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primary securities markets

answer

handle the sale of new securities; corporations make money on sale of their securities (stock) only once: when they sell it on the primary market

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initial public offering (IPO)

answer

first public offering of a corporation's stock

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secondary securities market

answer

handles the trading of these securities between investors, with the proceeds of the sale going to the investor selling the stock, not to the corporation whose stock is sold

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investment bankers

answer

specialists who assist in the issue and sale of new securities

question

institutional investors

answer

large organizations such as pension funds, mutual funds, and insurance companies that invest their own funds or the funds of others; powerful force in securities market

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stock exchange

answer

organization whose members can buy and sell (exchange) securities for companies and individual investors

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over the counter (OTC) market

answer

exchange that provides a means to trade stocks not listed on the national exchanges; network of several thousand brokers who maintain contact with one another and buy and sell securities through a nationwide electronic system; trading conducted between 2 parties directly

question

NASDAQ (National Association of Securities Dealers Automated Quotations)

answer

nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically; world's first electronic stock market; largest US electronic stock trading market and has more trading volume than any electronic exchange in the world

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Securities and Exchange Commission (SEC)

answer

federal agency that has responsibility for regulating the various stock exchanges; created by Securities and Exchange Act of 1934

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Securities Act of 1933

answer

helps protect investors by requiring full disclosure of financial info by firms selling bonds or stock; helps deal with free for all atmosphere

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prospectus

answer

condensed version of economic and financial info that company must file with SEC before issuing stock; must be sent to prospective investors

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stocks

answer

shares of ownership in a company

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stock certificate

answer

evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued

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dividends

answer

part of a firm's profits that the firm may distribute to stockholders as either cash payments or additional shares of stock

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common stock

answer

most basic form of ownership in a firm, it contains voting rights and the right to share in the firm's profits through dividends, if approved by firm's board of directors

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preferred stock

answer

stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders if the company is forced out of business and its assets sold; normally do not get voting rights; can be callable which means preferred stockholders could be required to sell their shares back to the corporation; can be cumulative, that is if one or more dividends are not paid when promised, they accumulate and the corporation must pay them in full at a later date before it can distribute any common stock dividends

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bond

answer

corporate certificate indicating that a person has lent money to a firm (or a government)

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principal

answer

face value (dollar value) of a bond, which the issuing company is legally bound to repay in full to the bondholder on the maturity date

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maturity date

answer

exact date the issuer of a bond must pay the principal to the bondholder

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interest

answer

payment the issuer of the bond makes to the bondholders for use of the borrowed money

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debenture bonds

answer

unsecured bonds not backed by any collateral

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sinking fund

answer

reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond. provide for an orderly retirement (repayment) of a bond issue reduce the risk the bond will not be repaid support the market price of the bond because they reduce the risk the bond will not be repaid

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callable bond

answer

permits the bond issuer to pay off the bond's principal before its maturity date

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stockbroker

answer

registered representative who works for a brokerage firm as a market intermediary to buy and sell securities for clients; place an order and negotiate a price, after the transaction is completed, the trade is reported to your broker, who notifies you

question

What are 5 key criteria when selecting investment options

answer

1) investment risk: the chance that an investment will be worth less at some future time than it's worth now 2) yield: the expected return on an investment like interest or dividends, usually over a period of one year 3) duration. the length of time your money is committed to an investment 4) liquidity: how quickly you can get back your invested funds in cash if you want or need them 5) tax consequences: how the investment will affect your tax situation

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diversification

answer

buying several different investment alternatives to spread the risk of investing

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capital gains

answer

the positive difference between the purchase price of a stock and its sale price

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growth stocks

answer

stocks of corporations in emerging fields such as tech, biotech, internet-related firms whose earnings are expected to grow at a faster rate than other stocks

question

income stocks

answer

stocks of public utilities because they usually offer investors a high dividend yield that generally keeps pace with inflation

