Introduction to Careers in Finance D9126 : 2. SECURITIES ANALYSIS AND INVESTMENTS

A robber baron is a person has settled on land that doesn't belong to him.

False

stock

Jack invests $10,000 in this capital investment.

semi-strong form

Market prices for XYZ Corporation are based on the financial statements issued and accessed recently.

efficient market hypothesis

Market prices for XYZ Corporation can be studied by it is still not possible to beat the market.

weak form

Market prices for XYZ Corporation stock reflect the company before it was taken over by the ABC Corporation.

Predictive models account for unknown variables as they attempt to forecast a security's outcome.

True

The Securities Investor Protection Corporation is a government agency charged with administering the liquidation of failed securities firms to protect the interests of investors as much as possible.

True

Of the bonds listed below, the riskiest investment is _____.

a bond costing $5,000 and with an interest rate of 10 percent

annual report

a comprehensive report on a company's performance covering a particular time usually a year 1

open-end fund

a fund open to new investors and issues; it redeems shares at net asset value

Sanjay is targeting the ABC Corporation as a potential investment. He is researching financial data and comparing what he learns with a successful company he has done well with. It sounds as though Sanjay is most likely doing _____.

a fundamental analysis

hedge

a risk management strategy used to minimize or eliminate risk of loss in an investment

Although China continues to move to be more of a global power, investors find it to be a weak investment possibility. That is mainly because _____. (Select all that apply.)

it isn't possible to get current financial information the government controls the country's currency the marketplace is not transparent

After the bankruptcy of 2008, investors in Lehman Brothers received _____.

nothing

P/B

share price divided by the book value of the stock.

corporate bonds

short-term investment in publicly traded companies that carries some risk

municipal bonds

tax-exempt money market fund which is a type of government bond

According to the efficient market hypothesis, the reason an individual cannot outperform the market is mainly because of _____.

the principles of economic efficiency

The present value of a five-year loan at 11 percent with payments of $322.00/month is _____.

$3,243.00

Andres bought 100 shares of ABC Corporation stock at $45/share, then a week later bought another 100 shares at $45/share, and shortly after that bought 100 shares at $42/share. Just now, he bought 100 shares at $36/share. The mean price of the ABC stock is _____.

$42.00

back-end load

Edna pays $75 in transaction fees when she sells her investment

strong form

Market prices for XYZ are based on all public and private information currently available.

All securities products in the United States are sold through licensed representatives in a market subject to strict oversight and controls. These controls are mandated by the _____.

SEC

The efficient market hypothesis forms a foundation of modern finance theory and was fathered by _____. (Select all that apply.)

Samuelson Fama

fundamental analysis

Terry and Edna are researching financial data before purchasing an investment

risk-return trade-off

Terry and Edna bet that their investment will have a high yield

front-end load

Terry pays $50 in transaction fees when his investment is purchased

An investor decides that instead of a bond with the highest risk and return, he will invest in a bond with lower risk but lower return. This is referred to as a risk/return tradeoff.

True

Open-end mutual funds are more liquid than close-end mutual funds.

True

The higher the projected interest rate, the more risky the bond.

True

systematic risk

cannot be offset using risk management tools for a specific security; for example, war, calamities, and inflation

Most mutual funds tend to be _____. (Select all that apply.)

diversified balanced managed

Researching financial and other data on a potential investment, and comparing this information with other possible investments, is the process known as _____.

fundamental analysis

GAAP

generally accepted accounting principles; standard framework of accounting guidelines

A bond is worth $10,600 at last month's interest rate of 8.5 percent. The present interest rate is 8 percent. That means the value of the bond will be _____.

greater than $10,600

As he looks to invest some money, Angelo requests the annual reports from three potential companies. One of them, the XYZ Company, tells him that the report is private and available only to investors. Angelo knows that this is_____.

illegal, since all companies must make their annual report public

diversification

investing in a variety of assets; used to manage or reduce risk

step two

investors look to make the company as efficient as possible

Which of the following has the lowest risk?

junk bonds

On his income tax, Mike is being taxed at 15 percent for the gain on his securities. It is most likely that Mike had a _____.

long-term gain

The Capital Asset Pricing Model is related to the efficient market hypothesis because they are both essentially about _____.

