Quiz 19: Using Securities Markets for Financing and Investing Opportunities

Securities markets represent the financial marketplaces for stocks and bonds.

Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.

An initial public offering (IPO) represents the first time a corporation's stock is offered and sold to persons outside of the company.

The proceeds from a secondary market sale of securities go to the corporation whose security is being traded.

In a secondary market sale of stock, the proceeds go to the investor selling the stock, not to the corporation.

Corporations sell a new issuance of securities in the Primary Market.

The primary market allows an investor to purchase financial securities from other investors.

The secondary market is where investors (both individuals and companies) go to find someone who is interested in selling their investments to them.

When given a choice, businesses prefer to obtain long-term financing through retained earnings or by borrowing from a lending institution such as a bank.

Issuing stock is considered equity financing.

Issuing bonds is considered debt financing.

It is easier for a small business to raise funds through a stock issuance than for a large, well-known company.

Before issuing stock or bonds, corporations must meet the disclosure requirements of the Federal Trade Commission (FTC).

An investment banking firm assists corporations in selling the new security issue.

When investment bankers underwrite an issue, they buy at a discounted price the entire stock issue of a firm and then sell the stock, at full price, to private investors.

Only government employees represent institutional investors.

Examples of institutional investors are pension funds, mutual funds, and insurance companies.

Securities markets help companies raise long-term debt and equity financing.

Many observers suggest that the stock market is dominated by the buying and selling activities of institutional investors.

Investment bankers assist in the issuing and selling of new securities.

Institutional investors include insurance companies, individual investors, and mutual funds.

Corporations receive needed funds when they sell a new issuance of a security in the primary market.

Investors who trade securities buy securities they are interested in holding or sell securities to make a profit or cut losses by trading in the secondary market.

The Securities and Exchange Commission does not intercede in any way in the process of an IPO. Doing so would disrupt the natural process of the capital markets.

Government employees, public school system employees, and even employees of some large companies pay a percentage of their monthly earnings into pension funds. These funds collect a large pool of money that they invest in securities. Pension funds, insurance companies and mutual fund companies which collect large sums of money and then invest these funds into stocks, bonds or other securities are called institutional investors.

Investment bankers are in the business of underwriting securities. They profit from purchasing the new stock offering of a corporation at a discount, and then selling those shares of stock to the public at the market price.

Your privately held firm needs additional funding for a planned expansion. Having never issued stock to the public, your firm is well advised to seek the assistance of an investment banker prior to an initial public offering of stock.

Hottie Potatee, Inc., wants to raise an undisclosed amount of funds in order to expand the company-owned potato bar stores overseas. The CFO of the company will negotiate with an expert at the FTC who will underwrite the issue of stock that Hottie Potatee plans to offer.

Ina Vestor inherited $75,000 when her grandfather died and decided to invest it in the Hottie Potatee company. As a student of business, you inform her that she can call a stockbroker who will help her purchase stock on the secondary market.

Sam Schiester, a stockbroker at Schemes Financial Services Company, called you the other day asking if you would like to purchase an IPO. "The hot new company, Hottie Potatee, is going public, and I thought you might want to get in on it," he exclaimed. If you agree to buy shares of this company, this trade will occur on the secondary market.

Idle Time Gaming, Inc., has reached the point where it needs several million dollars in order to expand and become the international company that it says it wants to be in its strategic plan. After consulting with an investment banker who is willing to underwrite the issue, it learned that investors will purchase the stock for $22/share. Idle Time will receive a smaller amount for each share that is sold.

If investor Jones buys a share of stock in the ABC Corporation from investor Smith, the ABC Corporation automatically receives a fixed percentage of the selling price.

Stocks that are not listed as trading on one of the national or international stock exchanges can be traded on the OTC, Over-The-Counter exchange.

A stock exchange provides a marketplace where the public can directly buy and sell securities without the help of intermediaries.

Only those individuals and/or companies with a membership on a stock exchange can buy and sell securities on that stock exchange.

Securities and Exchange Commission (SEC) rules prohibit the listing of the stock of foreign firms on U.S. stock exchanges.

The over-the-counter market utilizes an electronic securities trading system.

The stock of companies that fail to meet a stock exchange's minimum requirements can be delisted.

The NASDAQ is a floor-based exchange.

Stock exchanges compete with each other for the listing of a corporation's stock.

The Federal Trade Commission (FTC) regulates the security markets in the United States.

Before a corporation's stock can be sold on a major stock exchange, the firm must provide detailed financial information to the Securities and Exchange Commission.

Insider trading involves the sale of stock to employees at discounted prices.

The Securities and Exchange Commission requires that all prospective investors receive a copy of a firm's prospectus prior to investing.

Insider trading refers to someone who benefits unfairly from information about a security not available to the general public.

Insider trading laws prevent employees from buying or selling the securities of their employers.

Well-known foreign exchanges that also exchange the securities of U.S. firms include the London Exchange and the Tokyo Exchange.

The number of U.S. companies that are listed on foreign stock exchanges is declining.

The prospectus is summarization of the results of detailed financial documents that a firm files with the SEC prior to being given approval to issue securities.

Once a stock exchange agrees to list a company, the firm can be assured that it will always be listed by that exchange.

With recent mergers of stock exchanges, beginning with the New York Stock Exchange merger with Archipelago, and subsequently with Euronext and then Deutsche Borse, most exchange floors are symbolic because trades usually take place via computers.

