Question 1

Ken owns 100 shares in XYZ Company, currently selling for $60 per share. His stock split yesterday 3-for-1. The number of shares that Ken owns has tripled.

Accepted Answer

Since Ken's stock split 3-for-1, the number of shares he owns would triple from 100 to 300. This is consistent with the statement in option A.

Question 2

If an individual investor places a limit order at $38 and the stock currently sells for $41 per share, the broker will buy the stock for the investor.

Accepted Answer

A limit order to buy at $38 means the investor only wants to buy if the stock price drops to $38 or lower. If the stock currently sells for $41, the broker will not execute the order because it is not within the investor's specified price range.

Question 3

If you buy 100 shares of IBM for $120/share, and the margin on your account is 50%, the broker will float you an interest free loan of $6,000, until the price of IBM sufficiently rises to the point where you are willing to sell. You pay the broker back its $6,000, and you enjoy the capital gain.

Accepted Answer

The margin on the account is not a loan from the broker, but rather the amount of the investor's own funds being used to purchase the shares. The investor would need to use their own funds or borrow money at an interest rate to purchase the shares. Additionally, margin accounts can involve the use of borrowed funds, but they typically involve interest charges, not interest-free loans.

Question 4

Buying stock on margin lowers the overall risk for the investor.

Accepted Answer

Buying stock on margin actually increases the overall risk for the investor because they are borrowing money to invest, which amplifies both gains and losses.

Question 5

From an investor's point of view, corporate bonds offer less risk than government bonds.

Accepted Answer

This is false. Government bonds are considered less risky because they are backed by the government, which is less likely to default on its debt than a corporation. Corporate bonds typically have a higher risk of default, which is reflected in their higher interest rates.

Question 6

Ricardo owns 100 shares of stock in the ABC Corporation that currently sell for $100 per share. ABC just announced a two-for- one stock split for all current stockholders. Ricardo now owns $20,000 worth of stock in the ABC Corporation.

Accepted Answer

The answer of Ricardo owns 100 shares of stock in...

Question 7

A margin call requires an investor to repay money borrowed from the broker used to purchase the stock.

Accepted Answer

A margin call occurs when the value of the investor's securities decline and the investor does not have enough equity in their account to cover the margin requirement. This requires the investor to either deposit more money into their account or sell securities to repay the borrowed funds from the broker.

Question 8

A round lot refers to the purchase of 100 shares of stock in the same company in a single transaction.

Accepted Answer

A round lot is defined as the purchase of 100 shares of stock in the same company in a single transaction.

Question 9

Buying on margin is a relatively risk-free way of investing in the stock market.

Accepted Answer

Buying on margin involves borrowing money from a broker to purchase stocks. While this can potentially increase profits, it also amplifies losses if the value of the stocks decreases. This makes buying on margin a high-risk strategy rather than a risk-free one.

Question 10

Yesterday, Alberto purchased on margin 100 shares of stock in the ABC Corporation for $40 per share. Today, the price of the shares dropped by $10 per share. Alberto expects his broker to issue a margin call.

Accepted Answer

Since the price of the shares dropped and Alberto purchased on margin, the value of his investment has decreased. This means that his equity in the investment has also decreased. If his equity falls below the margin requirement (typically 50%), his broker will issue a margin call requiring him to deposit additional funds to bring the equity back up to the required level.

Question 11

A stock split refers to buying a share of stock at a discounted price if full payment is made at the time of purchase.

Accepted Answer

A stock split is not related to buying a share of stock at a discounted price. A stock split is when a company increases the number of its outstanding shares while maintaining the same total value of its shares. This is usually done to make the stock price more affordable for retail investors, but it does not involve discounted prices for individual shares.

Question 12

Buying on margin means you are borrowing part of the value of the stock purchase from the brokerage firm.

Accepted Answer

Buying on margin involves borrowing money from a brokerage firm to purchase stocks. The investor puts up a portion of the purchase price, and the rest is loaned by the broker. This strategy can increase potential returns but also carries additional risks.

Question 13

Lamont bought a share of stock in the ABC Corporation for $50. When he sold the stock later that year, he received $70. The par value of the stock is $5. Lamont's capital gain is $25.

Accepted Answer

Lamont's capital gain is actually $20 (selling price of $70 minus purchase price of $50). The par value of the stock is irrelevant to the calculation of his capital gain.

Question 14

The interest earned on municipal bonds is often tax-free at the state level.

Accepted Answer

Municipal bonds are issued by state and local governments, and the interest earned on these bonds is usually exempt from federal, state, and local income taxes. However, it's important to note that there may be exceptions and some municipal bonds may have taxable interest income.

Question 15

Investing in common stock can give an individual the opportunity to participate in the success or failure of a corporation.

Accepted Answer

Investing in common stock means that the investor owns a share of the company and has the potential to benefit from its profits and growth, but also bears the risk of loss if the company performs poorly.

Question 16

Buying stock on margin allows investors to increase the potential rate of return made on a stock investment.

Accepted Answer

Buying stock on margin allows investors to borrow money to buy more shares than they would be able to with their own funds, which can increase their potential rate of return if the stock price goes up. However, it also increases the risk and potential loss if the stock price goes down.

Question 17

If you are willing to hold on to your growth stock long enough, at least five years or more, you will realize capital gains.

Accepted Answer

The answer of If you are willing to hold on...

Question 18

Garrett's grandmother died and left him $100,000. He will invest the funds, but wants to make enough money to pay for his monthly car payment of $300/month. One suggestion might be an income stock that pays a 4% dividend.

Accepted Answer

If Garrett invests the entire $100,000 into an income stock that pays a 4% dividend, he would earn $4,000 annually in dividend payments. This equates to $333.33 per month, which is more than enough to cover his car payment of $300 per month.

Question 19

For investors who desire the least possible risk, a share of stock in an established corporation provides the safest investment.

Accepted Answer

While established corporations may offer more stability than smaller or newer companies, there is always some level of risk involved when investing in the stock market. No investment can be considered completely safe.

Question 20

Corporations and brokers prefer to have stock purchases conducted in round lots of 100 shares.

Accepted Answer

This is true, as purchasing in round lots of 100 shares is considered a standard practice in the stock market. Many brokerage firms even charge extra fees for purchasing shares in odd lots (less than 100 shares). This is because buying in round lots makes it easier for brokerage firms to process orders and reduces the impact of transaction costs on individual investors. It also allows for more efficient trading and liquidity in the market.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities