Question 1

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 the largest single institutional owner of common stocks, often investing on behalf of retired or soon-to-be retired employees. Mutual funds, insurance companies, and commercial banks also hold significant amounts of stocks, but pension funds hold the largest share.

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%

Accepted Answer

First, we need to calculate the after-tax return of the municipal bond. Since it is tax-exempt, the after-tax return is simply its nominal rate of 5%. 
Next, we need to determine the before-tax return required on the corporate bond to provide the same after-tax return. 
Using the formula:
Before-tax return x (1-tax rate) = After-tax return
We can plug in the numbers and solve for the before-tax return: 
Before-tax return x (1-0.28) = 0.05 
Before-tax return x 0.72 = 0.05 
Before-tax return = 0.05/0.72 = 0.0694 or 6.94%
Therefore, the corporate bond would need to pay a before-tax return of 6.94% to provide the same after-tax return as the tax-exempt municipal bond paying 5%.

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

Accepted Answer

Treasury STRIPS are zero-coupon bonds, which means they are sold at a discount and do not pay regular interest. This is similar to corporate zero-coupon bonds. Preferred stocks are equity securities, premium bonds are not a specific type of security, and high-yield bonds have a higher risk and pay higher interest rates than Treasury STRIPS.

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

Accepted Answer

A capital market security is a security that has a maturity of greater than one year. Therefore, a 6-month Treasury bill, which has a maturity of less than one year, would not be considered a capital market security. The other options listed - a 20-year corporate bond, a common stock, and a mutual fund share - all have maturities of greater than one year and would be considered capital market securities.

Question 5

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. The money market is a subsector of the financial market where short-term borrowing and lending are conducted.

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.

Accepted Answer

The answer of Which of the following statements is true...

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.

Accepted Answer

US government savings bonds, specifically I bonds, are nonmarketable financial assets that are indexed for inflation. This means that the interest rate on the bond adjusts based on changes in the inflation rate, providing protection against inflation. The other options may offer some level of protection against inflation, but are not specifically designed for this purpose.

Question 8

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

Accepted Answer

The standard face value of a corporate bond is $1000, so each point on a corporate bond quote represents 1 percent of $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.

Accepted Answer

Revenue bonds are issued to finance revenue-generating public projects, such as toll bridges, highways, or airports. The repayment of revenue bonds comes from the revenue generated by the project itself, rather than from taxes or other general revenues. Therefore, in this case, a revenue bond would be the most appropriate type of municipal bond to finance a toll bridge.

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.

Accepted Answer

Savings accounts are considered to be liquid as they can be easily converted into cash or used to make purchases. However, they are not typically considered to be marketable, as they do not have an active market where they can easily be bought or sold.

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.

Accepted Answer

Zero-coupon bonds and Treasury bills are both sold at less than their par value, meaning they are issued at a discount and do not pay periodic interest. Instead, they provide a return to the investor by maturing at their face value.

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)

Accepted Answer

Treasury bills are always sold at a discount, meaning they are sold for less than their face value and the investor receives the difference between the purchase price and the face value at maturity. Treasury notes and bonds can be sold at a discount or at a premium depending on market conditions, while TIPS are sold at a premium to account for inflation protection.

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.

Accepted Answer

The major difference between municipal bonds and other types of bonds is that the interest earned on municipal bonds is generally exempt from federal, state, and local taxes, while interest earned on other bonds is taxable. This tax-exempt feature makes municipal bonds particularly attractive to investors in higher tax brackets, as they can earn a higher after-tax yield on their investment.

Question 14

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. This is a common practice for most bond issuers. While some bonds may pay interest monthly or quarterly, these are less common and generally only offered by certain types of bonds. Annual interest payments are also possible, but this is not the typical payment schedule for bonds.

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.

Accepted Answer

When bonds are called in, they are typically replaced with new bonds that have a lower interest rate. This is because the issuer can save money on interest payments by issuing new bonds at a lower rate. Therefore, option B is the best choice.

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.

Accepted Answer

The coupon rate refers to the stated interest rate that a bond issuer promises to pay the bondholders. This rate is specified in the bond’s indenture or prospectus and represents the annual coupon payment as a percentage of the bond’s face value. It is also known as the nominal rate or stated rate. The market interest rate, or yield to maturity, is the rate at which the bond is actually trading in the market and can differ from the coupon rate depending on factors such as supply and demand and credit risk. The current yield is the bond’s annual coupon payment divided by its current market price, expressed as a percentage.

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

Accepted Answer

The primary nonmarketable financial asset owned by most individuals is savings bonds, which are often issued by the U.S. government and have low risk and high liquidity. However, their return is relatively low compared to other types of investments, making choice B incorrect.

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.

Accepted Answer

The answer of Bonds trade on an accrual interest basis.This...

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.

Accepted Answer

Money market instruments typically have maturities of less than one year, not from 1 to 3 years. The other statements are generally true regarding money market instruments.

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

Accepted Answer

A bond's maturity value is equal to its face value, which is the amount that the bond was originally issued for. Therefore, on the day that a bond matures, it will be worth its face value plus any remaining coupon payments that have not yet been paid out. Answer A is incorrect because a bond does not become worthless on the day of its maturity. Answer B is incorrect because a bond's maturity value is not necessarily $100, as the face value of a bond can be any amount. Answer D is incorrect because a bond's remaining coupon payments would only be part of its overall maturity value.

Quiz 2: Investment Alternatives

The largest single institutional owner of common stocks is:

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%?

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

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

Treasury bills are traded in the:

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

Nonmarketable financial assets that protect against inflation include:

Each point on a corporate bond quote represents:

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

Savings accounts are:

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

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

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

Interest on bonds is typically paid:

Bonds called in are likely to be:

The coupon rate is another name for the:

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

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

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

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