Unit 11

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. this is an example of a(n) A. inverted yield curve B. postitive yield curve C. normal yield curve D. algorithmic yield curve

A. An inverted, or negative, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer. A positive, or normal, yield curve results when the yields increase as maturities do.

A publicly traded corporation keeps its books on a calendar year basis. An investor wanting the most up-to-date financial information in last August would view the companies A. June 30 Form 10-Q B. June 30 Form 8-K C. December 31 Form 10-K D. July 31 Form 10-Q

A. Form 10-Q is the quarterly financial information document filed with the SEC. Because this is a calendar year company, 10-Q's are prepared as of March 31, June 30, and September 30. The form 10-K is prepared as of December 31 in lieu of another form 10-Q. For 8-K is event driven, not a routine financial report.

As current interest rates go up, the market price of existing corporate bonds bearing lower interest rates will: A. decrease B. Change in unpredictable ways C. stay the same D. increase

A. There is an inverse relationship between interest rates and bond prices. This means that as current interest rates go up, the market price of existing bonds will go down.

A corporation's cash flow will increase as a result A. paying dividends to preferred stockholders B. collecting on past due receivables C. paying overdue bills D. increasing inventory on hand

B. Cash flow increases when more money comes in than goes out. When receivables are collected, the company receives money. When dividends or bills are paid, someone else receives money. When we buy more inventory, we use cash to do so.

The sum of a company ys profits, after dividend payments, since the company's inception is called I. accumulated earnings II. Cash flow III. earned surplus IV. retained earnings A. III and IV B. II, III and IV C. I, III, and IV D. I and II

C. Although the most common term to describe this important part of a company's net worth is retained earnings, any of them may be used on the exam with the same meaning.

XYZ Corporation issues 1 million shares of common stock at a price of $6 per share. As a result of this, all of the following will be true EXCEPT A. net worth will increase by $6 million B. working capital will increase by $6 million C. net income will increase by $6 million D. current assets will increase by $6 million

C. The issuance of common stock brings cash into the company without any offsetting liability. Therefore, current assets, working capital and ent worth will increase by the amount fo the securities sold. Income is not generated by issuing stock; the company needs sales or revenues for that.

As current interest rates go up, the market price of existing corporate bonds bearing lower interest rates will A. increase B. stay the same C. decrease D. change in unpredictable ways

C. There is an inverse relationship between interest rates and bond prices. This means that as current interest rates go up, the market price of existing bonds will go down.

Which of the following industries' performance is least likely to track the business cycle? A. Automobiles B. Financials C. Consumer durables D. Pharmaceuticals

D. All except pharmaceuticals are examples of cyclical industries; the drug industry is defensive.

What is the balance sheet equation A. Assets = Liabilities - shareholders' equity B. Assets = net worth C. Assets = shareholders' equity - liabilities D. Assets = liabilities + shareholders' equity

D. Total assets equal total liabilities plus total shareholders' equity

True or False: A depression is defined as a decrease in the GDP for 6 or more consecutive months.

F. A depression is a decrease in the GDP for at least six consecutive quarters.

True or False: High consumer debt is characteristic of a downturn in the business cycle.

T. High consumer debt is characteristic of a downturn in the business cycle.

True or False: The CPI is a measurement of inflation.

T. The CPI is a measurement of inflation.

The contraction phase of the business cycle is least likely accompanied by decreasing A. consumer spending B. economic output C. inflation pressure D. unemployment

D. An economic contraction is like to feature increasing unemployment, along with decreasing consumer spending, declining economic output, and decreasing inflation pressure.

The conference board has release information indicating an increase in the Help Wanted Index. Most analysts would take this as a sign of A. An impending recession B. Likely wage inflation in the future C. an increase in manufacturing inventories. D. a rising trade deficit

B. An increase in the Help Wanted Index signifies that employers are hiring - business is good. Competition for qualified workers will usually result in paying higher wages and athletes will translate to higher prices for goes and services(inflation).

If the value of the U.S. dollar increases against other currencies, which of the following are TRUE? I. U.S. exports are more competitive in foreign countries. II. U.S. exports are less competitive in foreign countries III. Foreign imports into the U.S. are more competitive in the U.S. markets IV. Foreign imports into the U.S. are less competitive in the U.S. markets A. II and IV B. II and III C. I and III D. I and IV

B. I the value of the U.S. dollar increases against other currencies, then U.S. exports cost more for foreign markets to purchase. This also makes foreign imports less expensive for U.S. consumers

final approval of the annual operating b budget for the United States is given by the: A. President B. Congress C. Cabinet D. Conference of Governors

B. The United States Congress is responsible for voting approval of the budget submitted by the President.

Potential litigation for patent infringement would appear on a corporation's A. balance sheet as deferred asset B. footnotes C. income statement as an expense D. statement of potential litigation

B. The footnotes to the financial segments carry information such as potential legal actions, accounting methods use (e.g., FIFO or LIFO), and off-book debt.

As a result of corporate transactions, a company's assets remain the same the same and its equity decreases. Which of the following statements is TRUE? A. Prepaid expenses decrease B. Total liabilities increase C. accrued expenses decrease D. Net worth increases.

B. The formula for the balance sheet is as follows: assets = liabilities + shareholders' equity. If assets stay the same and equity (net worth) decreases, liabilities must increase. Prepaid expenses are assets; accused expenses are liabilities.

The difference between current assets and current liabilities is called A. net worth B. working capital C. cash flow D. quick assets

B. Working capital (or net working capital) is, by definition, the difference between current assets and current liabilities.

Core inflation is best described as an inflation rate A. for producers' raw materials B. the central bank views as acceptable C. that excludes certain volatile goods prices D. that represents a market basket of consumer items

C. core inflation is measured using a price index that excludes food and energy prices.

All of the following actions will increase the deficit in the U.S. balance of payments EXCEPT: A. investments by U.S. firms abroad B. Americans buying Japanese cars. C. U.S. foreign aid D. purchase by foreigners of U.S. securities

D. A debit in the U.S. balance of payments occurs when the country pays out more abroad than it takes in. This occurs when the U.S. imports more than it exports, invests money abroad, or sends money to foreign countries in the form of foreign aid.

An analyst attempting to determine the extent to which financial leverage is being employed by a company would examine the company's A. book value per share B. working capital C. acid-test ratio D. debt-to-equity ratio

D. Financial leverage is the use of debt capital. The best way to see the extent to which that exists is through the debt-to-equity ratio.

A company has been experiencing increased earnings but has kept its dividend payments constant. As a result solely of this, a company's balance sheet would reflect A. decreased net working capital B. decreased net worth C. decreased retained earnings D. increased shareholders' equity

D. If earning increase, retained earnings also increase. If the increased retained earnings are not paid out as dividends, shareholders' equity increases.

Which of the following is NOT affected by the issuance of a bond? A. Assets B. Total liabilities C. Working capital D. Shareholders' equity

D. On the issuance of a bond, cash is received (thus increasing current assets) are long-term debt increases (increasing total liabilities). Because there is no corresponding increase in current liabilities, working capital will increase; it would have no effect on shareholders' equity.

The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next 2 months. Under such circumstances, which of the following portfolio adjustments would be most suitable for the firms's customers who actively invest in common stock? A. cyclical stocks. B. corporate bonds C. aggressive growth stocks D. defensive stocks.

D. The concept of sector rotation involves moving assets from those sectors that are close to their peak and moving into those who will benefit from the next move in the business cycled. Defensive stocks such as those in the food, pharmaceuticals, and energy industries would most likely be suitable for investors who believe the cycle is near its peak. Defensive stocks are least likely to be affected by a reversal in the business cycle.

Which of the following securities are the most interest-rate sensitive? I. Utility stocks II. Growth stocks III. preferred stocks IV. common stock A. I and II B. II and IV C. III and IV D. I and III

D. Utility and preferred stocks are the most interest-rate sensitive. Utility stocks are interest-rate sensitive because they are highly leveraged. Preferred stocks are interest-rate sensitive because they have a set dividend and fluctuate in prices like bonds when interest rates change.

Among the effects of a country devaluating its currency is that there will probably be: I. a credit to that nation's trade account balance. II. a debit to that nation's trade account balance III. an increase in that nation's exports IV. an increase in that nations's imports A. II and III B. I and IV C. II and IV D. I and III

D. When currency is devalued by a country, it means that foreigners will find their money has more buying power in that country. Therefore, it would be expected that foreigners would by more goods produced in that country causing an increase in exports. Those exports result in a credit to the country's trade account balance.

Which of the following statements best describes what will happen when the value of the American. dollar rises in relationship to foreign currencies? A. Foreign goods and service will become more expensive for Americans. B. The risk of stagflation will increase. C. Shares of foreign stock will be worth more in terms of American dollars. D. Foreign goods and services will become less expensive for Americans.

D. When the value of the dollar rises, it will buy more foreign money, making foreign goods and services less expensive for Americans. Because foreign securities are valued in foreign currencies, shares of foreign stock will be worth fewer American dollars when the value of the dollar increases.

True or False: Monetarists believe that the government should take an active role in managing the economy through fiscal policy.

F. Monetarists prefer less government intervention. Keynesian economist believe that the federal government should manage inflation through taxation and spending.

True or False: Rising inventories are characteristic of an economic expansion.

F. Rising inventories are characteristic of a downturn in the business cycle. Inventories accumulate when consumers buy less.