Ch. 11 Investing Basics and Evaluating Bonds

Which of the following are advantages of purchasing securities issued by the U.S. Treasury?

Backed by the government Safe investment Decreased risk of default

General obligation bonds are repaid from income generated by the project that the bond issue is financing.

False

eneral obligation bonds are repaid from income generated by the project that the bond issue is financing.

False

Which of the following statements is not a factor to consider in choosing different investments?

If you invest in high quality stocks, there is no need to monitor your investments.

Liquidity is the ability to buy or sell an investment quickly without substantially affecting the investment's value.

True

Market risk is the fluctuation of stock and bond prices due to the behaviors of investors in the marketplace.

True

True or false: Any time you invest in stocks, corporate bonds, and mutual funds that invest in stocks, you assume business failure risk.

True

True or false: Interest rate risk is the result of changes in the interest rates in the economy.

True

True or false: Liquidity is the ability to buy or sell an investment quickly without substantially affecting the investment's value.

True

if interest rates increase, the value of a bond will ___.

drop

The maturity on a Treasury bond is:

thirty years

The risk associated with bad news that a company may bring to the public is the risk that the investment will decrease in ___ .

value

When looking at investment you should first ask yourself:

what is important to you and what do you value?

Treasury inflation-protected securities pays interest every ___months at a fixed rate.

6

For Standard & Poor's the bond ratings generally range from:

AAA to D

Speculative investments are medium-risk investments made with the hope of earning a relatively large profit in a short amount of time.

False

Municipal bonds are used to finance ongoing activities of th___ and ___ governments.

STATE LOCAL

Which of the following is has the shortest maturity?

T-bills

"Safe" investments include:

select mutual funds certificates of deposit government bonds

Taxable equivalent yield is equal to tax-exempt yield divided by X minus your tax rate. X is equal to:

1.0

A good rule of thumb is to limit consumer credit payments to:

20 percent of after-tax income

Tom has invested in TIPS. In the past year the inflation rate was 4 percent. Tom earns

4 percent on his investment

Mr. Smith wants to establish an emergency fund. His living expenses for his family are $1,800 per month. What is the minimum Mr. Smith should have in his emergency fund?

5400

treasury inflation-protected securities pays interest every months at a fixed rate.

6

Mr. Jones wants to establish an emergency fund. His living expenses for his family are $2,000 per month. The minimum Mr. Jones should have in his emergency fund is $ ___.

6000

Municipal bonds are used to finance which of the following?

Airports Toll roads Schools

Which of the following would not be a good choice when investing for a predictable source of income?

Any common stock

Which of the following statements is not a factor to consider in choosing different investments? Multiple choice question. If you invest in high quality stocks, there is no need to monitor your investments.

If you invest in high quality stocks, there is no need to monitor your investments.

Which of the following is true concerning municipal bonds?

Interest on municipal bonds may be exempt from federal taxation.

What type of risk associated with preferred stocks or government or corporate bonds is the result of changes in the interest rates of the economy?

Interest rate risk

Which of the following is not true about the time value of money affecting investments?

Many investors today seek higher returns by investing in certificates of deposit

Which of the following is NOT true?

Many people in today's economy choose CD's because of their high rates of return

With the primary objective of investment income, which of the following are good choices?

Municipal bonds Corporate bonds Certificates of deposit

Which of the following are generally the most predictable sources of income?

Passbook savings accounts Certificates of deposit U.S. government securities

Which of the following is a more liquid investment?

Savings account

What types of investments have a small chance of providing a predictable income?

Speculative investments

True or false: Revenue bonds are municipal bonds that are repaid from the income generated by the project it is designed to finance.

True

A legal document that details all of the conditions relating to a bond issue is called a:

bond indenture

For a bond, the maturity date is the date on which the corporation is to repay the borrowed ___

capital

The potential return on an investment should be:

directly related to the risk assumed

A(n) ___ fund is an amount of money you can obtain quickly in case of an immediate need.

emergency

An amount of money that you obtain quickly in case of an immediate need is a(n):

emergency fund

The dollar amount the bondholder will receive at the bond's maturity is called:

face value

A rise in the general level of prices is called:

inflation

Fluctuation of prices of securities due to the behaviors of investors in the marketplace is known as:

market risk

Inflation is the rise in the general level of ___ .

prices

A growth company is expected to have revenue that can be high or low, but that is ___ .

reinvested

A bond that is repaid from the income generated by the project it is designed to finance is called a:

revenue bond

Cash, CDs, government bonds, and money market mutual funds are all considered very___ (risky/safe) investments and are on level one of the investment pyramid.

safe

If a business fails (business failure risk), your stock investment is typically worth:

$0

Which of the following is true?

