Chapter 19 2 An average that indicates the overall trend of Canadian security

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

Chapter 19—Understanding Securities and Investments

82. If you bought a corporation bond that was selling for 155 1/4, how much would it cost you?

a. $155.25

b. $1555.25

c. $1552.50

d. $1000.00

e. It depends on how much demand there is for the bond.

Difficulty: 3 Page-Reference: 618

Question ID: 19-1-82 Skill: Application

Objective: 19.5

83. Suppose you purchased a $1000 par-value bond in 2004 for $650. Its stated interest rate is 6

percent and it matures in 2014. What is your yield?

a. 6.1 percent

b. 7.2 percent

c. 10.4 percent

d. 9.2 percent

e. 8.4 percent

Difficulty: 3 Page-Reference: 618

Question ID: 19-1-83 Skill: Application

Objective: 19.5

84. An average that indicates the overall trend of Canadian security prices is

a. the Dow Jones index.

b. the S&P/TSX index.

c. the price of Bell Telephone stock.

d. the average price of all oil stocks.

e. the NASDAQ index.

Difficulty: 2 Page-Reference: 620

Question ID: 19-1-84 Skill: Knowledge

Objective: 19.5

85. If you purchase a round lot of stock quoted in The Globe and Mail at $10.75 per share, the total

price you would pay for the stock is ________ plus commission.

a. $1034.00

b. $107.50

c. $10.34

d. $1075.00

e. $1000.75

Difficulty: 2 Page-Reference: 620

Question ID: 19-1-85 Skill: Application

Objective: 19.5

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

Chapter 19—Understanding Securities and Investments

86. If you purchase an odd lot of a stock quoted in The Globe and Mail at $10.75 per share, the total

price you would pay for the stock is ________ plus commission.

a. $1075.00

b. $50.00

c. $1000.00

d. $10 075.00

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

Difficulty: 2 Page-Reference: 620

Question ID: 19-1-86 Skill: Application

Objective: 19.5

87. Tom has authorized the purchase of a certain stock only if its price is less than or equal to a given

amount. This is known as a(n)

a. short sale.

b. odd lot order.

c. market order.

d. limit buy order.

e. round lot order.

Difficulty: 1 Page-Reference: 620

Question ID: 19-1-87 Skill: Comprehension

Objective: 19.5

88. Magdala has told her broker to sell a certain security if its price falls to or below a specified

amount. Magdala has given a(n)

a. limit order.

b. stop order.

c. round lot order.

d. market order.

e. odd lot order.

Difficulty: 1 Page-Reference: 620

Question ID: 19-1-88 Skill: Comprehension

Objective: 19.5

89. Scott just called his broker to place an order to buy 100 shares of IBM if the price is less than or

equal to $120. Which of the terms below describe his order?

a. Both a round lot and a limit buy order

b. Limit buy order

c. Round lot

d. Odd lot

e. Stop order

Difficulty: 3 Page-Reference: 620

Question ID: 19-1-89 Skill: Comprehension

Objective: 19.5

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

Chapter 19—Understanding Securities and Investments

90. Scott just called his broker to place an order to sell his 50 shares of IBM if the price falls to 100.

Which of the terms below describe his order?

a. Stop order, round lot

b. Round lot, limit order

c. Market order, round lot

d. Limit order, odd lot

e. Odd lot, stop order

Difficulty: 3 Page-Reference: 620

Question ID: 19-1-90 Skill: Comprehension

Objective: 19.5

91. Scott just called his broker to place an order to buy 200 shares of IBM at the best price the broker

could get. Which of the terms below describe his order?

a. Stop order, round lot

b. Round lot, limit order

c. Limit order, odd lot

d. Odd lot, stop order

e. Market order, round lot

Difficulty: 3 Page-Reference: 620

Question ID: 19-1-91 Skill: Comprehension

Objective: 19.5

92. Which of the following are aspects of a short sale by an investor?

a. The investor must return the stock to the broker at some point.

b. It means borrowing stock from a broker.

c. Money is not required up front.

d. The investor hopes the price of the stock will fall.

e. All of these are aspects.

