Question 1

Each point on a corporate bond quote represents:
A) $100.
B) 1 percent of $100.
C) 1 percent of $1000.
D) $1000.

Accepted Answer

Each point on a corporate bond quote represents 1 percent of $1000, which is equivalent to $10.

Question 2

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

Accepted Answer

The primary nonmarketable financial asset owned by most individuals, such as savings bonds, typically offers low risk and high liquidity but does not provide a high return.

Question 3

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%

Accepted Answer

To find the equivalent taxable yield, use the formula: Taxable Equivalent Yield = Municipal Bond Yield / (1 - Tax Rate). Here, it is 5% / (1 - 0.28) = 6.94%.

Question 4

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.

Accepted Answer

Savings accounts are liquid because funds can be easily accessed, but they are not marketable as they cannot be sold or transferred to another party.

Question 5

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.

Accepted Answer

Bonds are often called in when interest rates have fallen, allowing the issuer to replace them with new bonds at a lower interest rate, reducing their interest expenses.

Question 6

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.

Accepted Answer

A municipal bond issued to finance a toll bridge would most likely be a revenue bond, as it is backed by the revenue generated from the tolls collected from the bridge.

Question 7

The coupon rate is another name for the:
A) market interest rate.
B) current yield.
C) stated interest rate.
D) yield to maturity.

Accepted Answer

The coupon rate is the stated interest rate on a bond, which is the annual interest payment made by the issuer relative to the bond's face value.

Question 8

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.

Accepted Answer

Mortgage-backed securities (MBS) are generally considered to have little default risk because they are often backed by government-sponsored enterprises like Fannie Mae or Freddie Mac, which provide a level of credit protection.

Question 9

Treasury bills are traded in the:
A) money market.
B) capital market.
C) government market.
D) regulated market.

Accepted Answer

Treasury bills are short-term debt securities issued by the government and are traded in the money market, which deals with short-term borrowing and lending.

Question 10

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.

Accepted Answer

I bonds are nonmarketable US government savings bonds specifically designed to protect against inflation, as their interest rates are adjusted for inflation.

Question 11

Zero-coupon bonds are similar to Treasury bills in that both are:
A) issued exclusively by the U.S. Treasury.
B) money-market securities.
C) capital-market securities.
D) sold on a discount basis.

Accepted Answer

Zero-coupon bonds and Treasury bills are both sold at a discount to their face value and do not pay periodic interest.

Question 12

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.

Accepted Answer

Municipal bond interest is typically exempt from federal income tax and sometimes state and local taxes, which is a key difference from other types of bonds.

Question 13

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.

Accepted Answer

When bonds trade on an accrual interest basis, the seller receives the interest that has accrued up to the sale date, ensuring they do not lose the interest earned.

Question 14

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)

Accepted Answer

Treasury bills are short-term securities that are sold at a discount to their face value and do not pay periodic interest. Instead, the return to the investor is the difference between the purchase price and the face value paid at maturity.

Question 15

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

Accepted Answer

A 6-month Treasury bill is a money market security, not a capital market security, because it has a maturity of less than one year.

Question 16

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

Accepted Answer

On the day a bond matures, it is worth its face value, and if there is any remaining coupon payment due, that will also be paid.

Question 17

Which of the following statements regarding money market instruments is not 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.

Accepted Answer

Money market instruments typically have maturities of one year or less, not from 1 to 3 years.

Question 18

The largest single institutional owner of common stocks is:
A) mutual funds.
B) insurance companies.
C) pension funds.
D) commercial banks.

Accepted Answer

Pension funds are typically the largest single institutional owners of common stocks due to their large asset bases and long-term investment horizons.

Question 19

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

Accepted Answer

Treasury STRIPS are similar to zero-coupon bonds because they are sold at a discount and do not pay periodic interest, instead providing a single payment at maturity.

Question 20

Interest on bonds is typically paid:
A) monthly.
B) quarterly.
C) semi-annually.
D) annually.

Accepted Answer

Interest on bonds is typically paid semi-annually, meaning twice a year.

Quiz 2: Investment Alternatives

Each point on a corporate bond quote represents:

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

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%?

Savings accounts are:

Bonds called in are likely to be:

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

The coupon rate is another name for the:

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

Treasury bills are traded in the:

Nonmarketable financial assets that protect against inflation include:

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

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

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

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

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

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

Which of the following statements regarding money market instruments is not true?

The largest single institutional owner of common stocks is:

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

Interest on bonds is typically paid: