Deck 12: Investing in Stocks and Bonds

Question 1

Purchasing power risk is of most concern during economic recession.

Answer 1

False

Question 2

A company with low financial risk has little to no long-term debt.

Answer 2

True

Question 3

The returns you expect from securities are income and growth.

Answer 3

True

Question 4

Common stockholders are entitled to a prorated share of a company's earnings only after all of the firm's other obligations have been met.

Question 5

Dividend income and stock appreciation represent the elements of total return for a stock investment.

Question 6

All securities involve risk of some kind.

Question 7

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

Question 8

Interest rate risk is greater for stocks than for bonds.

Question 9

Interest rate risk is greater for short-term bonds than for long-term bonds.

Question 10

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

Question 11

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

Question 12

Bondholders have no equity in the issuing firm.

Question 13

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

Question 14

Market risk considers the possibility that the firm may fail.

Question 15

In most investments,there is a risk-return tradeoff.

Question 16

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

Question 17

Bondholders will receive interest payments only after stockholders receive dividends.

Question 18

Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition.

Question 19

The risk-free rate of return is often measured by the return on U.S.Treasury bills.

Question 20

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

Question 21

Price fluctuations of defensive stocks are usually contrary to movements in the business cycle.

Question 22

If Wristwatch Arm Corporation (WAC)has assets of $10 million,liabilities of $5 million,and preferred stock of $1 million,its book value is $6 million.

Question 23

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

Question 24

John and Mary Smith own 500 shares of ABE stock.After the company pays a 6 percent stock dividend,John and Mary will own 530 shares of ABE stock.

Question 25

Stocks with high betas will have low price volatility.

Question 26

Publicly traded issues are only available to qualified investors.

Question 27

A stock's beta is an indication of how responsive the stock is to changes in the overall stock market.

Question 28

Earnings per share (EPS)tell the stockholder the amount of dividend to be paid.

Question 29

Stocks with betas of less than 1.0 will have relatively stable prices.

Question 30

The higher a stock's beta,the riskier the stock.

Question 31

Historically,the long-term performance of stock outstrips that of bonds.

Question 32

Stock dividends are taxed at long-term capital gains rates.

Question 33

Common stocks pay a guaranteed dividend each year.

Question 34

Interest on corporate bonds is paid semiannually.

Question 35

Growth stocks generally pay little or nothing in dividends.

Question 36

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

Question 37

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

Question 38

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 39

You received a cash dividend from your stock investment this year.This is taxable income.

Question 40

Income stocks are purchased with the expectation of high capital gains upon their resale.

Question 41

Common stock owners must receive dividends before preferred stockholders.

Question 42

Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital gains.

Question 43

Dividend reinvestment plans provide shareholders with cash so that they can invest in similar stocks.

Question 44

Investors typically welcome their bonds being called because of the generous call premium paid.

Question 45

The value of any investment is a function of the return it is expected to produce relative to the amount of perceived risk involved in the investment.

Question 46

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

Question 47

Only the federal government issues zero coupon bonds.

Question 48

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

Question 49

TIPS are appropriate for investors who are conservative and concerned about inflation.

Question 50

If you buy a zero coupon bond,you will receive no cash from the corporation until the bond matures.

Question 51

You would expect more growth with the preferred stock you own than with the common stock in your portfolio.

Question 52

Bonds rated AA by S&P and Aa by Moody's are considered very safe bonds.

Question 53

Treasury notes,bills,and bonds represent loans to the federal government.

Question 54

Income stocks are similar to bonds in that they pay annual interest to owners.

Question 55

Municipal bonds can be attractive investments,despite their lower interest rate,since their interest income is exempt from federal income tax.

Question 56

All treasury bonds issued today are noncallable.

Question 57

Typically,the best time to invest in the stock market is when the market is very volatile.

Question 58

Bond return can include both interest and capital gains.

Question 59

To the issuing company,bonds are liabilities.

Question 60

A callable bond may be retired by the issuer prior to maturity.

Question 61

When a bond is sold between coupon payment dates,the buyer pays the seller for the accrued interest.

Question 62

Companies with a great deal of long-term debt would rate fairly high in ____ risk.

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

Question 63

A high inflation rate would result in a high degree of

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

Question 64

A beta of more than one would be expected of a speculative stock.

Question 65

A discount bond has a market value above par value.

Question 66

____ risk results from the behavior of investors in the securities market

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

Question 67

Bond prices are impacted by both the direction and magnitude of market interest rate changes.

Question 68

Convertible preferred stock can be exchanged for common stock.

Question 69

The commonly cited price for a bond is usually its clean bond price.

Question 70

The yields on municipal bonds are usually higher than the returns available from fully taxable issues.

Question 71

In which of the following types of investment is the most liquidity risk?

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

Question 72

Junk bonds have higher risk and similar returns to investment grade bonds.

Question 73

Security investors incur varying degrees of risk.Business risk is related to

A)price level changes in the economy.
B)investor behavior in the market.
C)the debt-to-equity ratio of the firm.
D)the potential success or failure of the firm.
E)security price fluctuations.

Question 74

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

Question 75

A bond with an S&P rating of BBB is considered investment-grade.

Question 76

Which of the following types of risk affect owners of fixed income securities more than owners of equity securities

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

Question 77

There is an inverse relationship between bond prices and market interest rates.

Question 78

A bond with a yield to maturity that equaled or exceeded an investor's desired rate of return is considered an attractive investment.

Question 79

At the time you buy a convertible bond,you will know the number of stock shares for which it can be exchanged.

Question 80

Preferred stockholders have no equity in the issuing firm.