Deck 12: Investing in Stocks and Bonds

Question 1

The higher the net profit margin of a company,the more money the company earns.

Answer 1

True

Question 2

Total investment return can be exactly calculated using the approximate expected yield method.

Answer 2

False

Question 3

Earnings per share indicates to the stockholders the amount of dividends earned.

Answer 3

False

Question 4

Changes in the value of securities due to social,political,or economic factors are referred to as market risk.

Question 5

One would prefer a stock with steadily increasing earnings per share and return on equity.

Question 6

Earnings per share can be defined as the return earned on behalf of each share of common and preferred stock,calculated by dividing all earnings by the total number of shares outstanding.

Question 7

The value of a stock at any time depends on its expected stream of future earnings.

Question 8

The returns you expect from securities are income and growth.

Question 9

A lower expected return means a higher risk will have to be accepted.

Question 10

American Depositary Receipts are denominated in the currencies of the foreign countries where the corporations issuing these ADRs are registered.

Question 11

Bondholders will receive interest payments after the stockholders receive dividends.

Question 12

An investment is acceptable if the expected rate of return is greater than the required rate of return.

Question 13

Past returns on an investment are only an indication of future returns.

Question 14

Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales.

Question 15

Capital appreciation of an investment is a form of current income.

Question 16

Market risk considers the possibility that a firm may fail.

Question 17

Dividend reinvestment plans should be avoided because of their relatively high cost.

Question 18

Low price/earnings ratios indicate limited or low investor confidence.

Question 19

Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a long time.

Question 20

Common stockholders are considered to be the residual owners of a company.

Question 21

Corporate ownership of an investor is evidenced by:

A)coupon payments received by him or her.
B)common stocks held in a corporate.
C)the investment in the bonds of the corporate.
D)the receipt of capital gains by him or her.
E)the holding of property rights of ownership.

Question 22

An investment that earns interest on interest is said to be earning a _____.

A)discounted rate of return
B)fully compounded rate of return
C)consolidated rate of return
D)risk-free rate of return
E)tax-free rate of return

Question 23

Bonds have higher returns when compared to stocks.

Question 24

An example of event risk is:

A)inflation.
B)a corporate takeover.
C)a newspaper article about the economy.
D)deflation.
E)capital growth.

Question 25

The callable feature of a bond protects the issuer when market interest rates are falling.

Question 26

The business risk faced by an investor when investing in a company is related to:

A)changes in the price level in the economy.
B)investor behavior in the market.
C)the book value of firm's assets.
D)the firm's ability to meet operating expenses in a timely manner.
E)security price fluctuations.

Question 27

Stocks can be used aggressively by investors seeking current income,and bonds can be used aggressively by investors seeking capital gains.

Question 28

Which of the following statements about risk is correct?

A)The higher the risk,the higher the expected return.
B)The higher the risk,the lower the return.
C)The lower the risk,the greater the maturity value of the investment.
D)The higher the risk,the lower the maturity value of the investment.
E)The higher the risk,the lower the risk-free rate.

Question 29

Which of the following investments have the highest liquidity risk?

A)Common stocks
B)Corporate bonds
C)Treasury bonds
D)Land
E)Mutual fund shares

Question 30

The return on a _____ is an appropriate measure of the risk-free rate of return.

A)long-term Treasury note
B)certificate of deposit
C)90-day Treasury bill
D)long-term corporate bond
E)common stock

Question 31

Which of the following types of risks affects owners of fixed income securities more than owners of equity securities?

A)Business risk
B)Event risk
C)Market risk
D)Interest rate risk
E)Purchasing power risk

Question 32

Changes in the general level of prices within an economy produce:

A)business risk.
B)financial risk.
C)market risk.
D)purchasing power risk.
E)liquidity risk.

Question 33

Companies with a great deal of long-term debt are considered to have high _____ risk.

A)market
B)event
C)business
D)financial
E)liquidity

Question 34

A callable bond allows the issuer to retire the security prior to maturity.

Question 35

What is the effect of an increase in the current price of an investment?

A)The approximate expected yield will increase.
B)The approximate expected yield will decrease.
C)The approximate expected yield will remain the same.
D)The average annual current income will increase.
E)The average annual current income will decrease.

Question 36

_____ risk results from the behavior of investors in the securities market.

A)Business
B)Financial
C)Market
D)Purchasing power
E)Interest rate

Question 37

The higher the tax bracket you are in,the more attractive the purchase of stocks becomes.

Question 38

Damien plans to buy a share at $120 and hold it for five years.During this period,he would receive average annual dividends of $4 a share.He expects to receive $145 at the end of the five-year period when he sells the share.What are the keystrokes used to calculate the rate of return on the investment?

A)N = 5,PV = -120,PMT = 4,FV = 145
B)N = 5,PV = 120,PMT = 4,FV = -145
C)N = 5,PV = -145,PMT = -4,FV = 120
D)N = 4,PV = -120,PMT = 5,FV = 145
E)N = 4,PV = 145,PMT = 5,FV = -120

Question 39

Bonds provide for investment returns primarily in the form of growth.

Question 40

An investor receives return from an investment due to:

A)recurring nature of a deposit.
B)capital gains on sale of an investment.
C)asset allocation among different asset classes.
D)rebalancing by buying more equities.
E)diversification among or within asset classes.

Question 41

Stock profitability is often measured by:

A)book value.
B)return on equity.
C)market value.
D)net profit margin.
E)beta.

Question 42

Which of the following accounting measures indicates the amount of stockholder funds used to finance the firm?

A)Book value
B)Actual rate of return
C)Net profit margin
D)Approximate yield
E)Price/earnings ratio

Question 43

A stock's dividend yield is calculated as _____.

A)the annual dividend received per share divided by the book value per share of stock
B)the book value per share of stock divided by the annual dividend received per share
C)the annual dividend received per share divided by the market price per share of stock
D)the market price per share of stock divided by the annual dividend received per share
E)the earnings remaining after paying preferred dividends divided by the number of common shares outstanding

Question 44

One of the advantages of common stock investments is:

A)guaranteed dividend income.
B)potential capital gains.
C)steady interest income.
D)fixed maturity periods.
E)guaranteed payback of the principal amount.

Question 45

The market price per share of Zinc Corporation is $150 and earnings per share is $20.What is the price/earnings ratio of Zinc Corporation?

A)10.25
B)7.50
C)2.25
D)12.36
E)15.00

Question 46

The easiest way to invest in foreign markets is through:

A)the stocks purchased directly from an overseas broker.
B)the stocks purchased directly from a regular broker.
C)the stocks purchased directly over the Internet.
D)international mutual funds.
E)the purchase of Eurobonds.

Question 47

Suppose the earnings per share of a stock is $2 and the current price/earnings (P/E)ratio is 10.What is the current price of the stock?

A)$5
B)$8
C)$20
D)$40
E)$35

Question 48

To most stockholders,the main advantages of common stock investments are:

A)attractive returns and active trading.
B)guaranteed returns and voting rights.
C)high interest payment and active trading.
D)high risk and guaranteed returns.
E)low risk and guaranteed returns.

Question 49

Stocks whose earnings have increased at an above average level over time are called:

A)cyclical stocks.
B)growth stocks.
C)income stocks.
D)speculative stocks.
E)defensive stocks.

Question 50

The net income of Sunrise Corporation is $5 million and shareholders' equity is $50 million.The return on equity is _____.

A)5%
B)10%
C)20%
D)15%
E)25%

Question 51

The Smith family owns 200 shares of Elta stock.The company declared a 5 percent stock dividend.The Smiths now own:

A)200 shares.
B)205 shares.
C)210 shares.
D)420 shares.
E)410 shares.

Question 52

Return on equity is calculated by:

A)subtracting liabilities from assets.
B)adding the book value and the market price of a stock.
C)dividing net income by shareholder's equity.
D)multiplying assets by a selected number.
E)deducting taxes from dividends.

Question 53

A stock generally issued by companies expected to provide an uninterrupted stream of dividends and good,long-term growth prospects is called:

A)blue-chip stocks.
B)growth stocks.
C)income stocks.
D)defensive stocks.
E)cyclical stocks.

Question 54

Stocks whose prices tend to increase when the economy is in an expansionary stage and decline during a contractionary stage are called:

A)cyclical stocks.
B)defensive stocks.
C)speculative stocks.
D)income stocks.
E)tech stocks.

Question 55

Cash dividends on common stock are most often paid:

A)weekly.
B)monthly.
C)quarterly.
D)semi-annually.
E)annually.

Question 56

The current net income of Sigma Inc.is $8 million,market price of the stock is $65,and sales is $50 million? Which of the following is the net profit margin of Sigma Inc.?

A)10%
B)28%
C)16%
D)8%
E)22%

Question 57

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

A)the coupon rate.
B)the expected interest income.
C)the net profit margin.
D)the maturity period.
E)the sinking fund.

Question 58

The advantages of a dividend reinvestment plan (DRP)may include:

A)stock sold at a discount.
B)guaranteed rate of return.
C)tax advantages.
D)convertibility option.
E)repayment of the principal.

