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Exam 19: Using Securities Markets for Financing and Investing Opportunities

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Question 71

True/False

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With recent mergers of stock exchanges, beginning with the New York Stock Exchange merger with Archipelago, and subsequently with Euronext and then Deutsche Borse, most exchange floors are symbolic because trades usually take place via computers.

A) True
B) False

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Question 72

Multiple Choice

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The risk associated with Firm A's bond is greater than the risk of Firm B's bond. All other things being equal, investors would be willing to pay ________ for Firm B's bond.

A) less
B) more
C) the same
D) a premium

E) C) and D)
F) None of the above

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Question 73

True/False

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Online investors expect more expert advice than investors using traditional brokerage firms.

Monica met with a financial planner last week and he urged her to consider only government bonds and mutual funds in her portfolio. Since she is in her 20s, Monica believes she can tolerate a little more risk. You suggest that it is a better plan to follow the advice of the financial planner, rather than research her choices on her own.

Corporate management decisions are influenced by the desire to keep stockholders happy.

Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.

Issuing stock is considered equity financing.

The NASDAQ reports its own average that investors follow to observe trends in the market.

Issuing new common stock usually expands ownership, giving all owners the right to vote for the firm's board of directors.

Well-known foreign exchanges that also exchange the securities of U.S. firms include the London Exchange and the Tokyo Exchange.

Cumulative preferred stockholders enjoy the first right to purchase any new shares of stock issued by the firm.

When an investor sells a security for more than the purchase price, the investor earns a(n) :

Buying stock on margin allows investors to increase the potential rate of return made on a stock investment.

Describe four different types of common stock that an investor may consider, depending upon the investor's strategy and risk tolerance.

Idle Time Gaming, Inc., has reached the point where it needs several million dollars in order to expand and become the international company that it says it wants to be in its strategic plan. After consulting with an investment banker who is willing to underwrite the issue, it learned that investors will purchase the stock for $22/share. Idle Time will receive a smaller amount for each share that is sold.

Bonds offering a higher interest rate than other bonds of similar risk will likely sell at a:

Growth stocks offer investors the attractive combination of low risk and high returns.

Investors earn a capital gain when they sell a stock for more than they paid for it.

Juan recently invested in 15-year Bellandro Bay Brewery bonds paying 6% interest annually, with a maturity date of 2030. The bonds are callable in 2025. If interest rates go down to 4.5% in the year 2025, the brewery is likely to:

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. -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) :