Deck 12: Investing in Stocks and Bonds

Question 1

Total investment return can be approximated using the current yield.

Answer 1

False

Question 2

Bondholders will receive interest payments after the stockholders receive dividends.

Answer 2

False

Question 3

The risk free rate of return is often measured by the return on US Treasury Bills.

Answer 3

True

Question 4

Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a long time.

Question 5

In most investments,there is a risk-return tradeoff.

Question 6

Changes in the value of securities due to social,political,or economic factors are referred to as market risk.

Question 7

The returns you expect from securities are income and growth.

Question 8

An investment is acceptable if the expected rate of return is greater than the desired rate of return.

Question 9

Interest rate risk is greater for stocks than for bonds.

Question 10

Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition.

Question 11

A lower expected return will mean a higher risk will have to be accepted.

Question 12

Market risk considers the possibility that the firm may fail.

Question 13

Interest rate risk is greater for long-term bonds than for short-term bonds.

Question 14

Purchasing power risk is of most concern during economic recession.

Question 15

Capital appreciation of an investment is a form of Current Income.

Question 16

Recovery of principal and capital gain are elements of total return.

Question 17

A company with low financial risk has little to no long-term debt.

Question 18

If the current price of an investment increases,the investment's annual yield will decrease.

Question 19

All securities involve risk of some kind.

Question 20

Common stockholders are considered to be the residual owners of the company.

Question 21

A stocks beta is an indication of its relationship to the general market.

Question 22

Earnings per share can be defined as the return earned on behalf of each share of common and preferred stock,calculated by dividing all earnings by the total number of shares outstanding.

Question 23

Tech stocks represent stocks in the technology and utility sectors.

Question 24

Stocks with high betas will have larger price gains but lower price declines than those with low betas.

Question 25

You received a stock dividend this year instead of cash.This is taxable income.

Question 26

Publicly traded issues are shares only available to qualified investors.

Question 27

Most companies pay their stockholders cash dividends on a semi-annual basis.

Question 28

Blue-chip stocks are expected to pay dividends more regularly than growth stocks.

Question 29

John and Mary Smith own 500 shares of ABE stock.After the company pays a 6 percent stock dividend,John and Mary will own 530 shares of ABE stock.

Question 30

Low price/earnings ratios indicate limited or low investor confidence.

Question 31

Common stocks pay a guaranteed dividend each year.

Question 32

Dividend reinvestment plans should be avoided because of their relatively high cost.

Question 33

Price fluctuations of defensive stocks follow the fluctuations of the market as a whole.

Question 34

Stock dividends are taxed at Long Term Capital Gains Rates.

Question 35

You received a cash dividend from your stock investment this year.This is taxable income.

Question 36

Stocks with high betas will have larger price gains and losses than those with low betas.

Question 37

Net Profit margin is a key measure of profitability that relates the net profits of a firm to its sales.

Question 38

One would prefer a stock with steadily increasing earnings per share and return on equity.

Question 39

If Wristwatch Arm Corporation (WAC)has assets of $10 million,liabilities of $5 million,and preferred stock of $1 million,its book value is $6 million.

Question 40

Earnings per share (EPS)tell the stockholder the amount of dividend earned.

Question 41

Typically the best time to invest in the stock market is when the market is very volatile.

Question 42

Income stocks are similar to bonds in that they pay annual interest to owners.

Question 43

The value of a stock at any time is a function of future returns rather than of past performance.

Question 44

Only the federal government issues zero coupon bonds.

Question 45

Dividend Reinvestment Plans provide shareholders with cash,so that they can invest in similar stocks.

Question 46

The callable feature of a bond protects the issuer when current rates are falling.

Question 47

You would expect more growth with the preferred stock you own than with the common stock in your portfolio.

Question 48

Bonds represent a form of corporate debt capital.

Question 49

All treasury bonds issued today are non-callable.

Question 50

An investor is guaranteed to make a positive return on Treasury notes and bonds.

Question 51

Bonds rated AA by S&P and Aa by Moody's would be investment quality.

Question 52

Investors typically welcome their bonds being called because of the generous call premium paid.

Question 53

Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital gains.

Question 54

TIPS are appropriate investors who are conservative and concerned about inflation.

Question 55

Treasury notes,bills,and bonds represent loans to the federal government.

Question 56

Bonds provide for investment return primarily in the form of growth.

Question 57

If you buy a zero coupon bond,you will receive no cash from the corporation until the bond matures.

Question 58

A callable bond allows the issuer to retire the security prior to maturity.

Question 59

Municipal bonds can be attractive investments,despite their lower interest rate,since their interest income is exempt from federal income tax.

Question 60

Bond return can include both interest and capital gains.

Question 61

Which of the following types of risk affect owners of fixed income securities more than owners of equity securities

A) business risk
B) financial risk
C) market risk
D) purchasing power risk
E) none of the above

Question 62

Pulling money out of the market exposes you to the significant risk that you'll miss the months of good returns that could help you recoup prior losses.

Question 63

There is an inverse relationship between the bond prices and current interest rates.

Question 64

The yields on municipal bonds are usually higher than the returns available from fully taxable issues.

Question 65

The commonly-cited price for a bond is usually its clean bond price.

Question 66

At the time you buy a convertible bond,you will know the number of stock shares for which it can be exchanged.

Question 67

When a bond is sold between coupon payment dates,the buyer pays the seller for the accrued interest.

Question 68

Companies with a great deal of long-term debt would rate fairly high in ____ risk.

A) market
B) event
C) business
D) financial
E) liquidity

Question 69

Security investors incur varying degrees of risk.Business risk is related to

A) price level changes in the economy.
B) investor behavior in the market.
C) the debt-to-equity ratio of the firm.
D) the potential success or failure of the firm.
E) security price fluctuations.

Question 70

A bond with a yield to maturity that equaled or exceeded an investor's desired rate of return is considered an attractive investment.

Question 71

Bond prices are impacted by both the direction and magnitude of interest rate changes.

Question 72

The higher the tax bracket you are in,the more attractive the purchase of municipal bonds becomes.

Question 73

Junk bonds have higher risk and similar returns to investment grade bonds.

Question 74

In which of the following type of investment is the most liquidity risk?

A) Common stock
B) Corporate bonds
C) Treasury bonds
D) Land
E) Mutual fund shares

Question 75

A bond with a S&P rating of BBB is considered investment-grade.

Question 76

Preferred stock can be exchanged for common stock.

Question 77

Convertible preferred stock can be exchanged for common stock.

Question 78

A beta of more than one would be expected of a speculative stock.

Question 79

Common stock owners must receive dividends before preferred stockholders.

Question 80

A premium bond sells at par value.