Chapter 1 missed questions

Technical analysts are often called "__________" because they chart stock price movements and use the patterns to fathom the market. In addition, technical analysts look at factors such as trading volume and funds available for investing in order to decide when to buy and sell

chartists

Yield curve analysis is useful for an investor in debt securities for all of the following reasons EXCEPT: A the yield curve is used to compare the marketability risk of one issue to that of another B investors can compare rates of return relative to changing maturities C the yield of a specific security can be compared to the market expectation for similar securities D the curve shows market expectations for interest rates

A the yield curve is used to compare the marketability risk of one issue to that of another

When the market is reaching an "oversold" condition, which of the following statements are TRUE? I Market price averages are decreasing daily II Market price averages are increasing daily III The number of declining issues is decreasing relative to the number of advancing issues IV The number of declining issues is rising relative to the number of advancing issues

1 and 111

A $1,000 par bond is issued with 3 years to maturity. The coupon rate on the bond is 2.50%. If the inflation rate for the next 3 years is 1.50%, the bond will be worth how much in 3 years? A $1,000 B $1,046 C $1,077 D $1,125

A $1,000 -The bond matures in 3 years. At maturity, the bondholder receives par from the issuer. The 2.50% coupon ($25 in interest) is paid to the bondholder annually, divided into semi-annual payments. The inflation rate has nothing to do with this question.

Text:A stock whose price moves down 5% when the market as a whole moves up by 10% has a beta coefficient of: A -.50 B +.50 C -2.00 D +2.00

A -.50 A stock with a positive "beta" moves in the same direction as the market; a stock with a negative "beta" moves in the opposite direction to the market. If a stock moves down 10% when the market moves up 10%, it has a beta of -1.00. If a stock moves down 5% when the market moves up 10%, it has a beta of -.50. If a stock moves down 20% when the market moves up 10%, it has a beta of -2.00. There are very few "negative" beta stocks - these are counter-cyclical stocks such as credit collection companies and pawnshops (when times are bad, these stocks do well; and vice-versa).

A customer has a 10-year investment time horizon and has $5,000 available for investment each year over that time frame. The customer wishes to have $100,000 at the end of that time. In order to accumulate $100,000 at the end of 10 years, the approximate rate of return on investment would need to be: A 12% B 8% C 6% D 4%

A 12% There are a number of ways to deal with this question. This customer is investing $5,000 a year in each of the next 10 years, for a total investment of $50,000. Using the "Rule of 72" dividing the Rate of Return into 72 gives the approximate number of years needed for an investment to double. Thus, if an investment is returning 7.2% (72/7.2), it would double in 10 years. However, all $50,000 is not being invested in the first year - rather, it is being invested at the rate of $5,000 per year over 10 years, for an average aggregate investment value of $25,000 ($50,000/2) over the 10 years. For $25,000 to become $100,000 over 10 years, it must double to $50,000 and double again to $100,000. Thus, the approximate rate of return would need to be double 7.2% = 14.4%. But it would be a bit lower than this, since any earnings are compounding at a much higher interest rate than 7.2%. Of the 4 choices offered, the highest is 12% - all the other choices are lower - so this must be the answer.

When the market is reaching an "oversold" condition, which of the following statements are TRUE? I Market price averages are decreasing daily II Market price averages are increasing daily III The number of declining issues is decreasing relative to the number of advancing issues IV The number of declining issues is rising relative to the number of advancing issues A I and III B I and IV C II and III D II and IV

A I and III

A resistance level is: I above the current market price of the stockII below the current market price of the stockIII a point through which the stock's price tends not to riseIV a point through which the stock's price tends not to fall A I and III B I and IV C II and III D II and IV

A I and III A "resistance" level is a price above the current market, through which a stock's price tends not to rise. Thus, the stock is said to have "resistance" at this price, meaning it is resisting further price rises.

If a stock's price breaks out through a resistance level, it is expected that the price of the stock will: A rise B fall C remain stable D become volatile

A rise A "resistance" level is a price above the current market, through which a stock's price tends not to rise. Thus, the stock is said to have "resistance" at this price, meaning it is resisting further price rises, because investors are willing to sell at this price. If a stock breaks the resistance level, this is strongly bullish, since all of the ready sellers have been "cleaned out" and there are still buyers for the stock. If there are many more buyers than sellers, prices will rise.

All of the following statements are true about Federal Reserve open market trading activities EXCEPT open market operations affect: A the National Debt B M 1levels C the Treasury's accounts D the business cycle

A-- the National Debt

A $1,000 par TIPS is issued with 3 years to maturity. The coupon rate on the bond is 2.50%. If the inflation rate for the next 3 years is 1.50%, the bond will be worth how much in 3 years? A $1,000 B $1,046 C $1,077 D $1,125

B $1,046 -A TIPS is a Treasury Inflation Protection Security. Aside from receiving the 2.50% coupon ($25 annual interest) paid to the bondholder, the principal is adjusted upwards by the inflation rate each year, and at maturity, the holder receives the inflated principal amount. $1,000 inflated by 1.50% annually equals: $1,000 x 1.015 x 1.015 x 1.015 = $1,046. (Note, while in reality the principal gets adjusted semi-annually, to simplify the calculation, we are adjusting the principal annually.)

A Registered Investment Adviser has a client with $100,000 in a 3% savings account. The RIA recommends leaving $20,000 in the account and placing $80,000 in an equity fund expected to yield 10% for the year. The client rejects the proposal. The opportunity cost of the decision is: A 0 B $5,600 C $7,000 D $10,000

B $5,600 The Registered Investment Adviser is recommending that $80,000 be moved from a savings account yielding 3% to an equity fund yielding 10%. The opportunity cost of not doing this is the 7% lower yield (10% - 3%) on the $80,000 that would be shifted = 7% x $80,000 = $5,600.

During a period when the yield curve is flat: A short term bond prices are more volatile than long term bond prices B long term bond prices are more volatile than short term bond prices C short term and long term bond prices are equally volatile D no relationship exists between short term and long term bond price changes

B long term bond prices are more volatile than short term bond prices

During a period when the yield curve is inverted: A short term bond prices are more volatile than long term bond prices B long term bond prices are more volatile than short term bond prices C short term and long term bond prices are equally volatile D no relationship exists between short term and long term bond price changes

B long term bond prices are more volatile than short term bond prices --Whether the yield curve is ascending (normal), flat or inverted, long term bond prices always move faster than short term bond prices, as interest rates change. This is due to the compounding effect on the bond's price that occurs, which increases with longer maturities.

A fully diversified portfolio eliminates: A market risk B non-systematic risk C both market and non-systematic risk D neither systematic nor non-systematic risk

B non-systematic risk

A Debt/Equity Ratio of 1 means that: A the company will be able to pay all of its debts in the upcoming year B shareholders and creditors have an equal stake in the company's assets C the company has not used any leverage in its capital base D the company's interest payments to bondholders equals the company's dividend payments to shareholders

B shareholders and creditors have an equal stake in the company's assets

A woman wins a $500,000 prize in the State lottery. She has the choice of taking $50,000 per year for each of the next ten years; or can take a lump-sum of $300,000 today. The difference in the amounts is explained by the: A inflation rate B time value of money C actions taken by the Federal Reserve regarding interest rates D impact of fiscal policy on economic output

B time value of money -This person can either take $300,000 today; or can choose to receive $50,000 per year, for each of the next 10 years ($500,000 total). The implicit interest rate that discounts the value of the 10-$50,000 payments to a current value of $300,000 is the internal rate of return (implicit rate of interest) of these payments and is about 10%. Simply put, the difference in the value of the payments is accounted for by the time value of money - in this case, money has a time value of 10% per year.

If the United States balance of payments goes from a surplus to a deficit position, the value of the U.S. dollar should: A appreciate B depreciate C fluctuate D stagnate

B-- depreciate

Regulatory risk for a municipal bond would be characterized by: A the Federal Reserve pursuing an "easy money" policy of lowering interest rates B Congress pursuing an economic stimulus policy of lowering tax rates C export quotas being placed on U.S. goods by foreign countries that are trading partners with the United States D the European Economic Union pursuing a policy of increasing the value of the Euro versus the value of the U.S. Dollar

B-Congress pursuing an economic stimulus policy of lowering tax rates. Regulatory risk (also called legislative risk) is usually the risk of a tax law change. For municipals, if tax rates are lowered, the relative attractiveness of buying a "tax-free" municipal bond is diminished, reducing the market value of outstanding municipal bonds compared to the value of taxable bonds.