Question 59

The _____ of a stock reflects stockholders' confidence.

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

Question 60

Which of the following is true of American Depositary Receipts (ADRs)?

A)ADRs are traded only in foreign exchanges.
B)ADRs are denominated in foreign currencies.
C)ADRs represent a stated number of shares in a specific foreign company.
D)The investors in ADRs receive annual interest amounts in dollars.
E)The investors in ADRs receive dividends in foreign currencies.

Question 61

The relevant sale or invoice price of a bond to the buyer,which adds the accrued interest to the quoted price,is its:

A)par value.
B)clean price.
C)negotiated price.
D)dirty price.
E)discount price.

Question 62

A Puppy Pet Services $1,000 bond has a 7.5 percent coupon rate,matures in 2016,and is currently quoted at $820.The current yield is:

A)6.15 percent.
B)7.50 percent.
C)9.15 percent.
D)10.27 percent.
E)11.43 percent.

Question 63

Stock dividends represent __________. ​

A)interest income
B)non-sinking income
C)non-taxable income
D)speculative income

Question 64

Positive aspects about bonds include:

A)high dividend receipts.
B)less diversification properties.
C)residual ownership.
D)low risk as compared to equity.
E)high returns as compared to equity.

Question 65

A bond is quoted as 6.5 percent coupon.The par value of the bond is $1,000,and the market value is $1,200.The bondholder would receive _____ interest per year.

A)$78
B)$780
C)$65
D)$500
E)$650

Question 66

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

A)6.900%.
B)8.261%.
C)9.583%.
D)12.105%.
E)14.625%.

Question 67

When interest rates rise,bond prices will:

A)increase and then return to a steady price.
B)rise.
C)fall.
D)vary unpredictably.
E)not be affected.

Question 68

If an investor wants a higher level of return on an investment,he or she should expect __________. ​

A)a higher risk exposure
B)a lower market risk exposure
C)a lower tax liability
D)a highly volatile security

Question 69

The approximate yield to maturity of a bond is greater than the stated rate of interest when:

A)the bond is purchased at face value.
B)the bond is purchased at a discount.
C)the bond is purchased at a premium.
D)the market rates of interest decline.
E)the market rates of interest are constant.

Question 70

A bond was issued at a par value of $1,000 when the interest rate for similar bonds was 8 percent.Presently,new bonds issued with a similar creditworthiness have a 10 percent interest rate.Which of the following is most likely to be true about the bond?

A)It is currently selling for a premium.
B)It is currently selling at a discount.
C)It is currently selling at par.
D)It is likely to be retired.
E)The bond's coupon rate increases.

Question 71

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

A)federal bonds.
B)agency bonds.
C)treasury bonds.
D)municipal bonds.
E)trust bonds.

Question 72

__________ is a measure of stock investors' confidence in a corporation. ​

A)Price/earnings ratio
B)Coupon rate
C)Debt safety ratio
D)Maturity value

Question 73

Which of the following types of bonds is unsecured?

A)Mortgage bonds
B)Equipment trust certificates
C)Debenture bonds
D)Agency bonds
E)Treasury bonds

Question 74

Sunshine Mining bonds have a $1,000 face value,pay $95 annual interest,mature in 2020,and are currently quoted at $1,302.50.The coupon rate of the bond is:

A)8.500%.
B)9.500%.
C)13.025%.
D)13.052%.
E)7.340%.

Question 75

__________ dividends are the most common form of dividends. ​

A)Cash
B)Stock
C)Convertible
D)Reinvestment

Question 76

A bond selling below par value is selling at:

A)a discount.
B)its coupon value.
C)a premium.
D)its maturity value.
E)the highest effective yield.

Question 77

When the market interest rate decreases,the bond:

A)price increases.
B)maturity period decreases.
C)coupon rate decreases.
D)current yield increases.
E)yield to maturity increases.

Question 78

__________ risk results from the behavior of investors in the securities markets that may cause security prices to fluctuate. ​

A)Market
B)Business
C)Purchasing power
D)Event

Question 79

For a U.S resident,the best way to minimize exchange rate risk when investing in foreign stocks is to __________. ​

A)buy defensive stocks
B)buy municipal bonds
C)invest in Certificate of Deposits (CDs)
D)buy American Depositary Receipts (ADRs)

Question 80

Bonds are issued:

A)by corporations and state,local,and federal governments.
B)only by state and local governments and partnership firms.
C)only by corporations and partnership firms.
D)by Moody's and Standard & Poor's.
E)by the Securities Exchange Commission (SEC).