Chapter 10 - Securities

financial markets

markets that transfer funds from savers to borrowers

dow jones industrial average (djia)

an index that tracks stock prices of thirty large, well-known u.s. corporations

market order

an order telling a broker to buy or sell a specific security at the best currently available price

limit order

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

accredited investor

an organization or individual investor who meets certain criteria established by the sec and so qualifies to invest in unregistered securities

stock exchange

an organized venue for trading stock and other securities that meet its listing requirements

mutual fund

as institutional investor that raises funds by selling shares to investors and uses the accumulated funds to buy a portfolio of many different securities

financial diversification

a strategy of investing in a wide variety of securities in order to reduce risk

preferred stock

a type of stock that gives its holder preference over common stockholders in terms of dividends and claim on assets

b. investment banks

a(n) _____ is a financial intermediary that specializes in helping firms raise financial capital by issuing securities in primary markets. a. credit union b. investment bank c. commercial bank d. savings and loan association

a. private placement

a(n) _____ is a primary market issue that is negotiated between the issuing corporation and a small group of accredited investors. a. private placement b. article of incorporation c. public offering d. underwriting

a. commercial bank

a(n) _____ is an example of a depository institution a. commercial bank b. insurance company c. investment bank d. mutual fund

b. dividend

a(n) _____ refers to the return on an asset than results when its market price rises above the price an investor paid for it a. capital gain b. dividend c. retained earning d. accounts receivable

financial services modernization act of 1999

an act that overturned the section of the banking act of 1933 that prohibited commercial banks from selling insurance or performing the functions of investment banks

underwriting

an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed-upon price

electronic communications network (ecn)

an automated, computerized securities trading system that automatically matches buyers and sellers, executing trades quickly and allowing trading when securities exchanges are closed

bond

a formal debt instrument issued by a corporation or government entity

private placement

a primary market issue that is negotiated between the issuing corporation and a small group of accredited investors

stock index

a statistic that tracks how the prices of a specific set of stocks have changed

registration statement

a long, complex document that firms must file with the sec when they sell securities through a public offering

public offering

a primary market issue in which new securities are offered to any investors who are willing and able to purchase them

c. primary securities market

a _____ is a market where newly issued securities are traded a. secondary securities market b. market cap c. primary securities market d. market niche

c. buy limit

a _____ order tells a broker to buy stock only if its price is at or below a specified value. a. market buy b. exchange buy c. buy limit d. buy cap

convertible security

a bond or share of preferred stock that gives its holders the right to exchange it for a stated number of shares of common stock

a. the interest paid on a bond, expressed as a percentage of the bond's par value

a bond's coupon rate is defined as: a. the interest paid on a bond, expressed as a percentage of the bond's par value. b. the amount of interest earned on the bond, expressed as a percentage of the bond's current market price. c. the rise in bond's market value, expressed as a percentage of its initial value. d. the dividends paid by the corporation before the bond's maturity date expressed with reference to the maturity period.

savings and loan association

a depository institution that has traditionally obtained most of its funds by accepting savings deposits, which have been used primarily to make mortgage loans

credit union

a depository institution that is organized as a cooperative, meaning that it is owned by its depositors

securities and exchange act of 1934

a federal law dealing with securities regulation that established the securities and exchange commission to regulate and oversee with the sec

securities broker

a financial intermediary that acts as an agent for investors who want to buy and sell financial securities brokers earn commission and fees for the securities they provide

depository institutions

a financial intermediary that obtains funds by accepting checking and savings deposits and then lending those funds to borrowers

securities dealer

a financial intermediary that participates directly in securities markets, buying and selling stocks and other securities for its own account

investment bank

a financial intermediary that specializes in helping firms raise financial capital by issuing securities in primary markets

a. value investing

charles is analyzing the stock market for companies to invest in. he realizes that an online taxi service provider operating in his city is underrated in the market. he decides to invest in this company, as he believes that its true worth will be revealed over time. by investing in this company, Charles is using the _____ strategy a. value investing b. investing for growth c. investing for income d. buying and holding

