Deck 2: Investment Alternatives

Question 1

Each point on a corporate bond quote represents:

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

Answer 1

C

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

Answer 2

B

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%

Answer 3

D

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.

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.

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.

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.

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.

Question 9

Treasury bills are traded in the:

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

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.

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.

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.

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.

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)

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

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

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.

Question 18

The largest single institutional owner of common stocks is:

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

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

Question 20

Interest on bonds is typically paid:

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

Question 21

Which of the following characteristics is true of municipal bonds?

A) They general have higher rates than corporate bonds of equal risk.
B) Capital gains on municipal bonds are exempt from federal taxation.
C) They pay interest income that is exempt from federal taxation.
D) They are default free.

Question 22

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 23

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 24

TL Bank is planning to purchase a T-bill with a $100,000 face value. The T-bill is quoted at a bank discount of 2.2% and has 300 days to maturity. What is the T-bill's bond equivalent yield (BEY)?

A) 2.21%
B) 2.23%
C) 2.25%
D) 2.27%

Question 25

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 26

American Depositary Receipts (ADRs) are attractive investments for U.S. investors because they:

A) eliminate foreign currency exchange risk.
B) are purchased on a U.S. exchange with U.S. dollars.
C) pay dividends that are exempt from income taxes.
D) are less risky than the typical U.S. stock.

Question 27

Which of the following is a money market security that has a weak secondary market?

A) preferred stock
B) banker's acceptance
C) repurchase agreement
D) commercial paper

Question 28

If a preferred stock issue is cumulative, this means that unpaid preferred stock dividends:

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

Question 29

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 30

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

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

Question 31

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 32

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 33

Which of the following is a capital market, fixed-income security?

A) An American Depository Receipt (ADR)
B) Commercial paper
C) Shares in a mutual fund
D) Corporate bond

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

If an investor states that Intel is overvalued at 20 times, he is referring to Intel's:

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

Question 36

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 37

Which of the following is a money market security that is insured by the FDIC?

A) Commercial paper
B) Banker's acceptance
C) Certificate of deposit
D) T-bill

Question 38

Treasury bonds generally have original maturities of:

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

Question 39

Which of the following is a money market security that pays income that is exempt from state and local income taxes?

A) municipal bond
B) repurchase agreement
C) banker's acceptance
D) T-bill

Question 40

An unsecured bond is known as a(n):

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

Question 41

TR Bank is planning to purchase a T-bill with a $100,000 face value. The T-bill is quoted at a bank discount of 2.1% and has 220 days to maturity. What is the T-bill's effective annual yield (EAY)?

A) 2.15%
B) 2.17%
C) 2.19%
D) 2.21%

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

Callable bonds attract investors because they can be redeemed early.

Question 48

Relative to venture capital funds, buyout funds tend to rely:

A) more heavily on debt and they are riskier.
B) more heavily on debt and they are less risky.
C) less heavily on debt and they are riskier.
D) less heavily on debt and they are less risky.

Question 49

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

Question 50

The money market security that sells with the lowest denomination is a:

A) negotiable CD and the amount is $100,000.
B) municipal bond and the amount is $1,000.
C) repurchase agreement and the amount is $5,000.
D) T-bill and the amount is $10,000.

Question 51

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

Question 52

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

Question 53

Money market securities generally carry a low chance of default.

Question 54

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

Question 55

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

Question 56

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

Question 57

A bond sells at a premium if its coupon rate is greater than the market yield.

Question 58

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

Question 59

Ted is considering a State of Nebraska bond that pays 3.40% and a comparable risk bond issued by Verizon that pays 5.25%. Ted is in the 37% marginal tax bracket. Relative to the Verizon bond, Ted should conclude that the taxable equivalent yield (TEY) on the Nebraska bond is approximately:

A) 9 basis points higher.
B) 15 basis points higher.
C) 9 basis points lower.
D) 15 basis points lower.

Question 60

Term bonds have a single maturity.

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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

Question 66

With repurchase agreements, both the buying price and selling price are set when the agreement is initiated.

Question 67

The typical banker's acceptance has a maturity of nine months.

Question 68

LEAPS have maturity dates up to 10 years.

Question 69

In bankruptcy, bondholders are paid before preferred or common stockholders.

Question 70

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

Question 71

Bond ratings are primarily used to assess interest rate risk.

Question 72

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

Question 73

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

Question 74

Most futures contracts are not exercised.

Question 75

The major bond rating service is Dun & Bradstreet.

Question 76

Bond investors typically pay more for a bond than its quoted price.

Question 77

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

Question 78

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

Question 79

Distinguish between direct and indirect investing.

Question 80

Certificates of deposit (CDs) and MMDA's are insured to $250,000 by the FDIC.