Chapter 19 1 Which The Following Undermines Less Argumenta The

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

Chapter 19: Understanding Securities and Investments

1. Which market handles the buying and selling of new stocks and bonds by business firms or

governments?

a. The primary securities market

b. The tertiary security market

c. The over-the-counter market

d. The commodities market

e. The secondary securities market

Difficulty: 2 Page-Reference: 604

Question ID: 19-1-01 Skill: Knowledge

Objective: 19.1

2. Why are stocks and bonds called “securities”?

a. Because investors have financial security by owning them

b. Because they are used to secure sales revenue for companies

c. Because they represent secured, or asset-based, claims on the part of investors

d. Because they are guaranteed by the Government of Canada

e. All of these are reasons

Difficulty: 2 Page-Reference: 604

Question ID: 19-1-02 Skill: Comprehension

Objective: 19.1

3. Which of the following business firms serve as financial specialists in issuing new securities?

a. Speculators

b. Venture capitalists

c. Financial managers

d. Institutional investors

e. Investment bankers

Difficulty: 1 Page-Reference: 604

Question ID: 19-1-03 Skill: Knowledge

Objective: 19.1

4. New securities are traded in the ______________, while existing securities are traded in the

_____________.

a. primary securities market; secondary securities market

b. equity market; debt market

c. debt market; equity market

d. secondary securities market; primary securities market

e. common stock market; preferred stock market

Difficulty: 2 Page-Reference: 604

Question ID: 19-1-04 Skill: Knowledge

Objective: 19.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

5. When an investment bank “underwrites” a new security, it is

a. assessing the risk of that new security.

b. privately supporting the issuing organization.

c. buying the new security.

d. co-signing the bonds.

e. attesting to the good investment potential of the new security.

Difficulty: 2 Page-Reference: 604

Question ID: 19-1-05 Skill: Comprehension

Objective: 19.1

6. What is the meaning of par value when discussing common stock?

a. The current price of a share of stock

b. The selling price of the previous day’s last transactions involving that stock

c. The average price paid on the previous day’s trades

d. The face value of a share of common stock

e. One dollar

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-06 Skill: Knowledge

Objective: 19.2

7. Corporation B had sales revenue last year of $20 million, operating expenses of $16 million, and net

profit of $4 million. There are 2 million shares of stock oustanding. What is the par value of the company’s

stock?

a. $5

b. $4.83

c. $4

d. $10

e. The par value cannot be determined with the information given.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-07 Skill: Application

Objective: 19.2

8. Suppose you were interested in purchasing a printing company. This might be an attractive target if

the ________ value of the stock were less than the ________ value.

a. book; market

b. par; market

c. book; par

d. market; book

e. market; par

Difficulty: 3 Page-Reference: 605

Question ID: 19-1-08 Skill: Comprehension

Objective: 19.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

9. Which of the following is correct with respect to the value of a share of common stock?

a. The par value is generally the best indicator of the real value of a share of stock.

b. The market value of a share of stock is determined by objective, financial considerations.

c. The book value of a share of stock is calculated by dividing shareholders’ equity by the current

market price of the stock.

d. A company’s market capitalization is determined by multiplying the number of a company’s

outstanding shares times the market value of each share.

e. By law, subjective factors like rumours and stockbroker recommendations are not allowed to

influence the market price of a share of stock.

Difficulty: 1 Page-Reference: 605

Question ID: 19-1-09 Skill: Comprehension

Objective: 19.2

10. Which of the following represents a stock’s real value?

a. Profitability ratio

b. Market value

c. Price earnings ratio

d. Par value

e. Book value

Difficulty: 1 Page-Reference: 605

Question ID: 19-1-10 Skill: Knowledge

Objective: 19.2

11. Mega Computer issued stock with a face value of one cent and then sold the shares to the public

for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each.