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market order

answer

tells a broker to buy or sell a stock immediately at the best price available

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limit order

answer

tells the broker to buy or sell a stock at a specific price, if that price becomes available

question

round lots/odd lots

answer

stock purchase at 100 shares a time/fewer than 100 shares at atime

question

stock splits

answer

an action by a company that gives stockholders two or more shares of stock for each one they own

question

buying stock on margin

answer

purchasing stocks by borrowing some of the stock's purchase cost from the brokerage firm; margin is the portion of the stock's purchase price that investors must pay with their own money

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junk bonds

answer

high risk, high interest, high default rate bonds

question

mutual fund

answer

an organization that buys stocks and bonds and other investments, then sells shares in those securities to the public; an investment company that pools investor's money and then buys stocks or bonds in many companies in accordance with the fund's specific purpose; mutual fund managers are specialists who pick what they consider to be the best stocks and bonds available and help investors diversify their investments.

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index fund

answer

invest in a certain ind of stocks or bonds or in the market as a whole; focus on large companies, emerging countries or real estates, etc

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exchange-traded funds (ETFs)

answer

collections of stocks, bonds, and other investments that are traded on exchanges but are traded more like individual stocks than like mutual funds

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Dow Jones Industrial Average (the Dow)

answer

the average cost of 30 selected industrial stocks, used to give an indication of the direction (up or down) of the stock market over time

question

program trading

answer

giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses

question

money

answer

anything people generally accept as payment for goods and services

question

barter

answer

direct trading of goods or services for other goods or services

question

M-1

answer

money that can be accessed quickly and easily (coins, paper money, checks, traveler's checks etc)

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M-2

answer

money included in M-1 plus money that can take a little more time to obtain (savings accounts, money market accounts, mutual funds, certification of deposit); most commonly used definition of money

question

M-3

answer

M-2 plus big deposits like institutional money market funds

question

reserve requirement

answer

percentage of commercial banks' checking and savings accounts that must be physically kept in the bank (cash in the vault) or in a non-interest bearing deposit at the local Federal Reserve district bank; one of the Fed's tools

question

What happens to the money supply when the Fed increase the reserve requirement?

answer

Money becomes scarcer as money supply would be reduced and reduces amount banks can lend out leading to prices falling in times of inflation

question

open market operations

answer

buying and selling of US government bonds by the Fed with the goal of regulating the money supply

question

What can the US government do to decrease the money supply in terms of bonds/open market operations

answer

the federal government sells US governments to public as the money it gets as payment is no longer in circulation, decreasing the money supply

question

What will the Fed do if it wants to increase the money supply in terms of bonds

answer

the Fed buys government bonds back from individuals, corporations or organizations that are willing to sell. The money the Fed pays for these securities enters circulation, increasing the money supply

question

discount rate

answer

interest rate the Fed charges for loans to member banks

question

How does an increase in the discount rate affect the money supply

answer

an increase in discount rate discourages banks from borrowing and reduces the number of available loans, decreasing the money supply

question

How does a decrease in discount rate affect money supply

answer

lowering the discount rate encourages member banks to borrow money and increases the funds they have available for loans which is supposed to increase the money supply

question

commercial bank

answer

profit-seeking organization that receives deposits form individuals and corporations in the form of checking and savings accounts and uses these funds to make loans; 2 types of customers: depositors and borrowers; makes a profit by efficiently using depositors' funds as inputs (on which it pays interest) to invest in interest-bearing loans to other customers. If the revenue generated by loans exceeds the interest paid to depositors plus operating expenses, the bank makes a profit

question

demand deposit

answer

technical name for a checking account; the money is available on demand from the depositor

question

time deposit

answer

technical name for savings account; the bank can require a prior notice before you make a withdrawal

question

certificate of deposit (CD)

answer

time deposit (savings) account that earns interest to be delivered at the end of the certificate's maturity date; depositor agrees not to withdraw any of the funds until then; usually the longer the period, the higher the interest rate

question

savings and loan association (S&L)

answer

financial institution that accepts both savings and checking deposits and provides home mortgage loans

