BD Ch 19

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A(n) ________ refers to the first public offering of a corporation’s stock.

-primary market offer (PMO)
-initial securities proposal (ISP)
-initial public offering (IPO)
-primary public sale (PPS)

initial public offering (IPO)

Trading in newly issued securities takes place in the:

-primary market.
-secondary market.
-initial offerings market.
-corporate trading market.

primary market

The trading of previously issued securities from one investor to another takes place in the:

-primary market.
-secondary market.
-initial offerings market.
-corporate trading market.

secondary market

Investment bankers ________ new issues of bonds or stocks by purchasing, at a discount, the entire stock or bond issue of a firm and selling the issue to interested investors at a higher price.



Investment bankers provide ________ services by purchasing the entire new security issue from a corporation seeking to raise capital, and selling it to interested investors.



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

-Federal Reserve bank.
-commercial bank.
-mutual fund.
-investment banker.

investment banker

Shareholder Jones sells 100 shares of Very Vegetarian Corporation stock to Investor Smith. This transaction takes place in the:

-primary market.
-secondary market.
-initial offerings market.
-security resale market.

secondary market The secondary market handles the trading of securities between investors.

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 ____________.

-fair trade market
-Boston market
-primary market
-secondary market

primary market

Peak Performance Sporting Goods, Inc., needs a large amount of funds to expand its operation and open new stores. Jackson is one of a team of finance professionals that is working on Peak Performance’s initial public offering. Peak Performance will partner with an investment banker to assist in pricing and selling several million original issue shares of company stock. Jackson just received word that the investment bank is willing to _____________ the issue. This means the investment bank will purchase the entire issue at a discount, and sell it for full price to interested investors.



The ________ is a large national electronic stock trading market.



A ________ certificate provides evidence of ownership in a specific corporation.



The dollar amount assigned to shares of stock by the corporation’s charter represents the stock’s:

-net asset value.
-legal value.
-market value.
-par value.

par value

When issuing stock to obtain long-term funding, dividend payments are:

-tax deductible.
-legally required.
-intended to discourage firms from issuing an excessive number of shares.
-not tax deductible.

not tax deductible

Which of the following securities guarantees preferred stockholders payment of missed dividends before any dividends are paid to common stockholders?

-Call provision
-Cumulative preferred
-Participating preferred
-Convertible preferred

cumulative preferred

Georgia Corporation, known for its very generous dividend policy, easily attracts investors. These dividend payments basically represent:

-a part of the firm’s profit distributed to stockholders.
-the increase in market share the company has earned.
-current value of the firm’s stock holdings.
-income that is sheltered from taxes.

a part of the firm’s profit distributed to stockholders

Tyrone owns shares of ________ stock in New Jersey Power. His stock certificate states that any missed dividends will be paid prior to any future common stock dividend payments.

-classified common
-preemptive common
-convertible preferred
-cumulative preferred

cumulative preferred

Another name for the fixed rate of interest attached to a bond is the:

-Yield to maturity
-Coupon rate
-Security rate

coupon rate

Which of the following accurately describes an advantage of selling bonds to raise long-term capital?

-Interest is a legal obligation.
-Face value must be repaid.
-Bondholders have voting rights.
-Interest is a tax-deductible expense.

interest is a tax-deductible expense

The investor will receive the face value of the bond on the ________ date.

-purchase anniversary
-annual interest


As your elderly Uncle Bill approaches retirement, he asks for your advice for a safe place to invest several thousand dollars. He wants to receive some kind of payment each year for investing his money without a great deal of risk. You explain:

-Yankee bonds are certain not to default.
-common stock always pays quarterly dividends.
-junk bonds do not pay annual interest.
-treasury and top-grade corporate bonds pay interest two times each year.

treasury and top-grade corporate bonds pay interest two times each year.

After owning a Cordero Company bond for five years, Gabrielle exercised an option that allowed her to exchange her bond for 20 shares of the company stock. Gabrielle owned a:

-callable bond.
-revenue bond.
-junk bond.
-convertible bond.

convertible bond

The interest rate on a AAA rated government treasury bond is 3.5%. A secured corporate bond is likely to pay:

-The same as the treasury bond.
-Less than the treasury bond.
-More than the treasury bond.
-The same as the treasury bond, but with a shorter maturity date.

more than the treasury bond

Investors buying bonds and corporations issuing bonds (both) accept investment risk. Which of the following statements is most correct when it comes to the investment that one or the other party accepts?

-If investor Joe is holding a bond that pays 5% and market interest rates on similar bonds go down, Joe must hold the bond until maturity because if he were to sell it today, he would have to sell it at a discount.
-If investor Joe is holding a bond that pays 5% and market interest rates on similar bonds go down, Joe’s bond is now worth more than its face value, and if he needed to sell it on the secondary market, he could probably sell it at a premium.
-If investor Joe is holding a bond that pays 5% and interest rates on similar bonds go up, Joe stands to gain more than the face value of the bond if he were to sell it on the secondary market today.
-If XYZ Corporation wants to issue bonds to pay for an expansion project, and analysts predict that interest rates are projected to climb over the next few years, it is to the corporation’s advantage to wait until next year to issue the bonds.

If investor Joe is holding a bond that pays 5% and market interest rates on similar bonds go down, Joe’s bond is now worth more than its face value, and if he needed to sell it on the secondary market, he could probably sell it at a premium. MORE: Investors and corporations are on the opposite side of the interest rate risk scenario. If corporations issued a bond carrying an interest rate of 7%, and interest rates go down, they are paying more in interest rates than they would be if they waited for interest rates to drop. Investors are thrilled because they made a good investment. Other investors who invest in a similar investment will make less.

Regis and Kelly plan to invest in corporate securities. While Regis plans to retire next year on his 65th birthday, Kelly is celebrating her first job after college and her 22nd birthday. Which of the two investors would be well advised to choose a more conservative investment strategy?

-A conservative investment strategy is always the best strategy.
-It depends on whether they want to invest in stocks or bonds.


Alejandro relies on his stockbroker to execute his buy and sell orders for shares of stock in different companies. He has found that the process of buying or selling a share of stock on a major stock exchange normally takes:



An investor who purchases stock in a company becomes a(n):

-blue chip master.


The market price of a share of common stock depends heavily on:

-the number of stocks traded on the New York Stock Exchange.
-the default rate on U.S. government bonds.
-the overall performance of the company.
-the relative value of the U.S. dollar compared to the euro.

the overall performance of the company

When an investor sells a security for more than the purchase price, the investor earns a(n):

-dividend payment.
-appreciated interest receipt.
-corporate benefit.
-capital gain.

capital gain

The term ________ refers to investors who anticipate increases in stock prices.



Which of the following securities are historically considered high quality and usually pay dividends?

-Dollar stocks
-Growth stocks
-Preferred stocks
-Blue chip stocks

blue chip stocks

An investor places a ________ order with a broker to sell a stock at the best price available at that time.



If a stock’s closing price for the day is 32.47, the stock’s price in U.S. dollars would be:

-$32 plus a $.47 commission.
-in between a low of $32 and a high of $47.


________ stocks represent investments in emerging fields that have the potential to realize better than average increases in the stock’s prices.

-Blue chip


Which of the following is not an odd lot of stock?


3000 "An odd lot denotes any trade of less than 100 shares."

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.

-blue chip

blue chip

Buying stock on margin allows an investor to borrow funds from the brokerage company as part of the transaction. This __________ the potential return to the investor and ___________ the risk.

-increases; increases
-increases; decreases
-decreases; increases
-decreases; decreases

increases; increases

After buying 100 shares of common stock in the It’s All Good Corporation for $20 per share, Popeye later sold the same shares for $25 per share. Popeye’s capital gain on the total transaction is:



Jason instructed his stockbroker to buy 100 shares of Utah Industries common stock if and when the price falls to $25 per share. Jason placed a(n):

-market order.
-odd-lot order.
-limit order.
-contingent order.

limit order

Idle Time Gaming announced a 2 for 1 common stock split for investors on record. Which of the following will occur?

-The stock price will increase to reflect the value of 2 shares for every one share.
-Each share will be worth ½ of its previous value, but shareholders total value of Idle Time Gaming will remain the same.
-The value of Idle Time common stock will remain the same, for a short period of time, and then experience a guaranteed growth spurt.
-The shareholders will sell their shares immediately after the split and take their capital gains, as well as provide others an opportunity to invest in Idle Time Gaming.

