FIN 310 Chapter 11

If you bought a 20-year bond issued by the government, with a par value of $1,000 and an interest rate of 8%. At maturity you will be returned the principal of

$1,000

Your next-door neighbor, a kind, elderly lady, just discovered that her stock account had been excessively traded in an inappropriate manner, mainly to generate excess commissions. This is an example of

Churning

The Securities Act of 1934

Created the SEC

Much of the day-to-day regulation of the market is left to the securities industry and is performed by the exchanges and the

FINRA

Stocks represent a legal obligation for the issuing company to pay dividends, whether the company has made a profit or not.

False

Which of the following is not a primary source of information about the stock market and individual stocks?

Fitch investment Survey

at is the purpose of a circuit breaker for the market?

It temporarily stops computerized trading to allow investors to analyze the extraordinary market swings.

Which of the following investors will potentially receive dividends on their investments?

Stockholders

If the corporation that issued a bond goes bankrupt, the bondholders are paid before stock holders are paid from any remaining assets of the corporation

TRUE

Interest rates are closely tied to the rate of inflation.

True

Investing in assets such as collectable Barbie Dolls or Beanie Babies are both example of speculating.

True

Churning occurs when

a broker engages in excessive trading in a clientʹs security account to generate more commissions for the broker.

The collateral an investor must put up when conducting a short sale is known as

a margin requirement.

When you purchase an asset that generates a return, it is generally considered to be

an investment

If the total rate of return is multiplied by 1/N, where N is the number of years for which the investment was held, the result is the

annualized rate of return

Returns on stocks can come in the form of

capital appreciation.

Suppose that you purchased a machine several years ago for your company. You recently sold the machine for more than you paid. This is an example of a

capital gain

One should keep in mind that when it comes to tax advantages, ________ is/are better than ________.

capital gains; ordinary income

Investors with ________ accounts pay in full for their security purchases.

cash

Historical rates of return for the last 82 years place ________ at the highest end of the spectrum for risk and ________ at the lowest end for risk.

common stocks; T-Bills

The ________ rate is the interest to be paid annually on a bond as a percentage of its par value.

coupon interest

A security whose value is based solely on the value of other assets is called a ________ security.

derivative

The ________ plays on the fear of regret and the seeking of pride, resulting in selling winning stocks too soon and keeping losing stocks too long.

disposition effect

Unsystematic risk can be eliminated through

diversification.

Jennifer has money invested in stocks. She earns a return on her investment, which is a portion of the companyʹs profits, called

dividends

You have just purchased a large number of Italian bonds, and you reside in the United States. The variability in earnings that you might experience as the relationship between the euro and the U.S. dollar fluctuates is called

exchange rate risk.

You are considering the purchase of a corporationʹs stock. You have noted that this particular corporation has a high use of debt, which is associated with ________ risk.

financial

The difference between an investment and speculation is that an investment ________ while speculation depends solely on ________ to produce results.

generates a return; supply and demand

Insider trading is both unfair and illegal. It occurs when officers, directors, major stockholders, or others trade securities while

in possession of ʺmaterialʺ nonpublic security information.

The ________ date is the date at which the bond issuer must repay the loan or borrowed funds.

maturity

Although some bonds are traded on the NYSE

most of the buying and selling of bonds doesnʹt occur on organized exchanges.

The ________ rate of return earned on an investment is unadjusted for lost purchasing power.

nominal

The Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 made it illegal to trade while in the possession of inside information, or ʺmaterialʺ non-public information held by

officers, directors, major stockholders

The ________ is the stated amount on the face of a bond, which the firm is to repay at the maturity date.

par value

Changes in the capital gains tax rate, or in the tax deductibility on municipal bonds are examples of ________ risk.

political and regulatory

A(n) ________ is a legal document that describes a securities issue and is made available to potential investors.

prospectus

Brokerage firm reports

provide access to research reports prepared by the firmʹs securities analysts.

Lawrence Wright is slow in math. He has before him the equation of (ending value minus beginning value) and income return totalled, then divided by beginning value. This is used to find the

rate of return.

What is an advantage to being a ʺpreferredʺ stock holder?

receive dividend payouts before common stock holders do.

Risk capacity

refers to the strength of your financial safety net.

A lending type investment, such as a corporate bond

represents a legal obligation for the issuer to pay its creditors back

Hern MacTavish only invests in lending investments. If his financial advisor gave him the list below, which might Hern invest in?

savings accounts, bonds

Barney Q. Hopkins borrows stock from his broker (short selling) with the goal of ________ and ________.

selling high; later buying low

You have decided to borrow stock from your broker, sell it in the market, and then (you hope) replace the borrowed shares when the price drops in the future. This is an example of

selling short

Purchasing derivatives is a form of

speculating

A typical bond will pay annual coupon payments until it matures, at which time it will

surrender its par value to the owner of the bond.

That portion of a stockʹs risk or variability that cannot be eliminated through investor diversification is called ________ risk.

systematic

Which of the following is not risk that can be diversified out of a portfolio of stocks?

systematic

One of the most important types of risk associated with real estate is

the liquidity risk.

The real rate of return is

the rate of return earned on an investment without any adjustment for inflation.

Alice learned that the difference between the real rate of return and the nominal or quoted rate of return is that

the real rate is adjusted for inflation.

An option gives you

the right to buy or sell the underlying asset at a set price on or before the optionʹs maturity date.

Call risk

the risk to bondholders that a bond may be called away from them before maturity

Historically, U.S. government securities have been considered

the safest, lowest-risk investment available.

As a young college graduate, your biggest investment ally is

time

A(n) ________ advertisement provides a listing of the underwriting syndicate involved in a new offering.

tombstone

Gracie Johnson saw the securities announcement for New York Bagel Enterprises that provided the details of the offering and a listing of the underwriting syndicate. She saw the

tombstone advertisement.

With short selling you are hoping for the stock price to fall.

true

t portion of a stockʹs risk or variability that can be eliminated through investor diversification is called ________ risk.

unsystematic

If you purchase some shares of stock

you may earn dividends.