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Exam 19: Using Securities Markets for Financing and Investing Opportunities

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Question 201

Multiple Choice

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A convertible bond allows the bondholder to exchange the bond for:

A) preferred stock.
B) common stock.
C) collateral.
D) debt holder privileges.

E) A) and B)
F) C) and D)

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Question 202

Multiple Choice

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The new issue $1,000 face value bonds due in 2020 issued by Bay Books,Ltd.are perceived by investors as being less attractive than other bonds offered by other businesses at the same time.The coupon rate attached to these bonds will need to be __________ than other corporate bond issues in order to attract investors.

A) the same
B) lower
C) higher
D) not important because it is a new issue

E) All of the above
F) B) and D)

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Question 203

True/False

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Small investors can spread the risk of investing by purchasing shares of mutual funds or ETFs.

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 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 ___________.

The stocks of high quality companies such as Coca-Cola and Microsoft are called blue chip stocks.

________ represent the best way for investors to have their investments managed by a trained specialist for a fee.

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.

A stock split refers to buying a share of stock at a discounted price if full payment is made at the time of purchase.

Corporations and brokers prefer to have stock purchases conducted in round lots of 100 shares.

Only government employees represent institutional investors.

Diversification means:

If a publicly traded corporation fails to maintain specific minimum requirements,the exchange can ________ the firm's securities.

Corporations sell a new issuance of securities in the Primary Market.

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) :

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.

When market interest rates increase,the selling price of existing bonds will:

If paid,dividends come from any profits remaining after the firm has paid taxes.The company cannot deduct dividends as an expense of doing business.

Both stocks and bonds represent temporary sources of funding for a firm.Eventually they must be repaid.

Maplewood Toy Company hopes to raise long-term capital by promising in writing to repay the principal provided by potential creditors in ten years.Additionally,the certificate issued by Maplewood promises to pay 5% interest annually for the ten year life of the security.Maplewood intends to issue:

Which of the following offers low risk,guaranteed income,backed by the full faith and credit of the federal government?