According to the Spotlight on Small Business box, the goal of the Jumpstart Our Business Startups Act (JOBS Act) is to ease small business financing problems.

In an effort to profit from stock market trading, Chad landed a job with the ABC Corporation. Chad intends to use his position to obtain privileged information about his new employer that would not be available to the public. While Chad realizes that he may be benefiting unfairly, as an employee he is not acting illegally.

According to the Securities Act of 1933 it is against the law for a firm that is publicly trading securities to deny an investor from knowing how the firm is doing financially.

An executive secretary at a major investment banking firm is asked to copy documents that detail a major merger that's going to be finalized in the next two weeks. This merger will be a positive outcome for one of the companies in this deal. The secretary is thrilled to read about the merger, plans to call her broker immediately and buy stock in the company, and suggests that you should also act on her stock tip. Since you are not employed at her firm your purchase is legal.

Stocks represent shares of ownership in a company.

Stock certificates identify per share dividends, expressed as a percentage of par value.

Par value reflects the current market price for a stock.

Dividends represent a portion of a firm's profits that are distributed to bondholders first then stockholders.

Although companies that issue bonds are required to pay interest, companies issuing stock are not required to pay dividends.

When a corporation enjoys a profitable year, dividends must be paid.

Issuing new common stock usually expands ownership, giving all owners the right to vote for the firm's board of directors.

Issuing new stock increases the firm's outstanding debt on their balance sheet.

If paid, dividends come from any profits remaining after the firm has paid taxes. The company cannot deduct dividends as an expense of doing business.

Corporate management decisions are influenced by the desire to keep stockholders happy.

Preferred stockholders have voting rights privileges not shared by common stockholders.

Preferred stockholders receive dividend payments before common stockholders are paid any dividends.

If the firm should find itself in bankruptcy, preferred stockholders would have claim to the value of any remaining assets before common stockholders.

Preferred stock may include callable and convertible provisions.

Preemptive rights provide common stockholders the first right to purchase any new shares of common stock issued by the firm.

Cumulative preferred stockholders enjoy the first right to purchase any new shares of stock issued by the firm.

Cumulative preferred stockholders enjoy a promise that missed dividends will accumulate and be paid later, before any dividends are paid to common stockholders.

Both preferred stocks and bonds represent funding sources that require repayment to investors.

Corporations that issue preferred stock incur a legal obligation to pay dividends to those stockholders.

For the firm, the cost of paying dividends to common stockholders is higher than the cost of the same amount of interest paid to bondholders.

The similarities between common stocks and bonds include a face or par value and a fixed rate of return for investors.

While common stockholders of corporations have voting rights, preferred stockholders generally do not.

A preferred stock's par value establishes the base used for calculating the preferred stockholders' dividend.

A company with cash flow shortages must pay common stockholders their dividends before paying preferred stockholders their dividends.

Preferred stockholders possess the first right to purchase any new stock the company issues.

Zach purchased 200 shares of Fast Track Corporation last year. This year, he plans to hire an attorney to go after the company for failure to pay dividends. If Zach follows through with his plan, he will probably win the lawsuit because companies are obligated to pay their stockholders dividends for owning and holding the firm's stock.

Through disciplined investing, Alyssa now owns 10% or 50,000 shares of a small biotech company. Although she has enjoyed a lot of control, she realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Her regret is that it will dilute her ownership.

A share of preferred stock currently sells for $120. It offers the investor a dividend rate of 8%, with a par value of $100. If the company is able to pay dividends, preferred stockholders would receive a dividend of $9.60 per share.

When acquiring funds through the sale of a bond, the business incurs a legal obligation to pay regular interest payments.

A bond represents a contract of indebtedness issued by a corporation that promises payment of a principal amount plus interest at a specified future date.

The interest paid to bondholders represents the principal of the bond.

The interest rate paid to bondholders is sometimes called the coupon rate.

Although the interest rate is fixed when the bond is issued, the interest rate that one firm must pay compared to another may vary depending upon risk factors such as the reputation of the firm.

U.S. government bonds are considered safe investments. Therefore such government bonds usually have a lower interest rate than corporate bonds.

The maturity date of a bond refers to the date on which the interest payment is due to be paid.

Bond classifications include, but are not limited to Corporate bonds, T-bills, Treasury bonds, Treasury notes, and Municipal bonds.

Standard and Poor's and Moody's are well-known companies that rate bonds.

Bond interest is usually paid in two times each year, even though the interest rate that is usually quoted is an annual rate.

Interest rates vary with changes in the state of the economy.

Bonds represent a permanent source of funding for companies. The money firms acquire by issuing bonds does not need to be repaid.

In the language of bonds, the terms "principal" and "face value" are synonymous.

Bondholders represent creditors of a firm.

As a legal contract, bonds issued by different companies carry the same level of risk.

Firms are at a disadvantage when issuing bonds because the interest rate that they must pay to bondholders is not tax deductible.

As creditors of a firm, bondholders enjoy voting privileges for the firm's board of directors' elections.

Both stocks and bonds represent temporary sources of funding for a firm. Eventually they must be repaid.

By issuing bonds, a firm's debt level increases, which may adversely affect the firm's image in the financial community.

Debenture bonds represent bonds that are not secured by collateral.

A sinking fund is a reserve account where the firm will periodically deposit funds in anticipation of repayment of a bond issue on the maturity date.

A callable bond allows a bondholder to exchange his/her bond for shares of common stock in the same corporation.

The owner of a convertible bond can exchange the bond for a specified number of shares of common stock in the same corporation.