"High Risk Investment = High Return Investment""Low Risk Investment = Low Return Investment" an example of?

correlation

When borrowing money, the interest rate charged measures the:

cost of money

A customer buys a TIPS at par with a 3½% coupon. Inflation stays at 4% over the life of the security. What is the total return on the investment? A 3½% B 4% C 7½% D This cannot be determined from the information presented

C 7½% The best answer is C. Treasury Inflation Protection Securities (TIPS) give a fixed coupon rate (3½% in this example), but they also adjust the principal value of the bond up each year for inflation (4% per year in this example). At maturity, the investor gets the inflated principal amount. The Total Return on this TIPS would be 3½% annual income + 4% annual gain = 7½%.

A portfolio of securities with a beta of 1 has produced an average annual return of 12%. Which investment should the portfolio manager NOT consider adding? A An investment with a 7.8% growth rate and a beta of .6 B An investment with a 15.4% growth rate and a beta of 1.2 C An investment with a 20% growth rate and a beta of 2 D An investment with a 26% growth rate and a beta of 2.1

C An investment with a 20% growth rate and a beta of 2 The portfolio has generated a 12% return without taking on extra risk (the portfolio beta of 1 is at the market risk level of 1). Any investment that yields less than 12% on a risk-adjusted basis would lower the overall portfolio performance. To risk-adjust the return of each investment offered, divide the investment return by that investment's beta. Any investment that yields less than the 12% portfolio return is a bad one for the portfolio. Choice A: 7.8% /.6 Beta = 13% risk adjusted returnChoice B: 15.4% /1.2 Beta = 12.833% risk adjusted returnChoice C: 20% /2 Beta = 10% risk adjusted returnChoice D: 26% /2.1 Beta = 12.38% risk adjusted return

Yield to maturity would NOT be appropriate as a measure of the return from investing in: A Treasury bonds B Corporate bonds C Common stock D Municipal bonds

C Common stock

Text:Duration would NOT be an appropriate measure for: A Treasury bonds B Corporate bonds C Corporate common stock D Corporate preferred stock

C Corporate common stock Duration measures the anticipated price movement of a fixed income security for a given change in market interest rate levels. Bonds and preferred stocks are fixed income securities. Common stock is not a fixed income security.

Which of the following are needed to calculate the Sharpe Ratio? I Risk measured by variability of return II Actual rate of return on an investment III Real Rate of Return IV Rate of return on an investment with zero risk A I and II B II and III C I, II and IV D I, II, III, IV

C I, II and IV

A customer has a term loan that is maturing in 3 years in the amount of $100,000. The customer has the cash now, and wants to know the best investment to make for the 3 years until the loan payment is due. The BEST recommendation is to buy: A Blue chip stocks B AA rated debentures with a 3 year maturity C Treasury notes maturing in 3 years D AA general obligation bonds maturing in 3 years

C Treasury notes maturing in 3 years Treasury securities have no credit risk, so this is the best choice. The customer knows he will get back the $100,000 in 3 years, plus will have earned interest every 6 months until maturity. A corporate debenture that is rated AA sounds good, but companies can get into business trouble quickly and the bonds could be downgraded in 3 years. AA general obligation bonds are safe (though not as safe as Treasuries), but their yield is lower, so they are not the best choice. Stocks prices can be volatile, so this is another bad choice.

If a company's leverage ratio is "1," this means that the company: A is able to pay off its current liabilities with its current assets B will be able to pay off its debt when it matures C has placed creditors and equity stakeholders on an equal footing D has a minimal chance of going bankrupt within the coming year

C has placed creditors and equity stakeholders on an equal footing

The "Efficient Market Theory" states that: A practitioners of fundamental analysis should realize superior investment returns as compared to technical analysts B practitioners of technical analysis should realize superior investment returns as compared to fundamental analysts C securities selection based on technical or fundamental factors is irrelevant since prices reflect all available information D securities selection based on both fundamental and technical analysis will result in superior returns

C securities selection based on technical or fundamental factors is irrelevant since prices reflect all available information`

What is the highest credit rating that can be assigned to a high-yield bond? A AAA B BBB C BB D B

C -BB

To counter a recession, the Federal Reserve would: A increase reserve requirements B increase the discount rate C buy securities in open market operations D sell bonds to the public

C-- buy securities in open market operations

A customer buys a new issue inflation-adjusted government bond with a 4% coupon at par. After the first year, the inflation rate as measured by the CPI has increased by 5%. After the second year, the inflation rate increases by 8%. For the third year of holding the security, the customer will receive: A interest of $40.00 B interest of $42.00 C interest of $45.36 D interest of $80.00

