Question 1

A company often exercises the call provision of a bond if it's available when prevailing interest rates fall below the interest rate currently being paid to bondholders.

Accepted Answer

This is true, as the company can then issue new bonds with a lower interest rate, saving them money on interest payments.

Question 2

After retirement, Hector began a search for a low-risk investment. He should consider buying a secured bond of a major corporation.

Accepted Answer

A secured bond of a major corporation is considered a low-risk investment because it is backed by the assets of the company. The company's assets would be used to pay back the bondholders in the event of a default.

Question 3

The high start-up costs of web-based businesses cause online brokers to charge higher commissions than traditional brokerage firms.

Accepted Answer

Web-based businesses generally have lower start-up costs compared to traditional brick-and-mortar businesses. Therefore, online brokers can afford to charge lower commissions due to their lower overhead costs.

Question 4

A well-diversified portfolio would consist of a variety of investments and even cash for emergencies. The important thing is that the choice of investments spreads the risk. Some investments may perform very well in any one year while others may lag. Those performing well will balance out those that are underperforming.

Accepted Answer

A well-diversified portfolio includes a variety of investments to spread the risk and balance out potential underperformers with strong performers. Cash is also important for emergency situations.

Question 5

Tyler is looking for an investment that will pay a little better than what he can get from a government bond. You suggest that he consider a new issue of debenture bonds by Very Vegetarian that pay 8.5% annually. You explain that Very Vegetarian has operated for a long time, and the debenture feature makes these bonds more secure than others.

Accepted Answer

The answer of Tyler is looking for an investment that...

Question 6

In an attempt to lower their investment risk, investors prefer to buy a company's bond rather than the stock of the same firm.

Accepted Answer

Investors prefer buying bonds because they provide a fixed income stream, a fixed maturity date, and are less risky than stocks.

Question 7

The advantage of using an online broker is that these services usually provide you with a wealth of information and help you allocate your assets. Sometimes they even help you create an investment plan for life!

Accepted Answer

The answer of The advantage of using an online broker...

Question 8

Monica met with a financial planner last week and he urged her to consider only government bonds and mutual funds in her portfolio. Since she is in her 20's, Monica believes she can tolerate a little more risk. You suggest that it is a better plan to follow the advice of the financial planner, rather than research her choices on her own.

Accepted Answer

While it is important for Monica to consider her risk tolerance, it is also important to research and understand her investment choices. Simply following the advice of one financial planner may not be sufficient in making the best investment decisions for her specific situation. Monica should consider seeking advice from multiple sources and conducting her own research before making any investment decisions.

Question 9

Taking into account the risk/return tradeoff, it would stand to reason that a secured bond holds a lower interest rate than an unsecured bond.

Accepted Answer

A secured bond has collateral backing it, which lowers the risk to the investor. As a result, the interest rate offered on a secured bond is typically lower than that of an unsecured bond, which does not have collateral backing it and is therefore riskier. This reflects the risk/return tradeoff, where investors demand higher returns for taking on higher levels of risk.

Question 10

Investors and corporations are on the opposite sides of the interest rate risk scenario. If interest rates go up to 7%, the bondholder holding a bond with a 6% interest rate knows that he could do better. If he is forced to sell his bond on the secondary market before it matures, he will receive less than the face value.

Accepted Answer

When interest rates rise, the value of existing bonds decreases, which means that bondholders may receive less than the face value if they sell their bond on the secondary market before it matures. This is known as interest rate risk. On the other hand, corporations may benefit from rising interest rates as they can earn higher returns on their investments and borrow money at lower rates.

Question 11

As a registered representative of a stock brokerage firm, a stockbroker works as an intermediary to buy and sell securities for clients.

Accepted Answer

This is a correct definition of a stockbroker's role.

Question 12

Online investors expect more expert advice than investors using traditional brokerage firms.

Accepted Answer

The answer of Online investors expect more expert advice than...

Question 13

The first step in any investment program is to analyze factors such as desired income, cash requirements, and your tolerance for risk.

Accepted Answer

This statement is true. Before making any investments, it is important to evaluate your financial goals, liquidity needs, and risk tolerance to determine the appropriate investment strategy.

Question 14

Diversification means buying several different types of investments with the funds you have available for investment.

Accepted Answer

Diversification is the act of spreading out investments across several different types of assets, such as stocks, bonds, and real estate, in order to reduce risk and potentially increase returns.

Question 15

The call provision set by a company on its bonds benefits the investor.

Accepted Answer

The call provision allows the company to call back or redeem the bonds before the maturity date, which can sometimes be disadvantageous for the investor.

Question 16

A sinking fund provision decreases the risk of repayment in the minds of the investors.

Accepted Answer

A sinking fund provision requires the borrower to make scheduled payments into a separate account, which can be used to redeem the bonds before they mature. This reduces the risk of default and increases the likelihood of timely repayment, which ultimately reduces the risk in the minds of the investors. As a result, the presence of a sinking fund provision can lead to lower interest rates and higher demand for the bonds.

Question 17

For starters, investors should consider the return on investment, the liquidity and riskiness of an investment.

Accepted Answer

These are three key factors that investors should consider when evaluating an investment. The return on investment measures the potential profit that an investor could make. Liquidity refers to how easily an investment can be bought or sold. Riskiness refers to the likelihood that an investor could lose money on the investment.

Question 18

The U.S. government just announced an increase in the interest rate paid on U.S. government bonds. This will likely cause a decrease in the interest rates paid on corporate bonds.

Accepted Answer

An increase in the interest rate paid on U.S. government bonds tends to lead to an increase in interest rates paid on other bonds, including corporate bonds. This is because investors will demand a higher return on all types of bonds, not just government bonds.

Question 19

The bonds' call provision was 2012. If interest rates go down to 4.5% in the year 2012, Bellandro Bay is not likely to call in this bond issue.

Accepted Answer

If interest rates go down to 4.5% in 2012, it becomes cheaper for Bellandro Bay to borrow money, making it more likely they will call in the bond issue and issue new bonds at a lower interest rate.

Question 20

Young investors place more importance on low risk investments, while elderly investors prefer significant growth in the value of their investments.

Accepted Answer

Generally, young investors are more willing to take risks in hopes of achieving high returns, while elderly investors tend to prioritize preserving their wealth over making risky investments.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities