Personal Finance Chapter 12

Stocks with price movements that tend to follow the business cycle are called Cyclical bonds
John Smith is in the 28 percent tax bracket. If he were to purchase a $1,000 municipal bond that had a stated interest rate of 6.9%, the taxable equivalent yield would be: 9.583%.
A company has a beta of 1.0; if the market goes down by 8%, the value of the company’s stock will likely decline 8%
The value of any investment is a function of the return it is expected to produce relative to the amount of perceived risk involved in the investment. True
If the current price of an investment increases, what effect does the price increase have on approximate yield? decrease yield
A beta of more than one would be expected of a speculative stock. True
The higher a stock’s beta, the riskier the stock. true
In most investments, there is a risk-return tradeoff. true
Which of the following statements about preferred stock is true? Dividends must generally be paid to preferred shareholders before dividends may be paid to common shareholders.
Security investors incur varying degrees of risk. Business risk is related to the potential success or failure of the firm.
Interest rate risk is greater for short-term bonds than for long-term bonds. False
Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital gains. True
Bondholders will receive interest payments only after stockholders receive dividends. False
Junk bonds have higher risk and similar returns to investment grade bonds. False
Bonds are issued by corporations and federal, state, and local governments.
Risk and return are ____ related. Directly
A company with low financial risk has little to no long-term debt. True
To the issuing company, bonds are liabilities. True
Only the federal government issues zero coupon bonds. False
When cash dividends on stock are paid, but the stockholder has these dividends automatically reinvested, what are the federal income tax implications? Taxes must be paid in the year the dividends are paid at ordinary income tax rates.
A bond is priced at 89 8/32. What is its price? $892.50
The commonly cited price for a bond is usually its clean bond price. True
Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales True
Publicly traded issues are only available to qualified investors. False
The ____ of a stock reflects stockholder confidence. price/earnings ratio
Which of the following types of bonds are unsecured? debenture bond
Suppose the EPS of Walmart stock is $2, and the current price per earnings ratio is 10. What is the current price of Walmart stock? $20
Investors typically welcome their bonds being called because of the generous call premium paid. False
The easiest way to invest in foreign stock is to purchase international mutual funds.
Common stockholders are entitled to a prorated share of a company’s earnings only after all of the firm’s other obligations have been met. True
A characteristic of defensive stocks is price stability in economic decline.
Municipal bonds can be attractive investments, despite their lower interest rate, since their interest income is exempt from federal income tax. True
The higher the tax bracket you are in, the more attractive the purchase of municipal bonds becomes. True
Stocks with betas of less than 1.0 will have relatively stable prices. True
Which of the following is an advantage of owning growth stocks? High potential for capital gains
Stock dividends are taxed at long-term capital gains rates. False
Assume you’re contemplating the purchase of a $1,000, 6% annual coupon income bond with 5 years remaining to maturity and that the bond currently is trading at $950. The approximate yield to maturity on this bond will be 7.2%
Bonds provide for investment return primarily in the form of growth. False
A convertible bond is usually a debenture in corporate market.
The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own 210 shares
Interest rate risk is greater for stocks than for bonds. False
An example of event risk would be corporate takeover
Common stockholders are considered to be the residual owners of the company. True
A bond selling below par value is selling at a discount
Bond return can include both interest and capital gains. True
Bonds issued by subdivisions of the U.S. government but not guaranteed by the government are called agency bonds
____ stocks are purchased as a gamble rather than because they have a proven history of good performance. speculative
All treasury bonds issued today are noncallable. True
A bond with a yield to maturity that equaled or exceeded an investor’s desired rate of return is considered an attractive investment. True
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. False
Which of the following types of risk affect owners of fixed income securities more than owners of equity securities purchasing power risk
Assume you’re contemplating the purchase of a $1,000, 5% annual coupon income bond with 10 years remaining to maturity and that the bond currently is trading at $925. The approximate yield to maturity on this bond will be 6.0%
The approximate yield to maturity of a bond is greater than the stated rate of interest when purchased at discount
You would expect more growth with the preferred stock you own than with the common stock in your portfolio. False
All securities involve risk of some kind. True
Common stocks pay a guaranteed dividend each year. False
Income stocks are similar to bonds in that they pay annual interest to owners. False
From an equityholder’s perspective, the firm’s overall profitability is measured by return on equity
Changes in the value of securities due to social, political, or economic factors are referred to as market risk. True
Which of the following would be a DISadvantageof owning an income stock? Lower growth potential
One of the more appealing features of a common stock is that stock investments offer ownership with a limited liability.
____ risk results from the behavior of investors in the securities market Market
The returns you expect from securities are income and growth. True
If Wristwatch Arm Corporation (WAC) has the book values of assets of $10 million, liabilities of $5 million, and preferred stock of $1 million, the book value of its stock is $6 million. False
Advantages of a dividend reinvestment plan can include -stock sold at a discount.-free of brokerage commissions.