Raising long-term funds through the sale of bonds requires the firm to make debt repayment when and if the organization has sufficient cash flow.

With everything else constant, investors prefer a bond issued with a sinking fund compared to a bond without a sinking fund.

A bond sold with a sinking fund provision requires the firm to allow a stockholder to exchange his/her bond for a specified number of shares of common stock.

A company often exercises the call provision of a bond if it's available when prevailing interest rates fall below the interest rate currently being paid to bondholders.

Taking into account the risk/return trade-off, it would stand to reason that a secured bond holds a lower interest rate than an unsecured bond.

A sinking fund provision decreases the risk of repayment in the minds of the investors.

After retirement, Hector began a search for a low-risk investment. He should consider buying a secured bond of a major corporation.

The U.S. government just announced an increase in the interest rate paid on U.S. government bonds. This will likely cause a decrease in the interest rates paid on corporate bonds.

Tyler is looking for an investment that will pay a little better than what he can get from a government bond. You suggest that he consider a new issue of debenture bonds by Very Vegetarian that pay 8.5% annually. You explain that Very Vegetarian has operated for a long time, and the debenture feature makes these bonds more secure than others.

Investors and corporations are on the opposite sides of the interest rate risk scenario. If interest rates go up to 7%, the bondholder holding a bond with a 6% interest rate knows that he could do better. If he is forced to sell his bond on the secondary market before it matures, he will receive less than the face value.

As a registered representative of a stock brokerage firm, a stockbroker works as an intermediary to buy and sell securities for clients.

The high start-up costs of web-based businesses cause online brokers to charge higher commissions than traditional brokerage firms.

Online investors expect more expert advice than investors using traditional brokerage firms.

Young investors place more importance on low-risk investments, while elderly investors prefer significant growth in the value of their investments.

Diversification means buying several different types of investments with the funds you have available for investment.

For starters, investors should consider the return on investment, the liquidity and riskiness of an investment.

A well-diversified portfolio would consist of a variety of investments and even cash for emergencies. The important thing is that the choice of investments spreads the risk. Some investments may perform very well in any one year while others may lag. Those performing well will balance out those that are underperforming.

The advantage of using an online broker is that these services usually provide you with a wealth of information and help you allocate your assets. Sometimes they even help you create an investment plan for life!

In the Reaching Beyond Our Borders box, one of the global investment suggestions given was to invest in global stocks listed on U.S. exchanges.

In the Reaching Beyond Our Borders box, one of the global investment suggestions given was to invest in stocks from countries with a history of currency problems or political instability.

Monica met with a financial planner last week and he urged her to consider only government bonds and mutual funds in her portfolio. Since she is in her 20s, Monica believes she can tolerate a little more risk. You suggest that it is a better plan to follow the advice of the financial planner, rather than research her choices on her own.

Raul and his grandfather receive individualized investment advice from the same chartered financial analyst. When comparing their customized investment recommendations, it is likely that Raul's strategy targets lower-risk investment options than the advice received by his grandfather.

Having just returned from the war in Afghanistan, David has $25,000 in his savings account. His girlfriend suggests that he talk with an investment advisor and let his money "make more money." David has his eye on a new Ford truck, but realistically he knows that his old Jeep Cherokee will probably last another four years, at which time he will definitely need this money as a down payment on the purchase of something new. He knows he may have other needs as well. David should buy high-growth stock with his funds because even though they are risky, they also have the greatest potential of bringing in a better return on his investment.

Buying a stock makes the investor an owner in the firm.

Investors earn a capital gain when they sell a stock for more than they paid for it.

The market price and growth potential of a common stock depends heavily on the performance of the firm in meeting its objectives.

A bull market occurs when overall stock prices increase.

A bear is an investor that expects stock prices to rise.

Growth stocks are the stocks of corporations whose earnings are expected to grow faster than the overall economy.

Growth stocks offer investors the attractive combination of low risk and high returns.

A blue chip stock represents a highly speculative stock investment.

An income stock offers investors a relatively high dividend yield on their investment.

A penny stock generally sells for a low initial price, pays regular dividends and provides consistent growth in the stock's value.

Penny stocks represent a high-risk stock investment.

When you place a limit order, it means you are willing to buy or sell the stock at the best price available.

An investor placing a market order with a broker agrees to buy or sell a stock immediately at the best price available.

If a company announces a stock split, the investor may receive two or more shares of the company stock, for every one share that he/she holds.

When brokers talk about trading round lots, they are referring to 50 shares of stock.

A stock split immediately increases the value of an investor's holdings.

The stocks of high-quality companies such as Coca-Cola and Microsoft are called blue chip stocks.

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

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

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

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

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

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

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

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

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

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

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.

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.

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.

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.

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.

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.

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

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

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

Corporate bonds provide investors the option of reselling the bond back to the issuing corporation at any time during the life of the bond.

A corporate bond provides the owner with the right to sell the bond to other investors at any time during the life of the bond.

Unlike stocks, for selling purposes, bond prices remain stable over the life of the bond.

Normally, the higher the risk associated with a bond issue, the higher the interest rate the organization must offer potential investors.

Bonds, like stocks, trade daily on major security exchanges.

Bonds sold at a discount are sold for more than the bond's face value.

As interest rates increase, bond prices fall.

From an investor's viewpoint, bonds generally provide a safer investment option than does the stock of the same corporation.

A U.S. government bond paying 3.25% interest annually is a lower risk than a Bellandro Bay Brewery bond paying 6%.

