Question 1

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 
The possibility that a corporation might fail is [ economic | business ] risk.

Accepted Answer

The answer of INSTRUCTIONS: Choose the word or phrase in...

Question 2

When interest rates decrease, bond:
A) prices increase.
B) maturity periods decrease.
C) coupon rates decrease.
D) current yields increase.
E) yields to maturity increase.

Accepted Answer

When interest rates decrease, bond prices increase. This is because existing bonds with higher interest rates become more valuable since they provide a higher return compared to new bonds with lower interest rates. As a result, investors are willing to pay more for these existing bonds, driving up their prices. Conversely, when interest rates increase, bond prices decrease.

Question 3

Treasury notes are issued with:
A) maturities of 2, 3, 5, and 10 years.
B) maturities of 20 and 30 years.
C) maturities of 5, 10, and 20 years.
D) a series of various maturity dates.
E) no maturity dates.

Accepted Answer

Treasury notes are issued with maturities of 2, 3, 5, and 10 years.

Question 4

Bonds issued by political subdivisions of the U.S. government that are not obligations of the U.S. Treasury are called:
A) federal bonds.
B) agency bonds.
C) Treasury bonds.
D) municipal bonds.
E) trust bonds.

Accepted Answer

The answer of Bonds issued by political subdivisions of the...

Question 5

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 
In general, investments traded in [ broad | thin ] markets tend to be less liquid.

Accepted Answer

The answer of INSTRUCTIONS: Choose the word or phrase in...

Question 6

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.

Accepted Answer

The relevant sale or invoice price of a bond to the buyer, which adds the accrued interest to the quoted price, is called dirty price. The dirty price represents the full price that the buyer pays, which includes the agreed-upon price of the bond plus the accrued interest from the last coupon date until the settlement date.

Question 7

Which of the following bond ratings would be for junk bonds?
A) BB
B) AaA
C) C
D) Aaa
E) BBB

Accepted Answer

The answer of Which of the following bond ratings would...

Question 8

A Puppy Pet Services $1,000 bond has a 7.5% coupon rate, matures in 2020, and is currently quoted at $820. What is the current yield? (Round the answer to two decimal places.)
A) 6.15%
B) 7.50 %
C) 9.15 %
D) 10.27 %
E) 11.43 %

Accepted Answer

The current yield is calculated by dividing the annual coupon payment by the current market price of the bond. The annual coupon payment is $1,000 * 7.5% = $75. The current market price is $820. So, the current yield = ($75 / $820) * 100 = 9.15%.

Question 9

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. 
In periods of inflation, the purchasing power of the dollar [ rises | declines ].

Accepted Answer

The answer of INSTRUCTIONS: Choose the word or phrase in...

Question 10

Use the following information to calculate the earnings per share (EPS) of Mercury Corporation. (Show all work. Round the answer to two decimal places.)

Accepted Answer

The answer of Use the following information to calculate the...

Question 11

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%, what would the fully taxable equivalent yield be? (Round the answer to two decimal places.)
A) 6.90%
B) 8.26%
C) 9.58%
D) 12.11%
E) 14.63%

Accepted Answer

The fully taxable equivalent yield is calculated by dividing the tax-free yield by (1 - tax rate). Here, it is 6.9% / (1 - 0.28) = 9.58%.

Question 12

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.

Accepted Answer

A bond selling below par value is selling at a discount, meaning the price is lower than the face value of the bond.

Question 13

Calculate the dividend yield on OPQ stock. Earnings per share (EPS) are $2.75, and the quarterly dividend is 25 cents. The book value is $15.20 per share, while the market value is $25.00. (Show all work.)

Accepted Answer

The answer of Calculate the dividend yield on OPQ stock....

Question 14

From an investor's point of view, the most important feature of a convertible bond is its:
A) coupon rate.
B) conversion ratio.
C) conversion value.
D) bond rating.
E) dirty price.

