Deck 11: Stocks and Bonds: Your Most Common Investments

Question 1

Which of the following is a non-cash distribution?

A)A stock dividend
B)A share repurchase
C)A preemptive right
D)A proxy

Answer 1

A stock dividend

Question 2

Little,Inc.paid a 20 percent stock dividend.Prior to the dividend,the stock's price was $50 a share.Immediately after the dividend,the price will

A)increase to $60.00 a share.
B)decrease to $40.00 a share.
C)decrease to $41.67 a share.
D)do nothing in particular because of the dividend.

Answer 2

decrease to $41.67 a share.

Question 3

An assignment of your shareholder voting rights to someone else is known as a

A)proxy.
B)preemptive right.
C)subrogation right.
D)put.

Answer 3

proxy.

Question 4

Inkle,Inc.has $200,000 of 10% bonds outstanding (which pay $20,000 interest)and $100,000 of 12% preferred stock (which pay $12,000 dividends).Assume that Inkle's earnings in the upcoming year will be either $50,000 or $100,000.Given these two possibilities,common stockholders' share of earnings will be either ________ or ________.

A)$38,000;$88,000
B)$30,000;$68,000
C)$18,000;$68,000
D)$18,000;$88,000

Question 5

Voting rights are typically held by

A)only common stockholders.
B)only preferred stockholders.
C)both common and preferred stockholders.
D)common and preferred stockholders and bond holders.

Question 6

A blue chip stock is best understood as a stock

A)with a high dividend rate.
B)that delivers what investors expect dividends and/or growth.
C)with a low capitalization.
D)with preferences;that is,it's actually a company's preferred stock.

Question 7

Little,Inc.paid a 10 percent stock dividend.Prior to the dividend,the stock's price was $100 a share.Immediately after the dividend,the price will

A)increase to $110.00 a share.
B)decrease to $90.91 a share.
C)decrease to $80.67 a share.
D)do nothing in particular because of the dividend.

Question 8

If you are interested in getting a high current yield,you should buy

A)income stocks.
B)growth stocks.
C)cyclical stocks.
D)special situations.

Question 9

BTA,Inc.declared a two-for-one stock split.Assuming you presently own 100 shares means that you

A)will receive another 100 shares.
B)will receive 200 more shares.
C)will receive two more shares.
D)can convert your 100 shares of common stock into 200 shares of preferred stock.

Question 10

A residual claim means common stockholders' claims

A)come before those of preferred stockholders and bondholders.
B)come after those of preferred stockholders and bond holders.
C)reside with the board of directors they decide the ranking.
D)are a fixed percentage of earnings.

Question 11

The preemptive right allows shareholders

A)to overthrow existing corporate officers if they fail to earn profits.
B)to maintain their proportionate ownership interest in the corporation.
C)to convert their shares of stock into bonds,if dividends are not paid.
D)to receive a dividend before interest is paid to bondholders.

Question 12

A proxy allows shareholders

A)to register shares with their stockbrokers.
B)to receive additional shares of stock in a stock dividend.
C)to assign their voting rights to others.
D)to elect corporate officers directly.

Question 13

Regular cash dividends are typically paid

A)each quarter.
B)annually.
C)monthly.
D)semi-annually.

Question 14

If you believe a company will grow rapidly in the future,you should buy its

A)common stock.
B)preferred stock.
C)bonds.
D)notes.

Question 15

A regular dividend refers to

A)the routine payment of a cash dividend.
B)the payment of a dividend on a company's regular shares of stock.
C)a stock dividend.
D)a dividend declared at a regular meeting of the board of directors.

Question 16

Which item below is not a shareholder right?

A)Right to vote
B)Preemptive right
C)Right to share earnings or asset distributions
D)Redemption right

Question 17

Which of the following statements on the voting rights of common stockholders is false?

A)Stockholders who fail to exercise their voting rights may lose the right.
B)You may assign your voting rights to another individual.
C)In most cases you have one vote for each share of stock you own.
D)Some stocks are classified as non-voting.

Question 18

A dividend payable in stock (a stock dividend)

A)is better than a cash dividend because you receive more shares of stock.
B)is usually associated with a company in bankruptcy.
C)has little impact on your net worth;although you receive additional shares,the market value of each share you own decreases.
D)allows you to exchange shares of common stock for shares of preferred stock.

Question 19

A periodic share repurchase plan is a form of

A)stock split.
B)stock dividend.
C)refinancing plan.
D)cash distribution to shareholders.

Question 20

A likely example of a growth stock is

A)General Motors.
B)Meadwestvaco.
C)Microsoft.
D)the U.S.Postal Service.

Question 21

Data for a share of common stock of ABC Company appear below:
Dividend: 2005 actual $ 1.000
2006 actual 1.100
2007 actual 1.210
2008 expected 1.331
Current market price per share: $20.000
Assuming the dividend pattern above will continue in the future and also assuming that it is the first of January,2008,the estimated future return for the stock is

A)6.67%.
B)10.00%.
C)6.05%.
D)16.67%.

Question 22

Zero,Inc.has an EPS of $5.00 and a P/E ratio of 10.This means the current market price of a share of Zero stock is

A)$2.00.
B)$5.00.
C)$50.00.
D)$55.00.

Question 23

If ACR's expected total return is 25% and its required rate of return is 20%,its alpha is

A)+45%.
B)+ 5%.
C)- 5%.
D)-45%.

Question 24

A stock's alpha is equal to

A)expected return - required return.
B)required return - expected return.
C)current return + future return.
D)future return - current return.

Question 25

If ACR's expected total return is 25% and its required rate of return is 20%,you should

A)buy the stock.
B)not buy the stock.
C)buy the stock,but only if its dividend yield is 5% or greater.
D)sell the stock,if you already own it.

Question 26

A company's fundamental value may be derived

A)from the application of a price-to-earnings analysis.
B)by referring to the Blue Book of Fundamental Values.
C)by constructing an appropriate chart.
D)through interviews with the company's management.

Question 27

GFX stock is currently paying dividend equal to 2% percent of its current market price.If you expect earnings to increase at an annual rate of 6%,the expected total return on the stock is

A)8%.
B)2%.
C)6%.
D)4%.

Question 28

Given the data below for the Zoom Corporation,you should
1.Beta = 0.8
2.Expected price appreciation = 15%
3.Market risk premium = 8%
4.Risk free rate = 4%
5.Next year's dividend = $1.00
6.Current market price = $50

A)buy the stock: expected return exceeds required return.
B)not buy the stock: required return exceeds expected return.
C)buy the stock: required return exceeds expected return.
D)not buy the stock: expected return exceeds required return.

Question 29

Given the data below for the Zoom Corporation,you should
1.Beta = 0.8
2.Expected price appreciation = 7%
3.Market risk premium = 8%
4.Risk free rate = 4%
5.Next year's dividend = $1.00
6.Current market price = $50

A)buy the stock expected return exceeds required return.
B)not buy the stock required return exceeds expected return.
C)buy the stock required return exceeds expected return.
D)not buy the stock expected return exceeds required return.

Question 30

Expressing future return in the total return equation is usually done by estimating

A)the expected annual growth in dividends or EPS.
B)the current yield and then doubling or tripling it as seems appropriate for the stock in question.
C)overall economic growth,expressed as a percentage.
D)the stock's beta.

Question 31

Stocks that are highly sensitive to changing economic conditions are known as

A)cyclical stocks.
B)growth stocks.
C)blue chip stocks.
D)income stocks.

Question 32

Given the data below for the Zoom Corporation,its required return is
1.Beta = 0.8
2.Expected price appreciation = 7%
3.Market risk premium = 8%
4.Risk free rate = 4%
5.Next year's dividend = $1.00
6.Current market price = $50

A)10.4%.
B)12.0%.
C)12.4%.
D)15.0%.

Question 33

A cyclical stock is one that

A)is often traded by market speculators.
B)varies its dividends frequently.
C)often has management changes.
D)might operate in the capital goods industries.

Question 34

You are looking at a stock quotation in the newspaper and read that its "net change" is +2.5.This means that

A)the difference between its high price and low price for the day was $2.50.
B)its closing price was $2.50 higher than its closing price of the previous trading day.
C)over the past 12 months the stock's highest price is 2.5 times its lowest price.
D)its dividend yield this year is 2.5% higher than its dividend yield last year.

Question 35

Given the data below for the Zoom Corporation,its expected total return is
1.Beta = 0.8
2.Expected price appreciation = 7%
3.Market risk premium = 8%
4.Risk free rate = 4%
5.Next year's dividend = $1.00
6.Current market price = $50

A)7.0%.
B)9.0%.
C)12.0%.
D)15.0%.

Question 36

Data for a share of common stock of ABC Company appear below:
Dividend: 2005 actual $ 1.000
2006 actual 1.100
2007 actual 1.210
2008 expected 1.331
Current market price per share: $20.000
Assuming the dividend pattern above will continue in the future and also assuming that it is the first of January,2008,the estimated current return for the stock is

A)6.67%.
B)10.00%.
C)5.05%.
D)16.67%.

