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WorksheetsInvestments, ETFs, and Securities Markets Worksheet Questions
Total questions: 102
Worksheet time: 51mins
To avoid paying a commission on an investment, what type of fund might an investor choose?
Blue-chip stock
Mutual funds
No-load funds
Common stock
Load funds
Investments such as money market mutual funds offer what advantage to investors?
Conservative capital growth
Long-term capital growth
Market appreciation
Aggressive growth
Safety and stability
What type of investment would preserve capital investment but seek capital appreciation?
Blue-chip stock
Balanced funds
Aggressive growth funds
No-load funds
Mutual funds
Which type of investment will sacrifice current income potential for long-term returns?
Blue-chip stock
Balanced funds
Aggressive growth funds
No-load funds
Mutual funds
What is the advantage of exchange-traded funds (ETFs) over mutual funds?
They can be traded throughout the day like a stock.
The cost of the fund management is passed on to the holder.
They do not require the services of a broker to complete a transaction.
They allow for frequent trading with lower overall transaction fees.
They regularly out-perform mutual funds.
When an investor wants to enter the market with a minimum amount of investment, what type of opportunities would offer ease of entry and low operating expenses?
Securities
Common stock
Blue-chip stock
Exchange-traded funds
Mutual funds
An exchange-traded fund (ETF) is a bundle of stocks (or bonds) that are in an index that tracks the overall movement of a market.
True
False
Select all statements that correctly explain what exchange-traded funds (ETFs) are and how they are tracked.
An ETF is a bundle of stocks or bonds that are in an index tracking the overall movement of a market.
Each share of an ETF can be traded like a stock and its price changes continuously as market prices change.
Because they are exchange traded, ETFs can be bought and sold any time throughout the day.
ETFs cannot be traded intraday and require a broker to complete all transactions at day’s end.
An ETF is designed to track the market being followed by its index.
Which is the MOST widely cited U.S. stock market index?
Standard & Poor's Composite Index of 500 Stocks
The NYSE index
Dow Jones Industrial Average
Moody's Stock List
The NASDAQ
New stocks and bonds are sold in what market?
Private placement market
Secondary market
Primary securities market
Tertiary market
Open market
Which of the following is the federal government agency that regulates U.S. securities markets?
New York Stock Exchange
Federal Reserve
Commerce Department
Securities and Exchange Commission
Treasury Department
Which of the following is an organization of individuals coordinated to provide an institutional setting in which stock can be bought and sold?
Stock exchange
Brokerage
Server
Over-the-counter market
Mutual fund
Which of the following is a basis for a firm to be listed on the New York Stock Exchange?
Headquarters in New York
Total value of outstanding stock
Industry in which the company operates
Type of stock
Global operations
Which of the following receives and executes buy-and-sell orders for other people in return for commissions?
Stock exchanges
Stock brokers
Investment banks
Stock agents
Savings banks
Which of the following is a summary of price trends in a specific industry and/or the stock market as a whole?
Investment index
Average index
Market indicator
Market index
Prospectus
Which of the following is a function performed by an investment bank?
Handling a client's portfolio in the secondary market
Establishing relationships for a client with a commercial bank
Underwriting purchases of stocks and bonds
Arranging travel abroad for purchasers of foreign currencies
Providing insurance services for clients
Which of the following is considered by many to be the BEST single indicator of the U.S. equities market?
NASDAQ Composite
Russell 2000
Dow Jones Industrial Average
Standard & Poor's 500
New York Stock Exchange
Which stock exchange has the highest volume of shares traded?
American Stock Exchange (ASE)
New York Stock Exchange (NYSE)
National Association of Securities Dealers Automated Quotation System (NASDAQ)
Philadelphia Stock Exchange (PSE)
Securities and Exchange Commission (SEC)
Which of the following allows after-hours trading and protects traders' anonymity?
National Association of Securities Dealers Automated Quotation (NASDAQ)
New York Stock Exchange (NYSE)
Electronic Communication Networks (ECNs)
Standard & Poor's 500
Mutual funds
For investors who do not want investment advice and wish to avoid paying a commission, what is the best type of broker assistance firm?
Mutual fund advisors
Investment banks
Stock broker
Discount broker
Full service broker
Which of the following is indicative of a bull market?
Stock prices that are averaging 20 percent off peak
Rising stock prices for 12 months or more
Falling stock prices for 6 months or more
A spike in the value of the Dow Jones Industrial Average
Investors who are motivated to sell stocks based on current value
In which type of market would investors be motivated to sell because they feel prices will fall further?
Bear market
Blue-chip market
Bull market
Large cap market
Composite market
A bear market can be revealed by tracking ________, which is a summary of overall price trends.
the Dow Jones Industrial Average
market indexes
the value of blue-chip stocks
technology-based economies
exchange-traded funds
Which index focuses specifically on the smallest U.S. companies, based on market capitalization?
S&P 500
Dow Jones Industrial Average
TradeStation
Russell 2000
NASDAQ Composite
The largest stock exchange in the world is the Tokyo exchange.
True
False
Unlike the Dow and the S&P 500, all NASDAQ-listed companies are included in the index for a total of some 3,100 firms.
True
False
Stocks are known as securities because they represent a secured interest in a company.
True
False
Mutual funds are traded in securities markets.
True
False
In a secondary securities market, new stocks and bonds are bought and sold by firms and governments.
True
False
An investment bank is a financial institution that specializes in issuing and reselling new securities.
True
False
A stock exchange is an organization of individuals coordinated to provide an institutional auction setting in which stocks can be bought and sold.
True
False
The New York Stock Exchange, the world's oldest electronic stock market, has orders gathered and executed exclusively on a computer network.
True
False
Stock brokers earn commissions from the individuals and organizations for which they place orders.
True
False
The value of the Dow Jones Industrial Average (DJIA) has remained unchanged in recent years.
True
False
An investment bank operates in the secondary securities market.
True
False
When an investment bank engages in underwriting, that investment bank is taking on risk in the process of launching new securities.
True
False
Is the following statement true or false: Although advising and underwriting may be tasks of an investment bank, distribution of new securities is NOT one of their services.
True
False
Is the following statement true or false: The Russell 2000 Index focuses primarily on technology companies, small-company stocks, and has a smaller representation of sectors such as financial, consumer products, and industrials.
True
False
Which combination best describes the core services provided by investment banks?
Advising companies on timing and financial terms of new issues; underwriting new securities and bearing some of the risk; creating distribution networks to move new securities through brokers to individual investors
Providing retail banking services to individuals; issuing savings accounts; managing government pensions
Only underwriting securities and trading for their own accounts, without advising companies or distributing new issues
Maintaining physical stock certificates for companies and investors, while avoiding involvement in underwriting or distribution
Which statement best distinguishes primary from secondary securities markets?
Primary markets involve businesses and governments selling new stocks and bonds, often with investment bank underwriting and possible private placements; secondary markets involve investors buying and selling existing securities on stock exchanges and via electronic communication networks
Primary markets are where investors trade existing stocks and bonds on exchanges, while secondary markets are limited to private placements of new issues
Primary markets occur only online through electronic networks, while secondary markets require face-to-face trading on exchange floors
Primary markets are exclusively for government bonds, and secondary markets are exclusively for corporate stocks
Which benefits are characteristic of online trading for individual investors? Select all that apply.
Convenient Internet access, fast transactions, and the ability to manage one’s own investments while paying low fees
A requirement to hold and store physical paper stock certificates for all transactions
The ability to buy into and sell out of the stocks of thousands of companies daily
Book-entry ownership that records shares in companies’ books, reducing the costs of storing, exchanging, and replacing certificates
What is the term for buying several different kinds of investments rather than just one?
Spreading
Shorting
Margin buying
Diversification
What is the term for the proportion of funds invested in each of several investment alternatives?
Spreading
Shorting
Margin buying
Asset allocation
Diversification
Which of the following is figured by dividing the yearly dollar amount of dividend income by the investment’s current market value?
Bond yield
Current dividend yield
Debenture
Trading volume
Earnings per share
The profit realized when the market value of an investment increases is known as which of the following?
Capital gains
Asset allocation
Diversification
Price appreciation
Profiteering
What are low grade bonds usually called?
Bankruptcy
Default bonds
Junk bonds
Corporate bonds
Grade B bonds
When do investors expect a higher rate of return on their investments?
When there is greater uncertainty
When the investment requires less upfront capital
When the investment is stable
When there is a short time commitment
When the investment is for a larger share of the offering
What is the increase in the dollar value of an investment known as?
Dividend payout
Total return
Interest yield
Capital gain
Price appreciation
Why should an investor consider diversification and asset allocation?
To offset capital gains
To achieve desired risk-return balance
To increase total returns
To achieve higher dividend yields
To improve price-appreciation values
What is the proportion of investments in each investment alternative referred to as?
Portfolio
Dividend yield
Asset allocation
Risk-reward relationship
Diversification
What type of investment offers low returns, but is insured by the U.S. government?
Common stock
Mutual funds
Exchange-traded funds
Treasury bills
Securities
Is the following statement true or false: Aggressive growth funds are designed for investors who can accept the risk of loss inherent in common stock investing with severe price fluctuations, but also the potential for superior returns over time.
True
False
Is the following statement true or false: An investment’s current dividend yield plus its capital gain rate is known as its total return.
True
False
A portfolio represents the proportion of funds invested in each of the investment alternatives.
True
False
Explain how dividend yield and interest dividend yield are computed.
Divide the yearly dollar amount of dividend income by the investment's current market value.
