Chapter 12—Investing in Stocks and Bonds
1. Market risk considers the possibility that the firm may fail.
a.
True
b.
False
False
Moderate
2. Changes in the value of securities due to social, political, or economic factors are referred to as market risk.
a.
True
b.
False
True
Moderate
3. A company with low financial risk has little to no long-term debt.
a.
True
b.
False
True
Challenging
4. Purchasing power risk is of most concern during economic recession.
a.
True
b.
False
False
Challenging
Chapter 12—Investing in Stocks and Bonds
5. Interest rate risk is greater for stocks than for bonds.
a.
True
b.
False
False
Moderate
6. Interest rate risk is greater for short-term bonds than for long-term bonds.
a.
True
b.
False
False
Moderate
7. Event risk occurs when something substantial happens to a company that has an immediate impact on its financial
condition.
a.
True
b.
False
True
Easy
8. The returns you expect from securities are income and growth.
a.
True
b.
False
True
Chapter 12—Investing in Stocks and Bonds
Easy
9. Capital appreciation of an investment is a form of current income.
a.
True
b.
False
False
Moderate
10. Compound interest is a very important concept when evaluating the return on an investment you plan to hold for a
long time.
a.
True
b.
False
True
Easy
11. A lower expected return will mean a higher risk will have to be accepted.
a.
True
b.
False
False
Easy
12. In most investments, there is a risk-return tradeoff.
Chapter 12—Investing in Stocks and Bonds
a.
True
b.
False
True
Easy
13. All securities involve risk of some kind.
a.
True
b.
False
True
Easy
14. Common stockholders are entitled to a prorated share of a company’s earnings only after all of the firm’s other
obligations have been met.
a.
True
b.
False
True
Challenging
15. An investment is acceptable if the expected rate of return is greater than the desired rate of return.
a.
True
b.
False
True
Easy
Chapter 12—Investing in Stocks and Bonds
16. Dividend income and stock appreciation represent the elements of total return for a stock investment.
a.
True
b.
False
True
Moderate
17. The risk-free rate of return is often measured by the return on U.S. Treasury bills.
a.
True
b.
False
True
Easy
18. Common stockholders are considered to be the residual owners of the company.
a.
True
b.
False
True
Easy
19. Bondholders have no equity in the issuing firm.
a.
True
b.
False
True
Moderate
Chapter 12—Investing in Stocks and Bonds
20. Bondholders will receive interest payments only after stockholders receive dividends.
a.
True
b.
False
False
Easy
21. Publicly traded issues are only available to qualified investors.
a.
True
b.
False
False
Easy
22. Historically, the long-term performance of stock outstrips that of bonds.
a.
True
b.
False
True
Moderate
23. You received a cash dividend from your stock investment this year. This is taxable income.
a.
True
b.
False
Chapter 12—Investing in Stocks and Bonds
24. Stock dividends are taxed at long-term capital gains rates.
a.
True
b.
False
False
Challenging
25. Common stocks pay a guaranteed dividend each year.
a.
True
b.
False
False
Moderate
26. Interest on corporate bonds is paid semiannually.
a.
True
b.
False
True
Moderate
True
Moderate
Chapter 12—Investing in Stocks and Bonds
27. If Wristwatch Arm Corporation (WAC) has assets of $10 million, liabilities of $5 million, and preferred stock of $1
million, its book value is $6 million.
a.
True
b.
False
False
Challenging
28. John and Mary Smith own 500 shares of ABE stock. After the company pays a 6 percent stock dividend, John and
Mary will own 530 shares of ABE stock.
a.
True
b.
False
True
Challenging
29. Earnings per share (EPS) tell the stockholder the amount of dividend to be paid.
a.
True
b.
False
False
Challenging
30. Net profit margin is a key measure of profitability that relates the net profits of a firm to its sales.
a.
True
b.
False
True
Moderate
Chapter 12—Investing in Stocks and Bonds
31. Low price/earnings ratios indicate limited or low investor confidence.
a.
True
b.
False
True
Moderate
32. Stocks with betas of less than 1.0 will have relatively stable prices.
a.
True
b.
False
True
Moderate
33. Stocks with high betas will have low price volatility.
a.
True
b.
False
False
Moderate
34. A stock’s beta is an indication of how responsive the stock is to changes in the overall stock market.
a.
True
b.
False
True
Chapter 12—Investing in Stocks and Bonds
35. Earnings per share can be defined as the return earned on behalf of each share of common and preferred stock,
calculated by dividing all earnings by the total number of shares outstanding.
a.
True
b.
False
False
Challenging
36. The higher a stock’s beta, the riskier the stock.
a.
True
b.
False
True
Moderate
37. Growth stocks generally pay little or nothing in dividends.
a.
True
b.
False
True
Moderate
Moderate
Chapter 12—Investing in Stocks and Bonds
38. Income stocks are purchased with the expectation of high capital gains upon their resale.
a.
True
b.
False
False
Challenging
39. Price fluctuations of defensive stocks are usually contrary to movements in the business cycle.
a.
True
b.
False
True
Challenging
40. Dividend reinvestment plans should be avoided because of their relatively high cost.
a.
True
b.
False
False
Moderate
41. The value of any investment is a function of the return it is expected to produce relative to the amount of perceived
risk involved in the investment.
a.
True
b.
