chapter 11 series 65
The MNO Manufacturing Company, headquartered in Springfield, has just filed for bankruptcy. Under federal bankruptcy law, which of the following would have highest priority with the bankruptcy trustee? A) Holders of mortgage bonds B) Employee wages earned within the 180 days prior to the bankruptcy filing C) Property taxes owed to the city of Springfield D) Holders of first lien, senior preferred stock
A
In this industry, many words have similar meaning. Which of the following choices consists of a pair which are NOT properly considered synonyms? A) Financial risk—market risk B) Liquidity risk—marketability risk C) Interest rate risk—money rate risk D) Inflation risk—purchasing power risk
A 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.
If you had expectations of high inflation, you would A) increase equity exposure and reduce fixed income exposure B) increase fixed-income exposure and reduce tangible asset exposure C) increase fixed-income exposure and reduce equity exposure D) increase fixed-income exposure and reduce commodity exposure
A Rising inflation will reduce real returns on fixed-income investments, so you would want to reduce that exposure. Equities, tangible assets, and commodities tend to increase along with the inflation rate.
Liquidity risk would be greatest for an investor whose portfolio was primarily composed of A) Nasdaq stocks B) municipal bonds C) municipal bond UITs D) ADRs listed on the NYSE
B Liquidity risk would be greatest for an investor whose portfolio was primarily composed of A) Nasdaq stocks B) municipal bonds C) municipal bond UITs D) ADRs listed on the NYSE
If your client is primarily concerned about the rising cost of living but wishes to limit his exposure to business risk, which of the following securities is most appropriate? A) Tax-free municipal bond B) S&P 500 index fund C) Small-cap stock fund D) AAA intermediate-term corporate bond
B S&P index funds are growth-oriented investment vehicles that have traditionally outpaced inflation and, because of their diversification, tend to limit business risk. Small-cap stock funds should also outpace inflation but carry too much risk for a client who wishes to limit business risk. Bonds, whether corporate or municipal, as fixed income investments, are generally not suitable for clients whose primary concern is protecting themselves against the rising cost of living.
A stock that has no ready market is said to have a high degree of A) market risk B) investment risk C) liquidity risk D) business risk
C Explanation A stock that is not readily convertible into cash has a high degree of liquidity risk.
Which of the following will be the most likely risk that you will face during the first year after purchasing a corporate AA bond that matures in 15 years? A) Inflation B) Interest rate C) Market D) Liquidity
B With 15 years to maturity, even an investment-grade bond is subject to interest rate risk. This is particularly true during the early years because price fluctuations are greater when duration is longer. Inflation risk is not very great over a period of only 1 year, and AA bonds generally possess better-than-average liquidity. For this exam, market risk usually applies to equity securities rather than debt.
