Deck 26: Stocks, bonds, futures, and Options

Question 1

The major components of a bond include all of the following except its

A) maturity date.
B) face value.
C) price.
D) coupon rate.

Answer 1

price.

Question 2

An IOU that promises to pay a certain amount at maturity,and also to pay periodic fixed amounts until that date,is called a(n)

A) stock.
B) equity.
C) bond.
D) futures contract.

Answer 2

bond.

Question 3

Exhibit 38-1

Refer to Exhibit 38-1.The yield on bond A is approximately

A) 10.0 percent.
B) 0.06 percent.
C) 8.0 percent.
D) 0.075 percent.
E) none of the above

Answer 3

10.0 percent.

Question 4

The coupon rate is equal to the annual coupon payment

A) divided by the face value of the bond.
B) divided by the price paid for the bond.
C) multiplied by the price paid for the bond.
D) divided by the current market value of the bond.

Question 5

A bond is

A) a claim on the assets of a corporation such that the purchaser has an ownership right in the corporation.
B) anything of value to which the firm has a legal claim.
C) a means of assuring that the business firm will pay its debts or fulfill other legal obligations.
D) a promise to pay for the use of someone else's money.

Question 6

Exhibit 38-1

Refer to Exhibit 38-1.For which bond is the yield and the coupon rate the same?

A) Bond A
B) Bond B
C) Bond C
D) Bond D
E) Bond E

Question 7

Which of the following statements is true?

A) A person who buys a bond always pays the face value for the bond.
B) If a corporation issues a bond and Dennis buys it,Dennis becomes one of the owners of the corporation.
C) A stockholder of Firm X is one of the owners of Firm X.
D) The owner of the bond receives periodic payments equal to its coupon rate times the price he paid for the bond.

Question 8

Exhibit 38-1

Refer to Exhibit 38-1.The coupon rate for bond D is

A) 7 percent.
B) 6.3 percent.
C) 3 percent.
D) 0.07 percent.
E) none of the above

Question 9

Exhibit 38-1

Refer to Exhibit 38-1.The coupon rate for bond E is

A) 37.5 percent.
B) 0.38 percent.
C) 0.45 percent.
D) 9.0 percent.
E) none of the above

Question 10

Exhibit 38-1

Refer to Exhibit 38-1.The coupon rate for bond C is

A) 0.25 percent.
B) 25 percent.
C) 2.5 percent.
D) 100 percent.
E) none of the above

Question 11

When you buy a corporate bond,you are

A) borrowing funds from the corporation.
B) lending funds to the corporation.
C) selling an ownership right in the corporation.
D) acquiring an ownership right in the corporation.
E) b and d

Question 12

Exhibit 38-1

Refer to Exhibit 38-1.The yield on bond B is approximately

A) 0.17 percent.
B) 18.9 percent.
C) 0.15 percent.
D) 17 percent.
E) none of the above

Question 13

When you purchase a share of stock,you are

A) borrowing funds from the corporation.
B) lending funds to the corporation.
C) selling an ownership right in the corporation.
D) acquiring an ownership right in the corporation.
E) b and d

Question 14

Exhibit 38-1

Refer to Exhibit 38-1.The yield on bond E is approximately

A) 37.5 percent.
B) 0.38 percent.
C) 0.45 percent.
D) 9.0 percent.
E) none of the above

Question 15

Exhibit 38-1

Refer to Exhibit 38-1.The coupon rate for bond B is

A) 0.17 percent.
B) 16.7 percent.
C) 0.15 percent.
D) 17 percent.
E) none of the above

Question 16

Exhibit 38-1

Refer to Exhibit 38-1.The yield on bond D is approximately

A) 7 percent.
B) 3 percent.
C) 6.4 percent.
D) 0.064 percent

Question 17

When a person buys a bond of the XYZ Corporation,he or she can expect to

A) pay the corporation a certain amount of money each quarter of the year.
B) receive the face value of the bond each year and the face value of the bond when the bond matures.
C) receive the coupon rate times the face value of the bond each year and the face value of the bond when the bond matures.
D) receive the face value of the bond each year in perpetuity.

Question 18

The face value of a bond is

A) the dollar amount that a person would receive if he or she were to sell the bond.
B) the dollar amount that a person would receive if he or she were to buy the bond.
C) the total value of payments that will be made over the course of the bond's life.
D) the dollar amount of the bond's final payment at maturity.

