Question 1

Michael and Kelly plan to invest in corporate securities. While Michael plans to retire next year on his 65th birthday, Kelly is celebrating her first job after college and her 22nd birthday. Which of the two investors would be well advised to choose a more conservative investment strategy?

Accepted Answer

Michael should choose a more conservative investment strategy as he is retiring soon and will need to rely on his investments for income. Kelly can afford to take more risks as she is young and has time to recover from any potential losses.

Question 2

Investors trading online:

Accepted Answer

Investors trading online generally do their own research and make their own investment decisions. They have access to a wealth of information online, but they are responsible for their own decisions and should be knowledgeable about investing before entering the market. Options A, B, and D are not accurate. Online investors may receive advice from online brokers or financial professionals, they typically buy and sell securities through a brokerage firm, and they are not insured against market downturns unless they take specific measures such as purchasing insurance or diversifying their investments.

Question 3

Investing online is usually ________ than trading through a traditional stock brokerage firm.

Accepted Answer

Online investing often involves lower fees and commissions compared to traditional stock brokerage firms, making it a more cost-effective option. The other options are not necessarily true for all cases of online investing.

Question 4

Ebony Enterprises decides to pay off its bonds several years before the maturity date. Apparently, the bonds ______________.

Accepted Answer

The option to pay off bonds before maturity is called "callable." Therefore, option C is the best choice, as the bonds in question have this feature. Options A, B, and D do not accurately describe this situation.

Question 5

When an investor purchases a security, the investor does so with the expectation of:

Accepted Answer

The primary reason for an investor to purchase a security is to make a profit. While maintaining their capital position and minimizing risk may also be important, the ultimate goal is to earn a return on their investment. Providing commissions is not a goal for the investor, but rather a source of income for the broker or financial institution facilitating the transaction.

Question 6

Diversification means:

Accepted Answer

Diversification means allocating your investment funds to several types of investments. This helps to spread the risk, as different types of investments tend to perform differently under different market conditions. This way, if one investment performs poorly, the others might perform well, helping to balance out your overall returns.

Question 7

Maplewood Toy Company hopes to raise long-term capital by promising in writing to repay the principal provided by potential creditors in ten years. Additionally, the certificate issued by Maplewood promises to pay 5% interest annually for the ten-year life of the security. Maplewood intends to issue:

Accepted Answer

Maplewood is promising to repay the principal and pay annual interest, making this a bond. Stocks represent ownership in the company, mutual funds are collections of securities, and commodities are physical goods such as gold or oil.

Question 8

After owning a Cordero Company bond for five years, Gabrielle exercised an option that allowed her to exchange her bond for 20 shares of the company stock. Gabrielle owned a:

Accepted Answer

Gabrielle owned a convertible bond, which gave her the option to exchange the bond for a specific number of shares of stock.

Question 9

Creating a portfolio by buying several different types of investments to spread the risk of investing is called _______________.

Accepted Answer

Diversification helps spread the risk of investing by buying different types of investments. This helps to ensure that if one investment performs poorly, the others may perform well, thus reducing the overall risk of the portfolio.

Question 10

A ________ is a registered representative acting as an intermediary to buy and sell securities for clients.

Accepted Answer

A stockbroker is a registered representative who serves as an intermediary between buyers and sellers of securities. They are licensed professionals who execute trades on behalf of their clients for a commission. Certified stock underwriters and securities bankers may also deal with securities, but their roles are more focused on the issuance and underwriting of securities rather than the buying and selling of securities on behalf of clients. Trading accountants are professionals who handle financial statements and accounting records, but they do not typically act as intermediaries for buying and selling securities.

Question 11

The risk/return trade-off investors assume means:

Accepted Answer

The risk/return trade-off suggests that investors will assume added risk if they believe they can achieve a greater return. This trade-off means that there is a direct relationship between risk and return, and investors must decide how much risk they are willing to take on in order to achieve their desired level of return. Option A is incorrect because taking less risk means potentially receiving less return. Option B is incorrect because diversification helps to manage risk, but it does not necessarily relate to the risk/return trade-off. Option D is incorrect because having investments that are always liquid and of short duration may limit potential returns as higher potential returns are often associated with higher risk and longer investment horizons.

