978-1259723223 Test Bank TBChap037 Part 2

37–21

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?

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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

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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

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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?

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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

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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

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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?

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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

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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

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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.

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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

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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

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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