Divide total annual interest earned by the face value of the bond.
Divide quarterly dividends by the original purchase price of the stock.
Divide the yearly dividend by par value and multiply by 100.
What is the formula for measuring a firm's working capital?
Current assets = working capital / current liabilities
Working capital = current assets − current liabilities
Current liabilities = current assets + working capital
Working capital = current assets × current liabilities
Current liabilities = current assets / working capital
Which of the following is a formal pledge (an IOU) obligating the issuer to pay interest periodically and repay the principal at maturity (a preset future date) to the lender?
Commercial bank loan
Corporate bond
Mutual fund
Bond indenture
Prospectus
What type of loan is guaranteed by collateral?
Unsecured loan
Venture capital loan
Angel investor loan
Secured loan
Corporate bond
What is the advantage to a small business when planning for shortfalls in cash flow?
Financial resources can be saved in a savings account until needed.
Banks are more likely to offer loans if they know when the money will be needed.
Loans can be obtained in advance and minimize their costs.
Lower interest loans can be sought for the needed time frame.
Small businesses will appear more professional, resulting in favorable banking relationships.
What can an angel investor offer to small businesses when the small business doesn't have enough history to get a loan from a commercial bank?
A credit history
Venture capital
Stock options
Financial oversight
Bonds
How are federal and state projects, such as roads and schools, typically financed?
Municipal bonds
Common stock
Angel investors
Corporate bonds
TARP loans
What is the legal document that identifies a borrower's obligation and the financial returns to lenders when issuing corporate bonds?
Bondholder's claim
Risk claim analysis
Initial public offering
Mortgage-backed security
Bond indenture
What is the result of a borrower who fails to make payments to the lender when due?
Bankruptcy
Default
Risk ratings
Bondholder's claim
Bond indenture
According to rating services such as Moody's, what type of rating would a bond have if it was one of the safest investments possible, but produced lower returns?
AAA
BBB
Caa
CCC
D
What type of loan allows a borrower to maintain a compensating balance at the bank instead of putting up collateral?
Unsecured loan
Venture capital loan
Angel investor loan
Secured loan
Corporate bond
How can an investor request the courts to enforce a bond's terms of payment?
File for bankruptcy
Ask for an improved risk rating on the bond
File a bondholders' claim
Have the bond converted to stock
Have the bond converted to a mortgage-backed security
When can a bondholder file a bondholders' claim?
When purchasing an initial issue of the bond
When buying a bond from a brokerage service
When the borrower is filing for bankruptcy
When selling a bond before maturity
When the borrower fails to make a payment that is due
When a new bond is issued, when does the bond's par value have to be repaid?
When the company files for bankruptcy
Before the company goes into default
On the maturity date
On the issue date
When the company makes enough profit to cover the value of the bond
How is the risk involved in purchasing bonds affected by the bond's maturity date?
The sooner the maturity date, the greater the rate of return is on the bond.
The further the maturity date, the less likely a bondholders' claim will be filed.
The sooner the maturity date, the lower the initial offering price of the bond.
The further the maturity date, the greater the chance for unforeseen circumstances that affect the bond.
The sooner the maturity date, the greater the chance for significant market changes that affect the bond.
How does an issuer of mortgage-backed security pay off debt obligations?
Through the sale of mortgages to consumers
Through an increase in interest rates on mortgages
Through the assets of the lending institutions
Through the closing of a mortgage loan
Through the influx of cash from mortgage payments
What is a mortgage-backed security?
A bundled group of home mortgages
A bundled group of investments with AAA credit-ratings
A bundled group of bonds
A bundled group of stocks
A bundled group of loans made to risk assessment firms
Municipal bonds may be issued by federal, state, or local governments.
True
False
A bond is said to be in default if the borrower fails to make payment when due to lenders.
True
False
Bankruptcy is the court-granted permission not to pay some or all debts.
True
False
When are corporate bonds attractive to a firm?
When firms need large amounts for long periods of time
When firms need small amounts for short periods of time
When firms want to avoid interest payments entirely
When dividend payments to stockholders are preferred over bond obligations
Explain the difference between angel investors and venture capital.
Angel investors are individuals who provide private funds; venture capital is the funding provided by such individuals or companies
Angel investors are banks that issue loans; venture capital is government grant money
Angel investors are company employees; venture capital is money raised through stock dividends
Angel investors are public mutual funds; venture capital is revenue from product sales
When giving an unsecured loan, what might a bank require?
A compensating balance kept on deposit in a non-interest-bearing account
Collateral pledged equal to the loan amount
A cap on variable interest rates for the term of the loan
A co-signer with no deposit requirement
What is an angel investor?
Outside individuals who provide additional capital for growth to successfully launched businesses
Government agencies that guarantee commercial loans for startups
Corporate boards that vote to issue additional shares of stock
Banks that offer low-interest secured loans to new firms
What do angel investors receive in return for their investment?
