Investment Ch.2 Multiple Choice & T/F

15. The majority of bonds pay interest with the following frequency: a) Semi-annual b) Quarterly c) Monthly d) Annually

A: Most bonds pay a fixed rate of interest on a semiannual basis. Section: Some Practical Advice.

5. The Discount yield of a treasury bill is always less than the Investment yield on the same bill.

True: The only difference between them is that the Discount yield uses 360 days in a year, while the Investment yield uses 365 (or 366 for leap years). Section: Money Market Securities.

8. Preferred stocks are like bonds in that the annual payments are guaranteed by the issuer.

False: Preferred stock dividends are not legally binding

7. Senior securities are those which have been outstanding the longest.

False: Senior securities, including secured debt, will be paid off before subordinated or junior securities.

6. The price of bonds is quoted in pennies, such as 101.38.

False: The price of bonds is quoted in eighths or sixteenths, such as 101-3/8.

1. The investments choices available to individual investors continue to change rapidly.

True

10. The Price/Earnings ratio (P/E) is the current market price per share, divided by the company's earnings per share.

True

2. Direct investing allows investors to buy and sell securities themselves

True

3. Debt traded in the Money Market is short-term, highly marketable, and has a low default probability.

True

9. A "closely held" company is owned by a few shareholders, and is not traded on any stock market.

True

Why does the invoice price of a bond include accrued interest? a) The seller wants to keep the interest earned since the last payment date. b) The buyer wants to receive the interest earned since the last payment date. c) The seller wants to obtain the interest earned between the time of sale and the next payment date. d) The buyer wants to keep the interest earned since the last payment date.

A: Accrued interest is interest earned since the last semi-annual payment date. Section: Fixed Income Securities.

9. Which of the following bonds should pay the lowest rate of coupon interest payments to investors? a) 10-year Treasury bond b) 10-year corporate bond rated BB c) 10-year corporate bond rated AA d) 30-year corporate bond rated BB

A: The higher the credit rating of a bond, and the lower the maturity of a bond, the lower the coupon interest payment should be. U.S. Treasury bonds have the highest ratings, AAA, from the 3 major bond rating agencies, and are therefore seen as the safest, and lowest yielding bonds for any given maturity. Section: Investments Intuition.

What happens if the price quoted for a bond goes above its face value? a) It is considered a premium bond. b) It is considered a discount bond. c) The buyer can pay the lower of face or market price. d) The seller receives only the face value.

A: The market price is determined by potential buyers and sellers, and can be either higher than face value (premium) or lower (discount), depending on market conditions. Section: Fixed Income Securities

7. Which of the following is NOT an example of capital market securities? a) Treasury bills b) Treasury bonds c) Corporate bonds d) Corporate stocks

A: Treasury bills are short-term, money market instruments. Section: Capital Market Securities.

6. Which of the following is NOT considered a Money Market security? a) Treasury bonds b) Treasury bills c) Negotiable bank Certificates of Deposit (CDs) d) Commercial paper

A: Treasury bonds have maturities from 10 to 30 years, far more than the one year limit defining the Money Markets. Section: Money Market Securities.

4. Why might investing in Coca-Cola might be considered an international investment? a) Coca-Cola has its headquarters in Europe. b) Coca-Cola derives most of its sales and profits from other countries. c) Coca-Cola's stock price is quoted in Euros. d) Coca-Cola's stock price is most heavily dependant on disposable income in the US.

B: Coca-Cola is truly a global company, with a significant percentage of its operations in countries around the world. As such, much of the stock's performance will be tied to events happening overseas. Section: Organizing Financial Assets.

3. Which of the following is an example of "indirect investing"? a) Common stocks b) Mutual funds c) Checking accounts d) Index Options

B: Investors buy and sell "direct investments" themselves, and directly control these investments. In a mutual fund, the fund managers buy and sell securities on behalf of the fund's investors. Section: Organizing Financial Assets.

5. Which of the following is the best explanation for why most individuals have at least some of their funds invested in nonmarketable financial assets? a) Nonmarketable financial assets generally have higher expected returns than marketable assets. b) Nonmarketable financial assets are very safe. c) All nonmarketable financial assets protect the investor against inflation. d) Nonmarketable financial assets are bought and sold through brokers.