Difficulty: 3 Page-Reference: 622

Question ID: 19-1-92 Skill: Comprehension

Objective: 19.5

93. When an investor gets involved in a short sale, what is that investor hoping for?

a. A sharp drop in the price of the stock

b. Stability in the price of the stock

c. A stable S&P/TSX index

d. Appreciation of the stock price

e. Inflation in the wider economy

Difficulty: 3 Page-Reference: 622

Question ID: 19-1-93 Skill: Comprehension

Objective: 19.5

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

Chapter 19—Understanding Securities and Investments

94. Which of the following statements about short selling is false?

a. At some time in the future, the speculator must buy the security to “cover” the short sale.

b. Short selling is legal.

c. Short selling involves selling a security that you do not own by borrowing it from your broker.

d. Speculators may profit from short selling when stock prices are falling.

e. Speculators will generally profit from short selling when the company puts out positive information

about its sales prospects.

Difficulty: 3 Page-Reference: 622

Question ID: 19-1-94 Skill: Comprehension

Objective: 19.5

95. ________ are trading rules reducing excessive market volatility and promoting investor

confidence that temporarily suspend trading on the New York Stock Exchange.

a. Auto-buy

b. Automated quotations

c. Program trading

d. Robotics

e. Circuit breakers

Difficulty: 2 Page-Reference: 624

Question ID: 19-1-95 Skill: Knowledge

Objective: 19.6

96. Canadian securities regulations

a. are generally seen as representing a good model that other industrialized countries should follow.

b. are characterized by a comprehensive federal securities legislation and a federal regulatory body.

c. apply only to the sale of new issues of stock.

d. have led to timely corrective action being taken when securities violations are alleged.

e. none of these are correct.

Difficulty: 2 Page-Reference: 623

Question ID: 19-1-96 Skill: Comprehension

Objective: 19.6

97. ________ involves the large purchase or sale of a group of stocks, often triggered by

computerized trading programs that can be launched without human supervision or control.

a. Program trading

b. Auto-buy

c. Automated quotations

d. Computer quotes

e. Robotics

Difficulty: 2 Page-Reference: 624

Question ID: 19-1-97 Skill: Knowledge

Objective: 19.6

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

Chapter 19—Understanding Securities and Investments

98. Before a corporation sells securities, that corporation is required by law to offer future investors

the opportunity to read through a document, which contains complete information on both the new issue

and the corporation. What is that required document called?

a. Prospectus

b. Book report

c. Affidavit

d. Income statement

e. Order blank

Difficulty: 2 Page-Reference: 623

Question ID: 19-1-98 Skill: Knowledge

Objective: 19.6

99. “I am a chemist with the nation’s largest chemical company. We have secretly developed a cure

for one of the world’s most serious epidemics. Before this news gets out, I am going to buy as many

shares of stock in my company as I can get my hands on. Then I’ll sit back and watch the stock price

head for the sky.” The person making this statement is about to engage in

a. a news conference.

b. insider trading.

c. open-market operations.

d. further research.

e. selling shares of stock.

Difficulty: 3 Page-Reference: 623

Question ID: 19-1-99 Skill: Comprehension

Objective: 19.6

100. Blue-sky laws apply mainly to the

a. operation of local brokerage firms.

b. sale of new securities.

c. purchase of shares by insiders.

d. sale of securities on the secondary market.

e. issuance of unsecured bonds.

Difficulty: 1 Page-Reference: 623

Question ID: 19-1-100 Skill: Knowledge

Objective: 19.6

1. The securities market is the place where financial firms sell the collateral that they hold as security

for business loans.

a. True

b. False

Difficulty: 2 Page-Reference: 604

Question ID: 19-2-101 Skill: Knowledge

Objective: 19.1

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

Chapter 19—Understanding Securities and Investments

2. Primary securities markets are those that handle the most important stock and bond issues, while

secondary markets are those that handle the less important issues.

a. True

b. False

Difficulty: 1 Page-Reference: 604

Question ID: 19-2-102 Skill: Knowledge

Objective: 19.1

3. An investment banker helps companies create new securities, but does not actually bear any of the

risk that is involved with new securities.