False
True
Moderate
Chapter 12—Investing in Stocks and Bonds
42. Dividend reinvestment plans provide shareholders with cash so that they can invest in similar stocks.
a.
True
b.
False
False
Moderate
43. Typically, the best time to invest in the stock market is when the market is very volatile.
a.
True
b.
False
False
Challenging
44. Income stocks are similar to bonds in that they pay annual interest to owners.
a.
True
b.
False
False
Moderate
45. To the issuing company, bonds are liabilities.
a.
True
b.
False
True
Chapter 12—Investing in Stocks and Bonds
Easy
46. Bonds provide for investment return primarily in the form of growth.
a.
True
b.
False
False
Challenging
47. Bond return can include both interest and capital gains.
a.
True
b.
False
True
Easy
48. A callable bond may be retired by the issuer prior to maturity.
a.
True
b.
False
True
Easy
49. Treasury notes, bills, and bonds represent loans to the federal government.
a.
True
Chapter 12—Investing in Stocks and Bonds
b.
False
True
Easy
50. Bonds can be used conservatively by investors seeking current income and aggressively by investors seeking capital
gains.
a.
True
b.
False
True
Challenging
51. Investors typically welcome their bonds being called because of the generous call premium paid.
a.
True
b.
False
False
Moderate
52. The callable feature of a bond protects the issuer when market interest rates are falling.
a.
True
b.
False
True
Challenging
Chapter 12—Investing in Stocks and Bonds
53. TIPS are appropriate for investors who are conservative and concerned about inflation.
a.
True
b.
False
True
Challenging
54. All treasury bonds issued today are noncallable.
a.
True
b.
False
True
Moderate
55. If you buy a zero coupon bond, you will receive no cash from the corporation until the bond matures.
a.
True
b.
False
True
Easy
56. Only the federal government issues zero coupon bonds.
a.
True
b.
False
False
Easy
Chapter 12—Investing in Stocks and Bonds
57. Municipal bonds can be attractive investments, despite their lower interest rate, since their interest income is exempt
from federal income tax.
a.
True
b.
False
True
Easy
58. Bonds rated AA by S&P and Aa by Moody’s are considered very safe bonds.
a.
True
b.
False
True
Moderate
59. You would expect more growth with the preferred stock you own than with the common stock in your portfolio.
a.
True
b.
False
False
Moderate
60. Common stock owners must receive dividends before preferred stockholders.
a.
True
b.
False
Chapter 12—Investing in Stocks and Bonds
False
Easy
61. Preferred stockholders have no equity in the issuing firm.
a.
True
b.
False
False
Moderate
62. Convertible preferred stock can be exchanged for common stock.
a.
True
b.
False
True
Easy
63. A bond with an S&P rating of BBB is considered investment-grade.
a.
True
b.
False
True
Moderate
Chapter 12—Investing in Stocks and Bonds
64. Junk bonds have higher risk and similar returns to investment grade bonds.
a.
True
b.
False
False
Moderate
65. At the time you buy a convertible bond, you will know the number of stock shares for which it can be exchanged.
a.
True
b.
False
True
Moderate
66. A discount bond has a market value above par value.
a.
True
b.
False
False
Easy
67. Bond prices are impacted by both the direction and magnitude of market interest rate changes.
a.
True
b.
False
True
Easy
Chapter 12—Investing in Stocks and Bonds
68. The higher the tax bracket you are in, the more attractive the purchase of municipal bonds becomes.
a.
True
b.
False
True
Easy
69. A bond with a yield to maturity that equaled or exceeded an investor’s desired rate of return is considered an attractive
investment.
a.
True
b.
False
True
Easy
70. There is an inverse relationship between bond prices and market interest rates.
a.
True
b.
False
True
Easy
71. The yields on municipal bonds are usually higher than the returns available from fully taxable issues.
a.
True
b.
False
False
Chapter 12—Investing in Stocks and Bonds
72. When a bond is sold between coupon payment dates, the buyer pays the seller for the accrued interest.
a.
True
b.
False
True
Challenging
PFIN.BILL.17.12-6 – LO: 12-6
United States – BUSPROG: Analytic skills – BUSPROG: Analytical skills
United States – KS – DISC: Stocks and Bonds
Bloom’s: Understanding
73. The commonly cited price for a bond is usually its clean bond price.
a.
True
b.
False
True
Easy
PFIN.BILL.17.12-6 – LO: 12-6
United States – BUSPROG: Analytic skills – BUSPROG: Analytical skills
United States – KS – DISC: Stocks and Bonds
Bloom’s: Remembering
74. A beta of more than one would be expected of a speculative stock.
a.
True
b.
False
True
Moderate
PFIN.BILL.17.12-6 – LO: 12-6
United States – BUSPROG: Analytic skills – BUSPROG: Analytical skills
United States – KS – DISC: Stocks and Bonds
Bloom’s: Analyzing
75. Security investors incur varying degrees of risk. Business risk is related to
a.
price level changes in the economy.
b.
investor behavior in the market.
c.
the debt-to-equity ratio of the firm.
d.
the potential success or failure of the firm.
Moderate
PFIN.BILL.17.12-6 – LO: 12-6
United States – BUSPROG: Analytic skills – BUSPROG: Analytical skills
United States – KS – DISC: Stocks and Bonds
Bloom’s: Understanding