question

credit unions

answer

nonprofit, member owned financial cooperatives that offer the full variety of banking services to their members: interest-bearing checking accounts at relatively high rates, short term loans at relatively rates, financial counseling, life insurance policies, and a limited number of home mortgage loans

question

nonbanks

answer

financial organizations that accept no deposits but offer many of the services provided by regular banks i.e. life insurance companies, pension funds, brokerage firms, commercial finance companies, and corporate financial services (like GE capital)

question

pension funds

answer

amount of money put aside by corporations, nonprofit organizations, or unions to cover part of the financial needs of members when they retire; contributions are made by employees, employers, or both; typically invest in low-return but safe corporate stocks or other conservative investments such as government securities and corporate bonds

question

Troubled Asset Relief Program (TARP)

answer

toward the end of Bush's presidency, the Treasury Department proposed a $700 billion "bailout" package; Obama proposed an additional $800 billion as a stimulus package

question

Federal Deposit Insurance Corporation (FDIC)

answer

an independent agency of the US government that insures bank deposits; if a bank were to fail the FDIC would arrange to have that bank's accounts transferred to another bank or reimburse depositors up to $250,000 per account; covers many commercial banks but does not have unlimited money to cover all losses if too many banks fail

question

Savings Association Insurance Fund (SAIF)

answer

part of the FDIC that insures holders of accounts in savings and loan associations

question

electronic funds transfer (EFT) system

answer

computerized system that electronically performs financial transactions such as making purchases, paying bills, and receiving paychecks

question

debit card

answer

an electronic funds transfer tool that serves the same function as checks; it withdraws funds from a checking account

question

letter of credit

answer

promise by the bank to pay the seller a given amount if certain conditions are met; German company may not paid until the goods have arrived at the US company's warehouse

question

banker's acceptance

answer

promise that the bank will pay some specified amount at a particular time

question

World Bank

answer

bank primarily responsible for financing economic development; also known as the International Bank for Reconstruction and Development; lends most of its money to developing nations to improve their productivity and help raise standards of living and quality of life

question

International Monetary (IMF)

answer

organization that assists in the smooth flow of money among nations; established to foster cooperative monetary policies that stabilize the exchange of one national currency for another

question

T/F: Tax payments are important to the finance manager because they represent a cash inflow to a firm.

answer

FALSE. Tax payments are a disbursement. Taxes represent a cash outflow for the firm. Finance managers must stay abreast of changes in tax laws in order to minimize the tax obligations of their firms.

question

T/F: Accountants truly represent the financial managers of a business.

answer

FALSE. Accountants perform the technical aspects of gathering, organizing, classifying, and summarizing events and transactions, and prepare technical documents such as financial statements and reports. Finance managers interpret the results of these reports and create financial strategy for the firm.

question

T/F: Mark manages credit and collections at Polly Parrot Pet Supplies, Inc. He is responsible for accounts receivable and accounts payable. These activities suggest that his job is in financial management.

answer

TRUE. Determining the customers that qualify for credit and making collection of overdue accounts are important responsibilities of financial managers.

question

T/F: A budget's primary purpose is to provide managers with a financial summary of past operations.

answer

FALSE. A budget is a future plan, not a summary of past operations. When properly constructed, a budget becomes the primary basis and guide for the firm's financial operations.

question

T/F: Big Bear Ski Lodge owners know that the lifts on the north slope will need replacing in the next two years. Three months prior to replacement, they will include the expenditure in their cash budget.

answer

FALSE. Chair lifts would be considered a capital budget item—a major capital expenditure for a ski lodge. A major purchase such as this would be part of the capital budget in the company's financial plan.

question

T/F: Debt financing refers to funds acquired from the profitable operations of a firm or through the sale of ownership in the firm.

answer

FALSE. Debt financing refers to borrowing money from lending institutions, with the understanding that these sources of funds will be repaid at a later date.

question

T/F: Companies raising funds must choose either debt or equity sources, but not both.

answer

FALSE. Firms may utilize several sources and several combinations of financing. These generally include debt financing (borrowed funds), equity financing (funds acquired through the sale of company stock), and even internal sources of financing such as companies retaining their earnings.

question

T/F: Corporations that issue stock to raise long-term funds accept the legal obligation to repay the amount borrowed.

answer

FALSE. Stock represents equity capital or owner-provided funds. Stockholders are owners of the firm and are not repaid their investment.

question

Which of the following represents a capital expenditure? A) issuing paychecks to workers B) paying for advertising on a local radio station C) purchasing raw materials to be used in the production of a firm's product D) purchasing a building to be used for office space

answer

D) purchasing a building to be used for office space Capital expenditures are major investments in long-term assets such as land, buildings, and equipment; or, intangible assets such as patents.

question

By selling shares of ownership in their company, California Scientific acquires the funds needed to finance their research and development projects. California Scientific provides for their long-term funding needs through ________ financing. A) debt B) equity C) retained D) asset

answer

B) equity Equity financing is generated through the sale of stock. It is also generated when a firm retains its earnings and reinvests those earnings back into the company.

question

Which of the following organizations would be most likely to acquire short-term funding by issuing commercial paper? A) A well-known, financially stable corporation B) A small business that is unable to qualify for loans from commercial banks C) A firm with a significant percentage of current assets held as accounts receivable D) A company that prefers equity financing to obtain short-term funds

answer

A) A well-known, financially stable corporation Commercial paper consists of unsecured promissory notes. Because the notes are unsecured, only large, financially sound corporations are able to sell them.

question

Maryland Nursery offers customers credit terms of 3/15, net 30. This gives customers a: A) 15 percent discount if they pay in three days. B) 3 percent discount if they pay in thirty days. C) 3 percent discount if they pay in fifteen days. D) 15 percent discount if they pay in thirty days.

answer

C) 3 percent discount if they pay in fifteen days. The terms 3/15, net 30 indicate that a 3% discount is offered to customers paying by the 15th day after the billing. No discount is offered to customers paying between the 16th and the 30th day after the billing.

question

Vitale Jewelers obtains needed short-term funds by selling its accounts receivable to the Friendly Finance Company. Friendly Finance usually pays Vitale about 80% of the value of the receivables. Vitale Jewelers utilizes ________ as a means of raising short-term funds. A) trade credit B) revolving credit agreements C) factoring D) receivable draft agreements

answer

C) factoring Factoring is the process of selling accounts receivable at a discount for cash. The factor assumes the risk of collecting on the accounts receivable. References

question

The interest paid on ________ represents a tax-deductible business expense. A) bonds B) stock C) retained earnings D) depreciated assets

answer

A) bonds Lenders usually require borrowers to pay interest on loans. Firms must also pay interest to their bondholders. Interest payments are deductible expenses on the firm's income statement.

question

As John considers approaching a venture capital firm to provide funding for his new software firm, he should realize that a venture capital firm will: A) offer no more than 20 percent of the funding he needs. B) charge a higher interest rate than a commercial bank. C) expect the company to provide a steady dividend income. D) probably want an ownership interest in the business.

answer

D) probably want an ownership interest in the business. Venture capitalists typically expect a share of ownership in the company.

question

T/F: The Securities and Exchange Commission does not intercede in any way in the process of an IPO. Doing so would disrupt the natural process of the capital markets.

answer

FALSE. The SEC (Securities and Exchange Commission) is the regulator of publicly traded firms, and the financial markets. Any company planning to issue an IPO must first provide the SEC with the proper documentation and financial statements that describe the firm's intent.

question

T/F: While common stockholders of corporations have voting rights, preferred stockholders generally do not.

answer

TRUE. Preferred stock is frequently referred to as a hybrid investment in that it has characteristics of both bonds and stocks. Normally preferred stock, like bonds, does not include voting rights in the firm.

question

T/F: For starters, investors should consider the return on investment, the liquidity and riskiness of an investment.

answer

TRUE. The five criteria to use when selecting an investment option are as follows: (1) investment risk; (2) yield; (3) duration; (4) liquidity; and (5) tax consequences.

question

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

answer

FALSE. When companies find their stock price has appreciated sufficiently high such that it may be out of reach for many investors, the Board of Directors will announce a stock split, where investors on record of holding the stock will receive two or more shares of stock for each one share that they currently hold. The dollar value of the investor's holdings in this stock stays the same.

question

T/F: Mutual funds offer small investors an opportunity to diversify their investments.

answer

TRUE. The benefit of a mutual fund is the opportunity to buy shares of a single mutual fund and thereby share in the ownership of many different companies. Ownership in all of the different companies that a mutual fund offers might not be affordable for a small individual investor.

question

T/F: The Dow Jones Industrial Average reflects the average of the eleven largest corporations traded on the New York Stock Exchange as originally selected by Charles Dow.

answer

FALSE. The Dow Jones Industrial Average was broadened in 1982 to include 30 stocks. New stocks are substituted when deemed appropriate.

question

Which of the following would be classified as an institutional investor? A) Pension funds B) Federal Reserve banks C) Stock exchanges D) Commodity brokers

answer

A) Pension funds Institutional investors are large investors such as pension funds, mutual funds, insurance companies, and banks.

question

Molly Manufacturing plans to issue $75 million of common stock. The firm will likely rely on the advice and assistance of a(n): A) Federal Reserve bank. B) commercial bank. C) mutual fund. D) investment banker.

answer

D) investment banker. Investment bankers are specialists who assist in the issue and sale of new securities.

question

Mark impresses his friends by stating that he just cast four votes in the election of the board of directors of Microsoft, indicating that Mark owns __________ stock in Microsoft. A) preferred B) cumulative preferred C) registered D) common

answer

D) common Common stock represents ownership privileges that include the right to vote to elect the board of directors.

question

Which of the following represents a disadvantage of issuing bonds? A) Bonds are permanent debt on the firm's balance sheet. B) Dividends are legally required. C) Bonds increase the firm's debt. D) Bondholders receive voting rights.

answer

C) Bonds increase the firm's debt. Bonds increase debt and may adversely affect the market's perception of the firm.

question

Bonds perceived as high risk typically pay ________ interest rates. A) higher B) lower C) more volatile D) less volatile

answer

A) higher The risk/return trade-off suggests that interest rates must be sufficiently high to attract investors to an above average risky investment.

question

Which of the following measures how quickly an investor has access to his/her invested funds, if they are needed? A) risk B) tax consequences C) yield D) liquidity

answer

D) liquidity Liquidity measures how quickly you can get back your invested funds if you want them or need them.

question

Diversification means: A) allocating all your investment funds into one type of investment. B) buying investments on margin. C) being knowledgeable about the various types of investment opportunities. D) allocating your investment funds to several types of investments.

answer

D) allocating your investment funds to several types of investments. Diversification is buying several types of investments to spread the risk of investing.

question

In the securities markets, capital gains take place when: A) the value of the Dow Jones Industrial Average appreciates. B) a security sells for more than the original purchase price. C) additional investors buy stock in an existing corporation. D) stockholders profit from the firm's use of leverage.

answer

B) a security sells for more than the original purchase price. A capital gain is the positive difference between the price at which you bought a stock and what you sell it for.

question

U.S. government bonds are considered a secure investment because: A) the interest rates are protected from inflation and tied to the consumer price index. B) they are backed by the full faith and credit of the federal government. C) the interest rates are higher than for corporate bonds of equal duration. D) if they are lost or stolen the federal government promises to replace them when the proof of purchase is provided.

answer

B) they are backed by the full faith and credit of the federal government. U.S. government bonds are a secure investment because they are backed by the full faith and credit of the federal government.

question

In the securities markets, capital gains take place when: A) the value of the Dow Jones Industrial Average appreciates. B) a security sells for more than the original purchase price. C) additional investors buy stock in an existing corporation. D) stockholders profit from the firm's use of leverage.

answer

B) a security sells for more than the original purchase price. A capital gain is the positive difference between the price at which you bought a stock and what you sell it for.

MGMT 1 Chapter 19-20 Securities Markets, Money, Financial Reserve – Flashcards

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