Deck 10: Financial Markets: Allocating Financial Resources

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

A

Question 4

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 5

Flammox Growth Fund, a mutual fund, issues 200 shares in the market. However, because of a sharp demand from the investors, the fund issues 350 additional shares. In this scenario, the Flammox Growth Fund is structured as a(n) _____:

A)an offshore fund.
B)an open-end fund.
C)a hedge fund.
D)an umbrella fund.

Question 6

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 7

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 8

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

Question 9

Which of the following is true of stock exchanges?

A)Electronic trading began with the establishment of the over-the-counter market.
B)Each exchange establishes its own requirements for the securities it lists.
C)The stocks of privately traded corporations are listed and traded on these exchanges.
D)Apart from the annual fee, exchanges do not require firms to pay any other fee for the stock listing.

Question 10

Lydia sells her ancestral property for a handsome amount of money. She invests this money in various securities. She decides not to trade the securities for a while and lets her money increase with the growth of the overall market. However, after almost eight years, when she feels that the value of the securities has risen considerably, Lydia sells her stocks and receives high returns on her investment. In this scenario, Lydia has used the _____ investment strategy.

A)market timing
B)investing for growth
C)value investing
D)buy-and-hold

Question 11

Exchange-traded funds and mutual funds account for:

A)financial liabilities.
B)financial losses.
C)financial stagnancies.
D)financial diversifications.

Question 12

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 13

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 14

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 15

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

Question 16

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 17

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 18

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

Question 19

Cartman owns convertible securities in OctoCore Corp. If the conversion ratio for the convertible securities is 37, it means that:

A)Cartman can convert 37 percent of the convertible securities that he owns for shares of common stock.
B)Cartman can resell the 37 percent of the convertible securities that he owns to other preferred stockholders.
C)Cartman can exchange each convertible security that he owns for 37 shares of common stock.
D)Cartman can liquidate each convertible security that he owns for $37.

Question 20

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

Question 21

The government of Brunasia issues bonds with a guarantee to make periodic interest payments on the par value. The government offers a 6.5% interest on its bonds. In this case, the percentage of interest offered by the government of Brunasia is called the _____.

A)coupon rate
B)dividend
C)premium
D)capitalization rate

Question 22

In the context of a public offering, a(n)__________is a complex document that must include a firm's key financial statements plus additional information about the company's management, its properties, its competition, and the intended uses for the funds it plans to obtain from the offering.

A)registration statement
B)corporate bylaw
C)article of incorporation
D)franchise agreement

Question 23

One drawback of exchange-traded funds (ETFs) is that investors:

A)are not able to buy diversified securities.
B)have to pay brokerage commissions every time they buy or sell shares.
C)are forced to pay higher fees as compared to mutual funds.
D)can buy or sell shares only after the major stock exchanges are closed.

Question 24

Urasil Mobil Corporation is a small petrochemicals firm. Since the owners of the firm do not want to pay a high listing fee, the firm's shares are not listed on an organized exchange. In this case, Urasil Mobil Corporation would trade its stocks in the _____.

A)over-the-counter market
B)money market
C)free market
D)private-player market

Question 25

Which of the following is a true statement about personal investing?

A)Every security investment will generate money.
B)In general, riskier investment strategies offer the potential for higher returns.
C)The buy-and-hold approach of securities results in substantial gains in a short time period.
D)Individuals who invest in securities must use the services of an investment bank.

Question 26

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 27

Involved in private placements, _____ are individuals, businesses, or other organizations that meet specific financial requirements set by the Securities and Exchange Commission.

A)money managers
B)angel investors
C)venture capitalists
D)accredited investors

Question 28

The advantage of electronic communication networks (ECNs) is that they:

A)allow traders to contact the market makers used in the over-the-counter market.
B)help firms identify and contact accredited investors.
C)guarantee the sale of all the securities of listed firms.
D)make it possible for investors to trade securities after the U.S.exchanges are closed.

Question 29

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 30

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 31

William holds shares of preferred stock in a telecommunications company. However, given the lucrative benefits that come with holding common stock, William exchanges his shares of preferred stock with shares of common stock at the conversion price. In this scenario, William was holding _____ in preferred stock.

