Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
152. A stock split refers to buying a share of stock at a discounted price if full payment is
made at the time of purchase.
Feedback: When companies find their stock price has appreciated sufficiently high such that
it may be out of reach for many investors, the Board of Directors will announce a stock split,
where investors on record of holding the stock will receive two or more shares of stock for
each one share that they currently hold. The dollar value of the investor’s holdings in this
stock stays the same.
153. A round lot refers to the purchase of 100 shares of stock in the same company in a
single transaction.
Feedback: Brokers prefer that investors buy and sell stock in round lots of 100 shares each.
Often times, investors, though, will want to buy odd lots. It is harder to find a buyer or seller
for an odd lot of stock.
154. Investing in common stock can give an individual the opportunity to participate in the
success or failure of a corporation.
Feedback: As a part owner, common stockholders will benefit from the profitable operations
of a corporation. However, the flip side of that scenario is also true. A stockholder of a
corporation that suffers a financial setback will experience a decrease in the stock value and
lower dividends.
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161. Ken owns 100 shares in XYZ Company, currently selling for $60 per share. His stock
split yesterday 3-for-1. The number of shares that Ken owns has tripled.
Feedback: The value of Ken’s stock has, theoretically, remained unchanged. A 3-for-1 stock
split would likely decrease the market value of each share to $20. Ken has tripled his number
of shares; however, they are worth proportionately less per share.
162. 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.
Feedback: Buying on margin involves borrowing some of the stock purchase cost from the
brokerage firm. If the investor’s account goes down in market value, the broker will issue a
margin call requiring the investor to come up with more money to cover the losses the stock
has suffered. Margin calls require an investor to repay a significant portion of the loss within
days or even hours.
163. For investors who desire the least possible risk, a share of stock in an established
corporation provides the safest investment.
164.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
The interest earned on municipal bonds is often tax-free at the state level.
165. From an investor’s point of view, corporate bonds offer less risk than government
bonds.
166. Corporate bonds provide investors the option of reselling the bond back to the issuing
corporation at any time during the life of the bond.
167. A corporate bond provides the owner with the right to sell the bond to other investors at
any time during the life of the bond.
168. Unlike stocks, for selling purposes, bond prices remain stable over the life of the bond.
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177. Jennifer prefers corporate bonds as an investment option because investors always
receive the face value of the bond whenever it is sold.
Feedback: If Jennifer holds the bond until its maturity, she is assured of receiving the face
value. However, if she sells her bonds to another investor prior to maturity, she is not
guaranteed to get the face value of the bond.
178. A bond offering description reads: “6s of 2015.” This means the bond pays 3% interest
semi-annually and matures in 2015.
Feedback: “6s” is an abbreviation for 6 percent interest bonds. This bond pays annual interest
of 6%, and it matures in 2015. It will pay semi-annual interest of 3%.
179.
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6.5% annually. They may be willing to pay something less than $1000 for Andrew’s bond.
180. Demetrius recently bought a bond with face value of $1000. He paid $1,150 for the
bond. Demetrius’ bond investment undoubtedly pays a higher interest rate than the going
rate for similar bonds currently out on the market.
Feedback: Demetrius is buying a bond on the secondary market. In order for Demetrius to
pay more than the face value for the bond, the future stream of interest payments the bond
promises to pay are greater in value than the going interest rate for similar bonds. New issue
bonds of similar quality hold a fixed interest rate that is less than the interest rate on
Demetrius’ bond.
181.
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As market interest rates increase, the selling price for existing bonds also increases.
Feedback: The selling price of bonds will move in the direction opposite of interest rates.
Existing bonds are carrying a coupon rate (fixed interest rate) that is less than the current rate
(the increased rate). On the secondary market, existing bonds will be sold at a discount.
182. A mutual fund pools investors’ money and then buys stocks and bonds in many
companies in accordance with the purpose of the fund.
183. A mutual fund’s purpose is rapid investment growth not to provide diversification for
investors.
184. When investing in mutual funds, the investor will buy shares of a fund that consists of
stocks or bonds, the fund will hold shares of many companies.
185.
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U.S. investors have invested $11 trillion in mutual funds.
186. On a mutual fund quotation, the Net Asset Value (NAV) = the number of persons who
are investing in the fund.
187. We calculate the mutual fund’s NAV (Net Asset Value) by dividing the total market
value of the fund, by the number of shared outstanding.
