Deck 12: Investing in Stocks and Bonds

Question 1

Bonds can earn income through interest payments and capital gains.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

Capital gains are paid at specified times, e.g., quarterly or semiannually.

Question 10

Market risk considers the possibility that a firm may fail.

Question 11

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

Question 12

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

Question 13

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

Question 14

The returns you expect from securities are income and growth.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

Low price\earnings ratios indicate high investor confidence.

Question 21

Cash dividends on common stock are most often paid:

A)weekly.
B)monthly.
C)quarterly.
D)semiannually.
E)annually.

Question 22

An investor receives a return from an investment due to:

A)recurring deposits.
B)capital gains on the 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 23

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 24

An example of event risk is:

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

Question 25

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

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

Question 26

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

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

Question 27

Which of the following investments has the highest liquidity risk?

A)Common stock
B)Corporate bond
C)Treasury bond
D)Land
E)Mutual fund share

Question 28

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 29

Bonds typically have higher long-term returns when compared to stocks.

Question 30

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

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

Question 31

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 32

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 33

Which of the following types of risk has the most effect on owners of fixed income securities?

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

Question 34

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 35

Corporate ownership by an investor is evidenced by:

A)coupon payments.
B)common stocks.
C)corporate bonds.
D)the receipt of capital gains.
E)property rights.

Question 36

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 37

_____ risk results from the behavior of investors buying and selling securities that lead to swings in prices.

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

Question 38

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 39

Which of the following statements about risk is true?

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 40

Damien plans to buy a share at $120 and hold it for 5 years. During this period, he would receive average annual dividends of $4 a share. He expects to receive $145 at the end of the 5-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 41

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 42

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 43

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 44

A bond was issued at a par value of $1,000 when the interest rate for similar bonds was 8%. Presently, new bonds issued with a similar creditworthiness have a 10% 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 45

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 46

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

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 47

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 48

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

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

Question 49

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 50

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 shareholders' equity.
D)multiplying assets by a selected number.
E)deducting taxes from dividends.

Question 51

Stock profitability is often measured by:

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

Question 52

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 53

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

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

Question 54

Positive aspects about bonds include:

A)high dividend receipts.
B)few diversification properties.
C)residual ownership.
D)potential capital gains.
E)high returns as compared to equity.

Question 55

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

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

Question 56

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).

Question 57

A stock's dividend yield is calculated as the:

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

Question 58

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 59

The market price per share of Zinc Corporation is $145, and earnings per share is $20. What is the price\earnings ratio of Zinc Corporation?

A)10.25
B)7.25
C)2.25
D)12.36
E)15.00

Question 60

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

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

Question 61

The commonly cited price for a bond in the financial press and on the Internet is usually its _____ bond price.

A)clean
B)dirty
C)premium
D)discount
E)accrued

Question 62

When a bond is sold between coupon payment dates, the buyer pays the seller for the _____, which is the prorated share of the upcoming coupon payment.

A)accrued interest
B)prepaid interest
C)bond premium
D)bond discount
E)discount

Question 63

In the stock market, the market cap of a large-cap stock is more than:

A)$10 billion.
B)$20 billion.
C)$1 billion.
D)$50 million.
E)$5 million.

Question 64

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 65

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

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

Question 66

A Puppy Pet Services $1,000 bond has a 7.5% coupon rate, matures in 2020, and is currently quoted at $820. The current yield is:

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

Question 67

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

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

Question 68

_____  dividends are the most common form of dividends.

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

Question 69

A bond is quoted as a 6.5% 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