A)century bonds
B)convertible securities
C)derivative securities
D)callable bonds

Question 32

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 33

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 34

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 35

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 36

Which of the following is a difference between dividends on stock and interest on bonds?

A)A firm has a legal obligation to pay interest on bonds, whereas it has no legal obligation to pay dividends on stock.
B)Dividend on stock is paid by the issuer of the stock, whereas interest on bond is paid by the bondholder.
C)A firm has a legal obligation to pay dividends on stock, whereas it has no legal obligation to pay interest on bonds.
D)Dividend on stock is paid by the stockholder, whereas interest on bond is paid by the issuer of the bond.

Question 37

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 38

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 39

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 40

Garret wants to buy shares of an iron manufacturing company, but he does not want to pay a high price for them. He asks his securities broker to only buy shares that come within the price of $300 and $400. In this scenario, Garret places a _____ with his broker.

A)market order
B)limit order
C)sell stop order
D)good-til-canceled order

Question 41

Oscilance Inc., a watch manufacturing company, issues new stocks. However, instead of floating its shares in public, it directly negotiates with a small number of accredited investors that meet specific financial requirements set by the Securities Exchange Commission (SEC). Which of the following methods of issuing securities is being used by Oscilance in the given scenario?

A)Peer-to-peer investing
B)Proxy selling
C)A private placement
D)A secondary market offering

Question 42

In the context of open-end mutual funds, the net asset value per share (NAVPS) is computed by:

A)dividing the total value of the fund's cash, securities, and other assets by the value of the coupon rate and the firm's liabilities.
B)dividing the capital gains by the number of fund shares outstanding.
C)dividing the accumulated value of the fund's assets by the current yield.
D)dividing the total value of the fund's cash, securities, and other assets by the number of fund shares outstanding.

Question 43

Paula wants to buy stocks in a publicly traded company that deals in networking equipment. However, the company is not listed on any of the major stock exchanges. Paula should, therefore, purchase the stocks of the company in the _____.

A)over-the-counter market
B)money market
C)free market
D)private-player market

Question 44

Olivia owns convertible securities in a company that manufactures electrical appliances. If the conversion ratio for the convertible securities is 50, it means that:

A)Olivia can resell the 50% of the convertible securities that she owns to other preferred stockholders.
B)Olivia can exchange half of the convertible securities that she already owns with shares of common stock.
C)Olivia can exchange each convertible security that she owns for 50 shares of common stock.
D)Olivia can sell each convertible security that she owns for $50.

Question 45

Glen wants to find the stock prices of some of the large actively traded companies listed on the Tokyo Stock Exchange. Which of the following stock indices should Glen follow?

A)The FTSE 100
B)The SSE Composite
C)The Russell 2000
D)The Nikkei 225

Question 46

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 47

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 48

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 49

A__________is the most common depository institution.

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

Question 50

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 51

Davis frequently trades on the NASDAQ exchange. He has made a commitment to constantly buy and sell the stocks of Ossani & Gautier, an automobile manufacturing company, that is listed on the exchange. He competes for customer order flow by quoting the bid price and the ask price for a number of shares. The information given in the scenario indicates that Davis is a(n) _____.

A)market maker
B)accredited investor
C)floor broker
D)proprietary trader

Question 52

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 53

Corporations that get into serious financial difficulties sometimes:

A)fall back on their bonds.
B)buy more bonds.
C)default on their bonds.
D)resell their bonds.

Question 54

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 55

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 56

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 57

The price at which shares of an open-end mutual fund are issued and redeemed is based on the fund's _____.

A)face value per share
B)coupon rate
C)net asset value per share
D)current yield

Question 58

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 59

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 60

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 61

__________is found by multiplying the price per share times the number of shares of common stock outstanding.

A)Earnings per share
B)Price-to-earnings
C)Market cap
D)Yield

Question 62

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 63

The stocks of firms that do not meet the listing requirements of stock exchanges are traded on the _____.