188. Small investors can spread the risk of investing by purchasing shares of mutual funds or
ETFs.
189.
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Most mutual funds provide investors an opportunity to buy shares directly without using
a stockbroker.
190. A mutual fund that carries a load will require the investor to pay a commission, only if
the fund appreciates in price.
191. A no-load mutual fund charges no commission fees to buy or sell its shares.
192. When comparing the investments of different mutual funds, little variation in the risk
level exists.
193.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Index funds invest in one specific type of investment, for example, an index fund might
only invest in income stocks, companies whose stocks pay dividends.
194. Exchange traded funds are like mutual funds because these funds permit the investor to
buy shares of a collection of several stocks or shares of a collection of stocks and bonds,
but, unlike mutual funds, they are traded during the day on the exchanges.
195. The investor always pays a fee when purchasing a share of a mutual fund.
Feedback: Many mutual funds are no-load funds, which indicate that these shares can be
bought without paying a commission to a salesperson or a fee to enter the fund.
196. Mutual funds offer small investors an opportunity to diversify their investments.
Feedback: The benefit of a mutual fund is the opportunity to buy shares of a single mutual
fund and thereby share in the ownership of many different companies. Ownership in all of the
different companies that a mutual fund offers might not be affordable for a small individual
investor.
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200. Last year Alexis landed her first professional job after graduating from college. She also
started her first investment account. Having met with several brokers before choosing
someone to work with, Alexis wanted to make certain that her investment choices would
provide for long-term growth, yet satisfy her concern for diversification. The person who
won her business prepared an asset allocation plan that would start her account by
investing in several index funds. Her adviser has offered her a sound way to combine the
concern for diversification since index funds are a sensible way for Alexis to start.
Feedback: Index funds are indexed to the total stock market. They usually consist of a wide
variety of stock issues whose risk balances each other out. Although index funds cannot
protect the investor from market risk (the market in general), it can help protect you from the
specific risk that accompanies the stocks of specific industries.
201. Every time someone sells a stock believing the price has reached its maximum,
someone else buys it believing the price will go still higher.
202. The Dow Jones Industrial Average reflects the daily average price of all the stocks
traded on the New York Stock Exchange.
203.
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The Dow Jones Industrial Average utilizes the prices of the same 30 companies’ stocks
each year to ensure consistency.
204. The Dow Jones Industrial Average provides us with a sense of direction (up or down) of
the overall stock market.
205. The NASDAQ reports its own average that investors follow to observe trends in the
market.
206. “Black Tuesday” refers to the stock market crash that occurred in October 1987.
207.
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Program trading refers to computer trading software that automatically sells stocks
when their price dips to a predetermined level.
208. Trading curbs motivate traders to utilize their computerized programs to reduce market
volatility.
209. Stock market “circuit breakers” stop stock trading for a short time when the stock
market experiences a significant drop in stock values.
210. Many stock market analysts suggest that program trading was a big cause of the stock
market crash of 1987.
211.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
The largest one-day drop in the stock market occurred in 1987 – a 22% drop.
212. Changes in investor trust and confidence strongly influence stock market prices.
213. The Dow Jones Industrial Average reflects the average of the eleven largest
corporations traded on the New York Stock Exchange as originally selected by Charles
Dow.
Feedback: The Dow Jones Industrial Average was broadened in 1982 to include 30 stocks.
New stocks are substituted when deemed appropriate.
214. One of the criticisms of the Dow Jones Industrial Average is that it does not include
enough stocks to provide a good representation of the entire stock market.
Feedback: Some analysts prefer to watch other indexes such as the Standard & Poor’s 500, or
the NASDAQ average.
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217. Corporations benefit from securities markets primarily by:
A. creating an efficient mechanism to invest in stocks and bonds.
B. obtaining the capital they need to finance their operations.
C. securing memberships on various stock exchanges.
D. participating in the mutual funds of investment bankers.
218. Private investors benefit from securities markets primarily by:
A. having a place to buy and sell stocks and bonds.
B. obtaining the capital they need to finance their operations.
C. securing memberships on various stock exchanges.
D. participating in the primary markets of investment bankers.
219. A(n) ________ refers to the first public offering of a corporation’s stock.
A. primary market offer (PMO)
B. initial securities proposal (ISP)
C. initial public offering (IPO)
D. primary public sale (PPS)