Question 1

Which of the following offers low risk, guaranteed income, backed by the full faith and credit of the federal government?

Accepted Answer

U.S. government bonds offer low risk and guaranteed income, as they are backed by the full faith and credit of the federal government. Municipal bonds also offer low risk, but their income is not guaranteed and they are not backed by the federal government. U.S. government preferred stocks and common stock in the U.S. postal service are not guaranteed and carry higher risk.

Question 2

Anjali's stockbroker called to inform her of a margin call that requires that she pay $1,000. This indicates that the value of Anjali's stock has

Accepted Answer

Buying stock on margin allows the investor to borrow a specified percentage of the purchase from the stockbroker. If, however, the stock value decreases, the broker will issue a margin call requiring the investor to come up with more money to cover the losses the stock has suffered.

Question 3

The higher the risk associated with a bond issue, the ________ the interest rate the organization must offer investors.

Accepted Answer

When the risk associated with a bond issue is higher, investors require a higher return to compensate for the increased risk. This means that the organization must offer a higher interest rate to attract investors to purchase their bond. Therefore, the answer is A) higher.

Question 4

High-risk, high-interest bonds are called

Accepted Answer

High-risk, high-interest bonds are commonly known as junk bonds.

Question 5

Bonds that pay very high interest rates and typically have a higher risk of default are known as

Accepted Answer

Bonds that pay very high interest rates and typically have a higher risk of default are known as junk bonds. Zero-coupon bonds do not pay interest and are sold at a discount, bearer bonds are not registered and can be owned by anyone who holds them, and volatile bonds may have fluctuations in their market value but do not necessarily have a high risk of default.

Question 6

Abraham found a $1,000 face value bond that belonged to his father. He checked The Wall Street Journal and found the bond was currently selling for $1,220. This bond sells at a

Accepted Answer

A bond selling for more than face value is selling at a premium.

Question 7

Brad told his stockbroker to buy 100 shares of Mineral Mining common stock if and when the price falls to $18 per share. Brad placed a(n)

Accepted Answer

A limit order tells the broker to buy or to sell stock at a specific price, if and when that price becomes available.

Question 8

Game Guys announced a 2-for-1 common stock split for investors on record. Which of the following will occur?

Accepted Answer

A two-for-one stock split would cause stock prices to drop by 50%. While there is no change in each investor's total value in that issue after the stock split, they generally approve of stock splits because often the demand for a share of stock at the lower price will be greater than the demand at the higher price.

Question 9

Which of the following organizations provides an assessment of the relative level of risk of a particular firm's bond issue?

Accepted Answer

Standard & Poor's is a credit rating agency that provides an assessment of the relative level of risk of a particular firm's bond issue. The Securities and Exchange Commission is responsible for regulating securities markets in the United States, E*trade is an online brokerage firm, and the Wall Street Journal is a financial news source. None of these organizations specialize in providing credit ratings for bond issues.

Question 10

The new issue $1,000 face value bonds due in 2030 issued by Bathtub Brewing Company are seen by investors as less attractive than other bonds offered by other businesses at the same time. The coupon rate attached to these bonds will need to be ________ than other corporate bond issues in order to attract investors.

Accepted Answer

In order to attract investors to bonds with poor ratings and a high risk of default, corporations must attach a high interest rate to the bond.

Question 11

Brittany read about PharmaONE and wants to buy 100 common shares at $40 per share. Unfortunately, she only has $3,000 available to invest. One risky strategy Brittany could consider is

Accepted Answer

Buying on margin involves the purchase of stocks by borrowing some of the purchase cost from the stockbroker.

Question 12

The risk associated with Firm A's bond is greater than the risk of Firm B's bond. All other things being equal, investors would be willing to pay ________ for Firm B's bond.

Accepted Answer

The risk/return trade-off suggests that the greater the risk associated with a specific security, the less investors are willing to pay for the bond, but the more they expect in interest payments for their willingness to take the risk. Investors will invest in a bond considered risky only if the potential expected return is sufficiently high to counter the risk.

Question 13

Bond prices in the newspaper or online are quoted as a percentage of their face value of $1,000. If the bond price is 103.25, this bond's value is equal to

Accepted Answer

When bond prices are quoted as 103.25, it means 103.25% of the face value, which is $1,000. Therefore, the bond's value is $1,032.50 (103.25% of $1,000).

Question 14

When market interest rates increase, the selling price of existing bonds will

Accepted Answer

Bond prices generally fluctuate inversely with current market interest rates. As interest rates go up, existing bond prices fall, because the existing bonds are paying a fixed interest rate that is lower than the market interest rate.

Question 15

Bondholders can sell their bonds

Accepted Answer

The answer of Bondholders can sell their bonds
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Question 16

Before the announcement of a three-for-one stock split, the selling price for a share of stock in Fossil Oil Refineries was $150 per share. Immediately after the stock split, the probable price per share is

Accepted Answer

A three-for-one stock split will give stockholders three shares of stock for each one they currently own. The impact of this split on the trading price of the stock is a reduction by one-third [$150 x 1/3 = $50].

Question 17

Bonds sold at a ________ sell for less than face value.

Accepted Answer

Bonds that are sold at a discount sell for less than their face value. This can occur when the bond's interest rate is lower than the prevailing market interest rates. The price of the bond will be lower to compensate for the lower interest payments.

Question 18

U.S. government bonds are considered a secure investment because

Accepted Answer

U.S. government bonds are a secure investment because they are backed by the full faith and credit of the federal government.

Question 19

Bonds offering a higher interest rate than other bonds of similar risk will likely sell at a

Accepted Answer

Bonds offering a higher interest rate than other bonds of similar risk are more attractive to investors, so they are willing to pay more for them, leading these bonds to sell at a premium.

Question 20

A recent publication referred to a series of bonds as "the 6s of 35." What does this mean?

Accepted Answer

The phrase "the 6s of 35" refers to bonds that pay 6% interest and are set to mature in the year 2035. This terminology is a shorthand way of describing the interest rate and maturity year of the bonds.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities