Part-2 Week-9

Aplia Homework: Securities, Business Finance, and the Economy: The Tail that Wags the Dog?

1. Corporations and their unique characteristics

True or False: If a corporation is unable to repay its debts, the creditors to whom the debt is owed may sue an individual stockholder for more than he or she invested in the corporation.

            True

            False

2. Definition of a stock or bond

A share of Dell stock represents:

            A risk-free investment vehicle in the long run

            A claim on Dell's assets that gives the purchaser a share of ownership of the corporation

            A right to require that Dell pays all profits as dividends

            An IOU, or promise to pay, from Dell

3. Bond prices and interest rates

Pacific Amalgamated (PA) issues 10-year bonds in 2011 with a $1,000 face value and a $150 coupon.

The interest rate at which PA issues these bonds is ________.

When the bond reaches maturity in 2021, how much will each investor holding one of these PA bonds receive?

            The initial investment of $1,000 plus $1,500 worth of coupons ($150 per year x 10 years)

            The initial investment of $1,000 plus $150 for the 10th coupon

            $1,500 worth of coupons ($150 per year x 10 years)

Suppose interest rates rise dramatically. The market price of these PA bonds will ________.

4. Another source of funds for corporations

When a corporation is profitable, which of the following is likely to be the least expensive source of funds for the company?

            Issuing new stocks

            Plowback

            Issuing new bonds

5. Stock exchanges

Which of the following are popular stock exchanges in the United States? Check all that apply.

           NASDAQ Composite

            New York Stock Exchange (NYSE)

            Standard & Poor's 500 (S&P 500)

            National Association of Securities Dealers Automated Quotations (NASDAQ)

If a company's stock price is very low in comparison with the value of its assets, it may be subjected to:

            Circuit breakers

            A takeover

            A financial inspection under the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

6. Speculation

Suppose a soybean farmer is concerned that the price of soybeans will decline before harvest time. In order to protect against this risk, the farmer signs a futures contract with a speculator for delivery of the harvested soybeans at a pre-set price.

In this case, the speculator will suffer a loss if the future price of soybeans turns out to ________ than the contracted price.

7. Securities and risks

_______________ are derivatives that function like an insurance policy that protects lenders against a third party's default on a debt. During the financial crisis of 2007–2009, many buyers of such derivatives faced bankruptcy because:

            A major seller had miscalculated the default risks of securities it had insured with such derivatives

            Homeowners refused to borrow mortgage loans from lenders that bought such derivatives

            The U.S. government refused to bail out financial firms that issued such derivatives

8. Selecting a portfolio

The decision to hold a variety of corporate stocks and bonds rather than investing in only one or two corporations is known as __________.