Question 1

Jason holds a bond with a par value of $1,000 issued by the Asbury Corporation that will mature in seven years. The coupon rate on the bond is 7 percent. He bought the bond for $900. Assuming Asbury lives up to its financial obligations and that he doesn't trade the bond, Jason can expect to receive $70 in interest from Asbury over the next year.

Accepted Answer

This is true because the coupon rate is 7%, which means that Jason will receive 7% of the par value ($1,000) in interest payments each year. 7% of $1,000 is $70, which is the amount he can expect to receive in interest over the next year. As long as Asbury Corporation does not default on their financial obligations, Jason will receive this interest payment.

Question 2

Carrie owns a lot of stocks in the Roan Hill Corporation. Based on recent developments, she is thinking about exercising her preemptive rights. This means that Roan Hill has decided to issue more shares of its common stock.

Accepted Answer

Preemptive rights allow existing shareholders to maintain their proportional ownership in a company by purchasing new shares before they are offered to the public. This typically occurs when a company issues more shares of its common stock.

Question 3

Pam bought 500 shares of stocks in the Lehman Corporation last year at a price of $24 per share. The market price has now risen to $35 per share. This result indicates that Pam could realize a capital gain if she sells her stock.

Accepted Answer

Since the market price has risen to $35 per share, it is higher than the price at which Pam bought the stocks ($24 per share). Therefore, she could sell her stocks at a higher price and realize a capital gain.

Question 4

A capital gain is an additional payment the company makes to the holder of one of its securities over and above the normal dividend or interest payment.

Accepted Answer

A capital gain is a profit realized from the sale of an asset, such as a security, not an additional payment from the company.

Question 5

Hillier owns some common stock in a company that is experiencing serious financial problems and may have to declare bankruptcy. Hillier shouldn't worry though, because as a common stockholder, his claims on the company's assets will be paid before the claims of any other stakeholder.

Accepted Answer

As a common stockholder, Hillier's claims on the company's assets will be paid after the claims of creditors, bondholders, preferred stockholders, and any other stakeholders who have priority in the event of bankruptcy.

Question 6

A bond is a formal IOU issued by a corporation or government entity.

Accepted Answer

A bond is a formal IOU issued by a corporation or government entity, promising to pay back a certain amount of money with interest at a specified future date.

Question 7

If a company goes bankrupt, its preferred stockholders have a better chance of recovering their investment than do the common stockholders.

Accepted Answer

Preferred stockholders typically have priority over common stockholders when it comes to recovering their investment in the event of a company's bankruptcy. They are usually the first in line to receive any remaining assets or funds after secured creditors have been paid off.

Question 8

The current yield expresses a bond's interest payment as a percentage of the bond's current market price rather than its par value.

Accepted Answer

The statement is true.

Question 9

Unlike stocks, bondholders cannot sell their bonds to other investors before they mature.

Accepted Answer

Bondholders can sell their bonds to other investors in the secondary market before they mature.

Question 10

The Dodd­Frank Act of 2010 makes the "say on pay" vote of common stockholders binding on corporations.

Accepted Answer

The Dodd-Frank Act of 2010 requires public corporations to give shareholders a non-binding "say on pay" vote on executive compensation, but it is not binding.

Question 11

All corporations have a legal obligation to pay dividends to their preferred stockholders.

Accepted Answer

Corporations do not have a legal obligation to pay dividends to their preferred stockholders. Dividends are paid at the discretion of the corporation's board of directors.

Question 12

The coupon rate on a bond expresses the annual interest payment as a percentage of the bond's par value.

Accepted Answer

The coupon rate is, indeed, the annual interest payment expressed as a percentage of the bond's par value.

Question 13

The common stockholders' right to a residual claim on assets means that if a corporation goes out of business and liquidates its assets, it must pay the stockholders before it clears other debts and back taxes.

Accepted Answer

Common stockholders have a residual claim, meaning they are paid after all debts, taxes, and other obligations are settled during liquidation.

Question 14

A conversion ratio indicates the number of shares of common stock exchanged for each convertible security.

Accepted Answer

A conversion ratio is the number of shares of common stock that can be obtained by converting each convertible security.

Question 15

Unlike dividends on stock, a firm has a legal obligation to pay interest on bonds.

Accepted Answer

Bond agreements legally require firms to pay interest to bondholders, while dividends on stock are not legally required and can be cut or eliminated at the discretion of the company's board of directors.

Question 16

John bought some common stock in McKelly Inc. last year. The company has just reported record earnings. This means John is guaranteed to receive an increase in his dividend this year.

Accepted Answer

Even though a company reported record earnings, it does not guarantee a dividend increase. The decision to increase dividends is ultimately made by the company's board of directors.

Question 17

Owners of common stock have ownership rights that include voting rights and rights to residual claims on assets.

Accepted Answer

Common stockholders are considered as the owners of the company and as a result, they have certain ownership rights such as voting rights and rights to residual claims on assets.

Question 18

Dan has $6,000 that he would like to invest. He wants to diversify his investment, but feels that $6,000 isn't enough to buy many different securities. Besides, he doesn't know much about picking stock and doesn't want the hassle of trying to make investment decisions. Dan is likely to find mutual funds an attractive way to invest his $6,000.

