Deck 12: Investing in Stocks and Bonds

Question 1

Recovery of principal and capital gain are elements of total return.

Answer 1

True

Question 2

Bondholders will receive interest payments after the stockholders receive dividends.

Answer 2

False

Question 3

Market risk considers the possibility that the firm may fail.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

A company with low financial risk are likely to have little to no long-term debt.

Question 8

Total investment return can be approximated using the current yield.

Question 9

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

Question 10

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

Question 11

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

Question 12

All securities involve risk of some kind.

Question 13

If the current price of an investment increases,the investment's annual yield will decrease.

Question 14

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

Question 15

Interest rate risk is greater for stocks than for bonds.

Question 16

The returns you expect from securities are income and growth.

Question 17

The risk free rate of return is often measured by the return on US Treasury Bills.

Question 18

In most investments,there is a risk-return trade-off.

Question 19

Purchasing power risk is of least concern during economic recession.

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

Tech stocks represent stocks in the technology and utility sectors.

Question 25

Publicly traded issues are shares only available to qualified investors.

Question 26

Blue-chip stocks are expected to pay dividends more regularly than growth stocks.

Question 27

A stocks beta is an indication of its relationship to the general market.

Question 28

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 29

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

Question 30

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 31

You received a stock dividend this year instead of cash.This is taxable income.

Question 32

Price fluctuations of defensive stocks follow the fluctuations of the market as a whole.

Question 33

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

Question 34

Most companies pay their bondholders cash dividends on a semi-annual basis.

Question 35

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

Question 36

Stocks with high betas will have larger price gains but lower price declines than those with low betas.

Question 37

Common stocks pay a guaranteed dividend each year.

Question 38

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

Question 39

Earnings per share (EPS)tell the stockholder the amount of dividend earned.

Question 40

Stocks with high betas will have larger price gains and losses than those with low betas.

Question 41

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

Question 42

Bond return can include both interest and capital gains.

Question 43

Treasury inflation-indexed bonds (TIPS)are appropriate for investors who are conservative and concerned about inflation.

Question 44

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

Question 45

Only the federal government issues convertible bonds.

Question 46

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

Question 47

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

Question 48

Bonds rated AA by S&P and Aa by Moody's would be investment quality.

Question 49

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

Question 50

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

Question 51

Common stock owners must receive dividends before preferred stockholders.

Question 52

An investor is guaranteed to make a positive return on Treasury notes and bonds.

Question 53

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

Question 54

Typically the best time to invest in the stock market is when the market is very volatile because the risk would be low.

Question 55

All treasury bonds issued today are inflation-adjusted.

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

Bonds represent a form of corporate debt capital.

Question 61

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

Question 62

A premium bond sells at par value.

Question 63

Convertible preferred stock can be exchanged for common stock.

Question 64

Preferred stock can be exchanged for common stock.

Question 65

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

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

Question 66

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 67

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

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

Question 68

The commonly-cited price for a bond in the financial press and on the Web is usually its clean bond price.

Question 69

Which of the following investments has the highest liquidity risk?

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

Question 70

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

Question 71

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

Question 72

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

Question 73

Pulling money out of the market exposes you to the significant risk that you'll miss the months of good returns that could help you recoup prior losses.

Question 74

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

Question 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

Which of the following types of risk affect 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) None of the above

Question 80

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