What is the par value of the stock?

a. $20.00

b. $25.00

c. $5.00

d. $19.99

e. $0.01

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-11 Skill: Application

Objective: 19.2

12. Mega Computer issued stock with a face value of one cent and then sold the shares to the public

for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each.

What is the market value of the stock?

a. $50.00

b. $25.00

c. $20.00

d. $19.99

e. $0.01

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-12 Skill: Application

Objective: 19.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

13. Mega Computer issued stock with a face value of one cent and then sold the shares to the public

for $20.00 each. Ted bought 10 shares at that price. Today, Ted sold his shares to David for $25.00 each.

What are Ted’s capital gains?

a. $19.99

b. $20.00

c. $25.00

d. $50.00

e. $0.01

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-13 Skill: Application

Objective: 19.2

14. The market value of a share of stock is determined by

a. dividing total assets by the number of outstanding shares.

b. stockbrokers‘ opinions and ratings.

c. dividing total shareholders’ equity by the number of outstanding shares.

d. what buyers are willing to pay for the shares.

e. dividing net profit by the number of outstanding shares.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-14 Skill: Knowledge

Objective: 19.2

15. Investors are concerned primarily with the ________ of a stock.

a. earnings value

b. par value

c. resale value

d. market value

e. book value

Difficulty: 1 Page-Reference: 605

Question ID: 19-1-15 Skill: Knowledge

Objective: 19.2

16. Regarding the issue of investor relations, it is correct to say that

a. investor relations activities do not have much impact on the price of a firm’s shares.

b. investor relations may include inviting financial analysts to one of the operating sites of a firm.

c. investor relations is a relatively new idea that began to be practised in the late 1990s.

d. investor relations are not that important to a firm’s success.

e. investor relations targets individual buyers of corporate stock rather than brokers and financial

analysts.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-16 Skill: Comprehension

Objective: 19.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

17. Deprenyl Research Ltd. makes a drug that is used to control Parkinson’s disease. When the

company convinced a Wall Street health care analyst to recommend the company’s stock to his clients,

this was an example of

a. a prospectus.

b. publicity.

c. insider trading.

d. investor relations.

e. margin trading.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-17 Skill: Comprehension

Objective: 19.2

18. The book value of a company’s common stock is determined by

a. what buyers are willing to invest in a firm.

b. dividing total assets by the number of outstanding shares.

c. dividing total shareholders’ equity by the number of outstanding shares.

d. dividing net profit by the number of outstanding shares.

e. stockbrokers‘ opinions and ratings.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-18 Skill: Knowledge

Objective: 19.2

19. Mega Computer’s financial statements show 1000 shares of common stock with a par value of

$10 000, retained earnings of $20 000, additional paid in capital of $10 000, and long-term debt of $30

000. What is the book value of a share of Mega’s stock?

a. $70.00

b. $20.00

c. $40.00

d. $30.00

e. $50.00

Difficulty: 3 Page-Reference: 605

Question ID: 19-1-19 Skill: Application

Objective: 19.2

20. Mega Computer’s financial statements show 1000 shares of common stock with a par value of

$10 000, retained earnings of $20 000, additional paid in capital of $10 000, and long-term debt of $30

000. What is the market value of a share of Mega’s stock?

a. $70.00

b. $20.00

c. $40.00

d. $30.00

e. It is not possible to tell from the information given.

Difficulty: 3 Page-Reference: 605

Question ID: 19-1-20 Skill: Application

Objective: 19.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

21. What is an advantage of purchasing common stock?

a. Stocks with high interest rates are desirable for individuals living on a fixed income.

b. Common stock pays out interest at regular intervals.

c. Common stock has first claim on dividends ahead of preferred stock.

d. Common stock offers high growth potential for investors.

e. Common stock is less risky than bonds.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-21 Skill: Comprehension

Objective: 19.2

22. Common stock issued by a well-established company with a sound financial history and a stable

pattern of dividend payouts is a(n)

a. preferred stock.

b. market leader stock.

c. blue chip stock.

d. blue sky stock.

e. IPO.