As interest rates rise, bond prices generally decline

Which of the following investments are included in a diversified portfolio?

Bonds Small company stocks Large company stocks Cash

Which of the following is NOT true about bonds?

Bonds are often recommended over bond funds for small investors

True or false: Interest paid on U.S. government securities is exempt from federal income tax.

False

Which of the following is NOT a factor to consider when choosing different investments?

Tax consequence of selling investments are NOT important

A typical emergency fund is:

at least 3 months of living expenses

The amount that should be in an emergency fund is ______ months of living expenses.

at least three

Lines of credit and credit cards have a ceiling that limits the amount of ___ credit.

available

A growth company has:

better than average earnings potential

Treasury ___ have a maturity of 4 to 52 weeks.

bills

For Treasury securities, if investors bid (competitively/noncompetitively), they must specify the rate of interest yield they are willing to accept.

competitively

A corporation's written pledge to repay a specified amount of money with interest is called a:

corporate bond

A corporate bond is a corporation's written pledge to repay a specified amount of money along with ___ .

coupons

Line of___is a short-term loan that is approved before money is actually needed.

credit

A good rule of thumb is to limit consumer ___ payments to 20 percent of___-tax income.

credit After

With business ___ risk, you are assuming the risk that the company you invest in could go out of business.

failure

Interest paid on U.S. government securities is taxable for ___ income tax purposes, but is exempt from___ and local taxation.

federal state

A municipal government bond backed by the full faith, credit, and unlimited taxing power of the government that issued it is called:

general obligation bond

A _____ bond is backed by the full faith of the government that issued it, while a _____ bond is repaid from the income generated by the project it is designated to finance.

general obligation; revenue

Among other factors, a person's priorities, age, and personal ___ affect his or her investment goals.

goal

Credit lines and credit cards:

have a maximum dollar limit

Speculative investments assume a:

high level of risk

U.S. Treasury securities are a very low risk investment that many investors use to allocate their investments and bring their overall risk down. Because of this low risk, they also offer a low ___ rate.

interest

Interest for Treasury notes is slightly largerBlank 1Blank 1 larger , Correct Unavailable than T-Bills since investors must wait longer to get their money back.

larger

Treasury bonds have a slightly ___ interest rate than T-notes or T-bills.

larger

A short-term loan that is approved before the money is actually needed is a(n):

line of credit

Savings and checking accounts are considered more ___ because the money can be converted into cash quickly.

liquid

The ability to buy or sell an investment quickly without substantially affecting the investments value is called:

liquidity

Face value is the dollar amount the bondholder will receive at the bond's ___date.

maturity

For a corporate bond, the date on which the corporation is to repay the borrowed money is called:

maturity date

"I want to make $300 quarterly for the next three years". This goal is not only specific but because it mentions a number, it is also:

measurable

A debt security issued by a state or local government is called a:

municipal bond

For Treasury securities, most investors are willing to accept the interest rate determined at auction so they are using:

noncompetitive bids

Changes in the market price for stocks are ______ to the financial health of the company.

not always related

Government and corporate bonds are often seen as ___ (riskier/safer) investments than stocks.

safer

Tom wants an investment with a minimal chance of loss. He is mainly concerned about the investment's:

safety

___in an investment means minimal risk of loss while ___ in an investment means a measure of uncertainty about an outcome.

safety risk

Useful investment goals are ___and ___ .

specific measurable

A high-risk investment made in the hope of earning a relatively large profit in a short time is called a:

speculative investment

A municipal bond is a debt security issued by a ___or local___.

state government

A general obligation bond is a bond backed by the full faith, credit, and unlimited ___ power of the government that issued it.

taxation

Maturity for Treasury notes ranges from two years to:

ten years.

Mutual funds are not included in the list of typical investments because:

they invest in the assets on the list