C--interest of $45.36 TIPS (Treasury Inflation Protection Securities) are issued with a fixed coupon that does not change. In Year 1, this bond will pay 4% of $1,000 par = $40. At the end of year 1, because inflation was 5%, the principal amount of the bond is adjusted to 1.05 x $1,000 = $1,050. In Year 2, the bond will pay 4% of $1,050 = $42 of interest. At the end of year 2, because inflation was 8%, the principal amount is adjusted to 1.08 x $1,050 = $1,134. In Year 3, the bond will pay 4% of $1,134 = $45.36 of interest

An investor buys a bond. At the end of the first year, the bond is worth $1,300. During the year, the investment paid $20 in interest and had a capital gain of $250. What is the Total Return? A 1.54% B 1.90% C 20.77% D 25.71%

D 25.71%

A customer buys a TIPS with a 3% coupon. The customer holds the investment for 5 years, during which the CPI increased by 3%, 4%, 4%, 4% and 5% respectively in years 1-5. What is the customer's Total Return over the 5 year holding period? A 3% B 4% C 7% D 38%

D 38% *** EYEBALLING CHOICES GIVES ANSWER DUE TO IT BEING HIGH***

A corporation has reported quarterly earnings of $3 per share. The corporation retained $3 of earnings at year end. The corporation's dividend payout ratio is: A 0% B 25% C 50% D 75%

D 75%

A 65-year old widow that is in a low tax bracket and that has a low risk tolerance wishes to make an investment that will provide income. Which is the BEST recommendation? A Growth mutual fund B Emerging markets mutual fund C Long term municipal bond fund D Bank certificates of deposit

D Bank certificates of deposit This elderly widow is in a low tax bracket and seeks income. Growth stocks and emerging markets stocks do not provide income; rather, they provide capital gains. Municipal bonds are not appropriate for a low tax bracket investor, since the bonds are exempt from Federal income tax, and the market interest rate is lower than that for taxable investments because of this. Municipal bonds are only suitable for high tax bracket investors, where the exemption from federal tax has real value. Thus, we are left with bank certificates of deposit as the only viable choice. They are low risk and will provide income with a higher "after-tax" return for a person in a low tax bracket than equivalent maturity municipal investments.

The Efficient Market Theory states that: I undervalued securities should exist II undervalued securities should not exist III overvalued securities should exist IV overvalued securities should not exist A I and III B I and IV C II and III D II and IV

D II and IV The "Efficient Market" Theory holds that prices of securities in the market fully reflect all publicly available information, so that undervalued or overvalued securities should not exist. Thus, securities selection based on any type of analytical method is irrelevant. In reality, most individuals believe that the market is only "partly" efficient in pricing securities - so that undervalued and overvalued securities will always exist. These could be identified by both fundamental and/or technical analysis.

A blue chip corporation is making a bond offering that is rated AAA. During the issue's first year of trading, what is the greatest potential risk that a bondholder assumes? A Inflation risk B Liquidity risk C Marketability risk D Interest rate risk

D Interest rate risk Because this is a bond offering that is rated AAA, it will be highly marketable. The bond will be easy to sell, so marketability risk is minimal. Liquidity risk is closely aligned with marketability risk. It is the risk that selling will incur high transaction costs, which is typical of illiquid investments. That is not the case with a AAA-rated bond. So we are left with either inflation risk or interest rate risk as the correct answer. Most corporate bond issues are 30-year bonds. If this is the bond's first year of trading, it probably has 29 years of life left. If market interest rates rise (which is typical in an expanding economy), long-term bonds are impacted more than short term bonds, and their price will fall dramatically. This is the greatest potential risk. The risk of inflation is also very real because it leads to higher interest rates, but this is generally a slower moving phenomenon than rising interest rate levels in an improving economy.

An investor buys a $100,000, 7% corporate bond maturing in 2043 for $70,000. The bond is callable starting in the year 2023. What is the most appropriate measure for calculating yield? A Total Return B Current Yield C Yield to Call D Yield to Maturity

D Yield to Maturity -This investor is paying $70,000 for a 7% bond with a face value of $100,000. Thus, the investor is paying 30% less than par for the bond. Because of the discount, these bonds are currently yielding 10% ($70 annual interest received / $700 purchase price per bond = 10%). This issuer would not call these bonds, since the issuer is only paying 7%; yet if the issuer were to sell new bonds in the current market, it would have to pay 10%. This bond is not likely to be called, so using the call date is not the appropriate time frame. Rather, this bond will probably remain outstanding until its maturity, and this is the time frame that should be used to compute the yield on the bond.

What is NOT a statistical measure? A Arithmetic average B Sharpe ratio C Correlation coefficient D Quick ratio

D- Quick Ratio The Quick Ratio is a measure of corporate solvency. It takes a corporation's current assets that can be quickly converted to cash (basically cash and accounts receivable) and divides them by that company's current liabilities. Arithmetic average (mean) is a statistic. The Sharpe ratio is the ratio of incremental return earned per unit of risk

The Federal Reserve might consider an easing of credit if all of the following decline EXCEPT: A real Gross Domestic Product B stock prices C Consumer Price Index D unemployment levels

D- unemployment levels

All of the following are revenue items found on an income statement EXCEPT: A sales of fixed assets B installment sales C interest income D reinvested dividends

D-- reinvested dividends

Which portfolio showed the LEAST volatility relative to its average annual return? EXPLAINED: Being too analytical can hurt you on this one. One would expect that the portfolio with the highest percentage of equities would also have the highest standard deviation, but that is not the case here! Standard deviation measures the variability of portfolio returns and Portfolio C has the lowest standard deviation (maybe it is packed with blue chip stocks that don't have as much price variation). By applying logic, you would assume that Portfolio A, consisting of 90% bonds, would have the lowest standard deviation, but it doesn't (maybe Portfolio B is packed with junk bonds which have greater volatility). This question is asking about standard deviation - all of the rest of the information presented is not relevant to the question being asked!

Go with lowest Std. Dev.

Which statements are TRUE when a bond sells at a discount? I The nominal yield is less than the yield to maturity II The nominal yield is more than the yield to maturity III The current yield is less than the yield to maturity IV The current yield is more than the yield to maturity

I and III

During periods when a normal yield curve exists, which of the following statements are TRUE? I Long term bond prices are less volatile than short term bond prices II Long term bond prices are more volatile than short term bond prices III Yields on long term maturities are greater than yields on short term maturities IV Yields on short term maturities are greater than yields on long term maturities

II and III

When the yield curve is inverted, which of the following statements are TRUE? I Short term rates are lower than long term rates II Short term rates are higher than long term rates III To maximize income, an investor should invest in short term maturities IV To maintain income, an investor should invest in long term maturities

II and III

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 8%. Which are TRUE statements about the outstanding 10% issue? I The current yield will be higher than the nominal yield II The current yield will be lower than the nominal yield III The dollar price of the bond will be at a premium to par IV The dollar price of the bond will be at a discount to par

II and III -The bond was issued with a coupon of 10%. Currently, the yield for a similar issue is 8%. Therefore, interest rates have dropped. When interest rates drop, yields on bonds already trading must also drop. What causes this is a rise in the dollar price of the issue - the bond now trades at a premium.

In a situation where the yield curve is sloping upward and to the right: I less funds are available to short term borrowers II greater funds are available to short term borrowers III there is a high demand for short term funds IV there is a high demand for long term funds

II and IV

Based solely upon fluctuations in foreign currency exchange rates, the net asset value per share, valued in U.S. dollars, of an "international" bond mutual fund, would increase if: I the value of the U.S. dollar increases II the value of the U.S. dollar decreases III interest rates increase in the United States IV interest rates increase in foreign countries

II and IV (The fund shares are valued, based on the value of the foreign currency in which the securities are denominated. When the net asset value is reported in the United States, it must be converted to its value in U.S. dollars. For example, assume that a bond has a market value of 1,000 Euros. Also assume that the dollar is valued at 2 Euros. Upon conversion, this bond is worth $500 dollars. If the dollar weakens to the point where it is valued at 1 Euro per dollar (the Euro is strengthening, therefore the dollar is weakening), then upon conversion, this bond would be worth $1,000 dollars. Conversely, if the dollar were to strengthen, then the conversion would result in a decrease in NAV per share.Interest rates increasing in foreign countries would cause those currencies to strengthen against the dollar, thus the dollar is weakening. This would cause the NAV to rise upon conversion into U.S. dollars. Interest rates increasing in the United States would cause the dollar to strengthen, resulting in a decrease in NAV upon conversion.)

The general strength of the market as a whole and stock groups within the market. For example, if takeovers are occurring in certain food stocks, it can be expected that interest will be raised in all food stock issues, which may rise in price.

market momentum