SIE Unit 6 Test

Which types of investments are most susceptible to interest rate risks? A) Common stocks B) Money market instruments C) Bonds D) Options

Bonds LO 6.b

When interest rates are falling, which bonds are most likely to expose holders to call risk? A) All bonds, regardless of the coupon rate B) Callable bonds with lower coupons C) All bonds, regardless of whether or not they are callable D) Callable bonds with higher coupons

Callable bonds with higher coupons LO 6.b

Which of the following would be most susceptible to currency risk? A) Common stock of a small cap company in the United States B) Municipal bonds C) Treasury bonds D) Common stock of a large, well established company in England

Common stock of a large, well established company in England LO 6.d

Regarding different types of risk, which of the following is true? A) Enactment of, or changes in, laws represent political risk. B) Changes in regulations represent potential legislative risk. C) Changes in regulations represent political risk. D) Enactment of, or changes in laws, represent potential legislative risk.

Enactment of, or changes in laws, represent potential legislative risk. LO 6.d

Prepayment risk is associated with which type of securities? A) Treasury bonds B) GNMA C) Corporate bonds D) Municipal bonds

GNMA LO 6.d

Which of the following are considered systematic risks—those that would impact all businesses? Market risk Inflation risk Regulatory risk Business risk A) II and III B) I and II C) III and IV D) I and IV

I and II LO 6.a

Which of the following risks is the risk that congress could change the laws and negatively impact a particular company or industry? A) Political risk B) Sovereign risk C) Legislative risk D) Regulatory risk

Legislative risk LO 6.d

An investor chooses to have a portfolio made up of domestically listed U.S. securities only. In so doing, this investor is primarily avoiding which of the following two risks? A) Inflation and interest rate B) Market and purchasing power C) Call and reinvestment D) Political and currency

Political and currency LO 6.d

An investor chooses to have a portfolio made up of domestically listed U.S. securities only. In so doing, this investor is primarily avoiding which of the following two risks? A) Political and currency B) Inflation and interest rate C) Market and purchasing power D) Call and reinvestment

Political and currency LO 6.d

Regarding investment risks, which of the following is true? A) Higher yields should be expected when assuming less risk. B) Lower yields should be expected when assuming more risk. C) Safer investments tend to offer lower yields. D) Safer investments come with higher yields.

Safer investments tend to offer lower yields. LO 6.a

Regarding investment risks, which of the following is true? A) Lower yields should be expected when assuming more risk. B) Safer investments tend to offer lower yields. C) Higher yields should be expected when assuming less risk. D) Safer investments come with higher yields.

Safer investments tend to offer lower yields. LO 6.a

Which of the following statements best describes financial risk? A) The risk that an issuer will be unable to meet interest and principal payments on debt obligations B) A risk generally caused by poor management and operating decisions C) The risk that when interest rates decline, it is difficult to invest proceeds from redemptions D) The risk that a security with a call feature might be called before maturity

The risk that an issuer will be unable to meet interest and principal payments on debt obligations LO 6.d

Which of the following statements best describes financial risk? A) The risk that when interest rates decline, it is difficult to invest proceeds from redemptions B) The risk that an issuer will be unable to meet interest and principal payments on debt obligations C) The risk that a security with a call feature might be called before maturity D) A risk generally caused by poor management and operating decisions

The risk that an issuer will be unable to meet interest and principal payments on debt obligations LO 6.d

A company is about to introduce a new product. While confident in the product's appeal and market, it is still an unknown factor until sales results are viewed later. Investors holding stock in the company are at this time specifically exposed to A) call risk. B) reinvestment risk. C) financial risk. D) business risk.

business risk. LO 6.d

Some bonds have a feature that prohibits them from being called by the issuer before a certain date. This is known as A) capital risk. B) financial risk. C) interest-rate exposure. D) call protection.

call protection. LO 6.b

Interest-rate risk A) occurs when interest rates rise, pushing bond prices higher. B) cannot be reduced by diversification. C) is often called purchasing power risk. D) occurs when interest rates fall, pushing bond prices lower.

cannot be reduced by diversification. LO 6.b

The risk when investing, where one has the potential to lose all or part of the investment due to circumstances that are unrelated to the issuer's financial strength or well-being, is known as A) financial risk. B) call risk. C) business risk. D) capital risk.

capital risk. LO 6.d

Examples of investments in assets that would be considered illiquid would be all of the following except A) classic automobiles. B) common stock. C) real estate. D) works of art.

common stock. LO 6.d

When investing in overseas markets in foreign securities, investors should be aware of and understand A) market risk. B) reinvestment risk. C) currency risk. D) business risk.

currency risk. LO 6.d

For investors, changes made to the tax code by the IRS are known as a form of A) political risk. B) financial risk. C) legislative risk. D) regulatory risk.

legislative risk LO 6.d

A change to tax rates on dividends would be an example of A) currency risk. B) legislative risk. C) purchasing power risk. D) liquidity risk.

legislative risk. LO 6.d

If the stock market were to fall substantially in a single day, a portfolio consisting primarily of common and preferred stock would be most subject to A) reinvestment risk. B) market risk. C) regulatory risk. D) inflation risk.

market risk. LO 6.b

Risks that are unique to a specific industry, business type, or investment type are known as A) security risks. B) systematic risks. C) stock market risk. D) nonsystematic risks.

nonsystematic risks. LO 6.c

For investors, instability within an emerging economy is generally recognized as A) regulatory risk. B) business risk. C) political risk. D) currency risk.

political risk. LO 6.d

For investors, instability within an emerging economy is generally recognized as A) regulatory risk. B) currency risk. C) political risk. D) business risk.

political risk. LO 6.d

All of the following are nonsystematic risks except A) purchasing power risk. B) call risk. C) capital risk. D) business risk.

purchasing power risk. LO 6.b

The Federal Reserve Bank is raising interest rates, this will A) make bonds trading in the open market more desirable. B) push bond prices lower in the open market. C) have no impact on bond prices in the open market. D) push bond prices higher in the open market.

push bond prices lower in the open market. LO 6.b

An investor holds shares of a manufacturing company where disposal of the by-products produced during the manufacturing process is necessary. The Environmental Protection Agency (EPA) updates the rules applicable to disposing of the product. For the investor, these changes present a form of A) financial risk. B) political risk. C) liquidity risk. D) regulatory risk.

regulatory risk. LO 6.d

An investor has a bond maturing during a time when interest rates are falling. It is likely that the investor, wanting to keep the funds invested, would be most concerned with A) business risk. B) purchasing power risk. C) reinvestment risk. D) inflation risk.

reinvestment risk. LO 6.b

Sovereign risk is the risk A) of losing all one's investment due to a change in tax laws. B) that a country will default on its commercial debt obligations. C) that interest rates decline in several countries simultaneously. D) that a dollar earned today will not be able to purchase the same goods or services it can now in the future.

that a country will default on its commercial debt obligations. LO 6.d