Deck 2: Investment Alternatives

Question 1

The largest single institutional owner of common stocks is:

A)mutual funds.
B)insurance companies.
C)pension funds.
D)commercial banks.

Answer 1

C

Question 2

For an investor with a 28% marginal tax rate,what return would a corporate bond have to pay to provide the same after-tax return as a municipal bond paying 5%?

A)1.40%
B)2.50%
C)5.00%
D)6.94%

Answer 2

D

Question 3

Treasury STRIPS are most similar to which type of corporate security?

A)Preferred stock
B)Premium bond
C)High-yield bond
D)Zero-coupon bond

Answer 3

D

Question 4

Which of the following would not be considered a capital market security?

A)A 20-year corporate bond
B)A common stock
C)A 6-month Treasury bill
D)A mutual fund share

Question 5

Treasury bills are traded in the:

A)money market.
B)capital market.
C)government market.
D)regulated market.

Question 6

Which of the following statements is true regarding an investment in mortgage-backed securities?

A)There is little default risk.
B)The stated maturity is generally 10 years.
C)They receive a fixed payment per month.
D)They are not subject to prepayment.

Question 7

Nonmarketable financial assets that protect against inflation include:

A)nonnegotiable certificates of deposit (CDs).
B)money market deposit accounts (MMDAs).
C)Series EE US government savings bonds.
D)US government savings bonds,I bonds.

Question 8

Each point on a corporate bond quote represents:

A)$100.
B)1 percent of $100.
C)1 percent of $1000.
D)$1000.

Question 9

A municipal bond issued to finance a toll bridge would most likely be a:

A)general obligation bond.
B)revenue bond.
C)special assessment bond.
D)zero-coupon bond.

Question 10

Savings accounts are:

A)negotiable but are not liquid.
B)marketable but are not liquid.
C)liquid but are not personal.
D)liquid but are not marketable.

Question 11

Zero-coupon bonds are similar to Treasury bills in that both:

A)are issued exclusively by the U.S.Treasury.
B)are money-market securities.
C)are capital-market securities.
D)are sold at less than par.

Question 12

Which of the U.S.Treasury securities is always sold at a discount?

A)Treasury bills
B)Treasury notes
C)Treasury bonds
D)Treasury inflation protected securities (TIPS)

Question 13

What is the major difference between municipal bonds and other types of bonds?

A)Municipal bonds are always insured;other bonds are not.
B)Unlike other bonds,municipal bonds sell at a discount.
C)Municipal bond interest is tax-exempt;interest on other bonds is not.
D)There is no brokerage commission on municipal bonds unlike other bonds.

Question 14

Interest on bonds is typically paid:

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

Question 15

Bonds called in are likely to be:

A)bonds already in default.
B)replaced with new bonds that have a lower interest rate.
C)replaced with new bonds that have a higher interest rate.
D)junk bonds.

Question 16

The coupon rate is another name for the:

A)market interest rate.
B)current yield.
C)stated interest rate.
D)yield to maturity.

Question 17

Which of the following is not a characteristic of the primary nonmarketable financial asset owned by most individuals?

A)High liquidity
B)High return
C)Often issued by the U.S.government
D)Low risk

Question 18

Bonds trade on an accrual interest basis.This means an investor:

A)can sell a bond at any time without losing the interest that has accrued.
B)can buy a bond at any time and gain the interest accrued from the time of the last payment.
C)can sell a bond at any time and retain the interest portion of the bond.
D)can buy a bond at any time and receive an immediate interest check.

Question 19

Which of the following statements regarding money market instruments isnot true?

A)They tend to be highly marketable.
B)They have maturities from 1 to 3 years.
C)They tend to have a low probability of default.
D)Their rates tend to move together.

Question 20

What will a bond be worth on the day it matures?

A)$0
B)$100
C)Its face value (plus remaining coupon,if applicable)
D)Its remaining coupon,if applicable

Question 21

The money market rate most often used as a benchmark for the risk-free rate is the money market deposit account rate.

Question 22

Which of the following statements is true regarding asset-backed securities?

A)They offer relatively high yields.
B)They have relatively long maturities.
C)They generally have low credit ratings.
D)Each traunche has the same risk.

Question 23

Marketable securities all fall into the category of capital market securities.

Question 24

If an investor states that Intel is overvalued at 65 times,he is referring to Intel's:

A)earnings per share.
B)dividend yield.
C)book value.
D)P/E ratio.

Question 25

If a call option has a $10 strike price,and the underlying stock is trading at $11,then the option is considered:

A)in the money.
B)at the money.
C)out of the money.
D)worthless.

Question 26

Money market securities generally carry a low chance of default.

Question 27

An example of indirect investing would be buying shares in a mutual fund.

Question 28

For U.S.companies,dividends are typically paid:

A)monthly.
B)quarterly.
C)semi-annually.
D)yearly.

Question 29

Nonmarketable investments would include savings accounts at banks and Treasury bills.

Question 30

Which of the following is a security that represents shares of a foreign company,which are held in a bank?

A)Convertible bond
B)American Depository Receipt (ADR)
C)Asset-backed security
D)LEAPS

Question 31

Direct investing involves trades made by directly purchasing shares of a financial intermediary.

