Chapter 16

Question 1

time value of money

Answer 1

principle that invested money grows, over time, by earning interest or some other form of return

Question 2

compound growth

Answer 2

compounding of interest over time - with each additional time period, interest returns accumulate

Question 3

stock

Answer 3

portion of ownership of a corporation

Question 4

common stock

Answer 4

most basic form of ownership, including voting rights on major issues, in a company

Question 5

market value

Answer 5

current price of a share of stock in the stock market

Question 6

book value

Answer 6

value of a common stock expressed as the firm’s owners’ equity divided by the number of common shares

Question 7

dividend

Answer 7

payment to shareholders, on a per-share basis, out of the company’s earnings

Question 8

mutual fund

Answer 8

company that pools cash investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities

Question 9

prospectus

Answer 9

registration statement filed with the SEC containing information for prospective investors abut the security to be offered and the issuing company

Question 10

insider trading

Answer 10

illegal practice of using special knowledge about a firm for profit or gain

Question 11

exchange-traded fund

Answer 11

bundle of stocks or bonds that are in a n index that tracks the overall movement of a market but, unlike a mutual fund, can be traded like a stock

Question 12

securities

Answer 12

stocks, bonds, and mutual funds representing secured, or asset-based, claims by investors against issuers

Question 13

securities markets

Answer 13

markets in which stocks and bonds are sold

Question 14

primary securities market

Answer 14

market in which new stocks and bonds are bought and sold by firms and governments

Question 15

securities and exchange commission (SEC)

Answer 15

government agency that regulates US securities markets

Question 16

investment bank

Answer 16

financial institution that specializes in issuing and reselling new securities

Question 17

secondary securities market

Answer 17

market in which existing (not new) stocks and bonds are sold to the public

Question 18

stock exchange

Answer 18

an organization of individuals to provide an institutional auction setting in which stocks can be bought and sold

Question 19

national association of securities dealers automated quotation (NASDAQ) system

Answer 19

world’s oldest electronic stock market consisting of dealers who buy and sell securities over a network of electronic communications

Question 20

electronic communication network (ECN)

Answer 20

electronic trading system that brings buyers and sellers together outside traditional stock exchanges

Question 21

stock broker

Answer 21

individual or organization that receives and executes buy and sell orders on behalf of outside customers in return for commissions

Question 22

book-entry ownership

Answer 22

procedure that holds investors’ shares in book-entry form, rather than issuing a physical paper certificate of ownership

Question 23

market index

Answer 23

statistical indicator designed to measure the performance of a large group of stocks or track the price changes of stock market

Question 24

bull market

Answer 24

period of rising stock prices, lasting 12 months or longer, featuring investor confidence for future gains and motivation to buy

Question 25

bear market

Answer 25

period of falling stock prices marked by negative investor sentiments with motivation to sell ahead of anticipated losses

Question 26

dow jones industrial average (DJIA)

Answer 26

oldest and most widely cited market index based on the prices of 30 blue-chip, large-cap industrial firms on the NYSE

Question 27

S&P 500

Answer 27

market index of US equities based on the performance of 500 large-cap stocks representing various sectors of the overall equities market

Question 28

NASDAQ composite index

Answer 28

market index that includes all NASDAQ-listed companies, both domestic and foreign, with a high proportion of technology companies and small-cap stocks

Question 29

Russell 2000 index

Answer 29

specialty index that uses 2000 stocks to measure the performance of the smallest US companies

Question 30

risk-return (risk-reward) relationship

Answer 30

principle that safer investments tend to offer lower returns whereas riskier investments tend to offer higher returns (rewards)

Question 31

current/interest dividend yield

Answer 31

yearly dollar amount of income divided by the investment’s current market value, expressed as a percentage

Question 32

price appreciation

Answer 32

increase in the dollar value of an investment at two points in time (the amount by which the price of a security increases)

Question 33

capital gain

Answer 33

profit realized from the increased value of an investment

Question 34

diversification

Answer 34

purchase of several different kinds of investments rather than just one

Question 35

asset allocation

Answer 35

relative amount of funds invested in (or allocated to) each of several investment alternatives

Question 36

portfolio

Answer 36

combined holdings of all the financial investments of any company or individual

Question 37

secured loan (asset-backed loan)

Answer 37

loan to finance an asset, backed by the borrower pledging the asset as collateral to the lender

Question 38

collateral

Answer 38

asset pledged for the fulfillment of repaying a loan

Question 39

loan principal

Answer 39

amount of money that is loaned and must be repaid

Question 40

annual percentage rate (APR)

Answer 40

one-year rate that is charged for borrowing, expressed as a percentage of the borrowed principal

Question 41

unsecured loan

Answer 41

loan for which collateral is not required

Question 42

angel investors

Answer 42

outside investors who provide new capital for forms in return for a share of equity ownership

Question 43

venture capital

Answer 43

private funds from wealthy individuals seeking investment opportunities in new growth companies

Question 44

corporate bond

Answer 44

formal pledge obligating the issuer (the company) to pay interest periodically and repay the principal at maturity

Question 45

bond indenture

Answer 45

legal document containing complete details of a bond issue

Question 46

maturity date (due date)

Answer 46

future date when repayment of a bond is due from the bond issuer (borrower)

Question 47

face value (par value)

Answer 47

amount of money that the bond buyer (lender) lent the issuer and that the lender will receive upon repayment

Question 48

default

Answer 48

failure of a borrower to make payment when due to a lender

Question 49

bondholders’ claim

Answer 49

requires for court enforcement of a bond’s terms of payment

Question 50

bankruptcy

Answer 50

court-granted permission for a company to not pay some or all debts

Question 51

mortgage-baked security (MBS)

Answer 51

mortgages pooled together to form a debt obligation - a bond - that entitles the holder (investor) to cash that flows in from the bundled mortgages

Question 52

initial public offering (IPO)

Answer 52

first sale of a company’s stock to the general public

Question 53

corporate raider

Answer 53

investor conducting a type of hostile corporate takeover against the wishes of the company

Question 54

stock split

Answer 54

stock dividend paid in additional shares to shareholders, thus increasing the number of outstanding shares

Question 55

market capitalization (market cap)

Answer 55

total dollar value of all the company’s outstanding shares

Question 56

debt financing

Answer 56

long-term borrowing from sources outside a company

Question 57

equity financing

Answer 57

using the owners’ funds form inside the company as the source for long-term funding