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

Accepted Answer

Municipal bond interest is tax-exempt at the federal level, and in some cases, also at the state and local levels. This tax exemption makes municipal bonds very attractive to certain investors, particularly those in higher tax brackets. However, it's important to note that not all municipal bonds are tax-exempt, and the exact tax treatment can vary depending on the bond and the investor's individual tax situation.

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.

Accepted Answer

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)

Accepted Answer

Treasury bills are always sold at a discount, meaning that their face value is greater than the price at which they are initially sold. This allows investors to earn a profit when the T-bill reaches maturity and the full face value is paid out.

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

Accepted Answer

Capital market securities are long-term securities with a maturity of more than one year. A 6-month Treasury bill is a short-term security with a maturity of less than one year and hence, is not considered a capital market security.

Question 5

Each point on a bond quote represents:
A) $100
B) 1 percent of $100
C) 1 percent of $1000
D) $1000

Accepted Answer

In bond trading, each point on a bond quote represents 1 percent of $1000. This means that if a bond quote increases by 1 point, it represents an increase in value of 1 percent of $1000, or $10.

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

Accepted Answer

US government savings bonds, specifically I bonds, are designed to protect against inflation. They have a fixed interest rate plus an additional rate that adjusts for inflation based on the Consumer Price Index. Series EE bonds also offer some protection against inflation, but the rate is not as favorable as that of I bonds. Nonnegotiable CDs and MMDAs do not offer any inflation protection.

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.

Accepted Answer

A revenue bond is sold to finance specific revenue-generating projects, like a toll bridge. The bondholders are repaid with revenue earned by the project, rather than general tax revenue. General obligation bonds (A) are backed by the issuer's taxing power, while special assessment bonds (C) are repaid by property owners within a specific area that benefits from the project. Zero-coupon bonds (D) do not pay interest but are sold at a discount to their face value and redeemed for the full face value at maturity.

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

Accepted Answer

Zero-coupon bonds, like Treasury bills, are sold at a discount to their par value, meaning investors can buy them for less than their face value and receive the full face value at maturity. Both are also considered fixed-income securities. However, Treasury bills are short-term money-market securities, while zero-coupon bonds are long-term capital-market securities. Also, while Treasury bills are issued exclusively by the U.S. Treasury, zero-coupon bonds can be issued by other entities as well.

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

Accepted Answer

The answer of Bonds trade on an accrual interest basis....

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.

Accepted Answer

Money market instruments typically have maturities of one year or less, not one to three years.

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%

Accepted Answer

The after-tax yield on the muni bond for an investor in the 28% bracket is 5% * (1-0.28) = 3.60%. To match this after-tax yield, the investor would need to earn 3.60% / (1 - 0.28) = 5.00% / (1 - 0.28) = 6.94% on the corporate bond. Therefore, the investor would need a coupon rate of 6.94% on the corporate bond to match the after-tax yield of the 5% muni bond.

Question 12

Savings accounts are ---------- but are not------------.
A) negotiable; liquid.
B) marketable; liquid.
C) liquid; personal
D) liquid; marketable

Accepted Answer

Savings accounts are considered liquid, meaning they can easily be converted to cash with little or no penalty. They are not considered marketable because they are not traded on any sort of exchange.

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

Accepted Answer

Treasury STRIPS are zero-coupon bonds, meaning they are sold at a discount and pay no interest until maturity, similar to other zero-coupon bonds.

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

Accepted Answer

Bonds called in are typically reissued as new bonds with a lower interest rate because the issuer can take advantage of lower interest rates in the market. This can save the issuer money on interest payments and make the bonds more attractive to investors at the new lower rate. Bonds already in default (A) generally cannot be called in, and reissuing as new bonds with a higher interest rate (C) would not make financial sense for the issuer. Junk bonds (D) are typically high-risk investments with low credit ratings and are not necessarily related to bonds called in.

Question 15

Interest on bonds is typically paid:
A) monthly
B) quarterly
C) semiannually
D) annually

Accepted Answer

Interest on bonds is typically paid semiannually, meaning twice a year.

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

Accepted Answer

The coupon rate is the stated interest rate that a bond pays annually.

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

Accepted Answer

The primary nonmarketable financial assets owned by most individuals are savings accounts, certificates of deposit (CDs), and U.S. savings bonds. These assets typically have high liquidity, are often issued by the U.S. government, and have low risk. However, they do not offer a high return compared to other investment options such as stocks or mutual funds. Therefore, option B is not a characteristic of these assets.

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

Accepted Answer

A bond will be worth its face value (plus remaining coupon, if applicable) on the day it matures. This is the amount that the issuer has agreed to pay the bondholder at the time of issuance. Option A is not correct as a bond will not become worthless at maturity. Option B is not correct as $100 may not be the face value of the bond. Option D is not correct as the remaining coupon payment is in addition to the face value payment.

Question 19

The largest single institutional owner of common stocks is:
A) mutual funds.
B) insurance companies.
C) pension funds
D) commercial banks

Accepted Answer

Pension funds, which are managed on behalf of employees' retirement savings, tend to have large amounts of money to invest and typically have a long-term investment horizon. As a result, they are often the largest institutional owners of common stocks. Mutual funds and insurance companies also hold significant amounts of stocks, but pension funds tend to have the largest stock holdings. Commercial banks generally have limited stock holdings compared to other institutional investors.

Question 20

Treasury bills are traded in the --------------------- .
A) money market.
B) capital market.
C) government market.
D) regulated market.

Accepted Answer

Treasury bills are short-term securities that are sold to investors to raise cash for the government. They are typically traded in the money market, which is a sub-section of the financial market where short-term borrowing and lending occurs. The money market trades in highly liquid instruments like Treasury bills, certificates of deposit (CDs) and commercial paper issued by government agencies, banks, and corporations.

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

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

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

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

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

Each point on a bond quote represents:

Nonmarketable financial assets that protect against inflation include:

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

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

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

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

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:

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

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

Bonds called in are likely to be:

Interest on bonds is typically paid:

The coupon rate is another name for the:

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

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

The largest single institutional owner of common stocks is:

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