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1. (p. 512) Securities markets represent the financial marketplaces for stocks and bonds.
2. (p. 512) Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.
3. (p. 512) Businesses primarily benefit from securities markets by having a convenient place to buy and sell
investments.
4. (p. 512) Securities markets benefit businesses and private investors.
5. (p. 512) Corporations receive money each time their securities are traded.
6. (p. 512) An initial public offering (IPO) represents the first time a corporation’s stock is sold to the general
public.
7. (p. 512) The proceeds from a secondary market sale of securities go to the corporation whose security is being
traded.
8. (p. 512) In a secondary market sale of stock, the proceeds go to the investor selling the stock, not to the
corporation.
9. (p. 512) The primary market involves the sale of new securities only.
10. (p. 512) The primary market allows an investor to purchase financial securities from other investors.
11. (p. 512) When given a choice, businesses prefer to obtain long-term financing through retained earnings or by
borrowing from a lending institution.
12. (p. 513) Before issuing stock or bonds, corporations must meet the disclosure requirements of the Federal
Trade Commission (FTC).
13. (p. 513) An investment banking firm assists investors in buying the new security issues of corporations.
14. (p. 513) Investment bankers buy, at a discounted price, the entire stock issue of a firm and then sell the stock,
at full price, to private investors.
15. (p. 513) Government employees represent institutional investors.
16. (p. 513) Institutional investors include pension funds, mutual funds, and insurance companies.
17. (p. 512–513) Securities markets help companies raise long-term debt and equity financing.
18. (p. 513) The New York Stock Exchange will underwrite new issues of stocks or bonds.
19. (p. 513) Many observers suggest that the stock market is dominated by the buying and selling activities of
institutional investors.
20. (p. 513) Investment bankers assist in the issuing and selling of new securities.
21. (p. 513) Institutional investors include insurance companies, individual investors, and mutual funds.
22. (p. 512) Corporations receive funds only in the primary market sale of their stock.
23. (p. 512) The secondary market deals in the trading of securities among investors.
24. (p. 512) The New York Stock Exchange operates to provide benefits exclusively for businesses.
25. (p. 513) Your privately held firm needs additional funding for a planned expansion. Having never issued stock
to the public, your firm should seek the advice and assistance of an investment banker prior to an initial public
offering of stock.
26. (p. 513) Investment bankers profit from purchasing the new stock offering of a corporation at a discount, and
then selling those shares of stock to the public at higher prices.
27. (p. 512) If investor Jones buys a share of stock in the ABC Corporation from investor Smith, the ABC
Corporation automatically receives a fixed percentage of the selling price.
28. (p. 513) When acquiring funds through the sale of a bond, the business incurs a legal obligation to pay regular
interest payments.
29. (p. 513) A share of stock represents a contract of indebtedness issued by a corporation that promises payment
of a principal amount plus interest at a specified future date.
30. (p. 513) Interest represents the payment to bondholders for the use of their money.
31. (p. 513) The interest paid to bondholders represents the principal of the bond.
32. (p. 513) The interest rate paid to bondholders is sometimes called the coupon rate.
33. (p. 513) The interest rate paid on a bond varies according to factors such as the reputation of the company
issuing the bond.
34. (p. 513) U.S. government bonds are considered safe investments.
35. (p. 514) The maturity date of a bond refers to the date on which the interest payments are due to be paid.
36. (p. 514) The maturity date represents the date on which a corporation must pay investors the principal of their
bond.
37. (p. 514, figure 19.1) A Yankee bond is issued by the U.S. government.
38. (p. 514, figure 19.2) Corporate bonds of different companies carry the same rating.
39. (p. 513) With the exception of floating rate bonds, once the interest rate for a bond issue is established, it
cannot be changed.
40. (p. 513) Interest rates vary with changes in the state of the economy.
41. (p. 514) A bond’s denomination represents the printed interest rate.
42. (p. 514) In the language of bonds, the terms “principal” and “face value” are synonymous.
43. (p. 513) Bondholders represent creditors of a firm.
44. (p. 513) As a legal contract, bonds issued by different companies carry the same level of risk.
45. (p. 515) Dividends paid to stockholders represent a tax deductible expense.
46. (p. 514) As creditors of a firm, bondholders enjoy voting privileges for the board of directors’ elections.
47. (p. 515) Stocks and bonds represent temporary sources of funding for a firm. Eventually they must be repaid.
48. (p. 515) By issuing bonds, a firm’s debt level increases which may adversely affect the firm’s image in the
financial community.
49. (p. 515) Debenture bonds represent unsecured bonds.
50. (p. 515) A sinking fund allows the bond issuer to retire a bond prior to its maturity date.
51. (p. 515–516) A callable bond allows a bondholder to exchange their bonds for shares of common stock in the
same corporation.
52. (p. 516) The owner of a convertible bond can exchange the bond for a specified number of shares of common
stock in the same corporation.
53. (p. 515) After retirement, Hector began a search for a low-risk investment. He should consider buying a
secured bond of a major corporation.
54. (p. 514) Raising long-term funds through the sale of bonds requires the firm to make debt repayment when and
if the organization has sufficient cash flow.