Difficulty: 1 Page-Reference: 605

Question ID: 19-1-22 Skill: Knowledge

Objective: 19.2

23. Which of the following is true with regard to preferred stock?

a. Dividends must be paid each year on preferred stock.

b. The growth potential of preferred stock is limited due to its fixed dividend.

c. Preferred stock is more risky than common stock.

d. The usual par value of a preferred share is $1.

e. It cannot be callable.

Difficulty: 3 Page-Reference: 606

Question ID: 19-1-23 Skill: Comprehension

Objective: 19.2

24. The market value of a company’s stock, computed by multiplying the number of a company’s

outstanding shares times the value of each share, is called ________.

a. net book value

b. shareholder’s equity

c. equity

d. goodwill

e. market capitalization

Difficulty: 1 Page-Reference: 605

Question ID: 19-1-24 Skill: Knowledge

Objective: 19.2

25. Dennis computes the market capitalization of the company he works for by

a. adding up all the fixed assets the company owns and subtracting the money still owed on those

fixed assets.

b. multiplying the market price of one share of the company’s stock by the total number of shares

outstanding.

c. adding up all the funds the company has received through selling its stock.

d. adding up the book value, par value, and market value of the company’s stock.

e. adding up the company’s assets and subtracting its liabilities.

Difficulty: 1 Page-Reference: 605

Question ID: 19-1-25 Skill: Application

Objective: 19.2

26. Which of the following statements is correct with regard to market capitalization?

a. There is considerable stability in the market capitalization of companies from year to year.

b. Market capitalization is computed by dividing owners’ equity by the number of outstanding shares.

c. Currently, in Canada, the companies with the highest market capitalization are financial institutions

or resource companies.

d. There is general agreement that market capitalization really doesn’t tell us very much about the real

value of a company.

e. All of these statements are correct.

Difficulty: 2 Page-Reference: 606

Question ID: 19-1-26 Skill: Comprehension

Objective: 19.2

27. A cumulative preferred stock with a $100 par value and 6% dividend is currently trading on the

market at $110 per share. What is the amount of the dividend the holder is entitled to receive each year?

a. $66

b. 6% of the company’s net profit

c. $6% of the total book value of preferred shares

d. $6

e. $0

Difficulty: 1 Page-Reference: 606

Question ID: 19-1-27 Skill: Application

Objective: 19.2

28. What is cumulative preferred stock?

a. By law, the preferred stock cannot pay dividends out every year.

b. Preferred shareholders vote whereas common shareholders do not.

c. This stock’s dividend payments are automatically reinvested into the firm, thus allowing for

compounding the return on investment.

d. If dividend payments are missed in one year, they are paid later and are paid before any common

stock dividends.

e. Cumulative preferred shareholders have the right to purchase shares of a new stock issue before it

is offered to the general public.

Difficulty: 3 Page-Reference: 606

Question ID: 19-1-28 Skill: Comprehension

Objective: 19.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

29. Bob’s Barbecue has issued preferred stock that is callable. Which of the following is possible with

this stock?

a. The investors can make Bob buy the stock back if it falls to a given price.

b. The investors can choose to receive interest payments instead of dividends.

c. The investors can exchange the preferred stock for common stock.

d. Bob can make the investors trade their preferred stock for common stock.

e. Bob can make the investors sell the stock back to the company.

Difficulty: 2 Page-Reference: 606

Question ID: 19-1-29 Skill: Application

Objective: 19.2

30. A ________ is an organization of individuals formed to provide an institutional setting where

stocks can be bought and sold.

a. credit union

b. commodity exchange

c. stock exchange

d. bank

e. market

Difficulty: 1 Page-Reference: 606

Question ID: 19-1-30 Skill: Knowledge

Objective: 19.2

31. Online trading is becoming increasingly popular because

a. experts manage the traders’ portfolios.

b. traders do not need to use a broker to buy and sell stocks.

c. online brokerages provide investment advice.

d. it is facilitated by convenient access to the internet.

e. all of these are reasons.