Question 37

A quotation for a company listed on the New York Stock Exchange would not show

A)its dividend yield.
B)its P/E ratio.
C)its book value.
D)the number of shares traded.

Question 38

ABC stock expects to earn $3.00 a share next year and pay a cash dividend of $2.00 a share.If the stock is selling for $20.00 a share,its current return is

A)15%.
B)10%.
C)25%.
D)5%.

Question 39

Which item below describes a common stock's total return?

A)Current return plus current yield
B)Current return plus future return
C)Future yield plus price appreciation
D)Current yield plus future earnings

Question 40

Data for a share of common stock of ABC Company appear below:
Dividend: 2005 actual $ 1.000
2006 actual 1.100
2007 actual 1.210
2008 expected 1.331
Current market price per share: $20.000
Assuming the dividend pattern above will continue in the future and also assuming that it is the first of January,2008,the estimated total return for the stock is

A)6.67%.
B)10.00%.
C)6.05%.
D)16.67%.

Question 41

The bond indenture is

A)a contract between the bond issuer and bond buyers.
B)escrow interest when a bond is in default.
C)a bondholder lien against the issuer.
D)the institution representing bond buyers' interests.

Question 42

The market-to-book ratio is determined by

A)multiplying EPS by book value.
B)dividing market price by book value.
C)multiplying market price by book value.
D)taking the average of market price and book value.

Question 43

A company's book value is determined by

A)applying the CAPM valuation model.
B)applying a price-to-earnings model.
C)dividing its assets by the number of common shares outstanding.
D)dividing its net worth by the number of common shares outstanding.

Question 44

Which statement below regarding book value is not appropriate?

A)It may not reflect a company's ability to generate future cash inflows.
B)It includes the market's valuation of the company's good will.
C)It reflects historical costs of assets,which may be poor indicators of those assets' replacement costs.
D)It often is a poor estimate of a company's fundamental value.

Question 45

A company's book value

A)reflects the historical cost of a company's assets.
B)is often a good estimate of a company's fundamental value.
C)includes a value for goodwill.
D)is equal to the total value of a company's assets.2

Question 46

Which of the following is not considered when calculating the cost basis for a stock?

A)Inflation
B)Purchase price
C)Recording fees
D)Commissions

Question 47

A bond pays semiannual interest of $40.00;thus,its coupon rate is

A)4.00%.
B)4.08%.
C)8.00%.
D)8.16%.

Question 48

GFM,Inc.earned $4 a share last year and it is expected to earn $5 a share next year.Assuming a P/E ratio of 10,the price of the company's stock should be

A)$40 a share.
B)$50 a share.
C)$90 a share.
D)$0.50 a share.

Question 49

Most corporate bonds have face values of

A)$1.00.
B)$10.00.
C)$100.00.
D)$1,000.00.

Question 50

All other things equal,analysts prefer companies with PEG ratios that

A)match or exceed the companies' earnings growth rates.
B)match or exceed the companies' book values.
C)are high.
D)are low.

Question 51

The stock's price to earnings ratio divided by its growth rate is the stock's

A)PEG ratio.
B)fundamental value.
C)alpha.
D)beta.

Question 52

If a bond is sold at par,the trade price is

A)less than $1,000.
B)more than $1,000.
C)equal to its coupon interest.
D)equal to its face value.

Question 53

Of the following three types of corporate bonds debentures,mortgage bonds,and subordinated debentures indicate the most secure and the least secure (in that order).

A)debentures,subordinated debentures
B)mortgage bonds,subordinated debentures
C)subordinated debentures,debentures
D)mortgage bonds,debentures

Question 54

The safety of a corporate bond is often determined by

A)the face value of the bond.
B)the coupon rate of the bond.
C)the bond indenture.
D)the protective covenants included in the bond indenture.

Question 55

A bond's coupon rate refers specifically to

A)the value of the coupons it issues at redemption.
B)its current yield in the market place.
C)the interest it pays each year divided by its face value.
D)the information needed to register a bond.

Question 56

Which of the following are secured by collateral?

A)Mortgages bonds
B)Only debentures
C)Only subordinated debentures
D)Debentures and subordinated debentures

Question 57

The holding period for calculating the short-term gain or loss on a stock is

A)1 year.
B)30 days.
C)6 months.
D)5 years.

Question 58

The face value of a bond is

A)the amount the issuer will pay to redeem the bond at its maturity.
B)its current market price.
C)its book value.
D)its potential value in the face of liquidation.

Question 59

One method for determining an appropriate P/E ratio is to use the company's

A)expected EPS growth rate.
B)current dividend yield.
C)book value per share.
D)market value per share.