a. True

b. False

Difficulty: 2 Page-Reference: 604

Question ID: 19-2-103 Skill: Comprehension

Objective: 19.1

4. The par value of a stock is an arbitrary accounting value that is of little interest to stock purchasers.

a. True

b. False

Difficulty: 1 Page-Reference: 605

Question ID: 19-2-104 Skill: Knowledge

Objective: 19.2

5. The par value of a stock reflects a buyer’s willingness to invest in a business firm.

a. True

b. False

Difficulty: 2 Page-Reference: 605

Question ID: 19-2-105 Skill: Knowledge

Objective: 19.2

6. The face value of stock is known as its book value.

a. True

b. False

Difficulty: 1 Page-Reference: 605

Question ID: 19-2-106 Skill: Knowledge

Objective: 19.2

7. The real value of a share of common stock is its market value.

a. True

b. False

Difficulty: 1 Page-Reference: 605

Question ID: 19-2-107 Skill: Knowledge

Objective: 19.2

8. By law, the market value of a stock is determined by objective factors like company profits, but not

by emotional factors like rumours.

a. True

b. False

Difficulty: 1 Page-Reference: 605

Question ID: 19-2-108 Skill: Comprehension

Objective: 19.2

9. Owners’ equity at Delray Corp. is $2 million, the number of outstanding shares is 10 000, and last

year’s net profit was $500 000. The book value of its common stock is therefore $4.

a. True

b. False

Difficulty: 2 Page-Reference: 605

Question ID: 19-2-109 Skill: Application

Objective: 19.2

10. If the market value of a stock falls to approximately the book value, investor interest in buying the

stock generally increases.

a. True

b. False

Difficulty: 2 Page-Reference: 605

Question ID: 19-2-110 Skill: Comprehension

Objective: 19.2

11. Common stocks are among the riskiest of securities.

a. True

b. False

Difficulty: 1 Page-Reference: 605

Question ID: 19-2-111 Skill: Knowledge

Objective: 19.2

12. A blue-chip stock is a stock of a well-established, financially sound firm.

a. True

b. False

Difficulty: 1 Page-Reference: 605

Question ID: 19-2-112 Skill: Knowledge

Objective: 19.2

13. If the market price of Gentec’s shares is $30.00, and there are 3 million shares outstanding, then

Gentec’s market capitalization is $9 million.

a. True

b. False

Difficulty: 2 Page-Reference: 605

Question ID: 19-2-113 Skill: Application

Objective: 19.2

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

Chapter 19—Understanding Securities and Investments

14. With cumulative preferred stock, any dividend payment the firm misses must be paid in later

periods before any dividend payments are made to holders of common stock.

a. True

b. False

Difficulty: 1 Page-Reference: 606

Question ID: 19-2-114 Skill: Knowledge

Objective: 19.2

15. Preferred shares are generally more risky than common shares because interest rates may drop

and preferred shareholders will then earn less on their investment than they originally expected.

a. True

b. False

Difficulty: 1 Page-Reference: 606

Question ID: 19-2-115 Skill: Knowledge

Objective: 19.2

16. A preferred stock is usually issued with a stated par value, and dividends are typically expressed

as a percentage of that par value.

a. True

b. False

Difficulty: 1 Page-Reference: 606

Question ID: 19-2-116 Skill: Knowledge

Objective: 19.2

17. Buying and selling existing stock is accomplished through a business firm with a seat on a stock

exchange.

a. True

b. False

Difficulty: 1 Page-Reference: 606

Question ID: 19-2-117 Skill: Knowledge

Objective: 19.2

18. All stock exchanges have trading floors, but not all of them have brokers.

a. True

b. False

Difficulty: 2 Page-Reference: 607

Question ID: 19-2-118 Skill: Knowledge

Objective: 19.2

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

Chapter 19—Understanding Securities and Investments

19. The popularity of online trading stems from convenient access to the internet, fast no-nonsense

transactions, and the opportunity for self-directed investors to manage their own portfolios while paying

low fees for trading.

