Deck 2: Investment Alternatives: Generic Principles All Investors Must Know

Question 1

What is the major difference between municipal bonds and other types of bonds?

A) Municipal bonds are always insured; other bonds are not
B) Unlike other bonds, municipal bonds sell at a discount
C) Municipal bond interest is tax-exempt; interest on other bonds is not
D) There is no brokerage commission on municipal bonds unlike other bonds

Answer 1

C

Question 2

Which of the following statements is true regarding an investment in mortgage-backed securities?

A) There is little default risk.
B) The stated maturity is generally 10 years.
C) They receive a fixed payment per month.
D) They are not subject to prepayment.

Answer 2

A

Question 3

Which of the U.S. Treasury securities is always sold at a discount?

A) Treasury bills
B) Treasury notes
C) Treasury bonds
D) Treasury inflation protected securities (TIPS)

Answer 3

A

Question 4

Which of the following would not be considered a capital market security?

A) a 20-year corporate bond
B) a common stock
C) a 6-month Treasury bill
D) a mutual fund share

Question 5

Each point on a bond quote represents:

A) $100
B) 1 percent of $100
C) 1 percent of $1000
D) $1000

Question 6

Nonmarketable financial assets that protect against inflation include:

A) Nonnegotiable certificates of deposit (CDs)
B) Money market deposit accounts (MMDAs)
C) Series EE US government savings bonds
D) US government savings bonds, I bonds

Question 7

A municipal bond issue that was sold to finance a toll bridge would most likely be a:

A) general obligation bond.
B) revenue bond.
C) special assessment bond.
D) zero-coupon bond.

Question 8

Zero-coupon bonds are similar to Treasury bills in that both:

A) are issued exclusively by the U.S. Treasury
B) are money-market securities
C) are capital-market securities
D) are sold at less than par

Question 9

Bonds trade on an accrual interest basis. This means an investor:

A) can sell a bond at any time without losing the interest that has accrued
B) can buy a bond at any time and gain the interest accrued from the time of the last payment
C) can sell a bond at any time and retain the interest portion of the bond
D) buy a bond at any time and receive an immediate interest check

Question 10

Which of the following statements regarding money market instruments is not true?

A) They tend to be highly marketable.
B) They have maturities from 1 to 3 years.
C) They tend to have a low probability of default.
D) Their rates tend to move together.

Question 11

An investor who pays taxes at the 28% marginal tax rate would need to earn what coupon rate on a corporate bond similar in all respects other than taxes to a 5% coupon municipal bond:

A) 1.40%
B) 2.50%
C) 5.00%
D) 6.94%

Question 12

Savings accounts are ---------- but are not------------.

A) negotiable; liquid.
B) marketable; liquid.
C) liquid; personal
D) liquid; marketable

Question 13

Treasury STRIPS are most similar to which type of corporate security?

A) preferred stock
B) premium bond
C) high-yield bond
D) zero-coupon bond

Question 14

Bonds called in are likely to be:

A) bonds already in default
B) reissued as new bonds with a lower interest rate
C) reissued as new bonds with a higher interest rate
D) junk bonds

Question 15

Interest on bonds is typically paid:

A) monthly
B) quarterly
C) semiannually
D) annually

Question 16

The coupon rate is another name for the:

A) market interest rate.
B) current yield.
C) stated interest rate.
D) yield to maturity

Question 17

Which of the following is not one of the characteristics of the primary nonmarketable financial assets owned by most individuals?

A) high liquidity
B) high return
C) often issued by the U.S. government
D) low risk

Question 18

What will a bond be worth on the day it matures?

A) $0
B) $100
C) its face value (plus remaining coupon, if applicable)
D) its remaining coupon, if applicable

Question 19

The largest single institutional owner of common stocks is:

A) mutual funds.
B) insurance companies.
C) pension funds
D) commercial banks

Question 20

Treasury bills are traded in the --------------------- .

A) money market.
B) capital market.
C) government market.
D) regulated market.

Question 21

If an investor states that Intel is overvalued at 65 times, he is referring to:

A) earnings per share
B) dividend yield
C) book value
D) P/E ratio

Question 22

For U.S. companies, dividends are typically paid:

A) monthly
B) quarterly
C) semi-annually
D) yearly

Question 23

All U. S. government securities are considered marketable securities.

Question 24

Money market securities generally carry a low chance of default.

Question 25

If a preferred stock issue is cumulative, this means:

A) unpaid preferred stock dividends are paid at the end of the year
B) unpaid preferred stock dividends are legally binding on the corporation
C) unpaid preferred stock dividends must be paid in the future before common stock dividends can be paid
D) unpaid preferred stock dividends are never repaid

Question 26

An example of indirect investing would be buying shares in a mutual fund.

Question 27

Treasury bonds generally have maturities of:

A) 5 to 15 years
B) 5 to 30 years
C) 10 to 20 years
D) 10 to 30 years

Question 28

Which of the following 10-year, AAA rated bonds would have the lowest yield?

A) corporate bond.
B) insured municipal bond.
C) U.S. Treasury bond.
D) mortgage-backed bond.

Question 29

The premium on an option is the:

A) par value of the option.
B) price of the option.
C) book value of the option.
D) price at which a security may be bought or sold using the option.

Question 30

The money market security most often used a benchmark for the risk-free rate is money market deposit account rate.

Question 31

What is the biggest difference between an option and a futures contract?

A) Options are traded on exchanges whereas futures are not
B) Options give investors a way to manage portfolio risk while futures do not
C) Options can be used by speculators to profit from price fluctuations while futures cannot
D) Options give their holders the right to buy or sell whereas futures contract are obligations to buy or sell

Question 32

Which of the following statements is true regarding asset-backed securities (ASB)?

A) They offer relatively high yields
B) They have relatively long maturities
C) They generally have low credit ratings
D) Each traunche has the same risk

Question 33

Direct investing involves trades made by directly purchasing shares of a financial intermediary.

Question 34

Nonmarketable investments would include savings accounts at banks and Treasury bills.

Question 35

Which of the following statements regarding common stocks is true?

A) The par value of common stock is usually $100
B) The market value of common stock is equal to its book value
C) Dividends on common stock are at the discretion of the company
D) Common stock has a senior claim on company assets

Question 36

A corporate bond with a rating of BBB- is considered to be which of the following?

A) non-investment grade
B) investment grade
C) speculative grade
D) junk, or high-yield

Question 37

---------------- represent shares of foreign companies kept in banks.

A) convertible bonds
B) American Depository Receipts (ADRs)
C) asset-backed securities
D) LEAPS

Question 38

An unsecured bond is known as a:

A) debenture
B) indenture
C) mortgage bond
D) junk bond

Question 39

If a call option has a $10 strike price, and the underlying stock is trading at $11, then the option is considered:

A) in the money.
B) at the money.
C) out of the money.
D) worthless.

Question 40

Marketable securities all fall into the category of capital market securities.

Question 41

In the case of a corporate bankruptcy, bondholders are paid before any distributions are paid to preferred or common stockholders.

Question 42

LEAPS have maturities dates up to 10 years.

Question 43

Term bonds have a single maturity.

Question 44

The major bond rating service is Dun & Bradstreet.

Question 45

Investors in high tax brackets would be unlikely to invest in municipal bonds.

Question 46

Convertible bonds give their investors the right to convert the bond into common stock whenever they choose.

Question 47

The return on a zero-coupon bond is derived from the difference between the purchase price of the bond and its par value.

Question 48

Distinguish between direct and indirect investing.

Question 49

TIPS adjust for inflation by adjusting the rate of interest paid on the bond.

Question 50

If a bond has a coupon greater than the current market yield, it should be selling at a premium.

Question 51

The par value on common stock sets the value that stockholders will
receive in case of bankruptcy.

Question 52

Treasury notes represent the nontraded debt of the U.S. government.

Question 53

The major attraction of municipal bonds is their extremely low risk.

Question 54

Callable bonds attract investors because they can be redeemed early.

Question 55

The capital market includes both fixed-income and equity securities.

Question 56

Bond ratings are primarily used to assess interest rate risk.

Question 57

The rate spreads between the different money market securities of the same term tend to be quite large.

Question 58

Most futures contracts are not exercised.

Question 59

The deeper the discount on a zero-coupon bond, the lower the effective return.

Question 60

The earnings retention rate is calculated as 1 - dividend yield.

Question 61

What are some advantages of asset-backed securities to investors?

Question 62

Who benefits from a futures contract, a call contract, and a put contract, if prices fall?

Question 63

The par value of Blaze, Inc. common stock is $0.50, the earnings per share is $4, the market price is $60, the dividend per share is $1. Calculate the dividend yield.

Question 64

What stated coupon rate would a taxable corporate bond have to have to be comparable to a municipal bond with a coupon rate of 7 percent if the investor is in the 28 percent tax bracket?

Question 65

The par value of Blaze, Inc. common stock is $0.50, the earnings per share is $4, the market price is $60, the dividend per share is $1. Calculate the payout ratio.

Question 66

Explain how writing option contracts (both puts and calls) can generate income for owners of the underlying stock.

Question 67

What are two direct and one indirect method for individuals to invest in foreign stocks?

Question 68

The par value of Inferno, Inc. common stock is $0.50, the earnings per share is $6,
and it trades at a P/E of 15. What is Inferno, Inc.'s stock price?

Question 69

How do asset-backed securities improve the flow of funds from savers to borrowers?

Question 70

Do the stock options markets help stabilize or destabilize the stock markets? Explain.

Question 71

Rank (lowest to highest) the following securities in terms of the risk-expected return tradeoff from the investors' viewpoint: common stock, corporate bonds, U. S. Treasury bonds, options, preferred stock..

Question 72

A corporate investor in a 34% marginal income tax bracket can buy bonds issued by a petroleum exploration company yielding 10.606%. The investor should be willing to buy tax-exempt municipal bonds of similar quality yielding what percent or higher?

Question 73

In what sense is a stock selling for 12 times earnings "cheaper" than a stock with a P/E ratio of 20?

Question 74

How is the total book value of equity affected by stock splits?

Question 75

How is the earnings retention rate related to the dividend payout rate?