market risk

When comparing the rate of return of one bond with a similar bond with the same time period, first create a line graph. Plot the market rate return first, as the _____.

midpoint

Mandy is looking at Morningstar.com. It is probable that she is trying to find information about _____.

mutual funds

OTC sales

products not actively traded (ex. variable life insurance)

certificates of deposit

promissory note with restricted withdrawals

Certificates of deposit are _____. (Select all that apply.)

promissory notes issued by a bank

Tammy just bought a AA bond from a city's waste management project. The purchase price was $5,000, and it is due in 10 years, with an annual yield of 8 percent. To evaluate that bond, Tammy would need to note the bond's _____. (Select all that apply.)

purchase price duration annual yield

The three basic parts of a bond are _____. (Select all that apply.)

purchase price interest rate term to maturity

step three

the company must have its value securitized

Investors will buy risky bonds mainly because _____.

they have the possibility of a big payoff

Clark is reviewing his investment portfolio and realizes that right now he has an investment in each of the three main securities areas. He has _____. (Select all that apply.)

1,000 shares of Bank of America stock a 10-year bond from ABC Insurance Company options to purchase another 1,000 shares of Bank of America if it hits a certain price

Consumers are protected in the event of the collapse of a member securities firm by the _____.

Securities Investor Protection Corporation

continuously compounding pricing formula

a futures contract valuation formula used to assess risk and arrive at the intersection of a risk-free rate and price

Black-Scholes model

a method of calculating risk and return in the practice of buying and selling options

Byron has a few bonds in his portfolio. Those considered junk bonds would be _____. (Select all that apply.)

a mortgage bond rated BB a utility bond rated D

Descriptions of a robber baron include _____. (Select all that apply.)

a wealthy person who attempts to add to her wealth dishonestly a 19th-century American capitalist who became wealthy dishonestly

market sales

actively traded securities, to include stocks and corporate bonds

An investor's portfolio holds an assortment of different bonds from different places. The safest investment she's holding right now is _____.

an AAA bond from a waste water treatment plant

capital appreciation

an increase in the value or price of a company's asset such as a building, land, or shares of stock

capital asset pricing model

an investing formula that takes sensitivity to risk into account in predicting the performance of a specific stock

unsystematic risk

analyzed and measured and therefore accommodated in a portfolio of securities; for example employee strikes and prices

Sanford's portfolio includes stock in Rowan Company, a business his grandfather worked for before it was publicly traded. To control risk as it directly pertains to this stock, Sanford should make sure that he _____.

applies sound research and logic to selecting potential investments

Thuy is buying securities and some foreign exchange products, using a few different stock markets and the foreign exchange markets. Then she is selling them back and is benefitting quite well from the price differences across all of the markets. Thuy has been an investor for about 15 years. It most nearly sounds as though she is involved with _____.

arbitrage

An active investment manager has an expense load that is higher than many others in his office. This is most likely because he has transaction costs mainly associated with _____.

arbitrage activity

Short-term gains _____. (Select all that apply.)

are taxed at ordinary income tax rates come from investments bought and sold in less than 12 months

The Gordon Growth model is useful mainly because it _____.

assumes that the value of a stock is equal to the sum of the future discounted dividends

Hector is selling his shares in a mutual fund and is being charged a fee for the transaction. It sounds as though the fund is set up as a _____.

back-end fund

An investor has some high-risk technology bonds in her portfolio. The wisest method to keep her investments safe is to _____.

buy some low risk energy bonds

Equity valuation methods are used to _____. (Select all that apply.)

calculate the stock's potential price levels assess a stock for investment potential

The equation: the expected rate of return times the return of the risk-free asset, equals the return plus the sensitivity for market risk, times the expected rate of return, minus the rate of return for a risk free asset is the formula to assess _____.

capital asset pricing

Mike is trying to figure out whether he should buy Security A or Security B. It would be most helpful for him if he was able to do a(n) _____.

capital asset pricing model

Money generated by a firm before taxes and revenues is called _____.

cash flow

What type of company you will not recommend using the asset-based model of valuation?

companies with a high value of goodwill in their balance sheet

An analyst is using ratios to estimate the value of ABC stock. After computing the ratios for specific variables, she would next _____.