B: Nonmarketable financial assets include accounts guaranteed by, and instruments issued by, the US government, and are therefore considered to be of the highest safety available. Section: Nonmarketable Financial Assets..

A bond's par value is almost always: a) $100 b) $1,000 c) $10,000 d) $1,000,000

B: Par value on almost all bonds, including government, corporate, mortgage and asset-backed is $1,000. Section: Some Practical Advice.

13. Why would investors choose to buy a zero coupon bond, if they receive no coupon interest? a) The price of the bond may go up if the company has significant profits. b) The price of the bond is significantly below the face value payable at maturity. c) These zero coupon bonds are not registered, so the investor need not pay taxes. d) Zero coupon bonds are, by definition, worthless.

B: The investors profit from the increase in price as the bond moves toward maturity. Section: Investments Intution.

18. Which of the following is NOT a bond rating agency? a) Standard & Poor's b) Moody's Investor Service c) Dun & Bradstreet d) Fitch, Inc.

C: Dun & Bradstreet supplies information about companies, but not bond ratings. Section: Fixed-Income Securities.

2. Which of the following alternatives has increased greatly in popularity over time? a) Traditional intermediaries, such as banks b) Direct securities, such as stocks and bonds c) Indirect securities, such as mutual funds d) All choices have remained about equally popular since World War II.

C: Indirect investing has become increasingly more popular over time, particularly through the purchase of mutual funds. Section: Organizing Financial Assets.

19.Which of the following is not an advantage of investing in so-called "junk bonds"? a) These bonds are more speculative than "investment grade" bonds, meaning higher potential returns if they pay off. b) These bonds have higher interest payments than "investment grade" bonds. c) These bonds are exempt from federal taxes. d) These bonds are more likely to default than "investment grade" bonds.

C: Municipal bonds, not junk bonds, are exempt from federal taxes. Section: Fixed-Income Securities.

10. Which of the following types of bonds are NOT issued by government entities? a) Federal government bonds b) Government agency bonds c) Municipal bonds d) Corporate bonds

D: Federal bonds, notes, and bills are issued by the US Treasury, as are federal agency bonds, such as those issued by SLMA. Municipal bonds are issued by state or local governments, or local authorities such as school districts. Section: Fixed Income Securities.

17. Which of the following is NOT an advantage of investing in municipal bonds? a) The issuer of General Obligations are based on the "full faith and credit" and taxing authority of the issuer. b) The investor in municipal bonds does not have to pay federal income taxes on interest earned from these bonds. c) The investor in Revenue bonds has the proceeds of the project to back the interest payments. d) Municipal bonds pay higher interest than similarly rated corporate bonds.

D: Municipal bonds usually pay a lower stated rate of interest, because they are not subject to federal taxes. Secton: Fixed-Income Securities.

14. Which of the following is an advantage to investors of Treasury Inflation Protected Bonds? a) The interest is exempt from Federal income tax. b) The interest payments are constant throughout the life of the bond. c) TIPS can be bought in denominations as low as $100. d) The principal or face amount is adjusted upward every six months, based on CPI.

D: TIPS protect investors from losses resulting from inflation. Section: Investments Intuition.

8. Which of the following bonds would be considered the most risky for investors to purchase? a) Treasury bonds b) Investment-grade corporate bonds c) Investment-grade municipal bonds d) Junk, or high yield bonds

D: The credit rating indicates the level of default risk, and junk bonds have lower credit ratings than Treasuries and investment-grade corporate and municipal bonds. Section: Investments Intuition.

20. Which of the following is not considered one of the four major types of bonds issued in the U.S.? a) U.S. Government b) Corporate c) Municipal d) Asset-backed

D: The four major bond types issued in the U.S. are corporate, municipal, U.S. government and federal agency. Asset-backed securities are bonds backed by cash flows from receivables like mortgages, credit cards and car loans, and are considered more esoteric than straightforward bonds. Section: Investments Intuition.

1. Which of the following is NOT an investing choice available to households? a) Hold the liabilities of traditional intermediaries, such as banks. b) Hold securities directly, such as common stock c) Hold securities indirectly, such as mutual funds. d) Hold currency in a drawer or under a mattress.

D: While holding currency may be considered saving (= not spending), it is not considered investing. This chapter explores choices which are probably better for nearly all households. Section: Organizing Financial Assets.

4. Individual investors often invest directly in money market instruments, such as Treasury Bills.

False