a. True

b. False

Difficulty: 1 Page-Reference: 607

Question ID: 19-2-119 Skill: Knowledge

Objective: 19.2

20. Discount brokerage services cost less because sales personnel receive fees or salaries, not

commissions.

a. True

b. False

Difficulty: 1 Page-Reference: 607

Question ID: 19-2-120 Skill: Knowledge

Objective: 19.2

21. Online traders do not need to go through a broker to make stock purchases.

a. True

b. False

Difficulty: 1 Page-Reference: 607

Question ID: 19-2-121 Skill: Knowledge

Objective: 19.2

22. Discount brokers are gradually driving full-service brokers out of business because discount

brokers charge much lower fees.

a. True

b. False

Difficulty: 1 Page-Reference: 607

Question ID: 19-2-122 Skill: Knowledge

Objective: 19.2

23. The OTC market consists of many people in different locations who hold an inventory of securities

that are not listed on any of the major exchanges.

a. True

b. False

Difficulty: 2 Page-Reference: 609

Question ID: 19-2-123 Skill: Knowledge

Objective: 19.2

24. NASDAQ is a stock market that operates by broadcasting trading information on an intranet to

more than 350 000 terminals worldwide.

a. True

b. False

Difficulty: 2 Page-Reference: 609

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

Chapter 19—Understanding Securities and Investments

Question ID: 19-2-124 Skill: Knowledge

Objective: 19.2

25. A bond is much like a stock except that bondholders receive lower interest payments than

shareholders do.

a. True

b. False

Difficulty: 2 Page-Reference: 610

Question ID: 19-2-125 Skill: Comprehension

Objective: 19.3

26. All corporations issue common stock, but not all of them issue bonds.

a. True

b. False

Difficulty: 2 Page-Reference: 610

Question ID: 19-2-126 Skill: Knowledge

Objective: 19.3

27. In recent years, bond rating firms like Moody’s and Standard & Poor’s have been very accurate in

their assessments of the risks of investing in various securities.

a. True

b. False

Difficulty: 2 Page-Reference: 610

Question ID: 19-2-127 Skill: Knowledge

Objective: 19.3

28. Bonds differ in terms of maturity dates, tax status, level of risk, and potential yield.

a. True

b. False

Difficulty: 1 Page-Reference: 610

Question ID: 19-2-128 Skill: Knowledge

Objective: 19.3

29. Bondholders have a claim on a corporation’s assets and earnings that comes before the claims of

common and preferred shareholders.

a. True

b. False

Difficulty: 1 Page-Reference: 610

Question ID: 19-2-129 Skill: Comprehension

Objective: 19.3

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

Chapter 19—Understanding Securities and Investments

30. Corporate bonds are a major source of long-term financing for Canadian corporations.

a. True

b. False

Difficulty: 1 Page-Reference: 610

Question ID: 19-2-130 Skill: Knowledge

Objective: 19.3

31. Corporations issuing debentures should expect to pay higher interest rates than corporations

issuing secured bonds.

a. True

b. False

Difficulty: 1 Page-Reference: 611

Question ID: 19-2-131 Skill: Comprehension

Objective: 19.3

32. The issuer of a callable bond has the right to raise the interest rate and extend the maturity date

at any time.

a. True

b. False

Difficulty: 2 Page-Reference: 611

Question ID: 19-2-132 Skill: Knowledge

Objective: 19.3

33. Bonds with a sinking fund provision are regarded as safer than bonds without such a fund.

a. True

b. False

Difficulty: 2 Page-Reference: 611

Question ID: 19-2-133 Skill: Knowledge

Objective: 19.3

34. Corporation B has issued $100 million in bonds that mature in 20 years, but it is retiring $5 million

of the bonds each year. The corporation has issued serial bonds.

a. True

b. False

Difficulty: 2 Page-Reference: 611

Question ID: 19-2-134 Skill: Comprehension

Objective: 19.3

35. Bond prices usually move in the same direction as interest rates.

a. True

b. False

Difficulty: 1 Page-Reference: 612

Question ID: 19-2-135 Skill: Knowledge

Objective: 19.3