Chapter 11 Vocabulary Quiz

The correct answer is the difference between a lower selling price and a higher purchase price, resulting in a loss for the seller. This is known as a capital loss, which occurs when an asset is sold for less than its original purchase price. It is a common concept in investing and trading, where individuals aim to sell assets at a higher price than what they initially bought them for in order to make a profit. However, if the selling price is lower than the purchase price, it results in a loss for the seller.

The correct answer is about municipal bonds being issued by state or local governments to finance various public improvements such as highways, state buildings, libraries, parks, and schools. Municipal bonds are debt securities that allow governments to raise funds for these projects by borrowing money from investors. This answer accurately describes the purpose and use of municipal bonds in financing public infrastructure and services.

The correct answer is "A steady drop in the stock market over a period of time." This is because a bear market refers to a prolonged period of declining stock prices, typically accompanied by negative investor sentiment and economic downturn. It is characterized by a general pessimism in the market, leading to a decrease in stock prices over time. This is in contrast to a bull market, which is characterized by rising stock prices and positive investor sentiment.

A bull market refers to a period of time in the stock market when prices are generally rising, and there is optimism and confidence among investors. This is characterized by a steady rise in stock prices over a period of time. It is the opposite of a bear market, where prices are generally falling.

The correct answer is "Contacts to buy or sell at a specific date in the future at a price specified today." This answer accurately describes what futures are. Futures contracts allow individuals to buy or sell assets, such as commodities or financial instruments, at a predetermined price on a specific date in the future. The price is agreed upon today, providing certainty for both parties involved in the transaction.

A mutual fund is a type of investment vehicle that pools the savings of many individuals and uses that money to invest in a diversified portfolio of stocks, bonds, and other financial assets. This allows individual investors to gain exposure to a wide range of investments that may not be easily accessible or affordable on their own. By pooling their resources, investors can benefit from professional management and diversification, which can help to reduce risk.

The correct answer is "Spreading out investments to reduce risk." This explanation accurately describes diversification as the act of spreading out investments across different assets or sectors in order to minimize the impact of any single investment's performance on the overall portfolio. By diversifying, investors can reduce the risk of losing all their investment if one particular asset or sector performs poorly.

The correct answer is "A collection of financial assets." This is because a portfolio refers to a collection of various financial assets such as stocks, bonds, mutual funds, and other investments held by an individual or an institution. It is a way to diversify investments and manage risk by spreading investments across different asset classes.

Capital gain refers to the profit made by a seller when they sell an asset, such as stocks or real estate, at a higher price than what they originally purchased it for. It is the difference between the selling price and the purchase price, and it represents a financial gain for the seller. This gain is typically subject to taxation, and it is an important concept in finance and investing.

The correct answer is a bond that a corporation issues to raise money in order to expand its business. This is because a corporate bond is specifically issued by a corporation to raise funds for various purposes, including expanding their business operations. This type of bond allows corporations to borrow money from investors and promise to repay the principal amount at maturity, along with periodic interest payments. By issuing corporate bonds, companies can access capital from the market and use it to finance their growth initiatives.

This answer accurately describes investment as the act of redirecting resources from being consumed today in order to create benefits in the future. It also mentions that investment involves using assets to earn income or profit, which further supports the definition of investment. The other options either do not fully capture the concept of investment or are incorrect.

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The correct answer is an electronic market place for stock that is not listed or traded on an organized exchange. This explanation aligns with the definition provided in the question, which states that the OTC Market is a market for stocks that are not listed or traded on an organized exchange. It emphasizes the electronic nature of the market and clarifies that it is specifically for stocks that do not meet the requirements for listing on an organized exchange.

The correct answer is a business that specializes in trading stocks. This is because a brokerage firm is a type of financial institution that facilitates the buying and selling of stocks, bonds, and other securities on behalf of its clients. They act as intermediaries between buyers and sellers in the stock market, executing trades and providing investment advice. The other options listed in the question are not accurate definitions of a brokerage firm. The claims of ownership in a corporation refer to stocks themselves, not the firm that trades them. The collapse of the stock market in 1929 is a historical event related to the stock market, but not a definition of a brokerage firm. The market in which money is lent for periods less than a year refers to the money market, not a brokerage firm. Lastly, the practice of making high-risk investments with borrowed money is known as margin trading, which can be done through a brokerage firm but is not the definition of the firm itself.

The correct answer is "Institution that helps channel funds from savers to borrowers." This answer accurately describes the role of a financial intermediary. A financial intermediary is an institution that acts as a middleman between savers and borrowers, facilitating the flow of funds from those who have excess funds (savers) to those who need funds (borrowers). This can include banks, credit unions, and other financial institutions that accept deposits from savers and provide loans or credit to borrowers.

The correct answer is the amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity. This is known as the par value of a bond. It represents the face value or principal amount of the bond and is the amount that the issuer promises to repay to the bondholder when the bond reaches its maturity date. The par value is typically set at $1,000 for most bonds, but it can vary depending on the specific bond.

The correct answer is "The time at which payment to a bondholder is due." This is because the term "maturity" refers to the date on which a bond or other financial instrument becomes due for payment. At maturity, the bondholder is entitled to receive the principal amount invested, as well as any interest or other payments that may be due. Therefore, this option accurately describes the concept of maturity in finance.

The correct answer is "Market in which money is lent for periods less than a year." This option accurately describes the concept of a money market. A money market is a financial market where short-term borrowing and lending of funds occur, typically for periods of less than a year. It is a place where institutions and individuals can invest in low-risk, highly liquid assets such as Treasury bills, commercial paper, and certificates of deposit. This market provides a means for investors to earn a small return on their excess cash while maintaining quick access to their funds.

The correct answer is "The interest rate that a bond issuer will pay to a bondholder." This answer is supported by the fact that a coupon rate is the interest rate that is paid to the bondholder by the issuer of a bond. It is the annual interest rate that the bondholder will receive based on the bond's face value. This interest is typically paid in fixed intervals, such as semi-annually or annually, and is a way for the bond issuer to compensate the bondholder for lending them money.

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The correct answer is "Market in which money is lent for periods longer than a year." This answer accurately describes the concept of a capital market. In a capital market, individuals and institutions can borrow or lend money for long-term periods, typically longer than a year. This market facilitates the flow of funds between borrowers and lenders, allowing businesses and governments to finance long-term projects and investments.

The correct answer is "American market for OTC (over-the-counter) securities." This is because Nasdaq is a stock exchange that primarily focuses on trading over-the-counter securities. It is a marketplace where buyers and sellers can trade stocks, bonds, and other financial instruments that are not listed on traditional exchanges like the New York Stock Exchange. The Nasdaq market is known for its technology-heavy listings and is one of the largest stock exchanges in the world.

Equities refers to claims of ownership in a corporation. This means that individuals who hold equities have a share of ownership in the company and are entitled to certain rights and benefits, such as voting rights and a portion of the company's profits. Equities represent an ownership stake in a business and are bought and sold in the stock market.

The correct answer is "Claim on the property or income of a borrower." This answer refers to a financial asset, which is an instrument or contract that represents a claim on the property or income of a borrower. It can include things like stocks, bonds, and loans. This definition aligns with the given options and accurately describes a financial asset.