Test Bank Questions, Chapter 16
1. As bond maturity increases, the bond’s risk:
a. Increases
b. Decreases
c. Does not change
d. Sometimes increases and sometimes decreases
e. Is inversely related to the value of the bond
2. The relationship that exists between bond maturity and risk can be explained
through observing that:
a. The longer the period, the greater the potential for a change in the ability of a
company to repay its debt
b. A broad-based change in interest rates will have a greater effect on long-term
bonds
c. The shorter the period, the greater the potential for a change in the ability of a
company to repay its debt
d. Both a and b
e. Both b and c
3. For which of the following categories of bonds is the risk for a given change in
interest rates generally classified as low?
a. Money market
b. Short term
c. Intermediate term
d. Long term
e. None of the above
4. For which of the following is a bond’s classification based on the likelihood that
the bond will fulfill its obligation to pay interest and repay the amount owed at
maturity?
a. Duration
b. Risk
c. Quality
d. Credit
e. None of the above
5. Below which of the following is a bond rating regarded as a high-yield bond or a
junk bond with a chance of default which typically results in bankruptcy?
a. AAA
b. BBB
c. CCC
d. C
e. None of the above
6. Of the following bond ratings, which are classified as medium quality?
a. B
b. BBB
c. A
d. Both a and b
e. Both b and c
7. What is liquidity?
a. The ability to convert an asset into cash quickly and at a relatively low
transaction cost.
b. The possibility that you will not be able to find a buyer at the current market
price for an asset
c. The possibility that you will not be able to sell assets without incurring
capital gains tax
d. Both a and b
e. Both b and c
8. The risk premium is equal to which of the following:
a. Risk free rate + maturity risk.
b. Liquidity risk + risk free rate.
c. Liquidity risk + maturity risk + default risk.
d. Liquidity risk + risk free rate + maturity risk + default risk.
e. None of the above.
9. Bond coupons are:
a. Fixed contractual payments that are affected by changes in market rates over
time.
b. Fixed contractual payments that are not affected by changes in market rates
over time.
c. Fixed contractual payments that are affected by changes in interest rates over
time.
d. Fixed contractual payments that are affected by changes in default rates over
time.
e. None of the above.
10. The amount due at bond maturity is called the:
a. Par value.
b. Face value.
c. Maturity value.
d. All of the above.
e. None of the above.
11. The coupon yield is:
a. The return that is calculated based on the annual coupon and the face value of
the bond.
b. The annual coupon divided by the market value of the bond.
c. The return you would receive if you purchased the bond today and held it
until it was repaid.
d. All of the above.
e. None of the above.
12. The current yield is:
a. Annual coupon/face value of bond
b. Market value of bond/Annual coupon
c. Annual coupon/market value of bond
d. Face value of bond/Annual coupon
e. None of the above
13. If the annual coupon is $40, the face value $1,000, the market price $930, and the
number of years to maturity 3, what is the approximate yield to maturity?
a. 6.51%
b. 5.31%
c. 4.31%
d. 3.31%
e. None of the above
14. If the annual coupon is $2,243.5, the face value $100,000, the market price
$124,345.43, and the number of years to maturity 23.76, what is the approximate
yield to maturity?
a. 0.42%
b. 1.42%
c. 2.42%
d. 24.42%
e. None of the above
15. Due to changes in interest rates,
a. A premium bond has greater fluctuation in price than a discount bond
b. A premium bond has identical fluctuation in price as a discount bond
c. A discount bond has a greater fluctuation in price than a premium bond
d. Both discount and premium bonds do not fluctuate in price
e. None of the above
16. Which of the following is not a factor that leads to market interest rate
fluctuations?
