Deck 19: Financial Markets and Investment Strategies

Question 1

Maturity date is the date on which the principle of a bond will be repaid in full.

Answer 1

True
Explanation:Maturity date is the date on which the principle of a bond will be repaid in full.

Question 2

An investor buys a right and obligation when he or she buys an option.

Answer 2

False
Explanation:An option is the purchased right-but not the obligation-to buy or sell a specified number of shares of a stock or other security at a predetermined price during a specified period.

Question 3

Albert buys the stock of an established corporation,mainly to obtain good dividends.However,the corporation's growth is limited.This stock is an example of a defensive stock.

Answer 3

False
Explanation:Stocks purchased primarily for dividend payouts rather than capital gains potential are called income stocks.

Question 4

A company's price/earnings ratio is determined by dividing the market value per share by the earnings per share.

Question 5

Stock of companies whose earnings tend to track the ups and downs of the economy in a predictable pattern are known as defensive stocks.

Question 6

Funds that invest in foreign and U.S.securities are called international funds.

Question 7

Treasury bonds are short-term debt securities issued by the federal government that are repaid within a year.

Question 8

The amount of money or principle that the purchaser of a bond lends to the bond issuer is known as its coupon.

Question 9

Derivatives are contracts whose value is derived from some other entity.

Question 10

Preferred stock appreciates in value much faster than common stock.

Question 11

Investing in bonds typically has higher risk than investing in stocks.

Question 12

Money-market funds are financial instruments that invest in stocks considered to be selling below their true value.

Question 13

A stock split is performed if a company's management team believes that the firm's shares are undervalued.

Question 14

Balanced funds refer to funds that invest in a combination of stocks and bonds.

Question 15

Preferred stock owners have no voting rights in a corporation.

Question 16

With a zero-coupon bond the purchaser buys the bond at a discount from the face value.

Question 17

Treasury notes are debt securities issued by the federal government that are repaid within 1 to 10 years after issuance.

Question 18

Suppliers use future contracts to protect themselves from future price decreases.

Question 19

Treasury bills are sold at a discount and redeemed at face value.

Question 20

The value assigned to each share of stock when it is first issued is known as its book value.

Question 21

In your portfolio,you own 450 shares of General Electric.The company announces that each share of stock is being divided into three new shares,so you now own 1,350 shares.This is known as a stock ________.

A) option
B) buyback
C) valuation
D) dilution
E) split

Question 22

Most trading in the bond market occurs over the counter and takes place outside organized exchanges.

Question 23

The price at which the stock is actually selling is referred to as its ________ value.

A) face
B) par
C) book
D) intrinsic
E) market

Question 24

________ refers to shares of ownership without voting rights but with defined dividends.

A) Treasury bond
B) Preferred stock
C) Derivative
D) Equity stock
E) Common stock

Question 25

The annual interest rate that an issuer offers when a bond is first sold is known as the ________.

A) current yield
B) coupon
C) market yield
D) par value
E) market value

Question 26

The loans themselves are not transferred when a credit default swap is performed.

Question 27

________ stocks tend to fare better when the economy is doing worse and vice versa.

A) Blue chip
B) Income
C) Penny
D) Cyclical
E) Defensive

Question 28

Jackson Associates is a firm that owns many stationary stores across the United States.The company's stock performance is highly linked to the overall performance of the stock market.The company's stock performs well when the economy and the stock market perform well and vice-versa.Jackson Associates is an example of a(n)________ stock.

A) blue chip
B) penny
C) defensive
D) income
E) cyclical

Question 29

Stop order is an order to sell a stock when its price falls to a particular point.

Question 30

________ value is an estimate of what a company is actually worth,independent of other values.

A) Intrinsic
B) Face
C) Par
D) Book
E) Market

Question 31

Stocks that are purchased primarily for dividend payouts rather than capital gains potential are known as ________ stocks.

A) blue chip
B) growth
C) income
D) penny
E) defensive

Question 32

Riban Industries is a manufacturer of watches.The company's profits are predictable and the stock yields huge dividends,although the prospects for growth are low.Riban Industries is an example of a(n)________ stock.

A) blue chip
B) income
C) cyclical
D) penny
E) defensive

Question 33

Companies attempt to increase the market valuation of a share by ________.

A) repurchasing some of the shares through a stock buyback
B) maintaining a lower than average price/earnings ratio
C) announcing a stock split of its shares
D) dividing the shares into multiple shares
E) reducing the percentage of dividend being paid out to investors

Question 34

Stocks of major,well-established corporations with demonstrated ability to manage their way through every kind of economic condition are known as ________ stocks.

A) blue chip
B) income
C) growth
D) penny
E) cyclical

Question 35

Stocks that sell for less than one dollar per share or stocks that are highly speculative are called ________ stocks.