Each share will be worth ½ of its previous value, but shareholders total value of Idle Time Gaming will remain the same.

Before the announcement of a three-for-one stock split, the selling price for a share of stock in Olympia Oil Refineries was $150 per share. Immediately after the stock split, the probable price per share is:



Laura read about Living Longer Biotechnology, Inc. and wants to buy 100 common shares at $45 per share. Unfortunately, she only has $3000 available to invest. One risky strategy Laura could consider is:

-buying on margin.
-buying from the dealer’s account.
-arranging for security funding.
-Leveraging her future professional earnings.

buying on margin

U.S. government bonds are considered a secure investment because:

-the interest rates are protected from inflation and tied to the consumer price index.
-they are backed by the full faith and credit of the federal government.
-the interest rates are higher than for corporate bonds of equal duration.
-if they are lost or stolen the federal government promises to replace them when the proof of purchase is provided.

they are backed by the full faith and credit of the federal government

Erica invests $5,000 in five ABC Corporation bonds that mature in ten years. Unexpectedly just the week after she invests, she has the opportunity to work abroad, which she has always wanted to do, but she needs cash. Which of the following most likely applies to Erica?

-She can immediately sell the bonds for $5000 plus interest for the week.
-She is out of luck. She must keep the bonds for the full ten years.
-She may immediately sell the bonds but it is unclear how much money they will sell for.
-She will be able to sell them immediately on the primary market.

she may immediately sell the bonds but it is unclear how much money they will sell for

Which of the following describes a benefit enjoyed by investors in mutual funds?

-Guaranteed dividend payments are received annually.
-Investment risk is eliminated.
-Investors buy an ownership interest in many different companies.
-Investors exercise managerial authority in many different companies.

investors buy an ownership interest in many different companies

New investors may want to consider _______ funds, which are mutual funds that invest in one particular kind of stock or a particular kind of bond, or even stocks that are representative of the entire market.



Buying several different investment alternatives to spread the risk helps an investor achieve:

-lower rates of return.
-lower commission fees.


____________ means that the mutual fund company does not show a fee or commission for investing in the fund.

-Front load
-Back load
-Double load
-No load

no load

During Ben’s lunch break, he logged on to his computer to find the mutual fund he wanted to buy. As he made his way around several websites, he realized that the NAV (net asset value) quoted was yesterday’s close. His shares would be purchased tomorrow, with today’s closing price. Looking over his shoulder, one of his coworkers suggested that he look into _________ because they are similar to mutual funds, but could be traded during the entire trading day, just like stocks.

-Index funds
-Reality funds
-Exchange traded funds
-Barter funds

Exchange traded funds (ETFs)

The Securities and Exchange Commission developed ________ to halt trading in the stock market for a short time when the market has experienced a dramatic decrease in prices.

-program trading
-on-line investing
-circuit breakers
-insider trading

circuit breakers


Penny Stock is the chairperson of Pirate Recording Company Inc. She is the person responsible for the tremendous growth this company has enjoyed over the past three years. It was Penny’s intuition and clever negotiating that enabled the company to sign two very hot recording artists: Half a Dollar and N’elli. These groups have generated profits of over $25 million.

The future looks even brighter at the firm because several current and aspiring entertainers have indicated an interest in signing on with Pirate Recording. This incredible growth has delighted everyone at the company, but it has also created a major problem for Penny. Pirate Recording has never been a major player in the recording industry, primarily because of limited capital. In order to take the company to the next level Penny realizes that she will need to expand the firm’s personnel and equipment. The amount of new funds required to finance this needed expansion is $150 million. Penny has started to consult with others about how to finance this major expansion of the company.

If Pirate Recording elects to offer an IPO (Initial Public Offering), it will involve preparing full financial disclosure with the __________. The firm is advised to solicit the services of an investment banker/underwriter, who will analyze the market and determine the best price for the new issue of Pirate Recording stock. The offering will then be sold on the ___________.

-Internal Revenue Service; secondary market
-Fair Trade Commission; primary market
-Federal Trade Commission; secondary market
-Securities and Exchange Commission; primary market

Securities and Exchange Commission; primary market

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