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 |