Difficulty: 1 Page-Reference: 607

Question ID: 19-1-31 Skill: Comprehension

Objective: 19.2

32. Which of the following is correct with respect to stock exchanges?

a. All of the people working on the trading floor are employed by the exchange.

b. Anyone is allowed to trade on the exchange.

c. The general public is allowed to participate in the actual buying and selling of stock on the exchange

floor.

d. Memberships on a stock exchange cannot be bought or sold.

e. Most are non-profit organizations.

Difficulty: 3 Page-Reference: 606

Question ID: 19-1-32 Skill: Comprehension

Objective: 19.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

33. ________buy and sell stocks and bonds on stock exchanges for investors.

a. Finance companies

b. Chartered banks

c. Pension services

d. Credit unions

e. Brokers

Difficulty: 1 Page-Reference: 607

Question ID: 19-1-33 Skill: Knowledge

Objective: 19.2

34. A(n) ________ is an individual or organization who receives and executes buy and sell orders on

behalf of other people in return for commissions.

a. commodities market

b. broker

c. stock exchange

d. agent

e. investment bank

Difficulty: 1 Page-Reference: 607

Question ID: 19-1-34 Skill: Knowledge

Objective: 19.2

35. In order for a security to be listed on the Toronto Stock Exchange, the issuing corporation must

a. have at least 200 employees.

b. have paid a fee.

c. have a market capitalization of at least $1 million.

d. be making a profit.

e. provide physical goods, not services.

Difficulty: 3 Page-Reference: 607

Question ID: 19-1-35 Skill: Comprehension

Objective: 19.2

36. Independent dealers who own the securities that they buy and sell do their trading

a. on the Toronto Stock Exchange.

b. only at par value.

c. with investors who want to hide their identity.

d. in the over-the-counter market.

e. only on foreign stock exchanges.

Difficulty: 2 Page-Reference: 609

Question ID: 19-1-36 Skill: Knowledge

Objective: 19.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

37. The world’s first electronic stock market is known as

a. the TSE.

b. the IMF.

c. AMEX.

d. NASDAQ.

e. the NYSE.

Difficulty: 2 Page-Reference: 609

Question ID: 19-1-37 Skill: Knowledge

Objective: 19.2

38. Les says that it is foolish to invest in the stock market because you can lose money. It is much

better to simply put your money in a savings account where it is safe. Laura agrees that investing is risky,

but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in

a savings account. What assumption is Les making when he makes his argument?

a. Some people do, in fact, make money by investing.

b. Interest earned on money in a savings account is the only thing that affects the value of the savings

account.

c. The typical person wants to save money instead of spending it.

d. Companies issue stock only if there is no other way to make money.

e. There are only a few companies whose stock always grows in value.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-38 Skill: Analysis

Objective: 19.2

39. Les says that it is foolish to invest in the stock market because you can lose money. It is much

better to simply put your money in a savings account where it is safe. Laura agrees that investing is risky,

but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in

a savings account. Which of the following undermines Les’s argument?

a. The value of some companies’ stocks have grown.

b. The stock market can experience a decline in its overall value.

c. The return on a savings account is not as high as the return on some stocks.

d. The interest rate earned in a savings account may be lower than the rate of inflation.

e. A minimum balance must be maintained in a savings account.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-39 Skill: Analysis

Objective: 19.2

40. Les says that it is foolish to invest in the stock market because you can lose money. It is much

better to simply put your money in a savings account where it is safe. Laura agrees that investing is risky,

but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in

a savings account. What are Les and Laura disagreeing about?

a. Whether the risk of investing is worthwhile

b. Whether savings accounts earn more interest than the return on stocks

c. Whether companies tell the truth about their financial status

d. Whether anyone can make money by investing in stocks

e. Whether investing always involves risk, or only sometimes involves risk.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-40 Skill: Analysis

