Question 1

The risk/return trade-off is inherent in any investment strategy. What are the five key criteria investors should consider when selecting investment options?

Accepted Answer

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Question 2

The purpose of the SEC's circuit breakers rule is to
A) prevent market disruption caused by a communication malfunction.
B) halt trading for a short time following a dramatic drop in stock prices.
C) allow floor traders to specialize in trading the securities of specific industries.
D) prevent individuals from profiting from information not available to the general public.

Accepted Answer

Following the precipitous drop of market value in 1987 (brought on by program trading), the SEC developed circuit breaker rules to stop trading for a period of time to give investors a chance to assess the market after a significant drop in prices. If prices continue to fall, additional pauses in trading will occur.

Question 3

Bonds represent a major source of long-term financing. What is a bond? Explain the major elements that must be in a bond issue.

Accepted Answer

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Question 4

Explain the differences between preferred stock and common stock.

Accepted Answer

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Question 5

If stock is issued in Pirate Recording, analysts predict that the company has potential for strong growth. The prospects for dividend payments to stockholders, at least in the beginning, are not good. Pirate Recording will need to retain its earnings in order to grow rapidly. The firm's stock would most likely be classified as a(n)
A) blue chip stock.
B) income stock.
C) growth stock.
D) capital stock.

Accepted Answer

Growth stocks are stocks of corporations whose earnings are expected to grow faster than other stocks in the market. They seldom pay dividends.

Question 6

The Securities and Exchange Commission developed ________ to halt trading in the stock market for a short time when the market has experienced a dramatic decrease in prices.
A) program trading
B) online investing
C) circuit breakers
D) insider trading

Accepted Answer

Circuit breakers are used by the Securities and Exchange Commission to temporarily halt trading when the market experiences a significant drop in prices. This allows traders and investors to regroup and reassess their positions before trading resumes. Program trading, online investing, and insider trading are all unrelated to circuit breakers.

Question 7

One funding source under consideration is the issuance of $150 million worth of corporate bonds. A financial advisor predicted that in order for the fast growing company to attract investors, it would have to put up collateral to back up the bond issue. The type of bond the financial advisor suggests is
A) debenture bonds.
B) asset bonds.
C) secured bonds.
D) preferred bonds.

Accepted Answer

Secured bonds are bonds that are backed by some tangible asset that is pledged to the bondholder if interest is not paid or principal is not paid back.

Question 8

If Pirate Recording elects to offer an Initial Public Offering (IPO), it will involve preparing full financial disclosure with the ________. The firm is advised to solicit the services of an investment banker/underwriter, who will analyze the market and determine the best price for the new issue of Pirate Recording stock. The offering will then be sold on the ________.
A) Internal Revenue Service; secondary market
B) Fair Trade Commission; primary market
C) Federal Trade Commission; secondary market
D) Securities and Exchange Commission; primary market

Accepted Answer

The Securities and Exchange Commission (SEC) is the regulating body of all publicly traded firms. By preparing an Initial Public Offering (IPO), Pirate Recording would be selling common stock to the general public, allowing several other investors to own a part of the firm, with voting rights. A new issue of stock, on an IPO, is sold on Primary Market. When the entire issue is sold, Pirate Recording would get its needed funding.

Question 9

Explain the major advantages and disadvantages of issuing stock as a source of long-term financing.

Accepted Answer

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Question 10

Daily reporting of the Dow Jones Industrial Average serves to
A) show the direction of the market over time.
B) distort short-term fluctuations for the financial community.
C) identify the beginning of a recession in the economy.
D) disclose the average price of a share of stock on the major exchanges.

Accepted Answer

The generally accepted assumption is that the 30-company average gives an indication of the direction of the market over time.

Question 11

Penny is concerned about the interest rate risk if the company decides to issue bonds. Penny would like protection from interest rate fluctuation. Therefore, the bond issue's features should include a(n)
A) equity proposition.
B) call provision.
C) convertibility clause.
D) collateral agreement.

Accepted Answer

A call provision permits the issuer to pay off a bond prior to its maturity date. If interest rates fall, corporations want the flexibility to issue new bonds at the lower interest rate, and then proceed to call in the previously higher interest carrying bonds early, and pay them off with the proceeds from the new issue.

Question 12

Describe four different types of common stock that an investor may consider, depending upon the investor's strategy and risk tolerance.

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Question 13

Discuss the role of investment bankers in the securities markets.

Accepted Answer

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Question 14

Bill is reviewing the firms whose stocks have comprised the Dow Jones Industrial Average over the years. He discovers
A) the same 30 stocks have been used since the inception of the indicator.
B) different companies are used each year.
C) these stocks change periodically as deemed appropriate.
D) there is an even mix between big and small companies.

Accepted Answer

New stocks are substituted when the Dow Jones Corporation believes that this is needed to reflect a change in the structure of the market.

Question 15

One criticism of the Dow Jones Industrial Average suggests that it
A) magnifies the fluctuations in the stock market.
B) does not indicate the cause of changes in stock prices.
C) is too small (too few companies) to get a good statistical representation.
D) is biased causing an overstatement of bond price increases and an understatement of stock price decreases.

Accepted Answer

Critics argue that if the purpose of the Dow is to give an indication of the direction of the broader market over time, the 30-company sample is too small. Many investors and market analysts, therefore, prefer to follow stock indexes like the Standard & Poor's 500 that track the performance of 500 companies' stocks.

Question 16

To reduce market volatility, ________ require that a key computer is turned off so that program trading is halted.
A) ultra restraints
B) trading curbs
C) market stops
D) nutmeg halts

Accepted Answer

Trading curbs are measures designed to reduce market volatility, and they can involve program trading halts. Ultra restraints, market stops, and nutmeg halts are not commonly used terms in this context.

Question 17

Penny is impressed with contemporary high-tech companies that have listed their stock on an electronic telecommunications network of securities dealers who trade the stock. She is referring to firms such as Microsoft, Google, and Apple. Penny ideally would like her company's stock listed on the
A) AMEX.
B) NASDAQ.
C) OTC.
D) NYSE Euronext.

Accepted Answer

The NASDAQ is a telecommunications network of dealers who trade stocks electronically.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities

The risk/return trade-off is inherent in any investment strategy. What are the five key criteria investors should consider when selecting investment options?

The purpose of the SEC's circuit breakers rule is to

Bonds represent a major source of long-term financing. What is a bond? Explain the major elements that must be in a bond issue.

Explain the differences between preferred stock and common stock.

The Securities and Exchange Commission developed ________ to halt trading in the stock market for a short time when the market has experienced a dramatic decrease in prices.

Explain the major advantages and disadvantages of issuing stock as a source of long-term financing.

Daily reporting of the Dow Jones Industrial Average serves to

Penny is concerned about the interest rate risk if the company decides to issue bonds. Penny would like protection from interest rate fluctuation. Therefore, the bond issue's features should include a(n)

Describe four different types of common stock that an investor may consider, depending upon the investor's strategy and risk tolerance.

Discuss the role of investment bankers in the securities markets.

Bill is reviewing the firms whose stocks have comprised the Dow Jones Industrial Average over the years. He discovers

One criticism of the Dow Jones Industrial Average suggests that it

To reduce market volatility, ________ require that a key computer is turned off so that program trading is halted.

Penny is impressed with contemporary high-tech companies that have listed their stock on an electronic telecommunications network of securities dealers who trade the stock. She is referring to firms such as Microsoft, Google, and Apple. Penny ideally would like her company's stock listed on the