market purchase order; market sales order

Question 66

A stock quote of 30.5 means

A) the stock is down 30.5 cents per share from yesterday's price.
B) the stock is selling at $30.50 per share.
C) the stock is selling at 30.5 cents per share.
D) the stock is up 30.5 cents per share from yesterday's price.
E) the stock will be selling for 30.5 cents per share for the next 5 days.

Question 67

Which of the following is correct with regard to hedge funds?

A) Historically,they have been bought only by conservative investors who don't have a lot of money to invest.
B) Hedge funds avoid risky practices like short-selling and leveraging.
C) Hedge funds are not as closely regulated as mutual funds.
D) Management fees in hedge funds are much lower than for mutual funds.
E) All of these.

Question 68

Assume you bought a $1000 par-value bond in 2004 for 75 1/4 with an interest rate of 7.5%.If you held the bond until maturity in 2014,what would be the total amount that you would earn on this bond?

A) $1000.00
B) $750
C) $779.50
D) $887.50
E) $997.50

Question 69

Jan owns a mutual fund that invests in new companies and even troubled companies and other high-risk securities.Jan's mutual fund is emphasizing

A) aggressive growth.
B) stability.
C) high current income.
D) growth.
E) safety.

Question 70

________ would be most likely for a mutual fund with a "safety" strategy.

A) Commodities futures
B) Stocks of mining companies
C) Stocks of new companies
D) Treasury bills
E) Common stocks with good dividend paying records

Question 71

________ are private pools of money that try to give investors a positive return regardless of stock market performance,and often engage in practices like short-selling and leveraging.

A) Mutual funds
B) Ethical funds
C) Stock purchase plans
D) Commodities
E) Hedge funds

Question 72

Mike owns a mutual fund that includes a balance of bonds,preferred stocks,and common stocks,especially the common stocks of established firms.His mutual fund is emphasizing

A) aggressive growth.
B) growth.
C) safety.
D) stability.
E) high current income.

Question 73

Which of the following is correct with regard to mutual funds?

A) They are oriented toward investors with large amounts of money.
B) Most mutual funds stress the same goal: growth.
C) Only managers who have passed an ethics test can work for ethical mutual funds.
D) A mutual fund that stresses safety of investment would likely invest in treasury bills.
E) All of these are correct.

Question 74

If a stock option is "under water," what does that mean?

A) The company has experienced flood damage to its facilities and cannot pay off on any stock options.
B) The federal government has blocked the company from paying off stock options.
C) The market price of the stock that the option applies to is lower than the option price.
D) The market price of the stock that the option applies to is higher than the option price.
E) The person holding the stock option will not exercise it because it would constitute poor public relations (the option is therefore "under water" and out of sight).

Question 75

Don has an agreement to purchase a specified amount of a commodity at a given price on a set future date.Don has a

A) load mutual fund.
B) debenture.
C) callable bond.
D) futures contract.
E) no-load mutual fund.

Question 76

Suppose you have a put option that allows you to sell 100 shares of Alcan for $54.50 per share any time before October 2013.If the stock price falls to $45.00 per share,your profit is

A) $9.50
B) $54.50
C) $950.00
D) $45.00
E) $0.00

Question 77

The ________ is the percentage of the total sales price that a buyer must put up to place an order for a stock or a futures contract.

A) installment
B) up-front money
C) purchase money
D) down payment
E) margin

Question 78

Which investment has the greatest risk?

A) Common stock
B) Stock options
C) Futures contracts in the commodities market
D) Municipal bond
E) A mutual fund with a safety strategy

Question 79

If the stock of Vogue Cosmetics were reported in The Globe and Mail as selling for 24.50,you would have to pay ________ per share.

A) $245.00
B) $2450.00 if you buy between 100 and 200 shares
C) $24.00 for one half of a share
D) $24.50
E) $24.05

Question 80

Exchange-traded funds

A) can only be traded by individuals who are members of a stock exchange.
B) can be traded only in the morning hours.
C) allow individual investors to exchange shares of mutual funds that they hold.
D) are priced only at the end of the day.
E) have lower operating expenses than mutual funds.