A) penny
B) income
C) defensive
D) cyclical
E) mid cap

Question 36

________ ratio is calculated by dividing the market value per share by the earnings per share.

A) Return on capital
B) Price/earnings
C) Sales/income
D) Gross value
E) Gross margin

Question 37

Bear market is a market situation in which most stocks are increasing in value.

Question 38

A stock exchange is an organization that buys and sells securities on behalf of individual and institutional investors.

Question 39

Josephine would like to invest part of her Individual Retirement Account (IRA)in the stock market,but she wants to minimize the risk as much as possible.Which of the following is the most suitable investment alternative for Josephine?

A) financial futures
B) derivatives
C) options
D) preferred stock
E) commodities futures

Question 40

The amount of money that the bond buyer is lending to the bond issuer is known as the ________.

A) par value
B) yield
C) dividend
D) coupon rate
E) intrinsic value

Question 41

Maturity date is the date on which ________.

A) interest will be paid every month to a bond's investors
B) interest will be paid every year to a bond's investors
C) a bond will be converted to a common stock
D) the principle of a bond will be repaid in full
E) an installment of interest will be paid to investors of bonds

Question 42

________ funds attempt to maintain a desirable balance of risk and growth potential based on a planned retirement date.

A) Balanced
B) Sector
C) International
D) Speciality
E) Target-date

Question 43

Funds that invest in a combination of stocks and bonds are called ________ funds.

A) specialized
B) sector
C) restricted
D) balanced
E) socially responsible

Question 44

You invest $6,000 in a no-load mutual fund whose net asset value per share is $36.How many shares of the mutual fund will you receive if the coupon is 8 percent?

A) 4.92
B) 166.66
C) 750
D) 288
E) 20.83

Question 45

Dobex Investing is a fund management company.Most of the firm's funds are invested in a wide mixture of stocks and bonds.Such funds are called ________ funds.

A) balanced
B) sector
C) restricted
D) specialized
E) socially responsible

Question 46

Norbon Securities is a financial intermediary.The firm facilitates the sale of mutual funds and charges commission when selling mutual funds to investors.This commission is referred to as ________.

A) bill
B) index
C) load
D) yield
E) coupon

Question 47

________ refer to debt securities issued by the federal government that are repaid within 1 to 10 years after issuance.

A) Municipal bonds
B) Treasury bills
C) Treasury bonds
D) TIPS
E) Treasury notes

Question 48

With a zero-coupon bond,the ________.

A) purchaser buys the bond at a discount from the face value
B) full face value is not paid to the investor at maturity
C) investor receives interest on a regular basis
D) interest is paid immediately after a bond is purchased
E) purchaser buys a bond by paying exactly the face value

Question 49

________ refer to treasury issues in which the principle amount is tied to the Consumer Price Index to protect the buyer against the effects of inflation.

A) Treasury notes
B) Treasury bills
C) Treasury bonds
D) TIPS
E) Municipal bonds

Question 50

Annual interest/closing price = ________.

A) current yield
B) maturity
C) coupon
D) par value
E) face value

Question 51

No-load funds are mutual funds that ________.

A) do not charge sales commission
B) offer high rates of interest
C) offer low rates of interest
D) do not invest in equity shares
E) offer huge tax benefits to investors

Question 52

________ refer to debt securities issued by the federal government that are repaid more than 10 years after issuance.

A) Treasury bonds
B) TIPS
C) Treasury notes
D) Municipal bonds
E) Treasury bills

Question 53

Global funds are funds that ________.

A) invest in U.S. securities from foreign countries
B) invest in special sectors or industries
C) invest in foreign and U.S. securities
D) invest strictly in foreign securities
E) make investment choices based on social responsibility

Question 54

A bond's face value is $2000.Its coupon is 9 percent.The bond's present market value is $1800.What is the current yield of the bond?

A) 12 percent
B) 6 percent
C) 9 percent
D) 8.1 percent
E) 10 percent

Question 55

Bonds issued by states,cities,and various government agencies to fund public projects are known as ________.

A) treasury bonds
B) treasury bills
C) TIPS
D) treasury notes
E) municipal bonds

Question 56

A call provision allows the issuer to ________.

A) reduce the interest rate of the bond
B) change the face value of the bond
C) repurchase the bond before maturity
D) downgrade the status of the bond
E) change the coupon rate of the bond

Question 57

Portfolio diversification is performed to ________.

A) protect against significant declines in any one vehicle
B) maximize the returns from any one vehicle
C) reduce the load that intermediaries charge
D) maximize the earning potential of a portfolio
E) maximize the earning potential of an investment vehicle

Question 58

________ refer to short-term debt securities issued by the federal government.

A) Municipal bonds
B) Treasury bills
C) TIPS
D) Treasury notes
E) Treasury bonds

Question 59

RS Bank introduces a mutual fund that is designed to invest only in the telecom sector.This mutual fund is an example of a(n)________.

