Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-138
398. Mutual fund investors will note that:
A. Fund managers have not yet added foreign securities into their funds.
B. Mutual funds cannot be purchased through a traditional brokerage house.
C. Loads can vary from one mutual fund to another. The fund manger dictates the
commissions and fees.
D. By law, mutual funds can no longer charge loads.
Feedback: Different mutual funds have different fees. Funds can contain loads, meaning
there are additional fees and commissions, either on the front-end or back-end – to buy
or sell the shares. No load means that any fees are already imbedded into the NAV (net
asset value) of the fund.
399. The initial cost of investing in mutual funds depends in part on:
A. whether the fund is a load or no-load fund.
B. the risk tolerance of the companies in the fund.
C. the tax rate on capital gains.
D. the imposition of government tariffs.
Feedback: While there are fees or charges imposed by all mutual funds, a load fund will
charge a commission to buy or sell shares in the fund.
400.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Yolanda has an ownership interest in many different companies, yet she owns the
shares of stock of just one organization. Yolanda undoubtedly owns shares in a(n):
A. investment trust.
B. security account.
C. options association.
D. mutual fund.
Feedback: A mutual fund is an investment group that buys stocks and bonds of many
different organizations and then sells shares in the investment group to the public.
401. Gerald, a recent graduate of a community college, is about to make his first
investment in the stock market. Which of the following would be a cautious way for
Gerald to start investing?
A. Future contracts in oil
B. Index funds
C. Short-selling technology stocks
D. Commodity market transactions in precious metals
Feedback: Many investment advisors recommend young investors buy a few index funds
and diversify those investments among different kinds of stock. An index fund is a fund
that invests in a certain kind of stock. The most recommended is an index fund that
covers the whole stock market.
19-144
412. Daily reporting of the Dow Jones Industrial Average serves to:
A. show the direction of the market over time.
B. distort short-term fluctuations for the financial community.
C. identify the beginning of a recession in the economy.
D. disclose the average price of a share of stock on the major exchanges.
Feedback: The generally accepted assumption is that the 30-company average gives an
indication of the direction of the market over time.
413. The purpose of the SEC’s circuit breakers rule is to:
A. prevent market disruption caused by a communication malfunction.
B. halt trading for a short time following a dramatic drop in stock prices.
C. allow floor traders to specialize in trading the securities of specific industries.
D. prevent individuals from profiting from information not available to the general
public.
Feedback: Following the precipitous drop of market value in 1987 (brought on by
program trading), the SEC developed circuit breaker rules to stop trading for a period
of time to give investors a chance to assess the market after a significant drop in prices.
If prices continue to fall, additional pauses in trading will occur.
414.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
In reviewing the firms whose stocks comprise the Dow Jones Industrial Average,
we discover:
A. The same 30 stocks have been used since the inception of the indicator.
B. Different companies are used each year.
C. These stocks change periodically as deemed appropriate.
D. There is an even mix between big and small companies.
Feedback: New stocks are substituted when the Dow Jones Corporation believes that it
is needed to reflect a change in the structure of the market.
19-146
415. Bonds represent a major source of long-term financing. What is a bond? Explain the
major elements that must be in a bond issue.
416.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-147
Explain the major advantages and disadvantages of issuing stock as a source of long-
term financing.
417.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-148
Discuss the role of investment bankers in the securities markets.
418.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-149
Explain the differences between preferred stock and common stock.
419.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19-150
The risk/return trade-off is inherent in any investment strategy. What are the five key
criteria investors should consider when selecting investment options?
420.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Describe four different types of common stock that an investor may consider, depending
upon the investor’s strategy and risk tolerance.
19-152
421. One funding source under consideration is the issuance of $150 million worth of
corporate bonds. A financial advisor predicted that in order for the fast growing
company to attract investors, it would have to put up collateral to back-up the bond
issue. The type of bond the financial advisor suggests is:
A. debenture bonds.
B. asset bonds.
C. secured bonds.
D. preferred bonds.
Feedback: Secured bonds are bonds that are backed by some tangible asset that is pledged to
the bondholder if interest is not paid or principal is not paid back.