compare them with marketplace averages for the security

The Gordon Growth model is best used to value companies that are _____.

considered mature

options

contracts giving the buyer the right to buy or sell an asset at a specific time or price

futures

contracts that require the delivery of an asset at a specific time and price

net present value

current value of an investment's future cash inflows and cash outflows overa given period

Bonds are _____. (Select all that apply.)

debt instruments traded in a stock market

What is not a component of the EBITDA formula?

earnings after taxes

The Securities and Exchange Commission will consider a monetary penalty to those financial institutions that do not abide by their mandates. This activity is an example of _____.

enforcement

The small ABC Software Corporation is readying itself for a takeover by the larger XYZ Corporation. ABC is worth $3.5 million right now. This is known as its _____.

enterprise value

A basic present value calculation for securities takes the company's earnings before interest after taxes, adds depreciation and amortization (if any) and subtracts any changes in working capital and capital expenditure. This calculation is to find _____.

free cash flow

Small stock capitalization and arbitrage gives an investor the opportunity for _____.

great gain

Tyrone is looking to buy shares of the ABC Corporation and is figuring out the P/E ratio. He sees that it is 31 times earnings. That means it is _____.

higher than the average P/E ratio

David has a minority interest in ABC Corporation. This specifically means he _____.

holds shares of the company but does not have control of ABC

enterprise value

the market value of the business as a whole. It is looked at as the takeover price if another company was looking to buy the business

arbitrage

the practice of simultaneously buying and selling securities as a way to benefit from price discrepancies

fundamental analysis

the process of evaluating an investment to determine if it is a good value or what actions needs to be taken

Maggie does an equity valuation on ABC Corporation stock and finds that its current value is about five dollars above the market price. Maggie realizes ____ and ______.

the stock is undervalued

present value

the value of an expected income stream as of the date it is being valued; the current worth of a future sum of money

When evaluating a security, investors will look to the company issuing to see its _____. (Select all that apply.)

total assets and liabilities earnings forecasts earnings ratios

arbitrage

trading securities in an assortment of markets to benefit from price differences

balanced portfolio

usually comprised of different types of securities such as stocks and bonds

The Black-Scholes Formula would most likely be used to _____.

value a stock option

Jorge has an options contract in his portfolio and is doing a valuation on the instrument. Aside from needing to know the price of the underlying asset, to do the valuation, Jorge will also need to know _____. (Select all that apply.)

when the option expires the volatility of the underlying asset the strike/call price when the stock will be purchased for a fixed price per share

primary markets

where IPOs are sold

The total value of all of the 2,000 mutual fund shares in Dion's portfolio is $260,000. He has liabilities of $10,000. The per-share dollar amount of the securities in his portfolio is $ _____.

125.00

P/CF

30- or 60-day average share price of the stock divided by money generated by the firm before taxes and revenues

Bond ratings are not assigned by the issuer but by an independent company such as Moody's.

True

Financial products may include those offered by banks, insurance companies, and brokerage or securities firms.

True

Fred has a futures contract in his portfolio. This contract is considered a derivative.

True

XYZ is a large, successful company that made a capital investment this year—buying a company in their industry. This will most likely impact the value of XYZ's stock.

True

Samantha buys 500 shares of Acme skin products, which is a company that is not actively traded. This would be a(n) _____ sale.

over-the-counter

step one

owners of the private company have been approached by private-equity investors

The main equity valuation methods can be divided into three categories. These are _____. (Select all that apply.)

present value models multipliers models asset-based models

The multiples method of stock valuation computes ratios for specific variables and compares them with marketplace averages for the security. These multiples can be based on _____. (Select all that apply.)

price enterprise values

This ratio can act as an indicator reflecting what investors see as company money available to improve the capital value of the company or to provide a dividend. This ratio is _____.

price-to-cash-flow ratio

Taking the price of a share of stock and dividing it by earnings gives the _____.

price-to-earnings ratio

Tim has an options contract that says he can sell his stock at a certain price up until the expiration date. He is holding a _____.

put

Bonds are discounted for _____.

risk

In evaluating a bond, investors compare _____. (Select all that apply.)

risk return price

The basis for all investment decisions is _____.

