Deck 12: Investing in Stocks and Bonds

Question 1

American Depositary Receipts (ADRs) are denominated in the currencies of the foreign countries where the corporations issuing these ADRs are registered.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

Capital gains are paid at specified times (e.g., quarterly or semiannually).

Question 6

The amount of interest on interest is a very important consideration when evaluating the return on an investment you plan to hold for a long time.

Question 7

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

Question 8

Low price/earnings (P/E) ratios indicate high investor confidence.

Question 9

Market risk considers the possibility that a firm may fail.

Question 10

Tech stocks often fall into either the growth stock category or the speculative stock class.

Question 11

Earnings per share (EPS) indicates to the stockholders the amount of dividends earned.

Question 12

The higher the net profit margin of a company, the more money the company earns.

Question 13

Investors would prefer a stock with steadily increasing earnings per share (EPS) and return on equity (ROE).

Question 14

U.S. bonds typically pay interest monthly.

Question 15

Bonds can earn income through interest payments and capital gains.

Question 16

The two basic sources of income from an investment are current income and capital gains.

Question 17

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

Question 18

The value of a stock depends on its expected stream of future earnings.

Question 19

The approximate expected return measure for determining the expected return on an investment does not include interest on interest.

Question 20

Research shows that most investors are better off investing steadily than trying to time the market.

Question 21

_____ risk results from the behavior of investors buying and selling securities that lead to swings in prices.

A) Business
B) Financial
C) Market
D) Purchasing power
E) Interest rate

Question 22

An investment that earns interest on interest is said to be earning a:

A) discounted rate of return.
B) fully compounded rate of return.
C) consolidated rate of return.
D) risk-free rate of return.
E) tax-free rate of return.

Question 23

Which of the following investments has the highest liquidity risk?

A) Common stock
B) Corporate bond
C) Treasury bond
D) Land
E) Mutual fund share

Question 24

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

Question 25

Companies with a great deal of long-term debt are considered to have high _____ risk.

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

Question 26

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

Question 27

The return on a _____ is an appropriate measure of the risk-free rate of return.

A) long-term Treasury note
B) certificate of deposit (CD)
C) 90-day Treasury bill (T-bill)
D) long-term corporate bond
E) common stock

Question 28

Changes in the general level of prices within an economy produce:

A) business risk.
B) financial risk.
C) market risk.
D) purchasing power risk.
E) liquidity risk.

Question 29

Which of the following types of risk has the most effect on owners of fixed-income securities?

A) Business risk
B) Event risk
C) Market risk
D) Interest rate risk
E) Purchasing power risk

Question 30

An investor receives a return from an investment due to:

A) recurring deposits.
B) capital gains on the sale of an investment.
C) asset allocation among different asset classes.
D) rebalancing by buying more equities.
E) diversification among or within asset classes.

Question 31

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

Question 32

Bonds rated AA by Standard & Poor's and AaA by Moody's are considered very safe bonds.

Question 33

An example of event risk is:

A) inflation.
B) a corporate takeover.
C) a newspaper article about the economy.
D) changing seasons.
E) capital growth.

Question 34

Which of the following statements about risk is true?

A) The higher the risk, the higher the expected return.
B) The higher the risk, the lower the expected return.
C) The lower the risk, the greater the maturity value of the investment.
D) The higher the risk, the lower the maturity value of the investment.
E) The higher the risk, the lower the risk-free rate.

Question 35

Aside from the initial distribution of common stock when the corporation is formed, subsequent sales of additional shares may be made through a procedure known as a:

A) trade-off.
B) public offering.
C) dividend reinvestment plan (DRP).
D) proxy.
E) call.

Question 36

Bonds typically have higher long-term returns when compared to stocks.

Question 37

The business risk faced by an investor when investing in a company is related to:

A) changes in the economy.
B) investor behavior in the market.
C) the book value of a firm's assets.
D) the firm's ability to meet operating expenses in a timely manner.
E) security price fluctuations.

Question 38

A discount bond has a market value above par value.

Question 39

Damien plans to buy a share at $120 and hold it for 5 years. During this period, he would receive average annual dividends of $4 a share. He expects to receive $145 at the end of the 5-year period when he sells the share. What are the keystrokes used to calculate the rate of return on the investment?

A) N = 5, PV = -120, PMT = 4, FV = 145
B) N = 5, PV = 120, PMT = 4, FV = -145
C) N = 5, PV = -145, PMT = -4, FV = 120
D) N = 4, PV = -120, PMT = 5, FV = 145
E) N = 4, PV = 145, PMT = 5, FV = -120

Question 40

Only the federal government issues zero coupon bonds.

Question 41

Suppose the earnings per share (EPS) of a stock is $2, and the current price/earnings (P/E) ratio is 10. What is the current price of the stock?

A) $5
B) $8
C) $20
D) $40
E) $35

Question 42

In the stock market, the market cap of a large-cap stock is:

A) more than  $10 billion.
B) more than  $20 billion.
C) between $2 to $10 billion.
D) less than $2 billion.
E) between $5 to $10 million.