a. buying and holding

hank recently obtained a considerable sum of money. he decides to invest this sum in a diversified set of securities. he plans to retain these securities for a long time until they have appreciated. hank is using the _____ investment strategy. a. buying and holding b. value investing c. market timing d. investing for growth

a. buy limit order

harry looks at scotcon's latest annual report and feels that the company is performing well. however, he believes it is not worth spending more than $60 per share of scotcon. he contacts his broker and tells him to acquire 50 shares of scotcon only if it is less than $60 a share. which of the following has harry issued? a. buy limit order b. stop-loss order c. market order d. liquidation order

d. do not accept deposits

institutional investors: a. do not hold corporate bonds. b. do not invest in corporate stock. c. do not hold shares in major U.S. corporations. d. do not accept deposits

a. investing for income

julius spends a lot of time researching and investing in low-risk securities that yield relatively steady returns. in this scenario, julius is using the _____ investment strategy a. investing for income b. buying and holding c. value investing d. investing for growth

b. capital gain

kenny purchases 10 shares of a company called vivacore for $1 per share. after 3 months, the share price increases to $5, i.e., the value of kenny's investment has increased from $100 to $500. in this case, the $400 that has been added to kenny's initial investment of $100 is called as _____. a. market orders b. capital gains c. dividends d. retained earnings

market makers

securities dealers that make a commitment to continuously offer to buy and sell the stock of a specific corporation listed on the nasdaq exchange or traded in the otc market

exchange traded fund (etf)

shares traded on securities markets that represent the legal right of ownership over part of a basket of individual stock certificates or other securities

d. right to a residual claim on assets

stewart recently learned that a company in which he owns stocks was closing its doors. all of the assets were being sold off in order to pay creditors. after all claims have been satisfied, stewart will receive a portion of any remaining monies because of his _____. a. preemptive rights b. right to payment of dividends c. right to capital gains d. right to a residual claim on assets

c. yield

the _____ is found by dividing the dividend per share by the previous day's price per share a. earnings per share b. day's range c. yield d. market cap

b. securities exchange act of 1934

the _____ requires that all publicly traded firms with at least 50 shareholders and $10 million in assets file quarterly and annual financial reports with the SEC a. Securities Act of 1933 b. Securities Exchange Act of 1934 c. Banking Act of 1933 d. Financial Services Modernization Act of 1999

a. nikkei 225

the _____ tracks stock prices of some of the largest and most actively traded companies listed on the Tokyo Stock Exchange. a. Nikkei 225 b. FTSE 100 c. SSE Composite d. Standard & Poor's 500

current yield

the amount of interest earned on a bond, expressed as a percentage of the bond's current market price

common stock

the basic form of ownership in a corporation

maturity date

the date when a bond will come due

securities and exchange commission

the federal agency with primary responsibility for regulating the securities industry

securities act of 1933

the first major federal law regulating the securities industry requires firms issuing new stock in a public offering to file a registration statement with the SEC

initial public offering (ipo)

the first time a company issues stock that may be bought by the general public

coupon rate

the interest paid on a bond, expressed as a percentage of the bond's par value

banking act of 1933

the law established the federal deposit insurance corporation (fdic) to insure bank deposits it also prohibited commercial banks from selling insurance or acting as investment banks

federal reserve act of 1913

the law established the federal reserve system as the central bank of the united states

primary securities market

the market where newly issued securities are traded the primary market is where the firms that issue securities raise additional financial capital

secondary securities market

the market where previously issued securities are traded

over-the-counter market (otc)

the market where securities that are not listed on exchanges are traded

capital gain

the return on asset that results when its market price rises above the price the investor paid for it

par value

the value of a bond at its maturity what the issuer promises to pay the bondholder when the bond matures

net asset value per share

the value of a mutual fund's securities and cash holdings minus any liabilities, divided by the number of shares of the fund outstanding

a. it is a bond's interest earnings expressed as a percentage of the bond's current market price

which of the following best defines the current yield of a bond? a. It is a bond's interest earnings expressed as a percentage of the bond's current market price. b. It is the interest paid on a bond expressed as a percentage of the bond's par value. c. It is the price at which a bond can be sold before its date of maturity. d. It is the amount that the issuer promises to pay the bondholder when the bond matures.

