BUS Chapter 19
If a company issues a $1,000 bond with an interest rate of 2 percent and a maturity date of 2040, how much interest does the company pay and for how long?
$20 each year until a specified date in 2040 when the bond must be paid in full.
Which statements represent disadvantages of issuing additional shares of stock? (Select all that apply)
-It can shift control of the firm. -Dividends are not tax deductible.
Preferred stockholders are given preference over common stockholders in ______. (Select all that apply)
-The claim on company assets -the payment of dividends
Which statements represent advantages to a company issuing stock? (Select all that apply)
-The company incurs no debt, so it may appear financially stronger. -There is no legal obligation to pay stock dividends. -The stock price never has to be repaid to stockholders, since they become owners in the company.
Sinking funds are attractive to both issuing firms and investors because ______. (Select all that apply)
-they reduce the risk the bond will not be repaid -they support the market price of the bond because they reduce the risk the bond will not be repaid -they provide for an orderly repayment of a bond issue
Investors that are thinking of using an online broker should know that ______.
-they will not get advice on their investment decisions -the service you receive depends on the size of your account -they will have to conduct their own research
Steps in investing in stocks and bonds
1. Decide that you want to buy stocks or bonds 2. Find a stockbroker 3. The stockbroker negotiates the price and places an order 4. The trade is reported to your broker, who then reports the trade to you
The Dow Jones Industrial Average is the average cost of ____ selected industrial stocks.
30
If a company issues a $1,000 bond with an interest rate of 5 percent and a maturity date of 2020, what is the company agreeing to pay the bondholder?
A total of $50 interest each year until a specified date in 2020, when it must repay the full $1,000
corporate bonds are usually issued in units of
$1,000
In what units are corporate bonds usually issued?
$1000
What is a bond?
Debt instruments that larger companies sell to raise long-term funds
True or false: First-time investors in bonds should know that bonds must be held until their maturity date.
False
True or false: The many legal barriers in place around the world makes it difficult to buy securities from foreign companies.
False
In order to reduce a stock's high per-share price, a company can declare a ____ ____ in which they issue two or more shares for every one that's outstanding.
Stock Split
What is an organization whose members can buy and sell securities for companies and individual investors?
Stock exchange
Considered the safest type of bond investment
U.S. Government bond
Louisa is interested in investing in the stock of a corporation that pays regular dividends and generates consistent growth, so she chose a leading pharmaceutical company. Louisa is interested in purchasing __________ stocks.
blue chip
As interest rates go up
bond prices fall and vice versa
A mutual Fund
buys stocks and bonds and then sells shares in those securities to the public.
The first step to take in investing in the securities market is to ______.
decide what stock or bond you want to buy
The principal reason for a company having a stock split is to:
decrease the market value per share of common stock
Buying several different types of investments to spread the risk of investing is a tactic called
diversification
When an investor purchases different types of investments for the purpose of spreading risk they are :
diversifying their portfolio
The Securities and Exchange Commission is responsible for ______.
regulating various stock exchanges
Curbs and circuit breakers are mechanisms used to
restrict program trading
2. DOW ETF
retirement
3. Energy sector mutual fund
retirement
5. 25-year General Electric bond
retirement
6. Johnson & Johnson stock
retirement
What are the two different classes of bonds a corporation can issue?
secured and unsecured bonds
Investment bankers are specialists who assist in the sale of new
securities
What is it called when you sell a bond above its face value?
selling it at a premium
One of the disadvantages of issuing stock is that
stockholders have the right to vote for the company's board of directors, which can change the direction of the company.
Shares of ownership in a company are called ______.
stocks
Which federal agency has responsibility for regulating the various stock exchanges?
the SEC
It is easy for investors to buy securities from companies almost anywhere in the world because:
there are fewer legal barriers
An advantage of issuing bonds is that ______.
they do not affect the owner's control
Two classes of bonds
unsecured, and secured
24-month certificate of deposit (CD)
wedding
4. 18-month General Electric bond
wedding
7. Money market shares
wedding
8. Savings account
wedding
9. Short-term junk bonds
wedding
The expected rate of return on an investment is called
yield
When selecting an investment, which criterion relates to the expected rate of return on an investment, usually over a period of one year?
yield
A _____ is a corporate certificate indicating that an investor has lent money to a firm (or a government).
Bond
What does investment risk mean in terms of selecting investments?
It is the chance that an investment will be worth less at some future time than it's worth now.
Which statement about common stock is correct?
It is the most basic form of ownership in a firm.
What is the primary purpose of a stock exchange?
It serves as a system through which stocks are traded.
Issued by states, cities, counties, and other local government agencies; usually exempt from federal taxes
Municipal bond
The __________ is the largest U.S. electronic stock trading market.
NASDAQ
Which type of stock gives its owners preference in the payment of dividends and an earlier claim on assets than other stockholders if the company is forced out of business and its assets are sold?
Preferred stock
What is buying stock on margin?
Purchasing stocks by borrowing some of the purchase cost from the brokerage firm
10. 60-month Treasury note
Retirment
What is an advantage to a corporation issuing stock?
There is no legal obligation to pay dividends to stockholders.
What is a major function of the securities markets?
They assist businesses in finding long-term funding to finance business expansion.
What are the functions of securities markets?
They provide long term funding for businesses and a place for investors to buy and sell stocks and bonds
Matures in less than a year; issued with a minimum denomination of $1,000
Treasury bill (T-bill)
Matures in 25 years or more; sold in denominations of $1,000 up to $1,000,000
Treasury bond
Matures in 10 years or less; sold in denominations of $1,000 up to $1,000,000
Treasury note
Issued by a foreign government; payable in U.S. dollars
Yankee bond
What is a junk bond?
a bond that is high-risk, high-interest
What is a stock?
a share of ownership in a company
When investors give computer instructions to sell automatically to avoid potential losses if their stock price dips to a certain point, it is called:
program trading
What information does the DJIA give investors?
an indication of the rise and fall of the stock market over time
When stock is sold at a higher price than that for which it was purchased, it is called a(n):
capital gain
The positive difference between the purchase price of a stock and its sale price is called
capital gains
The most basic form of ownership in a firm is
common stock
Sinking Funds
provide for an orderly repayment of a bond issue, reduce the risk that the bond will not be repaid, and help to support the market price of the bond.
True or false: Corporate bonds are usually issued in units of $100.
false
Jonathan is contemplating selling the bonds he holds prior to their date of maturity. What may result in Jonathan's bonds being worth less than their face value, if he decides to sell prior to the maturity date?
if interest rates for similar bonds are higher than the interest rate Jonathan's bond is paying.
Using the average of the cost of 30 selected industrial stocks, the purpose of the Dow Jones Industrial Average is to
indicate the general movement (up or down) of the stock market.
Specialists who assist in the issue and sale of new securities are called
investment bankers
When selecting an investment option, which criterion relates to the chance that an investment will be worth less at some future time than it's worth now?
investment risk
An organization that buys stocks, bonds, and other investments and then sells shares in those securities to the public is called a(n)
mutual fund
The benefit of a mutual fund for investors is that
mutual funds help investors to diversify and invest in many different companies.
Online brokers are an attractive option for investors because they ______.
place stock orders free of charge
Duong was trying to decide between purchasing the common stock shares of Longman Manufacturing, or preferred shares of the same company. As a student of business, you provide the accurate information that
preferred shareholders typically do not have voting rights. Companies are obligated to pay preferred shareholders their dividends before paying dividends to common stockholders.
What does pf stand for on a stock quote?
preferred stock