55. (p. 515) With everything else constant, investors prefer a bond issued with a sinking fund compared to a bond
without a sinking fund.
56. (p. 515) A bond sold with a sinking fund provision requires the firm to allow a stockholder to exchange their
bond for a specified number of shares of common stock
57. (p. 515–516) A company exercises the call provision of a bond when prevailing interest rates fall below the
interest rate currently being paid to bondholders.
58. (p. 516) Businesses and investors prefer the flexibility of a bond issued with a call option provision.
59. (p. 516) A convertible bond allows stockholders to exchange their ownership in a company for bonds of the
same company.
60. (p. 513) The U.S. government has just announced an increase in the interest rate paid on U.S. government
bonds. This will likely cause a decrease in the interest rates paid on corporate bonds.
61. (p. 515) Businesses and investors find bonds with a sinking fund provision an attractive option.
62. (p. 516) Common stock and corporate bonds represent the two sources of equity financing available to a firm.
63. (p. 516) Stocks represent shares of ownership in a company.
64. (p. 516) Stock certificates identify per share dividends, expressed as a percentage of par value.
65. (p. 516) Par value reflects the current market price for a stock.
66. (p. 516) Dividends represent a portion of a firm’s profits that are distributed to bondholders.
67. (p. 517) Long-term funds acquired through the sale of stock are not required to be repaid to the investor.
68. (p. 517) Although companies that issue bonds are required to pay interest, companies issuing stock are not
required to pay dividends.
69. (p. 517) When a corporation enjoys a profitable year, dividends must be paid.
70. (p. 517) Issuing new common stock usually creates new owners with the right to vote for the firm’s board of
directors.
71. (p. 517) Issuing new stock increases the firm’s outstanding debt on their balance sheet.
72. (p. 517) Corporate management decisions are influenced by the desire to keep stockholders happy.
73. (p. 517) Preferred stockholders have voting rights privileges not shared by common stockholders.
74. (p. 517) As a hybrid investment, preferred stockholders enjoy a priority claim in the payment of dividends.
75. (p. 517) Dividends paid to stockholders represent a tax-deductible business expense.
76. (p. 517) Preferred stock has characteristics of both bonds and stocks.
77. (p. 517) When a corporation pays dividends, preferred stockholders receive their fixed dividend before
common stock dividends are paid.
78. (p. 518) Bondholders and preferred stockholders receive a fixed rate of return.
79. (p. 518) Preemptive rights provide common stockholders the first right to purchase any new shares of common
stock issued by the firm.
80. (p. 518) Preferred stock, like bonds and common stock, are callable by the issuing corporation.
81. (p. 518) Cumulative preferred stockholders enjoy the first right to purchase any new shares of stock issued by
the firm.
82. (p. 518) Cumulative preferred stockholders enjoy a promise that missed dividends will accumulate and be paid
later, if and when the firm pays future dividends.
83. (p. 517) Both preferred stocks and bonds represent funding sources that require repayment to investors.
84. (p. 517) Corporations that issue preferred stock incur a legal obligation to pay dividends to those stockholders.
85. (p. 517) The cost of paying dividends to common stockholders is higher than the cost of the same amount of
interest paid to bondholders.
86. (p. 518) The similarities between common stocks and bonds include a face or par value and a fixed rate of
return for investors.
87. (p. 517) Preferred stocks and bonds both represent sources of long-term funds that require a future repayment.
88. (p. 517) While common stockholders of corporations have voting rights, preferred stockholders generally do
not.
89. (p. 518) A preferred stock’s par value establishes the base used for calculating the preferred stockholders’
dividend.
90. (p. 518) A share of preferred stock currently sells for $120. It offers the investor a dividend rate of 8%, with a
par value of $100. If dividends are paid, preferred stockholders would receive a dividend of $9.60.
91. (p. 518) Cumulative preferred stock guarantees an investor that if preferred dividends are not paid, then the
missing dividends will accumulate and be paid in full before any interest is paid to bondholders.
92. (p. 518) A company with cash flow shortages must pay common stockholders their dividends before paying
bondholders and preferred stockholders.
93. (p. 518) Preferred stockholders possess the first right to purchase any new stock the company issues.
94. (p. 519, Dealing with Change box) According to one of the “Dealing with Change” boxes in Chapter 19, the New
York Stock Exchange (NYSE) members approved a merger with Archipelago Holdings Inc. of Chicago in late
2005.
95. (p. 519) Archipelago is a securities trading company that specializes in electronic trading.
96. (p. 519) A stock exchange provides a marketplace where the public can directly buy and sell securities.
97. (p. 519) Only those with a seat on a stock exchange can buy and sell securities on that stock exchange.
98. (p. 521) Securities and Exchange Commission (SEC) rules prohibit the listing of the stock of foreign firms on
U.S. stock exchanges.
99. (p. 519) The American Stock Exchange, also known as the Big Board, is the largest stock exchange in the
United States.
100. (p. 520) Regional stock exchanges with lower transaction costs than the larger national exchanges often
attract institutional investors.
101. (p. 520) The over-the-counter market utilizes an electronic securities trading system.
102. (p. 520) The stock of companies that fail to meet a stock exchange’s minimum requirements can be delisted.