a. financial diversification

which of the following indicates the practice of holding many different securities in many different sectors? a. Financial diversification b. Initial public offering (IPO) c. Private placement d. Financial correlation

a. additional shares are issued when demand increases

which of the following is a characteristic of an open-end mutual fund? a. Additional shares are issued when demand increases. b. Redemptions of an open-end fund are carried out before its NAVPS is determined. c. The shares of open-end mutual funds can be traded among investors much like stocks. d. The funds invested are redeemed by selling shares on a publicly listed stock exchange.

a. unlike dividends on stock, a firm has a legal obligation to pay interest on bonds

which of the following is a correct comparison between stocks and bonds? a. Unlike dividends on stock, a firm has a legal obligation to pay interest on bonds. b. In the event of bankruptcy, unlike bondholders, stockholders will be repaid. c. Bondholders are less likely to receive a financial return than stockholders. d. Stocks involve a lot of risks, while bonds are completely risk-free.

b. unlike commercial banks, credit unions are not-for-profit organizations

which of the following is a difference between credit unions and commercial banks? a. Unlike credit unions, commercial banks are owned by their depositors. b. Unlike commercial banks, credit unions are not-for-profit organizations. c. Unlike commercial banks, credit unions charge very high interest rates on loans. d. Unlike credit unions, commercial banks are non-depository organizations.

d. brokerage commissions are paid every time shares are bought or sold

which of the following is a disadvantage of an exchange-traded fund (ETF) when compared to a mutual fund? a. Investors are forced to buy a limited range of securities as ETFs have a narrow index. b. ETFs cannot be bought or sold at any time of the day. c. ETFs have higher costs and fees. d. Brokerage commissions are paid every time shares are bought or sold.

c. it requires the investor to make frequent trades

which of the following is a disadvantage of strongly replying on market timing? a. It has steady but very low returns because the investments are low risk. b. It requires huge, long term-investments on a single company, thus accentuating the risk. c. It requires the investor to make frequent trades. d. It is very time consuming and takes a very long time to get the returns.

a. preferred stockholders receive their stated dividends in full before dividends are paid out to common stockholders

which of the following is an advantage of holding a preferred stock in a corporation? a. Preferred stockholders receive their stated dividends in full before dividends are paid out to common stockholders. b. When a corporation experiences strong earnings, the price of its preferred stock invariably appreciates much higher than the price of its common stock. c. Holders of preferred stock have the right to vote on important issues in the annual stockholders' meeting. d. Holders of preferred stock are guaranteed a better dividend than holders of common stock.

a. preferred stockholders normally do not have voting rights, while common stockholders do

which of the following is the difference between holders of preferred stock and holders of common stock? a. Preferred stockholders normally do not have voting rights, while common stockholders do. b. Preferred stockholders receive variable dividends, while common stockholders receive stated dividends. c. Preferred stockholders receive capital gain returns, while common stockholders do not. d. Preferred stockholders have a residual claim on assets, while common stockholders do not.

a. the S&P 500 has a broader index than the DJIA

which of the following is true of the comparison between DJIA stock index and S&P 500 stock index? a. The S&P 500 has a broader index than the DJIA. b. All the DJIA firms are well-established, whereas all the S&P 500 firms are start-ups with low market value. c. All the firms included in the DJIA are large, whereas all the firms in the S&P 500 are small. d. The stocks considered for S&P 500 are picked by the editors of The Wall Street Journal, whereas the ones for DJIA are selected by the stockholders.

d. it is the amount the issuer promises to pay the bondholder when the bond matures

which of the following statements best defines the par value of a bond? a. It is the rate of return received from investing in the bond. b. It is the stated interest that bondholders receive from issuers each year till the bond matures. c. It is the current market price at which a bond can be resold. d. It is the amount the issuer promises to pay the bondholder when the bond matures.

d. public offerings are more expensive than private placements

which of the following statements is a correct comparison of private placement and public offerings, in the context of primary securities market? a. Public offerings require lesser documentation than private placements. b. Public offerings are simpler than private placements. c. Public offerings are quicker than private placements. d. Public offerings are more expensive than private placements.