Question 1

Julie Johnson is in the 35 percent tax bracket.If she were to purchase a $1,000 municipal bond that had a stated interest rate of 6.5%,the fully taxable equivalent yield would be

Accepted Answer

The answer of Julie Johnson is in the 35 percent...

Question 2

Which of the following statements about preferred stock is true?

Accepted Answer

Preferred shareholders typically have priority over common shareholders when it comes to receiving dividends. They are often entitled to a fixed dividend rate, which must be paid before any dividends can be distributed to common shareholders. Option A is incorrect because preferred shareholders typically do not have voting rights. Option C is also incorrect because preferred stock is not actually considered a hybrid between equity and debt. It is a type of equity investment, but with some characteristics similar to debt. Option D is incorrect because the attractiveness of preferred stock versus common stock depends on many factors, including the specific terms of the preferred stock offering and the investment goals of the individual investor.

Question 3

Which of the following is most likely to occur immediately following the announcement that the rating on a corporate bond has been lowered to junk status?

Accepted Answer

When a corporate bond's rating is lowered to junk status, the bond is considered to be riskier, and as a result, investors may demand a higher yield or return on their investment to compensate for the increased risk. This will lead to a decline in the price of the bond, as investors will be willing to pay less for the same amount of future cash flows.

Question 4

Which of the following would be a disadvantage of owning an income stock?

Accepted Answer

Income stocks typically have lower growth potential compared to growth stocks, which may limit long-term capital appreciation.

Question 5

A bond selling below par value is selling at

Accepted Answer

A bond selling below par value is selling at a discount, which means that the bond's price is lower than its face value. This occurs when the bond's market interest rate is higher than the bond's coupon rate.

Question 6

Bonds issued by subdivisions of the U.S.government but not guaranteed by the government are called

Accepted Answer

Agency bonds are issued by government-affiliated organizations but are not directly guaranteed by the U.S. government.

Question 7

One of the more appealing features of a common stock is that stock investments

Accepted Answer

Common stock investments offer ownership in the company while limiting the liability of the investor to the amount of their investment. This means that if the company were to face financial difficulties or lawsuits, the investor's personal assets would not be at risk beyond the amount of their investment in the stock.

Question 8

When cash dividends on stock are paid,but the stockholder has these dividends automatically reinvested,what are the federal income tax implications?

Accepted Answer

The stockholder must pay taxes on the dividends in the year they are paid at ordinary income tax rates, even if they are reinvested into the stock. The reinvested dividends will increase the cost basis of the stock, which can eventually reduce capital gains taxes when the stock is sold. However, taxes must still be paid on the dividends in the year they are paid.

Question 9

John Smith is in the 28 percent tax bracket.If he were to purchase a $1,000 municipal bond that had a stated interest rate of 6.9%,the taxable equivalent yield would be

Accepted Answer

The answer of John Smith is in the 28 percent...

Question 10

Which of the following types of bonds are unsecured?

Accepted Answer

Debenture bonds are unsecured, meaning they are not backed by a specific asset (like a mortgage bond) or a specific piece of equipment (like an equipment trust certificate). Therefore, choice C is the only unsecured bond option listed.

Question 11

A bond is issued at $1,000 par value during a time in which interest rates for similar bonds were 8%.Today,new bonds with similar creditworthiness are issued at 10%.Which of the following is most likely to be true about the bond?

Accepted Answer

Since the current interest rates have increased from 8% to 10%, the bond's coupon rate is lower than the current market rate, making the bond less attractive and thus worth less than its par value. Therefore, the bond is likely to be selling at a discount.

Question 12

Advantages of common stock investments include

Accepted Answer

Common stock investments offer the potential for high returns and liquidity, but they do not guarantee dividend income.

Question 13

The easiest way to invest in foreign stock is to purchase

Accepted Answer

International mutual funds allow investors to easily invest in a diversified portfolio of foreign stocks without the need to directly purchase individual stocks from foreign markets.

Question 14

When evaluating a stock as a possible investment,one must consider

Accepted Answer

All of the factors listed (current market price, expected capital gain, expected dividend income, and one's investment goals) should be considered when evaluating a stock as a possible investment. The current market price will help determine if the stock is overvalued or undervalued, while the expected capital gain and dividend income can indicate potential return on investment. One's investment goals are important to consider as they will impact the desired level of risk and long-term strategy for the investment.

Question 15

To most stockholders,the main advantages of common stock investment are

Accepted Answer

The answer of To most stockholders,the main advantages of common...

Question 16

Which of the following is an advantage of owning growth stocks?

Accepted Answer

Growth stocks have high potential for capital gains, making them a good choice for investors who want to see their investment grow over time. While they may not offer high dividends like some other types of stocks, their potential for growth can make them a valuable addition to a diversified portfolio.

Question 17

____ stocks are really purchased as a gamble rather then because they have a proven history of good performance.

Accepted Answer

Speculative stocks are often purchased based on speculation rather than solid research and analysis. These stocks are more of a gamble because they have no proven track record of good performance. Blue-chip, growth, cyclical, and defensive stocks are usually purchased based on their long-term performance and stability, rather than as a short-term gamble.

Question 18

A characteristic of defensive stocks is

Accepted Answer

Defensive stocks are characterized by their ability to maintain stable earnings and dividends even during economic downturns. This makes them attractive to investors seeking income and stability.

Question 19

A bond may sell

Accepted Answer

A bond can sell at par value, below par value, or above par value depending on various factors such as market interest rates, creditworthiness of the issuer, and perceived risk. Therefore, option D is the correct choice.

Question 20

Bonds are issued by

Accepted Answer

Bonds can be issued by corporations as well as federal, state, and local governments. Therefore, option A is the correct choice. Option B and C are partially correct as they include state and local governments but exclude corporations. Option D is incorrect as Moody's and Standard & Poor's are credit rating agencies that assess the creditworthiness of bond issuers but do not issue bonds themselves. Option E is also incorrect as bonds are a common financial instrument that are frequently issued.

Quiz 12: Investing in Stocks and Bonds