Question 12

Alejandro relies on his stockbroker to execute his buy and sell orders for shares of stock in different companies. He has found that the process of buying or selling a share of stock on a major stock exchange normally takes:

Accepted Answer

The process of buying or selling a share of stock on a major stock exchange normally takes seconds. With the use of electronic trading platforms, transactions can be executed quickly and efficiently.

Question 13

Another term for portfolio strategy is:

Accepted Answer

Allocation model is the best choice as it accurately describes the process of allocating resources to various investments in a portfolio based on the investment goals and risk tolerance. The other options (modulation model, formula model, and equity model) do not accurately reflect the concept of portfolio strategy.

Question 14

Wyoming Mining Corporation makes regular monetary deposits that will accumulate and provide for an orderly retirement of their bonds when they come due in 2025. Wyoming Mining appears to be utilizing a:

Accepted Answer

Wyoming Mining Corporation is using a sinking fund to make regular deposits that will accumulate and provide for the orderly retirement of their bonds when they come due in 2025. A sinking fund is a type of fund that is set up by a company specifically to repay debt. The fund receives regular deposits that accumulate over time, providing a source of funds for the eventual repayment of the debt. This helps ensure that the company will be able to repay the debt when it comes due and can also help improve the creditworthiness of the company by providing investors with greater assurance that their investment will be repaid.

Question 15

Investors buying bonds and corporations issuing bonds (both) accept investment risk. Which of the following statements is most correct when it comes to the investment that one or the other party accepts?

Accepted Answer

When market interest rates go down, the value of existing bonds with higher interest rates goes up, as they become more attractive to investors. This means that if investor Joe wanted to sell his bond, he could do so at a premium price. Conversely, if interest rates go up, the value of existing bonds goes down, as they become less attractive to investors. Therefore, statement A and C are incorrect. Statement D may be true in some cases, but it is not a general rule, as market conditions and the corporation's specific needs and goals may vary.

Question 16

Which of the following measures how quickly an investor has access to his/her invested funds, if they are needed?

Accepted Answer

Liquidity is the measure of how easily and quickly an investor can convert their asset into cash without affecting the market price. It is important because it ensures that an investor has access to their invested funds when they are needed. A highly liquid asset can be easily sold without significant delay, while an illiquid asset might take longer to sell or might require a substantial discount on the price. Therefore, liquidity is a crucial factor to consider for investors who might need to access their funds quickly in case of an emergency or unexpected events.

Question 17

Which of the following is not an important criterion to consider before investing?

Accepted Answer

The answer of Which of the following is not an...

Question 18

When an investor places a buy order with a stockbroker, the broker contacts a(n) __________ to complete the transaction.

Accepted Answer

When an investor places a buy order with a stockbroker, the broker contacts a stock exchange member or dealer where the stock is traded to complete the transaction. The member or dealer acts as an intermediary between the buyer and seller, executing the trade on behalf of the buyer. A certified underwriter is responsible for issuing and underwriting securities, an investment banker helps companies raise capital, and a trading officer of the Securities Exchange Commission oversees trading activities and enforces securities laws.

Question 19

Online trading services target those investors who:

Accepted Answer

Online trading services are suited for investors who are willing to do their own research. Online trading platforms generally provide tools and resources for investors to make educated trading decisions, but do not typically offer the research and advice of a licensed stockbroker. Government bonds and foreign securities may be traded through online platforms, but this is not the sole target audience.

Question 20

Juan recently invested in 15-year Bellandro Bay Brewery bonds paying 6% interest annually, with a maturity date of 2030. The bonds are callable in 2025. If interest rates go down to 4.5% in the year 2025, the brewery is likely to:

Accepted Answer

If interest rates go down to 4.5% in 2025, the brewery is likely to exercise the call option and refinance the bonds at the lower interest rate, saving them money on interest payments. This means that Juan would have to give up his bonds, but he would receive the face value of the bonds plus any accrued interest.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities