Deck 10: Securities Markets: Trading Financial Resources

Question 1

The date a bond comes due is called its record date.

Answer 1

False

Question 2

In a public offering, securities are sold to anyone among the interested investors who is willing and financially able to buy them.

Answer 2

True

Question 3

Financial diversification is a strategy of investing in a wide variety of securities in order to reduce risk.

Answer 3

True

Question 4

The Dodd-Frank Act of 2010 created the Financial Stability Oversight Council to identify emerging risks in the financial sector so that action could be taken to rein in risky practices before they led to a crisis.

Question 5

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

Question 6

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 referred to as a century bond.

Question 7

One of the key responsibilities of an investment bank is to arrange for the actual sale of the securities.

Question 8

Members of the general public can directly trade stocks in the over-the-counter market.

Question 9

A downside of placing market orders is that investors may end up buying at a higher price than he or she expected to pay.

Question 10

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

Question 11

Par value is the value of a bond at its maturity; what the issuer promises to pay the bondholder when the bond matures.

Question 12

Passed during the early twenty-first century, the Sarbanes-Oxley Act included provisions to ensure that external auditors offered fair, unbiased opinions when they examined a company's financial statements.

Question 13

The Sarbanes-Oxley Act of 2002 reversed the Glass-Steagall Act's prohibition of banks selling insurance or acting as investment banks.

Question 14

Exchange-traded funds (ETFs) allow investors to buy ownership in a market basket of many different securities.

Question 15

In the context of each NASDAQ stock, the bid price indicates how much a market maker will pay per share to buy a stated quantity of the stock.

Question 16

Mr. Lewis bought 650 shares of stocks in Garrett Corp. the previous 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 receive a capital gain if he sells his stock.

Question 17

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

Question 18

Private placements are usually more time consuming and complex than public offerings.

Question 19

In the context of bonds, the current yield expresses a bond's interest payment as a percentage of the bond's present market price rather than its par value.

Question 20

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

Question 21

Anvis Asset Management Fund is a mutual fund company that sells securities to investors and uses the money to purchase bonds and corporate stocks. Anvis Asset Management Fund is a(n) _____.

A) credit union
B) thrift institution
C) institutional investor
D) private equity firm

Question 22

Which of the following statements is true of credit unions?

A) They are open to individuals who belong to a specific field of membership.
B) They are the most common depository institutions.
C) They are for-profit organizations.
D) They are a much bigger player in financial markets than commercial banks.

Question 23

A sell limit order tells a broker to sell the shares only if the price is at or above a specified value.

Question 24

Kenneth is very particular about his investment decisions and likes to perform an extensive market research before making any major investment. He, however, does not have the time and expertise to conduct market research. To deal with this situation, he should hire a(n) _____.

A) accredited investor
B) securities dealer
C) institutional investor
D) securities broker

Question 25

Helmert Federal, a financial institution, acquires its funds primarily from the deposits of its customers, and then uses these funds to make mortgage loans for individuals interested in purchasing real estate properties. Helmert Federal is a(n) _____.

A) credit union
B) savings and loan association
C) securities and exchange commission
D) investment bank

Question 26

Samuel assists his clients in investing in the stock market. He not only acts as an agent by buying and selling corporate stocks and bonds on behalf of them, but also provides them with services like financial consultation and market research for a fee. In this scenario, Samuel plays the role of a(n) _____.

A) securities broker
B) personal investor
C) institutional investor
D) securities dealer

Question 27

In the context of the various strategies for investing in securities, a buy-and-hold approach works only if a person makes frequent trades.

Question 28

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

Question 29

Investors who employ a buy-and-hold investment approach invest in index mutual funds and exchange-traded funds.

Question 30

Tony is facing a financial crisis in his business. Instead of applying for a loan from a commercial bank, he takes a loan from the cooperative that he partly owns with some of his friends. This cooperative acts as a depository institution where all the members deposit their savings on a higher interest rate than that offered by commercial banks. Being a member of this cooperative, he gets the advantage of being charged lower interest rate on his loan. Based on the information given in the scenario, the cooperative owned by Tony and his friends exemplifies a(n) _____.

A) investment bank
B) savings and loan association
C) private equity firm
D) credit union

Question 31

A _____ is the most common depository institution.

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

Question 32

Mr. Troy wants to buy stocks of a local retail company. He needs help with market research and requires some investing advice, as well as someone to do the trading for him. Mr. Troy should contact a(n) _____.

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

Question 33

It is fairly easy to acquire loans in Arzenia as the financial intermediaries of the country receive sufficient funds in the form of savings from its people and businesses. This enables them to turn the funds obtained into loans. Based on the information given in the scenario, these financial intermediaries are a form of _____.

A) treasury companies
B) securities and exchange commissions
C) depository institutions
D) mutual funds

Question 34

Mrs. Jamieson, a retiree, likes to invest in preferred stocks and bonds as it involves very little risk. She knows that the value of many of these stocks will not increase drastically, but the small returns help supplement her pension. Mrs. Jamieson's approach is an example of the market timing strategy.

Question 35

Markets that transfer funds from savers to borrowers are referred to as _____.

A) treasury markets
B) monopolistic markets
C) financial markets
D) mutual markets

Question 36

Which of the following is true of securities brokers?

A) They earn a profit by selling securities for higher prices than they paid to purchase them.
B) They collect premiums from policyholders.
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 37

Futures Life Insurance is an insurance company in South Africa. The insurance company uses its large pool of financial capital, which it accumulates by collecting premiums from its policyholders, to purchase corporate stocks of different multinational companies. In this scenario, Futures Life Insurance is a(n) _____.

A) credit union
B) thrift institution
C) institutional investor
D) private equity firm

Question 38

Lina, along with ten of her colleagues, starts a financial cooperative to financially assist each other. The members pool their savings in the cooperative, and they can also take loans from it on a low interest rate. Members of the cooperative benefit from higher returns on savings and lower rates on loans. In this scenario, the cooperative started by Lina and her colleagues exemplifies a(n) _____.

A) investment bank
B) savings and loan association
C) private equity firm
D) credit union

Question 39

Institutional investors:

A) accept deposits.
B) do not hold shares in major U.S. corporations.
C) amass huge pools of financial capital from various sources.
D) never invest in corporate stock.

Question 40

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 nondepository 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 41

Which of the following is true of the Securities Act of 1933?

A) It prohibited misrepresentation in the sale of newly issued stocks and bonds.
B) It made firms issuing new securities independent of the Securities and Exchange Commission.
C) It issued a list of protocols for brokers and brokerage firms.
D) It established the Financial Stability Oversight Council.

Question 42

Colbert Blanc is a financial intermediary that helps firms raise their capital by facilitating the firms in issuing new securities and making sure that the securities are sold out in the market. In this scenario, Colbert Blanc is a(n) _____.

A) securities broker
B) commercial bank
C) investment bank
D) securities dealer

Question 43

Vincent is actively engaged in the stock market and frequently buys and sells stocks for personal profits. With a good insight about the market trends, Vincent is mostly able to sell his stocks at higher prices than the prices at which he purchases them. Vincent is a(n) _____.

A) securities broker
B) personal investor
C) institutional investor
D) securities dealer

Question 44

In the context of the deregulation during the 1980s and 1990s, critics argued that laws such as the Glass-Steagall Act and the Securities Exchange Act represented an onerous government intrusion into the financial sector that:

A) encouraged rampant and harmful product promotion.
B) led to insider trading.
C) resulted in the Great Depression.
D) stifled competition.

Question 45

The Securities and Exchange Commission (SEC) has the authority to go after individuals who engage in illegal insider trading, which is the practice of:

A) creating dummy corporations to serve as a front for companies trading in illegal goods.
B) disseminating fraudulent information in trade-related chat rooms or forums.
C) deceptively promoting securities of small companies of under $250 million market capitalization and then selling them to an unwary public.
D) using inside information to profit unfairly from trading in a company's securities.

Question 46

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

Question 47

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 48

Ellizon Fiber Optics, a publicly traded firm, has approximately 1200 shareholders and $32 million in assets. Given the specifications of the company, the Securities and Exchange Commission (SEC) mandates Ellizon Fiber Optics to:

A) pay commissions to the accredited investors.
B) undertake insider trading to make profit in business.
C) list its stocks in over-the-counter market as it can no longer be listed in NASDAQ.
D) file quarterly and annual financial reports with the SEC.

Question 49

The rationale behind why the Glass-Steagall Act mandated the ban on commercial banks from dealing in securities markets and selling insurance was that such activities:

A) encouraged the banks to engage in fraudulent activities.
B) exhausted the business assets of investment banks and insurance companies.
C) reduced the banks' funds to create loans for their customers.
D) exposed banks and their depositors to higher levels of risk.

Question 50

_____ 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 51

Grenville Osborn Corp., a commercial bank in the United States, faces legal action for its private dealings in the securities market and in selling insurance. The Grenville Osborn & Co. is in violation of the:

A) Sarbanes-Oxley Act.
B) Glass-Steagall Act.
C) Gramm-Bliley-Leach Act.
D) Securities Act.

Question 52

A wave of bank failures occurred in the United States in the early 1930s as the economy sank into the Great Depression. Congress responded by passing the _____ of 1933.

A) Export-Import Bank Act
B) Banking Act
C) Bank Holding Company Act
D) Bank Secrecy Act

Question 53

The Federal Reserve System was:

A) given the responsibility of being a watchdog of the international banking system.
B) formed to serve as a district-level bank for all the states in the United States.
C) created by the Financial Services Modernization Act of 1999.
D) created to serve as the central bank in the United States.

Question 54

The difference between the prices at which securities dealers buy and sell a security is called _____.

A) a capital gain
B) price dispersion
C) thrift
D) the spread

Question 55

Elyon holds a savings account in the Rochester City Bank in the United States. During an economic downturn, the bank suffers great losses. Elyon, however, is insured under the Federal Deposit Insurance Corporation and his savings are protected as the insurance covers his deposit value. Which of the following laws ensured the protection of depositors from a bank's failure?

A) The Sarbanes-Oxley Act
B) The Glass-Steagall Act
C) The Gramm-Bliley-Leach Act
D) The Securities Act

Question 56

Reese buys securities in a pharmaceutical company for $3300. After a period of eight months, when the prices of the securities go up in the market, she sells her securities for $3700. In this case, the difference of $400 in the prices of the securities is called:

A) a price override.
B) price dispersion.
C) thrift.
D) the spread.

Question 57

According to critics, the Glass-Steagall Act:

A) encouraged rampant and harmful product promotion.
B) impeded financial innovation.
C) loosened government control over commodity pricing.
D) led to risky competition.

Question 58

Danner City Bank, a commercial bank in Oklahoma, was suffering from financial losses. Once the U.S. government passed the _____ in 1999, the bank started recovering from its losses as it was allowed to sell its securities.

A) Securities Act
B) Sarbanes-Oxley Act
C) Banking Act
D) Gramm-Bliley-Leach Act

Question 59

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) 10,000
B) 6,000
C) 100
D) 500

Question 60

The banking panic of 1907 in the United States created pressure for Congress to find a way to stabilize the nation's banking system. The result was the:

A) Revenue Act of 1916.
B) Future Trading Act of 1921.
C) Securities Exchange Act of 1934.
D) Federal Reserve Act of 1913.

Question 61

The preferred stock of a firm sometimes includes a cumulative feature. This means that:

A) holders of preferred stock have a claim on assets that comes before common stockholders if the firm goes out of business.
B) if the firm skips a preferred dividend in one period, the amount it must pay the next period is equal to the dividend for that period plus the amount of the dividend it skipped in the previous period.
C) the firm must pay any back taxes, legal expenses, wages owed to workers, and debts owed to creditors before the owners of the firm get anything.
D) if the firm issues new stock, existing stockholders can purchase new shares in proportion to their existing holdings before the stock is offered to the other investors.

Question 62

Elliot holds a bond in a health care company that matures after a period of ten years. Taken together with the interest on the principal amount, on maturity, Elliot will receive a sum of $55,000, which is the bond's _____.

A) exit rate
B) par value
C) current yield
D) capital gain

Question 63

Which of the following is a difference between common stockholders and preferred stockholders?

A) Unlike common stockholders, preferred stockholders normally have voting rights.
B) Unlike common stockholders, preferred stockholders have a residual claim on assets.
C) Preferred stockholders are guaranteed a better dividend than common stockholders, who may or may not receive a dividend.
D) Common stockholders are assured a greater capital gain than preferred stockholders when a company experiences strong earnings.

Question 64

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 capital gain that the company has not paid.

Question 65

Aaron buys 300 shares in a tobacco company. Within a year, he receives a capital gain on his stocks. This means that:

A) he retained his shares till the market prices went down.
B) the company distributed its dividends among its stockholders.
C) the price of the shares soared in the market.
D) he earned a profit by making the company repurchase his shares.

Question 66

Which of the following statements is true of bonds?

A) Long-term bonds issued by corporations usually mature five years after issuance.
B) Unlike dividends on stock, a firm does not have a legal obligation to pay interest on bonds.
C) When a bond's market price is below par value, it is selling at a discount.
D) Bondholders cannot sell their bonds to other investors before they mature.

Question 67

Jonathan is a common stockholder in an information technology firm. Owing to his right to a residual claim on assets, he is entitled to receive a share in the proceeds of the company that is proportionate to his ownership if the company:

A) issues new stocks.
B) earns extra profits.
C) merges with another firm.
D) goes out of business.

Question 68

Which of the following explains the preemptive right of common stockholders?

A) A corporation cannot pay any dividend to its preferred stockholders unless it pays the full stated dividend on its common stock.
B) When a company goes bankrupt, its stockholders can recover some (but not all) of what they are owed.
C) If a corporation issues new stock, existing stockholders can purchase new shares in proportion to their existing holdings before the stock is offered to the other investors.
D) If a firm skips a stockholder's dividend in one period, the amount it must pay the next period is equal to the dividend for that period plus the amount of the dividend it skipped in the previous period.

Question 69

Abigail and Pamela both have stocks in the Rondante Group. However, if in the future the company goes out of business, Pamela will have a claim on the assets of the company before Abigail. Also, she is given higher priority when the company pays the dividends to all its stockholders. Unlike Abigail, Pamela is a _____.

A) value stockholder
B) growth stockholder
C) preferred stockholder
D) common stockholder

Question 70

An online food delivery service goes out of business owing to stiff competition. The company has long overdue taxes because of which its stockholders do not receive the proceeds of the company after its dissolution. In this case, the company is not able to fulfill the _____ of its stockholders.

A) right to a residual claim on assets
B) prima facie right
C) right to dividends and capital gain
D) preemptive right

Question 71

Andy invests in Orelon Corp., a plastic manufacturing company. As a stockholder, he owns a part of the company and he holds the right to vote on company issues. However, he is entitled to dividends only when the company's board of directors decides to. According to the company policies, if Orelon Corp. faces dissolution in the future, Andy will receive his assets only after the company satisfies the claim of the preferred stockholders. Based on the given information, it can be concluded that Andy is a _____.

A) common stockholder
B) cumulative stockholder
C) participating stockholder
D) convertible stockholder

Question 72

Damien buys stocks worth $2800 in a cosmetic products manufacturing company. His investment turns out to be a sound decision as the prices of his stocks go up by $900. In this scenario, Damien earns a _____.

A) price override
B) bequest value
C) consumer surplus
D) capital gain

Question 73

Clanston Corp., a steel manufacturing giant, announces its plans to merge with another steel manufacturing company, Tralesta Corp. Peter is a major stockholder in Clanston Corp., and his experience suggests that the merger is not going to be a profitable one. Which of the following basic shareholder rights must Peter use to express his disapproval of the merger?

A) Trading rights
B) Entitlement to a residual claim on assets
C) Entitlement to dividends
D) Voting rights

Question 74

Jason and Edward held stocks in a cell phone manufacturing company. However, when the company went out of business in a few years and liquidated its assets, Edward rightfully received his share in the company proceeds before Jason. Based on the given information, it can be concluded that Edward was a _____.

A) cumulative preferred stockholder and Jason was a participating preferred stockholder
B) participating preferred stockholder and Jason was a cumulative preferred stockholder
C) preferred stockholder and Jason was a common stockholder
D) common stockholder and Jason was a preferred stockholder

Question 75

Which of the following statements is true of the common stockholders' right to a residual claim on assets?

A) A firm must pay any back taxes, legal expenses, wages owed to workers, and debts owed to creditors before the owners get anything.
B) If a corporation issues new stock, existing stockholders can purchase new shares in proportion to their ownership before the stock is offered to the other investors.
C) If a firm skips a stockholder's dividend in one period, the amount it must pay the next period is equal to the dividend for that period plus the amount of the dividend it skipped in the previous period.
D) A firm has a legal obligation to pay interest on bonds-and to pay the bondholder the par value of the bond when it matures.

Question 76

Jeremy holds 14.5% shares of stock in an automobile company. As per the company norms, if the company issues new stock, as an existing stockholder, Jeremy can buy 14.5% of the new shares before the stock is offered to the other investors of the company. Which of the following common stockholder rights does this scenario exemplify?

A) A prima facie right
B) Tag-along right
C) A preemptive right
D) Right to a residual claim on assets

Question 77

A(n) _____ is a type of stock that gives its holder priority over common stockholders in terms of dividends and claims on assets.

A) preferred stock
B) growth stock
C) value stock
D) income stock

Question 78

Sapphinx Growth and Income, a mutual fund company, had a free hand in its operations before the year 2010. However, after an alteration in the government rules, the company faced a number of restrictions in selling its shares to investors. Which of the following acts is responsible for the alteration in the rules?

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

Question 79

Dividends of a company are:

A) a distribution of earnings that are paid to a corporation's stockholders.
B) different kinds of stocks a company offers its shareholders.
C) legally mandated earnings of stockholders.
D) money from illegal stock transactions.

Question 80

Each year, Arnold receives a stated amount of dividend from the earnings of the company he has stocks in. In a particular period, if the company skips the dividend, then Arnold will receive the accumulated amount, that is, the dividend of that period plus the amount of the dividend the company skipped in the previous period. Based on the information given in the scenario, Arnold is most likely a holder of:

A) financial bond.
B) fidelity bond.
C) preferred stock.
D) common stock.