Question 19

Exhibit 38-1

Refer to Exhibit 38-1.The yield on bond C is approximately

A) 25.0 percent.
B) 20.8 percent.
C) 2.5 percent.
D) 100 percent.
E) none of the above

Question 20

Exhibit 38-1

Refer to Exhibit 38-1.The coupon rate for bond A is

A) 8.0 percent.
B) 10.0 percent.
C) 7.5 percent.
D) 0.075 percent.
E) none of the above

Question 21

A bond purchaser bought a bond from which she receives $800 a year from the issuer.If the face value of the bond is __________ then the coupon rate is __________.

A) $10,000;10 percent
B) $8,000;8 percent
C) $10,000;8 percent
D) $8,000;12 percent
E) none of the above

Question 22

Exhibit 38-2

Refer to Exhibit 38-2.If the closing price of Dancer's stock on the previous day was $34.25,what value goes in blank (B)?

A) 34.85
B) 34.55
C) 34.75
D) 34.50
E) There is not enough information given to answer this question.

Question 23

In reading the stock market quotes in the newspaper,the column with the heading "Ticker" gives the

A) number of shares of the stock traded that day.
B) the full name of the company whose stock is being studied.
C) stock symbol for the company.
D) highest price the stock has sold for in the past year.

Question 24

The yield of a stock is the

A) dividend divided by the closing price per share.
B) dividend divided by the average daily price of the stock.
C) closing price divided by the 52-week low price.
D) dividend divided by the opening price per share.

Question 25

Suppose that the annual dividend per share of stock is $1.40 and the closing price of the stock is $22.00,the yield on the stock would be approximately

A) 6.36%
B) 15.71%
C) 21.60%
D) 9.70%

Question 26

Jessica paid $4,000 for a bond with a face value of $5,000.She will be paid $400 annually as long as she holds on to the bond,until the bond's maturity date.The coupon rate of the bond is

A) 8.0 percent.
B) 7.5 percent.
C) 10.0 percent.
D) 80.0 percent.
E) none of the above

Question 27

In reading the stock market quotes in the newspaper,the column with the heading "P/E" gives the

A) number of shares of the stock traded that day.
B) dividend per share divided by the closing price per share.
C) stock symbol for the company.
D) latest closing price per share divided by the latest available earnings per share.

Question 28

A bond is

A) a claim on the assets of the corporation that gives the purchaser an ownership right in the corporation.
B) the share of profits distributed to bondholders.
C) a promise to pay for the use of someone else's money.
D) a promise of ownership of the government.
E) c and d

Question 29

The coupon rate is the percentage of

A) profits distributed to bondholders.
B) profits distributed to stockholders.
C) the face value of the bond that is paid out regularly to the bondholder.
D) the assets of the corporation that is paid out regularly to each stockholder.

Question 30

Which of the following is false?

A) The Wilshire 5000 is a stock index that consists of the stocks of about 6,500 firms.
B) Instead of buying a mutual fund that consists of various stocks picked by a fund manager you can buy a mutual fund that consists of the stocks that make up a particular stock index.
C) The term Sypders stands for "Standard & Poors Direct Receipts."
D) When an investor buys Spyders they are said to "buy the market."

Question 31

Exhibit 38-2

Refer to Exhibit 38-2.If the closing price of Prancer's stock on the previous day was $55.50,what value goes in blank (C)?

A) +0.75
B) -0.50
C) +0.50
D) +0.25
E) There is not enough information given to answer this question.

Question 32

A person buys a bond with a face value of $10,000 for $9,325.Each year until the maturity date the bond buyer receives $850 from the issuer of the bond.The coupon rate on the bond is

A) 9.11 percent.
B) 8.5 percent.
C) 10.0 percent.
D) 6.75 percent.
E) There is not enough information to answer the question.

Question 33

Today,the Dow Jones Industrial Average

A) consists of 30 stocks.
B) is a set group of stocks that remains constant over time.
C) contains stocks that are widely held by institutional investors and individuals.
D) contains both stocks and bonds of large American companies.
E) a and c

Question 34

Which of the following is false?

A) The list of stocks that are included in the Dow Jones Industrial Average changes from time to time,and is determined by the editors of the Wall Street Journal.
B) The Dow Jones Industrial Average first appeared on the scene in 1896.
C) When the Dow Jones Industrial Average was first computed,prudent investors bought bonds,not stocks.
D) The Dow Jones Industrial Average is computed by summing the prices of the thirty stocks included in the average and dividing by 30.

