Question 1

New stocks and bonds are brought and sold by firms and governments in primary securities markets.

Accepted Answer

In primary securities markets, firms and governments issue new stocks and bonds to investors for the first time to raise capital.

Question 2

The Securities and Exchange Commission is the federal agency that administers laws to protect the investing public and maintain smoothly functioning markets.

Accepted Answer

The Securities and Exchange Commission (SEC) is responsible for enforcing federal securities laws, proposing securities rules, and regulating the securities industry, the nation's stock and options exchanges, and other activities and organizations, including the electronic securities markets in the United States, to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Question 3

Blue-chip stocks are issued by new companies.

Accepted Answer

Blue-chip stocks are issued by well-established companies with stable financial performance and a solid reputation for reliability, quality, and the ability to operate profitably in good times and bad.

Question 4

The over-the-counter market trades stock outside the formal institutional setting of the organized stock exchanges.

Accepted Answer

The over-the-counter (OTC) market refers to the trading of stocks, bonds, or other financial instruments directly between two parties without the supervision of a formal exchange, such as the New York Stock Exchange or NASDAQ, making it an outside, less formal setting.

Question 5

A bond is a security through which an issuer promises to pay the buyer a certain amount of money by a specified future date.

Accepted Answer

A bond is indeed a financial security in which the issuer is obligated to pay the holder a specified sum of money at predetermined future dates, typically including periodic interest payments and the return of the principal at maturity.

Question 6

A debenture is an unsecured corporate bond.

Accepted Answer

A debenture is indeed an unsecured bond, meaning it is backed only by the creditworthiness and reputation of the issuer, without specific collateral.

Question 7

The net asset value of a share of stock at the time it is originally issued is the market value.

Accepted Answer

The answer of The net asset value of a share...

Question 8

A limit order instructs the broker to sell if a stock price falls to a certain level.

Accepted Answer

A limit order instructs the broker to sell or buy at a specific price or better, not necessarily when the price falls to a certain level. A stop order is used to sell if a stock price falls to a certain level.

Question 9

A short sale occurs when an investor borrows securities from a broker to be sold and then replaced at a specified future date.

Accepted Answer

In a short sale, an investor borrows shares from a broker and sells them on the open market, planning to buy them back later at a lower price to return to the broker, aiming to profit from a decline in the security's price.

Question 10

A prospectus is a potential buyer of a security.

Accepted Answer

A prospectus is a formal document that companies and investment funds use to describe the securities they are offering for sale to potential investors, not a potential buyer of a security.

Question 11

Insider trading involves the use of special knowledge about a firm for profit or gain.

Accepted Answer

Insider trading refers to the buying or selling of a publicly-traded company's stock by someone who has non-public, material information about that stock.

Question 12

Stocks and bonds are referred to as securities because they guarantee a profit to investors.

Accepted Answer

Stocks, bonds, and mutual funds are referred to as securities because they represent secured, or financially valuable, claims on the part of investors.

Question 13

Both blue-chip stocks such as Wal-Mart, and dot-coms such as Yahoo! can be evaluated exactly the same using tools such as earnings per share, dividend yield, and book value.

Accepted Answer

With the proliferation of Internet and start-up dot-coms, experts realize that many of the old rules for judging the market prospects of stocks are changing. Conventional methods do not seem to apply to surges in "new economy" stock prices.

Question 14

To gain entry to the trading floor of a stock exchange, a potential trader must own at least one share of stock being traded on the exchange.

Accepted Answer

Some people on the trading floor are stockbrokers who match buyers with sellers; they do not own the securities.

Question 15

Scottrade is a full-service broker.

Accepted Answer

Charles Schwab, Scottrade, and Ameritrade are all discount brokers.

Question 16

The largest regional stock exchanges are the Chicago and Pacific Stock Exchanges.

Accepted Answer

Other smaller regional exchanges include Philadelphia, Boston, Cincinnati, and Spokane; many corporations list their stocks both regionally and on either the NYSE or the AMEX.

Question 17

The U.S. Government is the world's largest debtor.

Accepted Answer

New federal borrowing from the public increased by $362 billion in 2004 and, in 2006, total U.S. debt reached more than $8 trillion.

Question 18

U.S. government bonds are among the most risky investments available.

Accepted Answer

Government bonds, issued by the federal government, are among the safest investments available.

Question 19

The most attractive feature of municipal bonds is the fact that investors do not pay taxes on interest earned.

Accepted Answer

Municipal bonds are issued by local and state governments; investors pay no tax on interest earned.

Question 20

Ideally, an investor will diversify his or her portfolio within one category of investments.

Accepted Answer

Investors often select a mixed portfolio of investments, including various types of stocks, bonds, mutual funds, and/or real estate options, in order to strike the right balance of risk and return.

Quiz 16: Securities and Investments