Unit 19

The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The clothing industry B) The utilities industry C) The food industry D) The electronics industry

B) The utilities industry Utilities are generally very heavily funded with debt. If interest rates go up, their new debt will be at higher interest rates, causing lower earnings available for common stocks.

In this industry, many words have similar meaning. Which of the following choices consists of a pair which are not properly considered synonyms? A) Inflation risk—purchasing power risk B) Liquidity risk—marketability risk C) Interest rate risk—money rate risk D) Financial risk—market risk

D) Financial risk—market risk Financial risk is an unsystematic risk; generally, the concern that an issuer will be unable to meet its debt obligations as they come due. It could be paired with either credit risk or default risk. Market risk is a systematic risk.

A general risk component representing the variability of a stock's total return as it directly relates to overall movements in the general economy is known as A) political risk. B) business risk. C) financial risk. D) systematic risk.

D) systematic risk. Systematic risk, also referred to as market risk, is the variability in a stock's total return that is directly associated with overall movements in the general economy and cannot be eliminated through diversification. The other 3 choices are all unsystematic risks.

The risk known as opportunity cost is often measured by A) comparing the investor's actual return to the return on the 91-day Treasury bill. B) comparing the yield to maturity to the nominal yield. C) the tax-equivalent yield. D) whether the investment had positive or negative returns.

A) comparing the investor's actual return to the return on the 91-day Treasury bill. In economic terms, opportunity cost is defined as the highest valued alternative that must be sacrificed as a result of choosing among alternatives. It is common to use the 91-day T-bill as the risk-free alternative. If the selected investment does not outperform the risk-free one, the investor has lost out on the guaranteed return.

U.S. Treasury bonds are generally subject to all of the following risks except A) purchasing power risk. B) liquidity risk. C) inflation risk. D) reinvestment risk.

B) liquidity risk. The market for U.S. Treasury bonds is highly liquid. As safe and as liquid as they are, they, like all fixed-income investments, are subject to purchasing power (also known as inflation) risk and reinvestment risk.