Name: ______________________________________________________ Period:__________________
CHAPTER 7 - FINANCE BUSINESS ACTIVITIES
Goals
1. Define Commodity investment options
2. Define Money Market investment options
3. Define Bond investment options
4. Define Stock investment options
5. Identify which investment option(s) are available to meet specific financing needs
6. Calculate Treasury bill returns, purchase prices, call premiums, dividend awards, bond discounts, dividend
yields, capital gains
Vocabulary
commodity market
money market
accounts payable
line of credit
creditor
lease
lessor
lessee
certificated of deposit (CD)
commercial paper
negotiable certificate of deposit (NCD)
Treasury bill/note/bond
yield to maturity
external foreign government bond
internal foreign government bond
general obligation bond
revenue bond
mortgage bond
debenture bond
callable bond
convertible bond
global bond
bond premium
bond discount
capital market
common stock
preferred stock
capital gains
dividends
dividend yield
cumulative stock
non-cumulative stock
convertible stock
market index
stock split
selling short
mutual funds
net asset value
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7
SECTION 7.1 FINANCING OPTIONS - INDEPENDENT SECTION - BRING ANY QUESTIONS TO CLASS
1.
Buying on account/accounts payable:
2. Bank loans
a.
Promissory note:
b. Line of credit:
3. Leasing:
a.
The __________ is the owner of the property
b. The ______________ is the person who uses the item.
SECTION 7.4 STOCK AND BOND MARKETS
1.
A ________________________ is a licensed specialist in the buying and selling of stocks and bonds.
Brokers charge fees called _______________________. Full-service brokers generally charge a
_______________ commission but they also provide ________________ research than discount brokers.
Brokers and investors often use stock _____________ to determine the relative value of a stock. These
indexes average the stock prices for a specific _____________ of stocks. Two common indexes include the
S&P 500 which provides a measure of the general stock market and the Dow Jones Industrial Average which
provides a measure of industrial production.
2. When the value of a stock gets too high, companies may execute a stock ____________ which is the
proportional division of a number of shares into a larger number. After a stock split, the share value is
_____________, but the dollar value of each shareholders’ investment ___________________________.
Example:
Investor owns 50 shares of stock with a value of $100 per share. The company does a 2:1 stock
split. After the split the investor will own 100 shares of stock with a value of $50 per share.
3. If investors believe the price of a stock will ________________ they may try _______________________
where the investor _____________ shares to make a trade today at the current market price. Then, at a
point in the future, the investor must _______________ the borrowed shares hopefully at a lower price.
Example:
An investor borrows 100 shares of stock at $20 per share (total investment loan of $2,000). The
investor pays interest on the value of the borrowed shares to the broker. At some point in the future, the
price of the stock drops to $15 a share. The investor then purchases the shares in the market for $1,500 and
returns them to the broker for a gain of $500 less interest paid on the stock loan.
4. When deciding which stocks to purchase, investors generally follow this process:
a.
b.
c.
d.
8
5. A mutual fund is an investment company that takes money invested by others and uses the money to invest in
financial _________ to achieve specific ___________________. The price of a mutual fund is determined
by its _________________________________ or ________. This value is calculated by taking the total
__________ of all the investments in the fund and dividing it by the number of ____________. A part of
the gains made by the individual investments in the fund is used to pay the fund’s operating ______________.
These fees result in a ____________ return than if the same investments were purchased in the open market.
a.
Growth
b. Income
c.
International
d. Sector
e.
Bond
f.
Balanced
EQUITY/STOCK MATRIX
FIXED-INTEREST MATRIX
Style
Value
Maturity
Core
Growth
Short
Intermed.
Long
Quality
High
Medium
Market Value
Large
Medium
Low
Small
Styles
Growth – Investments that the investment manager
believes have the potential to increase earnings
faster than the rest of the market
Value – Investments that the manager believes are
undervalued in price, and whose worth will eventually
be recognized by the market
Core – Investments that are dominated by neither
growth nor value characteristics.
Maturity
Short – Fixed-interest investments that have an
average maturity of less than four years.
Intermediate – Fixed-interest investments that have
an average maturity between four and ten years.
Long – Fixed-interest investments that have an
average maturity of greater than ten years.
Market Value
Large – Investments with a median market
capitalization of $5 billion or more.
Medium - Investments with a median market
capitalization between $1 billion and $5 billion.
Small - Investments with a median market
capitalization of less than $1 billion.
Quality
High – Investments that have an average credit
rating greater than or equal to AA.
Medium – Investments with average credit ratings
between BBB and A.
Low - Investments with average credit ratings lower
than BB.
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CHAPTER 7 REVIEW QUESTIONS
1. Read pages 200-202 in your text. Answer the checkpoint question on page 202, and questions 1, 3, and 4.
2. Describe the following money market securities: (a) Treasury bills, (b) commercial paper, and (c) negotiable
certificates of deposit.
3. What distinguishes regular CDs from the other money market options?
4. Money market securities, in general, provide lower returns than capital market securities. In the presence of
the secondary market where capital securities are easily tradable, why would anyone invest in money market
securities instead of capital market securities?
5. You purchased a 180-day maturity, $100,000 par value Treasury bill for $96,800.
a.
Calculate your annualized return if you hold it until it matures.
b. If you sell it for $98,100 after 90 days, what is your annualized return?
c.
What should the price be in part b in order for your annualized return to be the same as in part a?
6. Distinguish between a general obligation bond and a revenue bond.
7. Northampton Township wants to issue a $440,000 bond to pay for a new township park. The current interest
rate on corporate bonds is 6.5%. Would you expect the interest rate for the Northampton Township bonds to
be more or less that the corporate bond rate? Why?
8. True or False: Debentures generally earn a higher rate of return than mortgage bonds.
9. Your friend is confused about the difference between internal and external foreign bonds. Make up an
example to help you friend understand these bonds.
10. When will investors take advantage of the conversion feature of a bond?
11. Shellton Corp. decides to call in 200 bonds earning 9% interest.
a.
How much money will Shellton have to pay in regular semi-annual interest payments?
b. How much money will Shellton have to pay to cover repayment of the principal?
c.
How much money will Shellton have to pay for the call premium?
d. What factor(s) might cause Shellton to want to make this payment?
12. Textbook page 210 – Questions 1, 2, 3, 4, 5
13. What risks do common stockholders take that suppliers of other long-term capital do not take?
14. Why are preferred stocks often referred to as a hybrid between debt and equity securities?
15. In each case in the following table, how many dollars of preferred dividends per share must be paid to
preferred stockholders before common stock dividends are paid?
Case
A
B
C
D
E
Type
Cumulative
Noncumulative
Noncumulative
Cumulative
Cumulative
Par
Value
$80
$110
$100
$60
$90
Dividend per
share per period
$5
8%
$11
8.5%
9%
Periods of
dividend passed
2
3
1
4
0
16. Textbook page 216 – Questions 1, 2, 3, 4, 5
10
17. Buzz Newsstand is authorized to issue 100,000 shares of $5 par common stock and 5,000 shares of $100 par,
cumulative preferred 8% stock. The issued stocks were distributed as follows:
Preferred stock
$150,000
Common stock
$225,000
Treasury stock
$17,000
On March 15, the board of directors approved a semiannual cash dividend of $62,250 for both preferred and
common stockholders.
a.
Calculate the dollar amount to be distributed to preferred stockholders
b. Calculate the dollar amount to be distributed to common stockholders
c.
Calculate the dollar amount to be distributed to Treasury stock
On September 1, the board of directors passed on the semi-annual dividend payments.
a.
Calculate the dollar amount to be distributed to preferred stockholders
b. Calculate the dollar amount to be distributed to common stockholders
c.
Calculate the dollar amount to be distributed to Treasury stock
On March 1 of the following year, the board of directors approved a semi-annual cash dividend of $5,000 for
both preferred and common stockholders.
a.
Calculate the dollar amount to be distributed to preferred stockholders
b. Calculate the dollar amount to be distributed to common stockholders
c.
Calculate the dollar amount to be distributed to Treasury stock
On September 1 of the following year, the board of directors approved a semi-annual cash dividend of $55,840
for both preferred and common stockholders.
a.
Calculate the dollar amount to be distributed to preferred stockholders
b. Calculate the dollar amount to be distributed to common stockholders
c.
Calculate the dollar amount to be distributed to Treasury stock
18. In which market(s) are mutual funds traded (check all that apply)?
commodity
money
bond
stock
19. What determines the market price of a mutual fund?
20. What are the advantages to investing in mutual funds? What are the disadvantages?
21. The American Investors Fund currently has $7,900,000,000 invested in various stocks and bonds. The fund
has sold 639,000,000 shares. What is the fund’s NAV?
22. Textbook page 225 – Questions 6-7
23. Textbook pages 227 & 228 – Questions 1-17; 19; 22-23; 25-31
11
CROSSWORD PUZZLE REVIEW
1
5
2
3
4
6
7
8
9
10
11A
11B
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
ACROSS
DOWN
2. shares that are eligible to be sold
5. stock type with voting rights
11A. market in which shares are first sold
12. can be cumulative on non-cumulative
13. NASDAQ, for example
16. shares that have been put in to circulation
17. a bond issued by a local government (abbr)
20. the first time a company issues stock (abbr)
21. market where issued shares are traded
23. major stores for investor cash
24. to guarantee a certain amount of payment
26. market with maturities greater than one year
27. companies traded on an exchange
28. price at which a dealer will purchase
securities
29. bond backed by specific payments like tolls
30. connect dealers and investors
31. a debt security
32. offering made to all investors
1. short-term debt instrument issued by
corporations
3. shares owned by the public
4. lists the number of authorized shares
6. security made up of highly liquid investments
7. net suppliers of funds
8. stocks and bonds
9. placement of stock with specified number of
people
10. exchange with a physical location
11B. pools money of investors to purchase
securities
12. source of funds for insurance companies
14. shares repurchased by the company
15. price at which a dealer will sell securities
18. hold inventories of securities for the OTC
19. retirement fund
22. method of trading on an organized exchange
25. government money market security (abbr)
12