Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Josh purchased the following shares of stock from three companies:
Name of Company
Price when Purchased
Price when Sold
Capital Gain/loss (+/-)
Cisco Systems, 100 shares
10/2007 $32.00
04/2011 $17.00
– 15.00/share
Toyota Moor, 100 shares
11/2009 $58.00
01/2010 $91.00
+ 33.00/share
Johnson & Johnson, 100 shares
03/2009 $47.50
07/2011 $67.25
+ 19.75/share
Josh’s total capital gain on these investments =
A. $37.55
B. $3775
C. $67.75
D. $6775
Feedback: Capital Gain is the positive difference between the price that you paid for the
stock, and the price that you received when you sold. Essentially, it is what you gained
on the sale. Capital Loss is the negative difference between the price you paid when you
bought the stock, and the price you received when you sold. In this particular scenario,
overall, Josh had capital gains.
Cisco Systems 100 shares X -$15.00/share = -$1500 (loss)
Toyota 100 shares X $33.00/share = 3300 (gain)
Johnson & Johnson 100 shares X $19.75/share = 1975 (gain)
Total Capital Gain $3775 (capital gain).
19-130
379. A recent publication referred to a series of bonds as “the 6s of 25”.
A. This means that they were issued in 2006, and they mature in 2025.
B. This means that any bond in this issue, whose series’ numbers end in “6” are
callable in the year 2025.
C. This means they are 25-year bonds, due on 2006.
D. This means they pay 6% interest and they mature in 2025.
380. When market interest rates increase, the selling price of existing bonds will:
A. increase.
B. decrease.
C. remain constant.
D. be less volatile.
Feedback: Bond prices generally fluctuate inversely with current market interest rates.
As interest rates go up, existing bond prices fall, because the existing bonds are paying a
fixed interest rate that is lower than the market interest rate.
381.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Abraham found a $1000 face value bond that belonged to his father. He checked
the Wall Street Journal and found the bond was currently selling for $1220. This
bond sells at a:
A. discount.
B. premium.
C. price that is overvalued.
D. primary market.
Feedback: A bond selling for more than face value is selling at a premium.
382. The risk associated with Firm A’s bond is greater than the risk of Firm B’s bond.
All other things being equal, investors would be willing to pay ________ for Firm
B’s bond.
A. less
B. more
C. the same
D. a premium
Feedback: The risk/return trade-off suggests that the greater the risk associated with a
specific security, the less investors are willing to pay for the bond, but the more they
expect in interest payments for their willingness to take the risk. Investors will invest in
a bond considered risky only if the potential expected return is sufficiently high to
counter the risk.
19-133
385. 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?
A. She can immediately sell the bonds for $5000 plus interest for the week.
B. She is out of luck. She must keep the bonds for the full ten years.
C. She may immediately sell the bonds but it is unclear how much money they will
sell for.
D. She will be able to sell them immediately on the primary market.
Feedback: Erica may sell the bonds on the secondary market. Depending upon market
interest rates, Erica stands to receive the full $5,000 or something less, or something
more.
386. An investment that pools together investors’ money in order to buy securities in
many different companies or governments is a ___________.
A. commercial fund
B. mutual fund
C. holding company
D. Public Investment Corporation
387.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
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
388. Which of the following describes a benefit enjoyed by investors in mutual funds?
A. Guaranteed dividend payments are received annually.
B. Investment risk is eliminated.
C. Investors buy an ownership interest in many different companies.
D. Investors exercise managerial authority in many different companies.
389. 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.
A. international
B. index
C. global
D. relief