Question 35

Suppose that the annual dividend per share of stock is $5.40 and the closing price of the stock is $72.50,the yield of the stock would be

A) 13.43%
B) 7.45%
C) 23.62%
D) 8.38%

Question 36

The acronym NASDAQ (one of the stock exchanges)stands for

A) National Academy of Stock Dealers Automated Quotations
B) New American Securities Dealers Automated Quotations
C) National Association of Securities Dealers Automated Quotations
D) North American Stock Dealers Automated Quotations

Question 37

The original Dow Jones Industrial Average (DJIA)contained ____________ stocks,while the DJIA now consists of ____________ stocks.

A) 10;500
B) 11;30
C) 15;50
D) 20;60

Question 38

A share of stock is

A) a claim on the assets of the corporation that gives the purchaser an ownership right in the corporation.
B) the share of profits distributed to stockholders.
C) a promise to pay for the use of someone else's money.
D) a promise to loan money to someone.
E) a and b

Question 39

Which of the following is false?

A) The Dow Jones Industrial Average went down by 40 percent during the decade of the 1930s.
B) Based on data from the period between 1926 and 2004,the probability of having a positive return on an investment in the stocks contained in the Dow Jones Industrial Average would have been 97.1 percent if the stocks had been held for 10 years.
C) When reading the stock market page of a newspaper,if the column marked "Div." is blank,it means that the company does not currently pay out dividends.
D) A stock that yields 4 percent is better than a stock that yields 5 percent,all else being the same.

Question 40

Exhibit 38-2

Refer to Exhibit 38-2.If the closing price of Dasher's stock on the previous day was $17.50,what value goes in blank (A)?

A) -0.50
B) +0.50
C) -0.25
D) -0.75
E) There is not enough information given to answer this question.

Question 41

Which of the following is false?

A) A corporate bond typically has face value of $1,000.
B) Corporate bonds typically sell for a price that is equal to the bond's face value.
C) The interest that corporate bonds pay is fully taxable.
D) State and local governments issue municipal bonds.

Question 42

You turn to the Treasury bond market page of a newspaper and look under the column headed "Ask" and see that it says,"128:16" this indicates that

A) the price that the buyer is willing to pay for this bond is $128.16.
B) the price that the buyer is willing to pay for this bond is $1,280.16.
C) the price that the seller is willing to sell this bond for is $1,285.
D) the price that the seller is willing to sell this bond for is $128.16.

Question 43

Municipal bonds

A) are issued by state and local governments.
B) pay interest that is fully taxable.
C) are issued by corporations.
D) are issued by the federal government.

Question 44

You turn to the bond market page of a newspaper and look under the column headed "Net Chg" and see that it says,"-1/4" this indicates that

A) the closing price for the bond on this particular day was $2.50 lower than on the previous day.
B) the closing price for the bond on this particular day is $0.25 lower than on the previous day.
C) the yield for the bond has fallen by 0.25% compared to the previous day.
D) the yield for the bond has fallen by 0.25% compared to exactly one year ago.

Question 45

The yield on a bond is the

A) annual coupon payment divided by the price paid for the bond.
B) coupon rate divided by the price paid for the bond.
C) annual coupon payment divided by the face value of the bond.
D) same as the interest rate on the bond.
E) a and d

Question 46

You turn to the Treasury bond market page of a newspaper and look under the column headed "Bid" and see that it says,"125:8" this indicates that

A) the price that the buyer is willing to pay for this bond is $125.08.
B) the price that the buyer is willing to pay for this bond is $1,252.50.
C) the price that the seller is willing to sell this bond for is $125.80.
D) the price that the seller is willing to sell this bond for is $125.08.

Question 47

Which of the following is false?

A) The issuer of a bond is a borrower.
B) The person who buys a bond is a lender.
C) Interest earned on corporate bonds is exempt from federal income taxes.
D) The coupon rate on a bond is the percentage of the face value that the bondholder receives annually until the bond matures.

Question 48

Which of the following is false?

A) The Treasury bond information published under the column heading "Yield" is based on the ask price of the bond.
B) The Treasury bond information published under the column heading "Yield" is based on the assumption that the bond is held to maturity.
C) The Treasury bond information published under the column heading "Bid" indicates the price a buyer will pay if he buys the bond.
D) The Treasury bond information published under the column heading "Bid" is the price a buyer will receive if she sells the bond.

Question 49

Bond prices and bond yields have a(n)______________ relationship.

A) direct
B) inverse
C) independent
D) positive

Question 50

Which of the following can issue bonds?

A) the government
B) corporations
C) government agencies
D) all of the above

Question 51

Which of the following is false?

A) For bond buyers,the higher the yield the better it is for them.
B) For bond buyers,the higher the price of the bond the better it is for them.
C) For bond buyers,the lower the yield the worse it is for them.
D) The term yield on a bond is the same as the term interest rate on a bond.

