199. (p. 530) If a firm defaults on interest payments on its bonds, the bondholders have the right to convert their
investment into common stock.
200. (p. 531) Novice investors trading in commodities earn rates of return over the long run that are higher than
rates offered in a savings account.
201. (p. 531) A commodity exchange provides trading opportunities for investors in precious metals and minerals.
202. (p. 531) The Chicago Board of Trade represents one of the largest stock exchanges in the United States.
203. (p. 531) Futures markets allow for the purchase or sale of goods on the Internet for immediate delivery.
204. (p. 531) Trading in commodities represents a high risk, volatile investment option.
205. (p. 532, figure 19.6) Preferred stock is riskier than commodities.
206. (p. 532, figure 19.6) Mutual funds are a good source of capital appreciation.
207. (p. 532, figure 19.6) The expected income from common stock is variable.
208. (p. 530) Junk bonds represent high-risk investments that should be avoided by investors.
209. (p. 531) After planting wheat, Farmer Jones worries about the volatility in wheat prices. To reduce his risk,
Farmer Jones should consider selling his wheat today in the futures market.
210. (p. 530) Buying stock on margin allows investors to increase the potential rate of return made on a stock
investment.
211. (p. 530) Yesterday, Alberto purchased on margin 100 shares of stock in the ABC Corporation for $40 per
share. Today, the price of the shares dropped by $10 per share. Alberto expects his broker to issue a margin
call.
212. (p. 532) Every time someone sells a stock believing the price has reached its maximum, someone else buys it
believing the price will go still higher.
213. (p. 531) Daily prices for bonds, stock, and mutual funds can be found in the Wall Street Journal.
214. (p. 532) While stock quotations now appear in decimal amounts, they originally appeared as fractions.
215. (p. 534) The P/E ratio presents the relationship between a firm’s profits divided by their earnings per share.
216. (p. 534) A mutual fund’s NAV refers to the fund’s new administrator valuation.
217. (p. 535) The Dow Jones Industrial Average reflects the daily average price of all the stocks traded on the New
York Stock Exchange.
218. (p. 535) The Dow Jones Industrial Average utilizes the prices of the same 30 companies’ stocks each year to
ensure consistency.
219. (p. 535) The Dow Jones Industrial Average includes stocks traded on the NASDAQ.
220. (p. 536) The NASDAQ reports its own average that investors follow to observe trends in the market.
221. (p. 536) “Black Tuesday” refers to the stock market crash of October 1987.
222. (p. 536) Program trading refers to computer trading software that automatically sells stocks when their price
dips to a predetermined level.
223. (p. 536) Trading curbs motivate traders to utilize their computerized programs to reduce market volatility.
224. (p. 537) Stock market “circuit breakers” stop stock trading for a short time when the stock market experiences
a significant drop in stock values.
225. (p. 536) Many stock market analysts suggest that program trading was a big cause of the stock market crash
of 1987.
226. (p. 536) The largest one-day drop in the stock market occurred in 1929.
227. (p. 537) Changes in investor trust and confidence strongly influence stock market prices.
228. (p. 535) The Dow Jones Industrial Average reflects the average of the eleven largest corporations traded on
the New York Stock Exchange as originally selected by Charles Dow.
229. (p. 537) As the largest economy in the world, the U.S. stock market is insulated from the effects of political
events in the rest of the world.
230. (p. 533, figure 19.8) Daily stock quotations identify the high and low price of the stock over the past 52 weeks.
231. (p. 534) Felecia wants to buy the bonds of several different corporations. A bond mutual fund offers her a
quick and easy way to accomplish her goal.
232. (p. 534-535) Most investment advisors put mutual funds high on the list of recommended investments for
experienced investors, but consider them too risky for beginning investors.
233. (p. 532) In order to buy a share of stock, someone has to be willing to sell a share of stock.
234. (p. 532-533) Bond and stock quotes appear in the newspaper as a percentage of their face value.
235. (p. 536) Many stock analysts believe that program trading decreases the volatility of stock market prices.
236. (p. 537) The threat of terrorist attacks tends to depress stock market prices.
237. (p. 512) Businesses benefit from securities markets primarily by:
D. participating in the mutual funds of investment bankers.
238. (p. 512) Private investors benefit from securities markets primarily by:
D. participating in the primary markets of investment bankers.
239. (p. 512) A(n) ________ refers to the first public offering of a corporation’s stock.
A. primary market offer (PMO)
240. (p. 512) Trading in newly issued securities takes place in the:
D. corporate trading market.
241. (p. 512) The trading of previously issued securities from one investor to another takes place in the:
D. corporate trading market.
242. (p. 512) When businesses cannot use retained earnings to meet their long-term funding needs they may be
able to raise funds by:
D. decreasing their accounts payable.
243. (p. 513) _________ represent the most powerful force in the buying and selling of corporate securities.