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

Objective: 19.2

41. Les says that it is foolish to invest in the stock market because you can lose money. It is much

better to simply put your money in a savings account where it is safe. Laura agrees that investing is risky,

but says that even relatively low-risk investments will earn more than the low rate of interest that is paid in

a savings account. Which of the following assumptions is Laura making?

a. Inflation will be higher than the interest rate paid on a savings account.

b. Any stock will eventually go up in value, given enough time.

c. Riskier investments have more value over a long period of time.

d. If you invest in more stocks, their value will be higher.

e. The stock market will experience net growth over time.

Difficulty: 2 Page-Reference: 605

Question ID: 19-1-41 Skill: Analysis

Objective: 19.2

42. A ________ is a promise by the issuer to pay the buyer a certain amount of money at a stated

future date, usually with interest paid at regular intervals.

a. preferred stock

b. bond

c. banker’s acceptance

d. common stock

e. letter of credit

Difficulty: 1 Page-Reference: 610

Question ID: 19-1-42 Skill: Knowledge

Objective: 19.3

43. Bonds that receive poor ratings are likely to

a. be registered.

b. not be issued.

c. pay higher interest rates.

d. require more underwriting.

e. reduce the total amount issued.

Difficulty: 3 Page-Reference: 610

Question ID: 19-1-43 Skill: Knowledge

Objective: 19.3

44. At regular intervals, Harry receives a cheques from the Dow Corporation for bond interest. Harry

has _________ bonds.

a. secured

b. registered

c. bearer

d. debenture

e. callable

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-44 Skill: Comprehension

Objective: 19.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

45. Jenny clips coupons from certificates and send them to the issuer in order to receive payment.

Jenny has __________ bonds.

a. callable

b. secured

c. bearer

d. debenture

e. registered

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-45 Skill: Comprehension

Objective: 19.3

46. Issuers reduce the risk to bondholders by pledging certain assets in the event of default. These

bonds are

a. callable.

b. secured.

c. registered.

d. bearer.

e. debenture.

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-46 Skill: Knowledge

Objective: 19.3

47. Barry holds a ________ for which no specific property is pledged as collateral.

a. secured bond

b. bearer bond

c. callable bond

d. debenture

e. registered bond

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-47 Skill: Comprehension

Objective: 19.3

48. ________ are mostly used by financially strong corporations.

a. Callable bonds

b. Bearer bonds

c. Registered bonds

d. Debentures

e. Secured bonds

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-48 Skill: Knowledge

Objective: 19.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

49. The type of bonds that are said to have “inferior claims” on a corporation’s assets are

a. secured bonds.

b. debentures.

c. registered bonds.

d. callable bonds.

e. bearer bonds.

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-49 Skill: Knowledge

Objective: 19.3

50. Issuers of bonds are most likely to call them in when

a. the prevailing rate of interest exceeds that stipulated on the bonds.

b. investor confidence goes down.

c. the prevailing rate of interest is less than that stipulated on the bonds.

d. investor confidence goes up.

e. the government revises its capital gains tax law.

Difficulty: 2 Page-Reference: 611

Question ID: 19-1-50 Skill: Comprehension

Objective: 19.3

51. When a bond sells at a premium,

a. its selling price is below its redemption price.

b. its selling price is above its redemption price.

c. its price is getting into the range that is too high for most people.

d. its redemption price equals its face value.

e. its selling price equals its redemption price.

Difficulty: 2 Page-Reference: 611

Question ID: 19-1-51 Skill: Comprehension

Objective: 19.3

52. What kind of bond gives the issuer the right to redeem the bond at almost any time?

a. Municipal bonds

b. Registered bonds

c. Convertible bonds

d. Promissory bonds

e. Callable bonds

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-52 Skill: Knowledge

Objective: 19.3

53. A ________ can pay the holder in stock instead of cash.

a. derivative

b. common share

c. callable bond

d. convertible bond

e. preferred share

Difficulty: 1 Page-Reference: 611

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

Question ID: 19-1-53 Skill: Knowledge

Objective: 19.3

54. Janet holds a bond that permits the issuing firm to retire portions of the bond issue at different

predetermined dates. Janet is holding a ______bond.

a. municipal

b. serial

c. secured

d. callable

e. convertible

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-54 Skill: Comprehension

Objective: 19.3

55. What is an advantage of issuing a bond with a sinking fund provision?

a. This provision offers greater security to an investor because funds to retire the bond issue are set

aside each year into the sinking fund.

b. The bonds may be converted to a specified number of shares of common stock at the firm’s

convenience.

c. The firm has the right to call in the outstanding bonds at any time and thus “sink” the bond issue.

d. The firm can decide to redeem the fund at any time.

e. The firm may retire portions of the bond issue at different predetermined dates.

Difficulty: 2 Page-Reference: 611

Question ID: 19-1-55 Skill: Comprehension

Objective: 19.3

56. When interest rates move up, bond prices tend to

a. move down.

b. stay about the same.

c. move up.

d. move up, but only if the company is making a profit.

e. there is no general pattern of movement.

Difficulty: 2 Page-Reference: 611

Question ID: 19-1-56 Skill: Comprehension

Objective: 19.3

57. In practical terms, what is the difference between registered bonds and bearer bonds?

a. Registered bonds have to be registered with the Government of Canada, but bearer bonds do

not.

b. Registered bonds generally pay lower rates of interest than bearer bonds.

c. Registered bondholders automatically receive interest cheques, but holders of bearer bonds have to

clip coupons and send them to the company.

d. Registered bonds have lower financial risk than bearer bonds.

e. There is really no practical difference between registered and bearer bonds.

Difficulty: 1 Page-Reference: 611

Question ID: 19-1-57 Skill: Comprehension

Objective: 19.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

58. The bonds that are issued to finance schools, transportation, and airports are called

a. government bonds.

b. public bonds.

c. private bonds.

d. municipal bonds.

e. debentures.

Difficulty: 1 Page-Reference: 612

Question ID: 19-1-58 Skill: Knowledge

Objective: 19.3

59. Which of the following statements is correct with respect to bonds?

a. Nearly all secondary trading of bonds occurs in the over–the-counter market.

b. Over the years, bonds have become steadily less important as a source of long-term funds for

corporations.

c. From an investor’s perspective, debentures are generally a better investment than bearer bonds.

d. When an investor hears that a bond has a sinking fund, that is a sign that the company is in financial

trouble.

e. All of these statements are correct.

Difficulty: 1 Page-Reference: 612

Question ID: 19-1-59 Skill: Comprehension

Objective: 19.3

60. What is a mutual fund?

a. A mutual fund is a pool of funds established by corporate financial managers to provide for short–

term business loans.

b. A mutual fund is a loan to the federal government made by a business firm.

c. Investors pool resources from individuals and business firms to purchase a portfolio of stocks,

bonds, and short-term securities.

d. A mutual fund consists of money raised by selling a share of ownership in a business firm.

e. A mutual fund is a product sold by mutual life companies.

Difficulty: 2 Page-Reference: 613

Question ID: 19-1-60 Skill: Knowledge

Objective: 19.4

61. Exchange-traded funds

a. can only be traded by individuals who are members of a stock exchange.

b. can be traded only in the morning hours.

c. allow individual investors to exchange shares of mutual funds that they hold.

d. are priced only at the end of the day.

e. have lower operating expenses than mutual funds.

