Question 1

Aggressive growth funds are designed for investors who can accept the risk of loss inherent in common stock investing with severe price fluctuations,but also the potential for superior returns over time.

Accepted Answer

Aggressive growth funds typically invest in high-growth companies with significant potential for capital appreciation. However, these investments are also subject to high volatility and the potential for significant losses, making them suitable for investors who can tolerate risk.

Question 2

Negative ratings do not necessarily keep issues from being successful.Rather,they raise the interest rates that issuers must offer to attract lenders.

Accepted Answer

Negative ratings indicate higher risk for lenders, which means that issuers must offer a higher interest rate to attract lenders who are willing to take on that risk. This does not necessarily prevent the issue from being successful, as investors may still be interested in the higher returns offered by the higher interest rate.

Question 3

Private owners lose some control of the company when shares are sold to the public.

Accepted Answer

When shares are sold to the public, private owners need to comply with various regulations and also need to report to shareholders who hold partial ownership of the company. Shareholders can also vote on certain company decisions, which can impact the control of private owners.

Question 4

An investment bank operates in the secondary securities market.

Accepted Answer

The answer of An investment bank operates in the secondary...

Question 5

The Dow Jones Industrial Average (DJIA)measures the performance of the industrial sector of the U.S.stock markets by focusing on just 30 blue-chip,large-cap companies as reflectors of the economic health of the many similar U.S.firms.

Accepted Answer

The statement correctly defines the Dow Jones Industrial Average (DJIA) as a measure of the performance of the industrial sector of the U.S. stock markets by focusing on 30 blue-chip, large-cap companies. These companies are considered to be representative of the broader U.S. economy, as they are leaders in their respective industries and are generally considered to be financially stable and strong.

Question 6

The largest stock exchange in the world is the Tokyo exchange.

Accepted Answer

The largest stock exchange in the world is the New York Stock Exchange (NYSE). The Tokyo exchange is one of the largest in Asia, but not the largest in the world.

Question 7

Conservative investors prefer the higher risks and potential returns from long-term junk bonds and common stocks.

Accepted Answer

Conservative investors typically prioritize safety over potential returns, and therefore tend to prefer low-risk investments such as government bonds or blue-chip stocks rather than long-term junk bonds or common stocks with higher risks.

Question 8

Which of the following statements is NOT true about dividend payments?

Accepted Answer

During bad years, companies are not required to pay dividends. Dividend payments are discretionary and can be adjusted based on the company's financial performance and cash flows. In fact, many companies may choose to suspend or decrease dividend payments during tough economic times to conserve cash and reinvest in the business.

Question 9

Because of the uncertainties involved in stock prices,investment professionals believe day-to-day prices to be a generally poor indicator of any stock's real value.

Accepted Answer

Investment professionals often focus on long-term trends and the underlying fundamentals of a company to determine its true value, rather than short-term fluctuations in stock prices.

Question 10

Dividend payments are optional and variable - the corporation's CEO decides whether and when a dividend will be paid,as well as the amount that is best for the future of the company and its employees.

Accepted Answer

Dividend payments are required and are indexed to a company's overall performance.

Question 11

A stock's ________ can be calculated by dividing total shareholders' equity by the total number of shares of stock issued.

Accepted Answer

Book value is calculated by dividing total shareholders' equity by the total number of shares of stock issued. Par value is a nominal value assigned to shares and does not affect the calculation of book value. Market value is the current price of a stock in the market and is not directly related to the calculation of book value. Therefore, only option C) book value is the correct answer.

Question 12

When making an initial investment of $10,000,the gains for the last 10 years are much greater than for the first 10 years illustrating the ________ .

Accepted Answer

The power of compound growth is demonstrated when the gains for the last 10 years are much greater than for the first 10 years, as the gains from each year's returns are reinvested and earn additional returns in subsequent years. This can result in significant growth over time. The other options (B, C, D) are not relevant to this scenario.

Question 13

Although advising and underwriting may be tasks of an investment bank,distribution of new securities is NOT one of their services.

Accepted Answer

Distribution of new securities is one of the services provided by investment banks, along with advising and underwriting. Investment banks help companies to issue new securities, such as stocks or bonds, and distribute them to investors through auction or direct placement.

Question 14

Common shareholders owning a small proportion of the company's shares gains a powerful position in determining who runs the corporation and how.

Accepted Answer

Common shareholders with a small proportion of shares typically have limited influence over corporate decisions, as voting power is proportional to the number of shares owned.

Question 15

Interest paid to bondholders is a business expense and therefore not tax deductible for the firm.

Accepted Answer

This statement is false. Interest paid to bondholders is tax deductible for the firm as a business expense, which can reduce the firm's taxable income and overall tax liability.

Question 16

When an investment bank engages in underwriting,that investment bank is taking on risk in the process of launching new securities.

Accepted Answer

When an investment bank engages in underwriting, it is taking on the risk of selling the new securities to investors. If the securities do not sell well, the investment bank may be left with unsold securities, which can result in financial losses.

Question 17

In return for their investment,angel investors typically expect a small piece of ownership in the company (up to 10 percent of its equity).

Accepted Answer

The answer of In return for their investment,angel investors typically...

Question 18

The investment industry categorizes firms according to size of capitalization.

Accepted Answer

This is correct. The investment industry typically categorizes firms as small-cap, mid-cap, or large-cap based on their market capitalization, which is a measure of a company's value based on its stock price and number of outstanding shares.

Question 19

Unlike the Dow and the S&P 500,all NASDAQ-listed companies,not just a selected few,are included in the index for a total of some 3,800 firms across six continents.

Accepted Answer

The statement is true. Unlike the Dow and the S&P 500, the NASDAQ index includes all listed companies, not just a selected few. The index encompasses around 3,800 firms across six continents.

Question 20

A(n)________ fund nearly matches the performance of a particular market.

Accepted Answer

An index fund is designed to mirror the performance of a specific market or index, such as the S&P 500. This means that it will closely track the performance of the market, making it a good choice for investors who want exposure to a particular market without the risk of actively managed funds. The other choices (aggressive, balanced, market) are not specific enough to match the description of a fund that closely mirrors a particular market.

Quiz 16: Managing Finances