Question 1

Which form of stock owner would receive dividend payments first?

Accepted Answer

Preferred stockholders have a higher claim on dividends than common stockholders, meaning they receive dividends before common stockholders do.

Question 2

What feature gives the bondholder or preferred stockholder the right to exchange the bond or preferred stock for a fixed number of shares of common stock?

Accepted Answer

Convertible securities give the holder the right to convert the bond or preferred stock into a fixed number of shares of common stock, usually at any time up until maturity or redemption.

Question 3

Daily trading on the AMEX market is _____ shares.

Accepted Answer

Daily trading volumes on the AMEX (now known as the NYSE American) are significantly lower than those of larger exchanges like the NYSE or NASDAQ, typically falling under 100 million shares.

Question 4

Which are the two largest stock markets in the world?

Accepted Answer

The two largest stock markets in the world by market capitalization are the New York Stock Exchange (NYSE) and the NASDAQ stock market.

Question 5

Which of these connect major brokerages and individual traders virtually using the Internet,so that trades can be made directly without going through an intermediary?

Accepted Answer

Electronic communications networks (ECNs) connect major brokerages and individual traders directly over the Internet, allowing trades to be executed without an intermediary.

Question 6

When a company needs capital to purchase inventory,expand a plant,make major investments,acquire another firm,or pursue other business goals,it may sell a bond or stock issue to the investing public.This is done in the ______ market.

Accepted Answer

The primary market is where new securities are issued and sold for the first time, allowing companies to raise capital directly from investors for business expansions, acquisitions, or other financial needs.

Question 7

Other things being equal,as interest rate rises,the price of a bond

Accepted Answer

The answer of Other things being equal,as interest rate rises,the...

Question 8

Which of the following is a depository financial institution?

Accepted Answer

Credit unions are depository financial institutions that accept deposits from members, manage these deposits within various financial products, and make loans. Unlike life insurance companies, pension funds, and mutual funds, which primarily provide investment and insurance services, credit unions function similarly to banks but are member-owned and often offer more favorable rates.

Question 9

Which of these is a collection of financial markets in which previously issued securities are traded among investors?

Accepted Answer

The secondary market is where previously issued securities, such as stocks and bonds, are bought and sold among investors, after their initial issuance in the primary market.

Question 10

Veronica just bought a bond from United Pet Group.This bond is only backed by the financial reputation of the company.What type of bond did Veronica buy?

Accepted Answer

Debenture bonds are unsecured bonds that are not backed by collateral but rather by the creditworthiness and reputation of the issuer. Since the bond Veronica bought is only backed by the financial reputation of United Pet Group, it is classified as a debenture.

Question 11

Corporate bonds are a diverse group and often vary based on the _____ that backs it.

Accepted Answer

Corporate bonds can vary based on the collateral that backs them, which provides security to the bondholders in case the issuing company defaults on its payment obligations.

Question 12

Two factors determine the price of a bond: _____ and _____.

Accepted Answer

The price of a bond is primarily determined by its risk (which affects the interest rate or yield required by investors to compensate for that risk) and the prevailing interest rates in the market. Higher risk typically leads to higher required yields, and as market interest rates rise, the prices of existing bonds tend to fall (and vice versa).

Question 13

Which securities are backed by a pool of mortgage loans purchased from lenders,such as savings banks?

Accepted Answer

Mortgage pass-through securities are backed by a pool of mortgage loans. These securities involve the pooling of mortgages and the distribution of the payments to investors, effectively passing through the mortgage payments from the borrowers to the investors.

Question 14

A ______ bond is a bond whose proceeds are to be used to pay for a project that will not produce any income.

Accepted Answer

General obligation bonds are used by municipalities to fund projects that do not generate revenue, such as parks or schools, and are backed by the full faith and credit of the issuing municipality.

Question 15

For which type of bonds,interest is exempt from state income taxes?

Accepted Answer

Interest on U.S. Treasury bonds is exempt from state and local income taxes, making them a tax-efficient investment for residents in states with income tax.

Question 16

______ are loans made to borrowers with poor credit ratings.

Accepted Answer

Subprime mortgages are loans given to borrowers who have lower credit scores or a limited credit history, indicating a higher risk to the lender.

Question 17

What provision allows the issuer to redeem the bond before its maturity at a specified price?

Accepted Answer

The call provision allows the issuer to redeem the bond before its maturity at a specified price, giving the issuer flexibility to refinance the debt if interest rates decline.

Question 18

Bonds with ratings of BBB and above are classified as

Accepted Answer

Bonds rated BBB and above are considered investment-grade bonds, indicating they are of high quality and low default risk, making them a safer investment compared to speculative or junk bonds.

Question 19

The _____ involves the direct trading of exchange-listed stocks off the floor of the exchange (in the case of NYSE-listed stocks)or outside the network (in the case of NASDAQ-listed stocks).

Accepted Answer

The fourth market refers to the direct trading of exchange-listed stocks outside of the formal exchange floors or networks, allowing institutional investors to trade securities directly without the involvement of a broker.

Question 20

The basic form of corporate ownership is embodied in

Accepted Answer

The basic form of corporate ownership is embodied in common stock, which represents ownership in a company and gives shareholders voting rights and a share in the company's profits through dividends or stock appreciation.

Quiz 16: The Financial System