Difficulty: 3 Page-Reference: 614

Question ID: 19-1-61 Skill: Knowledge

Objective: 19.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

62. ________ would be most likely for a mutual fund with a “safety” strategy.

a. Commodities futures

b. Stocks of mining companies

c. Stocks of new companies

d. Treasury bills

e. Common stocks with good dividend paying records

Difficulty: 2 Page-Reference: 613

Question ID: 19-1-62 Skill: Comprehension

Objective: 19.4

63. Miklos has a mutual fund that includes long-term municipal bonds, corporate bonds, and common

stocks with good dividend-paying records. Miklos’ fund is emphasizing

a. growth.

b. stability.

c. aggressive growth.

d. high current income.

e. safety.

Difficulty: 2 Page-Reference: 613

Question ID: 19-1-63 Skill: Comprehension

Objective: 19.4

64. Mike owns a mutual fund that includes a balance of bonds, preferred stocks, and common stocks,

especially the common stocks of established firms. His mutual fund is emphasizing

a. aggressive growth.

b. growth.

c. safety.

d. stability.

e. high current income.

Difficulty: 2 Page-Reference: 613

Question ID: 19-1-64 Skill: Comprehension

Objective: 19.4

65. Jan owns a mutual fund that invests in new companies and even troubled companies and other

high-risk securities. Jan’s mutual fund is emphasizing

a. aggressive growth.

b. stability.

c. high current income.

d. growth.

e. safety.

Difficulty: 1 Page-Reference: 613

Question ID: 19-1-65 Skill: Comprehension

Objective: 19.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

66. Don has an agreement to purchase a specified amount of a commodity at a given price on a set

future date. Don has a

a. load mutual fund.

b. debenture.

c. callable bond.

d. futures contract.

e. no-load mutual fund.

Difficulty: 1 Page-Reference: 614

Question ID: 19-1-66 Skill: Comprehension

Objective: 19.4

67. ________ are private pools of money that try to give investors a positive return regardless of

stock market performance, and often engage in practices like short-selling and leveraging.

a. Mutual funds

b. Ethical funds

c. Stock purchase plans

d. Commodities

e. Hedge funds

Difficulty: 1 Page-Reference: 614

Question ID: 19-1-67 Skill: Knowledge

Objective: 19.4

68. The ________ is the percentage of the total sales price that a buyer must put up to place an order

for a stock or a futures contract.

a. installment

b. up-front money

c. purchase money

d. down payment

e. margin

Difficulty: 1 Page-Reference: 615

Question ID: 19-1-68 Skill: Knowledge

Objective: 19.4

69. Which investment has the greatest risk?

a. Common stock

b. Stock options

c. Futures contracts in the commodities market

d. Municipal bond

e. A mutual fund with a safety strategy

Difficulty: 2 Page-Reference: 615

Question ID: 19-1-69 Skill: Knowledge

Objective: 19.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

70. Suppose you have a put option that allows you to sell 100 shares of Alcan for $54.50 per share

any time before October 2013. If the stock price falls to $45.00 per share, your profit is

a. $9.50

b. $54.50

c. $950.00

d. $45.00

e. $0.00

Difficulty: 2 Page-Reference: 616

Question ID: 19-1-70 Skill: Application

Objective: 19.4

71. Suppose that in June 2013 you bought a call option that allows you to buy 100 shares of a certain

stock for $20 before October 2013. If the market price of the stock at some point before October 2013 is

$23, and you exercise your option, what will happen?

a. You will make a $30.00 profit.

b. You will make a $300.00 profit.

c. You will make a $3000.00 profit.

d. You will incur a loss of $30.00.

e. You will incur a loss of $300.00.

Difficulty: 2 Page-Reference: 616

Question ID: 19-1-71 Skill: Application

Objective: 19.4

72. If a stock option is “under water,” what does that mean?

a. The company has experienced flood damage to its facilities and cannot pay off on any stock

options.

b. The federal government has blocked the company from paying off stock options.

c. The market price of the stock that the option applies to is lower than the option price.

d. The market price of the stock that the option applies to is higher than the option price.

e. The person holding the stock option will not exercise it because it would constitute poor public

relations (the option is therefore “under water” and out of sight).