Question 43

Cash dividends on common stock are most often paid:

A) weekly.
B) monthly.
C) quarterly.
D) semiannually.
E) annually.

Question 44

Which of the following statements about a stock's beta is true?

A) Stocks with betas of less than 2.0 have low price volatility.
B) High-beta stocks are relatively conservative investments.
C) The higher the beta, the more confidences that investors are presumed to have in a given security.
D) Most stock betas are positive.
E) Stocks with positive betas are considered to be highly volatile.

Question 45

The current net profit of Sigma Inc. is $8 million, the market price of the stock is $65, and sales is $50 million. The net profit margin of Sigma Inc. is:

A) 10%.
B) 28%.
C) 16%.
D) 8%.
E) 22%.

Question 46

The _____ of a stock reflects investors' confidence.

A) par value
B) book value
C) earnings per share (EPS)
D) price/earnings (P/E) ratio
E) dividend yield

Question 47

Return on equity (ROE) is calculated by:

A) subtracting liabilities from assets.
B) adding the book value and the market price of a stock.
C) dividing net income by shareholders' equity.
D) multiplying assets by a selected number.
E) deducting taxes from dividends.

Question 48

Stocks whose prices tend to increase when the economy is in an expansionary stage and decline during a contractionary stage are called:

A) cyclical stocks.
B) defensive stocks.
C) speculative stocks.
D) income stocks.
E) tech stocks.

Question 49

A stock generally issued by companies expected to provide an uninterrupted stream of dividends and good long-term growth prospects is called a(n):

A) blue-chip stock.
B) growth stock.
C) income stock.
D) defensive stock.
E) cyclical stock.

Question 50

Stocks whose earnings and market price have increased at an above-average rate over time are called:

A) cyclical stocks.
B) growth stocks.
C) income stocks.
D) speculative stocks.
E) defensive stocks.

Question 51

_____  dividends are the most common form of dividends.

A) Cash
B) Stock
C) Convertible
D) Reinvestment
E) Discount

Question 52

A firm's overall profitability is often measured by:

A) book value.
B) return on equity (ROE).
C) market value.
D) net profit margin.
E) beta.

Question 53

A stock's dividend yield is calculated as the:

A) annual dividend received per share divided by the book value per share of stock.
B) book value per share of stock divided by the annual dividend received per share.
C) annual dividend received per share divided by the market price per share of stock.
D) market price per share of stock divided by the annual dividend received per share.
E) earnings remaining after paying preferred dividends divided by the number of common shares outstanding.

Question 54

The net income of Sunrise Corporation is $5 million, and shareholders' equity is $50 million. The return on equity (ROE) is:

A) 5%.
B) 10%.
C) 20%.
D) 15%.
E) 25%.

Question 55

The easiest way to invest in foreign markets is through:

A) the stocks purchased directly from an overseas broker.
B) the stocks purchased directly from a regular broker.
C) the stocks purchased directly over the Internet.
D) international mutual funds.
E) the purchase of Eurobonds.

Question 56

The main advantages of common stock ownership are:

A) potential substantial returns and high liquidity.
B) potential substantial returns and voting rights.
C) a high interest payment and availability of market information.
D) no direct management and guaranteed dividends.
E) low risk and guaranteed dividends.

Question 57

The market price per share of Zinc Corporation is $145, and earnings per share (EPS) is $20. What is the price/earnings (P/E) ratio of Zinc Corporation?

A) 10.25
B) 7.25
C) 2.25
D) 12.36
E) 15.00

Question 58

The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own:

A) 200 shares.
B) 205 shares.
C) 210 shares.
D) 420 shares.
E) 410 shares.

Question 59

Which of the following accounting measures indicates the amount of stockholder funds used to finance a firm?

A) Book value
B) Actual rate of return
C) Net profit margin
D) Earnings per share (EPS)
E) Price/earnings (P/E) ratio

Question 60

Which of the following statements regarding American Depositary Receipts (ADRs) is true?

A) ADRs are traded only in foreign exchanges.
B) ADRs are denominated in foreign currencies.
C) ADRs represent a stated number of shares in a specific foreign company.
D) The investors in ADRs receive annual interest amounts in dollars.
E) The investors in ADRs receive dividends in foreign currencies.

Question 61

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.

Question 62

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.

Question 63

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.

Question 64

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.

Question 65

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.

Question 66

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.

Question 67

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

A) BB
B) AaA
C) C
D) Aaa
E) BBB

Question 68

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 %

Question 69

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 ].

Question 70

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

Question 71

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%

Question 72

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.

Question 73

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.)

Question 74

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.

Question 75

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

Question 76

Which of the following types of bonds is unsecured?

A) Mortgage bonds
B) Equipment trust certificates
C) Debentures
D) Agency bonds
E) Treasury bonds

Question 77

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

Question 78

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

Question 79

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.

Question 80

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