Chapter 10
A
A _____ is an example of a non-depository institution. a. securities dealer b. credit union c. commercial bank d. savings and loan association
financial markets
markets that transfer funds from savers to borrowers
C
A(n) _____ is a depository institution that is organized as a cooperative, meaning that it is a not-for-profit organization owned by its depositors. a. investment bank b. commercial bank c. credit union d. savings and loan association
D
A(n) _____ is a formal debt instrument issued by a corporation or government entity. a. premium b. article of incorporation c. common stock d. bond
preferred stock
A type of stock that gives its holder preference over common stockholders in terms of dividends and claims on assets
convert security
A bond or share of preferred stock that gives its holder the right to exchange it for a stated number of shares of common stock
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 the securities industry
securities broker
A financial intermediary that acts as an agent for investors who want to buy and sell financial securities. Brokers earn commissions and fees for the services they provide
depository institution
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
bond
A formal debt instrument issued by a corporation or government entity
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
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
Standard & Poor's 500
A stock index based on prices of 500 major US corporations in a variety of industries and market sectors
financial diversification
A strategy of investing in a wide variety of securities in order to reduce risk
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
Dow Jones Industrial Average (DIJA)
An index that tracks stock prices of thirty large, well-known US corporations
mutual fund
An institutional investor that raises funds by selling shares to investors and uses the accumulated funds to buy a portfolio of many different securities
D
An investor interested in investing in a relatively small but actively traded U.S. corporation is most likely to use the _____ stock price index as a benchmark. a. FTSE 100 b. NASDAQ Composite c. SSE Composite d. Russell 2000
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 (or securities) exchange
An organized venue fro trading stocks and other securities that meet its listing requirements
A
Christy, after a rigorous analysis of the stock market, realized that a company called Caneway had been underrated in the market, and that it will reveal its true worth over time. She invests on Caneway, and after a year, its market price rises exponentially and helps her pocket the capital gain. Christy has used the _____ strategy. a. value investing b. investing for income c. buying and holding d. investing for growth
B
Kenny purchases 100 shares of a company called VivaCore for $1 per share. After three months, the share price increases to $5 per share, increasing the value of Kenny's investment from $100 to $500. In this case, the $400 that has been added to Kenny's initial investment of $100 is called _____. a. market orders b. capital gains c. dividends d. retained earnings
B
Julius spends a lot of time researching and investing in low-risk securities that yield relatively low but steady returns. In this scenario, Julius is using the _____ strategy. a. value investing b. investing for income c. buying and holding d. investing for growth
D
How do securities brokers earn their compensation? a. By collecting premiums from policy holders b. By selling securities for higher prices than they paid to purchase them c. By issuing new securities to raise financial capital d. By charging fees and commissions for the services they provide
B
In which of the following ways do investment banks assist firms in an initial public offering? a. They assist with the buying and the selling of the shares without any commission. b. They arrange for the actual sale of the firm's securities while also providing marketing advice. c. They help the firms to legally offer its securities for sale even before the SEC has examined the registration statement. d. They guarantee the selling of the firms' securities at a high enough price to meet their financial goals.
C
Ranklux is a publicly traded firm that has 2000 shareholders and $25 million in assets. As per the Securities Exchange Act of 1934, which of the following actions should Ranklux undertake? a. Ranklux should undertake insider trading as it is allowed to do so. b. Ranklux should pay commissions to the accredited investors. c. Ranklux should file quarterly and annual financial reports with the SEC. d. Ranklux should now list its stocks in Over-the-Counter market as it cannot be listed in NASDAQ.
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
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 the creditors. After all other 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
A
Teri holds 100 shares of Fixtone. As a common stockholder, which of the following is true of Teri's basic rights? a. Teri has the right to receive a dividend if Fixtone's board of directors declares one. b. Teri has the right to cast three votes on the selection of members to the corporation's board of directors. c. Teri has the right to receive capital gains even when the stock's price falls. d. In the event of Fixtone liquidating its assets, Teri has the right to share in the proceeds in proportion to her ownership before Fixtone pays back any taxes or legal expenses.
A
The _____ expresses the annual interest payment as a percentage of the bond's par value. a. coupon rate b. premium c. current yield d. security value
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. It requires firms issuing new stock in a public offering to file a registration statement with 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 that 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 that established the Federal Reserve System as the central bank of the US
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 (OTC) market
The market where securities that are not listed on exchange are traded
capital gain
The return on an asset that results when its market price rises above the price the investor paid for it
par value (of a bond)
The value of a bond as 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
B
Which of the following best describes convertible securities? a. They are the bonds or shares that are sold only to the existing stockholders. b. They are bonds or shares of preferred stock that investors can exchange for a given number of shares of the issuing corporation's common stock. c. They are the bonds or shares that are sold only to the existing stockholders who are willing to pay more than their market price. d. They are bonds or shares of common stock that investors can exchange for a given number of shares of the issuing corporation's preferred stock.
B
Which of the following is a correct comparison between OTC stocks and the stocks listed in major exchanges? a. The OTC stocks have much lower spreads between bid and ask prices than the stocks traded on major exchanges. b. The market for OTC stocks is less active than for stocks listed on major exchanges. c. OTC stocks have more competition than the stocks listed on major exchanges. d. To list OTC stocks, a certain listing price has to be paid, which is not the case for publicly traded stocks.
B
Which of the following is a difference between securities brokers and securities dealers? a. Securities brokers earn profits through their trades, whereas securities dealers do not earn a profit. b. Securities brokers execute trades on behalf of others, whereas securities dealers execute from their own accounts. c. Securities dealers issue new securities to raise capital, whereas securities brokers do not. d. Securities brokers are not paid a commission for the transactions, whereas securities dealers are paid a commission.
D
Which of the following is a disadvantage of a mutual fund? a. Mutual funds are not managed professionally and require a great deal of time and expertise from the investor. b. It is difficult to withdraw funds from a mutual fund. c. Mutual funds offer increased risk and poor levels of diversification. d. Investors in mutual funds have to pay a variety of fees for professional management of the funds.
A
Which of the following is a similarity between exchange-traded funds and mutual funds? a. Both offer investors a proportionate share in a pool of stocks and other assets. b. Both cannot be bought and sold like stocks. c. Both can be bought and sold only during specific periods of the financial year. d. Both involve trading through brokers and hence include brokerage commissions.
A
Which of the following is the primary reason for the higher spreads between bid and ask prices for stocks traded in over-the-counter (OTC) markets? a. The lack of competition b. The abundance of market makers c. The high listing fees d. The intense activity of stocks traded
D
Which of the following is true in the context of common stock? a. When a corporation goes out of business, owners of common stock claim their share of assets before legal expenses. b. The dividends on common stock are usually a stated amount and are paid out every year. c. When a company experiences strong earnings, the price of its common stock usually appreciates less than the price of its preferred stock. d. Owners of common stock have the right to vote on important issues in the annual stockholders' meeting.
D
Which of the following is true of a firm commitment arrangement between an investment bank and a firm that is going public? a. The investment bank earns a profit by charging a commission on each of the shares sold. b. The investment bank waives the requirement to file a registration statement with the SEC. c. The investment bank provides a revolving credit agreement by purchasing the securities. d. The investment bank underwrites the issue by purchasing all of the shares at a specified price.
B
Which of the following is true of trading in secondary markets? a. The issuing firms negotiate the terms of the offer directly with a small number of accredited investors. b. The issuing firms do not receive additional funds when their stocks are traded in secondary markets. c. Trading in secondary markets involves an investment bank that underwrites the securities issued by a firm. d. Firms that need to obtain more financial capital must file a registration statement with the SEC.
D
Which of the following statements best describes market makers? a. They are organizations that provide a venue for stockbrokers or securities dealers to trade listed stocks and other securities for their clients. b. They are not-for-profit organizations owned by their depositors, which strive to pay higher interest rates on member deposits and charge lower interest rates on loans. c. They are financial intermediaries that assist corporations when they issue new securities. d. They are securities dealers that make a commitment to continuously offer to buy and sell specific NASDAQ- listed stocks.
C
Which of the following statements is true of electronic communication networks (ECNs)? a. ECNs and established stock exchanges have the same closing time for trading securities. b. Trading in ECN is requires individuals to go through a market maker. c. ECNs represent an alternative to established stock exchanges as a venue for trading securities. d. Trading in ECN is done manually and hence is more time consuming than trading in established stock exchanges.
D
Which of the following statements is true of open-end mutual funds? a. Their shares are traded like stocks. b. They issue a fixed number of shares. c. They stop issuing shares when there is an increase in demand. d. They redeem old shares when investors want to cash in.
A
Which of the following was a major outcome of the Banking Act of 1933? a. It banned commercial banks from competing with non-depository institutions. b. It established the Federal Reserve to serve as the central bank in the U.S. c. It created the Securities and Exchange Commission to oversee the securities industry. d. It prohibited fraud in the sale of newly issued stocks and bonds.
B
Which of the following was the major outcome of the Financial Services Modernization Act of 1999? a. It established the Federal Reserve Insurance Corporation, which insured depositors against financial losses when a bank failed. b. It reversed the Glass-Steagall Act's prohibition of commercial banks selling insurance or acting as investment banks. c. It required that all publicly traded firms with at least 500 shareholders and $10 million in assets file quarterly and annual financial reports with the SEC. d. It prohibited misrepresentation or other forms of fraud in the sale of newly issued stocks and bonds.
D
Which of the following will stockholders receive if the stock prices are greater than what they were, when the stockholders initially purchased the stocks? a. Dividends b. Retained earnings c. Market orders d. Capital gains
B
_____ are financial intermediaries that obtain funds by accepting checking and savings deposits from individuals, businesses, and other institutions, and then lending those funds to borrowers. a. Common markets b. Depository institutions c. Investment banks d. Securities brokers
C
_____ is an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed-upon price. a. Limit order b. Financial diversification c. Underwriting d. Accrediting
