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1) If a bank pays 2 percent compounded daily, the true rate of interest is greater than 2 percent. 2) Distributions from a closed-end investment are subject to federal income taxation. Answer: T 3) A call feature is an option […]

1) The money supply, defined as M1, includes currency, coins, and checking accounts. 2) Holding period returns for greater than a year do not give an accurate measure of the true rate of return. Answer: T 3) The per share […]

1) An increase in retained earnings will increase the debt to equity ratio. 2) If a stock meets a resistance level and penetrates that level, the implication is avoid the stock. Answer: F 3) The future value of an ordinary […]

1) If the firm’s current ratio exceeds 1:1 and the firm retires an account payable, the quick ratio increases. 2) The dividend-growth valuation model depends on dividends and the required rate of return. Answer: T 3) Compounding refers to the […]

1) The future value of an annuity of $100 at 6 percent for ten years exceeds $1,000. 2) Securities must be sold before capital gains taxation applies. Answer: T 3) If a $1,000 convertible bond may be converted into 25 […]

1) Portfolio risk is the summation of business and financial risk. 2) The most the investor who sells a naked stock index option can lose is the cost of the option. Answer: F 3) Hedge funds are sold primarily to […]

1) Ratios may be used in both timeseries and cross section types of analysis. 2) The term and duration of a bond are equal for zero coupon bonds. Answer: F 3) Convertible preferred stock may be converted into debt. Answer: […]

1) An informed investor can expect to consistently outperform the market. 2) Matching a bond’s duration with the time the funds are needed reduces reinvestment risk. Answer: T 3) A publicly held bond has a trustee who enforces the terms […]

1) According to put-call parity, if a stock is overvalued (overpriced), the investor should sell the stock short, sell the put, buy the call, and buy the bond. 2) Unsystematic risk refers to factors that are unique to the specific […]

1) If an investor believes that financial markets are inefficient, that argues for the individual to pursue a more active portfolio strategy. 2) If a stock increased from $25 to $50 in five years, the annual rate of return was […]

1) Build American bonds are not exempt from federal income taxation. 2) Convertible preferred stock is usually less risky to investors than the firm’s convertible bonds. Answer: F 3) A shelf-registration involves the selling of new securities without having them […]

1) The structure of yields generally suggests that longterm bonds have greater yields. 2) Interest earned and received appears on the individual’s balance sheet. Answer: F 3) If the price of common stock falls, the value of a convertible preferred […]

1) The numerical value of beta for the market equals 1. 2) If a firm’s inventory turnover is 4 and days sales outstanding (average collection period) is 60, then it takes about five months for newly acquired inventory to generate […]

1) Bond averages that are expressed in percentages are not comparable to the S&P 500. 2) The price of a call option is often more volatile than the price of the underlying stock. Answer: T 3) Yields on municipal bonds […]

1) The only costs of investing in a mutual fund are the commissions to buy and sell the shares. 2) Because of arbitrage, an option should not sell for less than its intrinsic value. Answer: T 3) According to the […]

1) A portfolio consisting of securities whose returns are highly correlated is not truly diversified. 2) The interest earned on federal government’s debt is exempt from state income taxation. Answer: T 3) If a bond sells for a premium, the […]

1) The CBOE is a secondary market for put and call options. 2) Since ETFs mimic an index, they do not buy individual shares of stock. Answer: F 3) Programmed trading (index arbitrage) transfers changes in the futures markets to […]

1) An increase in stock prices is a lagging indicator of economic activity. 2) The required rate of return includes the riskfree rate and a risk premium. Answer: T 3) An exit fee (e.g., 3 percent) has the same impact […]

1) ADRs pay dividends in foreign currencies. 2) If interest rates decline, the expected life of a Ginnie Mae bond is reduced. Answer: T 3) The smaller a bond’s coupon implies a longer duration. Answer: T 4) Asset allocation is […]

1) Buying a futures contract is a long position. 2) If a $1,000 bond with a 7 percent coupon were to sell for $978, the current interest rate exceeds 7 percent. Answer: T 3) In a well-diversified portfolio, the risk […]

1) The New York Stock Exchange is an example of a secondary market. 2) The cost of an underwriting (to the firm issuing the securities) is the difference between the price of the public and the proceeds received by the […]

