156. Buying stock on margin allows investors to increase the potential rate of return made on
a stock investment.
157. If you buy 100 shares of IBM for $120/share, and the margin on your account is 50%, the
broker will float you an interest-free loan of $6,000, until the price of IBM sufficiently rises to the
point where you are willing to sell. You pay the broker back its $6,000, and you enjoy the capital
gain.
158. Lamont bought a share of stock in the ABC Corporation for $50. When he sold the stock
later that year, he received $70. The par value of the stock is $5. Lamont’s capital gain is $25.
159. If an individual investor places a limit order at $38 and the stock currently sells for $41
per share, the broker will buy the stock for the investor.
160. Ricardo owns 100 shares of stock in the ABC Corporation that currently sell for $100 per
share. ABC just announced a two–for-one stock split for all current stockholders. Ricardo now
owns $20,000 worth of stock in the ABC Corporation.
161. Ken owns 100 shares in XYZ Company, currently selling for $60 per share. His stock split
yesterday 3-for-1. The number of shares that Ken owns has tripled.
162. 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.
163. For investors who desire the least possible risk, a share of stock in an established
corporation provides the safest investment.
164. The interest earned on municipal bonds is often tax–free at the state level.
165. From an investor’s point of view, corporate bonds offer less risk than government bonds.
166. Corporate bonds provide investors the option of reselling the bond back to the issuing
corporation at any time during the life of the bond.
167. A corporate bond provides the owner with the right to sell the bond to other investors at
any time during the life of the bond.
168. Unlike stocks, for selling purposes, bond prices remain stable over the life of the bond.
169. Normally, the higher the risk associated with a bond issue, the higher the interest rate the
organization must offer potential investors.
170. Bonds, like stocks, trade daily on major security exchanges.
171. Bonds sold at a discount are sold for more than the bond’s face value.
172. As interest rates increase, bond prices fall.
173. From an investor’s viewpoint, bonds generally provide a safer investment option than does
the stock of the same corporation.
174. A U.S. government bond paying 3.25% interest annually is a lower risk than a Bellandro
Bay Brewery bond paying 6%.
175. If an investor owns a bond that pays a higher rate of interest than other bonds of similar
risk, the investor should be able to sell the bond on the secondary market for more than its face
value.
176.
Junk bonds
are offered at higher interest rates than government bonds or corporate
bonds with good ratings.
177. Jennifer prefers corporate bonds as an investment option because investors always
receive the face value of the bond whenever it is sold.
178. A bond offering description reads: “6
s
of 2015.” This means the bond pays 3% interest
semi-annually and matures in 2015.
179. Andrew invested in a new issue corporate bond on the primary market for $1,000, with a
coupon rate of 5%, and a maturity date of 2025. The bond was held in his brokerage account
electronically, so he did not think about it on a daily basis. In 2015, he thought about selling the
bond on the secondary market to help pay for his school tuition. At that time, interest rates had
climbed to 6.5%. This was great news for Andrew because now he could sell his bond for more
than the principal amount he would receive in 2025.
180. Demetrius recently bought a bond with face value of $1,000. He paid $1,150 for the bond.
Demetrius’s bond investment undoubtedly pays a higher interest rate than the going rate for
similar bonds currently out on the market.
181. A mutual fund pools investors’ money and then buys stocks and bonds in many companies
in accordance with the purpose of the fund.
182. A mutual fund’s purpose is rapid investment growth, not to provide diversification for
investors.
183. When investing in mutual funds, the investor will buy shares of a fund that consists of
stocks or bonds; the fund will hold shares of many companies.
184. U.S. investors have invested $13 trillion in mutual funds.
185. On a mutual fund quotation, the Net Asset Value (NAV) = the number of persons who are
investing in the fund.
186. We calculate the mutual fund’s NAV (Net Asset Value) by dividing the total market value
of the fund, by the number of shared outstanding.
187. Small investors can spread the risk of investing by purchasing shares of mutual funds or
ETFs.
188. Most mutual funds provide investors an opportunity to buy shares directly without using a
stockbroker.
189. A mutual fund that carries a
load
will require the investor to pay a commission, only if the
fund appreciates in price.
190. A no-load mutual fund charges no commission fees to buy or sell its shares.
191. When comparing the investments of different mutual funds, little variation in the risk level
exists.
192. Index funds invest in one specific type of investment; for example, an index fund might
only invest in income stocks, companies whose stocks pay dividends.
193.
Exchange traded funds
are like mutual funds because these funds permit the investor to
buy shares of a collection of several stocks or shares of a collection of stocks and bonds, but,
unlike mutual funds, they are traded during the day on the exchanges.
194. The investor always pays a fee when purchasing a share of a mutual fund.
195. Mutual funds offer small investors an opportunity to diversify their investments.
196. The degree of risk in mutual fund investments remains nearly the same from one fund to
the next.
197. Most investment advisors put mutual funds high on the list of recommended investments
for experienced investors, but consider them too risky for beginning investors.
198. From a risk standpoint, stocks are considered the riskiest investments, followed by
mutual funds, preferred stock, and ETFs. Bonds represent a lower-risk investment.
199. Last year Alexis landed her first professional job after graduating from college. She also
started her first investment account. Having met with several brokers before choosing someone
to work with, Alexis wanted to make certain that her investment choices would provide for long–
term growth, yet satisfy her concern for diversification. The person who won her business
prepared an asset allocation plan that would start her account by investing in several index
funds. Her adviser has offered her a sound way to combine the concern for diversification since
index funds are a sensible way for Alexis to start.
200. Every time someone sells a stock believing the price has reached its maximum, someone
else buys it believing the price will go still higher.
201. The Dow Jones Industrial Average reflects the daily average price of all the stocks traded
on the New York Stock Exchange.
202. The Dow Jones Industrial Average utilizes the prices of the same 30 companies’ stocks
each year to ensure consistency.
203. The Dow Jones Industrial Average provides us with a sense of direction (up or down) of
the overall stock market.
204. The NASDAQ reports its own average that investors follow to observe trends in the
market.
205. “Black Tuesday” refers to the stock market crash that occurred in October 1987.
206. Program trading refers to computer trading software that automatically sells stocks when
their price dips to a predetermined level.