Accepted Answer

Mutual funds allow investors to diversify their investments in a single purchase, and are managed by investment professionals, eliminating the need for individual stock picking. This makes them a good option for someone like Dan who wants a diversified portfolio but does not have the knowledge or interest in selecting individual stocks.

Question 19

The par value of a bond is the value of that bond at its maturity. It represents what the firm must pay the bondholder when the bond matures.

Accepted Answer

This statement is true. The par value, also known as face value or principal value, is the amount that the issuer of the bond promises to pay the bondholder when the bond matures.

Question 20

Convertible securities are bonds or shares of preferred stock that investors can exchange for a given number of shares of the issuing corporation's common stock.

Accepted Answer

Convertible securities are securities that can be converted into a different form, usually common stock, at the investor's discretion. This includes convertible bonds and convertible preferred stock.

Quiz 10: Securities Markets: Trading Financial Resources

Carrie owns a lot of stocks in the Roan Hill Corporation. Based on recent developments, she is thinking about exercising her preemptive rights. This means that Roan Hill has decided to issue more shares of its common stock.

Pam bought 500 shares of stocks in the Lehman Corporation last year at a price of $24 per share. The market price has now risen to $35 per share. This result indicates that Pam could realize a capital gain if she sells her stock.

A capital gain is an additional payment the company makes to the holder of one of its securities over and above the normal dividend or interest payment.

Hillier owns some common stock in a company that is experiencing serious financial problems and may have to declare bankruptcy. Hillier shouldn't worry though, because as a common stockholder, his claims on the company's assets will be paid before the claims of any other stakeholder.

A bond is a formal IOU issued by a corporation or government entity.

If a company goes bankrupt, its preferred stockholders have a better chance of recovering their investment than do the common stockholders.

The current yield expresses a bond's interest payment as a percentage of the bond's current market price rather than its par value.

Unlike stocks, bondholders cannot sell their bonds to other investors before they mature.

The DoddFrank Act of 2010 makes the "say on pay" vote of common stockholders binding on corporations.

All corporations have a legal obligation to pay dividends to their preferred stockholders.

The coupon rate on a bond expresses the annual interest payment as a percentage of the bond's par value.

The common stockholders' right to a residual claim on assets means that if a corporation goes out of business and liquidates its assets, it must pay the stockholders before it clears other debts and back taxes.

A conversion ratio indicates the number of shares of common stock exchanged for each convertible security.

Unlike dividends on stock, a firm has a legal obligation to pay interest on bonds.

John bought some common stock in McKelly Inc. last year. The company has just reported record earnings. This means John is guaranteed to receive an increase in his dividend this year.

Owners of common stock have ownership rights that include voting rights and rights to residual claims on assets.

The par value of a bond is the value of that bond at its maturity. It represents what the firm must pay the bondholder when the bond matures.

Convertible securities are bonds or shares of preferred stock that investors can exchange for a given number of shares of the issuing corporation's common stock.

Quiz 10: Securities Markets: Trading Financial Resources

Carrie owns a lot of stocks in the Roan Hill Corporation. Based on recent developments, she is thinking about exercising her preemptive rights. This means that Roan Hill has decided to issue more shares of its common stock.

Pam bought 500 shares of stocks in the Lehman Corporation last year at a price of $24 per share. The market price has now risen to $35 per share. This result indicates that Pam could realize a capital gain if she sells her stock.

A capital gain is an additional payment the company makes to the holder of one of its securities over and above the normal dividend or interest payment.

Hillier owns some common stock in a company that is experiencing serious financial problems and may have to declare bankruptcy. Hillier shouldn't worry though, because as a common stockholder, his claims on the company's assets will be paid before the claims of any other stakeholder.

A bond is a formal IOU issued by a corporation or government entity.

If a company goes bankrupt, its preferred stockholders have a better chance of recovering their investment than do the common stockholders.

The current yield expresses a bond's interest payment as a percentage of the bond's current market price rather than its par value.

Unlike stocks, bondholders cannot sell their bonds to other investors before they mature.

The Dodd­Frank Act of 2010 makes the "say on pay" vote of common stockholders binding on corporations.

All corporations have a legal obligation to pay dividends to their preferred stockholders.

The coupon rate on a bond expresses the annual interest payment as a percentage of the bond's par value.

The common stockholders' right to a residual claim on assets means that if a corporation goes out of business and liquidates its assets, it must pay the stockholders before it clears other debts and back taxes.

A conversion ratio indicates the number of shares of common stock exchanged for each convertible security.

Unlike dividends on stock, a firm has a legal obligation to pay interest on bonds.

John bought some common stock in McKelly Inc. last year. The company has just reported record earnings. This means John is guaranteed to receive an increase in his dividend this year.

Owners of common stock have ownership rights that include voting rights and rights to residual claims on assets.

The par value of a bond is the value of that bond at its maturity. It represents what the firm must pay the bondholder when the bond matures.

Convertible securities are bonds or shares of preferred stock that investors can exchange for a given number of shares of the issuing corporation's common stock.

The DoddFrank Act of 2010 makes the "say on pay" vote of common stockholders binding on corporations.