CHAPTER-10 multiple choice

d. the spread.

43. Reese buys securities in a pharmaceutical company for $3300. After a period of eight months, when the prices of the securities go up in the market, she sells her securities for $3700. In this case, the difference of $400 in the prices of the securities is called: a. a price override.

b. Dodd-Frank Act

60. The _____ of 2010 expanded the Fed's regulatory authority over nondepository financial institutions, such as hedge funds and mortgage brokers that had previously operated with little regulatory oversight or accountability.

a. A firm must pay any back taxes, legal expenses, wages owed to workers, and debts owed to creditors before the owners get anything.

68. Which of the following statements is true of the common stockholders' right to a residual claim on assets?

a. They are open to individuals who belong to a specific field of membership.

30. Which of the following statements is true of credit unions?

d credit union

31. Lina, along with ten of her colleagues, starts a financial cooperative to financially assist each other. The members pool their savings in the cooperative, and they can also take loans from it on a low interest rate. Members of the cooperative benefit from higher returns on savings and lower rates on loans. In this scenario, the cooperative started by Lina and her colleagues exemplifies a(n) _____. a. investment bank

d. credit union

32. Tony is facing a financial crisis in his business. Instead of applying for a loan from a commercial bank, he takes a loan from the cooperative that he partly owns with some of his friends. This cooperative acts as a depository institution where all the members deposit their savings on a higher interest rate than that offered by commercial banks. Being a member of this cooperative, he gets the advantage of being charged lower interest rate on his loan. Based on the information given in the scenario, the cooperative owned by Tony and his friends exemplifies a(n) _____.

d. investment bank

44. A(n) _____ is a financial intermediary that specializes in helping firms raise financial capital by issuing securities in primary markets. a. credit union

c. The Financial Services Modernization Act of 1999

58. _____ overturned the section of the Banking Act of 1933 that prohibited commercial banks from selling insurance or performing the functions of investment banks. a. The Sarbanes-Oxley Act of 2002 b. The Securities and Exchange Act of 1934

d. Gramm-Bliley-Leach Act

59. Danner City Bank, a commercial bank in Oklahoma, was suffering from financial losses. Once the U.S. government passed the _____ in 1999, the bank started recovering from its losses as it was allowed to sell its securities. a. Securities Act

d. The Dodd-Frank Act

61. Sapphinx Growth and Income, a mutual fund company, had a free hand in its operations before the year 2010. However, after an alteration in the government rules, the company faced a number of restrictions in selling its shares to investors. Which of the following acts is responsible for the alteration in the rules?

d. Voting rights

62. Clanston Corp., a steel manufacturing giant, announces its plans to merge with another steel manufacturing company, Tralesta Corp. Peter is a major stockholder in Clanston Corp., and his experience suggests that the merger is not going to be a profitable one. Which of the following basic shareholder rights must Peter use to express his disapproval of the merger?

d. capital gain

64. Damien buys stocks worth $2800 in a cosmetic products manufacturing company. His investment turns out to be a sound decision as the prices of his stocks go up by $900. In this scenario, Damien earns a _____. a. price override

c. the price of the shares soared in the market.

65. Aaron buys 300 shares in a tobacco company. Within a year, he receives a capital gain on his stocks. This means that:

c. If a corporation issues new stock, existing stockholders can purchase new shares in proportion to their existing holdings before the stock is offered to the other investors.

66. Which of the following explains the preemptive right of common stockholders?

c. A preemptive right

67. Jeremy holds 14.5% shares of stock in an automobile company. As per the company norms, if the company issues new stock, as an existing stockholder, Jeremy can buy 14.5% of the new shares before the stock is offered to the other investors of the company. Which of the following common stockholder rights does this scenario exemplify?

c. A private placement

104. Oscilance Inc., a watch manufacturing company, issues new stocks. However, instead of floating its shares in public, it directly negotiates with a small number of accredited investors that meet specific financial requirements set by the Securities Exchange Commission (SEC). Which of the following methods of issuing securities is being used by Oscilance in the given scenario?

d. accredited investors

105. Involved in private placements, _____ are individuals, businesses, or other organizations that meet specific financial requirements set by the Securities and Exchange Commission.

d. financing can be obtained without having to prepare complex registration documents

107. In the context of the primary securities market, in a private placement, _____.

d. Investing for income

126. In which of the following strategies for investing do investors buy low-risk securities, thereby getting a relatively low return because the market value of low-risk securities seldom increases much over time? a. Buying and holding

d. investing for income

127. Charles, a 62-year-old army veteran, buys preferred stocks in companies. Although the returns on these stocks are not high, he is more than happy with his investments as they bring a steady flow of money that helps him in his sustenance. Charles's investment approach is an example of the strategy of _____. a. buying and holding

a. They try to make quick gains by buying low and selling high over a relatively short time horizon.

128. In the context of the various strategies for investing in securities, which of the following statements is true of market timers?

a. it is tough to consistently identify the timing and direction of changes in stock prices.

129. In the context of the various strategies for investing in securities, the problem with market timing is that:

a. It requires investors to make frequent trades.

130. Which of the following is a disadvantage of market timing?

c. financial markets

26. Markets that transfer funds from savers to borrowers are referred to as _____. a. treasury markets

c. depository institutions

27. It is fairly easy to acquire loans in Arzenia as the financial intermediaries of the country receive sufficient funds in the form of savings from its people and businesses. This enables them to turn the funds obtained into loans. Based on the information given in the scenario, these financial intermediaries are a form of _____. a. treasury companies

d. commercial bank

28. A _____ is the most common depository institution.

a. Unlike commercial banks, credit unions are not-for-profit organizations.

29. Which of the following is a difference between credit unions and commercial banks

c. amass huge pools of financial capital from various sources.

34. Institutional investors:

c. institutional investor

36. Anvis Asset Management Fund is a mutual fund company that sells securities to investors and uses the money to purchase bonds and corporate stocks. Anvis Asset Management Fund is a(n) _____.

c. They act as agents for investors who want to buy or sell financial securities.

37. Which of the following is true of securities brokers?

a. securities broker

38. Samuel assists his clients in investing in the stock market. He not only acts as an agent by buying and selling corporate stocks and bonds on behalf of them, but also provides them with services like financial consultation and market research for a fee. In this scenario, Samuel plays the role of a(n) _____.

d. securities broker

39. Kenneth is very particular about his investment decisions and likes to perform an extensive market research before making any major investment. He, however, does not have the time and expertise to conduct market research. To deal with this situation, he should hire a(n) _____. a. accredited investor

a. a distribution of earnings that are paid to a corporation's stockholders.

63. Dividends of a company are:

c. preferred stock.

75. Each year, Arnold receives a stated amount of dividend from the earnings of the company he has stocks in. In a particular period, if the company skips the dividend, then Arnold will receive the accumulated amount, that is, the dividend of that period plus the amount of the dividend the company skipped in the previous period. Based on the information given in the scenario, Arnold is most likely a holder of:

c. default on their bonds.

83. Corporations that get into serious financial difficulties sometimes:

a. provides advice about pricing and marketing the securities and assists in finding potential buyers.

100. Almost all firms that go public enlist the help of an investment bank that specializes in helping firms issue new securities.

b. try to find stocks that are undervalued in the market.

131. In the context of the various strategies for investing in securities, investors who favor value investing:

b. impeded financial innovation.

