12. Investing in Stocks and Bonds
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1. Market risk considers the possibility that a firm may fail.
a. True
b. False
2. The returns you expect from securities are income and growth.
a. True
b. False
3. Capital gains are paid at specified times, e.g., quarterly or semiannually.
a. True
b. False
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4. Compound interest is a very important consideration when evaluating the return on an investment you plan to hold for a
long time.
a. True
b. False
5. A lower expected return means a higher risk will have to be accepted.
a. True
b. False
6. An investment is acceptable if the expected rate of return is greater than the required rate of return.
a. True
b. False
12. Investing in Stocks and Bonds
12. Investing in Stocks and Bonds
12. Investing in Stocks and Bonds
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12. Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales.
a. True
b. False
13. Low price/earnings ratios indicate high investor confidence.
a. True
b. False
14. Dividend reinvestment plans should be avoided because of their relatively high cost.
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a. True
b. False
15. The value of a stock at any time depends on its expected stream of future earnings.
a. True
b. False
16. The higher the net profit margin of a company, the more money the company earns.
a. True
b. False
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17. Bonds can earn income through interest payments and capital gains.
a. True
b. False
18. A callable bond allows the issuer to retire the security prior to maturity.
a. True
b. False
19. The callable feature of a bond protects the issuer when market interest rates are falling.
a. True
b. False
12. Investing in Stocks and Bonds
12. Investing in Stocks and Bonds
12. Investing in Stocks and Bonds
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c. Market risk
d. Interest rate risk
e. Purchasing power risk
25. Companies with a great deal of long-term debt are considered to have high _____ risk.
a. market
b. event
c. business
d. financial
e. liquidity
26. _____ risk results from the behavior of investors buying and selling securities that lead to swings in prices.
a. Business
b. Financial
c. Market
d. Purchasing power
e. Interest rate
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27. Changes in the general level of prices within an economy produce:
a. business risk.
b. financial risk.
c. market risk.
d. purchasing power risk.
e. liquidity risk.
28. An example of event risk is:
a. inflation.
b. a corporate takeover.
c. a newspaper article about the economy.
d. changing seasons.
e. capital growth.
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29. An investor receives a return from an investment due to:
a. recurring deposits.
b. capital gains on the sale of an investment.
c. asset allocation among different asset classes.
d. rebalancing by buying more equities.
e. diversification among or within asset classes.
30. An investment that earns interest on interest is said to be earning a:
a. discounted rate of return.
b. fully compounded rate of return.
c. consolidated rate of return.
d. risk-free rate of return.
e. tax-free rate of return.
31. Which of the following statements about risk is true?
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a. The higher the risk, the higher the expected return.
b. The higher the risk, the lower the return.
c. The lower the risk, the greater the maturity value of the investment.
d. The higher the risk, the lower the maturity value of the investment.
e. The higher the risk, the lower the risk-free rate.
32. What is the effect of an increase in the current price of an investment?
a. The approximate expected yield will increase.
b. The approximate expected yield will decrease.
c. The approximate expected yield will remain the same.
d. The average annual current income will increase.
e. The average annual current income will decrease.
33. Damien plans to buy a share at $120 and hold it for 5 years. During this period, he would receive average annual
dividends of $4 a share. He expects to receive $145 at the end of the 5-year period when he sells the share. What are the
keystrokes used to calculate the rate of return on the investment?
a. N = 5, PV = –120, PMT = 4, FV = 145
b. N = 5, PV = 120, PMT = 4, FV = –145
c. N = 5, PV = –145, PMT = –4, FV = 120
d. N = 4, PV = –120, PMT = 5, FV = 145
e. N = 4, PV = 145, PMT = 5, FV = –120
12. Investing in Stocks and Bonds
12. Investing in Stocks and Bonds
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36. The Smith family owns 200 shares of Elta stock. The company declared a 5% stock dividend. The Smiths now own:
a. 200 shares.
b. 205 shares.
c. 210 shares.
d. 420 shares.
e. 410 shares.
37. Cash dividends on common stock are most often paid:
a. weekly.
b. monthly.
c. quarterly.
d. semiannually.
e. annually.