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Exam 19: Using Securities Markets for Financing and Investing Opportunities

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Question 21

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Buying stock on margin lowers the overall risk for the investor.

A) True
B) False

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Question 22

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A mutual fund company buys securities from corporations and governments and packages them together into a "mutual fund." It then ________________.

A) sells shares of this packaged investment to interested investors.
B) deposits the mutual fund into a pension fund for institutional investors.
C) charges investors a fee to find out how these investments fared, so that investors can decide for themselves as to whether they want to own the investments.
D) gives investors the option to bid on a share of this investment.

E) All of the above
F) B) and D)

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Question 23

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Yesterday, Alberto purchased on margin 100 shares of stock in the ABC Corporation for $40 per share. Today, the price of the shares dropped by $10 per share. Alberto expects his broker to issue a margin call.

Having just returned from serving with the U.S. Marines in Afghanistan, Callahan has managed to save most of his earnings. He has enrolled in the local community college and he is living in his parent's lower level while he assimilates back into U.S. life. As his business major friend, he has come to you for advice. He would like to see his $40,000 savings grow, yet he knows that he will need it in about five years when he and his girlfriend are out of school and make plans to get married. He also worries that his car may break down and he will need to invest in another used car. Which of the following would you suggest for Callahan?

Preferred stockholders possess the first right to purchase any new stock the company issues.

Small investors can spread the risk of investing by purchasing shares of mutual funds or ETFs.

A preferred stock's par value establishes the base used for calculating the preferred stockholders' dividend.

The stock of well-known, high-quality firms, such as Coca-Cola, General Electric, and Procter & Gamble, fit the characteristics of ________ stocks, because investors can almost always be assured a dividend and consistent stock price appreciation.

If you are willing to hold on to your growth stock long enough, at least five years or more, you will realize capital gains.

Stocks that are not listed as trading on one of the national or international stock exchanges can be traded on the OTC, Over-The-Counter exchange.

The Dow Jones Industrial Average represents the average price of ________ industrial stocks.

The risk/return trade-off investors assume means:

If paid, dividends come from any profits remaining after the firm has paid taxes. The company cannot deduct dividends as an expense of doing business.

Hottie Potatee, Inc., wants to raise an undisclosed amount of funds in order to expand the company-owned potato bar stores overseas. The CFO of the company will negotiate with an expert at the FTC who will underwrite the issue of stock that Hottie Potatee plans to offer.

Only those individuals and/or companies with a membership on a stock exchange can buy and sell securities on that stock exchange.

Molly Manufacturing plans to issue $75 million of common stock. The firm will likely rely on the advice and assistance of a(n) :

Government bonds can vary in denomination, but most corporate bonds are issued in ____________.

Ina Vestor has a brokerage account with one of the remaining large investment firms. This morning her broker called asking if she is interested in participating in an IPO. He went on to say that he could get her 200 shares for $23/share. If Ina agrees to buy the IPO, the trade will take place in the _____________.

In an effort to profit from stock market trading, Chad landed a job with the ABC Corporation. Chad intends to use his position to obtain privileged information about his new employer that would not be available to the public. While Chad realizes that he may be benefiting unfairly, as an employee he is not acting illegally.

Although the interest rate is fixed when the bond is issued, the interest rate that one firm must pay compared to another may vary depending upon risk factors such as the reputation of the firm.