Personal Finance Chapter 12
TIPS are appropriate for investors who are conservative and concerned about inflation.
True
The callable feature of a bond protects the issuer when market interest rates are falling.
True
The commonly cited price for a bond is usually its clean bond price.
True
The higher the tax bracket you are in, the more attractive the purchase of municipal bonds becomes.
True
The returns you expect from securities are income and growth
True
The returns you expect from securities are income and growth.
True
The value of any investment is a function of the return it is expected to produce relative to the amount of perceived risk involved in the investment.
True
There is an inverse relationship between bond prices and market interest rates.
True
To the issuing company, bonds are liabilities.
True
Treasury notes, bills, and bonds represent loans to the federal government.
True
When a bond is sold between coupon payment dates, the buyer pays the seller for the accrued interest.
True
You received a cash dividend from your stock investment this year. This is taxable income.
True
Stocks of companies that have experienced—and are expected to continue experiencing—higher rates of growth in operations and earnings are called
growth stock
Positive aspects about bonds do NOT include
high long-run return
The easiest way to invest in foreign stock is to purchase
international mutual funds.
U-Need-This has $12 million liabilities, $12 million preferred stock, 10 million shares of common stock outstanding, and $39 million in total assets. The book value per share of common stock is: .
$1.50 per share.
Interest rate risk is greater for short-term bonds than for long-term bonds.
False
Anderson, Inc. has $10 million liabilities, $12 million preferred stock, 8 million shares of common stock outstanding, and $45 million in total assets. The book value per share of common stock is: .
$2.88 per share.
Suppose the EPS of Walmart stock is $2, and the current price per earnings ratio is 10. What is the current price of Walmart stock?
$20
Your convertible bond has a conversion ratio of 15. The current market price of the common stock is $50/share. The conversion value of this bond is
$750
A bond is priced at 89 8/32. What is its price?
$892.50
Characteristics of corporate bonds include
-interest paid semi-annually -issued in $1,000 denominations -sinking funds are common
Advantages of common stock investments include
-potential for high return -liquidity.
Advantages of a dividend reinvestment plan can include
-stock sold at a discount. -free of brokerage commissions.
Interest rate risk is greater for stocks than for bonds.
False
Investors typically welcome their bonds being called because of the generous call premium paid.
False
Julie Johnson is in the 35 percent tax bracket. If she were to purchase a $1,000 municipal bond that had a stated interest rate of 6.5%, the fully taxable equivalent yield would be
10.00%
Junk bonds have higher risk and similar returns to investment grade bonds.
False
Market risk considers the possibility that the firm may fail.
False
The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own
210 shares
Assume you're contemplating the purchase of a $1,000, 5% annual coupon income bond with 10 years remaining to maturity and that the bond currently is trading at $925. The approximate yield to maturity on this bond will be
6.0%
Assume you're contemplating the purchase of a $1,000, 6% annual coupon income bond with 5 years remaining to maturity and that the bond currently is trading at $950. The approximate yield to maturity on this bond will be
7.2%
A company's $1,000 bond has a 7.5% interest rate and is currently selling for $820. The current yield is:
9.15%
Sunshine Mining Bonds have a $1,000 face value, pay $95 annual interest, and are currently quoted at $1,302.50. The coupon rate of interest is:
9.500%.
John Smith is in the 28 percent tax bracket. If he were to purchase a $1,000 municipal bond that had a stated interest rate of 6.9%, the taxable equivalent yield would be:
9.583%.
Only the federal government issues zero coupon bonds.
False
Preferred stockholders have no equity in the issuing firm.
False
Publicly traded issues are only available to qualified investors.
False
Purchasing power risk is of most concern during economic recession.
False
Stock dividends are taxed at long-term capital gains rates.
False
Stocks with high betas will have low price volatility.
False
The yields on municipal bonds are usually higher than the returns available from fully taxable issues.
False
Typically, the best time to invest in the stock market is when the market is very volatile.
False
Which of the following bond ratings would be for junk bonds?
BB
Stocks with price movements that tend to follow the business cycle are called
Cyclical bonds
Risk and return are ____ related.
Directly
You would expect more growth with the preferred stock you own than with the common stock in your portfolio.
False
Which of the following statements about preferred stock is true?
Dividends must generally be paid to preferred shareholders before dividends may be paid to common shareholders.
A discount bond has a market value above par value.
False
A lower expected return will mean a higher risk will have to be accepted.
False
Bondholders will receive interest payments only after stockholders receive dividends.
False
Bonds provide for investment return primarily in the form of growth.
False
Capital appreciation of an investment is a form of current income.
False
Common stock owners must receive dividends before preferred stockholders.
False
Common stocks pay a guaranteed dividend each year.
False
Dividend reinvestment plans provide shareholders with cash so that they can invest in similar stocks.
False
Dividend reinvestment plans should be avoided because of their relatively high cost.
False
Earnings per share (EPS) tell the stockholder the amount of dividend to be paid.
False
Earnings per share can be defined as the return earned on behalf of each share of common and preferred stock, calculated by dividing all earnings by the total number of shares outstanding.
False
If Wristwatch Arm Corporation (WAC) has the book values of assets of $10 million, liabilities of $5 million, and preferred stock of $1 million, the book value of its stock is $6 million.
False
Income stocks are purchased with the expectation of high capital gains upon their resale.
False
Income stocks are similar to bonds in that they pay annual interest to owners.
False
Companies with a great deal of long-term debt would rate fairly high in ____ risk.
Financial
Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales
True
Which of the following is an advantage of owning growth stocks?
High potential for capital gains
Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales.
True
Bond prices and market interest rates are ____ related.
Inversely
Price fluctuations of defensive stocks are usually contrary to movements in the business cycle.
True
A bond is issued at $1,000 par value during a time in which interest rates for similar bonds were 8%. Today, new bonds with similar creditworthiness are issued at 10%. Which of the following is most likely to be true about the bond?
It is currently selling at a discount.
In which of the following types of investment is the most liquidity risk?
Land
Which of the following would be a DISadvantage of owning an income stock?
Lower growth potential
____ risk results from the behavior of investors in the securities market
Market
Stocks with betas of less than 1.0 will have relatively stable prices.
True
The minimum rate of return you would like to receive in compensation for the amount of risk you have assumed is the
Required rate of return
When cash dividends on stock are paid, but the stockholder has these dividends automatically reinvested, what are the federal income tax implications?
Taxes must be paid in the year the dividends are paid at ordinary income tax rates.
Municipal bonds can be attractive investments, despite their lower interest rate, since their interest income is exempt from federal income tax.
True
Historically, the long-term performance of stock outstrips that of bonds.
True
If you buy a zero coupon bond, you will receive no cash from the corporation until the bond matures.
True
Which of the following is a characteristic of Treasury inflation-indexed bonds?
The par value of the bond is indexed for inflation
Which of the following is most likely to occur immediately following the announcement that the rating on a corporate bond has been lowered to junk status?
The price of the bond will decline.
Interest on corporate bonds is paid semiannually.
True
John and Mary Smith own 500 shares of ABE stock. After the company pays a 6 percent stock dividend, John and Mary will own 530 shares of ABE stock.
True
Low price/earnings ratios indicate limited or low investor confidence.
True
A beta of more than one would be expected of a speculative stock.
True
A bond with a yield to maturity that equaled or exceeded an investor's desired rate of return is considered an attractive investment.
True
A bond with an S&P rating of BBB is considered investment-grade.
True
A callable bond may be retired by the issuer prior to maturity.
True
A company with low financial risk has little to no long-term debt.
True
A stock's beta is an indication of how responsive the stock is to changes in the overall stock market.
True
All securities involve risk of some kind.
True
All treasury bonds issued today are noncallable.
True
An investment is acceptable if the expected rate of return is greater than the desired rate of return.
True
At the time you buy a convertible bond, you will know the number of stock shares for which it can be exchanged.
True
Bond prices are impacted by both the direction and magnitude of market interest rate changes.
True
Bond return can include both interest and capital gains.
True
Bondholders have no equity in the issuing firm.
True
Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital gains.
True
Bonds rated AA by S&P and Aa by Moody's are considered very safe bonds.
True
Changes in the value of securities due to social, political, or economic factors are referred to as market risk.
True
Common stockholders are considered to be the residual owners of the company.
True
Common stockholders are entitled to a prorated share of a company's earnings only after all of the firm's other obligations have been met.
True
Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a long time.
True
Convertible preferred stock can be exchanged for common stock.
True
Dividend income and stock appreciation represent the elements of total return for a stock investment.
True
Event risk occurs when something substantial happens to a company that has an immediate impact on its financial condition.
True
Growth stocks generally pay little or nothing in dividends.
True
A bond selling below par value is selling at
a discount
Bonds issued by subdivisions of the U.S. government but not guaranteed by the government are called
agency bonds
A bond may sell
at par value. below par value. above par value.
To most stockholders, the main advantages of common stock investment are
attractive returns and active trading.
Market risk is often measured using
beta
Only the shares of the strongest, most stable, and safe-return companies can be called
blue-chip stocks
An example of event risk would be
corporate takeover
Bonds are issued by
corporations and federal, state, and local governments.
Which of the following types of bonds are unsecured?
debenture bond
A convertible bond is usually a
debenture in corporate market.
A company has a beta of 1.0; if the market goes down by 8%, the value of the company's stock will likely
decline 8%
If the current price of an investment increases, what effect does the price increase have on approximate yield?
decrease yield
The relevant sale or invoice price of a bond to the buyer is its
dirty price
When market interest rates rise, bond prices will
fall
Zero coupon bonds are issued by
federal agencies. municipalities. corporations.
One of the more appealing features of a common stock is that stock investments
offer ownership with a limited liability.
A characteristic of defensive stocks is
price stability in economic decline.
The ____ of a stock reflects stockholder confidence.
price/earnings ratio
The approximate yield to maturity of a bond is greater than the stated rate of interest when
purchased at discount
A high inflation rate would result in a high degree of
purchasing power risk
Which of the following types of risk affect owners of fixed income securities more than owners of equity securities
purchasing power risk
Cash dividends on common stock are most often paid
quarterly
The best returns in the stock market will be achieved by
remaining fully invested.
From an equityholder's perspective, the firm's overall profitability is measured by
return on equity
____ stocks are purchased as a gamble rather than because they have a proven history of good performance.
speculative
Corporate ownership is evidenced by
stock
When evaluating a stock as a possible investment, one must consider
the current market price. the expected capital gain. the expected dividend income. one's investment goals.
Security investors incur varying degrees of risk. Business risk is related to
the potential success or failure of the firm.
In most investments, there is a risk-return tradeoff.
true
The higher a stock's beta, the riskier the stock.
true
The risk-free rate of return is often measured by the return on U.S. Treasury bills.
true