Quiz 12

A $1000 par value bond has an 8 percent coupon, pays interest semiannually, and is currently selling for $1,050. What would be the yield to maturity on this bond for someone purchasing it today, assuming the bond matures in 5 years and that the payments occur at the end of a period?

6.78%

If a municipal bond offered a yield of 5 percent, an individual in the 35 percent federal tax bracket would have to find a fully taxable bond with a yield of ________ to get the same after-tax return.

7%

A $1,000 par value bond has a 7.5 percent coupon, pays interest semiannually, and is currently selling for $975. If you purchased the bond today at the stated price, what would be your current yield and how much would you expect to receive in interest each six months?

7.70%, $37.50

Bonds that receive a rating lower than investment grade are known as a. junk bonds. b. high-yield bonds. c. poor-quality bonds. d. All of these.

All of these.

Owners of ________ will normally receive voting rights.

Common stock

Which of the following investments is NOT among those most affected by interest rate risk?

Common stock

________ are a type of hybrid security because they possess the features of both corporate bonds and common stocks.

Convertible bonds

Industrials are examples of ________ bonds.

Corporate

An investor who spends the interest received from a 6 percent bond will still receive a 6 percent compounded rate of return from the investment.

FALSE

Bonds represent a share of ownership in a company.

FALSE

Coupon is defined as the annual payment that the issuer will pay to the bondholder.

FALSE

Investors expect both current income and capital gains from all types of investments.

FALSE

When interest rates go up, bond prices go up.

FALSE

________ is the risk reflected in the price volatility of a security so that the more volatile the price of a security the greater this type of risk.

Market Risk

________ are backed by a legal claim on some specific property of the issuer that acts as collateral for the bonds.

Mortgage bonds

________ bonds almost always offer a lower return than is available on other comparable bonds because their interest income is free from federal income taxes.

Municipal

Bond returns are far more stable than stock returns.

TRUE

Bonds prices have an inverse relationship with the direction of interest rate changes; for example, when interest rates rise, bond prices fall.

TRUE

In general, investment vehicles traded in broad markets tend to be less liquid than those traded in broad markets.

TRUE

Most investors expect to be compensated more for taking a higher level of risk. Therefore, if investors expect a greater return on an investment, they will most likely have to take greater risk.

TRUE

________ have a risk-free rate of return.

U.S. Treasury bills

A $1,000 par value bond has a 7.5 percent coupon, pays interest semiannually, and is currently selling for $900. The bond is selling at

a discount.

Bond quotes are given

as a percent of par.

Stocks that typically do well when the economy does well and suffer when the economy suffers are known as

cyclical stocks.

Characteristics of small-cap stocks typically include a. a total market value of $2 billion or less. b. the potential for high growth and above average rates of return. c. greater risk and price volatility than that of larger-cap stocks. d. All of these.

d. All of these.

When compared with the market as a whole, a stock with a beta of +1.5 would be expected to a. have greater price volatility. b. have a higher expected return. c. move in the same general direction as the market. d. All of these.

d. All of these.

Which of the following is NOT a type of call feature?

discounted call

As residual owners of a company, holders of common stock are

entitled to dividend income and a prorated share of the company's earnings only after all the other obligations of the firm have been met.

The measure of a company's performance that relates net income or profit to sales is its

net profit margin.

The ________ is viewed as an indication of investor confidence and expectations.

price/earnings ratio

Investments are subject to various types of risk. The risk that the return on an investment will be less than the rate of inflation is known as

purchasing power risk.

Generally, in companies that pay dividends, dividends are distributed

quarterly.

The annual compounded rate of return a bondholder would receive if he or she held the issue to its maturity is called the

yield to maturity.