If an investor owns a bond that pays a higher rate of interest than other bonds of similar risk, the investor should be able to sell the bond on the secondary market for more than its face value.

Junk bonds are offered at higher interest rates than government bonds or corporate bonds with good ratings.

Jennifer prefers corporate bonds as an investment option because investors always receive the face value of the bond whenever it is sold.

A bond offering description reads: "6s of 2015." This means the bond pays 3% interest semi-annually and matures in 2015.

Andrew invested in a new issue corporate bond on the primary market for $1,000, with a coupon rate of 5%, and a maturity date of 2025. The bond was held in his brokerage account electronically, so he did not think about it on a daily basis. In 2015, he thought about selling the bond on the secondary market to help pay for his school tuition. At that time, interest rates had climbed to 6.5%. This was great news for Andrew because now he could sell his bond for more than the principal amount he would receive in 2025.

Demetrius recently bought a bond with face value of $1,000. He paid $1,150 for the bond. Demetrius's bond investment undoubtedly pays a higher interest rate than the going rate for similar bonds currently out on the market.

A mutual fund pools investors' money and then buys stocks and bonds in many companies in accordance with the purpose of the fund.

A mutual fund's purpose is rapid investment growth, not to provide diversification for investors.

When investing in mutual funds, the investor will buy shares of a fund that consists of stocks or bonds; the fund will hold shares of many companies.

U.S. investors have invested $13 trillion in mutual funds.

On a mutual fund quotation, the Net Asset Value (NAV) = the number of persons who are investing in the fund.

We calculate the mutual fund's NAV (Net Asset Value) by dividing the total market value of the fund, by the number of shared outstanding.

Small investors can spread the risk of investing by purchasing shares of mutual funds or ETFs.

Most mutual funds provide investors an opportunity to buy shares directly without using a stockbroker.

A mutual fund that carries a load will require the investor to pay a commission, only if the fund appreciates in price.

A no-load mutual fund charges no commission fees to buy or sell its shares.

When comparing the investments of different mutual funds, little variation in the risk level exists.

Index funds invest in one specific type of investment; for example, an index fund might only invest in income stocks, companies whose stocks pay dividends.

Exchange traded funds are like mutual funds because these funds permit the investor to buy shares of a collection of several stocks or shares of a collection of stocks and bonds, but, unlike mutual funds, they are traded during the day on the exchanges.

The investor always pays a fee when purchasing a share of a mutual fund.

Mutual funds offer small investors an opportunity to diversify their investments.

The degree of risk in mutual fund investments remains nearly the same from one fund to the next.

Most investment advisors put mutual funds high on the list of recommended investments for experienced investors, but consider them too risky for beginning investors.

From a risk standpoint, stocks are considered the riskiest investments, followed by mutual funds, preferred stock, and ETFs. Bonds represent a lower-risk investment.

Last year Alexis landed her first professional job after graduating from college. She also started her first investment account. Having met with several brokers before choosing someone to work with, Alexis wanted to make certain that her investment choices would provide for long-term growth, yet satisfy her concern for diversification. The person who won her business prepared an asset allocation plan that would start her account by investing in several index funds. Her adviser has offered her a sound way to combine the concern for diversification since index funds are a sensible way for Alexis to start.

Every time someone sells a stock believing the price has reached its maximum, someone else buys it believing the price will go still higher.

The Dow Jones Industrial Average reflects the daily average price of all the stocks traded on the New York Stock Exchange.

The Dow Jones Industrial Average utilizes the prices of the same 30 companies' stocks each year to ensure consistency.

The Dow Jones Industrial Average provides us with a sense of direction (up or down) of the overall stock market.

The NASDAQ reports its own average that investors follow to observe trends in the market.

"Black Tuesday" refers to the stock market crash that occurred in October 1987.

Program trading refers to computer trading software that automatically sells stocks when their price dips to a predetermined level.

Trading curbs motivate traders to utilize their computerized programs to reduce market volatility.

Stock market "circuit breakers" stop stock trading for a short time when the stock market experiences a significant drop in stock values.

Many stock market analysts suggest that program trading was a big cause of the stock market crash of 1987.

The largest one-day drop in the stock market occurred in 1987-a 22% drop.

Changes in investor trust and confidence strongly influence stock market prices.

The Dow Jones Industrial Average reflects the average of the eleven largest corporations traded on the New York Stock Exchange as originally selected by Charles Dow.

One of the criticisms of the Dow Jones Industrial Average is that it does not include enough stocks to provide a good representation of the entire stock market.

Many stock analysts believe that program trading decreases the volatility of stock market prices.

Corporations benefit from securities markets primarily by: A) creating an efficient mechanism to invest in stocks and bonds. B) obtaining the capital they need to finance their operations. C) securing memberships on various stock exchanges. D) participating in the mutual funds of investment bankers.

Private investors benefit from securities markets primarily by: A) having a place to buy and sell stocks and bonds. B) obtaining the capital they need to finance their operations. C) securing memberships on various stock exchanges. D) participating in the primary markets of investment bankers.

A(n) ________ refers to the first public offering of a corporation's stock. A) primary market offer (PMO) B) initial securities proposal (ISP) C) initial public offering (IPO) D) primary public sale (PPS)

Trading in newly issued securities takes place in the: A) primary market. B) secondary market. C) initial offerings market. D) corporate trading market.

The trading of previously issued securities from one investor to another takes place in the: A) primary market. B) secondary market. C) initial offerings market. D) corporate trading market.