57. According to critics, the Glass-Steagall Act:

d. best efforts

101. Ecclestone Corporation plans to go for an initial public offering and, therefore, seeks the help of an investment bank in issuing the new securities. The bank agrees to help the company in finding potential buyers and providing advice on the pricing of the securities. However, the bank does not guarantee that it will accomplish the task of selling all of the company's securities at a high price. In this scenario, the investment bank is using a _____ approach.

a. underwriting

102. A health and fitness startup company goes for an initial public offering. For assistance, it enters into a firm commitment arrangement with an investment bank. As per the agreement, the investment bank itself will purchase all the shares at a specified price. This will guarantee that the company will receive a fixed amount of new funds. This scenario exemplifies a(n) _____.

a. registration statement

103. In the context of a public offering, a(n) _____ is a complex document that must include a firm's key financial statements plus additional information about the company's management, its properties, its competition, and the intended uses for the funds it plans to obtain from the offering

d. Privately placed securities are exempt from the requirement to register with the Securities and Exchange Commission.

106. Which of the following is the main reason for private placements being less expensive than public offerings?

d. They do not have the potential to raise as much money as public offerings.

108. Which of the following is a drawback of private placements?

b. securities that haven't been registered with the Securities and Exchange Commission can only be sold to other accredited investors

109. In private placements, _____.

a. market maker

112. Davis frequently trades on the NASDAQ exchange. He has made a commitment to constantly buy and sell the stocks of Ossani & Gautier, an automobile manufacturing company that is listed on the exchange. He competes for customer order flow by quoting the bid price and the ask price for a number of shares. The information given in the scenario indicates that Davis is a(n) _____.

a. over-the-counter market

113. The stocks of firms that do not meet the listing requirements of stock exchanges are traded on the _____.

a. over-the-counter market

114. Urasil Mobil Corporation is a small petrochemicals firm. Since the owners of the firm do not want to pay a high listing fee, the firm's shares are not listed on an organized exchange. In this case, Urasil Mobil Corporation would trade its stocks in the _____.

a. over-the-counter market

115. Paula wants to buy stocks in a publicly traded company that deals in networking equipment. However, the company is not listed on any of the major stock exchanges. Paula should, therefore, purchase the stocks of the company in the _____.

b. In general, riskier investment strategies offer the potential for higher returns.

117. Which of the following is a true statement about personal investing?

b. Discount brokers tend to charge significantly lower commissions than full-service brokers.

118. Which of the following is a difference between full-service brokers and discount brokers?

a. They provide the basic services needed to buy and sell securities.

119. In the context of personal investing, which of the following statements is true of discount brokers?

a. do not place enough orders.

120. In the context of personal investing, brokerage firms sometimes charge inactivity fees when investors.

c. They help people automatically set and track their financial goals.

121. In the context of choosing a broker, which of the following statements is true of robo advisors?

c. market order

122. A _____ issued by an investor instructs a broker to buy or sell a security at its reigning price at that particular time.

b. limit order

123. A _____ is an order to a broker to buy a specific stock only if its price is below a certain level, or to sell a specific stock only if its price is above a certain level.

c. institutional investor

35. Futures Life Insurance is an insurance company in South Africa. The insurance company uses its large pool of financial capital, which it accumulates by collecting premiums from its policyholders, to purchase corporate stocks of different multinational companies. In this scenario, Futures Life Insurance is a(n) _____.

d. securities broker

40. Mr. Troy wants to buy stocks of a local retail company. He needs help with market research and requires some investing advice, as well as someone to do the trading for him. Mr. Troy should contact a(n) _____.

d. securities dealer

41. Vincent is actively engaged in the stock market and frequently buys and sells stocks for personal profits. With a good insight about the market trends, Vincent is mostly able to sell his stocks at higher prices than the prices at which he purchases them. Vincent is a(n) _____.

d. the spread

42. The difference between the prices at which securities dealers buy and sell a security is called _____. a. a capital gain

c. investment bank

45. Colbert Blanc is a financial intermediary that helps firms raise their capital by facilitating the firms in issuing new securities and making sure that the securities are sold out in the market. In this scenario, Colbert Blanc is a(n) _____.

d. Federal Reserve Act of 1913.

