387. 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?
388. Six years ago, Angie invested $50,000 that she inherited from her grandfather into a
growth stock mutual fund. Each share of the fund cost $22/share. Yesterday, she perused a
mutual fund quote on the Internet. The quotation showed (1) Year To Date Return; (2) Yield; (3)
Net Asset Value; (4) Previous Close. Which of these will provide her with an indication of the
present price per share she can expect to realize if she calls her broker tomorrow morning and
asks her to sell the shares?
389. During Ben’s lunch break, he logged on to his computer to find the mutual fund he
wanted to buy. As he made his way around several websites, he realized that the NAV (net asset
value) quoted was yesterday’s close. His shares would be purchased tomorrow, with today’s
closing price. Looking over his shoulder, one of his coworkers suggested that he look into
_________ because they are similar to mutual funds, but could be traded during the entire trading
day, just like stocks.
390. Applying what you have learned about investments as introduced to you in Chapter 19,
put the following investments in order from least risky to riskiest. Which of following lists begin
with the least risky investment and ends with the most risky? Least risky = 1; most risky = 5.
391. The traditional market barometer used to measure the direction of the stock market is
the:
392. The Dow Jones Industrial Average represents the average price of ________ industrial
stocks.
393. ________ involve(s) computer instructions that automatically sell stocks whose value has
dropped by a predetermined amount.
394. To reduce market volatility, ________ require that a key computer is turned off so that
program trading must be done “by hand” rather than automatically by computer.
395. The Securities and Exchange Commission developed ________ to halt trading in the stock
market for a short time when the market has experienced a dramatic decrease in prices.
396. One criticism of the Dow Jones Industrial Average suggests that it:
397. Daily reporting of the Dow Jones Industrial Average serves to:
398. The purpose of the SEC’s circuit breakers rule is to:
399. In reviewing the firms whose stocks comprise the Dow Jones Industrial Average, we
discover:
Mini-Case
Penny Stock is the chairperson of Pirate Recording Company Inc. She is the person responsible
for the tremendous growth this company has enjoyed over the past three years. It was Penny’s
intuition and clever negotiating that enabled the company to sign two very hot recording artists:
Half a Dollar
and
N’elli
. These groups have generated profits of over $25 million.
The future looks even brighter at the firm because several current and aspiring entertainers have
indicated an interest in signing on with Pirate Recording. This incredible growth has delighted
everyone at the company, but it has also created a major problem for Penny. Pirate Recording
has never been a major player in the recording industry, primarily because of limited capital. In
order to take the company to the next level Penny realizes that she will need to expand the firm’s
personnel and equipment. The amount of new funds required to finance this needed expansion is
$150 million. Penny has started to consult with others about how to finance this major expansion
of the company.
400. 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:
401. Penny is concerned about the interest rate risk if the company decides to issue bonds.
Penny would like protection from interest rate fluctuation. Therefore, the bond issue’s features
should include a(n):
402. If Pirate Recording elects to offer an IPO (Initial Public Offering), it will involve preparing
full financial disclosure with the __________. The firm is advised to solicit the services of an
investment banker/underwriter, who will analyze the market and determine the best price for the
new issue of Pirate Recording stock. The offering will then be sold on the ___________.
403. If stock is issued in Pirate Recording, analysts predict that the company has potential for
strong growth. The prospects for dividend payments to stockholders, at least in the beginning,
are not good. Pirate Recording will need to retain its earnings in order to grow rapidly. The firm’s
stock would most likely be classified as a(n):
404. Penny is impressed with contemporary high-tech companies that have listed their stock
on an electronic telecommunications network of securities dealers who trade the stock. She is
referring to firms such as Microsoft [MSFT], Google [GOOG], and Apple [AAPL]. Penny ideally
would like her company’s stock listed on the ___________.
405. Bonds represent a major source of long-term financing. What is a bond? Explain the
major elements that must be in a bond issue.
406. Explain the major advantages and disadvantages of issuing stock as a source of long–
term financing.
407. Discuss the role of investment bankers in the securities markets.
408. Explain the differences between preferred stock and common stock.
409. The risk/return trade-off is inherent in any investment strategy. What are the five key
criteria investors should consider when selecting investment options?
410. Describe four different types of common stock that an investor may consider, depending
upon the investor’s strategy and risk tolerance.