Aggregate
measures of stock prices include dividend income.
True
False
False
The
S&P 500 uses
|
|
A.
|
a
simple average
|
|
|
B.
|
a
compound average
|
|
|
C.
|
a
geometric average
|
|
|
D.
|
a value-weighted average
|
Holding
period returns for greater than a year do not give an accurate measure of the
true rate of return.
True
False
False
The
Standard & Poor's 500 stock index illustrates
|
|
A.
|
an
exponential index
|
|
|
B.
|
a
simple average
|
|
|
C.
|
a
geometric index
|
|
|
D.
|
a value-weighted index
|
The
S&P 500 stock index is more sensitive to changes in the prices of small
stocks than the stocks of large companies.
True
False
False
If
a stock increased from $25 to $50 in five years, the annual rate of return was
20 percent.
True
False
False
To
determine the realized return on an investmen, the investor needs to know
1. income received
2. the cost of an investment
3. the sale price of the investment
1. income received
2. the cost of an investment
3. the sale price of the investment
|
|
A.
|
2 and 3
|
|
|
B.
|
all of the above
|
|
|
C.
|
1 and 3
|
|
|
D.
|
1 and 2
|
The
Russell 3000 is a broad-based measure of bond prices.
True
False
False
Which
of the following is the least broad-based measure of stock prices?
|
|
A.
|
Nasdaq market index
|
|
|
B.
|
Russell
3000
|
|
|
C.
|
Dow
Jones industrial average
|
|
|
D.
|
S&P
500 stock index
|
Historical
studies of rates of return on large stocks suggest
|
|
A.
|
the
average return is about 6.4 percent annually
|
|
|
B.
|
equity
investors rarely sustain losses
|
|
|
C.
|
over a period of years, the rate is
approximately 10 percent
|
|
|
D.
|
dividends
account for over half the return
|
An
investor may expect a bond to be called if its current yield exceeds the yield
to maturity.
True
False
False
The
market price of preferred stock moves directly with changes in interest rates.
True
False
False
If
interest rates in general were to fall,
1. the prices of existing bonds would rise
2. the prices of existing bonds would fall
3. yields to maturity would rise
4. yields to maturity would fall
1. the prices of existing bonds would rise
2. the prices of existing bonds would fall
3. yields to maturity would rise
4. yields to maturity would fall
|
|
A.
|
1 and 4
|
|
|
B.
|
2 and 4
|
|
|
C.
|
1 and 3
|
|
|
D.
|
2 and 3
|
If
interest rates rise, the price of preferred stock
|
|
A.
|
rises
|
|
|
B.
|
falls
|
|
|
C.
|
rises
or falls
|
|
|
D.
|
is not
affected
|
The
spread (the basis points) between the yields on AAA-rated bonds and B-rated
bonds tends to rise when yields increase.
True
False
False
If a bond is selling for a premium,
|
|
A.
|
the
current yield has risen
|
|
|
B.
|
the
bond cannot be called
|
|
|
C.
|
the
yield to maturity exceeds the current yield
|
|
|
D.
|
the current yield exceeds the yield to
maturity
|
The
yield to call
|
|
A.
|
is important if interest rates have risen
|
|
|
B.
|
equals
the current yield
|
|
|
C.
|
equals
the yield to maturity
|
|
|
D.
|
is
important if interest rates have fallen
|
The
prices of zero coupon bonds fluctuate less than bonds with large coupons.
True
False
False
A
conservative investor will prefer a bond with a smaller duration even though it
may have a longer term to maturity.
True
False
False
If
preferred stock is subject to mandatory retirement, its price is more volatile
than preferred stock without the retirement feature.
True
False
False
Municipal
bonds are considered to be safe investments because they may be readily sold
with little chance of loss.
True
False
False
A
revenue bond is supported by the taxation authority of the issuing government.
True
False
False
General
obligation bonds
|
|
A.
|
are
secured by property
|
|
|
B.
|
illustrative
of a revenue bond
|
|
|
C.
|
not
illustrative of a tax-exempt bond
|
|
|
D.
|
are supported by taxing authority
|
If
interest rates are expected to rise, a prudent strategy would be to sell
treasury bills and buy treasury bonds.
True
False
False
Ginnie
Mae bonds are secured by private mortgages.
True
False
False
The
interest on series EE bonds
|
|
A.
|
is
distributed semi-annually
|
|
|
B.
|
is
taxed even though it is not received until the bond is redeemed
|
|
|
C.
|
is
exempt from federal income taxation
|
|
|
D.
|
is exempt from state income taxation
|
Poor
quality municipal bonds pay more interest than poor quality corporate debt.
True
False
False
The
owner of a Ginnie Mae bond receives monthly both interest and principal
repayments.
True
False
False
Build
American bonds are not exempt from federal income taxation.
True
False
False
Municipal
bonds are often examples of serial bonds.
True
False
False
When
an investor purchases a bond, that individual receives accrued interest from
the seller.
True
False
False
Bonds
may be retired by
1. being called
2. a sinking fund
3. being repurchased
1. being called
2. a sinking fund
3. being repurchased
|
|
A.
|
1 and 2
|
|
|
B.
|
1 and 3
|
|
|
C.
|
2 and 3
|
|
|
D.
|
all of the above
|
If
a firm repurchases bonds at a discount, the difference between the principal
amount and the purchase price produces taxable income.
True
False
False
Income
taxation on the interest earned from an investment in a zero coupon bond occurs
when the bond matures.
True
False
False
Debentures
are secured by equipment.
True
False
False
In
general, income bonds are less risky than
|
|
A.
|
preferred stock
|
|
|
B.
|
secured
debt
|
|
|
C.
|
short-term
debt obligations
|
|
|
D.
|
mortgage
bonds
|
Serial
bonds
|
|
A.
|
are issued and retired in a series
|
|
|
B.
|
are
primarily issued by the federal government
|
|
|
C.
|
have a
sinking fund
|
|
|
D.
|
are a
type of income bond
|
Bonds
pay a flow of income called “interest.”
True
False
False
A
diversified portfolio of high-yield securities may be achieved with ten or
fewer bonds.
True
False
False
The
current yield and the yield to maturity are equal if a bond sells for its par
value.
True
False
False
The
economic goals of the Federal Reserve include
1. prosperity
2. full employment
3. stable prices
1. prosperity
2. full employment
3. stable prices
|
|
A.
|
1 and 3
|
|
|
B.
|
all of the above
|
|
|
C.
|
2 and 3
|
|
|
D.
|
1 and 2
|
The
anticipation of inflation suggests that the investor should
|
|
A.
|
avoid
real estate investments
|
|
|
B.
|
sell
stocks of gold companies
|
|
|
C.
|
buy
bonds
|
|
|
D.
|
anticipate higher interest rates
|
The
money supply, defined as M1, includes currency, coins, and checking accounts.
True
False
False
An
increase in stock prices is a lagging indicator of economic activity.
True
False
False
If
the Federal Reserve sells securities, that reduces commercial banks' capacity
to lend.
True
False
False
M-2
is a narrower definition of the money supply and excludes savings accounts in
commercial banks.
True
False
False
The
federal funds rate is the rate banks charge each other when they borrow
reserves.
True
False
False
A
tight monetary policy should generate a higher required return for common
stock.
True
False
False
An
easy monetary policy increases the cost of credit.
True
False
False
A
recession is a period of rising employment.
True
False
False
Studies
of investment returns suggest that investors can expect to earn at least 15
percent annually.
True
False
False
Averaging
down will prove to be profitable only if the price of the stock subsequently
rises.
True
False
False
Dollar
cost averaging is
|
|
A.
|
periodically investing a specified dollar
amount in a stock
|
|
|
B.
|
periodically
buying a round lot of stock
|
|
|
C.
|
a means
to increase the average cost basis
|
|
|
D.
|
a means
to insure a positive return
|
The
rate of return on a stock considers the price change but not dividend income.
True
False
False
Historical
studies of investment returns suggest that the stocks of small companies generate
higher returns than the stocks of larger companies.
True
False
False
Movements
in individual stock prices tend to be
|
|
A.
|
positively correlated
|
|
|
B.
|
positively
correlated with inflation
|
|
|
C.
|
positively
correlated with changes in interest rates
|
|
|
D.
|
negatively
correlated
|
Preferred
stock and long-term bonds are similar because
|
|
A.
|
they
both have voting power
|
|
|
B.
|
interest
and dividend payments are legal obligations
|
|
|
C.
|
interest and dividend payments are fixed
|
|
|
D.
|
interest
and dividend payments are tax-deductible expenses
|
A
call penalty is a payment made to the firm to encourage early retirement of the
bond.
True
False
False
While
bond prices fluctuate,
|
|
A.
|
coupons are constant
|
|
|
B.
|
yields
are constant
|
|
|
C.
|
short-term
bond prices fluctuate more
|
|
|
D.
|
the
spread between yields is constant
|
The
value of a bond depends on the amount of principal, when it matures, and the
interest it pays.
True
False
False
Preferred
stock generally pays
|
|
A.
|
a
variable dividend
|
|
|
B.
|
a fixed dividend
|
|
|
C.
|
a stock
dividend
|
|
|
D.
|
no
dividend
|
Bonds
that are callable often have a call penalty.