1) The anticipated return and the realized return often differ. 2) A timesinterestearned of 0.9 means that interest will not be paid. Answer: F 3) If investors expect interest rates to decline, they should buy bonds. Answer: T 4) The […]

1) The intrinsic value of an option to buy stock (i.e., a call option) is the difference between the price of the stock and the per share exercise price of the option. 2) If speculators anticipate interest rates will rise, […]

1) As interest rates increase, the probability that a convertible bond will be called declines. 2) Acquiring shares in no load funds is one means to avoid 12b-1 fees. Answer: F 3) The larger the rate of interest, the smaller […]

1) The federal government cannot issue debt that matures in less than five years. 2) Dollarcost averaging is achieved by periodic, equal dollar investments. Answer: T 3) Evidence supporting technical analysis is the lack of serial correlation between stock prices. […]

1) The present value of an annuity increases as the number of years increases. 2) The expected return depends on future dividends and future price appreciation. Answer: T 3) An inventory turnover of 3.0 suggests that inventory is sold every […]

1) The beta of a portfolio is a weighted average of each asset’s beta coefficient. 2) Call options, unlike warrants, may be written by individuals. Answer: T 3) If a bond sells for a discount, the yield to maturity exceeds […]

1) If a beta coefficient is 1.7, that implies the return on the stock tends to be less volatile than the return on the market. 2) The profits (gains) on option trading are exempt from federal income taxation. Answer: F […]

1) The S&P 500 stock index may be an inappropriate benchmark for a small-cap fund. 2) Under current law, American corporations may not issue bearer bonds with coupons attached. Answer: T 3) Coverage ratios may be used to measure the […]

1) If a firm repurchases bonds at a discount, the difference between the principal amount and the purchase price produces taxable income. 2) A portfolio manager with a position in many stocks may hedge the portfolio by purchasing a stock […]

1) Firms with too much debt are undercapitalized. 2) If a mutual fund specializes in the securities of one sector of the economy, unsystematic risk may not be reduced. Answer: T 3) The potential savings from a 401(k) plan increases […]

1) The intrinsic value of a put is the price of the stock minus the put’s strike price. 2) The market price of preferred stock moves directly with changes in interest rates. Answer: F 3) The shares of noload mutual […]

1) Averaging down will prove to be profitable only if the price of the stock subsequently rises. 2) The tendency for securities prices to overreact may create an anomaly that can lead to superior returns. Answer: T 3) The amount […]

1) Convertible bonds are often subordinated to the firm’s other debt. 2) Dividends are the primary source of returns from an investment in a mutual fund. Answer: F 3) If the price of an option to buy stock were to […]

1) High portfolio turnover is associated with high tax efficiency. 2) The return on assets employs operating income instead of net income. Answer: F 3) A loading fee charged by a mutual fund does not apply to a closed-end investment […]

1) An increase in the riskfree rate will tend to decrease stock prices. 2) The payout ratio is dividends divided by earnings. Answer: T 3) Selling a covered call option is comparable to selling a stock short. Answer: F 4) […]

1) A series of equal payments is called an annuity. 2) Beta coefficients may be computed for investment companies and used to compute riskadjusted rates of return. Answer: T 3) The Dow Jones industrial and utility averages include a relatively […]

1) The shares of a mutual often sell for discount from net asset value. 2) A conservative investor will prefer a bond with a smaller duration even though it may have a longer term to maturity. Answer: T 3) If […]

1) If a cumulative preferred stock pays a dividend, it is said to be in arrears. 2) A call penalty protects the firm from early retirement of the bond. Answer: F 3) Municipal bonds are considered to be safe investments […]

1) Bonds with comparable ratings but different terms to maturity tend to have different yields. 2) If an investor expects the stock market to rise, that individual enters into a short position in stock index futures. Answer: F 3) An […]

1) A short position is premised on securities prices rising. 2) If the ratio of debt to equity increases, the proportion of assets financed by debt is increased. Answer: T 3) The Wilshire stock index is more broad based than […]

1) Convertible bonds tend to sell for a premium over their value as stock. 2) A unit trust is a passive investment that holds a fixed portfolio of securities such as federal government bonds. Answer: T 3) During a rising […]