Question 52

You turn to the bond market page of a newspaper and look under the column headed "Bonds" and see that it says,"Alpha 7 1/2 25" this indicates that

A) the coupon rate on this bond is 7.5 percent.
B) the year this bond matures is 2025.
C) the current yield on this bond is 7.5 percent.
D) the current yield on this bond has risen 0.25 percent since the previous trading day.
E) a and b

Question 53

Jessica paid $7,000 for a bond with a face value of $6,000.She will be paid $400 annually as long as she holds on to the bond,until the bond's maturity date.The yield on the bond is

A) 6.67 percent.
B) 5.71 percent.
C) 15.0 percent.
D) 80.0 percent.

Question 54

Which of the following is true?

A) Treasury bills mature in 2 to 10 years.
B) Treasury notes mature in 13 or 26 weeks.
C) Treasury bills,notes,and bonds are considered to be very safe investments.
D) Municipal bonds are issued to help the federal government build new projects such as highways and stadiums.

Question 55

You turn to the bond market page of a newspaper and look under the column headed "Close" and see that it says,"49 1/2" this indicates that

A) the closing price for the bond on this particular day is $495.
B) the closing price for the bond on this particular day is $49.50.
C) the closing price for the bond was $49.50 higher than on the previous trading day.
D) the bond will mature on June 30,2049.

Question 56

Which of the following is false?

A) As the price paid for a bond rises,the yield declines.
B) If you purchase stock from an individual that currently owns the stock,you are buying it in the secondary market.
C) The yield on a bond is another term for the coupon rate on a bond.
D) A rating of Aaa from Moody's is the highest bond rating given by that rating agency.

Question 57

Which of the following is false?

A) Even if a corporation is not currently issuing bonds,you could still buy a bond directly from the corporation.
B) Bonds that are rated AAA from Standard and Poor's have received the highest rating possible.
C) A bond that is rated in the D category indicates that the bond issuer cannot pay off the bond.
D) It is possible to buy a bond from someone who purchased and still holds the bond he bought from the corporation at an earlier date.

Question 58

A person buys a bond with a face value of $10,000 for $9,325.Each year until the maturity date the bond buyer receives $750 from the issuer of the bond.The yield on the bond is

A) 8.04 percent.
B) 7.5 percent.
C) 10.0 percent.
D) 6.75 percent.
E) There is not enough information to answer the question.

Question 59

Which of the following is false?

A) Another term for a Treasury bill is a T-bill.
B) Treasury notes mature in 2 to 10 years.
C) Treasury bonds are considered very safe investments,but Treasury bills are considered to be a more risky investment.
D) It is unlikely the federal government will default on its bond obligations.

Question 60

Exhibit 38-2

Refer to Exhibit 38-2.If the closing price of Vixen's stock on the previous day was $65.50,what value goes in blank (D)?

A) 64.00
B) 65.15
C) 65.75
D) 65.00
E) There is not enough information given to answer this question.

Question 61

An option is a contract that always

A) gives the owner the right,but not the obligation,to buy shares of a stock at a specified price within the time limits of the contract.
B) gives the owner the right,but not the obligation,to sell shares of a stock at a specified price within the time limits of the contract.
C) states that the seller agrees to provide a particular good to the buyer on a specified future date at an agreed-upon price.
D) gives the owner the right,but not the obligation,to buy or sell shares of a stock at a specified price within the time limits of the contract.

Question 62

Which of the following companies was part of the original Dow Jones Industrial Average?

A) Chicago Gas Company
B) National Lead Company
C) General Motors Corp.
D) AT&T Inc.
E) a and b

Question 63

A futures contract

A) gives the owner the right,but not the obligation,to buy shares of a stock at a specified price within the time limits of the contract.
B) gives the owner the right,but not the obligation,to sell shares of a stock at a specified price within the time limits of the contract.
C) is a contract in which the seller agrees to provide a particular good to the buyer on a specified future date at an agreed-upon price.
D) gives the owner the right,but not the obligation,to buy or sell shares of a stock at a specified price within the time limits of the contract.

Question 64

If you thought the share price of a stock was going to fall,would you be more likely to buy a call option or a put option?

A) a call option
B) a put option
C) a call option and a put option
D) There is not enough information given to answer this question.

Question 65

You turn to the bond market page of a newspaper and look under the column headed "Bonds" and see that it says,"Gemco 5 3/4 13" this indicates that

A) the coupon rate on this bond is 5.75 percent.
B) this bond will mature 13 years from the date that it was first issued..
C) the current yield on this bond is 5.75 percent.
D) a and b
E) all of the above

Question 66

Exhibit 38-3

Refer to Exhibit 38-3.Which of the two stocks has a bigger gap between its close price and net earnings per share?