Question 60

The PEG ratio is calculated by dividing the stock's

A)market price by its earnings growth.
B)market price by the company's earnings gradient.
C)price earnings ratio by estimated earnings growth.
D)price earnings ratio by the company's book value.

Question 61

A bond sinking fund

A)is a method of reserving funds to gradually retire bonds.
B)involves reserving funds to pay periodic bond interest.
C)refers to the practice of selling bonds and saving the proceeds as an emergency in case the company goes bankrupt.
D)refers to bonds of corporations that are in default.

Question 62

Which alternative below is not a bond retirement method?

A)Redemption at maturity
B)Forced liquidation
C)Exercising a bond call
D)Conversion into shares of common stock

Question 63

A zero coupon bond

A)pays no annual interest.
B)sells at face value.
C)are a poor choice for retirement funds.
D)depreciates in value as it matures.

Question 64

Agency bonds are issued by

A)state and local government welfare agencies.
B)regional agencies of multinational corporations.
C)the U.S.Treasury.
D)agencies of the federal government.

Question 65

A U.S.Treasury Strip is

A)a zero coupon bond created from Treasury securities.
B)an agency bond stripped of its prepayment obligations.
C)a Treasury bond with no maturity.
D)a defaulted Treasury bond.

Question 66

Which of the following statements concerning callable bonds is false?

A)They can be redeemed at the borrower's discretion.
B)The redemption is usually at a price above face value.
C)Callable bonds give corporations greater flexibility in financing.
D)Callable bonds may be redeemed before maturity.

Question 67

Which of the following statement concerning Treasury bonds is true?

A)They are priced and sold at auction.
B)Interest accumulates and is paid out at maturity.
C)They are more risky than comparable maturity private bonds.
D)They have higher rates than comparable municipal bonds.

Question 68

In comparison to traditional Treasury bonds,inflation-indexed bonds

A)have a lower coupon rate.
B)have a higher coupon rate.
C)have an equal coupon rate.
D)have an equal coupon rate,but are issued with lower par values.

Question 69

An inflation-indexed Treasury bond with a 5% coupon rate is issued at $1,000.If inflation in the year after issuance is 6%,

A)the new coupon rate will be 11%.
B)the new redemption value is $1,060.
C)the new redemption value is $1,100.
D)the bond is redeemed and a new bond with a 6% coupon is issued.

Question 70

On its issuance date,which Treasury security has a maturity of one year or less?

A)Bonds
B)Notes
C)Bills
D)Mortgages

Question 71

All things considered,investors with limited resources should

A)not invest in corporate bonds.
B)buy corporate bonds in the open market to save transaction costs.
C)buy corporate bonds through pooling arrangements.
D)borrow money to buy corporate bonds in sufficiently-large quantities.

Question 72

On its issuance date,which Treasury security has a maturity of 2 to 10 years?

A)Bonds
B)Notes
C)Bills
D)Mortgages

Question 73

The longer the maturity of a zero coupon bond,the

A)greater its price.
B)greater its redemption value
C)greater the difference between its price and redemption value.
D)less the difference between its price and redemption value.

Question 74

Which of the following statements concerning convertible bonds is true?

A)Convertible bonds are more risky than conventional bonds.
B)Convertible bonds can be redeemed for cash at the discretion of the lender.
C)Convertible bonds are the same as conventional bonds.
D)Convertible bonds can be exchanged for stock at the discretion of the lender.

Question 75

On a fixed rate bond which of the following generally remain constant.

A)the face value and the coupon rate
B)the coupon rate and the yield
C)the market price and the face value
D)the market price and the coupon rate

Question 76

A zero coupon bond is a bond that:

A)has no risk.
B)pays no periodic interest.
C)offers no price appreciation.
D)is never redeemed.

Question 77

Which item below is not true of a Ginnie Mae bond?

A)Ginnie Mae purchases mortgages from banks.
B)It usually has a lower yield than a Treasury bond.
C)It is based on a pool of mortgages.
D)It is issued by the GNMA.

Question 78

Which response below is not true of Treasury bonds?

A)They are only issued in discount form.
B)They have a face value of $1,000.
C)Interest is paid semi-annually.
D)Their maturities are between 10 and 30 years.

Question 79

A convertible bond is one that

A)can be converted into another bond if the issuer goes into bankruptcy.
B)can be exchanged for a commodity such as silver or gold.
C)is open-topped,meaning its redemption value can increase over time.
D)can be converted into a specific number of shares of common stock of the issuer.

Question 80

Examples of a mortgage-backed and student-loan backed bonds are

A)Ginnie Mae and Betsy Ann.
B)Betsy Ann and Sallie Mae.
C)Ginnie Mae and Sallie Mae.
D)All are examples.