Question 1

Which of the following is a major difference between stock and bond investments?

Accepted Answer

Stocks represent ownership in a company and do not have a maturity date, while bonds are debt instruments that can be issued by governments and have a fixed maturity date.

Question 2

Melvin owns 10 20-year corporate bonds, each with a face value of $1,000. If the bonds pay an interest rate of 7.5%, how much total interest will Melvin earn before taxes in one year on this investment?

Accepted Answer

Each bond pays 7.5% interest on a $1,000 face value, which is $75 per bond per year. With 10 bonds, Melvin earns $75 x 10 = $750 in total interest per year.

Question 3

Kramer Manufacturing wants to issue $50 million in bonds and pay interest at the rate of 5% semiannually on a face value of $1,000. Kramer will need to issue ________ bonds and pay ________ per bond in interest every six months.

Accepted Answer

Kramer needs to issue 50,000 bonds because $50,000,000 / $1,000 = 50,000. The interest per bond every six months is $25 because 5% annual interest on $1,000 is $50, and half of that is $25.

Question 4

Skyjet Airlines has $200 million in existing bond debt, $50 million in preferred stock, and total common stockholders' equity of $400 million. If Skyjet were to file for bankruptcy and liquidate its total assets for $500 million, Skyjet would have to pay

Accepted Answer

In bankruptcy, debt holders are paid first, followed by preferred stockholders, and then common stockholders. Skyjet would pay $200 million to debt holders, $50 million to preferred stockholders, and the remaining $250 million to common stockholders.

Question 5

Derivative securities derive their value from the

Accepted Answer

Derivative securities derive their value from the price fluctuations of the underlying asset, as they are financial instruments whose value is dependent on the value of other assets.

Question 6

The buyer of a call option has the right to ____ the underlying asset at a set price on _______.

Accepted Answer

The buyer of a call option has the right to buy the underlying asset at a set price on or before the call's expiration date.

Question 7

Which is a difference between options and futures?

Accepted Answer

The buyer of an options contract has the right, but not the obligation, to exercise the contract, whereas futures contracts obligate both parties to fulfill the contract terms.

Question 8

Which of the following statements is true regarding speculative investments, such as derivatives?

Accepted Answer

Speculative investments like derivatives primarily generate returns based on price movements rather than tangible asset values or long-term holding.

Question 9

Which of the following would be considered a commodity?

Accepted Answer

Gold is considered a commodity because it is a raw material that can be bought and sold, typically through futures contracts, and is interchangeable with other gold of the same type.

Question 10

Which of the following is the most appropriate investment for emergency funds?

Accepted Answer

Money market securities are low-risk, highly liquid investments, making them ideal for emergency funds which require quick access and minimal risk.

Question 11

Which of the following is the riskiest asset class?

Accepted Answer

Derivative securities are considered the riskiest asset class because they derive their value from underlying assets and can be highly leveraged, leading to significant volatility and potential for large losses.

Question 12

Which of the following is the least risky asset class?

Accepted Answer

Money market securities are considered the least risky because they are short-term, highly liquid, and typically have lower volatility compared to other asset classes.

Question 13

Mutual fund investors are considered

Accepted Answer

Mutual fund investors are considered owners of the fund, and they are entitled to share in both the income and growth of the investment pool.

Question 14

Which of the following would be considered a pooled investment?

Accepted Answer

Mutual funds are pooled investments where multiple investors contribute money to a fund that is managed collectively.

Question 15

In general, _____ investments provide you with _____ average rates of return over time .

Accepted Answer

Riskier investments tend to offer higher potential returns to compensate for the increased risk.

Question 16

The sacrifice of today's consumption for consumption at a later date is captured in the

Accepted Answer

The real risk-free rate represents the compensation for deferring consumption, reflecting the time value of money without considering inflation or risk factors.

Question 17

The rate of return on any investment includes

Accepted Answer

The rate of return on an investment includes both the current income earned (such as dividends or interest) and any capital gains (or losses) realized from the increase (or decrease) in the investment's value.

Question 18

You invest $250 into ABC Corp. stock for a price of $62.50 per share. At the end of one year, you sell your shares for $70.50 per share and you received a $1.10 per share dividend during the year. What is your return on investment for this period?

Accepted Answer

The answer of You invest $250 into ABC Corp. stock...

Question 19

An investment of $1 each in two different securities led to a value of $10 (Security A) and $20 (Security B), respectively, after 15 years. When comparing the rate of return earned by the two securities, it can be said that

Accepted Answer

Security B earned a higher average annual rate of return because it grew from $1 to $20, which is a larger increase compared to Security A's growth from $1 to $10 over the same period.

Question 20

Mindy purchased 100 shares of Fly By Wire Training Academy at $75.50 per share one year ago. She has just received a dividend of $2.50 per share and the share is selling at a price of $89.25. If Mindy sold it at this price, what was her rate of return on Fly By Wire stock over the one-year holding period?

Accepted Answer

The rate of return is calculated as [(Ending Price - Initial Price + Dividend) / Initial Price] * 100. Here, it is [($89.25 - $75.50 + $2.50) / $75.50] * 100 = 21.52%.

Quiz 11: The Fundamentals of Investing