A)over-the-counter market
B)money market
C)primary market
D)private-player market

Question 64

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 65

BrunoCaf is an American coffee manufacturing company headquartered in New York. Recently, there was a market discrepancy and because of that its stock prices fell below their original values. However, given the slow but steady progress of the company, Marcos is confident that the market price of the stocks will rise with time, and he decides to invest in its stocks. In this scenario, Marcos uses the strategy of _____ in his investing decision.

A)investing for income
B)value investing
C)investing for growth
D)buying and holding

Question 66

Jack receives a considerable sum of money by selling his property. He decides to invest this sum in a diversified set of securities. He plans to invest in these securities and retain them for a long time. He is optimistic that eventually the overall market conditions will rise, thus giving him a high return sometime in the future. Jack is using the _____ investment strategy.

A)market timing
B)investing for growth
C)value investing
D)buy-and-hold

Question 67

Which of the following is a disadvantage of market timing?

A)It requires investors to make frequent trades.
B)It has steady but very low returns because the investments are low-risk.
C)It lets investors take away bigger earnings than brokers.
D)It is time-consuming as the stockholders have to wait for the market situation to be profitable.

Question 68

VIO is a giant aviation company based in the United Kingdom. It is listed on the London Stock Exchange among the most actively traded companies. Albert has recently invested in the company shares of VIO. Therefore, he wants to keep a track on how the company stocks are performing. In this scenario, which of the following stock price indices would be helpful to Albert?

A)The FTSE 100
B)The SSE Composite
C)The Nikkei 225
D)The Russell 2000

Question 69

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 70

Ecclestone Corporation plans to go for an initial public offering and, therefore, seeks the help of an investment bank in issuing the new securities. The bank agrees to help the company in finding potential buyers and providing advice on the pricing of the securities. However, the bank does not guarantee that it will accomplish the task of selling all of the company's securities at a high price. In this scenario, the investment bank is using a _____ approach.

A)partial risk factor
B)firm commitment
C)value investing
D)best efforts

Question 71

A health and fitness startup company goes for an initial public offering. For assistance, it enters into a firm commitment arrangement with an investment bank. As per the agreement, the investment bank itself will purchase all the shares at a specified price. This will guarantee that the company will receive a fixed amount of new funds. This scenario exemplifies a(n) _____.

A)underwriting
B)proxy selling
C)follow-on offering
D)corporate spin-off

Question 72

A(n) _____ is the first time a company issues stock that may be bought by the general public.

A)alternative public offering
B)reverse public offering
C)initial public offering
D)direct public offering

Question 73

Charles, a 62-year-old army veteran, buys preferred stocks in companies. Although the returns on these stocks are not high, he is more than happy with his investments as they bring a steady flow of money that helps him in his sustenance. Charles's investment approach is an example of the strategy of _____.

A)buying and holding
B)value investing
C)investing for growth
D)investing for income

Question 74

Goodwin Ross MidCap Growth is a fund that lets its investors buy ownership in a market basket that contains different securities. The fund's market basket has a composition that is similar to the composition of the Dow Jones Industrial Average stock index. In this scenario, Goodwin Ross MidCap Growth is a(n) _____.

A)offshore fund
B)open-end mutual fund
C)hedge fund
D)exchange-traded fund

Question 75

A__________issued by an investor instructs a broker to buy or sell a security at its reigning price at that particular time.

A)mid-price peg
B)limit order
C)market order
D)good-till-cancelled order

Question 76

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 77

A drawback of actively managed funds is:

A)the meagre fee that the professional managers of the funds receive.
B)that significant tax consequences occur when there is a lot of trading.
C)the difficulty in redeeming shares from the fund.
D)the uncertainty of recovering at least a portion of the initial investment.

Question 78

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 79

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 80

Which of the following is the main reason for private placements being less expensive than public offerings?

A)In a private placement, the requirement for hiring an expensive investment bank to trade the stocks on behalf of the company is not mandatory.
B)In private placements, issuers of stocks can quote a high price to the limited number of investors and get high returns.
C)Private placements takes place within a firm itself, thereby avoiding expenditures on resources.
D)Privately placed securities are exempt from the requirement to register with the Securities and Exchange Commission (SEC).