Chapter 11

Jane and Bill Collins have total take-home pay of $5,100 a month. Their monthly expenses total $4,050. Calculate the minimum amount this couple needs to establish an emergency fund.

=Monthly expenses × 3 months =$4,050 × 3 =$12,150

Assume you are in the 28 percent tax bracket and purchase a municipal bond with a yield of 3.10 percent. Use the formula presented in chapter 11 of your textbook to calculate the taxable equivalent yield for this investment. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

=Tax-exempt yield / (1 − Your tax rate) =0.0310 / (1 − 0.28) =0.0431, or 4.31%

Five years ago, you purchased seven corporate bonds that each pay 4.30 percent annual interest. Each bond has a face value of $1,000. How much interest do you earn on the seven bonds each year?

Amount of annual interest=Face value × Interest rate =$1,000 × 0.0430 =$43 Total Interest Amount=Interest for each bond × Number of bonds =$43 × 7 =$301

Five years ago, you purchased a $1,000 par value corporate bond with a coupon interest rate of 3.5 percent. Today comparable bonds are paying 4 percent. What is the approximate dollar price for which you could sell your bond? (Round your answer to 2 decimal places.)

Amount of annual interest=Face value × Interest rate =$1,000 × 0.035 =$35 Approximate market value=Dollar amount of annual interest / Comparable interest rate =$35 / 0.04 =$875.00

Assume you own a corporate bond that has a face value of $1,000 and pays 5.20 percent. What is the current yield if the bond is currently selling for $1,040? (Enter your answer as a percent rounded to the nearest whole number.)

Amount of annual interest=Face value × Interest rate =$1,000 × 0.0520 =$52 Current yield=Annual interest amount / Current price =$52 / $1,040 =0.05, or 5%

The process of spreading your assets among several different types of investments to lessen risk is called

Asset allocation.

The potential return on any investment should

Be directly related to the risk the investor assumes.

Which of the following statements is correct?

Bonds are a form of debt financing.

Which of the following risks deals with the possibility that bad management, unsuccessful products, or other factors will cause the business to be less profitable than originally anticipated?

Business failure risk

If your main focus is to have your investments increase in value, you are most concerned with

Growth.

Which of the following risks reduces your purchasing power?

Inflation risk

A discounted security means that the actual purchase price is

Less than the maturity value.

Which of the following would be considered a safe investment?

Savings accounts

Which of the following is not one of the four components of the risk factor to be considered when evaluating investments?

Stock risk

Interest paid to corporate bond owners is

Tax-deductible for the corporation.

A U.S. government security issued in minimum units of $100 with 4, 13, 26, or 52-week maturities is called a

Treasury bill.