A) target-date fund
B) sector fund
C) optimal fund
D) balanced fund
E) socially responsible fund

Question 60

Mutual fund's assets - its liabilities = ________.

A) net asset value
B) face value
C) par value
D) load value
E) market value

Question 61

Which of the following is the basic premise of a derivative?

A) limiting the value of an asset attached to them
B) transferring risk from one party to another
C) linking shares to governmental bonds
D) minimizing the risk for all parties involved
E) maximizing the dividend payout on equities

Question 62

Credit derivatives are derivatives used to ________.

A) reduce a lender's exposure to risk
B) link liabilities to a federal agency
C) hedge against exchange rate shifts
D) link assets to a federal agency
E) avoid obligations to buy or sell assets

Question 63

A(n)________ is a contract to buy or sell a financial instrument for a set price at a later date.

A) financial future
B) put option
C) credit derivative
D) call option
E) commodities future

Question 64

Which of the following is an example of a call option?

A) a purchased right that gives the right to buy a stock at a fixed price until an expiration date
B) a contract to buy amounts of specified currency at some future date
C) a contract to sell a foreign currency for a set price without an expiry date
D) a contract to sell a treasury bond for a set price without an expiry date
E) a purchased right that gives the right to sell the stock at a fixed price until the expiration date

Question 65

________ are contracts whose value is derived from some other entity.

A) Preference shares
B) Derivatives
C) Equities
D) Secured bonds
E) Unsecured bonds

Question 66

________ is an over-the-counter marketplace for short-term debt instruments such as Treasury bills and commercial papers.

A) Options market
B) Bond market
C) Money market
D) Stock market
E) Futures market

Question 67

Bear market is a market situation in which ________.

A) there are more buyers than sellers
B) the value of assets are increasing
C) short selling is rarely observed
D) most stocks are declining in value
E) most portfolios are not diversified

Question 68

James wants to buy some shares of JE Electricals.He instructs the broker to buy 1000 shares at the best possible price immediately.This is an example of a(n)________.

A) market order
B) control order
C) limit order
D) stop order
E) bounded order

Question 69

You want to trade some of the futures that you have.Which of the following markets will facilitate such a trade?

A) money market
B) bond market
C) stock market
D) currency market
E) derivatives market

Question 70

Which of the following statements is true of bond markets?

A) Treasury bills and commercial papers are traded in a bond market.
B) A bond market is a component of a stock market.
C) Exchange trading of futures occurs at a bond market.
D) Most trading is done over the counter in a bond market.
E) A bond market is less diffuse and centralized than the stock market.

Question 71

Which of the following markets includes exchange trading and over-the-counter trading?

A) derivatives market
B) bond market
C) money market
D) stock market
E) currency market

Question 72

Arabex is a stock market in one of the developing countries.Most of the stocks listed in the market are increasing in value.Arabex is an example of a(n)________.

A) partial bear market
B) bull market
C) derivative market
D) bear market
E) commodity market

Question 73

A put option is purchased when the buyer believes that the ________.

A) price of underlying stock will have no effect on options
B) price of underlying stock will decrease
C) option will not be profitable
D) price of underlying stock will increase
E) price of underlying stock will remain constant

Question 74

Currency futures are used to ________.

A) reduce a lender's exposure to credit risk
B) buy commodities at a fixed price
C) avoid obligations to buy or sell assets
D) hedge against exchange rate shifts
E) reduce a borrower's exposure to credit risk

Question 75

A(n)________ is the purchased right,but not the obligation,to buy or sell a specified number of shares of a stock or other security at a predetermined price during a specified period.

A) credit derivative
B) secured bond
C) option
D) financial future
E) commodity future

Question 76

Robex Retail forms a contract with one of its suppliers to buy specific amounts of agricultural produce at a later date.This contract is an example of a(n)________.

A) financial future
B) put option
C) credit derivative
D) call option
E) commodities future

Question 77

Gordon Fiber is a firm that manufactures fiber products.The firm is facing a credit crunch and wants to liquidize the treasury bills and commercial papers they have.The firm can sell these at the ________ market.

A) options
B) bond
C) money
D) stock
E) futures

Question 78

JSE Limited is a South African organization that facilitates exchange of equities between investors.JSE Limited is a(n)________.

A) financial broker
B) fund manager
C) treasury
D) stock exchange
E) underwriter firm

Question 79

You ask your broker to buy 500 shares of Microsoft,if it is available,at a price less than or equal to $26.This is an example of a ________ order.

A) market
B) limit
C) discount
D) stop
E) control

Question 80

Stock exchanges are organizations that ________.

A) issue cash in exchange for pledging stock
B) function as underwriters in public issues
C) facilitate the buying and selling of stock
D) issue stock on behalf of small companies
E) combine multiple stocks to create mutual funds