Series 65: Unit 20 Quiz 1

A client owns an investment-grade bond with a coupon of 7%. If similarly rated bonds are being issued today with coupons of 5%, and the market is efficient, it would be expected that the client's bond A. will be selling at a discount from par B. has a positive net present value C. has a zero net present value D. has a negative net present value

Has a zero net present value

Which of the following financial statement entries is eliminated when calculating the quick ratio? A. Cost of goods sold B. Accounts receivable C. Notes payable D. Inventory

Inventory

As a bond's duration changes, A. its rating might be affected. B. its sensitivity to changes in interest rates changes. C. the income received by the bondholder changes. D. its maturity date changes.

Its sensitivity to changes in interest rates changes

Five years ago, an investor purchased an ABC Corporation BBB-rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB-rated debentures maturing in 2037 are being issued with coupons of 5%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A. positive B. less than the par value C. more than the par value D. equal to the par value

More than the par value

Plymouth Standard's common stock has an average return of 12%; its returns fall within a range of -2% to +26% approximately 68% of the time. Which one of the following numbers is closest to the standard deviation of returns of Plymouth Standard's stock? A. 14% B. 8% C. 19% D. 28%

14%

An investment of $2,000 made 10 years ago is now worth $8,000. Using the Rule of 72, the approximate compounded annual rate of return is A. 25% B. 7.2% C. 14.4% D. 40%

14.4%

Last year, ABC Corporation had earnings per share of $5 and paid a quarterly dividend of $.75 per share. It has a current market value of $75. What is its price-earnings ratio? A. 15:1 B. 10:1 C. 50:1 D. 25:1

15:1

Here are the past seven years of returns for XYZ common stock, 17%, 3%, 13%, 3%, 5%, 9%, 8%. As a measure of central tendency, the value 8 is most accurately described as A. the standard deviation. B. the mode. C. the mean. D. the median.

The median

Moonglow Specialties, Inc., is currently trading at $20 per share. Recently, the company reported net income of $1 million. The company is capitalized with 200,000 common shares and $5 million of 20-year debentures with a coupon of 4%. Given the data, Moonglow's price-to-earnings (P/E) ratio is closest to A. 5 times. B. 4 times. C. 3 times. D. 2 times.

4 times

If a company with 10 million shares outstanding with total earnings of $50 million pays a $2 dividend, the dividend payout ratio is A. 4% B. 20% C. 40% D. 25%

40%

RAP mutual fund had the following returns over the past 3 years: Year 1: 15%. Year 2: -5%. Year 3: 7%. What is the arithmetic mean of the returns for the RAP fund? A. 7.00% B. 20.00% C. 5.67% D. 9.00%

5.67%

An investor has created a laddered bond portfolio by placing $100,000 into zero-coupon bonds with maturities of 1, 5, 10, and 20 years. The average duration of this portfolio is approximately A. 9 years. B. 7.5 years. C. 11.39 years. D. 22.9 years.

9 years

An analyst wishing to measure the sensitivity of a debt security when faced with changes in interest rates will compute the security's A. sensitivity ratio B. nominal yield C. duration D. yield to maturity

Duration

Which of the following statements is not true? A. Beta is a volatility measure of a security compared with the overall market. B. A stock with a beta of 0.8 will move 20% less than the market. C. Beta is a measure of a security's deviation from its historical average returns. D. A stock with a beta of 1.2 will move 20% more than the market.

Beta is a measure of a security's deviation from its historical average returns

A company has two outstanding bond issues, both with a coupon rate of 8%. Bond A will mature in 2 years, while Bond B will mature in 15 years. If market interest rates were to increase to 10%, which of the following statements is correct? A. Bond B will be selling at a greater premium than Bond A. B. The company will attempt to postpone the maturity of Bond A. C. Bond B will be selling at a greater discount than Bond A. D. Both bonds will be selling at a premium

Bond B will be selling at a greater discount than Bond A

While searching for a suitable investment for your client, you narrow the choice to the following four companies. Company A with returns over the past 4 years of: 12%, 4%, 8%, 6% Company B with returns over the past 4 years of: 7%, 8%, 9%, 6% Company C with returns over the past 4 years of: 10%, 12%, −2%, 10% Company D with returns over the past 4 years of: 15%, 20%, −8%, 3% Which of these choices has the highest volatility? A. Company A B. Company C C. Company B D. Company D

Company D

Which of the following statements regarding the time value of money is not correct? A. Compound interest is interest earned on interest. B. Compound interest is interest earned on the initial investment. C. Future value is the future amount to which a sum of money today will increase on the basis of a defined interest rate and period. D. Future value of an ordinary annuity is the future amount to which a series of deposits of equal size will increase.

Compound interest is interest earned on the initial investment

Which of the following statements with regards to net present value and internal rate of return is correct? A. If the net present value equals zero, then the internal rate of return is less than the required rate of return. B. If the net present value equals zero, then the internal rate of return is greater than the required rate of return. C. If the net present value is less than zero, then the internal rate of return is greater than the required rate of return. D. If the net present value is greater than zero, then the internal rate of return is greater than the required rate of return.

If the net present value is greater than zero, then the internal rate of return is greater than the required rate of return

As the correlation between any 2 assets decreases, A. the standard deviation of the portfolio increases B. greater risk is assumed C. the benefits of diversification decrease D. the benefits of diversification increase

The benefits of diversification increase

Which of the following statements regarding investment theory is not correct? A. A correlation coefficient of 0.14 between the returns of Stock C and Stock L indicates that very little of Stock C's returns can be attributed to the returns of Stock L. B. In a well-diversified portfolio, diversifiable risk is zero. C. The beta coefficient may be used to help select a portfolio that is consistent with an investor's willingness to assume unsystematic risk. D. Combining two stocks with a negative correlation coefficient can significantly reduce the portfolio's standard deviation.

The beta coefficient may be used to help select a portfolio that is consistent w/ an investor's willingness to assume unsystematic risk

When an IA tells a client who is investigating the common stock of two different issuers that there is no linear relationship between the two stock's returns, it means A. one of the stock's standard deviation is significantly higher than the other B. one is listed on an exchange, the other traded OTC C. one is likely to pay dividends, the other not D. the correlation coefficient is zero

The correlation coefficient is zero

The difference between present value and net present value represents A. the initial cash outlay B. the internal rate of return C. the discounted cash flow D. the credit risk premium

The initial cash outlay

Your client wants to have $1 million in her investment account when she retires at age 70. She is currently 50 and has about $215,000 available to invest today. You tell her that if the portfolio can earn at a compounded rate of 8%, she will reach her goal. That 8% rate is A. the future value rate B. the market rate of return C. the internal rate of return D. the present value rate

The internal rate of return

Bond investors use the discounted cash flow formula to A. compute their income tax liability. B. determine the annual interest paid on a bond. C. translate future cash flows to be received from interest and principal repayment into their present value. D. evaluate the risk of investing in a bond.

Translate future cash flows to be received from interest and principal repayment into their present value