When retained earnings are not enough to meet their long-term funding needs, businesses may be able to raise funds by: A) selling common stock. B) petitioning the government for a loan. C) purchasing additional assets. D) decreasing their accounts payable.

_________ represent a powerful force in the buying and selling of corporate securities. A) Individual investors B) Mutual banks C) Institutional investors D) Investment banks

Investment bankers ________ new issues of bonds or stocks by purchasing, at a discount, the entire stock or bond issue of a firm and selling the issue to interested investors at a higher price. A) syndicate B) underwrite C) guarantee D) sanction

Corporations receive the proceeds for the sale of their stock in: A) the primary market. B) the secondary market. C) both primary and secondary markets. D) venture capital markets.

Security markets assist businesses in performing their ________ function. A) long-term investing B) long-term planning C) long-term financing D) concurrent controlling

Which of the following would be classified as an institutional investor? A) Pension funds B) Federal Reserve banks C) Stock exchanges D) Commodity brokers

Most businesses prefer to meet their long-term financial needs through: A) debt financing. B) capital from the sale of stock. C) retained earnings. D) capital from the sale of bonds.

Investment bankers provide ________ services by purchasing the entire new security issue from a corporation seeking to raise capital, and selling it to interested investors. A) underwriting B) investing C) leveraging D) discounting

How do investment bankers generate revenues for their firms? A) They invest their own funds, or the funds of others, in mutual funds and commodities. B) They earn commissions by managing the investments of insurance companies and mutual funds. C) They buy, at a discount, the entire issue of a new security and then sell the issue to investors at full price. D) They receive consulting revenues from the advice they offer the Securities and Exchange Commission.

Molly Manufacturing plans to issue $75 million of common stock. The firm will likely rely on the advice and assistance of a(n): A) Federal Reserve bank. B) commercial bank. C) mutual fund. D) investment banker.

Shareholder Jones sells 100 shares of Very Vegetarian Corporation stock to investor Smith. This transaction takes place in the: A) primary market. B) secondary market. C) initial offerings market. D) security resale market.

As the chief financial officer (CFO), you identify that your firm needs to raise additional funds by selling new shares of stock. Which of the following refers to a specialist that assists corporations in the issue and sale of new securities? A) An investment banker B) A commodities broker C) An officer of the Securities and Exchanges Commission (SEC) D) An institutional investor advisor

As a new father, Sean plans to accumulate funds over the next 18 years to help pay for his son's college education. Security markets provide Sean with: A) financing opportunities. B) investing opportunities. C) opportunities to reduce his taxes. D) borrowing opportunities.

Ina Vestor has a brokerage account with one of the remaining large investment firms. This morning her broker called asking if she is interested in participating in an IPO. He went on to say that he could get her 200 shares for $23/share. If Ina agrees to buy the IPO, the trade will take place in the _____________. A) fair trade market B) Boston market C) primary market D) secondary market

Idle Time Gaming, Inc., has reached the point where it needs several million dollars in order to expand and follow its strategic plan. In negotiations with the investment banker, they agree to issue 40 million shares of common stock, at $22/share. If the investment banker's fee for underwriting the total sale is 6.82%, what is the discounted price that the investment bank is willing to pay Idle Time for the shares? A) Approximately $300,000,000 B) Approximately $820,000,000 C) Approximately $ 880,000,000 D) Approximately $88,000

Chipper's Golf Resort has learned that Rory McIlroy is interested in putting his name on golf course designs; however, in order for any golf course to be acceptable to him, it will cost a minimum of $20 million to build. Chipper's owners want an international presence, and they believe that "just the way golf club companies became publicly traded corporations, it may be time for golf courses to do the same." The plan is to begin to purchase real estate for four new golf resorts. Proceeding with their venture, the owners have calculated that they will need approximately $100 million. But putting together an IPO is another matter. After meeting with their investment banker, they believe that investors will be willing to pay $16/share for the IPO. As the ___________ for this issue, the investment bank requires 3% of the revenues generated by the sale. Chipper's will need to issue _______ shares in order to have the $100 million they need to proceed with their plan. A) underwriter; more than 6.250 million shares B) underwriter; 6.250 million shares C) regulator; more than 10 million shares D) regulator; more than 60 thousand shares

Which of the following terms best describes the relationship between the New York Stock Exchange and the NASDAQ? A) Cooperative B) Dependent C) Competitive D) Disastrous

An organization whose members can buy and sell securities for companies and investors is known as a: A) public securities dealer. B) securities facilitator. C) transfer medium. D) stock exchange.

A company's stock does not have to be listed on one of the major stock exchanges in order to trade. It can be traded on _____________. A) Over-the-counter market B) NYSE Euronext C) NASDAQ D) AMEX

If a publicly traded corporation fails to maintain specific minimum requirements, the exchange can ________ the firm's securities. A) relist B) transfer ownership of C) delist D) provide preemptive rights to

The ________ is a large national electronic stock trading market. A) SEC B) NYSE C) NASDAQ D) NLRB

Which of the following trades corporate stocks not listed on the national securities exchanges? A) Federal Investment Assurance Agency B) American Stock Exchange C) The over-the-counter market D) Chicago Board of Trade

A(n) ________ represents a condensed version of the registration statement that enables prospective investors to evaluate a stock for possible purchase. A) insider report B) securities disclosure C) evaluative report D) prospectus

Which of the following federal government agencies has responsibility for regulating the various stock exchanges in the U.S.? A) SEC B) NASDAQ C) FCC D) ICC

Using information not available to the public to unfairly benefit in the stock market represents: A) security fraud. B) an unethical, but a legal activity. C) blue-sky violations. D) insider trading.

