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True / False
1. The issuer of a bond is a lender.
a.
True
b.
False
2. When an investor buys shares of stock, those stocks must be held for a specified period of time before they can be sold.
a.
True
b.
False
3. Unlike the New York Stock Exchange, NASDAQ is an electronic stock market with trades executed through a
sophisticated computer and telecommunications network.
a.
True
b.
False
4. The three major components of a bond are the bond price, maturity date, and coupon rate.
a.
True
b.
False
5. Another term for a stockbroker is an account representative.
a.
True
b.
False
6. The Wilshire 5000 stock index is made up of the stocks of 5,000 of the largest U.S. companies.
a.
True
b.
False
7. The longer you hold stocks in the stock market, the more likely you will earn a positive return, ceteris paribus.
a.
True
b.
False
8. A stock with a price-earnings ratio of 11.2 means that the stock is selling for a closing share price that is 11.2 times its
latest available net earnings per share.
a.
True
b.
False
9. If the stock market quote in the newspaper reads 752 in the column headed “Vol 00s”, it means that 752 shares of this
stock were traded on this particular day.
a.
True
b.
False
10. A low price-earnings ratio usually indicates that people believe that this corporation will have lower than average
growth in earnings.
a.
True
b.
False
11. A stock is purchased either for the expected gain in the price of the stock, for the dividends that the stock may pay, or
both.
a.
True
b.
False
12. Bonds that are rated in the D category are of higher quality than bonds that are rated in the A category.
a.
True
b.
False
13. If you are buying a bond that is newly issued by the corporation, you are buying it in the primary market.
a.
True
b.
False
14. If the bid value of a Treasury bond is listed as “112:16”, it means that the buyer is willing to pay $1,125 for the bond.
a.
True
b.
False
15. Applied to any investment, the phrase “there’s no such thing as a free lunch” means that higher returns come with
lower risks, and lower returns come with higher risks.
a.
True
b.
False
16. Treasury bonds are so safe (risk-free) that they often pay relatively low returns.
a.
True
b.
False
17. A futures contract is a contract in which the seller agrees to provide a given good to the buyer on a predetermined
future date at an agreed-upon price.
a.
True
b.
False
18. Another term for stocks is equity.
a.
True
b.
False
19. The term after the bell means after the closing of the stock market.
a.
True
b.
False
20. The interest paid on corporate bonds is not subject to federal taxes.
a.
True
b.
False
21. A bear market is one in which prices are expected to rise.
a.
True
b.
False
22. A private equity firm is a group of investors that buys up the publicly traded stock of a large corporation and then
takes the corporation private.
a.
True
b.
False
23. Those who think that a popular investment is necessarily a good investment often find themselves earning low returns.
a.
True
b.
False
24. The typical face value of a corporate bond is $1,000.
a.
True
b.
False
Multiple Choice
25. Which of the following statements is true?
a.
A person who buys a bond always pays the face value for the bond.
b.
If a corporation issues a bond and Dennis buys it, Dennis becomes one of the owners of the corporation.
c.
A stockholder of Firm X is one of the owners of Firm X.
d.
The owner of the bond receives periodic payments equal to its coupon rate times the price he paid for the
bond.
26. An IOU that promises to pay a certain amount at maturity, and also to pay periodic fixed amounts until that date, is
called a(n)
a.
stock.
b.
equity.
c.
bond.
d.
futures contract.
27. The major components of a bond include all of the following except its
a.
maturity date.
b.
face value.
c.
price.
d.
coupon rate.
28. The face value of a bond is
a.
the dollar amount that a person would receive if he or she were to sell the bond.
b.
the dollar amount that a person would receive if he or she were to buy the bond.
c.
the total value of payments that will be made over the course of the bond's life.
d.
the dollar amount of the bond's final payment at maturity.
29. A bond is
a.
a claim on the assets of a corporation such that the purchaser has an ownership right in the corporation.
b.
anything of value to which the firm has a legal claim.
c.
a means of assuring that the business firm will pay its debts or fulfill other legal obligations.
d.
a promise to pay for the use of someone else's money.
30. When a person buys a bond of the XYZ Corporation, he or she can expect to
a.
pay the corporation a certain amount of money each quarter of the year.
b.
receive the face value of the bond each year and the face value of the bond when the bond matures.
c.
receive the coupon rate times the face value of the bond each year and the face value of the bond when the
bond matures.
d.
receive the face value of the bond each year in perpetuity.
Exhibit 38-1
Bond
Face
Value
of Bond
Price of
the Bond
Annual
Coupon
Payment
A
$1,000
$800
$60
B
$1,000
$950
$150
C
$1,000
$1,100
$40
D
$1,000
$1,100
$70
E
$1,000
$1,000
$50
31. Refer to Exhibit 38-1. The coupon rate for bond A is
a.
6.0 percent.
b.
10.0 percent.
c.
7.5 percent.
d.
0.075 percent.
32. Refer to Exhibit 38-1. The yield on bond A is approximately
a.
7.5 percent.
b.
0.06 percent.
c.
6.0 percent.
d.
0.075 percent.
33. Refer to Exhibit 38-1. The yield on bond B is approximately
a.
9.5 percent.
b.
15.8 percent.
c.
0.15 percent.
d.
17 percent.
34. Refer to Exhibit 38-1. The yield on bond C is approximately
a.
11.0 percent.
b.
4.8 percent.
c.
3.6 percent.
d.
100 percent.
35. Refer to Exhibit 38-1. The coupon rate for bond B is
a.
0.09 percent.
b.
16.7 percent.
c.
9.5 percent.
d.
11 percent.
36. Refer to Exhibit 38-1. The coupon rate for bond C is
a.
0.25 percent.
b.
11 percent.
c.
3.6 percent.
d.
100 percent.
37. Refer to Exhibit 38-1. The coupon rate for bond D is
a.
11 percent.
b.
6.4 percent.
c.
3 percent.
d.
0.07 percent.
38. Refer to Exhibit 38-1. The coupon rate for bond E is
a.
37.5 percent.
b.
0.38 percent.
c.
0.45 percent.
d.
9.0 percent.
e.
none of the above
39. Refer to Exhibit 38-1. The yield on bond D is approximately
a.
11 percent.
b.
3 percent.
c.
6.4 percent.
d.
0.064 percent
40. Refer to Exhibit 38-1. The yield on bond E is approximately
a.
37.5 percent.
b.
0.38 percent.
c.
0.45 percent.
d.
5.0 percent.
41. Refer to Exhibit 38-1. For which bond is the yield and the coupon rate the same?
a.
Bond A
b.
Bond B
c.
Bond C
d.
Bond D
e.
Bond E
42. The coupon rate is equal to the annual coupon payment
a.
divided by the face value of the bond.
b.
divided by the price paid for the bond.
c.
multiplied by the price paid for the bond.
d.
divided by the current market value of the bond.
43. When you buy a corporate bond, you are
a.
borrowing funds from the corporation.
b.
lending funds to the corporation.
c.
selling an ownership right in the corporation.
d.
acquiring an ownership right in the corporation.
e.
b and d
44. When you purchase a share of stock, you are
a.
borrowing funds from the corporation.
b.
lending funds to the corporation.
c.
selling an ownership right in the corporation.
d.
acquiring an ownership right in the corporation.
e.
b and d
45. A bond is
a.
a claim on the assets of the corporation that gives the purchaser an ownership right in the corporation.
b.
the share of profits distributed to bondholders.
c.
a promise to pay for the use of someone else's money.
d.
a promise of ownership of the government.
e.
c and d
46. A share of stock is
a.
a claim on the assets of the corporation that gives the purchaser an ownership right in the corporation.
b.
the share of profits distributed to stockholders.
c.
a promise to pay for the use of someone else's money.
d.
a promise to loan money to someone.
e.
a and b
47. The coupon rate is the percentage of
a.
profits distributed to bondholders.
b.
profits distributed to stockholders.
c.
the face value of the bond that is paid out regularly to the bondholder.
d.
the assets of the corporation that is paid out regularly to each stockholder.
48. Jessica paid $2,300 for a bond with a face value of $2,000. She will be paid $300 annually as long as she holds on to
the bond, until the bond’s maturity date. The coupon rate of the bond is
a.
15.0 percent.
b.
7.5 percent.
c.
13.0 percent.
d.
80.0 percent.
49. A person buys a bond with a face value of $10,000 for $9,325. Each year until the maturity date the bond buyer
receives a coupon payment of
$650 from the issuer of the bond. The coupon rate on the bond is
a.
9.11 percent.
b.
6.5 percent.
c.
7.0 percent.
d.
6.75 percent.
50. A bond purchaser bought a bond from which she receives $800 a year from the issuer. If the face value of the bond is
__________ then the coupon rate is __________.
a.
$10,000; 10 percent
b.
$8,000; 8 percent
c.
$10,000; 8 percent
d.
$8,000; 12 percent
e.
none of the above
51. The beginnings of the New York Stock Exchange can be traced back to a small group of men who bought and sold
stock in New York in
a.
1792.
b.
1866.
c.
1892.
d.
1929.
52. The acronym NASDAQ (one of the stock exchanges) stands for
a.
National Academy of Stock Dealers Automated Quotations
b.
New American Securities Dealers Automated Quotations
c.
National Association of Securities Dealers Automated Quotations
d.
North American Stock Dealers Automated Quotations
53. The original Dow Jones Industrial Average (DJIA) contained ____________ stocks, while the DJIA now consists of
____________ stocks.
a.
10; 500
b.
11; 30
c.
15; 50
d.
20; 60
54. Today, the Dow Jones Industrial Average
a.
consists of 30 stocks.
b.
is a set group of stocks that remains constant over time.
c.
contains stocks that are widely held by institutional investors and individuals.
d.
contains both stocks and bonds of large American companies.
e.
a and c
55. Which of the following statements is false?
a.
The list of stocks that are included in the Dow Jones Industrial Average changes from time to time, and is
determined by the editors of the Wall Street Journal.
b.
The Dow Jones Industrial Average first appeared on the scene in 1896.
c.
When the Dow Jones Industrial Average was first computed, prudent investors bought bonds, not stocks.
d.
The Dow Jones Industrial Average is computed by summing the prices of the thirty stocks included in the
average and dividing by 30.
56. Which of the following statements is false?
a.
The Wilshire 5000 is a stock index that consists of the stocks of about 6,500 firms.
b.
Instead of buying a mutual fund that consists of various stocks picked by a fund manager you can buy a
mutual fund that consists of the stocks that make up a particular stock index.
c.
The term Sypders stands for “Standard & Poors Direct Receipts.”
d.
When an investor buys Spyders they are said to “buy the market.”
57. Which of the following statements is false?
a.
The Dow Jones Industrial Average went down by 40 percent during the decade of the 1930s.
b.
Based on data from the period between 1926 and 2004, the probability of having a positive return on an
investment in the stocks contained in the Dow Jones Industrial Average would have been 97.1 percent if the
stocks had been held for 10 years.
c.
When reading the stock market page of a newspaper, if the column marked “Div.” is blank, it means that the
company does not currently pay out dividends.
d.
A stock that yields 4 percent is better than a stock that yields 5 percent, all else being the same.
58. The yield of a stock is the
a.
dividend divided by the closing price per share.
b.
dividend divided by the average daily price of the stock.
c.
closing price divided by the 52-week low price.
d.
dividend divided by the opening price per share.
59. Suppose that the annual dividend per share of stock is $1.40 and the closing price of the stock is $22.00, the yield on
the stock would be approximately
a.
6.36%
b.
15.71%
c.
21.60%
d.
9.70%
60. Suppose that the annual dividend per share of stock is $5.40 and the closing price of the stock is $72.50, the yield of
the stock would be
a.
13.43%
b.
7.45%
c.
23.62%
d.
8.38%
