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Exam 19: Using Securities Markets for Financing and Investing Opportunities

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Question 161

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) B) and C)
F) None of the above

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Question 162

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From an investor's viewpoint, bonds generally provide a safer investment option than does the stock of the same corporation.

A) True
B) False

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Question 163

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When comparing the investments of different mutual funds, little variation in the risk level exists.

According to the Standard & Poor's Investor Services ratings, which of these ratings indicate a highly speculative bond?

New investors may want to consider funds, which are mutual funds that invest in one particular kind of stock or a particular kind of bond, or even stocks that are representative of the entire market.

Zach purchased 200 shares of Fast Track Corporation last year. This year, he plans to hire an attorney to go after the company for failure to pay dividends. If Zach follows through with his plan, he will probably win the lawsuit because companies are obligated to pay their stockholders dividends for owning and holding the firm's stock.

Which of the following securities would investors consider the most risky?

Both preferred stocks and bonds represent funding sources that require repayment to investors.

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.

If you want to buy the stocks of largely capitalized companies (companies with millions, and even billions worth of assets), your broker will need to make the trade through the NYSE Euronext.

The interest earned on municipal bonds is often tax-free at the state level.

A company often exercises the call provision of a bond if it's available when prevailing interest rates fall below the interest rate currently being paid to bondholders.

Government bonds can vary in denomination, but most corporate bonds are issued in .

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 -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) :

Which of the following legislative acts created the Securities and Exchange Commission?

A share of preferred stock currently sells for $120. It offers the investor a dividend rate of 8%, with a par value of $100. If the company is able to pay dividends, preferred stockholders would receive a dividend of $9.60 per share.

A company with cash flow shortages must pay common stockholders their dividends before paying preferred stockholders their dividends.

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.

A certificate provides evidence of ownership in a specific corporation.

"Black Tuesday" refers to the stock market crash that occurred in October 1987.