A sizable piece of ownership in the company and often a formal say in how the company is run
Only fixed interest payments with no ownership rights
A tax deduction but no equity or control
Guaranteed repayment before any public offering
What is the term for a division of stock that gives stockholders a greater number of shares but does not change each individual's proportionate share of ownership?
Stock dividend
Stock split
Stock yield
Stock warrant
Stock exchange
What is the first sale of a company's stock to the general public called?
IPO
Common offering
Par value
Venture capital
Portfolio
When issuing shares of stock, what is being given to stock holders in exchange for their investment in the organization?
Dividends
Voting rights
Increased par value
Tax advantages
Long-term growth on investments
When is a company susceptible to a hostile takeover?
When a bull market is in effect
When stock prices are high, but assets are decreasing
When stocks are low priced, but assets have high value
When the international market is in recession
When angel investors demand repayment of their venture capital
When a security bought through an IPO is resold, where does the gain or loss go?
The investor who bought the security
The bank that financed the IPO
Stakeholders with vested interests in the company
The investor who sold the security
The company
Which of the following allows a company to generate long-term funding from within the organization?
Long-term loans
Equity financing
Debt financing
Market capitalization
Stock splits
What can a company do to attract investors when the value of their stock becomes too high?
Use the increased value for equity financing
Institute a market cap
Increase earnings per share
Buy back some shares
Issue a stock split
What is determined when the value of outstanding shares is multiplied by the number of outstanding shares?
Market capitalization
Stock split value
Earnings per dollar of investment
Dividend value
Earnings per share
When a firm needs a large amount of capital for an extended period of time, what type of financing, even with stiff annual or semi-annual interest payments, might be best?
Retained earnings
Corporate bonds
Common stock
Stock split
IPO
The use of special knowledge about a firm, which results in an unfair advantage or generates profit or other types of gain, is known as what?
Equity financing
Market capitalization
Insider trading
Prospectus information
FINRA violation
How does a corporate raider attempt to take control of a company and its assets?
Buying shares of stock on the open market
Joining the Board of Directors
Attend the annual shareholders' meeting to solicit support
Increase the value of shares on the market prompting a large sell off
Buying stock in competitor's companies
What is the outcome when a corporate raider takes over an organization?
The value of assets decreases.
Assets are sold off at a profit.
The value of the stock increases.
The company can be reorganized into a stronger, more productive organization.
A hostile takeover is avoided.
Before the Securities and Exchange Commission allows a firm to issue a public offering of new securities, what must be filed?
Incidents of insider trading
A prospectus
The firm's history of reinvesting retained earning
A statement of equity financing to be used
The firm's corporate bond rating
Where can an investor learn information about a firm's proposed security offering and the issuing company?
The Russell 2000 Index
The annual report
The prospectus
The SEC
The retained earnings statement
Before a firm can offer an IPO, they must file a document with the SEC that explains the offering and the company. This document is called a(n)
Rule of 72 report.
prospectus.
FINRA confirmation.
blue-chip evaluation.
IPO launch form.
Initial public offerings (IPOs) are the first sale of a company's stock to the general public and are a major source of funds that fuel continued growth for many firms.
True
False
The investment industry categorizes firms according to size of capitalization.
True
False
In case of financial distress, the firm would pay its stockholders before paying its bondholders.
True
False
Discuss how a stock split works if a company has 100,000 common shares outstanding that are trading at $100 per share.
In a 2-for-1 split, shares double to 200,000 and the price halves to $50, leaving each shareholder's total investment value unchanged.
In a 2-for-1 split, shares are halved to 50,000 and the price doubles to $200, increasing the company's value.
In a 2-for-1 split, both shares and price remain unchanged while market capitalization falls.
In a 2-for-1 split, investors must buy additional shares at $100 to maintain their investment value.
Explain the difference between debt financing and equity financing.
Debt financing uses borrowed funds from outside the firm; equity financing uses owners' capital, such as issuing stock or retaining earnings.
Debt financing raises funds by selling common stock; equity financing is the issuance of corporate bonds.
Debt financing relies on reinvested profits; equity financing depends only on bank loans.
Debt financing is always preferable for long-term funding; equity financing is used only for short-term cash needs.
Which of the following is the enforcement agency that oversees a market's activities and the way securities are issued within that market?
SEC
FINRA
Galleon group
Prospectus
Attorney general
Some employees have special knowledge about a future event an organization will experience that will affect the value of stock. Using this knowledge to buy or sell stock before the major event is called
prospectus violations.
market capitalization.
insider trading.
retaining earnings.
underwriting.
Established in 2003, this group protects U.S. investors by overseeing brokerage firms and securities representatives.
The attorney general's office
The SEC
The Galleon group
FINRA
The prospectus evaluation committee