Which of the following legislative acts created the Securities and Exchange Commission? A) Dealers Trust and Assistance Act of 1933 B) Federal Trade Commission Act of 1933 C) Securities and Exchange Act of 1934 D) Bond Trading Act of 1934

Which of the following statements best describes the current legal interpretation of insider trading? A) Is only possible when you are a board member or a chief officer of a company. B) Can be any employee and relatives or friends of the employee. C) Would involve members of the SEC (Securities and Exchange Commission) and the investment banker who handles most of a firm's transactions. D) Anyone who has securities information about a particular firm that is not known by the general public.

According to the Spotlight on Small Business box, which of the following is NOT a way the SEC changes altered securities laws following the JOBS Act? A) Raised the number of shareholders a company could have before registering with the SEC from 500 to 2,000. B) Allows equity crowdfunding through investment brokers or portals. C) Expanded the ability of private companies to raise capital through limited stock offerings. D) Required small businesses to have at least 100 employees before allowing crowdfunding to be pursued.

After operating for years as a privately held corporation, MidAtlantic Ironworks plans to publicly trade its stock. As a midsized firm, MidAtlantic wants to avoid excessive paperwork, and the fear of being delisted in the future. The ________ provides the best fit for MidAtlantic's plans. A) over-the-counter market B) New York Stock Exchange C) American Stock Exchange D) secondary market

Suzanne wants to purchase stock in a company that is headquartered in Germany. Suzanne: A) will have to place her order through the Frankfurt Stock Exchange. B) cannot legally own the stock of a German corporation. C) can buy the shares from a broker on a U.S. exchange. D) must obtain an investor visa to complete the purchase.

The Securities and Exchange Commission has accused Martha of benefiting unfairly from information secured from a corporate officer of Stewart Engineering. Because Martha used that information to profit in the stock market, she faces ________ charges. A) insider trading B) security tampering C) corporate fraud D) short selling

Which of the following situations would be considered insider trading? A) You open the morning paper and read that Sun Microsystems has a new CEO, who plans to bring in his own team. You decide to call your broker and buy shares of Sun Microsystems. B) Your Uncle Jerry works for Microsoft and sends you a news release put out by the company that talks about the acquisition of a Chinese company. You believe this will significantly boost Microsoft revenues so you buy 200 shares through an online service. C) You call your stockbroker and ask him to buy 500 shares of your company, Best Dressed Computers, Inc., because you just heard from the CEO's administrative assistant that the CEO just got the boot! You figure that this emotional news has got to help the stock price. D) Your stockbroker calls and recommends that you diversify your portfolio with a few shares of SLB [Schlaumberger] because SLB's request through the FTC and several international trade commissions to finalize the purchase of two oil companies was successful. You act on this information.

Although you were not fortunate enough to get Chipper's Golf Resort stock [ticker symbol: CHPR] as an IPO, you are still thinking about trying to add some to your portfolio. Last week when you mentioned it to your broker, he said that there are plenty of shares trading on ____________, but he wanted to send you the company's financial disclosures provided in the ______ before you finalize your decision. A) the secondary market; prospectus B) the NASDAQ; regulatory agreement C) the OTC; regulatory agreement D) the primary market; prospectus

Which of the following securities provides the owner the right to vote for the corporate board of directors? A) Common stock B) Bonds C) Preferred stock D) Callable bonds

Two kinds of equity financing are: A) common and preferred stock. B) convertible and superior stock. C) fixed and variable stock. D) common and superior stock.

A ________ certificate provides evidence of ownership in a specific corporation. A) stock B) bond C) debt D) capital

__________ represents the most basic form of company ownership and includes voting rights and dividends, if and when the firm elects to pay dividends. A) Capital stock B) Common stock C) Preferred stock D) Carrier stock

___________ are the firm's after tax profits that are distributed to stockholders. A) Equity capital B) Interest payments C) Dividends D) Retained earnings

The dollar amount assigned to shares of stock by the corporation's charter represents the stock's: A) net asset value. B) legal value. C) market value. D) par value.

When investors purchase ________ stock, they receive a priority claim in the payment of dividends, as well as assets, if the business is liquidated. However, these investors do not have voting rights. A) common B) preferred C) secured D) debenture

Investors in ________ preferred stock receive a guarantee that missed dividends will accumulate and potentially be paid later. A) participating B) superior C) convertible D) cumulative

Each share of common stock provides the investor with a ________ right that offers the investor the first right to purchase any new shares of common stock the firm decides to issue. This allows common stockholders to maintain a proportional share of ownership in the company. A) participating B) preemptive C) cumulative D) convertible

When issuing stock to obtain long-term funding, dividend payments are: A) tax deductible. B) legally required. C) intended to discourage firms from issuing an excessive number of shares. D) not tax deductible.

Similar to bond investments, preferred shares can be _________, meaning the firm may buy them back. A) cumulative B) callable C) responsive D) retroactive

Stock certificates represent evidence of ownership in an organization. A stock certificate contains which of the following? A) Current market value of the stock B) The total number of shares issued by the company C) The type of stock the investor is buying D) The stock symbol and trading exchange of the company

Dividends are paid out of a corporation's: A) profit, before taxes. B) profit, after taxes. C) sales revenue. D) capital contributed by bondholders.

Dividends on preferred stock are: A) paid after common stockholders receive their dividends. B) guaranteed, except in the event of bankruptcy. C) normally fixed, if and when dividends are paid. D) always greater than dividends on common stock.

Which of the following securities guarantees preferred stockholders payment of missed dividends before any dividends are paid to common stockholders? A) Call provision B) Cumulative preferred C) Participating preferred D) Convertible preferred

Mark impresses his friends by stating that he just cast four votes in the election of the board of directors of Microsoft, indicating that Mark owns __________ stock in Microsoft. A) preferred B) cumulative preferred C) registered D) common

After many years as a privately held corporation, Connecticut Industries decided to offer stock to the general public. Connecticut may discover that stockholders: A) expect to be repaid at a future date. B) can legally demand dividend payments if the corporation maintains profitability. C) adversely affect the company's debt level. D) can exercise a significant impact on company management and policies.

The disadvantages of selling stock to obtain long-term financing include: A) the legal obligation to pay dividends if the company is profitable. B) the funds contributed by stockholders must be repaid from after-tax profits. C) a reduction in the market value of the firm's products. D) a possible change in management and policies in the company.

When Tong Su purchased 500 shares of preferred stock in the Vibrates Corporation, his certificate indicated the stock had a par value of $50 per share. This means that Tong Su: A) will never get less than $50 per share when selling his stock. B) has shares that are currently worth $50 per share. C) may receive dividends based on this value per share. D) must receive a $5 dividend each and every year.

Georgia Corporation, known for its very generous dividend policy, easily attracts investors. These dividend payments basically represent: A) a part of the firm's profit distributed to stockholders. B) the increase in market share the company has earned. C) current value of the firm's stock holdings. D) income that is sheltered from taxes.

Ellie owns stock in Rotary Technologies. Her stock provides a priority claim on dividend payments and on the firm's assets in the event of liquidation. However, her ________ stock ownership does not offer her voting rights. A) common B) preferred C) superior D) callable

Maureen owns 20% of the common stock of the Queen Bean Corporation. The company announced plans to offer an additional 10,000 shares of common stock for sale. If Maureen exercises her preemptive rights, Queen Bean must offer her the opportunity to purchase: A) 8,000 shares. B) 2,000 shares. C) as many of the new shares as the investor is willing and able to buy. D) 20% of the outstanding preferred stock.

Greg purchased 2,000 shares of common stock of the Rite Track Corporation last year. He learned several months later that the stock does not pay a dividend. Greg should proceed to: A) hire an attorney and file a lawsuit. B) hire an attorney and go after the registered representative that brokered the trade. C) do the proper research before he invests. D) immediately proceed to sell the shares.

Maggie owns 10% or 50,000 common shares of a small biotech company. Although she has enjoyed a lot of control, Maggie realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Unless she and others exercise preemptive rights, A) the company will surely begin to pay dividends. B) the new issue will dilute her ownership. C) the new issue will decrease the market price of the stock. D) The new issue will be traded on the secondary market.

A share of preferred stock currently sells for $120. It offers the investor a dividend rate of 8%, on a par value of $100. If the investor owns 500 shares, her total annual dividend will equal: A) $800 B) $8.00 C) $2,000 D) $4,000

The corporate certificate issued to an investor that has loaned money to the corporation or government is called a: A) common stock. B) preferred stock. C) bond. D) debt document.

Issuing bonds to obtain long-term funds legally compels a firm to pay regular ________ payments and repay the ________ at the maturity date. A) dividend; par value B) interest; bond premium C) dividend; maturity value D) interest; principal

The cost of a firm borrowing money is called the: A) interest rate. B) dividend payment. C) prime charge. D) opportunity charge.

Another name for the fixed rate of interest attached to a bond is the: A) Yield to maturity B) Dividend C) Coupon rate D) Security rate

A bond's face value is the same as its: A) risk rating. B) principal. C) coupon value. D) yield.

Government bonds can vary in denomination, but most corporate bonds are issued in ____________. A) discounted denominations B) $1,000 denominations C) $100 denominations D) $5,000 denominations

Which of the following accurately describes an advantage of selling bonds to raise long-term capital? A) Interest is a legal obligation. B) Face value must be repaid. C) Bondholders have voting rights. D) Interest is a tax-deductible expense.

Issuing ________ increases a firm's debt and may adversely affect the financial community's perception of the firm. A) common stock B) bonds C) preferred stock D) retained earnings

An unsecured bond, backed only by the well-respected name of the organization, is called a________ bond. A) mortgage B) leveraged C) debenture D) convertible

Corporations issuing ________ bonds pledge a tangible asset as collateral to reduce the risk incurred by a bondholder. A) secured B) endorsement C) escrow D) replacement

Firms establish a ________ so that sufficient funds are available to repay bondholders on the maturity date. A) mutual fund B) sinking fund C) retirement account D) encumbered account

By issuing bonds with a ________, the corporation retains the right to pay off the bond prior to the maturity date. A) redemption feature B) discount clause C) retirement privilege D) call provision

By buying a ________ bond, investors will have an option to exchange their bond for shares of common stock in the company at a future date. A) discount B) contingent C) convertible D) preferred

According to the Standard & Poor's Investor Services ratings, which of these ratings indicates a highly speculative bond? A) AA B) B C) C D) BBB

Which of the following represents a disadvantage of issuing bonds? A) Bonds are permanent debt on the firm's balance sheet. B) Dividends are legally required. C) Bonds increase the firm's debt. D) Bondholders receive voting rights.

Bonds perceived as high risk typically pay ________ interest rates. A) higher B) lower C) more volatile D) less volatile

The investor will receive the face value of the bond on the ________ date. A) purchase anniversary B) declaration C) maturity D) annual interest

Which of these represents a special feature included with some bond issues? A) No repayment of par value B) No obligation to pay dividends C) No increase in the firm's debt level D) Convertibility of a debt security (bond) into an equity security (stock)

A convertible bond allows the bondholder to exchange the bond for: A) preferred stock. B) common stock. C) collateral. D) debt holder privileges.

Seattle Music, Inc., recently offered bonds for sale to the public. The unsecured corporate bond paid interest of 9% to investors for the twenty-year life of the bonds. Seattle Music is obligated to: A) Represent each bondholder as an owner in the company. B) Pay interest semi-annually. C) Pay stockholders their dividends, before paying bondholders their interest. D) Pay each owner their principal if and when they want to cash in their investment.

As your elderly Uncle Bill approaches retirement, he asks for your advice for a safe place to invest several thousand dollars. He wants to receive some kind of payment each year for investing his money without a great deal of risk. You explain: A) Yankee bonds are certain not to default. B) common stock always pays quarterly dividends. C) junk bonds do not pay annual interest. D) treasury and top-grade corporate bonds pay interest two times each year.

The ABC Corporation issues a $1,000 bond, with an interest rate of 10%, and a maturity date of 2025. This creates a liability for the ABC Corporation to pay the bondholder: A) $100 interest per year and $1,000 in the year 2025. B) 10% of the selling price of the bond. C) an interest payment equal to the dividend payment distributed to the common stockholders. D) $1,100 annually until the year 2025.

Moody's Investor Service currently rates the Sasha Deal Corporation bonds as a C grade. This indicates that these bonds are: A) of the highest quality with lowest default risk. B) moderately speculative. C) corporate bonds with variable interest rates. D) the lowest quality and the highest risk.

Ebony Enterprises decides to pay off its bonds several years before the maturity date. Apparently, the bonds ______________. A) contain an early dismissal clause B) have an early retirement option C) are callable D) have discount authorization

Wyoming Mining Corporation makes regular monetary deposits that will accumulate and provide for an orderly retirement of their bonds when they come due in 2025. Wyoming Mining appears to be utilizing a: A) call provision. B) sinking fund. C) compensating balance system. D) retirement escrow account.

Maplewood Toy Company hopes to raise long-term capital by promising in writing to repay the principal provided by potential creditors in ten years. Additionally, the certificate issued by Maplewood promises to pay 5% interest annually for the ten-year life of the security. Maplewood intends to issue: A) stocks. B) bonds. C) mutual funds. D) commodities.

After owning a Cordero Company bond for five years, Gabrielle exercised an option that allowed her to exchange her bond for 20 shares of the company stock. Gabrielle owned a: A) callable bond. B) revenue bond. C) junk bond. D) convertible bond.

Juan recently invested in 15-year Bellandro Bay Brewery bonds paying 6% interest annually, with a maturity date of 2030. The bonds are callable in 2025. If interest rates go down to 4.5% in the year 2025, the brewery is likely to: A) not exercise the call. B) exercise the call. C) give bondholders a choice of whether they want to turn the bonds back to the brewery. D) decrease the interest rate that they are willing to pay the holder.

Investors buying bonds and corporations issuing bonds (both) accept investment risk. Which of the following statements is most correct when it comes to the investment that one or the other party accepts? A) If investor Joe is holding a bond that pays 5% and market interest rates on similar bonds go down, Joe must hold the bond until maturity because if he were to sell it today, he would have to sell it at a discount. B) If investor Joe is holding a bond that pays 5% and market interest rates on similar bonds go down, Joe's bond is now worth more than its face value, and if he needed to sell it on the secondary market, he could probably sell it at a premium. C) If investor Joe is holding a bond that pays 5% and interest rates on similar bonds go up, Joe stands to gain more than the face value of the bond if he were to sell it on the secondary market today. D) If XYZ Corporation wants to issue bonds to pay for an expansion project, and analysts predict that interest rates are projected to climb over the next few years, it is to the corporation's advantage to wait until next year to issue the bonds.

A ________ is a registered representative acting as an intermediary to buy and sell securities for clients. A) certified stock underwriter B) stockbroker C) securities banker D) trading accountant

When an investor places a buy order with a stockbroker, the broker contacts a(n) __________ to complete the transaction. A) certified underwriter B) investment banker C) stock exchange member or dealer where the stock is traded D) trading officer of the Securities Exchange Commission

Investors trading online: A) receive more advice than offered by traditional stockbrokers. B) buy and sell securities without using a brokerage firm. C) generally do their own research and make their own investment decisions. D) generally were insured against the market downturn of the early and late 2000s.

Investing online is usually ________ than trading through a traditional stock brokerage firm. A) more expensive B) less expensive C) more volatile D) less profitable

Which of the following is not an important criterion to consider before investing? A) Exchange where the company offering the investment is traded B) The riskiness of the investment C) The duration of the investment D) The expected rate of return on the investment

Creating a portfolio by buying several different types of investments to spread the risk of investing is called _______________. A) modulation B) diversification C) re-allocation D) formula investing

Another term for portfolio strategy is: A) modulation model B) formula model C) allocation model D) equity model