A) Stock ABC
B) Stock XYZ
C) Both stocks have the same gap between its close price and net earnings per share
D) There is not enough information provided to answer the question.

Question 67

Which of the following is false?

A) Private equity firms often need to borrow the money needed to buy a public corporation.
B) Once a private equity firm owns a formerly publicly held corporation,they tend to cut costs and enhance efficiency.
C) Critics of private equity firms say that companies that have too much cash and too little debt become targets for private equity firms to buy.
D) A private equity firm is a group of investors that takes a privately held corporation and uses an investment banker to turn it into a publicly held corporation.

Question 68

With respect to the stock market,the acronym IPO stands for

A) Investment Proposal Offering.
B) Immediate Public Offering.
C) Internal Public Offering
D) Initial Public Offering.

Question 69

What is the difference between an inflation-indexed Treasury bond,and a Treasury bond that is not indexed?

A) An inflation-indexed Treasury bond guarantees a certain real rate of return,while a nonindexed Treasury bond does not.
B) A nonindexed Treasury bond guarantees a certain real rate of return,while a nonindexed Treasury bond does not.
C) An inflation-indexed Treasury bond can only be purchased directly from the Federal Reserve,while a nonindexed Treasury can be purchased through a broker.
D) An inflation-indexed Treasury bond always guarantees the purchaser a 5 percent rate of return,while a nonindexed Treasury bond does not.

Question 70

Exhibit 38-4

Refer to Exhibit 38-4.If the closing price of Black Motor's stock on the previous day was $76.95,what value goes in blank (C)?

A) +1.95
B) -1.95
C) +0.95
D) -0.95
E) There is not enough information given to answer this question.

Question 71

If you thought the share price of a stock was going to rise,would you be more likely to buy a call option or a put option?

A) a call option
B) a put option
C) a call option and a put option
D) There is not enough information given to answer this question.

Question 72

The issuer of a bond is a lender.

Question 73

A put option is a contract

A) that gives the owner the right,but not the obligation,to buy shares of a stock at a specified price within the time limits of the contract.
B) that gives the owner the right,but not the obligation,to sell shares of a stock at a specified price within the time limits of the contract.
C) in which the seller agrees to provide a particular good to the buyer on a specified future date at an agreed-upon price.
D) that gives the owner the right,but not the obligation,to buy or sell shares of a stock at a specified price within the time limits of the contract.

Question 74

If the coupon payment on a bond is $350 and the coupon rate is 7%,then what is the face value of the bond?

A) $5,000
B) $374.50
C) $24.50
D) $528.57
E) There is not enough information provided to answer this question.

Question 75

Which of the following is false?

A) A call option will sell for a fraction of the cost of the stock.
B) A futures contract can be written for a commodity (such as wheat),or for a currency.
C) A futures contract gives the owner the right,but not the obligation,to buy or sell a commodity at a specified price on a given future date.
D) The specified price at which an option gives the owner the right to buy a stock at is called the stick price.

Question 76

If the coupon payment on a bond is $640 and the coupon rate is 6%,then what is the price of the bond?

A) $10,667
B) $10,000
C) $1,067
D) $678.40
E) There is not enough information provided to answer this question.

Question 77

Exhibit 38-4

Refer to Exhibit 38-4.If the closing price of Brown,Inc.'s stock on the previous day was $43.10,what value goes in blank (A)?

A) -1.00
B) +1.00
C) -0.50
D) +0.50
E) There is not enough information given to answer this question.

Question 78

Exhibit 38-4

Refer to Exhibit 38-4.If the closing price of Greenco's stock on the previous day was $48.10,what value goes in blank (B)?

A) $47.35
B) $48.85
C) $45.85
D) $47.85
E) There is not enough information given to answer this question.

Question 79

If the coupon payment on a bond is $140 and the coupon rate is 5%,then what is the face value of the bond?

A) $2,800
B) $147
C) $254.40
D) $5,000
E) There is not enough information provided to answer this question.

Question 80

A call option is a contract

A) that gives the owner the right,but not the obligation,to buy shares of a stock at a specified price within the time limits of the contract.
B) that gives the owner the right,but not the obligation,to sell shares of a stock at a specified price within the time limits of the contract.
C) in which the seller agrees to provide a particular good to the buyer on a specified future date at an agreed-upon price.
D) that gives the owner the right,but not the obligation,to buy or sell shares of a stock at a specified price within the time limits of the contract.