Deck 10: Securities Markets: Trading Financial Resources

Question 1

The Glass­Steagall Act established the Federal Deposit Insurance Corporation.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Benjamin, Inc. is a publicly traded corporation with 680 stockholders and $15 million in assets. Considering the company's size, Benjamin is not required to file quarterly and annual reports with the Securities and Exchange Commission.

Question 5

A financial intermediary that obtains funds from checking and savings deposits, and then loans these funds to borrowers is known as a depository institution.

Question 6

Financial markets make it easy for companies to obtain financial resources.

Question 7

The purpose of the Federal Reserve Act of 1913 was to stabilize the nation's banking system.

Question 8

Securities brokers not only handle financial securities for their clients, they also offer additional services such as financial planning and market research for a fee.

Question 9

Investment banks are usually divisions of huge bank holding companies that also own commercial banks.

Question 10

Savings and loan associations traditionally accepted only savings account deposits and used them to make mortgage loans.

Question 11

Jack Richman works as a senior manager at The Brown Brothers Co. During a recent strategy session, Jack learned that the company was on the verge of announcing a major technological breakthrough. He's confident that once the breakthrough is announced to the public, the price of the company's stock will surge dramatically. If Jack buys more of his company's stock before the announcement, his actions could be investigated by the Securities and Exchange Commission.

Question 12

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

Question 13

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

Question 14

The Federal Deposit Insurance Corporation was established by the Banking Act of 1933 and insures depositors against financial loss if a bank fails.

Question 15

Allen would like to raise financial capital for his company by issuing new securities. A securities dealer would be the best financial intermediary to assist him.

Question 16

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

Question 17

The Securities Exchange Act of 1934 prohibited misrepresentation or other forms of fraud in the sale of newly issued stocks and bonds.

Question 18

Credit unions are the most common depository institutions.

Question 19

The Banking Act of 1933 is also known as the Gramm­Bliley­Leach Act.

Question 20

The Securities and Exchange Commission is a private self­regulatory organization that supports the securities industry by informing consumers on the stock trading process.

Question 21

Jason holds a bond with a par value of $1,000 issued by the Asbury Corporation that will mature in seven years. The coupon rate on the bond is 7 percent. He bought the bond for $900. Assuming Asbury lives up to its financial obligations and that he doesn't trade the bond, Jason can expect to receive $70 in interest from Asbury over the next year.

Question 22

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

Question 23

Pam bought 500 shares of stocks in the Lehman 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 sells her stock.

Question 24

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 25

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

Question 26

A bond is a formal IOU issued by a corporation or government entity.

Question 27

If a company goes bankrupt, its preferred stockholders have a better chance of recovering their investment than do the common stockholders.

Question 28

The current yield expresses a bond's interest payment as a percentage of the bond's current market price rather than its par value.

Question 29

Unlike stocks, bondholders cannot sell their bonds to other investors before they mature.

Question 30

The Dodd­Frank Act of 2010 makes the "say on pay" vote of common stockholders binding on corporations.

Question 31

All corporations have a legal obligation to pay dividends to their preferred stockholders.

Question 32

The coupon rate on a bond expresses the annual interest payment as a percentage of the bond's par value.

Question 33

The common stockholders' right to a residual claim on assets means that if a corporation goes out of business and liquidates its assets, it must pay the stockholders before it clears other debts and back taxes.

Question 34

A conversion ratio indicates the number of shares of common stock exchanged for each convertible security.

Question 35

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

Question 36

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

Question 37

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

Question 38

Dan has $6,000 that he would like to invest. He wants to diversify his investment, but feels that $6,000 isn't enough to buy many different securities. Besides, he doesn't know much about picking stock and doesn't want the hassle of trying to make investment decisions. Dan is likely to find mutual funds an attractive way to invest his $6,000.

Question 39

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 40

Convertible securities are bonds or shares of preferred stock that investors can exchange for a given number of shares of the issuing corporation's common stock.

Question 41

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

Question 42

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

Question 43

An open­end mutual fund issues a fixed number of shares and invests the money received from selling these shares in a portfolio of assets.

Question 44

Underwriting is an arrangement in which an investment banker agrees to purchase all shares of a public offering at an agreed­upon price.

Question 45

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 46

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

Question 47

Accredited investors are individuals, businesses, or other organizations that meet specific financial requirements set by the SEC.

Question 48

Public offerings are usually quicker, simpler, and less expensive than private placements.

Question 49

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 that the investment bank itself will purchase all of the shares at a specified price, thus guaranteeing that the firm receives a known amount of new funds.

Question 50

When securities are issued in the primary market using the public offering method, securities are sold to one or more private investors under terms negotiated between the issuing firm and the investors.

Question 51

Harry is thinking about investing in ETFs. If he decides to do so, he could make the purchase by calling a broker, in the same way as if he were buying separate stock issues.

Question 52

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 53

Andrew wants to make a withdrawal from his mutual fund, but he can't decide if he should sell the closed­end or open­end fund. Andrew should sell the closed­end fund since he wouldn't have to wait for the NAVPS to be determined.

Question 54

An investment banker's main responsibility is to help firms work out the financial details of issuing new securities before a public offering. This can include assisting the firm with the planning and market assessment phase, providing assistance with SEC details, and deciding whether to sell the stock via a firm commitment or a best efforts approach.

Question 55

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 56

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

Question 57

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

Question 58

The secondary market is where previously issued securities are traded.

Question 59

The underwriting syndicate is a group of investment banks that purchase all shares at a specific price from firms with large public offerings.

Question 60

Under the best efforts approach a bank guarantees that the firm will sell all of its securities at a high enough price to meet its financial goals.

Question 61

The key players in the NASDAQ market are known as market makers.

Question 62

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

Question 63

Calissia would like to sell 500 shares of the stock she owns in the Megabux Corporation, but only if she can sell them for at least $30 per share. She could ensure that her stock is sold only at or above $30 by issuing a market order to her broker.

Question 64

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

Question 65

Accredited investors are securities dealers that make a commitment to continuously offer to buy and sell specific NASDAQ­listed stocks.

Question 66

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

Question 67

The NASDAQ was established in 1971. Since early stock exchanges had been so successful with on­the­floor trading, the NASDAQ decided not to implement electronic trading.

Question 68

The price of MacTek's stock on the NYSE has dropped dramatically in the past month. While this might be bad news for some stockholders, MacTek's top management is unlikely to be concerned because it could always move to the OTC market which is much more active than for stocks listed on larger exchanges.

Question 69

NASDAQ is the largest stock exchange in the world.

Question 70

An electronic communications network is an automated, computerized securities trading system that automatically matches buyers and sellers, allowing trades to be executed very quickly.

Question 71

NASDAQ is a physical location where brokers meet to buy and sell stocks for their clients.

Question 72

The stocks of Apple, Google, and Microsoft are listed on the NASDAQ exchange.

Question 73

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

Question 74

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

Question 75

The buy­and­hold strategy always allows investors to "get rich quick," and usually results in immediate financial return.

Question 76

A securities exchange provides an organized venue for stockbrokers and securities dealers to trade listed stocks and other securities.

Question 77

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 78

Stock indices indicate the general market trend.

Question 79

Setting up an account with a broker­dealer is the first step in implementing your investment plans.

Question 80

If you plan to make stock trades, you could save money by trading stock yourself on the ECN, and not use a broker.