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37-21
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
framework for comparing assets and explain why asset prices and rates of return are inversely
related.
Test Bank: I
T o p i c : Calculating Investment Returns
53.
Bonds represent
54.
Debt contracts (also called instruments) issued by government and corporations are known as
55.
Which of the following is a difference between stocks and bonds?
37-22
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Remember
D i f f i c u l t y : 01 Easy
Learning Objective: 37-03 Identify and distinguish between the most common financial
investments: stocks, bonds, and mutual funds.
Test Bank: I
T o p i c : Some Popular Investments
56.
Which of the following is a difference between stocks and bonds?
57.
Which of the following is a difference between stocks and bonds?
58.
Les buys a bond for $5,000. Every year that he holds the bond, he will receive interest
payments of $250. The interest rate on the bond
37-23
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A.
is 2 percent.
B. is 5 percent.
C.
is 20 percent.
D.
cannot be determined.
59.
Augi buys a bond for $10,000 and receives interest payments of $400 every six months. The
interest rate on the bond is approximately
60.
Karen holds a $100 bond that pays $10 per year in interest. The minimum price Karen would
have to be offered before she would sell the bond
37-24
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 37-04 Relate how percentage rates of return provide a common
framework for comparing assets and explain why asset prices and rates of return are inversely
related.
Test Bank: I
T o p i c : Calculating Investment Returns
61.
Mark buys a bond for $8,000 and receives interest payments of $100 every three months.
The interest rate on the bond is approximately
62.
"Default" occurs when
63.
Which institution is least likely to default on a bond?
37-25
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C. U.S. federal government
D. large corporation
64.
The U.S. federal government is unlikely to default on its bond payments because
65.
Bond payments are generally more predictable than stocks because
66.
The largest mutual fund, as of April 2016, held approximately billion in assets under
management.
67.
The Standard & Poor's 500 Index measures prices of the 500
68.
Index funds are a portfolio of
37-27
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
investments: stocks, bonds, and mutual funds.
Test Bank: I
T o p i c : Some Popular Investments
69.
Index funds
70.
At the end of 2015, U.S. households and nonprofit organizations held approximately in
mutual funds.
71.
The estimated value of all financial assets held by U.S. households and nonprofit
organizations in 2015 was about
72.
Mutual funds may contain
73.
How do actively managed funds differ from passively managed funds?
74.
Investment returns
75.
Denny buys a rare coin for $200 and sells the coin one year later for $220. Denny's rate of
return is
76.
Kelly buys a share of stock for $20 that she sells a year later for $15. Kelly's rate of return is
37-30
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficulty : 02 Medium
Learning Objective: 37-04 Relate how percentage rates of return provide a common
framework for comparing assets and explain why asset prices and rates of return are inversely
related.
Test Bank: I
T o p i c : Calculating Investment Returns
77.
Katie buys a house for $200,000 and rents it for $1,000 per month. Katie's annual rate of
return
78.
George buys an antique car for $20,000 and sells it five years later for just over $24,000.
George's per-year rate of return is
79.
Thea buys a house for $250,000, rents it for two years for $1,000 per month, and sells it at
the end of those two years for $300,000. Thea's per-year rate of return is
80.
Lucian buys a house for $400,000, rents it for one year for $1,500 per month, and sells it at
the end of the year for $390,000. Lucian's rate of return
81.
Pigou buys a house for $500,000, rents it for $2,000 per month for four years, and then sells
it for $600,000. What is Pigou's per-year rate of return?
37-32
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficulty : 02 Medium
Learning Objective: 37-04 Relate how percentage rates of return provide a common
framework for comparing assets and explain why asset prices and rates of return are inversely
related.
Test Bank: I
T o p i c : Calculating Investment Returns
82.
An asset's price and rate of return
83.
Vilfredo is considering buying a house for $220,000 and renting it out for $2,000 per month.
If the price suddenly jumps to $250,000, Vilfredo's expected yearly rate of return will
84.
Maria is looking to buy one of two houses to rent out for additional income. She determines
that the first house, priced at $200,000, could rent for $1,500 per month. If the second house is
priced at $280,000, how much rent would Maria have to charge to get an equivalent yearly rate
of return?
85.
Pavel is considering buying a $10,000 bond with no expiration date that generates yearly
payments of $500. If the price of the bond were to fall to $9,000,
86.
The buying and selling process that leads profit-seeking investors to equalize average
expected rates of return from identical assets is known as
37-34
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D.
securitization.
87.
Arbitrage occurs when investors try to profit from situations where
88.
Arbitrage occurs when
89.
Suppose two corporate bonds with similar risk pay different rates of return. The process of
arbitrage should
90.
Arbitrage is the process by which investors simultaneously sell
91.
The process by which investors seek to profit by simultaneously selling an asset with a
lower rate of return and buying an otherwise identical asset with a higher rate of return is known
as
37-36
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
T o p i c : Arbitrage
92.
Meb owns stock in two similar, large, financially sound corporations. Company A
consistently earns rates of return of 12 percent per year, while company B regularly generates
rates of return of 8 percent per year. If Meb is attempting to arbitrage, he will
93.
For heavily traded assets like stocks and bonds, arbitrage
94.
Arbitrage causes an equalization of the when assets are identical or nearly identical.
37-37
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
D i f f i c u l t y : 01 Easy
Learning Objective: 37-05 Define and utilize the concept of arbitrage.
Test Bank: I
T o p i c : Arbitrage
95.
Suppose stock A sells for $30 per share and pays dividends of $1 per share per year. Stock B
sells for $40 per share and pays dividends of $2 per share per year. Through the process of
arbitrage, we would expect the price of
96.
Suppose stock A sells for $50 per share and pays dividends of $2 per share per year. Stock B
sells for $100 per share and pays dividends of $4 per share per year. Through the process of
arbitrage, we would expect the price of
97.
Arbitrage equalizes rates of return across similar investments because
37-38
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written consent of McGraw-Hill Education.
return.
D. investors will want to replace higher rate of return assets with those generating lower rates of
return.
98.
Investors diversify portfolios
99.
Another name for diversifiable risk is
100.
Another name for nondiversifiable risk is
101.
Portfolio diversification
102.
Diversifiable risk refers to risk
37-40
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
explain the difference between diversifiable and nondiversifiable risk.
Test Bank: I
T o p i c : Risk
103.
Brinley holds stock in large high-tech companies in his portfolio. The best way for Brinley
to diversify his risk would be to buy
104.
Portfolio diversification eliminates all of the from a portfolio.
105.
An investor with a diversified portfolio is generally less concerned about