risk and return

The main reason investors choose money market products are _____. (Select all that apply.)

safety liquidity

secondary markets

securities able to be redeemed at a set price in a specific period of time

Money market investments are a type of _____.

security

Lorena is a private investor who studies the annual report of a company before buying its stock. She orders the reports by calling the headquarters of the companies she is potentially interested in. After studying the material, she makes her decisions about what to buy, then calls her broker to place the order. It sounds as though Lorena is operating under _____.

semi-strong form market efficiency

P/E

share price divided by how much the company has made, based on the financial statement

P/S

share price dividend by what the company has sold over a period of time

Mia buys 1,000 shares of ABC Corporation as an over-the-counter sale. This means that the _____.

shares were of a company that is not actively traded.

Paolo has a futures contract for ABC stock. This means that _____. (Select all that apply.)

she will buy the stock at a specific price she will buy the stock on a specific date

banker's acceptance notes

short-term debt instruments similar to Treasury bills

commercial paper

short-term money market instrument used in business

Serita is buying a security with settlement two business days after the trade day. It sounds most nearly as though she is doing a _____.

spot sale

The process used by the SEC to approve securities products can be said to be _____.

standardized

step four

stock is publicly available on the stock market

Those securities that are in the derivatives category include _____. (Select all that apply.)

stock options futures

A hurricane and ensuing damage cause a resort area to close for two months at the height of the tourist season. This results in ten businesses going bankrupt. These included a hotel, three restaurants, two bars, a bakery, a food store, a realtor, and a coffee shop. Investors in any of those businesses should realize this is a _____.

systematic risk

Tad is evaluating his portfolio and buying some investments in a few industries: an energy stock, a tech stock, and soon a bank stock. It sounds as though he is trying to avoid _____.

systematic risk

Defaulting on a bond most nearly means _____.

the bond issuer cannot pay the promised amount

bond ratings

the current value of an investment, which will mature in the future, accounting for time and the expected rate of return

Mitchell has shares in an open-ended mutual fund. He is very happy with his investment, mainly because _____. (Select all that apply.)

the funds are liquid it is a diversified investment he can recommend others invest in the fund

A five-year loan of $10,000 at an interest rate of 9 percent has a future value of _____.

$0

Although it is not possible, per the EMH, to outperform the market in the long run, it is relatively easy to consistently realize high rates of return by investing in securities in the short term.

False

An investment advisor most likely first worked as a commodities and futures broker.

False

Equity valuation methods can be used to calculate potential price levels for stocks, although they are not reliable to assess possible investment opportunities.

False

Futures contracts are valued using the Black-Scholes model.

False

The main reason an investor will evaluate a bond is to determine the payout at the security's maturity.

False

The qualitative information about securities valuations can be found on a business's balance sheet.

False

Prior to the Gramm-Leach-Bliley Act of 1999, it was not possible to buy stock through _____. (Select all that apply.)

J.P. Morgan Goldman Sachs Deutsche Bank Credit Suisse

Marco is an investor in a mutual fund. He has just sold half of his shares and is paying an exit fee. Jack is also an investor in this fund and is selling half of his shares. Marco is paying a higher exit fee. That is most likely because _____.

Jack held the shares longer than Marco.

futures

Jack invests $10,000 in this obligation to purchase shares of the ABC Corporation with a set length of time.

option

Jack pays $5,000 for the right to purchase shares of the ABC Corporation and ends up exercising this three weeks later.

bond

Jack pays $5,000 to buy this debt instrument.

An analyst is figuring out the intrinsic value of a stock option. That means she is figuring out the value of the option _____.

if it was exercised today

derivatives

investment products that include stock options and futures

A company's market capitalization can be best described as _____.

its worth today in a publicly traded marketplace

A bond is worth $5,500 at last month's interest rate of 7.5 percent. The present interest rate is 8 percent. That means the value of the bond will be _____.

less than $5,500

An asset-based valuation of a company uses estimates of the market or fair value of the company's _____. (Select all that apply.)

liabilities assets

"Number of years until maturity" is the same as saying _____.

life of the bond

Gina is an investor involved with arbitrage and is buying and selling shares of ABC stock at the same time. This method of trading is considered _____.

low risk regardless of the stock