True
False
False
If
an investor were to anticipate that interest rates were going to fall, that
individual should
|
|
A.
|
sell
bonds
|
|
|
B.
|
acquire
money market securities
|
|
|
C.
|
buy bonds
|
|
|
D.
|
take no
action
|
The
prices of twenty-year bonds tend to fluctuate less than bonds with five years
to maturity.
True
False
False
If
investors expect interest rates to rise, they should sell preferred stock and
buy bonds.
True
False
False
Agencies
of the federal government are not allowed to issue bonds.
True
False
False
Which
of the following is not traded in the secondary markets?
|
|
A.
|
U.S.
Treasury bonds
|
|
|
B.
|
municipal
bonds
|
|
|
C.
|
series EE bonds
|
|
|
D.
|
U.S.
Treasury bills
|
Municipal
bonds are not registered with the SEC.
True
False
False
The
federal government cannot issue debt that matures in less than five years.
True
False
False
Interest
earned on series EE bonds is exempt from federal income taxation.
True
False
False
Treasury
bonds may be bought and sold in the secondary markets like corporate bonds.
True
False
False
Collateralized
mortgage obligations (CMOs) are sold in classes ("tranches") that
increase the certainty of the timing of payments.
True
False
False
Yields
on municipal bonds exceed yields on corporate bonds with the same term to
maturity and credit rating.
True
False
False
If
interest rates decline, the expected life of a Ginnie Mae bond is reduced.
True
False
False
One
advantage to the issuing firm of a split coupon bond is that cash is initially
conserved.
True
False
False
A
high yield bond
|
|
A.
|
pays no
interest
|
|
|
B.
|
pays
interest only at maturity
|
|
|
C.
|
is a high-risk debt instrument
|
|
|
D.
|
is a
bond in default
|
A
negatively sloped yield curve occurs when short-term rates exceed long-term
rates.
True
False
False
A
firm may not repurchase bonds at a discount.
True
False
False
A
call penalty (i.e., call premium) protects the
|
|
A.
|
issuer
from rising interest rates
|
|
|
B.
|
investor against premature retirement of
the bond
|
|
|
C.
|
issuer
from the bondholder requesting payment
|
|
|
D.
|
investor
from default
|
Equipment
trust certificates are
|
|
A.
|
secured debt obligations
|
|
|
B.
|
a type
of debenture
|
|
|
C.
|
bonds
with low credit ratings
|
|
|
D.
|
riskier
than convertible bonds
|
Under
current law, American corporations may not issue bearer bonds with coupons
attached.
True
False
False
A
bond's seller pays accrued interest to the buyer.
True
False
False
Large
increases in the money supply may be associated with
|
|
A.
|
increased
employment
|
|
|
B.
|
decreased
inflation
|
|
|
C.
|
increased unemployment
|
|
|
D.
|
increased
inflation
|
When
the Federal Reserve seeks to contract the money supply, it may
|
|
A.
|
buy
securities and raise the targeted federal funds rate
|
|
|
B.
|
sell securities
and lower the targeted federal funds rate
|
|
|
C.
|
buy
securities and lower the targeted federal funds rate
|
|
|
D.
|
sell securities and raise the targeted
federal funds rate
|
Monetary
policy affects securities prices by
1. affecting investors' required return
2. increasing the federal deficit
3. affecting firms' capacity to generate earnings
1. affecting investors' required return
2. increasing the federal deficit
3. affecting firms' capacity to generate earnings
|
|
A.
|
1 and 3
|
|
|
B.
|
all of
the above
|
|
|
C.
|
1 and 2
|
|
|
D.
|
2 and 3
|
Changes
in the price of gold are often related to the anticipation of inflation.
True
False
False
The
price of gold tends to rise during inflationary periods.
True
False
False
If
the country's exports increase, GDP declines.
True
False
False
The
fiscal policy of the federal government excludes
|
|
A.
|
taxation
|
|
|
B.
|
the money supply
|
|
|
C.
|
debt management
|
|
|
D.
|
expenditures
|
Indices
of Nasdaq stocks tend to be less volatile than the S&P 500 index.
True
False
False
Dollar-cost
averaging is achieved by periodic, equal dollar investments.
True
False
False
The
Wilshire stock index is more broad based than the S&P 500 stock index.
True
False
False
Stock
indices do not consider taxes on capital gains.
True
False
False
A
strategy of averaging down will be profitable if
|
|
A.
|
the
firm retains earnings
|
|
|
B.
|
the
firm pays more dividends
|
|
|
C.
|
the
price of the stock continues to fall
|
|
|
D.
|
the price of the stock subsequently rises
|
Movements
in stock prices are often illustrated using relative (percentage) price changes
instead of absolute price changes.
True
False
False
Bond
averages that are expressed in percentages are not comparable to the S&P
500.