Question 32

If a preferred stock issue is cumulative,this means:

A)unpaid preferred stock dividends are paid at the end of the year.
B)unpaid preferred stock dividends are legally binding on the corporation.
C)unpaid preferred stock dividends must be paid in the future before common stock dividends can be paid.
D)unpaid preferred stock dividends are never repaid.

Question 33

The premium on an option is the:

A)par value of the option.
B)price of the option.
C)book value of the option.
D)price at which a security may be bought or sold using the option.

Question 34

Which of the following statements regarding common stocks is true?

A)The par value of common stock is usually $100.
B)The market value of common stock is equal to its book value.
C)Dividends on common stock are at the discretion of the company.
D)Common stock has a senior claim on company assets.

Question 35

A corporate bond with a rating of BBB- is considered to be which of the following?

A)Non-investment grade
B)Investment grade
C)Speculative grade
D)Junk or high-yield

Question 36

Treasury bonds generally have maturities of:

A)5 to 15 years.
B)5 to 30 years.
C)10 to 20 years.
D)10 to 30 years.

Question 37

All U.S.government securities are considered marketable securities.

Question 38

What is the biggest difference between an option and a futures contract?

A)Options are traded on exchanges,whereas futures are not.
B)Options give investors a way to manage portfolio risk,while futures do not.
C)Options can be used by speculators to profit from price fluctuations,while futures cannot.
D)Options give their holders the right to buy or sell,whereas futures contracts are obligations to buy or sell.

Question 39

An unsecured bond is known as a(n):

A)debenture.
B)indenture.
C)mortgage bond.
D)junk bond.

Question 40

Which of the following 10-year bonds would have the lowest yield?

A)AAA-rated corporate bond
B)AAA-rated insured municipal bond
C)U.S.Treasury bond
D)AAA-rated mortgage-backed bond

Question 41

In the case of a corporate bankruptcy,bondholders are paid before any distributions are paid to preferred or common stockholders.

Question 42

LEAPS have maturity dates up to 10 years.

Question 43

Treasury notes represent the nontraded debt of the U.S.government.

Question 44

The major bond rating service is Dun & Bradstreet.

Question 45

The major attraction of municipal bonds is their extremely low risk.

Question 46

Term bonds have a single maturity.

Question 47

Bond ratings are primarily used to assess interest rate risk.

Question 48

The capital market includes both fixed-income and equity securities.

Question 49

Distinguish between direct and indirect investing.

Question 50

The par value on common stock sets the value that stockholders will receive in case of bankruptcy.

Question 51

Most futures contracts are not exercised.

Question 52

The rate spreads between the different money market securities of the same term tend to be quite large.

Question 53

If a bond has a coupon greater than the current market yield,it should be selling at a premium.

Question 54

TIPS adjust for inflation by adjusting the rate of interest paid on the bond.

Question 55

Investors in high tax brackets would be unlikely to invest in municipal bonds.

Question 56

The deeper the discount on a zero-coupon bond,the lower the effective return.

Question 57

Convertible bonds give their investors the right to convert the bond into common stock at their discretion.

Question 58

The earnings retention rate is calculated as 1 - dividend yield.

Question 59

The return on a zero-coupon bond is derived from the difference between the purchase price of the bond and its par value.

Question 60

Callable bonds attract investors because they can be redeemed early.

Question 61

How is the total book value of equity affected by stock splits?

Question 62

Who benefits from a futures contract,a call contract,and a put contract,if prices fall?

Question 63

How is the earnings retention rate related to the dividend payout rate?

Question 64

What rate would a taxable corporate bond have to pay to be comparable to a municipal bond with a coupon rate of 7 percent if the investor is in the 28 percent tax bracket?

Question 65

The par value of Blaze,Inc.common stock is $0.50,the earnings per share is $4,the stock price is $60,and the dividend per share is $1.Calculate the payout ratio.

Question 66

How do asset-backed securities improve the flow of funds from savers to borrowers?

Question 67

Does the options market help stabilize or destabilize the stock market?Explain.

Question 68

The par value of Blaze,Inc.common stock is $0.50,the earnings per share is $4,the stock price is $60,and the dividend per share is $1.Calculate the dividend yield.

Question 69

Explain how writing option contracts (both puts and calls)can generate income for owners of the underlying stock.

Question 70

What are two direct and one indirect method for individuals to invest in foreign stocks?

Question 71

Rank (lowest to highest)the following securities in terms of the risk-expected return tradeoff from the investors' viewpoint:common stock,corporate bonds,
U.S.Treasury bonds,preferred stock.

Question 72

In what sense is a stock selling for 12 times earnings "cheaper" than a stock with a P/E ratio of 20?

Question 73

The par value of Inferno,Inc.common stock is $0.50,the earnings per share is $6,
and it trades at a P/E of 15.What is Inferno,Inc.'s stock price?

Question 74

Compare the cash flows an investor expects from coupon bonds,zero-coupon bonds,and preferred stock.

Question 75

What are some advantages of asset-backed securities to investors?

Question 76

A corporate investor in the 34% marginal income tax bracket can buy bonds issued by a petroleum exploration company yielding 10.606%.The investor should be willing to buy tax-exempt municipal bonds of similar quality yielding what percent or higher?