Cash dividends on common stock are most often paid quarterly
Your convertible bond has a conversion ratio of 15. The current market price of the common stock is $50/share. The conversion value of this bond is $750
A lower expected return will mean a higher risk will have to be accepted. False
The minimum rate of return you would like to receive in compensation for the amount of risk you have assumed is the Required rate of return
Convertible preferred stock can be exchanged for common stock. True
TIPS are appropriate for investors who are conservative and concerned about inflation. True
To most stockholders, the main advantages of common stock investment are attractive returns and active trading.
There is an inverse relationship between bond prices and market interest rates. True
Stocks with high betas will have low price volatility. False
Typically, the best time to invest in the stock market is when the market is very volatile. False
A bond is issued at $1,000 par value during a time in which interest rates for similar bonds were 8%. Today, new bonds with similar creditworthiness are issued at 10%. Which of the following is most likely to be true about the bond? It is currently selling at a discount.
When evaluating a stock as a possible investment, one must consider the current market price.the expected capital gain.the expected dividend income.one’s investment goals.
Bondholders have no equity in the issuing firm. True
Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition. True
An investment is acceptable if the expected rate of return is greater than the desired rate of return. True
Stocks of companies that have experienced—and are expected to continue experiencing—higher rates of growth in operations and earnings are called growth stock
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. True
A callable bond may be retired by the issuer prior to maturity. True
Bond prices and market interest rates are ____ related. Inversely
Preferred stockholders have no equity in the issuing firm. False
When a bond is sold between coupon payment dates, the buyer pays the seller for the accrued interest. True
Zero coupon bonds are issued by federal agencies.municipalities.corporations.
A high inflation rate would result in a high degree of purchasing power risk
Dividend reinvestment plans should be avoided because of their relatively high cost. False
Anderson, Inc. has $10 million liabilities, $12 million preferred stock, 8 million shares of common stock outstanding, and $45 million in total assets. The book value per share of common stock is: . $2.88 per share.
A stock’s beta is an indication of how responsive the stock is to changes in the overall stock market. True
U-Need-This has $12 million liabilities, $12 million preferred stock, 10 million shares of common stock outstanding, and $39 million in total assets. The book value per share of common stock is: . $1.50 per share.
Common stock owners must receive dividends before preferred stockholders. False
Corporate ownership is evidenced by stock
Price fluctuations of defensive stocks are usually contrary to movements in the business cycle. True
The risk-free rate of return is often measured by the return on U.S. Treasury bills. true
Which of the following is most likely to occur immediately following the announcement that the rating on a corporate bond has been lowered to junk status? The price of the bond will decline.
Sunshine Mining Bonds have a $1,000 face value, pay $95 annual interest, and are currently quoted at $1,302.50. The coupon rate of interest is: 9.500%.
Treasury notes, bills, and bonds represent loans to the federal government. True
In which of the following types of investment is the most liquidity risk? Land
Advantages of common stock investments include -potential for high return-liquidity.
Bond prices are impacted by both the direction and magnitude of market interest rate changes. True
Only the shares of the strongest, most stable, and safe-return companies can be called blue-chip stocks
Capital appreciation of an investment is a form of current income. False
Historically, the long-term performance of stock outstrips that of bonds. True
A company’s $1,000 bond has a 7.5% interest rate and is currently selling for $820. The current yield is: 9.15%
Companies with a great deal of long-term debt would rate fairly high in ____ risk. Financial
A bond with an S&P rating of BBB is considered investment-grade. True
If you buy a zero coupon bond, you will receive no cash from the corporation until the bond matures. True
Low price/earnings ratios indicate limited or low investor confidence. True
Market risk considers the possibility that the firm may fail. False
A discount bond has a market value above par value. False
You received a cash dividend from your stock investment this year. This is taxable income. True
Dividend income and stock appreciation represent the elements of total return for a stock investment. True
Market risk is often measured using beta
Dividend reinvestment plans provide shareholders with cash so that they can invest in similar stocks. False
A bond may sell at par value.below par value.above par value.
Purchasing power risk is of most concern during economic recession. False
The yields on municipal bonds are usually higher than the returns available from fully taxable issues. False
The callable feature of a bond protects the issuer when market interest rates are falling. True
Positive aspects about bonds do NOT include high long-run return
Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a long time. True
Interest on corporate bonds is paid semiannually. True
Growth stocks generally pay little or nothing in dividends. True
Bonds rated AA by S&P and Aa by Moody’s are considered very safe bonds. True
Income stocks are purchased with the expectation of high capital gains upon their resale. False
At the time you buy a convertible bond, you will know the number of stock shares for which it can be exchanged. True
When market interest rates rise, bond prices will fall
Earnings per share (EPS) tell the stockholder the amount of dividend to be paid. False
The best returns in the stock market will be achieved by remaining fully invested.
Characteristics of corporate bonds include -interest paid semi-annually -issued in $1,000 denominations -sinking funds are common
The returns you expect from securities are income and growth True
Julie Johnson is in the 35 percent tax bracket. If she were to purchase a $1,000 municipal bond that had a stated interest rate of 6.5%, the fully taxable equivalent yield would be 10.00%
Which of the following is a characteristic of Treasury inflation-indexed bonds? The par value of the bond is indexed for inflation
Which of the following bond ratings would be for junk bonds? BB
The relevant sale or invoice price of a bond to the buyer is its dirty price
Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales. True

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