Accepted Answer

The conversion ratio is crucial for investors as it determines how many shares they can receive upon conversion, impacting the potential upside of the investment.

Question 15

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

Accepted Answer

Accrued interest is the interest that has accumulated on the bond since the last coupon payment date. When a bond is sold between coupon payment dates, the buyer must compensate the seller for the accrued interest, which is the prorated share of the upcoming coupon payment. Therefore, the correct choice is A - accrued interest. The other choices are not applicable to this situation: prepaid interest refers to interest paid in advance, bond premium refers to a bond that is trading above par value, bond discount refers to a bond that is trading below par value, and discount alone is too vague to provide a clear explanation.

Question 16

Which of the following types of bonds is unsecured?
A) Mortgage bonds
B) Equipment trust certificates
C) Debentures
D) Agency bonds
E) Treasury bonds

Accepted Answer

Debentures are unsecured bonds, meaning they are not backed by collateral or specific assets of the issuer like mortgage bonds or equipment trust certificates. Instead, debentures rely solely on the creditworthiness and reputation of the issuer. Agency bonds and treasury bonds are also unsecured, but they are backed by the full faith and credit of the U.S. government.

Question 17

A _____ is a type of municipal bond that is backed by the full faith and credit of the municipality.
A) debenture
B) general obligation bond
C) revenue bond
D) zero coupon bond
E) equipment trust certificate

Accepted Answer

A general obligation bond is backed by the full faith and credit of the municipality, meaning that the municipality pledges to use all available resources, including tax revenues, to repay the bond. This makes it a relatively safe investment for bondholders.

Question 18

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

Accepted Answer

The commonly cited price for a bond in financial press and on the Internet is usually its clean bond price, which excludes any accrued interest.

Question 19

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 statements about the bond is most likely to be true?
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 will increase.

Accepted Answer

When new bonds are issued with a higher interest rate than the bond in question, its value decreases as it becomes less attractive to investors. As a result, the bond is likely selling at a discount. The coupon rate, which is fixed at the time of issuance, will not increase. There is no information to suggest that the bond will be retired. The fact that the bond was issued at par value is irrelevant to its current value.

Question 20

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 _____ in interest per year.
A) $78
B) $780
C) $65
D) $500
E) $650

Accepted Answer

The coupon rate of the bond is 6.5%, which means that the bondholder will receive an annual interest payment of 6.5% of the par value of the bond. Therefore, the bondholder will receive $65 in interest per year (6.5% x $1,000). The market value of the bond is irrelevant to the calculation of the interest payment.

Quiz 12: Investing in Stocks and Bonds

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. The possibility that a corporation might fail is [ economic | business ] risk.

When interest rates decrease, bond:

Treasury notes are issued with:

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

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. In general, investments traded in [ broad | thin ] markets tend to be less liquid.

The relevant sale or invoice price of a bond to the buyer, which adds the accrued interest to the quoted price, is its:

Which of the following bond ratings would be for junk bonds?

A Puppy Pet Services $1,000 bond has a 7.5% coupon rate, matures in 2020, and is currently quoted at $820. What is the current yield? (Round the answer to two decimal places.)

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement. In periods of inflation, the purchasing power of the dollar [ rises | declines ].

Use the following information to calculate the earnings per share (EPS) of Mercury Corporation. (Show all work. Round the answer to two decimal places.)

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%, what would the fully taxable equivalent yield be? (Round the answer to two decimal places.)

A bond selling below par value is selling at:

Calculate the dividend yield on OPQ stock. Earnings per share (EPS) are $2.75, and the quarterly dividend is 25 cents. The book value is $15.20 per share, while the market value is $25.00. (Show all work.)

From an investor's point of view, the most important feature of a convertible bond is its:

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.

Which of the following types of bonds is unsecured?

A _____ is a type of municipal bond that is backed by the full faith and credit of the municipality.

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

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 statements about the bond is most likely to be true?

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 _____ in interest per year.