46. The banking panic of 1907 in the United States created pressure for Congress to find a way to stabilize the nation's banking system. The result was the: -------?

d. created to serve as the central bank in the United States.

47. The Federal Reserve System was:

b. Banking Act

48. A wave of bank failures occurred in the United States in the early 1930s as the economy sank into the Great Depression. Congress responded by passing the _____ of 1933. a. Export-Import Bank Act

b. The Glass-Steagall Act

49. Elyon holds a savings account in the Rochester City Bank in the United States. During an economic downturn, the bank suffers great losses. Elyon, however, is insured under the Federal Deposit Insurance Corporation and his savings are protected as the insurance covers his deposit value. Which of the following laws ensured the protection of depositors from a bank's failure?

b. Glass-Steagall Act.

50. Grenville Osborn Corp., a commercial bank in the United States, faces legal action for its private dealings in the securities market and in selling insurance. The Grenville Osborn & Co. is in violation of the:

a. It prohibited misrepresentation in the sale of newly issued stocks and bonds.

52. Which of the following is true of the Securities Act of 1933?

c. preferred stockholder and Jason was a common stockholder

73. Jason and Edward held stocks in a cell phone manufacturing company. However, when the company went out of business in a few years and liquidated its assets, Edward rightfully received his share in the company proceeds before Jason. Based on the given information, it can be concluded that Edward was a _____.

a. common stockholder

74. Andy invests in Orelon Corp., a plastic manufacturing company. As a stockholder, he owns a part of the company and he holds the right to vote on company issues. However, he is entitled to dividends only when the company's board of directors decides to. According to the company policies, if Orelon Corp. faces dissolution in the future, Andy will receive his assets only after the company satisfies the claim of the preferred stockholders. Based on the given information, it can be concluded that Andy is a _____.

a. takes precedence over common stockholders.

76. If Carl is a preferred stockholder at Cedia Inc., and Cedia goes out of business, Carl's claim on the firm's assets:

b. b. if the firm skips a preferred dividend in one period, the amount it must pay the next period is equal to the dividend for that period plus the amount of the dividend it skipped in the previous period.

77. The preferred stock of a firm sometimes includes a cumulative feature. This means that:

d. Common stockholders are assured a greater capital gain than preferred stockholders when a company experiences strong earnings.

78. Which of the following is a difference between common stockholders and preferred stockholders?

c. When a bond's market price is below par value, it is selling at a discount.

80. Which of the following statements is true of bonds?

a. coupon rate

81. The government of Brunasia issues bonds with a guarantee to make periodic interest payments on the par value. The government offers a 6.5% interest on its bonds. In this case, the percentage of interest offered by the government of Brunasia is called the _____.

a. A firm has a legal obligation to pay interest on bonds, whereas it has no legal obligation to pay dividends on stock.

82. Which of the following is a difference between dividends on stock and interest on bonds?

b. convertible securities

84. William holds shares of preferred stock in a telecommunications company. However, given the lucrative benefits that come with holding common stock, William exchanges his shares of preferred stock with shares of common stock at the conversion price. In this scenario, William was holding _____ in preferred stock. a. century bonds

d. financial diversifications.

88. Exchange-traded funds and mutual funds account for:

a. a closed-end fund.

89. The Willsborough Growth Trust, an institutional investor, issues a fixed number of shares among investors. However, this is not how the trust makes its profit. For maximum returns, it uses the money received from selling its shares to investors and puts it in a portfolio of assets. This scenario is reflective of:

a. A closed-end fund issues a fixed number of shares, whereas an open-end fund does not have a fixed number of shares.

90. In the context of mutual funds, which of the following is a difference between a closed-end fund and an open-end fund?

a. They redeem old shares when investors want to cash in.

91. Which of the following statements is true of open-end mutual funds?

c. net asset value per share

92. The price at which shares of an open-end mutual fund are issued and redeemed is based on the fund's _____.

b. The professional management touted by many funds does not come cheap.

95. Which of the following is a drawback of mutual funds?

d. dividing the total value of the fund's cash, securities, and other assets by the number of fund shares outstanding.

93. In the context of open-end mutual funds, the net asset value per share (NAVPS) is computed by:

c. preferred stockholder

72. Abigail and Pamela both have stocks in the Rondante Group. However, if in the future the company goes out of business, Pamela will have a claim on the assets of the company before Abigail. Also, she is given higher priority when the company pays the dividends to all its stockholders.

b. savings and loan association

33. Helmert Federal, a financial institution, acquires its funds primarily from the deposits of its customers, and then uses these funds to make mortgage loans for individuals interested in purchasing real estate properties. Helmert Federal is a(n) _____.

c. Cartman can exchange each convertible security that he owns for 37 shares of common stock.

85. Cartman owns convertible securities in OctoCore Corp. If the conversion ratio for the convertible securities is 37, it means that:

c. Olivia can exchange each convertible security that she owns for 50 shares of common stock.

86. Olivia owns convertible securities in a company that manufactures electrical appliances. If the conversion ratio for the convertible securities is 50, it means that:

b. prevents your broker from selling your stock at a price you believe is too low.

124. In the context of buying and selling securities, placing a sell limit order:

b. limit order

125. Garret wants to buy shares of an iron manufacturing company, but he does not want to pay a high price for them. He asks his securities broker to only buy shares that come within the price of $300 and $400. In this scenario, Garret places a _____ with his broker.

b. The competition to locate undervalued stocks is intense.

132. In the context of the various strategies for investing in securities, which of the following is a drawback of value investing?

b. value investing

133. BrunoCaf is an American coffee manufacturing company headquartered in New York. Recently, there was a market discrepancy and because of that its stock prices fell below their original values. However, given the slow but steady progress of the company, Marcos is confident that the market price of the stocks will rise with time, and he decides to invest in its stocks. In this scenario, Marcos uses the strategy of _____ in his investing decision.

c. investing for growth strategy

134. Investors using a(n) _____ often invest in stocks of relatively new companies with innovative products in a hot sector of the economy.

b. solid financial returns are the usual results

135. In a buy-and-hold investment approach, _____.

d. buy-and-hold

136. Jack receives a considerable sum of money by selling his property. He decides to invest this sum in a diversified set of securities. He plans to invest in these securities and retain them for a long time. He is optimistic that eventually the overall market conditions will rise, thus giving him a high return sometime in the future. Jack is using the _____ investment strategy.

b. stock index

138. A _____ tracks the prices of a large group of stocks that meet certain defined criteria.

d. exposed banks and their depositors to higher levels of risk.

51. The rationale behind why the Glass-Steagall Act mandated the ban on commercial banks from dealing in securities markets and selling insurance was that such activities:

d. 500

53. The Securities Exchange Act of 1934 required that all publicly traded firms with at least _____ shareholders and $10 million in assets file quarterly and annual financial reports with the Securities and Exchange Commission (SEC).

d. file quarterly and annual financial reports with the SEC.

54. Ellizon Fiber Optics, a publicly traded firm, has approximately 1200 shareholders and $32 million in assets. Given the specifications of the company, the Securities and Exchange Commission (SEC) mandates Ellizon Fiber Optics to: a. pay commissions to the accredited investors.

d. using inside information to profit unfairly from trading in a company's securities.

55. The Securities and Exchange Commission (SEC) has the authority to go after individuals who engage in illegal insider trading, which is the practice of:

d. stifled competition.

56. In the context of the deregulation during the 1980s and 1990s, critics argued that laws such as the Glass-Steagall Act and the Securities Exchange Act represented an onerous government intrusion into the financial sector that: a. encouraged rampant and harmful product promotion.

b. Each exchange establishes its own requirements for the securities it lists.

110. Which of the following is true of stock exchanges?

a. maintained a physical trading location where dealers meet to trade securities.

111. Unlike the early stock exchanges, National Association of Securities Dealers Automated Quotation System (NASDAQ) has never:

d. buy-and-hold

137. Lydia sells her ancestral property for a handsome amount of money. She invests this money in various securities. She decides not to trade the securities for a while and lets her money increase with the growth of the overall market. However, after almost eight years, when she feels that the value of the securities has risen considerably, Lydia sells her stocks and receives high returns on her investment. In this scenario, Lydia has used the _____ investment strategy.

b. Unlike the DJIA, the S&P 500 is a much broader index.

139. In the context of stock indices, which of the following is a difference between the Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 (S&P 500)?

b. Russell 2000

140. In the context of major stock price indices, the _____ tracks the stock prices of relatively small but actively traded U.S. corporations.

a. The FTSE 100

141. VIO is a giant aviation company based in the United Kingdom. It is listed on the London Stock Exchange among the most actively traded companies. Albert has recently invested in the company shares of VIO. Therefore, he wants to keep a track on how the company stocks are performing. In this scenario, which of the following stock price indices would be helpful to Albert?

d. make it possible for investors to trade securities after the U.S. exchanges are closed.

116. The advantage of electronic communication networks (ECNs) is that they:

a. Nikkei 225

142. The _____ tracks the stock prices of some of the largest and most actively traded companies listed on the Tokyo Stock Exchange.

d. The Nikkei 225

143. Glen wants to find the stock prices of some of the large actively traded companies listed on the Tokyo Stock Exchange. Which of the following stock indices should Glen follow?

c. Market cap

144. _____ is found by multiplying the price per share times the number of shares of common stock outstanding.

c. investors expect a greater growth in earnings over time.

145. In the context of tracking the performance of specific securities, a higher price-to-earnings (P/E) ratio means:

d. may have a growth in future earnings.

146. Richard has been following information about a firm on a financial website. He has noticed that the firm's price-toearnings ratio (P/E) has been steadily rising. Richard can conclude from this result that the company: a. is in serious financial trouble.

d. goes out of business.

69. Jonathan is a common stockholder in an information technology firm. Owing to his right to a residual claim on assets, he is entitled to receive a share in the proceeds of the company that is proportionate to his ownership if the company:

a. right to a residual claim on assets

70. An online food delivery service goes out of business owing to stiff competition. The company has long overdue taxes because of which its stockholders do not receive the proceeds of the company after its dissolution. In this case, the company is not able to fulfill the _____ of its stockholders.

a. preferred stock

71. A(n) _____ is a type of stock that gives its holder priority over common stockholders in terms of dividends and claims on assets.

b. par value

79. Elliot holds a bond in a health care company that matures after a period of ten years. Taken together with the interest on the principal amount, on maturity, Elliot will receive a sum of $55,000, which is the bond's _____.

d. Investing in a large number of individual securities is time consuming than investing in exchange-traded funds.

87. Which of the following is true of financial diversification?

b. open-end fund.

94. Flammox Growth Fund, a mutual fund, issues 200 shares in the market. However, because of a sharp demand from the investors, the fund issues 350 additional shares. In this scenario, the Flammox Growth Fund is structured as a(n) _____:

b. that significant tax consequences occur when there is a lot of trading.

96. A drawback of actively managed funds is:

d. exchange-traded fund

97. Goodwin Ross MidCap Growth is a fund that lets its investors buy ownership in a market basket that contains different securities. The fund's market basket has a composition that is similar to the composition of the Dow Jones Industrial Average stock index. In this scenario, Goodwin Ross MidCap Growth is a(n) _____.

b. have to pay brokerage commissions every time they buy or sell shares.

98. One drawback of exchange-traded funds (ETFs) is that investors:

c. initial public offering

99. A(n) _____ is the first time a company issues stock that may be bought by the general public