a. Changes in the expected rate of inflation
b. Economic activity
c. Federal Reserve actions
d. Cyclical investor interest in bonds
e. All of the above are factors
17. The maturity of a Treasury bond is:
a. 0-1 years
b. 2-10 years
c. 10 years or more
d. All of the above
e. None of the above
18. Are U.S. Government bonds subject to federal and state taxes?
a. Yes
b. No
c. They are subject to state but not federal taxes
d. They are subject to federal but not state taxes
e. None of the above
19. A callable corporate bond may be retired if:
a. Interest rates rise sharply
b. Interest rates decrease sharply
c. Default rates rise sharply
d. Default rates decrease sharply
e. None of the above
20. Are municipal bonds subject to both federal and state taxes if purchased in the
state in which you reside?
a. Yes
b. No
c. They are only subject to state taxes
d. They are only subject to federal taxes
e. None of the above
21. Why are preferred shares generally considered more risky than bonds?
a. They have a lower priority on assets than bonds in the event of bankruptcy
b. They lack the assurance of a bond’s contracted for return of principal
c. They typically have higher yields than bonds
d. Both a and b
e. All of the above
22. Which of the following is an approach that advocates purchasing stocks that have
had large price movements relative to the market?
a. Relative investing
b. Fundamental analysis
c. Momentum investing
d. Relative timing
e. None of the above
Answer: c
23. According to the dividend discount model, the current value of a security is equal
to:
a. The annual divided payable at the end of the year/(The company’s required
rate of return on its equity – Projected growth rate in dividends)
b. The annual divided payable at the end of the year/(The company’s required
rate of return on its equity + Projected growth rate in dividends)
c. The annual divided payable at the end of the year x (The company’s required
rate of return on its equity – Projected growth rate in dividends)
d. The annual divided payable at the end of the year x (The company’s required
rate of return on its equity + Projected growth rate in dividends)
e. None of the above.
24. A mutual fund composed of a blend of stocks and bonds can be categorized as
which of the following?
a. Industry fund
b. Sector fund
c. Balanced fund
d. Hedge fund
e. None of the above
25. What is a load fund?
a. A fund that that does not offer sales commissions to the marketers of the
funds
b. A fund that provides a sales commission to the individual or brokerage firm
that markets the fund
c. A fund where the management company does not charge a load that they
retain
d. Both a and b.
e. Both b and c
26. Sales charges that are covered under marketing fees for loan funds are:
a. 12b-1 fees
b. 12a-1 fees
c. 10b-1 fees
d. 10a-1 fees
e. None of the above
27. Which of the following is not a reason why the majority of actively managed
mutual funds underperform the averages?
a. Significant expenses associated with actively managed funds to support
analysts, portfolio managers, and other overhead costs as well as trading
costs to shift investment holdings
b. Mutual funds frequently keep 5 percent or more in cash for such reasons as
meeting unusually larger redemptions
c. The relative performance between categories does not differ substantially
over extended periods of time
d. Fund overhead expenses including direct management fees can provide
benefits other than performance
e. All of the above are reasons
28. Capital gains taxes may be paid yearly:
a. Even though the shareholder has not sold any fund shares
b. Only when the shareholder has sold fund shares
c. Never
d. During tax-transition years exclusively
e. None of the above
29. The key difference between mutual funds and separately managed accounts is
that:
a. Mutual funds are taxed as capital gains while separately managed accounts
are not
b. Separately managed accounts are taxed as capital gains while mutual funds
are not
c. There is no difference between the two
d. Mutual funds pool all investor funds in one account while separate accounts
investors own stocks and bonds that are placed in their name in a segregated
account
e. None of the above
30. What are unit investment trusts?
a. Portfolios of stocks and bonds that are traded on the major exchanges
b. Portfolios that are set up at a point in time as are mutual funds, but are
generally unmanaged
c. Investments that wrap mutual funds in a tax-sheltered framework for an extra
ongoing charge
d. Both a and b
e. Both b and c
Essay questions:
31. List and provide examples of eight types of specialized funds that concentrate in
publicly traded securities.
32. List and provide a detailed explanation for nine types of bond funds.
33. For each of the following types of fund loads, please describe the fund’s front-end
charge, annual sales charge, redemption charge, and 12b-1 fees characteristics.
1) A type load.
2) B type load.
3) C type load.
4) No load.