A. Individual investors
244. (p. 513) Investment bankers ________ new issues of bonds or stocks by purchasing, at a discount, the entire
security issue of a firm. The investment bank earns a profit by attempting to sell the securities to investors at
D. sanction
245. (p. 512) Corporations receive the proceeds for the sale of their stock in:
D. venture capital markets.
246. (p. 512-513) Security markets assist businesses in performing their ________ function.
A. investing
247. (p. 513) Molly Manufacturing plans to issue $75 million of common stock. The firm will likely rely on the
advice and assistance of a(n):
A. Federal Reserve bank.
248. (p. 512) Shareholder Jones sells 100 shares of Fiberrific Corporation stock to Investor Smith. This transaction
normally takes place in the:
D. security resale market.
249. (p. 513) Which of the following would be classified as an institutional investor?
D. commodity brokers
250. (p. 512) Most businesses prefer to meet their long-term financial needs through:
A. debt financing.
251. (p. 513) As the chief financial officer (CFO), you identify that your firm needs to raise additional funds by
selling new shares of stock. Which of the following refers to a specialist that assists corporations in the issue
and sale of new securities?
D. an institutional investor advisor
252. (p. 512) As a new father, Dave plans to accumulate funds over the next eighteen years to help pay for his
son’s college education. Security markets provide Dave with:
D. borrowing opportunities.
253. (p. 513) Investment bankers provide ________ services by purchasing the entire new security issue from a
corporation seeking to raise capital.
D. discounting
254. (p. 513) How do investment bankers generate revenues for their firms?
A. They invest their own funds, or the funds of others, in mutual funds and commodities.
255. (p. 513) The corporate certificate indicating that an investor has loaned money to the organization is called a:
A. common stock.
256. (p. 513) Issuing bonds to obtain long-term funds legally compels a firm to pay regular ________ payments
and repay the ________ at the maturity date.
A. dividend; par value
257. (p. 513) The cost of borrowing money is called the:
D. opportunity charge.
258. (p. 514) In the language of bonds, face value is synonymous with:
D. yield.
259. (p. 514) The ________ of a bond represents the amount of debt incurred by the issuer of the security.
D. maturity date
260. (p. 515) Which of the following accurately describes an advantage of selling bonds to raise long-term
capital?
A. Interest is a legal obligation.
261. (p. 515) Issuing ________ may adversely affect the financial community’s perception of the firm.
D. retained earnings
262. (p. 515) An unsecured bond, backed only by the well-respected name of the organization, is called a(n)
________ bond.
A. mortgage
263. (p. 515) Corporations issuing ________ bonds pledge a tangible asset to reduce the risk incurred by a
bondholder.
D. replacement
264. (p. 515) Firms establish a ________ fund so that sufficient funds are available to repay bondholders on the
maturity date.
D. encumbered
265. (p. 515) By issuing bonds with a ________, the corporation retains the right to pay off the bond prior to the
maturity date.
A. redemption feature
266. (p. 516) By buying a ________ bond, investors may choose to exchange their bond for shares of common
stock in the company.
A. discount
267. (p. 514, figure 19.2) According to the Standard & Poor’s Investor Services ratings, which of these ratings indicate
a highly speculative bond?
A. AA
268. (p. 514-515) Which of the following represent a disadvantage of issuing bonds?
269. (p. 513) Bonds perceived as high risk typically pay ________ interest rates.
D. less volatile
270. (p. 515) With everything else held constant, secured bonds likely pay investors a ________ interest rate than
debenture bonds.
D. more volatile
271. (p. 514) The face value of bonds must be repaid on the ________ date.
A. purchase anniversary
272. (p. 516) Which of these represents a special feature included with some bond issues?
273. (p. 516) A convertible bond allows the bondholder to exchange the bond for:
D. debt holder privileges.
274. (p. 514) Seattle Industries recently offered bonds for sale to the public. They offered an interest rate on the
bonds of 9% to investors for the twenty-year life of the bonds. Seattle must remember that:
D. bond principal must be paid on owner demand.
275. (p. 513, figure 19.1) As your elderly Uncle Bill approaches retirement, he asks for your advice for a safe place to
invest several thousand dollars. Which of these would you suggest given your uncle’s age and concern for
safety?
A. Yankee bonds
276. (p. 514) The ABC Corporation issues a $1,000 bond, with an interest rate of 10%, and a maturity date of
2015. This creates a liability for the ABC Corporation to pay the bondholder:
D. $1,100 annually until the year 2015.
277. (p. 514, figure 19.2) Moody’s Investor Service currently rates the Sasha Deal Corporation bonds as a C grade.
This indicates that these bonds are:
A. of the highest quality with lowest default risk.
278. (p. 515) Ebony Enterprises decides to pay off its bonds several years before the maturity date. Apparently, the
bonds contain a(n):
A. early dismissal clause.