True
False
False
An
investment's internal rate of return equates
|
|
A.
|
initial
cash outflow and the sale price
|
|
|
B.
|
cash outflows and subsequent cash inflows
|
|
|
C.
|
dividend
payments and the investment's cost
|
|
|
D.
|
dividend
payments and capital gains
|
Over
time, holding period returns tend to overstate the true annualized rate of
return.
True
False
False
A
few bonds called "perpetuals" never mature.
True
False
False
Preferred
stock pays a fixed amount of interest.
True
False
False
The
concept of duration stresses when a bond will make its payments to bondholders.
True
False
False
If
interest rates have fallen, a firm may prefer to repurchase the bonds on the
market instead of calling and redeeming them.
True
False
False
Fluctuations
in yields is one means by which the economy allocates scarce credit.
True
False
False
The
value of a bond depends on
1. the coupon rate
2. the terms of the indenture
3. the maturity date
a. 1 and 2
1. the coupon rate
2. the terms of the indenture
3. the maturity date
a. 1 and 2
|
|
A.
|
2 and 3
|
|
|
B.
|
all of the above
|
|
|
C.
|
1 and 3
|
The
smaller the duration, the more volatile the bond's price.
True
False
False
Sources
of risk to investors in municipal bonds include
1. fluctuations in interest rates
2. reinvestment rate risk
3. default risk
1. fluctuations in interest rates
2. reinvestment rate risk
3. default risk
|
|
A.
|
2 and 3
|
|
|
B.
|
1 and 2
|
|
|
C.
|
all of the above
|
|
|
D.
|
1 and 3
|
Municipal
bonds are more marketable than corporate and federal government bonds.
True
False
False
Collateralized
mortgage obligations (CMOs)
|
|
A.
|
have
certain repayment schedules
|
|
|
B.
|
are
free of interest rate risk
|
|
|
C.
|
are not exempt from federal income
taxation
|
|
|
D.
|
increase
in value when interest rates rise
|
Ginnie
Maes are
|
|
A.
|
mortgage backed securities issued by the
Government National Mortgage Association
|
|
|
B.
|
long-term
mortgage securities sold by banks
|
|
|
C.
|
long-term
bonds issued by the federal government
|
|
|
D.
|
short-term,
mortgage-backed securities
|
There
is no secondary market for EE bonds.
True
False
False
If
interest rates fall, the value of a Ginnie Mae bond should increase.
True
False
False
Since
bonds are legal obligations, their prices are determined when issued and do not
change.
True
False
False
A
zero coupon only pays interest when it is sold.
True
False
False
A
"fallen angel" was once a quality bond whose issuing firm is
currently having financial problems.
True
False
False
Zero
coupon bonds
|
|
A.
|
are
sold for a premium
|
|
|
B.
|
are sold at a discount
|
|
|
C.
|
cannot
be called
|
|
|
D.
|
accrue
interest at maturity
|
In
a typical bond classification
|
|
A.
|
"C"
stands for a convertible bond
|
|
|
B.
|
"B"
stands for a "bearer" bond
|
|
|
C.
|
"A" are investment grade bonds
|
|
|
D.
|
"D"
represents a debenture
|
A
negatively sloped yield curve suggests
1. short-term rates exceed long-term rates
2. long-term rates exceed short-term rates
3. the Federal Reserve is following a tight monetary policy
4. the Federal Reserve is following an easy monetary policy
1. short-term rates exceed long-term rates
2. long-term rates exceed short-term rates
3. the Federal Reserve is following a tight monetary policy
4. the Federal Reserve is following an easy monetary policy
|
|
A.
|
1 and 4
|
|
|
B.
|
2 and 4
|
|
|
C.
|
1 and 3
|
|
|
D.
|
2 and 3
|
One
source of risk associated with investments in bonds is the possibility of default.
True
False
False
Virtually
all bonds have each of the following except
|
|
A.
|
interest
payments
|
|
|
B.
|
voting rights
|
|
|
C.
|
an
indenture
|
|
|
D.
|
maturity
date
|
In
most cases, interest accrues daily on long-term bonds but distributed only
twice a year.
True
False
False
A
bond that is traded "flat" has a fixed coupon.
True
False
False
A
federal government deficit may be financed by
1. the general public buying government bonds
2. commercial banks buying treasury bills
3. the Federal Reserve selling securities
1. the general public buying government bonds
2. commercial banks buying treasury bills
3. the Federal Reserve selling securities
|
|
A.
|
all of
the above
|
|
|
B.
|
2 and 3
|
|
|
C.
|
1 and 2
|
|
|
D.
|
1 and 3
|
Open
market operations is the buying and selling of securities by the Federal
Reserve.
True
False
False
The
Federal Reserve is the central bank of the United States.
True
False
False
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