Difficulty: 2 Page-Reference: 616

Question ID: 19-1-72 Skill: Comprehension

Objective: 19.4

73. A ________ is the right to buy a particular stock at a certain price until a particular date, while a

________ gives the owner the right to sell a particular stock at a specified price until a particular date.

a. put option; call option

b. limit order; sales order

c. call option; put option

d. sales order; limit order

e. market purchase order; market sales order

Difficulty: 1 Page-Reference: 616

Question ID: 19-1-73 Skill: Knowledge

Objective: 19.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

74. ________ is the proportion of funds invested in each of several investment alternatives.

a. Asset allocation

b. Shorting

c. Spreading

d. Margin buying

e. Diversification

Difficulty: 2 Page-Reference: 617

Question ID: 19-1-74 Skill: Knowledge

Objective: 19.4

75. Which of the following is correct with regard to mutual funds?

a. They are oriented toward investors with large amounts of money.

b. Most mutual funds stress the same goal: growth.

c. Only managers who have passed an ethics test can work for ethical mutual funds.

d. A mutual fund that stresses safety of investment would likely invest in treasury bills.

e. All of these are correct.

Difficulty: 2 Page-Reference: 613

Question ID: 19-1-75 Skill: Comprehension

Objective: 19.4

76. Which of the following is correct with regard to hedge funds?

a. Historically, they have been bought only by conservative investors who don’t have a lot of money

to invest.

b. Hedge funds avoid risky practices like short-selling and leveraging.

c. Hedge funds are not as closely regulated as mutual funds.

d. Management fees in hedge funds are much lower than for mutual funds.

e. All of these.

Difficulty: 1 Page-Reference: 614

Question ID: 19-1-76 Skill: Comprehension

Objective: 19.4

77. If the stock of Vogue Cosmetics were reported in The Globe and Mail as selling for 24.50, you

would have to pay ________ per share.

a. $245.00

b. $2450.00 if you buy between 100 and 200 shares

c. $24.00 for one half of a share

d. $24.50

e. $24.05

Difficulty: 1 Page-Reference: 617

Question ID: 19-1-77 Skill: Application

Objective: 19.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 19—Understanding Securities and Investments

78. A stock quote of 30.5 means

a. the stock is down 30.5 cents per share from yesterday‘s price.

b. the stock is selling at $30.50 per share.

c. the stock is selling at 30.5 cents per share.

d. the stock is up 30.5 cents per share from yesterday’s price.

e. the stock will be selling for 30.5 cents per share for the next 5 days.

Difficulty: 2 Page-Reference: 617

Question ID: 19-1-78 Skill: Comprehension

Objective: 19.5

79. A(n) ________ is a summary of price trends in a specific industry and/or the stock market as a

whole.

a. investment index

b. market index

c. average index

d. market indicator

e. average indicator

Difficulty: 1 Page-Reference: 619

Question ID: 19-1-79 Skill: Knowledge

Objective: 19.5

80. Assume you bought a $1000 par-value bond in 2004 for 75 1/4 with an interest rate of 7.5%. If

you held the bond until maturity in 2014, what would be the total amount that you would earn on this

bond?

a. $1000.00

b. $750

c. $779.50

d. $887.50

e. $997.50

Difficulty: 3 Page-Reference: 618

Question ID: 19-1-80 Skill: Application

Objective: 19.5

81. Assume you bought a $1000 par-value bond in 2004 for 85 1/4 with an interest rate of 4.7%. If

you held the bond until maturity in 2014, what would be the total amount that you would earn on this

bond?

a. $1000.00

b. $852.50

c. $617.50

d. $470.00

e. The amount cannot be calculated given the information provided.

Difficulty: 3 Page-Reference: 618

Question ID: 19-1-81 Skill: Application

Objective: 19.5